1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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, 1999: 156,330,620
================================================================================
2
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,
1999 1998 1999 1998
------- ------- ------- -------
NET SALES $ 3,288.8 $ 3,191.7 $ 9,328.7 $ 9,423.2
Cost of Goods Sold 2,764.6 2,469.8 7,531.2 7,193.7
Selling, Administrative and General Expense 515.4 471.5 1,435.4 1,382.4
Rationalizations 6.1 -- 163.9 (29.7)
Interest Expense 46.2 41.4 123.5 105.7
Other (Income) and Expense (159.2) (44.3) (148.2) (72.5)
Foreign Currency Exchange (1.3) (0.3) (34.8) (14.8)
Minority Interest in Net Income of Subsidiaries 12.1 9.7 23.1 25.6
--------- --------- --------- ---------
Income from Continuing Operations before Income Taxes 104.9 243.9 234.6 832.8
United States and Foreign Taxes on Income (4.2) 58.9 34.3 237.3
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 109.1 185.0 200.3 595.5
Discontinued Operations -- -- -- (34.7)
--------- --------- --------- ---------
NET INCOME $ 109.1 $ 185.0 200.3 560.8
========= =========
Retained Earnings at Beginning of Period 3,477.8 2,983.4
CASH DIVIDENDS (140.6) (141.2)
--------- ---------
Retained Earnings at End of Period $ 3,537.5 $ 3,403.0
========= =========
PER SHARE OF COMMON STOCK - BASIC:
INCOME FROM CONTINUING OPERATIONS $ 0.70 $ 1.19 $ 1.28 $ 3.80
Discontinued Operations -- -- -- (0.22)
--------- --------- --------- ---------
NET INCOME $ 0.70 $ 1.19 $ 1.28 $ 3.58
========= ========= ========= =========
Average Shares Outstanding 156.3 156.4 156.1 156.8
PER SHARE OF COMMON STOCK - DILUTED:
INCOME FROM CONTINUING OPERATIONS $ 0.69 $ 1.17 $ 1.26 $ 3.75
Discontinued Operations -- -- -- (0.22)
--------- --------- --------- ---------
NET INCOME $ 0.69 $ 1.17 $ 1.26 $ 3.53
========= ========= ========= =========
Average Shares Outstanding 159.5 157.8 159.0 158.7
CASH DIVIDENDS PER SHARE $ 0.30 $ 0.30 $ 0.90 $ 0.90
========= ========= ========= =========
The accompanying notes are an integral part of this financial statement.
-1-
3
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Unaudited
(In millions)
SEPTEMBER 30, DECEMBER 31,
1999 1998
ASSETS: ------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 233.4 $ 239.0
Accounts and notes receivable,
less allowance - $90.6 ($54.9 in 1998) 2,639.4 1,770.7
Inventories:
Raw materials 378.0 369.9
Work in process 100.0 87.5
Finished product 1,807.0 1,707.1
--------- ---------
2,285.0 2,164.5
Sumitomo 1.2% Convertible Note Receivable Due 8/00 136.1 --
Prepaid expenses and other current assets 334.4 354.9
--------- ---------
TOTAL CURRENT ASSETS 5,628.3 4,529.1
Long Term Accounts and Notes Receivable 172.8 173.5
Investments in Affiliates, at equity 127.4 111.4
Other Assets 75.0 99.5
Goodwill 636.5 259.0
Deferred Charges 983.4 1,058.3
Properties and Plants,
less accumulated depreciation - $5,499.2 ($5,394.6 in 1998) 5,512.0 4,358.5
--------- ---------
TOTAL ASSETS $13,135.4 $10,589.3
========= =========
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable - trade $ 1,310.5 $ 1,131.7
Compensation and benefits 812.0 751.0
Other current liabilities 375.9 351.9
United States and foreign taxes 141.4 252.6
Notes payable 1,613.8 763.3
Sumitomo 1.2% Convertible Note Payable Due 8/00 123.5 --
Long term debt due within one year 157.1 26.0
--------- ---------
TOTAL CURRENT LIABILITIES 4,534.2 3,276.5
Compensation and Benefits 2,189.4 1,945.9
Long Term Debt and Capital Leases 1,673.3 1,186.5
Other Long Term Liabilities 173.0 175.6
Minority Equity in Subsidiaries 886.7 259.0
--------- ---------
TOTAL LIABILITIES 9,456.6 6,843.5
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value:
Authorized 50,000,000 shares, unissued -- --
Common Stock, no par value:
Authorized 300,000,000 shares
Outstanding shares - 156.3 (155.9 in 1998)
after deducting 39.4 treasury shares (39.7 in 1998) 156.3 155.9
Capital Surplus 1,029.0 1,015.9
Retained Earnings 3,537.5 3,477.8
Accumulated Other Comprehensive Income (1,044.0) (903.8)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 3,678.8 3,745.8
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,135.4 $10,589.3
========= =========
The accompanying notes are an integral part of this financial statement.
-2-
4
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unaudited
(In millions) Accumulated Other
Comprehensive Income
-------------------------------------
Common Capital Retained Foreign Minimum Unrealized Total
Stock Surplus Earnings Currency Pension Investment Shareholders'
Translation Liability Gains Equity
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $155.9 $1,015.9 $3,477.8 $(877.6) $ (26.2) $ - $ 3,745.8
Comprehensive income for 1999:
Net income 200.3
Foreign currency translation (169.4)
Sale of subsidiaries 15.3
Minimum pension liability 6.1
Unrealized investment gain 7.8
(net of tax of $4.8)
TOTAL COMPREHENSIVE INCOME 60.1
Cash dividends (140.6) (140.6)
Common stock issued 0.4 13.1 13.5
---------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 $156.3 $1,029.0 $3,537.5 $(1,031.7) $ (20.1) $ 7.8 $ 3,678.8
=======================================================================================
The accompanying notes are an integral part of this financial statement.
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
NET INCOME $ 109.1 $ 185.0 $ 200.3 $ 560.8
Other comprehensive income:
Foreign currency translation adjustment 8.0 8.0 (169.4) (97.0)
Less reclassification adjustment for
recognition of FCTA in net income 15.3 -- 15.3 --
due to the sale of subsidiaries
Minimum pension liability adjustment 1.3 0.9 6.1 (0.5)
Unrealized investment gain (loss) (49.0) -- 12.6 --
Tax on unrealized investment income 18.6 -- (4.8) --
---------------------- ----------------------
COMPREHENSIVE INCOME $ 103.3 $ 193.9 $ 60.1 $ 463.3
====================== ======================
The accompanying notes are an integral part of this financial statement.
-3-
5
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
(In millions) NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 200.3 $ 560.8
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation 393.6 351.8
Discontinued operations -- 49.5
Rationalizations and other actions 125.7 (19.6)
Asset sales (154.8) (69.9)
Changes in operating assets and liabilities, net of
asset acquisitions and dispositions:
Accounts and notes receivable (355.0) (326.2)
Inventories 294.7 (376.4)
Accounts payable-trade (197.8) (197.3)
Other assets and liabilities (83.6) (283.1)
-------- --------
Total adjustments 22.8 (871.2)
-------- --------
TOTAL CASH FLOWS FROM OPERATING ACTIVITIES 223.1 (310.4)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (560.0) (490.6)
Asset sales 49.5 488.8
Asset acquisitions (845.6) (197.1)
Other transactions (61.5) (87.5)
-------- --------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (1,417.6) (286.4)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term debt incurred 1,434.4 543.6
Short term debt paid (86.8) (59.8)
Long term debt incurred 23.2 325.6
Long term debt paid (38.1) (116.9)
Common stock issued 13.5 36.9
Common stock acquired -- (85.2)
Dividends paid (140.6) (141.2)
-------- --------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 1,205.6 503.0
Effect of Exchange Rate Changes on Cash and Cash Equivalents (16.7) (6.5)
-------- --------
Net Change in Cash and Cash Equivalents (5.6) (100.3)
Cash and Cash Equivalents at Beginning of the Period 239.0 258.6
-------- --------
Cash and Cash Equivalents at End of the Period $ 233.4 $ 158.3
======== ========
The accompanying notes are an integral part of this financial statement.
-4-
6
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
All per share amounts in these Notes to Financial Statements are diluted
unless otherwise indicated.
RATIONALIZATIONS
- ----------------
Rationalization charges (credits) were recorded as follows:
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
1ST QUARTER
- -----------
Termination of tire
production at Gadsden $ -- $ -- $ 85.5 $ --
Plant downsizing
and consolidation -- -- 81.9 --
-------- ------ -------- --------
$ -- $ -- $ 167.4 $ --
2ND QUARTER
- -----------
1997 program-plant down-
sizing/consolidation $ -- $ -- $ (6.5) $ (7.7)
1997 program-Formula 1 -- -- -- (22.0)
1996 program -- -- (3.1) --
-------- ------ -------- --------
$ -- $ -- $ (9.6) $ (29.7)
3RD QUARTER
- -----------
Termination of
tire production $ 34.8 $ -- $ 34.8 $ --
CART/IRL 6.9 -- 6.9 --
North American Tire staffing 4.8 -- 4.8 --
1st qtr 1999-Gadsden (33.4) -- (33.4) --
1st qtr 1999-plant down-
sizing/consolidation (6.8) -- (6.8) --
1997 program-plant down-
sizing/consolidation (.2) -- (.2) --
-------- ------ -------- --------
$ 6.1 $ -- $ 6.1 $ --
RATIONALIZATIONS $ 6.1 $ -- $ 163.9 $ (29.7)
======== ====== ======== ========
AFTER TAX $ 15.7 $ -- $ 112.0 $ (19.6)
======== ====== ======== ========
PER SHARE $ .10 $ -- $ .80 $ (.12)
======== ====== ======== ========
THIRD QUARTER 1999 PROGRAM - Continued competitive conditions in the markets
served by the Company resulted in the approval of rationalization plans in the
third quarter of 1999. The plans consisted of the decision to terminate tire
production at a facility in Latin America, the reduction of staffing levels in
North American Tire and the termination of participation in the Championship
Auto Racing Teams (CART) and Indy Racing League (IRL) racing series upon
completion of the 1999 series in November 1999. Of the $46.5 million of charges
recorded ($42.4 million after tax or $.27 per share), $19.2 million related to
non-cash writeoffs and $27.3 million related to future cash outflows, primarily
for associate severance costs and payments under noncancellable contracts. The
remaining balance of these provisions totaled $26.2 million at September 30,
1999.
