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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 SEPTEMBER 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 October 31, 2001: 163,137,018
==============================================================================
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,
2001 2000 2001 2000
---- ---- ---- ----
NET SALES $ 3,677.9 $ 3,619.3 $ 10,674.6 $ 10,890.7
Cost of Goods Sold 2,994.3 2,968.8 8,692.0 8,753.4
Selling, Administrative and General Expense 568.0 549.2 1,681.7 1,662.2
Rationalizations -- 1.2 79.0 5.9
Interest Expense 77.7 73.7 220.9 205.7
Other (Income) Expense 21.3 4.4 23.2 17.4
Foreign Currency Exchange (2.6) (2.9) (17.9) 0.8
Equity in Earnings of Affiliates 4.8 2.3 14.0 5.0
Minority Interest in Net Income of Subsidiaries 3.1 10.0 19.6 37.5
----------- ----------- ----------- -----------
Income (Loss) before Income Taxes 11.3 12.6 (37.9) 202.8
United States and Foreign Taxes on Income 2.0 (4.4) (8.3) 60.5
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 9.3 $ 17.0 $ (29.6) $ 142.3
=========== ===========
Retained Earnings at Beginning of Period 3,558.8 3,706.9
CASH DIVIDENDS (142.9) (141.2)
----------- -----------
Retained Earnings at End of Period $ 3,386.3 $ 3,708.0
----------- -----------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK - BASIC: $ 0.06 $ 0.11 $ (0.19) $ 0.91
=========== =========== =========== ===========
Average Shares Outstanding 159.9 157.0 159.0 156.6
NET INCOME (LOSS) PER SHARE OF COMMON STOCK - DILUTED: $ 0.06 $ 0.11 $ (0.19) $ 0.90
=========== =========== =========== ===========
Average Shares Outstanding 161.6 158.2 159.0 158.6
CASH DIVIDENDS PER SHARE $ 0.30 $ 0.30 $ 0.90 $ 0.90
=========== =========== =========== ===========
The accompanying notes are an integral part of this financial statement.
-1-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Unaudited
(In millions)
September 30, December 31,
2001 2000
ASSETS: ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 785.4 $ 252.9
Accounts and notes receivable,
less allowance - $90.7 ($93.3 in 2000) 1,907.9 2,074.7
Inventories:
Raw materials 438.7 480.4
Work in process 114.9 123.5
Finished product 2,108.7 2,275.8
----------- -----------
2,662.3 2,879.7
Prepaid expenses and other current assets 200.4 259.9
----------- -----------
TOTAL CURRENT ASSETS 5,556.0 5,467.2
Long Term Accounts and Notes Receivable 111.8 92.8
Investments in Affiliates, at equity 111.3 102.0
Other Assets 259.1 183.8
Goodwill 573.8 588.4
Deferred Charges 1,772.3 1,612.8
Properties and Plants,
less accumulated depreciation - $6,062.0 ($5,862.6 in 2000) 5,243.2 5,521.0
----------- -----------
TOTAL ASSETS $13,627.5 $13,568.0
=========== ===========
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable - trade $ 1,278.8 $ 1,505.2
Compensation and benefits 832.6 823.6
Other current liabilities 270.6 395.6
United States and foreign taxes 206.9 208.4
Notes payable 788.4 1,077.0
Sumitomo 1.2% Convertible Note Payable - 56.9
Long term debt due within one year 210.0 159.2
----------- -----------
TOTAL CURRENT LIABILITIES 3,587.3 4,225.9
Long Term Debt and Capital Leases 3,202.0 2,349.6
Compensation and Benefits 2,302.6 2,310.5
Other Long Term Liabilities 369.9 334.1
Minority Equity in Subsidiaries 834.5 844.9
----------- -----------
TOTAL LIABILITIES 10,296.3 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 - 163.1 (157.6 in 2000)
after deducting 32.6 treasury shares (38.1 in 2000) 163.1 157.6
Capital Surplus 1,244.8 1,092.4
Retained Earnings 3,386.3 3,558.8
Accumulated Other Comprehensive Income (1,463.0) (1,305.8)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 3,331.2 3,503.0
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,627.5 $13,568.0
=========== ===========
The accompanying notes are an integral part of this financial statement.
-2-
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) (29.6)
Foreign currency translation (150.6)
Minimum pension liability 3.7
Unrealized investment gain 5.3
(net of tax of $3.3)
Transition adjustment from
adoption of SFAS 133 5.4
Deferred derivative loss (20.6)
Less reclassification adjustment for
amounts recognized in income (0.4)
Total comprehensive income (loss) (186.8)
Cash dividends (142.9) (142.9)
Common stock issued from treasury:
Domestic pension funding 4.3 95.7 100.0
Conversion of 1.2% Convertible Note Payable 1.1 55.1 56.2
Stock compensation plans 0.1 1.6 1.7
-------------------------------------------------------------------
Balance at September 30, 2001 $ 163.1 $ 1,244.8 $ 3,386.3 $ (1,463.0) $ 3,331.2
===================================================================
09/30/01 12/31/00
Accumulated Other Comprehensive Income -------- --------
Foreign currency translation adjustment $ (1,424.5) $ (1,273.9)
Minimum pension liability adjustment (18.2) (21.9)
Unrealized investment loss (4.7) (10.0)
Deferred derivative loss (15.6) -
------------- --------------
Total $ (1,463.0) $ (1,305.8)
============= ==============
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,
2001 2000 2001 2000
---- ---- ---- ----
Net Income (Loss) $ 9.3 $ 17.0 $ (29.6) $ 142.3
Other comprehensive income (loss):
Foreign currency translation 8.1 (88.4) (150.6) (196.1)
Minimum pension liability 0.3 0.1 3.7 0.2
FAS 133 transition amount (net of tax of $3.3) - - 5.4 -
Deferred derivative gain (loss) 11.4 - (33.3) -
Tax on deferred derivative gain (loss) (4.4) - 12.7 -
Reclassification adjustment for amounts
recognized in income (28.6) - (0.7) -
Tax on derivative reclassification adjustment 10.9 - 0.3 -
Unrealized investment gain (loss) (5.8) 1.3 8.6 44.8
Tax on unrealized investment gain (loss) 2.2 (0.4) (3.3) (17.0)
-------------------------------- ----------------------------
Comprehensive Income (Loss) $ 3.4 $ (70.4) $ (186.8) $ (25.8)
================================ ============================
The accompanying notes are an integral part of this financial statement.