The third quarter charges included $20.4 million for the release of
approximately 340 associates around the world, including approximately 160
production and supervisory associates at the Latin American facility, 120
managerial, administrative and support associates in North American Tire
operations and 60 production and support associates in CART/IRL activities. At
September 30, 1999, six North American Tire managerial associates had been
released at a cost of $1.2 million. The Company plans to release approximately
334 more associates and had reserved $19.2 million for that cost at September
30, 1999.
-5-
7
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RATIONALIZATIONS (CONTINUED)
- ----------------------------
Rationalization costs, other than associate-related costs, were recorded in
the 1999 third quarter and were incurred through September 30, 1999, as follows:
(In millions)
Recorded Incurred
-------- --------
Termination of tire production $19.6 $17.5
Withdrawal of support for CART and IRL 6.5 1.6
----- -----
$26.1 $19.1
Costs associated with termination of tire production were primarily for
equipment taken out of service. Costs associated with the withdrawal of support
for CART and IRL were for the early termination of contracts with various racing
teams and for the writeoff of equipment taken out of service. The remaining
balance of these provisions totaled $7.0 million at September 30, 1999.
The Company expects that the major portion of these actions will be
completed during 2000.
----------------
The Company continued to implement its prior rationalization programs. The
following discussion reflects the activity and progress of those programs in the
third quarter of 1999.
FIRST QUARTER 1999 PROGRAM - A number of rationalization actions were approved
in the first quarter of 1999 to reduce costs and increase productivity and
efficiency. These actions consisted primarily of the termination of tire
production at the Gadsden, Alabama facility and the downsizing and consolidation
of tire manufacturing facilities at Freeport, Illinois and 12 other locations in
Europe, South Africa and Latin America. A charge of $167.4 million ($116.0
million after tax or $.74 per share) was recorded, of which $28.4 million
related to non-cash writeoffs and $139.0 million related to future cash
outflows, primarily for associate severance costs. The remaining balance of
these provisions totaled $25.4 million at September 30, 1999.
In the third quarter of 1999, charges recorded in the 1999 first quarter
totaling $40.2 million ($26.5 million after tax or $.17 per share) were
reversed. The reversals included $33.4 million related to the decision to resume
production of certain passenger tire lines in a portion of the Gadsden facility
due to higher-than-expected demand in North America and the high cost and time
delays associated with installing additional capacity at other plants. The other
$6.8 million related to the decision to abandon the planned relocation of
certain agricultural tire production to Turkey due to the rationalization
opportunities presented by the joint venture with Sumitomo and production
difficulties in Turkey following the recent earthquake.
Under the first quarter 1999 program, the Company recorded a charge of
$130.6 million for the release of approximately 4,000 associates around the
world. Most of the associates to be released under the plan are or were
production and support associates at manufacturing locations, primarily in the
United States and Latin America. Through September 30, 1999, approximately 2,300
associates, including over 1,400 production and support associates in Latin
America, over 375 production associates at Gadsden, Alabama and over 390
production associates in Freeport, Illinois were released at a cost of $94.4
million. In connection with the plan for terminating tire production at the
Gadsden facility, more than 400 associates have been transferred from Gadsden to
other manufacturing facilities, the cost of which was not included in the first
quarter program. In the third quarter of 1999, $20.3 million was charged to the
reserve for the release of approximately 500 associates, primarily production
associates in Latin America. Associate costs totaling $34.4 million, including
$18.4 million of pension curtailment costs, were reversed in the third quarter
as a result of the previously discussed changes related to Gadsden and Turkey.
The Company plans to release approximately 1,000 more associates and had
reserved $20.2 million for that cost at September 30, 1999. During October 1999,
production at the Logan, Ohio facility was terminated and more than 550
associates were released at a cost of $2.6 million.
-6-
8
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RATIONALIZATIONS (CONTINUED)
- ----------------------------
Rationalization costs, other than associate-related costs, were recorded in
the first quarter program, and were incurred through September 30, 1999, as
follows:
(In millions) Recorded Incurred
-------- --------
Plant downsizing and consolidation $26.7 $ 20.7
Asset sales and other exit costs 10.1 5.1
----- -----
$36.8 $25.8
===== =====
Costs associated with downsizing and consolidation activities were
primarily for the writeoff of equipment taken out of service and obligations
under noncancellable contracts, primarily utility contracts, both at the Gadsden
facility. Asset sales and other exit costs included a loss on the anticipated
sale of a rubber plantation in Asia and additional costs associated with the
Company's 1998 exit from the Formula 1 racing series. Through September 30,
$25.8 million was charged to the reserve, of which $.5 million was incurred in
the 1999 third quarter. Reserves totaling $5.8 million were reversed in the
third quarter due to the changes related to Gadsden. The remaining balance of
these provisions totaled $5.2 million at September 30, 1999.
The Company expects the major portion of the first quarter 1999 program to
be completed during 1999, with the remaining actions to be completed in 2000.
1997 PROGRAM - During the third quarter, approximately 200 associates, primarily
hourly associates in North American operations, were released at a cost of $5.3
million. In addition, reserves related to European operations totaling $.2
million were reversed. The Company plans to release approximately 800 more
associates under the 1997 program and had reserved $33.1 million for that cost
at September 30, 1999.
Optimization, downsizing, consolidation and withdrawal costs of the 1997
program, other than associate-related costs, were recorded, and were incurred
through September 30, 1999, as follows:
(In millions)
Recorded Incurred
-------- --------
Withdrawal of support for the Formula 1 racing series $ 63.4 $43.2
Plant downsizing and closure activities 23.0 13.7
Kelly-Springfield consolidation 12.9 1.8
Consolidation of North American distribution facilities 12.3 11.4
Commercial tire outlet consolidation 4.7 4.7
Production realignments 2.8 2.8
------ -----
$119.1 $77.6
====== =====
During the third quarter of 1999, $1.9 million was charged to the reserve.
In the second quarter of 1999, reserves totaling $.5 million related to plant
downsizing and closure activities were reversed. During 1998, the Company
reversed $22 million due to the favorable settlement of Formula 1 obligations
and $7.7 million due to a change in the plant downsizing and closure activities
($19.6 million after tax or $.12 per share when taken together). At September
30, 1999, the remaining balance of these provisions totaled $11.3 million.
The Company expects that the major portion of the 1997 program will be
completed during 1999 with the remaining actions to be completed in 2000.
-7-
9
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RATIONALIZATIONS (CONTINUED)
- ----------------------------
1996 PROGRAM - The Company has completed the planned release of associates under
the 1996 program. Rationalization costs, other than for associate-related costs,
were recorded, and were incurred through September 30, 1999, as follows:
(In millions)
Recorded Incurred
-------- --------
Discontinuance of PVC production $10.6 $10.6
Canadian retail store closures 9.0 6.2
International production rationalization 8.5 8.5
North American Tire production rationalization 7.1 8.1
----- -----
$35.2 $33.4
===== =====
During the third quarter of 1999, $1.1 million was charged to the reserve.
In the second quarter of 1999 reserves totaling $1.0 million were adjusted. The
remaining balance of these provisions at September 30, 1999 totaled $2.8
million, which is for payments due under noncancellable leases through 2007
related to Canadian retail store closures. Except for the remaining Canadian
lease payments, the Company has completed the 1996 program.
BUSINESS SEGMENTS
- -----------------
Effective July 1, 1999 the Company reorganized its Europe Tire strategic
business unit (SBU) into the European Union Tire SBU and the Eastern Europe,
Africa and Middle East Tire SBU. In the segment information on the following
page, prior periods have been restated to reflect this change.