-3-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
(In millions) Nine Months Ended
September 30,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES: ------ ------
Net Income (Loss) $(29.6) $142.3
Adjustments to reconcile net income (loss) to cash flows
from operating activities:
Depreciation and amortization 477.1 475.7
Rationalizations 57.1 6.4
Asset sales (13.9) (2.3)
Proceeds from sale of accounts receivable 414.7 (3.2)
Changes in operating assets and liabilities:
Accounts and notes receivable (298.2) (367.2)
Inventories 169.1 (271.4)
Accounts payable-trade (203.5) (35.4)
Other assets and liabilities (144.2) (98.6)
------ ------
Total adjustments 458.2 (296.0)
------ ------
TOTAL CASH FLOWS FROM OPERATING ACTIVITIES 428.6 (153.7)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (315.9) (411.1)
Asset sales 40.0 38.4
Other transactions (114.3) (13.3)
------ ------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (390.2) (386.0)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term debt incurred 76.9 1,217.9
Short term debt paid (839.7) (1,469.7)
Long term debt incurred 1,493.5 1,065.8
Long term debt paid (71.9) (101.0)
Common stock issued 1.2 1.6
Dividends paid to Sumitomo (13.1) (27.1)
Dividends paid to Goodyear shareholders (142.9) (141.2)
------ ------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 504.0 546.3
Effect of Exchange Rate Changes on Cash and Cash Equivalents (9.9) (11.1)
------ ------
Net Change in Cash and Cash Equivalents 532.5 (4.5)
Cash and Cash Equivalents at Beginning of the Period 252.9 241.3
------ ------
Cash and Cash Equivalents at End of the Period $785.4 $236.8
====== ======
The accompanying notes are an integral part of this financial statement.
-4-
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 in the current
period 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.
-5-
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.
-6-
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 $1.3
million during the three and nine months ended September 30, 2001, respectively.
Deferred net gains totaling $2.3 million on hedges of forecasted transactions
are anticipated to be recognized in income during the twelve months ending
September 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 certain long term currency exchange and interest rate
contracts.
Deferred losses totaling $4.4 million and gains totaling $1.2 million
were recorded as Foreign Currency Translation Adjustment during the three and
nine months ended September 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 9/30/01
-------- ------- -------- -------
Plant downsizing and consolidation $48.0 $10.8 $ (56.8) $ 2.0
Worldwide associate reductions 25.2 48.6 (61.2) 12.6
-------- ------- -------- -------
$73.2 $59.4 $(118.0) $14.6
======== ======= ======== =======
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, 6,300 associates have been released for which the
Company incurred costs totaling $118.0 million during 2001, including 1,000
associates at a cost of $10.6 million in the third quarter. The Company plans to
release approximately 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 9/30/01
- ------------- -------- ------- -------- -------
Plant downsizing and consolidation $8.8 $7.1 $(11.2) $4.7
==== ==== ======= ====
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. This was the
final charge for the program which began in 1999 and had a balance of $4.3
million at December 31, 2000. During 2001, $15.9 million of costs were incurred,
including $1.9 million in the third quarter, primarily for ongoing associate
severance payments. Actions taken under this plan are now complete.
-7-
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 $12.4
million for the release of approximately 750 associates, including approximately
150 associates at a cost of $1.5 million in the third quarter. At September 30,
2001, the Company evaluated the remaining reserves and recorded a reversal of
$3.0 million for reserves no longer needed for their originally intended
purposes. The remaining balance of $8.0 million at September 30, 2001 relates to
the release of approximately 50 associates and ongoing associate severance
payments. The balance at September 30, 2001, for rationalization costs, other
than associate-related costs, was $5.8 million. The Company intends to complete
these actions by the end of the fourth quarter of 2001, except for future rental
payments under noncancellable leases.
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,
2001 2000 2001 2000
----- ----- ----- -----
Average shares outstanding-basic 159.9 157.0 159.0 156.6
Stock options 1.7 - - -
1.2% Convertible Note - 1.2 - 2.0
----- ----- ----- -----
Average shares outstanding-diluted 161.6 158.2 159.0 158.6
===== ===== ===== =====
The average shares outstanding-diluted total for the first nine months
of 2001 does not include the antidilutive impact of 2.0 million shares of
potential common stock associated with stock options and .3 million shares
associated with the Sumitomo 1.2% Convertible Note Payable.
FINANCING ARRANGEMENTS
- ----------------------
In the first quarter of 2001, the Company borrowed $800 million for a
period of three years under a bank term loan agreement. The term loan is due
March 30, 2004 and 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.
In the third quarter of 2001, the Company issued $650 million of its
7.857% Notes due 2011.
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.
-8-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NONCASH INVESTING AND FINANCING ACTIVITIES (continued)
- ------------------------------------------------------
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. Sumitomo converted the remaining Y6,536,535,767 principal
amount of the Company's Note into 1,140,866 shares of the Company's Common Stock
on February 6, 2001.
During the third quarter of 2001, the Company issued 4.3 million shares
of its common stock with a market value of approximately $100.0 million as a
contribution to certain domestic pension plans.
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 $109.6 million at September 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 September 30, 2001, the gross unrealized holding loss on the Sumitomo
Investment, net of the hedge, totaled $7.4 million ($4.7 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 program. The new program involves the continuous sale of substantially all
of the Company's domestic trade accounts receivable to a wholly-owned limited
liability subsidiary company that is a bankruptcy-remote special purpose
entity. The results of operations and financial position of the special purpose
subsidiary are not included in the consolidated financial statement of the
Company. The special purpose subsidiary purchases the Company's receivables
with (a) the cash proceeds of borrowings from a group of five bank affiliated
issuers of commercial paper, which borrowings are secured by the trade accounts
receivable it acquires from the Company, (b) the cash proceeds of the Company's
$98.2 million equity investment in the subsidiary and (c) a subordinated note
payable to the Company in an amount equal to the total amount of trade
receivables purchased by the subsidiary minus the sum of the equity of the
special purpose subsidiary and the cash proceeds from the sale of the notes
issued by the special purpose subsidiary to the five lenders and minus a
discount. The Company retained servicing responsibilities, subordinated
interests in the receivables transferred and a residual equity interest in the
special purpose company. As the receivables are collected, the cash proceeds
are used to purchase additional receivables. The Company pays fees under the
program based on certain variable market interest rates and other agreed
amounts. These fees are reported as Other (Income) and Expense. The special
purpose subsidiary may borrow up to $825 million from the note purchasers. The
amount that may be borrowed from time to time by the special purpose subsidiary
depends on, among other things, the total uncollected balance of receivables
owned by it. The borrowings are available until May, 2002, and may be extended
for additional annual periods upon the agreement of the lenders.
In the third quarter of 2001, a Canadian subsidiary of the Company
established an accounts receivable continuous sale program, whereunder the
subsidiary may receive proceeds of up to a maximum of $100 million at any one
time from the sale of certain of its receivables to affiliates of certain banks.
-9-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
ACCOUNTS RECEIVABLE (continued)
- -------------------------------
The following table presents certain cash flows between the Company
(and its Canadian subsidiary), and the purchasers of the receivables:
THREE MONTHS ENDED NINE MONTHS ENDED
(In millions) SEPTEMBER 30,2001 SEPTEMBER 30,2001
----------------- -----------------
Proceeds from new securitizations $ 53.9 $ 795.4
Proceeds from collections reinvested in
previous securitizations 1,768.2 2,683.5
Servicing fees received 1.9 2.5
Reimbursement for rebates and discounts
issued (67.3) (86.2)
At September 30, 2001, the level of net proceeds from sales under these programs
was $886.1 million. The balance of net proceeds from these and other agreements
was $1,018.9 million at September 30, 2001. The balance of net proceeds under
similar agreements were $604.2 million at December 31, 2000 and $563.3 million
at September 30, 2000.
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. Other (Income) and Expense in the third
quarter of 2000 included a gain of $5.0 million ($3.2 million after tax) on the
sale of land at a manufacturing facility in Mexico.
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.
-10-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
Unaudited
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------- ---------- ----------- -----------
SALES:
North American Tire $ 1,957.2 $ 1,832.0 $ 5,409.6 $ 5,319.6
European Union Tire 770.7 759.6 2,329.7 2,436.2
Eastern Europe, Africa and Middle East Tire 181.7 215.1 523.0 599.7
Latin American Tire 246.4 263.2 754.8 785.5
Asia Tire 122.8 128.9 370.2 404.8
---------- ---------- ----------- -----------
TOTAL TIRES 3,278.8 3,198.8 9,387.3 9,545.8
Engineered Products 267.4 282.7 867.7 910.1
Chemical Products 260.9 275.7 824.1 847.5
---------- ---------- ----------- -----------
TOTAL SEGMENT SALES 3,807.1 3,757.2 11,079.1 11,303.4
Inter-SBU Sales (136.4) (139.6) (419.8) (422.4)
Other 7.2 1.7 15.3 9.7
---------- ---------- ----------- -----------
NET SALES $ 3,677.9 $ 3,619.3 $ 10,674.6 $ 10,890.7
========== ========== =========== ===========
INCOME:
North American Tire $ 87.9 $ 60.8 $ 152.3 $ 197.1
European Union Tire 3.1 12.3 52.1 95.8
Eastern Europe, Africa and Middle East Tire 6.2 19.0 15.6 46.4
Latin American Tire 19.3 10.1 61.5 54.9
Asia Tire 5.1 3.5 15.7 19.6
---------- ---------- ----------- -----------
TOTAL TIRES 121.6 105.7 297.2 413.8
Engineered Products (1.2) 2.3 16.7 46.6
Chemical Products 16.4 7.0 45.7 60.4
---------- ---------- ----------- -----------
TOTAL SEGMENT INCOME (EBIT) 136.8 115.0 359.6 520.8
Rationalizations and Asset sales -- 3.8 (62.0) (0.9)
Interest expense (77.7) (73.7) (220.9) (205.7)
Foreign currency exchange 2.6 2.9 17.9 (0.8)
Minority interest in net income (3.1) (10.0) (19.6) (37.5)
of subsidiaries
Inter-SBU income (9.6) (5.4) (23.0) (22.8)
Other (37.7) (20.0) (89.9) (50.3)
---------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES $ 11.3 $ 12.6 $ (37.9) $ 202.8
========== ========== =========== ===========
-11-
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
North American Tire $ -- $ -- $ 4.0 $ (.7)
European Union Tire -- 1.2 6.2 7.2
Eastern Europe, Africa
and Middle East Tire -- -- 8.9 --
Latin American Tire -- -- -- --
Asia Tire -- -- 3.6 --
------- ------- ------- -------
TOTAL TIRES -- 1.2 22.7 6.5
Engineered Products -- -- 3.0 (.6)
Chemical Products -- -- -- --
------- ------- ------- -------
TOTAL SEGMENTS $ -- $ 1.2 $ 25.7 $ 5.9
======= ======= ======= =======
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,
2001 2000 2001 2000
---- ---- ---- ----
NET SALES:
Asia Tire $122.8 $128.9 $370.2 $404.8
SPT 116.0 127.3 359.1 436.8
------- ------ ------ ------
$238.8 $256.2 $729.3 $841.6
======= ====== ====== ======
EBIT:
Asia Tire $ 5.1 $ 3.5 $ 15.7 $ 19.6
SPT (5.9) (3.6) (19.8) (6.9)
------ ------ ------ ------
$ ( .8) $ (.1) $ (4.1) $ 12.7
====== ====== ====== ======
-12-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
CONSOLIDATED
- ------------
(All per share amounts are diluted)
Sales in the third quarter of 2001 were $3.68 billion, increasing 1.6%
from $3.62 billion in the 2000 quarter. Net income of $9.3 million or $.06 per
share was recorded in the 2001 third quarter, compared to net income of $17.0
million or $.11 per share in the 2000 period.
In the nine months of 2001, sales of $10.67 billion decreased 2.0% from
$10.89 billion in 2000. The net loss was $29.6 million or $.19 per share
compared to net income of $142.3 million or $.90 per share in 2000.
Revenues increased in the third quarter of 2001 primarily due to a
change in product mix to higher priced tires and price and unit increases in the
North America replacement market. Revenues decreased in the nine months of 2001
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 $50 million in the
third quarter and $330 million for the nine months.
Worldwide tire unit sales in the third quarter of 2001 were 56.7
million units, a decrease of 258.2 thousand units or .5% compared to the 2000
period. North American (U.S. and Canada) volume increased 692.4 thousand units
or 2.3% in the quarter, while international unit sales decreased 950.6 thousand
units or 3.5%. Worldwide replacement unit sales decreased .6% from the 2000
quarter, due to decreases in international markets. Original equipment unit
sales were down .1% in the quarter, due to decreases in North America being
partially offset by increases internationally. Worldwide tire unit sales in the
nine months of 2001 decreased 1.7% from the 2000 period, with North American and
international units lower by 2.2% and 1.0%, respectively.
Cost of goods sold (CGS) was up in dollars, but decreased to 81.4% of
sales in the third quarter of 2001, compared to 82.0% in the 2000 period. CGS,
as a percent to sales, was favorably impacted by a change in mix to higher
priced tires and price increases enacted during the third quarter of 2001. CGS
reflected higher 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
-13-
nine months of 2001 but rose to 81.4% of sales compared to 80.4% in the nine
months of 2000. CGS, for the nine months, reflected higher raw material and
conversion costs combined with lower levels of plant utilization.
Selling, administrative and general expense (SAG) in the third quarter
of 2001 was up in dollars and was 15.4% of sales compared to 15.2% in the 2000
period, primarily due to increased costs in North America. SAG was 15.8% of
sales for the nine months of 2001 compared to 15.3% in the 2000 period.
The Company estimates the impact of foreign currency translation
reduced the 2001 quarter's and nine month's operating income by approximately
$20 million and $70 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 and 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. Currency fluctuations
and general economic and industry conditions may adversely impact sales and
earnings in future periods.
Interest expense of $77.7 million rose 5.4% in the 2001 third quarter
compared to the third quarter last year, and 7.4% in the nine months of 2001 to
$220.9 million compared to the nine months of 2000. The increase is due to
higher debt levels.
Other (Income) and Expense was $21.3 million net expense in the 2001
third quarter compared to $4.4 million net expense in the 2000 period. For the
nine months of 2001, Other (Income) and Expense was $23.2 million net expense
compared to $17.4 million net expense in 2000. The nine months of 2001 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 offset by $41.0
million related to commitment fees and accounts receivable sales fees. Other
(Income) and Expense in the third quarter of 2000 included a gain of $5.0
million ($3.2 million after tax) on the sale of land at a manufacturing facility
in Mexico, offset by $32.6 million related to commitment fees and accounts
receivable sales fees.