Portions of the items reported as Rationalizations and Other (Income) and
Expense on the Consolidated Statement of Income were not charged (credited) to
segment EBIT but were attributable to the Company's seven segments as follows:
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------ ----- ------ -------
RATIONALIZATIONS
- ----------------
North American Tire $ (21.7) $ -- $ 64.6 $ (7.7)
European Union Tire (7.1) -- (.5) --
Eastern Europe, Africa
and Middle East Tire .1 -- 2.2 --
Latin American Tire 34.8 -- 77.3 --
Asia Tire -- -- 1.5 --
------- ------- ------- -------
TOTAL TIRES 6.1 -- 145.1 (7.7)
Engineered Products -- -- 8.8 --
Chemical Products -- -- 3.1 --
------- ------- ------- -------
TOTAL SEGMENTS $ 6.1 $ -- $ 157.0 $ (7.7)
======= ======= ======= =======
OTHER (INCOME) AND EXPENSE
- --------------------------
North American Tire $ -- $ (39.0) $ -- $ (39.0)
European Union Tire (149.7) -- (149.7) --
Eastern Europe, Africa
and Middle East Tire -- -- -- --
Latin American Tire -- (3.6) -- 12.0
Asia Tire -- (9.6) -- (9.6)
------- ------- ------- -------
TOTAL TIRES (149.7) (52.2) (149.7) (36.6)
Engineered Products -- (.6) -- 1.2
Chemical Products (17.0) (.4) (17.0) (61.5)
------- ------- ------- -------
TOTAL SEGMENTS $(166.7) $ (53.2) $(166.7) $ (96.9)
======= ======= ======= =======
-8-
10
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
Unaudited
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- --------
SALES:
North American Tire $1,622.5 $1,603.8 $4,709.4 $4,678.0
European Union Tire 661.5 523.7 1,635.8 1,494.7
Eastern Europe, Africa and 212.3 222.6 582.8 626.4
Middle East Tire
Latin American Tire 234.7 302.6 694.5 965.1
Asia Tire 150.0 123.8 439.8 358.2
-------- -------- -------- --------
TOTAL TIRES 2,881.0 2,776.5 8,062.3 8,122.4
Engineered Products 297.9 311.9 935.3 970.5
Chemical Products 231.5 236.6 683.1 741.3
-------- -------- -------- --------
TOTAL SEGMENT SALES 3,410.4 3,325.0 9,680.7 9,834.2
Inter-SBU Sales (122.4) (129.2) (355.7) (404.5)
Other 0.8 (4.1) 3.7 (6.5)
-------- -------- -------- --------
NET SALES $3,288.8 $3,191.7 $9,328.7 $9,423.2
======== ======== ======== ========
INCOME:
North American Tire $ (108.6) $ 94.9 $ 7.4 $ 294.3
European Union Tire 42.7 39.8 123.3 147.8
Eastern Europe, Africa and 13.1 31.6 34.3 78.5
Middle East Tire
Latin American Tire 12.5 40.1 58.6 154.0
Asia Tire 5.5 1.6 16.9 9.4
-------- -------- -------- --------
TOTAL TIRES (34.8) 208.0 240.5 684.0
Engineered Products 8.9 22.3 60.2 89.9
Chemical Products 36.5 34.5 95.4 109.4
-------- -------- -------- --------
TOTAL SEGMENT INCOME (EBIT) 10.6 264.8 396.1 883.3
Rationalizations and other actions 160.6 53.2 2.8 126.6
Interest expense (46.2) (41.4) (123.5) (105.7)
Foreign currency exchange 1.3 0.3 34.8 14.8
Minority interest in net income (12.1) (9.7) (23.1) (25.6)
of subsidiaries
Inter-SBU Income (15.2) (16.4) (41.4) (49.2)
Other 5.9 (6.9) (11.1) (11.4)
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES $ 104.9 $ 243.9 $ 234.6 $ 832.8
======== ======== ======== ========
-9-
11
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
STRATEGIC ALLIANCE
- ------------------
On June 14, 1999, the Company entered into a definitive general agreement
and various other agreements with Sumitomo Rubber Industries Ltd. ("Sumitomo")
relating to the formation and operation of the strategic global alliance (the
"Alliance Agreements"). The Alliance Agreements provide, among other things, for
tire manufacturing and sales joint ventures. On September 1, 1999, the global
alliance was completed and the joint ventures commenced operations. In addition
to the businesses contributed, the Company paid $915.5 million to Sumitomo and
its affiliates, which was financed by the issuance of additional debt.
In accordance with the terms of the Alliance Agreements, on September 1,
1999 the Company acquired 75%, and Sumitomo owned 25%, of Goodyear Dunlop Tires
Europe B.V., a Netherlands holding company. On September 1, 1999, this company
acquired substantially all of Sumitomo's tire businesses in Europe, including
eight tire manufacturing plants located in England, France and Germany and sales
and distribution operations in 18 European countries, and most of the Company's
tire businesses in Europe. The Company's tire businesses in Poland (other than a
sales company), Slovenia and Turkey (as well as Morocco and South Africa), the
Company's aircraft tire businesses, and the Company's textile, steel tire cord
and tire mold manufacturing plants and technical center and related facilities
located in Luxembourg are excluded from the joint venture. On September 1, 1999,
the Company also acquired 75%, and Sumitomo acquired 25%, of Goodyear Dunlop
Tires North America Ltd., a holding company that purchased Sumitomo's tire
manufacturing operations in North America and certain of its related tire sales
and distribution operations. In addition, the Company acquired 100% of the
balance of Sumitomo's Dunlop tire distribution and sales operation in the United
States and Canada. The Company also acquired a 25% (and Sumitomo acquired a 75%)
equity interest in each of two tire companies in Japan, one for the distribution
and sale of Goodyear-brand passenger and truck tires in the replacement market
in Japan and the other for the distribution and sale of Goodyear-brand and
Dunlop-brand tires to original equipment manufacturers in Japan. The Company
transferred certain assets of its subsidiary located in Japan in exchange for
such equity interests and approximately $27 million in cash. The Company also
acquired a 51% (and Sumitomo acquired a 49%) equity interest in a company that
will coordinate and disseminate commercialized tire technology among the
Company, Sumitomo, the joint ventures and their respective affiliates, and an
80% (and Sumitomo acquired a 20%) equity interest in a global purchasing
company.
The Company accounted for the strategic alliance using the purchase method.
The cost of the acquired businesses totaled approximately $1.22 billion,
including the cash payment of $915.5 million and the fair value of 25% of the
Goodyear businesses contributed to the European joint venture, or $307 million.
The Company will amortize the $390 million of goodwill recorded on the
transaction on a straight-line basis over 40 years. The Company recognized a
gain of $149.7 million ($143.7 million after tax or $.90 per share) on the
change of control of 25% of the businesses it contributed to the European joint
venture.
The Company has been undergoing an extensive analysis and assessment of the
various activities of the combined businesses and is formulating, but has not
completed, plans to integrate the businesses in order to optimize market growth
opportunities as well as maximize cost efficiencies. The actions contemplated
under the plans will include the downsizing or consolidation of various
manufacturing, distribution, sales, support and administrative operations. The
execution of the plan is contingent upon the completion of the analysis of the
optimal integration of manufacturing, distribution and sales operations and
facilities, information systems, research and development activities and the
appropriate staffing levels for various other functions. Due to the magnitude of
the assessment required, the establishment and implementation of these plans
will extend over several periods commencing in the fourth quarter of 1999. The
Company anticipates that some of these actions will result in charges to future
operations while others will result in an adjustment to the acquisition cost.
-10-
12
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
STRATEGIC ALLIANCE (CONTINUED)
- ------------------------------
The actions contemplated by the Company related to the businesses acquired
are expected to result in costs totaling $80 million to $120 million. These
costs include associate severance costs and noncancellable lease obligations.
The costs will be recorded as an adjustment to the acquisition cost and will
result in increased values assigned to non-current assets.
The Consolidated Balance Sheet includes all of the assets and liabilities
of the European and North American businesses acquired by the Company. The
Consolidated Statement of Income also includes the results of operations of the
former Sumitomo operations from September 1, 1999, which are referred to in the
table below as "Dunlop".
The following table presents supplemental pro forma estimated results of
operations as if the joint ventures had commenced operations on January 1, 1998.
Historical results of the acquired businesses have been adjusted to exclude
non-recurring items and to reflect changes in the carrying amounts and
depreciable lives of certain fixed assets. The pro forma information also
reflects amortization of goodwill recorded by the Company and interest expense
at 6% associated with the debt incurred to finance the Company's cash payment of
$915.5 million to Sumitomo and its affiliates.
THREE MONTHS ENDED NINE MONTHS ENDED
(In millions, except per share) SEPT. 30, SEPT. 30,
1999 1998 1999 1998
NET SALES
- ---------
Goodyear $ 3,064.4 $ 3,191.7 $ 9,104.3 $ 9,423.2
Dunlop 608.2 636.0 1,802.2 1,815.1
---------- ---------- ---------- ----------
$ 3,672.6 $ 3,827.7 $ 10,906.5 $ 11,238.3
========== ========== ========== ==========
NET INCOME
- ----------
Goodyear $ 80.3 $ 176.5 $ 154.5 $ 535.3
Dunlop 16.5 11.8 48.5 42.1
---------- ---------- ---------- ----------
$ 96.8 $ 188.3 $ 203.0 $ 577.4
========== ========== ========== ==========
NET INCOME PER SHARE - BASIC
- ----------------------------
Goodyear $ .51 $ 1.12 $ .99 $ 3.41
Dunlop .11 .08 .31 .27
---------- ---------- ---------- ----------
$ .62 $ 1.20 $ 1.30 $ 3.68
========== ========== ========== ==========
NET INCOME PER SHARE - DILUTED
- ------------------------------
Goodyear $ .50 $ 1.11 $ .97 $ 3.37
Dunlop .11 .08 .31 .27
---------- ---------- ---------- ----------
$ .61 $ 1.19 $ 1.28 $ 3.64
========== ========== ========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES
- ------------------------------------------
The Consolidated Statement of Cash Flows is presented net of the following
transactions:
In connection with the Company's strategic alliance with Sumitomo Rubber
Industries, Ltd., on February 25, 1999 the Company issued to Sumitomo at par its
1.2% Convertible Note Due August 16, 2000, in the principal amount of
Yen13,073,070,934 (equivalent to $123.5 million at September 30, 1999). The
Company's Note is convertible, if not earlier redeemed, during the period
beginning July 16, 2000 through August 15, 2000 into 2,281,115 shares of the
Common Stock, without par value, of the Company at a conversion price of
Yen5,731 per share, subject to certain adjustments. In addition, on February 25,
1999, the Company purchased at par from Sumitomo a 1.2% Convertible Note Due
August 16, 2000, in the principal amount of Yen13,073,070,934 (also equivalent
to $123.5 million at September 30, 1999). The Sumitomo Note is convertible, if
not earlier redeemed, during the period beginning July 16, 2000 through August
15, 2000 into 24,254,306 shares of the Common Stock, Yen50 par value per share,
of Sumitomo at a conversion price of Yen539 per share, subject to certain
adjustments. The Company and Sumitomo have agreed not to redeem their respective
Notes, and to convert the Notes, if the joint ventures are operating on July 1,
2000.
-11-
13
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NONCASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
- ------------------------------------------------------
On September 1, 1999, the Company completed its global alliance with
Sumitomo. The Company's acquisition cost included the approximately $307 million
fair value of 25% of its businesses contributed to the European joint venture.
The Company also assumed debt totaling $165 million in Dunlop's European and
North American businesses.
In the third quarter of 1999, a tire manufacturing subsidiary recorded
fixed assets totaling $43.4 million acquired under a capital lease. In the third
quarter of 1998, the Company acquired a majority ownership interest in an Indian
tire manufacturer and assumed $103 million of debt.