Foreign currency exchange gain of $2.6 million decreased $.3 million
from last year's third quarter. For the nine months of 2001, foreign currency
exchange gain was $17.9 million compared to foreign currency exchange expense of
$.8 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.
-14-
For the nine months of 2001, the Company had a tax benefit at an
effective tax rate of 45.4%. The Company's effective tax rate was 25.2% in 2000.
RATIONALIZATION ACTIVITY
- ------------------------
The Company recorded a rationalization charge on the Consolidated
Statement of Income totaling $79.0 million ($57.1 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 6,300 associates have been released, for which the Company
incurred costs totaling $118.0 million during the nine months of 2001, including
approximately 1,000 associates at a cost of $10.6 million in the third quarter.
The Company plans to release approximately 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 $19.3 million at September
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 $100 million in the nine months of
2001, including approximately $35 million in the third 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. This was the
final charge for the program which began in 1999 and had a balance of $4.3
million at December 31, 2000. During 2001, $15.9 million of costs were incurred,
including $1.9 million in the third quarter, primarily for ongoing associate
severance payments. Actions taken under this plan are now complete.
-15-
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. In
accordance with these actions, approximately 750 associates were released at a
cost of $12.4 million during the nine months of 2001, including approximately
150 associates in the third quarter at a cost of $1.5 million. At September 30,
2001, the Company evaluated the remaining reserves and reversed $3.0 million to
goodwill for reserves no longer needed for their originally intended purposes.
The Company plans to release approximately 50 more associates under this program
during 2001. The balance of the reserve for associate and other than
associate-related costs at September 30, 2001 was $13.8 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
- ------------------------
On January 1, 2001, 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 2001.
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 140 (SFAS 140), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". SFAS 140 requires that
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. A transfer of financial assets in which the transferor
surrenders control over those assets is accounted for as a sale to the extent
that consideration other than beneficial interests in the transferred assets is
received in exchange. The adoption of SFAS 140 did not have a material impact on
the Company's results of operations, financial position or liquidity.
The Financial Accounting Standards Board has issued
-16-
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 and intangible assets with an indefinite useful
life 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 $136.8 million in the third quarter of 2001,
increasing 19.0% from $115.0 million in the 2000 quarter. Segment operating
margin in the third quarter of 2001 was 3.6%, compared to 3.1% in the 2000
period.
In the nine months, segment EBIT was $359.6 million, decreasing 31.0%
from $520.8 million in the 2000 period. Segment operating margin in the nine
months was 3.2% compared to 4.6% in the 2000 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 2001 were
$1.96 billion, increasing 6.8% from $1.83 billion in the 2000 quarter. In the
nine months, sales of $5.41 billion increased 1.7% from $5.32 billion in 2000.
Unit sales in the 2001 third quarter were 30.2 million, increasing 2.3%
from the 2000 period. Replacement unit sales increased 5.8% but original
equipment volume decreased 6.7%.
Unit sales in the nine months were 84.9 million, decreasing 2.2% from
the 2000 period. Replacement unit sales increased 3.7% and original equipment
volume decreased 14.3%.
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. The replacement market experienced higher volume as a result of the Ford
Motor Company ("Ford") recall program. Sales were adversely affected in both
2001 periods by lower original equipment volume, resulting from production
cutbacks by most manufacturers of automobiles and commercial trucks. Sales in
both 2000 periods benefited from the sale of approximately 1.5 million tires
related to a replacement
-17-
program involving approximately 6.5 million Firestone tires.
On May 22, 2001, Ford announced a customer satisfaction program
impacting 13 million units of a competitor's tires. In the third quarter of
2001, the Company supplied approximately 3 million tire units under the program
which increased EBIT by approximately $50 million. For the nine months, the
Company has supplied approximately 4 million tire units with an EBIT impact of
approximately $70 million.
North American Tire segment EBIT was $87.9 million in the third quarter
of 2001, increasing 44.6% from EBIT of $60.8 million in the 2000 quarter.
Operating margin was 4.5%, compared to 3.3% in 2000.
In the nine months, EBIT was $152.3 million, decreasing 22.7% from
$197.1 million in 2000. Operating margin was 2.8%, compared to 3.7% in 2000.
EBIT in the third quarter was favorably impacted by the Ford tire
replacement program, price increases in the replacement market, lower raw
material costs and higher volume. EBIT was adversely affected by higher
conversion costs as a result of lower production volumes and higher SAG costs.
EBIT for the nine months decreased due to higher conversion, raw
material and SAG costs and lower volume. EBIT was favorably impacted by price
increases in the replacement market and a shift in mix to higher margin tires.
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 intended purposes.
On October 9, 2001, the Company announced plans to lay off up to 1,400
associates at five U.S. tire manufacturing plants. This action has been made to
deal with the industry's current downturn and continued economic uncertainty in
the marketplace.
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, anticipated higher wage and benefit
costs and general economic conditions.
EUROPEAN UNION TIRE
- -------------------
European Union Tire segment sales in the third quarter of 2001 were
$770.7 million, increasing 1.5% from $759.6 million in the 2000 quarter. In the
nine months, sales of $2.33 billion decreased 4.4% from $2.44 billion in 2000.
-18-
Unit sales in the 2001 third quarter were 15.0 million, increasing .4%
from the 2000 period. Replacement unit sales decreased 4.4% while original
equipment volume increased 14.1%.
Unit sales in the nine months were 45.6 million, increasing .8% from
the 2000 period. Replacement unit sales decreased 3.0% and original equipment
volume increased 9.8%.
Revenues in the third quarter of 2001 increased compared to 2000
primarily due to higher volume. Revenues were adversely impacted in the 2001
third quarter by a shift in mix to lower-priced original equipment tires.
For the nine months, revenues decreased compared to 2000 due to
currency translation, a shift in mix towards lower-priced original equipment
tires and competitive pricing. Revenues were favorably impacted by higher
volume.
The Company estimates that currency translation favorably affected
European Union Tire segment sales by approximately $10 million in the third
quarter while having an adverse impact on the nine months of $110 million
compared to the 2000 period.
European Union Tire segment EBIT was $3.1 million in the third quarter
of 2001, decreasing 74.8% from $12.3 million in the 2000 quarter. Operating
margin was 0.4%, compared to 1.6% in 2000.
In the nine months, EBIT was $52.1 million, decreasing 45.6% from $95.8
million in 2000. Operating margin was 2.2%, compared to 3.9% in 2000.
EBIT decreased in the 2001 quarter due to higher raw material costs and
a change in mix to lower margin original equipment tires. EBIT was favorably
impacted by lower SAG costs from cost containment and rationalization programs.
For the nine months, EBIT decreased compared to 2000 due to higher raw
material costs, a change in mix to lower margin original equipment tires,
currency translation and competitive pricing. EBIT was favorably impacted by
higher sales volume and lower SAG costs from cost containment and
rationalization programs.
The Company estimates that the effects of currency translation,
especially the weak Euro versus the U.S. dollar, reduced operating income by
approximately $10 million in the 2001 nine months, compared to the 2000 period.
There was no significant translation impact on EBIT in the 2001 third quarter
compared to the 2000 period.
Rationalization charges totaling $23.2 million and the $17.0 million
gain on the sale of closed manufacturing and warehouse
-19-
facilities in the United Kingdom, both recorded in the 2001 first quarter, were
not included in EBIT for 2001. EBIT in 2000 did not include rationalization
charges totaling $1.2 million in the third quarter and $7.2 million in the nine
months.
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 segment("Eastern Europe
Tire") sales in the third quarter of 2001 were $181.7 million, decreasing 15.5%
from $215.1 million in the 2000 quarter. In the nine months, sales of $523.0
million decreased 12.8% from $599.7 million in 2000.
Unit sales in the 2001 third quarter were 3.5 million, decreasing 21.6%
from the 2000 period. Replacement unit sales decreased 20.7% and original
equipment volume decreased 25.8%.
Unit sales in the nine months were 10.3 million, decreasing 12.0% from
the 2000 period. Replacement unit sales decreased 10.8% and original equipment
volume decreased 16.4%.
Revenues in both 2001 periods decreased from the 2000 periods due to
currency devaluations in Turkey, Poland, South Africa and Slovenia and lower
volume in both the original equipment and replacement markets. The Company
estimates that the effects of currency translation adversely affected Eastern
Europe Tire segment sales by approximately $35 million in the third quarter and
$85 million in the nine months compared to 2000.
Eastern Europe Tire segment EBIT was $6.2 million in the third quarter
of 2001, decreasing 67.4% from $19.0 million in the 2000 quarter. Operating
margin was 3.4%, compared to 8.8% in 2000.
In the nine months, EBIT was $15.6 million, decreasing 66.4% from $46.4
million in 2000. Operating margin was 3.0%, compared to 7.7% in 2000.
EBIT in both 2001 periods decreased due to the economic crisis in
Turkey, the effects of currency translation, lower sales volume and the effect
of a labor strike in South Africa during the third quarter. 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 $5 million in the third quarter and $25 million in the
nine months.
-20-
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 third quarter of 2001 were
$246.4 million, decreasing 6.4% from $263.2 million in the 2000 quarter. In the
nine months, sales of $754.8 million decreased 3.9% from $785.5 million in 2000.
Unit sales in the 2001 third quarter were 4.9 million, decreasing 3.3%
from the 2000 period. Replacement unit sales decreased 6.6% while original
equipment volume increased 4.5%.
Unit sales in the nine months were 14.8 million, increasing 1.1% from
the 2000 period. Replacement unit sales decreased 7.1% and original equipment
volume increased 26.2%.
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, in the third quarter of 2001, were also adversely
impacted by lower volume. Revenues, in both periods, benefited from price
increases. Revenues, in the nine months, also benefited from higher volume. The
Company estimates that currency translation reduced sales by approximately $30
million in the third quarter and $75 million in the nine months compared to
2000.
Latin American Tire segment EBIT was $19.3 million in the third quarter
of 2001, increasing 91.1% from $10.1 million in the 2000 quarter. Operating
margin was 7.8%, compared to 3.8% in 2000.
In the nine months, EBIT was $61.5 million, increasing 12.0% from $54.9
million in 2000. Operating margin was 8.1%, compared to 7.0% in 2000.
EBIT in both 2001 periods reflected the favorable impact of price
increases to recover the effects of currency devaluations and the benefits of
cost reduction programs, rationalizations and lower raw material costs. EBIT was
adversely affected by currency translation and a change in mix to lower margin
original equipment tires. The Company estimates that the effects of currency
translation reduced operating income by approximately $10 million in the third
quarter and $25 million in the nine months.
Revenues and EBIT in future periods may be adversely affected by the
effects of continued competitive pricing
-21-
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 third quarter of 2001 were $122.8
million, decreasing 4.7% from $128.9 million in the 2000 quarter. In the nine
months, sales of $370.2 million decreased 8.5% from $404.8 million in 2000.
Unit sales in the 2001 third quarter were 3.1 million, increasing 4.2%
from the 2000 period. Replacement unit sales decreased .3% while original
equipment volume increased 17.4%.
Unit sales in the nine months were 9.2 million, increasing .6% from the
2000 period. Replacement unit sales decreased 3.8% while original equipment
volume increased 14.2%.
Revenues decreased in both 2001 periods compared to the 2000 periods,
reflecting the adverse impacts of currency translation and competitive pricing
pressures. The Company estimates that currency translation reduced sales by
approximately $10 million in the third quarter and $35 million in the nine
months compared to 2000.
Asia Tire segment EBIT was $5.1 million in the third quarter of 2001,
increasing 45.7% from $3.5 million in the 2000 quarter. Operating margin was
4.2%, compared to 2.7% in 2000.
In the nine months, EBIT was $15.7 million, decreasing 19.9% from $19.6
million in 2000. Operating margin was 4.2%, compared to 4.8% in 2000.
EBIT increased in the third quarter of 2001 due to lower SAG and
conversion costs from cost containment programs, which more than offset the
adverse effects of intensive price competition and currency translations.
For the nine months, EBIT decreased due to the adverse effects of
currency translation and intense price competition. 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 third quarter and $15
million in the nine 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 impacted by the
effects of continued competitive pricing conditions, changes in mix, rising raw
material and energy costs
-22-
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 NINE MONTHS ENDED
(In millions) SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
NET SALES:
Asia Tire $122.8 $128.9 $370.2 $404.8
SPT 116.0 127.3 359.1 436.8
------ ------ ------ ------
$238.8 $256.2 $729.3 $841.6
====== ====== ====== ======
EBIT:
Asia Tire $ 5.1 $ 3.5 $15.7 $ 19.6
SPT (5.9) (3.6) (19.8) (6.9)
----- ------ ----- ------
$( .8) $ ( .1) $(4.1) $ 12.7
===== ====== ====== ======
SPT has announced a restructuring plan to be implemented during the
fourth quarter of 2001. The Company anticipates that this action will adversely
impact its fourth quarter Equity in Earnings of Affiliates by approximately $20
million to $25 million.
ENGINEERED PRODUCTS
- -------------------
Engineered Products segment sales in the third quarter of 2001 were
$267.4 million, decreasing 5.4% from $282.7 million in the 2000 quarter. In the
nine months, sales of $867.7 million decreased 4.7% from $910.1 million in 2000.
Revenues in the third quarter were down slightly from 2000 due to lower
unit sales of air springs, power transmission belts and molded products,
resulting from production cutbacks by the automotive and truck industry.
Revenues were favorably impacted by higher sales of conveyer belts and
industrial hose products.
For the nine months, revenues decreased due to unit sales decreases in
the hose, air springs, power transmission belt and molded products businesses,
resulting from production cutbacks by the automotive and truck industry as well
as the general global economic decline and price competition.
Engineered Products segment EBIT was a loss of $1.2 million
-23-
in the third quarter of 2001, compared to an EBIT income of $2.3 million in the
2000 quarter. Operating margin was (.4)%, compared to .8% in 2000.
In the nine months, EBIT was $16.7 million, decreasing 64.2% from $46.6
million in 2000. Operating margin was 1.9%, compared to 5.1% in 2000.