INVESTMENTS
- -----------
Reflecting the completion of the strategic alliance with Sumitomo and the
planned conversion into equity of the previously mentioned Convertible Notes,
the Company has classified its investment in the Sumitomo 1.2% Convertible Note
("the Note") as available-for-sale, as provided in Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The fair value of the Note as an equity instrument was
$136.1 million at September 30, 1999. Changes in the fair value of the Note are
reported in the Consolidated Balance Sheet as Accumulated Other Comprehensive
Income. At September 30, 1999 the gross unrealized holding gain on the Note
totaled $28.1 million ($17.5 million after tax). The Company's 1.2% Convertible
Note has been designated as a hedge of the exchange exposure of the Sumitomo
Note, and the effect of exchange rate changes on the Company's Note are reported
on the Consolidated Balance Sheet as Accumulated Other Comprehensive Income. The
fair value of the Company's Note as a debt instrument was $119.0 million at
September 30, 1999.
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
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------- ------- ------- -------
NET SALES:
Asia Tire $ 150.0 $ 123.8 $ 439.8 $ 358.2
SPT 158.7 147.0 489.8 470.6
------- ------- ------- -------
$ 308.7 $ 270.8 $ 929.6 $ 828.8
======= ======= ======= =======
EBIT:
Asia Tire $ 5.5 $ 1.6 $ 16.9 $ 9.4
SPT 7.8 12.1 27.0 35.1
------- ------- ------- -------
$ 13.3 $ 13.7 $ 43.9 $ 44.5
======= ======= ======= =======
-12-
14
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OTHER (INCOME) AND EXPENSE
- --------------------------
Other (Income) and Expense in 1999 included a third quarter gain of $149.7
million ($143.7 million after tax or $.90 per share) on the change in control of
25% of the European businesses contributed to Goodyear Dunlop Tires Europe B.V.
by the Company. In addition, proceeds of $17.0 million ($11.1 million after tax
or $.07 per share) were realized in the 1999 third quarter from the Company's
sale of customer lists and formulations in connection with its exit from
the production of certain rubber chemicals. The third quarter of 1998 included
gains on dispositions of real estate totaling $53.2 million ($32.0 million after
tax or $.20 per share). The second quarter of 1998 included a charge of $17.4
million ($11.4 million after tax or $.07 per share) for the settlement of
several related lawsuits involving employment matters in Latin American Tires
and Engineered Products in Latin America. The first quarter of 1998 included a
gain of $61.1 million ($37.9 million after tax or $.24 per share) on the sale of
the Company's Calhoun, Georgia latex processing facility.
DISCONTINUED OPERATIONS
- -----------------------
On March 21, 1998 the Company reached an agreement to sell, and on July 30,
1998 the Company completed the sale of, substantially all of the assets and
liabilities of its oil transportation business to Plains All American Inc., a
subsidiary of Plains Resources Inc. Proceeds from the sale were $422.3 million,
which included distributions to the Company of $25.1 million prior to closing.
The principal asset of the oil transportation business was the All American
Pipeline System, consisting of a 1,225 mile heated crude oil pipeline system
extending from Las Flores and Gaviota, California, to McCamey, Texas, a crude
oil gathering system located in California's San Joaquin Valley and related
terminal and storage facilities.
The transaction was accounted for as a sale of discontinued operations.
Operating results and the loss on sale of discontinued operations follow:
(In millions, except per share) NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
NET SALES $ 22.4
======
Income before Income Taxes $ 12.9
United States Taxes on Income 4.7
------
Income from Discontinued Operations 8.2
Loss on Sale of Discontinued Operations, including
estimated income from operations during the
disposal period (3/21/98-7/30/98)of $10.0
(net of tax of $24.1) (42.9)
------
DISCONTINUED OPERATIONS $(34.7)
======
INCOME (LOSS) PER SHARE - BASIC:
Income from Discontinued Operations $ .05
Loss on Sale of Discontinued Operations (.27)
------
DISCONTINUED OPERATIONS $ (.22)
======
INCOME (LOSS) PER SHARE - DILUTED:
Income from Discontinued Operations $ .05
Loss on Sale of Discontinued Operations (.27)
------
DISCONTINUED OPERATIONS $ (.22)
======
-13-
15
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
Stock options 917,564 1,142,429 951,509 1,654,882
Performance units -- 252,273 130,973 252,240
1.2% Convertible Note 2,281,115 -- 1,774,201 --
--------- --------- --------- ---------
3,198,679 1,394,702 2,856,683 1,907,122
========= ========= ========= =========
RECLASSIFICATION
- ----------------
Certain items previously reported in specific financial statement captions
have been reclassified to conform to the 1999 presentation.
ADJUSTMENTS
- -----------
All adjustments, consisting of normal recurring adjustments, necessary for
a fair statement of the results of these unaudited interim periods have been
included.
-14-
16
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 1999 were $3.29 billion, increasing 3.0% from
$3.19 billion in the 1998 quarter. Net income of $109.1 million, or $.69 per
share, decreased 41.0% from $185.0 million or $1.17 per share in the 1998
period.
In the nine months, sales of $9.33 billion decreased 1.0% from $9.42
billion in 1998. Net income was $200.3 million or $1.26 per share, compared to
$560.8 million or $3.53 per share in 1998.
Worldwide tire unit sales in the third quarter were almost 4 million
units, or 8.1%, higher than in 1998. The increase reflects the Company's
strategic alliance with Sumitomo Rubber Industries Ltd. (Sumitomo), which
commenced operations on September 1, 1999, as well as strong performances in
Europe and Asia. North American volume increased more than 1 million units,
however performance was limited by severe capacity constraints in several
product lines. Total North American (United States and Canada) volume increased
4.2% in the quarter while international unit sales increased 13.2%. Worldwide
replacement unit sales increased 5.7% from the 1998 quarter, while worldwide
original equipment (OE) unit sales rose 15.3%. Both the OE and replacement
markets benefited from increased volume in North America, Europe and Asia.
Significant decreases in OE and replacement units were experienced in Latin
American markets. In the nine months, unit sales increased 5.3 million units, or
3.8%, from the 1998 period, with North American units 3.2% higher and
international units up 4.5%. Worldwide replacement unit sales rose 4.0% in the
first nine months of 1999, while original equipment volume increased 3.3%.
Revenues increased in the quarter due primarily to higher tire unit sales.
The Dunlop businesses acquired from Sumitomo contributed more than $200 million
to third quarter sales. Revenues decreased in the nine months despite higher
unit sales, due primarily to the adverse effect of currency translations on
international results. The Company estimates that versus 1998, currency
movements adversely affected revenues in 1999 by approximately $70 million in
the third quarter and $275 million in the nine months. In addition, revenues in
both 1999 periods were adversely affected by continued worldwide competitive
pricing pressures, weak economic conditions in Latin America and lower unit
sales of engineered products.
-15-
17
The following table presents cost of goods sold (CGS) and selling, general
and administrative expense (SAG) as a percent of sales:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
CGS 84.1% 77.4% 80.7% 76.3%
SAG 15.7 14.8 15.4 14.7
Cost of goods sold increased in dollars and as a percent to sales in 1999
third quarter due primarily to increased production costs associated with higher
unit volumes, increased distribution costs, higher research and development
costs and a change in mix to lower margin tires. In addition, the Company
incurred operating charges for inventory write-offs and adjustments. These
charges relate primarily to inventory write-offs resulting from the realignment
of North American tire brand positioning and replacement market distribution
strategies and the termination of participation in CART and IRL racing. In
the 1999 nine months, CGS was also adversely impacted by higher unit costs
associated with lower production levels in first six months of 1999 resulting
from the Company's programs to realign capacity and reduce inventories.
SAG increased in both 1999 periods in dollars and as a percent to sales due
to higher SAG levels at the Dunlop businesses acquired on September 1, 1999, and
due to lower revenues in the first half of 1999.
The Dunlop businesses acquired from Sumitomo contributed more than $18
million in EBIT (net sales less cost of goods sold and selling, administrative
and general expense) in the third quarter of 1999. EBIT was adversely affected
by the effect of currency movements versus 1998. The Company estimates the
impact of currency fluctuations on EBIT to be approximately $12 million in the
third quarter and $50 million in the nine months.
The Company is unable to predict the impact of currency fluctuations and
economic conditions on its sales and EBIT in future periods. Reported sales and
EBIT in future periods are likely to be unfavorably impacted if the dollar
strengthens versus various foreign currencies. Similarly, the continuing
economic downturn in Latin America is expected to adversely affect the Company's
sales and operating income in future periods.
Rationalization plans approved in the third quarter of 1999 resulted in
third quarter charges totaling $46.5 million ($42.4 million after tax or $.27
per share). In addition, credits of $40.4 million ($26.7 million after tax or
$.17 per share) were recorded in the 1999 third quarter due to the reversal of
certain rationalization charges recorded in the first quarter of 1999. The 1999
first quarter charges totaled $167.4 million ($116.0 million
-16-
18
after tax or $.74 per share). The second quarter of 1999 included credits of
$9.6 million ($6.0 million after tax or $.04 per share), and the second quarter
of 1998 included credits of $29.7 million ($19.6 million after tax or $.12 per
share). For additional information concerning the Company's rationalization
programs, see "Rationalizations" below.
Interest expense rose in 1999 due primarily to higher debt levels incurred
to fund acquisitions and increased working capital requirements. Higher interest
rates were also experienced. Interest expense in future periods is expected to
be significantly higher than in the third quarter of 1999, due to increased debt
levels resulting from the strategic alliance with Sumitomo and higher interest
rates.
Other (Income) and Expense in the third quarter of 1999 included a gain of
$149.7 million ($143.7 million after tax or $.90 per share) on the change in
control of 25% of the European businesses contributed to Goodyear Dunlop Tires
Europe B.V. by the Company. In addition, proceeds of $17.0 million ($11.1
million after tax or $.07 per share) were realized in the 1999 third quarter
from the Company's sale of customer lists and formulations in connection with
its exit from the production of certain rubber chemicals. The third quarter of
1998 included gains on dispositions of real estate totaling $53.2 million ($32.0
million after tax or $.20 per share). The second quarter of 1998 included a
charge of $17.4 million ($11.4 million after tax or $.07 per share) for the
settlement of several related lawsuits involving employment matters in Latin
American Tires and Engineered Products in Latin America. The first quarter of
1998 included a gain of $61.1 million ($37.9 million after tax or $.24 per
share) on the sale of the Company's Calhoun, Georgia latex processing facility.
Foreign currency exchange gains increased pretax income in the nine months
due primarily to the impact of currency movements on U.S. dollar denominated
monetary items in Brazil.
The effective rate of U.S. and foreign taxes on income benefited from the
nontaxable character of the gain resulting from the change in control of 25% of
Goodyear's businesses contributed to the European joint venture with Sumitomo.
RATIONALIZATIONS
- ----------------
THIRD QUARTER 1999 PROGRAM - Continued competitive conditions in the markets
served by the Company resulted in the approval of a number of rationalization
plans in the third quarter of 1999. The actions consisted of the decision to
terminate tire production at a facility in Latin America, the reduction of
staffing levels in North American Tire and the termination of participation in
the Championship Auto Racing Teams (CART) and Indy Racing League (IRL) racing
series at the end of the season in November 1999. Of the $46.5 million of
charges recorded
-17-
19
($42.4 million after tax or $.27 per share), $19.2 million related to non-cash
writeoffs and $27.3 million related to future cash outflows, primarily for
associate severance costs and payments under noncancellable contracts. The
remaining balance of these provisions totaled $26.2 million at September 30,
1999.
The third quarter charges included $20.4 million for the release of
approximately 340 associates around the world, including approximately 160
production and supervisory associates at the Latin American facility, 120
managerial, administrative and support associates in North American Tire
operations and 60 production and support associates in CART/IRL activities. At
September 30, 1999, six North American Tire managerial associates had been
released at a cost of $1.2 million. The Company plans to release approximately
334 more associates and had reserved $19.2 million for that cost at September
30, 1999.
Rationalization costs, other than associate-related costs, of $26.1 million
were recorded in the 1999 third quarter, of which $19.1 million were incurred
during the third quarter of 1999. Costs associated with termination of tire
production totaled $19.6 million and are primarily for equipment taken out of
service. Costs associated with the withdrawal of support for CART and IRL
totaled $6.5 million and are for the early termination of contracts with various
racing teams. The remaining balance of these provisions totaled $7.0 million at
September 30, 1999.
The Company expects that the major portion of these actions will be
completed during 2000. Annual pretax savings of approximately $35 million are
expected when the planned actions have been fully implemented.
PRIOR RATIONALIZATION PROGRAMS
- ------------------------------
During 1999, the Company continued to implement its prior rationalization
programs. The following discussion reflects the activity and progress of those
programs in the third quarter of 1999.
FIRST QUARTER 1999 PROGRAM - A number of rationalization actions were approved
in the first quarter of 1999 to reduce costs and increase productivity and
efficiency. These actions consisted primarily of the termination of tire
production at the Gadsden, Alabama facility and the downsizing and consolidation
of tire manufacturing facilities at Freeport, Illinois and 12 other locations in
Europe, South Africa and Latin America. A charge of $167.4 million ($116.0
million after tax or $.74 per share) was recorded, of which $28.4 million
related to non-cash writeoffs and $139.0 million related to future cash
outflows, primarily for associate severance costs. The remaining balance of
these provisions totaled $25.4 million at September 30, 1999.
-18-
20
In the third quarter of 1999, charges recorded in the 1999 first quarter
totaling $40.2 million ($26.5 million after tax or $.17 per share) were reversed
and credited to the Rationalizations line on the Consolidated Statement of
Income. The reversals included $33.4 million related to the decision to resume
production of certain passenger tire lines in a portion of the Gadsden facility
due to higher-than-expected demand in North America and the high cost and time
delays associated with installing additional capacity at other plants. The other
$6.8 million related to the decision to abandon the planned relocation of
certain agricultural tire production to Turkey due to the rationalization
opportunities presented by the joint venture with Sumitomo and production
difficulties in Turkey following the recent earthquake.
Under the first quarter 1999 program, the Company recorded a charge of
$130.6 million for the release of approximately 4,000 associates around the
world. Most of the associates to be released under the plan are or were
production and support associates at manufacturing locations, primarily in the
United States and Latin America. Through September 30, 1999, approximately 2,300
associates, including over 1,400 production and support associates in Latin
America, over 375 production associates at the Gadsden, Alabama tire plant and
over 390 production associates at the Freeport, Illinois tire plant were
released at a cost of $94.4 million. In connection with the plan for terminating
tire production at the Gadsden facility, more than 400 Gadsden plant associates
have been transferred to other manufacturing facilities, the cost of which was
not included in the first quarter program. In the third quarter of 1999, $20.3
million was charged to the reserve for the release of approximately 500
associates, primarily production associates in Latin America. Associate costs
totaling $34.4 million, including $18.4 million of pension curtailment costs,
were reversed in the third quarter as a result of the previously discussed
changes related to the plants in Gadsden and Turkey. The Company plans to
release approximately 1,000 more associates and had reserved $20.2 million for
that cost at September 30, 1999. During October 1999, production at the Logan,
Ohio facility was terminated and more than 550 associates were released at a
cost of $2.6 million.
Rationalization costs, other than associate-related costs, of $36.8 million
were recorded, of which $.5 million were incurred during the third quarter of
1999. The costs were primarily associated with the writeoff of equipment taken
out of service and obligations under noncancellable contracts, primarily utility
contracts, both at the Gadsden facility, the loss on the anticipated sale of a
rubber plantation in Asia and additional costs associated with the Company's
1998 exit from the Formula 1 racing series. Through September 30, $25.8 million
was charged to the reserve. Reserves totaling $5.8 million were reversed in the
third quarter, as utility termination reserves will not be required due to the
resumption of production at the Gadsden facility. The remaining balance of these
provisions totaled $5.2
-19-
21
million at September 30, 1999.
The Company expects that the major portion of the remaining actions will be
completed during 1999 with the balance to be completed in 2000. Annual pretax
savings of approximately $140 million are expected when the planned actions have
been fully implemented.
1997 PROGRAM - During the third quarter, approximately 200 associates, primarily
hourly associates in North American operations, were released at a cost of $5.3
million. In addition, reserves related to European operations totaling $.2
million were reversed. The Company plans to release approximately 800 more
associates under the 1997 program and had reserved $33.1 million for that cost
at September 30, 1999.
Rationalization costs, other than associate-related costs, totaling $1.9
million were incurred during the third quarter of 1999. The remaining balance of
these provisions totaled $11.3 million at September 30, 1999.
The Company expects that the major portion of the 1997 program will be
completed during 1999 with the balance to be completed in 2000. Annual pretax
savings of approximately $200 million are expected when the planned actions have
been fully implemented.
1996 PROGRAM - The Company has completed the planned release of associates under
the 1996 program. During the third quarter of 1999, $1.1 million was charged to
the reserve for other than associate related costs. In the second quarter of
1999, reserves totaling $1.0 million were adjusted. The remaining balance of
these provisions at September 30, 1999 totaled $2.8 million, which is for
payments due under noncancellable leases through 2007 related to Canadian retail
store closures. With the exception of the Canadian lease payments, the Company
has completed the 1996 program.
For further information, refer to the note to the financial statements
captioned "Rationalizations".
DISCONTINUED OPERATIONS
- -----------------------
On March 21, 1998 the Company reached an agreement to sell, and on July 30,
1998 the Company completed the sale of, substantially all of the assets and
liabilities of its oil transportation business. The loss on the sale, net of
income from operations during 1998, totaled $34.7 million after tax or $.22 per
share. For further information, refer to the note to the financial statements
captioned "Discontinued Operations".
-20-
22
STRATEGIC ALLIANCE
- ------------------
On June 14, 1999, the Company entered into a definitive general agreement
and various other agreements with Sumitomo Rubber Industries Ltd. ("Sumitomo")
relating to the formation and operation of the strategic global alliance (the
"Alliance Agreements"). The Alliance Agreements provide, among other things, for
tire manufacturing and sales joint ventures. On September 1, 1999, the global
alliance was completed and the joint ventures commenced operations. In addition
to the businesses contributed, the Company paid $915.5 million to Sumitomo and
its affiliates, which was financed by the issuance of additional debt. Certain
adjustments may be made to the cash payment based on the amounts of cash, debt,
accounts receivable, inventory and trade payables contributed by Sumitomo and
the Company to the joint venture.
In accordance with the terms of the Alliance Agreements, the Company
acquired 75%, and Sumitomo owned 25%, of Goodyear Dunlop Tires Europe B.V., a
Netherlands holding company. On September 1, 1999, this company acquired
substantially all of Sumitomo's tire businesses in Europe, including eight tire
manufacturing plants located in England, France and Germany and sales and
distribution operations in 18 European countries, and most of the Company's tire
businesses in Europe. The Company's tire businesses in Poland (other than a
sales company), Slovenia and Turkey (as well as Morocco and South Africa), the
Company's aircraft tire businesses, and the Company's textile, steel tire cord
and tire mold manufacturing plants and technical center and related facilities
located in Luxembourg are excluded from the joint venture.
On September 1, 1999, the Company also acquired 75%, and Sumitomo acquired
25%, of Goodyear Dunlop Tires North America Ltd., a holding company that
purchased Sumitomo's tire manufacturing operations in North America and certain
of its related tire sales and distribution operations. In addition, the Company
acquired 100% of the balance of Sumitomo's Dunlop tire distribution and sales
operation in the United States and Canada. The Company also acquired a 25% (and
Sumitomo acquired a 75%) equity interest in each of two tire companies in Japan,
one for the distribution and sale of Goodyear-brand passenger and truck tires in
the replacement market in Japan and the other for the distribution and sale of
Goodyear-brand and Dunlop-brand tires to original equipment manufacturers in
Japan. The Company transferred certain assets of its subsidiary located in Japan
in exchange for such equity interests and approximately $27 million in cash.