EBIT in the 2001 periods decreased due primarily to lower revenues,
increased SAG 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. EBIT in 2000 did not include a rationalization credit of
$.6 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, anticipated higher wage and benefit costs and currency translation.
CHEMICAL PRODUCTS
- -----------------
Chemical Products segment sales in the third quarter of 2001 were
$260.9 million, decreasing 5.4% from $275.7 million in the 2000 quarter. In the
nine months, sales of $824.1 million decreased 2.8% from $847.5 million in 2000.
Approximately 50% of Chemical Products segment sales were made to the Company's
other segments.
Chemical Products segment EBIT was $16.4 million in the third quarter
of 2001, increasing significantly from $7.0 million in the 2000 quarter.
Operating margin was 6.3%, compared to 2.5% in 2000.
In the nine months, EBIT was $45.7 million, decreasing 24.3% from $60.4
million in 2000. Operating margin was 5.5%, compared to 7.1%.
Revenues in the 2001 third quarter decreased compared to 2000 despite
higher volume from third party sales, due primarily to lower prices caused by a
decrease in raw material costs. In the nine months, revenues decreased due to
lower volumes.
EBIT in the third quarter increased primarily due to lower raw material
prices. In the nine months, EBIT was down as increases in raw material and
energy prices outpaced price increases, due to the competitive pricing
environment and high conversion costs resulting from production cutbacks.
-24-
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash provided by operating activities was $428.6 million during the
first nine months of 2001, as reported on the Consolidated Statement of Cash
Flows. Working capital requirements decreased during the period as the Company
implemented inventory reduction programs and increased its sales of trade
accounts receivables.
During the second quarter of 2001, the Company terminated its $550
million domestic accounts receivable continuous sale program and entered into a
new program. The new program involves the continuous sale of substantially all
of the Company's domestic trade accounts receivable to a wholly-owned limited
liability subsidiary company that is a bankruptcy-remote special purpose
entity. The results of operations and financial position of the special purpose
subsidiary are not included in the consolidated financial statement of the
Company. The special purpose subsidiary purchases the Company's receivables
with (a) the cash proceeds of borrowings from a group of five bank affiliated
issuers of commercial paper, which borrowings are secured by the trade accounts
receivable purchased by the Company, (b) the cash proceeds of the Company's
$98.2 million equity investment in the subsidiary and (c) a subordinated note
payable to the Company in an amount equal to the total amount of trade
receivables purchased by the subsidiary minus the sum of the equity of the
special purpose subsidiary and the cash proceeds from the sale of the notes
issued by the special purpose subsidiary to the five lenders and minus a
discount. The Company retained servicing responsibilities, subordinated
interests in the receivables transferred and a residual equity interest in the
special purpose company. As the receivables are collected, the cash proceeds
are used to purchase additional receivables. The Company pays fees under the
program based on certain variable market interest rates and other agreed
amounts. These fees are reported as Other (Income) and Expense. The special
purpose subsidiary may borrow up to $825 million from the note purchasers. The
amount that may be borrowed from time to time by the special purpose subsidiary
depends on, among other things, the total uncollected balance of receivables
owned by it. The borrowings are available to the special purpose subsidiary
until May, 2002, unless extended by the lenders for additional one-year
periods.
In the third quarter of 2001, a Canadian subsidiary of the Company
established an accounts receivable continuous sale program, whereunder the
subsidiary may receive proceeds of up to a maximum of $100 million at any one
time from the sale of certain of its receivables to affiliates of certain
banks. In addition, various international subsidiaries of the Company sold
certain of their trade receivables at September 30, 2001. At September 30,
2001, the net proceeds of all such agreements was $1,018.9 million. Net cash
inflows of $414.7 million were received in 2001 from transfers of accounts
receivable under these and other programs. For further information, refer to
the note to
-25-
the financial statements, Accounts Receivable.
Net cash used in investing activities was $390.2 million during the
first nine months of 2001. Capital expenditures totaled $315.9 million, and were
primarily for plant modernizations and new tire molds. Capital expenditures in
2001 have been reduced in response to current economic and business conditions.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) 2001 2000 2001 2000
---- ---- ---- ----
Capital Expenditures $ 94.7 $144.4 $315.9 $411.1
Depreciation and
amortization $154.1 $155.5 $477.1 $475.7
Cash inflows of $40.0 million were realized in 2001 from asset sales,
primarily from the sale of closed manufacturing and warehouse facilities in the
United Kingdom.
Net cash provided by financing activities was $504.0 million during the
first nine months of 2001, which was used primarily to support the previously
mentioned operating and investing activities. Consolidated Debt and the Debt to
Debt and Equity Ratio for the periods indicated:
(Dollars in millions) 9/30/01 12/31/00 9/30/00
-------- -------- ---------
Consolidated Debt $4,200.4 $3,585.8 $4,004.4
Debt to Debt and Equity 55.8% 50.6% 53.5%
Through the first nine months of 2001, the net change in cash and cash
equivalents, as reported in the Consolidated Statement of Cash Flows, was an
increase of $532.5 million. A portion of this cash was invested and will be
retained for general corporate purposes and a portion will be used to repay
debt.
On February 6, 2001 Sumitomo converted the Company's 1.2% Convertible
Note Due August 16, 2001 in the principal amount of (Yen)6,536,535,767 into
1,140,866 shares of the Common Stock of the Company. Consolidated Debt as stated
above at September 30, 2000 and December 31, 2000 does not include the note.
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. The Company may prepay without
penalty at the 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.
The Company issued $650 million of its 7.857% Notes due 2011 in the
third quarter of 2001. A portion of the proceeds from the issuance of the Notes
was used to repay outstanding commercial
-26-
paper and short term bank borrowings. The remaining portion was retained for
general corporate purposes.
During the third quarter of 2001, the Company issued 4.3 million shares
of its common stock with a market value of approximately $100.0 million as a
contribution to certain domestic pension plans.
During the third quarter of 2001, the Board of Directors of the Company
declared a regular quarterly dividend of $.12 per share, a reduction of $.18 per
share from the $.30 per share declared and paid in each quarter of 2000 and
2001. The Board's decision to reduce the dividend was in response to current
economic and business conditions.
Substantial short term and long term credit sources are available to
the Company globally under normal commercial practices. At September 30, 2001,
the Company had short term committed and uncommitted bank credit arrangements
totaling $1.9 billion, of which $1.1 billion were unused. The Company also had
available long term credit arrangements at September 30, 2001, totaling $4.925
billion, of which $1.525 billion were unused.
The Company is a party to two revolving credit facility agreements,
consisting of a $750 million five-year revolving credit facility and a $775
million 364-day revolving credit facility. These agreements were amended in
August and November, 2001.
The $750 million five-year credit facility agreement is with 26
domestic and international banks and provides that the Company may borrow at any
time until August 15, 2005, when the commitment terminates and any outstanding
loans mature. The Company pays a commitment fee ranging from 12.5 to 25 basis
points on the entire amount of the commitment (whether or not borrowed) and a
usage fee on amounts borrowed (other than on a competitive bid or prime rate
basis) ranging from 37.5 to 125 basis points over LIBOR (or 50 to 137.5 basis
points over a defined CD rate). These fees may fluctuate quarterly within these
ranges based upon the Company's leverage. During 2001, commitment fees averaged
20 basis points.