The Company also acquired a 51% (and Sumitomo acquired a 49%) equity
interest in a company that will coordinate and disseminate commercialized tire
technology among the Company, Sumitomo, the joint ventures and their respective
affiliates, and an 80% (and Sumitomo acquired a 20%) equity interest in a global
-21-
23
purchasing company.
The Company accounted for the strategic alliance using the purchase method.
The cost of the acquired businesses totaled approximately $1.22 billion,
including the cash payment of $915.5 million and the fair value of 25% of the
Goodyear businesses contributed to the European joint venture, or $307 million.
The Company will amortize the approximately $390 million of goodwill recorded on
the transaction on a straight-line basis over 40 years.
The Company recognized the previously mentioned gain of $149.7 million
($143.7 million after tax or $.90 per share) on the change of control of 25% of
its businesses contributed to the European tire company. The Consolidated
Statement of Income also includes the results of operations of the former
Sumitomo operations from September 1, 1999. The Consolidated Balance Sheet at
September 30, 1999 includes all of the assets and liabilities of the European
and North American businesses acquired by the Company.
The Company has been undergoing an extensive analysis and assessment of the
various activities of the combined businesses and is formulating, but has not
completed, plans to integrate the businesses in order to optimize market growth
opportunities as well as maximize cost efficiencies. The actions contemplated
under the plans will include the downsizing or consolidation of various
manufacturing, distribution, sales, support and administrative operations. The
execution of the plan is contingent upon the completion of the analysis of the
optimal integration of manufacturing, distribution and sales operations and
facilities, information systems, research and development activities and the
appropriate staffing levels for various other functions. Due to the magnitude of
the assessment required, the establishment and implementation of these plans
will extend over several periods commencing in the fourth quarter of 1999. The
Company anticipates that some of these actions will result in charges to future
operations while others will result in an adjustment to the acquisition cost.
The actions contemplated by the Company related to the businesses acquired
are expected to result in costs totaling $80 million to $120 million. These
costs include associate severance costs and noncancellable lease obligations.
The costs will be recorded as an adjustment to the acquisition cost and will
result in increased values assigned to non-current assets. Because of these
actions and other initiatives, the Company anticipates that it will be able to
realize synergies that will, by the end of the third year of combined
operations, yield annual cost savings aggregating $300 to $360 million. The
synergies are expected to be derived from the rationalization of manufacturing,
the integration of distribution facilities and staffing and the benefits of
combined purchasing activities.
-22-
24
In addition to the above mentioned actions, the Company anticipates that it
will take certain other actions in respect of its European Union Tire and North
American Tire operations made possible by the strategic alliance with Sumitomo
that will result in fourth quarter rationalization charges of up to $45 million.
For further information, refer to the note to the financial statements,
Strategic Alliance.
YEAR 2000
- ---------
The Company has inventoried and assessed all date sensitive technical
infrastructure and information and transaction processing computer systems ("I/T
Systems"). The Company has also inventoried and assessed its manufacturing and
other operating systems that may be date sensitive ("Process Systems"),
including those that use embedded technology such as micro-controllers and
micro-processors. The Company has also determined the actions required to make
its I/T Systems and Process Systems Year 2000 compliant.
The Company monitors its Year 2000 compliance efforts with respect to I/T
Systems and Process Systems in three phases: (1) the identification and
inventory of date sensitive transactions, processes and systems (the "Inventory
Phase"), (2) the determination of repairs and replacements required, if any,
through testing, analysis and design (the "Analysis Phase"), and (3) the repair
or acquisition, installation and testing of Year 2000 compliant systems (the
"Remediation Phase"). The following table indicates the Company's progress in
its Year 2000 compliance program. This information includes the manufacturing
and distribution operations acquired by the Company on September 1, 1999 from
Sumitomo ("the Dunlop Facilities").
Estimated Percentage of Year 2000 Compliance Activity Completed:
----------------------------------------------------------------
Inventory Phase Analysis Phase Remediation Phase
--------------- -------------- -----------------
Percentage Completed at Percentage Completed at Percentage Completed at
9/30/99 12/31/98 9/30/99 12/31/98 9/30/99 6/30/99 12/31/98
------- -------- ------- -------- ------- ------- --------
I/T Systems 100% 100% 100% 100% 97% 92% 74%
Process Systems 100% 100% 100% 95% 96% 92% 66%
The I/T Systems and Process Systems that were not compliant as of September
30, 1999 are scheduled to be remediated and determined to be Year 2000 compliant
prior to December 31, 1999.
The cost of modifying the Company's existing I/T Systems in order to
achieve Year 2000 compliance is estimated to be $81 million to $89 million.
Approximately $79 million has been expended to modify existing I/T Systems
through September 30, 1999, including approximately $5 million expended during
the third quarter of 1999. The remaining $2 million to $10 million
-23-
25
will be spent during the balance of 1999. All of the costs of repairing such
existing I/T Systems have been or will be expensed in the period incurred. The
cost of new hardware has been and will be capitalized.
In addition, for several years the Company has been designing, acquiring,
and installing various business transactions processing I/T Systems, which in
each case provide significant new functionality and, in some instances, replace
non-compliant I/T Systems with Year 2000 compliant I/T Systems. Due to the
integrated nature of these I/T Systems enhancement projects, it is not
practicable to segregate the costs associated with the elements of these new I/T
Systems that may have been accelerated to facilitate Year 2000 compliance. The
Company estimates that prior to January 1, 2000 it will have spent approximately
$230 million to $245 million for consulting, software and hardware costs
incurred in connection with the I/T Systems enhancement projects in process
since 1996. Approximately $219 million has been expended on these projects
through September 30, 1999, including approximately $24 million during the third
quarter of 1999. The Company anticipates that costs incurred in respect of these
projects will be approximately $11 million to $26 million during the balance of
1999. Through September 30, 1999, approximately $41 million of these costs have
been expensed and $178 million of these costs have been capitalized.
Substantially all of the remaining consulting, software and hardware costs for
these I/T Systems enhancement projects will be capitalized.
The Company is modifying or replacing and testing its Process Systems at an
anticipated cost of between $34 million and $42 million, substantially all of
which is for the acquisition of replacement systems. The cost of Process Systems
has been and will be capitalized. Through September 30, 1999, the cost of
Process Systems installed by the Company has totaled $33 million, of which $6
million was incurred during the third quarter of 1999.
Accordingly, the Company's Year 2000 compliance costs (including the cost
of all I/T Systems enhancement projects) are expected to total approximately
$340 million to $370 million. Through September 30, 1999, Year 2000 compliance
costs have totaled $330 million, of which $35 million was incurred during the
third quarter of 1999. All Year 2000 costs have been and will be funded from
operations.
For 1999, costs for repairing existing I/T Systems for Year 2000 compliance
is expected to be approximately 10% of the Company's budget for information
technology. The total cost of repairing existing I/T Systems and of the I/T
Systems enhancement projects is expected to represent 30% of the Company's
information technology budget during 1999.
-24-
26
The Company surveyed its significant suppliers to determine the extent to
which the Company may be vulnerable to their failure to correct their own Year
2000 issues. Based on responses to its survey and other communications, the
Company has assessed the Year 2000 readiness of all of its significant
suppliers. Supplier assessments in respect of the Dunlop Facilities acquired
from Sumitomo on September 1, 1999 in connection with the formation of the
strategic alliance were 96% complete as of September 30, 1999 and have been
completed. If, contrary to the Company's expectations based on its supplier
assessment results, significant trading partners fail to adequately address Year
2000 issues, such failures could have a material adverse effect on the Company's
operations, although it is not possible at this time to quantify the amount of
revenues and profits that might be lost or costs that could be incurred by the
Company.
The Company is preparing contingency plans for its critical operational
areas, which plans include identification of critical processes, risk assessment
and response techniques in the event of a system failure. Planned responses to
system failures include emergency response teams designed to produce prompt
corrective action, identification of alternate sources of supply, manual
processing of transactions, manual control of production processes and the stock
piling of raw materials and finished goods in those instances where a risk of a
supply failure is suspected. The Company will also have a communications and
monitoring center operational from December 31, 1999 to January 3, 2000 (and
beyond, if necessary). The Company's contingency plans were 95% complete at
September 30, 1999 and were completed for all significant locations prior to
October 31, 1999, except that the contingency plans for the operational Dunlop
Facilities were 98% complete as of September 30, 1999 and were completed prior
to October 31, 1999. In certain cases, especially global infrastructure
failures, there may be no practical alternative course of action available to
the Company that will permit resumption of an interrupted business activity.
While the Company believes its efforts to address the Year 2000 issue will
be successful in avoiding any material adverse effect on the Company's
operations or financial condition, it recognizes that failing to resolve Year
2000 issues on a timely basis would, in a "most reasonably likely worst case
scenario", significantly limit its ability to manufacture and distribute certain
of its products for an undeterminable period of time, which is most likely to
arise in the event of the failure of one or more significant suppliers or
essential components of the global infrastructure, such as power sources. The
Company is not able to estimate its lost revenues, lost profits and costs
incurred in the event of the occurrence of the "most reasonably likely worst
case scenario". If the Company's systems are not Year 2000 compliant in a timely
manner, the Company may also incur liability for breach of contract or other
harm. It is not possible at this time to estimate either the risk of incurring
-25-
27
any such liability or the nature or amount of any such liability.
The foregoing discussion regarding Year 2000 is based on management's
current evaluation using available information. Factors that might cause
material changes include, but are not limited to, the readiness of third parties
and the Company's ability to respond to unforeseen Year 2000 complications.
NEW ACCOUNTING STANDARDS
- ------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 requires all derivatives to be recognized as
either assets or liabilities on the balance sheet and be measured at fair value.
Changes in such fair value are required to be recognized in earnings to the
extent that the derivatives are not effective as hedges. The provisions of SFAS
133 are effective for fiscal years beginning after June 15, 2000, and are
effective for interim periods in the initial year of adoption. At the present
time the Company has not yet determined the financial statement impact of the
adoption of SFAS 133.
SEGMENT INFORMATION
- -------------------
Effective July 1, 1999 the Company reorganized its Europe Tire segment into
two segments, the European Union Tire business and the Eastern Europe, Africa
and Middle East Tire business. This was done to reflect the way the business
would be managed given the anticipated addition of the Dunlop Facilities and
related businesses, which was completed on September 1, 1999. Segment
information for prior periods has been restated to reflect this change.
Segment EBIT was $10.6 million in the third quarter of 1999, decreasing
96.0% from $264.8 million in the 1998 quarter. Segment operating margin in the
third quarter of 1999 was .3%, compared to 8.0% in the 1998 period.
In the nine months, segment EBIT was $396.1 million, decreasing 55.2% from
$883.3 million in the 1998 period. Segment operating margin in the nine months
was 4.1%, compared to 9.0% in the 1998 period.
Segment EBIT does not include the previously discussed rationalizations and
certain items reported in other income and expense. For further information,
refer to the note to the financial statements captioned "Business Segments".
-26-
28
NORTH AMERICAN TIRE
- -------------------
North American Tire segment sales in the third quarter of 1999 were $1.62
billion, increasing 1.2% from $1.60 billion in the 1998 quarter. In the nine
months, sales of $4.71 billion increased .7% from $4.68 billion in 1998.
Unit sales in the 1999 third quarter increased 4.2% from the 1998 period,
with replacement unit sales .6% higher and original equipment volume up 13.1%.
Unit sales in the nine months increased 3.2% from the 1998 period, with
replacement unit sales 1.3% higher and original equipment volume up 7.1%.
Revenues increased in the quarter and nine months due primarily to higher
tire unit sales resulting from the acquisition of the Dunlop Facilities and
related businesses in the United States and Canada. Revenues in both periods
were adversely impacted by competitive pricing pressures, a less favorable mix
and the impact of currency translation on Canadian results. The Company also
experienced unanticipated product shortages of certain tire lines and sizes,
which is expected to continue into the fourth quarter of 1999. Revenues in
future periods are likely to be adversely affected by competitive pricing
pressures.
The North America Tire segment incurred an EBIT loss of $108.6 million in
the third quarter of 1999, compared to income of $94.9 million in the 1998
quarter. Operating margin was (6.7)%, compared to 5.9% in the 1998 quarter.
In the nine months, EBIT in North America was $7.4 million, decreasing
97.5% from the $294.3 million recorded in the 1998 period. Operating margin was
.2%, compared to 6.3% in 1998.
EBIT was lower in the third quarter due primarily to increased production
costs associated with higher unit volumes and shifts in mix to lower margin
tires, increased distribution costs and higher research and development costs.
Third quarter EBIT also included charges for inventory write-offs and
adjustments resulting primarily from the realignment of brand positioning and
replacement market distribution strategies occasioned by the addition of the
Dunlop brand on September 1, 1999 and from the Company's exit from CART and
IRL racing and higher SAG. EBIT in the nine months was also affected by a
change in mix to lower priced tires, increased costs to realign capacity and
reduce inventories, competitive pricing conditions and second quarter
nonrecurring costs related to operational changes at the Company's Danville tire
plant. EBIT was favorably affected in both 1999 periods by the September 1, 1999
acquisition of the Dunlop facilities and related businesses in the United States
and Canada from Sumitomo.
-27-
29
EBIT in 1999 did not include first quarter rationalization charges totaling
$95.5 million and credits resulting from the reversal of certain rationalization
reserves totaling $9.2 million in the second quarter and $21.7 million in the
third quarter. EBIT in 1998 did not include $7.7 million of credits in the
second quarter resulting from rationalization reversals and third quarter gains
on asset sales totaling $39.0 million.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to the Canadian dollar. Revenues and EBIT in the North American
Tire segment may be affected in future periods by the effects of currency
translation on Canadian results.
EUROPEAN UNION TIRE
- -------------------
European Union Tire segment sales in the third quarter of 1999 were $661.5
million, increasing 26.3% from $523.7 million in the 1998 period. In the nine
months, sales of $1.64 billion increased 9.4% from $1.49 billion in 1998.
Unit sales in the 1999 quarter increased 29.8% from the 1998 period, with
replacement unit sales 27.4% higher and original equipment volume up 36.9%. Unit
sales in the nine months increased 12.9% from the 1998 period, with replacement
unit sales 16.5% higher and original equipment volume up 4.3%.
Revenues increased in the quarter due primarily to higher tire unit sales
resulting from the acquisition of certain of Sumitomo's Dunlop tire
manufacturing and distribution operations in Europe. Revenues were adversely
impacted by the effects of currency translation and competitive pricing
pressures. Revenues in future periods may be adversely affected by competitive
pricing pressures.
European Union Tire segment EBIT was $42.7 million in the third quarter of
1999, increasing 7.3% from $39.8 million in the 1998 quarter. Operating margin
was 6.5%, compared to 7.6% in the 1998 quarter.
In the nine months, EBIT in the European Union was $123.3 million,
decreasing 16.6% from $147.8 million in 1998. Operating margin was 7.5%,
compared to 9.9% in 1998.
EBIT increased in the quarter due primarily to higher tire unit sales
resulting from the acquisition of the Dunlop businesses. EBIT decreased in the
nine months due primarily to increased costs resulting from ongoing programs to
align production with inventory, the effects of currency translations and higher
SAG.
EBIT in 1999 did not include first quarter rationalization charges totaling
$6.7 million and credits totaling $7.1 million in the third quarter resulting
from the reversal of certain rationalization reserves. A third quarter gain
totaling $149.7 million resulting from the change in control of 25% of the
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30
Company's businesses contributed to the European joint venture was not included
in EBIT.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to the Euro and other Western European currencies. Revenues and
EBIT in the European Union segment may be affected in future periods by the
effects of currency translations.
EASTERN EUROPE, AFRICA AND MIDDLE EAST TIRE
- -------------------------------------------
Eastern Europe, Africa and Middle East Tire segment ("Eastern Europe")
sales in the third quarter of 1999 were $212.3 million, decreasing 4.6% from
$222.6 million in the 1998 period. In the nine months, sales of $582.8 million
decreased 7.0% from the $626.4 million recorded in the 1998 period.
Unit sales in the 1999 quarter increased 6.7% from the 1998 period, with
replacement unit sales 3.3% higher and original equipment volume up 26.0%. Unit
sales in the nine months increased 7.4% from the 1998 period, with replacement
unit sales 9.2% higher and original equipment volume up .6%.
Revenues decreased in the quarter and nine months despite higher tire unit
sales, due primarily to the effects of currency translation, competitive pricing
conditions and adverse economic conditions in South Africa and Turkey. Revenues
were favorably impacted in the nine months by the acquisition of a majority
interest in tire manufacturing operations in Slovenia. Revenues in future
periods may be adversely affected by competitive pricing pressures and economic
conditions in the markets served by the Eastern Europe segment.
EBIT in the Eastern Europe Tire segment was $13.1 million in the third
quarter of 1999, decreasing 58.5% from $31.6 million in the 1998 quarter.
Operating margin was 6.2%, compared to 14.2% in the 1998 quarter.
In the nine months, EBIT in Eastern Europe was $34.3 million, decreasing
56.3% from $78.5 million in 1998. Operating margin was 5.9%, compared to 12.5%
in 1998.
EBIT was lower in the quarter and nine months due primarily to lower
revenues, increased costs resulting from lower production levels associated with
programs to realign capacity and reduce inventories, the impact of the recent
earthquake on the Turkish economy and adverse economic conditions in Eastern
Europe and South Africa.
EBIT in 1999 did not include first quarter rationalization charges totaling
$2.1 million.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to the various Eastern European
-29-
31
currencies. Revenues and EBIT in the Eastern Europe Tire segment are likely to
be adversely affected in future periods by the effects of currency translations
if the dollar, as expected, strengthens against the currencies in the region.
LATIN AMERICAN TIRE
- -------------------
Latin American Tire segment sales in the third quarter of 1999 were $234.7
million, decreasing 22.4% from $302.6 million in the 1998 period. In the nine
months, sales of $694.5 million decreased 28.0% from $965.1 million in 1998.
Unit sales in the 1999 quarter decreased 10.0% from the 1998 period, with
replacement unit sales 2.7% lower and original equipment volume down 30.6%. Unit
sales in the nine months decreased 16.2% from the 1998 period, with replacement
unit sales 8.2% lower and original equipment volume down 37.8%.
Revenues in the quarter and nine months decreased due primarily to lower
tire unit sales resulting from significantly reduced levels of vehicle
production, a significant economic downturn in most of the region, competitive
pricing pressures and the effects of currency translations.
EBIT in the Latin American Tire segment was $12.5 million in the third
quarter of 1999, decreasing 68.8% from $40.1 million in the 1998 quarter.
Operating margin was 5.3%, compared to 13.3% in 1998.
In the nine months, EBIT in Latin America was $58.6 million, decreasing
61.9% from $154.0 million in 1998. Operating margin was 8.4%, compared to 16.0%
in 1998.
EBIT was lower in the quarter and nine months due to lower revenues and
increased costs resulting from significantly lower demand from original
equipment manufacturers and in the replacement market due to adverse economic
conditions and from increased unit costs due to lower levels of capacity
utilization necessary to align production with demand and reduce inventory.
EBIT in 1999 did not include first quarter rationalization charges totaling
$42.5 million and third quarter rationalization charges totaling $34.8 million.
EBIT in 1998 did not include a second quarter charge for a lawsuit settlement
totaling $15.6 million and third quarter gains on asset sales totaling $3.6
million.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to Latin American currencies. Revenues and EBIT in the Latin
American Tire segment in future periods may be adversely affected by the effects
of currency translations. In addition, the expected continuing unfavorable
economic conditions and competitive pricing pressures in the region are expected
to adversely affect future revenues and EBIT.
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ASIA TIRE
- ---------
Asia Tire segment sales in the third quarter of 1999 were $150.0 million,
increasing 21.2% from $123.8 million in the 1998 period. In the nine months,
sales of $439.8 million increased 22.8% from $358.2 million in 1998.