The $775 million 364-day credit facility agreement is with 26 domestic
and international banks and provides that the Company may borrow until August
13, 2002, on which date the facility commitment terminates, except as it may be
extended on a bank by bank basis. If a bank does not extend its commitment if
requested to do so, the Company may obtain from such bank a two year term loan
up to the amount of such bank's commitment. The Company pays a commitment fee
ranging from 10 to 20 basis points on the entire amount of the commitment
(whether or not borrowed) and a usage fee on amounts borrowed (other than on a
competitive bid or prime rate basis) ranging from 40 to 130 basis points over
LIBOR (or 52.5 to 142.5 basis points over a defined CD rate). These fees may
fluctuate quarterly within these ranges based upon the Company's
-27-
leverage.
Under each of the facility agreements, a utilization fee of 25 basis
points per annum is charged each day on which the sum of the outstanding loans
exceeds 50% of the total commitment.
Each of the facilities provide that the Company may obtain loans
bearing interest at reserve adjusted LIBOR or a defined certificate of deposit
rate, plus in each case the applicable usage fee, at rates based on the prime
rate, or at rates determined on a competitive bid basis. Each facility agreement
contains certain covenants which, among other things, require the Company to
maintain at the end of each fiscal quarter a minimum consolidated net worth and
a defined minimum interest coverage ratio. In addition, the facility agreements
establish a limit on the aggregate amount of consolidated debt the Company and
its subsidiaries may incur. There are no borrowings outstanding under these
agreements at September 30, 2001. These revolving credit facilities support,
among other things, the uncommitted short term bank facilities.
The Company's long term and short term credit ratings have been placed
on credit watch negative by Standard & Poor's. The Company's debt is currently
rated at either the lowest or the next to lowest investment grade by the
principal rating agencies (A-3/BBB by Standard & Poor's, P-3/Baa3 by Moody's
Investors Services and F-3/BBB by Fitch). The Company is not able to predict
future rating actions. The Company does not anticipate that its ongoing
operations will require significant additional funding in the foreseeable
future.
Funds generated by operations, together with funds available under
existing credit arrangements, are expected to be sufficient to meet the
Company's currently anticipated requirements.
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 September 30, 2001, the interest rate on 58% 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 45%
at September 30, 2000. The Company also from time to time enters into interest
-28-
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)
INTEREST RATE SWAP CONTRACTS
- ----------------------------
2001 2000
---- ----
Notional principal amount $375.0 $ 75.0
Pay fixed rate 5.17% 6.24%
Receive variable LIBOR 2.79% 6.88%
Average years to maturity 2.2 .8
Fair value - asset (liability) $(12.2) $ .5
Pro forma fair value - asset (liability) (13.9) .1
The pro forma fair value assumes a 10% decrease in variable market
interest rates at September 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 NINE MONTHS ENDED
(Dollars in millions) SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
Notional principal $95.0 $75.0 $80.0 $75.0
Pay fixed rate 6.21% 6.24% 6.23% 6.24%
Receive variable LIBOR 3.61% 6.87% 4.49% 6.48%
The following table presents fixed rate debt information at September
30:
(In millions)
FIXED RATE DEBT 2001 2000
- --------------- ---- ----
Fair value - liability $2,388.8 $1,915.5
Pro forma fair value - liability 2,496.6 1,991.8
The pro forma fair value assumes a 100 basis point decrease in market
interest rates at September 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. The precision of the model decreases as the assumed change in
interest rates increases.
-29-
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 and
2002. Contracts hedging short term trade receivables and payables normally have
no hedging designation.
The following table presents foreign exchange contract information at
September 30:
(In millions)
FOREIGN EXCHANGE CONTRACTS
- --------------------------
2001 2000
---- ----
Spot value (unfavorable) favorable $ 8.6 $38.4
Pro forma change in spot value 27.2 9.0
Contract maturities 10/01-03/06 10/00-03/06
Fair value asset (liability):
Swiss franc swap-current $ - $24.2
Swiss franc swap-long term 10.0 8.0
Euro swaps-long term (14.6) -
Other-current 13.2 6.2
The pro forma change in spot value assumes a 10% change in foreign
exchange rates at September 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.
-30-
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.
-31-
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 (C), (D), (E), (F) and (H), pages
24, 25 and 26, Goodyear reported certain legal proceedings, to the Quarterly
Report of Goodyear on Form 10-Q for the quarter ended March 31, 2001 (the "1st
Quarter 10-Q"), wherein at Part II, Item 1, paragraphs (2), (3) and (4), pages
27 and 28, Goodyear reported developments in respect of certain legal
proceedings, and to the Quarterly Report of Goodyear on Form 10-Q for the
quarter ended June 30, 2001 (the "2nd Quarter 10-Q"), wherein at Part II, Item
1, paragraphs (1) and (2), page 29, Goodyear reported further developments in
respect of certain legal proceedings. Goodyear reports the following
developments in respect of the legal proceedings described at paragraphs (C),
(D), (E), (F) and (H) of Item 3 of the 2000 10-K and updated at paragraphs (3)
and (4) of Part II, Item 1, of the 1st Quarter 10-Q and at paragraphs (1) and
(2) of Part II, Item 1, of the 2nd Quarter 10-Q:
(1) At paragraph (C), page 24, of the 2000 10-K, Goodyear reported a
civil action (Gregory Tire, et al. v. Goodyear, et al.) in the Judicial District
Court, Dallas County, Texas, filed against it by 22 independent tire dealers or
franchisees located in Texas alleging, among other things, that Goodyear in its
dealings with the plaintiffs violated the Texas Deceptive Practices Act and
various other Texas statutes, breached its covenants of good faith and fair
dealing with the plaintiffs, breached certain contracts with the plaintiffs and
committed common law fraud. The plaintiffs are seeking unspecified compensatory
damages, exemplary damages equal to up to 10% of Goodyear's net worth and
injunctive and other relief. In 1999, the claims of two of the plaintiffs were
dismissed with prejudice. The court has ordered that the claims of each
remaining plaintiff would be the subject of a separate trial. On October 29,
2001, following a trial in respect of one of the plaintiffs, the jury found in
favor of Goodyear.
(2) At paragraph (D), page 24, of the 2000 10-K, Goodyear reported that
on August 12, 1999 the United States District Court for the Central District of
California entered an order dismissing Orion Tire et al. vs. Goodyear et al., a
civil action filed by Orion Tire Corporation ("Orion") and China Tire Holdings
Limited ("China Tire"), and other parties whose claim had theretofore been
dismissed. Orion and China Tire had alleged, among other things, that Goodyear,
in connection with its 1994 acquisition of a 75% interest in a tire
manufacturing facility (the "Dalian Facility") in Dalian, People's Republic of
China, and a Goodyear subsidiary committed tortious interference with certain
prospective economic advantages of Orion and China Tire, committed trade libel
and defamation concerning Orion and China Tire and engaged in civil
racketeering in respect of China Tire. The plaintiffs seek more than $1.0
billion in actual damages, and $3.0 billion in exemplary damages, together with
such further relief as the court may deem appropriate. Orion and China Tire
appealed the decision of the court dismissing their claims to the United States
Court of Appeals for the Ninth Circuit and on October 18, 2001, the Court of
Appeals reversed and vacated in part the judgment of the district court with
respect to the dismissal of Orion's trade libel and defamation and intentional
interference with prospective economic advantage claims and China Tire's civil
racketeering claims and remanded the case to the
-32-
district court for further proceedings.
(3) At paragraph (E), page 25, of the 2000 10-K, and at paragraph (2)
of Item 1, Part II, page 27, of the 1st Quarter 10-Q, Goodyear reported various
civil actions relating to Goodyear's Entran II hose installed in Heatway
radiant heating systems. As previously reported, a class action complaint was
filed in the District Court of Eagle County, Colorado (Anderson, et al. v.
Goodyear, et al.) in November, 1998 on behalf of a putative class consisting of
all persons who have or had an ownership interest in real property located in
Colorado which Heatway heating systems using Entran II hose had been installed.
These plaintiffs claim, among other things, breach of express warranties,
breach of implied warranties of merchantability and fitness for a particular
purpose, negligence and strict liability against both Heatway and Goodyear. In
July of 2000, the court denied class certification. On November 7, 2001, the
court, in response to plaintiffs' amended complaint and request for
reconsideration of the denial of class certification, issued an order
certifying a class to consist of all persons (alleged to be more than 1,000)
who presently own or have owned real property located in Colorado on which
Entran II hose was used in Heatway systems who have suffered or will suffer
damages due to the defective nature of Entran II hose. The plaintiffs are
seeking unspecified damages and other relief.
(4) At paragraph (F), page 26, of the 2000 10-K, and at paragraph (3)
of Item 1 of Part II, page 28, of the 1st Quarter 10-Q and paragraph (1) of Item
1 of Part II, page 29, of the 2nd Quarter 10-Q, Goodyear reported the filing of
five class action complaints alleging, among other things, that certain types of
load range D and E light truck and recreational tires manufactured by Goodyear
did not conform to certain express and implied warranties, that Goodyear was
negligent in the design and manufacture of the specified tires and that Goodyear
engaged in a "silent recall" of the specified tires thereby committing an unfair
and deceptive trade practice. On September 17, 2001, one of the class action
complaints (Adkins et al. vs Goodyear, et al., United States District Court for
the Southern District of Ohio, Western Division, Civil Action No. C-1-01-0017)
was voluntarily dismissed without prejudice by the plaintiff. The other four
class action proceedings remain and nineteen non-class action civil lawsuits
related to deaths or serious injuries involving allegedly defective Goodyear
load range E light truck tires are currently pending.
(5) At paragraph (H), page 26, of the 2000 10-K, and at paragraph (4)
of Item 1 of Part II, page 28, of the 1st Quarter 10-Q and paragraph (2) of Item
1 of Part II, page 29, of the 2nd Quarter 10-Q, Goodyear 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. At
October 31, 2001, approximately 61,000 asbestos-related claims were pending
against Goodyear. The plaintiffs allege various respiratory diseases resulting
from their exposure to asbestos, including in some cases lung cancer and
mesothelioma, and are seeking actual and punitive damages and other relief.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ------ -----------------------------------------
On September 10, 2001, Goodyear issued 4,300,000 shares of its Common
Stock, without par value, to The Goodyear Tire & Rubber Company Common Trust for
the
-33-
Collective Investment of Plan Funds as a contribution to certain of Goodyear's
domestic pension plans. The fair market value of the 4,300,000 shares of
Goodyear Common Stock contributed was approximately $100,000,000 on September
10, 2001. Goodyear has determined that the issuance of the shares of Goodyear
Common Stock to the trust was exempt from registration under the Securities Act
of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act, as a
transaction by the issuer not involving a public offering.
ITEM 5. OTHER INFORMATION.
- ------ -----------------
On August 15, 2001, Goodyear issued $650,000,000 in principal amount of its
7.857% Notes due 2011 (the "Notes") pursuant to that certain Indenture, dated
March 1, 1999 (the "Indenture"), between Goodyear and The Chase Manhattan Bank,
as Trustee. The net proceeds to Goodyear from the sale of the Notes were
$637,000,000, before deducting expenses payable by Goodyear which are estimated
to be approximately $819,248. A portion of the net proceeds from the sale of the
Notes was used to repay commercial paper as it came due and certain short term
bank borrowings and the balance was retained for general corporate purposes and
invested in cash equivalent securities. The terms and conditions of the Notes
are set forth in the Indenture (filed as Exhibit 4.1 to Goodyear's Quarterly
Report on Form 10-Q for the quarter ended March 30, 2000), as supplemented by
that certain Officer's Certificate, dated August 15, 2001, which includes the
form of Global Note, filed as Exhibit 4.3 to this Quarterly Report on Form 10-Q.
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, 2001.
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: November 14, 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.)
-34-
THE GOODYEAR TIRE & RUBBER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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
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(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).
(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).
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*Pursuant to Item 601 of Regulation S-K.
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EXHIBIT EXHIBIT
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TABLE ITEM NO. * Description of Exhibit NUMBER
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4 (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).
(g) 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).
(h) Conformed copy of Amended and Restated 4.1
Five Year Credit Agreement, dated as of
August 14, 2001, among Goodyear, the Lenders
party thereto and The Chase Manhattan Bank,
as Agent.
(i) Conformed copy of Amended and Restated 4.2
364-Day Credit Agreement, dated as of August
14, 2001, among Goodyear, the Lenders party
thereto and The Chase Manhattan Bank, as
Agent.
(j) Conformed copy of Officer's Certificate 4.3
dated August 15, 2001, supplementing that
certain Indenture dated as of March 1, 2001,
between Goodyear and The Chase Manhattan
Bank, as Trustee.
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*Pursuant to Item 601 of Regulation S-K.
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EXHIBIT EXHIBIT
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TABLE ITEM NO. * Description of Exhibit NUMBER
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(k) Form of First Amendment, dated as of 4.4
November 9, 2001, among Goodyear, the
Lenders party thereto and The Chase
Manhattan Bank, as Administrative Agent and
Chase Manhattan International Limited, the
London Agent.
(l) Form of First Amendment, dated as of 4.5
November 9, 2001, to the Amended and
Restated Five Year Revolving Credit
Agreement dated as of August 14, 2001, among
Goodyear, the Lenders party thereto and The
Chase Manhattan Bank, as Agent.
(m) Form of First Amendment, dated as of 4.6
November 9, 2001, to the Amended and
Restated 364-Day Revolving Credit Agreement
dated as of August 14, 2001, among Goodyear,
the Lenders party thereto and The Chase
Manhattan Bank, as Agent.
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 September 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.
12 STATEMENT RE COMPUTATION
OF RATIOS
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Statement setting forth the computation of 12
Ratio of Earnings to Fixed Charges.
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*Pursuant to Item 601 of Regulation S-K.
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