Unit sales in the 1999 quarter increased 12.7% from the 1998 period, with
replacement unit sales 3.7% higher and original equipment volume up 75.6%. Unit
sales in the nine months increased 14.6% from the 1998 period, with replacement
unit sales 5.4% higher and original equipment volume up 82.6%.
Revenues in the quarter and nine months increased due primarily to higher
tire unit sales, the favorable impact of currency translations and improving
economic conditions in the region.
EBIT in the Asia Tire segment was $5.5 million in the third quarter of
1999, increasing from $1.6 million in the 1998 quarter. Operating margin was
3.7%, compared to 1.3% in 1998.
In the nine months, EBIT in Asia was $16.9 million, increasing 79.8% from
$9.4 million in 1998. Operating margin was 3.8%, compared to 2.6% in 1998.
EBIT increased in the quarter and nine months due primarily to higher
revenues, but was adversely impacted by a charge of $5.2 million to write off
obsolete equipment in India.
EBIT in 1999 did not include first quarter rationalization charges totaling
$1.5 million. EBIT in 1998 did not include third quarter gains on asset sales
totaling $9.6 million.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to Asian currencies. Revenues and EBIT in the Asia Tire segment
in future periods may be affected by the effects of currency translations. In
addition, changing economic conditions in the region may adversely affect future
revenues and EBIT. Revenues and EBIT in future periods may be adversely affected
by competitive pricing pressures.
Sales and EBIT of the Asia Tire segment reflect the results of the
Company's majority-owned tire businesses 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.
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33
The following table presents the sales and EBIT of the Company's Asia Tire
segment together with 100% of the sales and operating income of SPT:
THREE MONTHS ENDED NINE MONTHS ENDED
(In millions) SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
NET SALES:
Asia Tire $150.0 $123.8 $439.8 $358.2
SPT 158.7 147.0 489.8 470.6
------ ------ ------ ------
$308.7 $270.8 $929.6 $828.8
====== ====== ====== ======
EBIT:
Asia Tire $ 5.5 $ 1.6 $ 16.9 $ 9.4
SPT 7.8 12.1 27.0 35.1
------ ------ ------ ------
$ 13.3 $ 13.7 $ 43.9 $ 44.5
====== ====== ====== ======
ENGINEERED PRODUCTS
- -------------------
Engineered Products segment sales in the third quarter of 1999 were $297.9
million, decreasing 4.5% from $311.9 million in the 1998 period. In the nine
months, sales of $935.3 million decreased 3.6% from $970.5 million in 1998.
EBIT in the Engineered Products segment was $8.9 million in the third
quarter of 1999, decreasing 60.1% from $22.3 million in the 1998 quarter.
Operating margin was 3.0%, compared to 7.1% in 1998.
In the nine months, EBIT in Engineered Products was $60.2 million,
decreasing 33.0% from $89.9 million in 1998. Operating margin was 6.4%, compared
to 9.3% in 1998.
Revenues and EBIT decreased in the quarter and nine months due primarily to
lower unit sales resulting from reduced demand from the mining industry,
unfavorable currency translation and adverse economic conditions in Latin
America and South Africa. EBIT was adversely affected in both periods by
increased costs resulting from programs to align production with demand and
reduce inventories.
Revenues and EBIT in the Engineered Products segment in future periods may
be adversely affected by continued unfavorable economic conditions in Latin
America and South Africa.
EBIT in 1999 did not include first quarter rationalization charges totaling
$9.1 million. EBIT in 1998 did not include a second quarter charge for a lawsuit
settlement totaling $1.8 million and a third quarter gain on an asset sale
totaling $.6 million.
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CHEMICAL PRODUCTS
- -----------------
Chemical Products segment sales in the third quarter of 1999 were $231.5
million, decreasing 2.2% from $236.6 million in the 1998 period. In the nine
months, sales of $683.1 million decreased 7.9% from $741.3 million in 1998.
EBIT in the Chemical Products segment was $36.5 million in the third
quarter of 1999, increasing 5.8% from $34.5 million in the 1998 quarter.
Operating margin was 15.8%, compared to 14.6% in 1998.
In the nine months, EBIT in Chemical Products was $95.4 million, decreasing
12.8% from $109.4 million in 1998. Operating margin was 14.0%, compared to 14.8%
in 1998.
Revenues decreased in the quarter and nine months due primarily to
competitive pricing pressures. EBIT rose in the quarter due to the benefits of
cost control measures.
EBIT in 1999 did not include a first quarter rationalization charge of $3.1
million and third quarter proceeds of $17 million from the sale of customer
lists and formulations in connection with the Company's exit from the production
of certain rubber chemicals. EBIT in 1998 did not include gains on asset sales
totaling $61.1 million in the first quarter and $.4 million in the third
quarter.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash provided by operating activities was $223.1 million during the
first nine months of 1999, as reported on the Consolidated Statement of Cash
Flows. Excluding the impact of the strategic alliance with Sumitomo, as
discussed below, inventories decreased, although working capital requirements
increased for accounts receivable and accounts payable. The strategic alliance
with Sumitomo resulted in substantial increases on the Consolidated Balance
Sheet in accounts receivable, inventories, goodwill, other deferred charges,
property, plant and equipment, accounts payable, compensation and benefits, debt
and minority equity in subsidiaries. Cash flows from operating activities in the
Consolidated Statement of Cash Flows are presented net of the effects of the
strategic alliance, which is reflected in investing activities, as discussed
below.
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35
Net cash used in investing activities was $1.42 billion during the first
nine months of 1999. Cash used for investing activities in 1999 included a cash
payment of $915.5 million for the acquisition of the majority interests in
Sumitomo's Dunlop tire businesses in Europe and North America as part of the
strategic alliance with Sumitomo. Other investing activities in 1999 included
the net proceeds from the sale of assets to the Japanese joint ventures formed
under the strategic alliance, which are 25% owned by the Company, and the
proceeds from the sale of customer lists and formulations in connection with
the company's exit from the production of certain rubber chemicals. Capital
expenditures in the first nine months of 1999 were $560.0 million, primarily
for plant modernizations and expansions and new tire molds.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) 1999 1998 1999 1998
---- ---- ---- ----
Capital Expenditures $206.6 $199.9 $560.0 $490.6
Depreciation 140.2 121.4 393.6 351.8
Investing activities in 1998 included the divestitures of the Calhoun,
Georgia latex processing facility, the oil transportation segment, distribution
facilities in North America and other miscellaneous real estate. In addition,
other investing activities in 1998 included the acquisition a majority interest
in tire manufacturers in Slovenia, India and Japan and a tire and engineered
products manufacturing and distribution business in South Africa.
Net cash provided by financing activities was $1.21 billion during the
first nine months of 1999, which was used primarily to support the previously
mentioned investing activities.
(Dollars in millions) 9/30/99 12/31/98 9/30/98
-------- -------- --------
Consolidated Debt $3,444.2 $1,975.8 $2,169.1
Debt to Debt and Equity 48.4% 34.5% 37.2%
In connection with the Company's strategic alliance with Sumitomo, on
February 25, 1999 the Company issued to Sumitomo at par a 1.2% Convertible Note
Due August 16, 2000 in the principal amount of Yen13,073,070,934 (equivalent to
$123.5 million at September 30, 1999). The Company's Note is convertible, if not
earlier redeemed, during the period beginning July 16, 2000 through August 15,
2000 into 2,281,115 shares of the Common Stock, without par value, of the
Company at a conversion price of Yen 5,731 per share, subject to certain
adjustments. Consolidated Debt and Debt to Debt and Equity as stated above do
not reflect the issuance of the Company's 1.2% Convertible Note.
In addition, on February 25, 1999 the Company purchased at par from
Sumitomo a 1.2% Convertible Note Due August 16, 2000 in the principal amount of
Yen 13,073,070,934 (also equivalent to $123.5 million at September 30, 1999. The
Sumitomo Note is convertible, if not earlier redeemed, during the period
beginning July 16, 2000
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36
through August 15, 2000 into 24,254,306 shares of the Common Stock, Yen50 par
value per share, of Sumitomo at a conversion price of Yen539 per share, subject
to certain adjustments. Upon conversion of the Sumitomo Note into Sumitomo
Common Stock, the Company would own 10% of Sumitomo's outstanding shares. The
Company accounts for the Sumitomo note as an available-for-sale equity
instrument. The fair value of the note at September 30, 1999 was $136.1 million.
For further information, refer to the note to the financial statements,
Investments.
The Company and Sumitomo have each agreed that it would not redeem its
convertible note if the joint ventures contemplated by the global alliance were
operating on July 1, 2000.
Substantial short term and long term credit sources are available to the
Company globally under normal commercial practices. At September 30, 1999, the
Company had an aggregate of $1.3 billion of commercial paper outstanding. In
addition, at September 30, 1999, the Company had short term uncommitted bank
credit arrangements totaling $2.1 billion, of which $1.1 billion were unused.
The Company also had available long term credit arrangements at September 30,
1999 totaling $3.3 billion, of which $2.0 billion were unused.
In August of 1999, the Company entered into a Credit Agreement [364-Day
Facility], dated as of August 20, 1999, whereunder the Company may borrow from
25 domestic and international banks up to an aggregate amount of $1.3 billion at
any time and from time to time until August 18, 2000, when the commitment of
each lender terminates unless extended for 364 days on a bank by bank basis. If
a bank does not extend its commitment if requested to do so, the Company may
obtain a two-year loan from such bank in an amount up to the amount of such
bank's commitment. The Company currently pays a commitment fee of 8 basis points
on the entire amount of the commitment. The Company will pay a usage fee on the
aggregate amount borrowed ranging from 32 to 57 basis points. The Company is
also a party to a Revolving Credit Facility Agreement, as amended by a Second
Amendment and Restatement Agreement dated as of July 13, 1998, whereunder the
Company may borrow from 23 domestic and international banks up to $700 million
at any time and from time to time through July 13, 2003, when the commitment
terminates and any outstanding loans mature. The Company currently pays a
commitment fee of 12.5 basis points on the entire amount of the commitment and
would pay a usage fee of 25 basis points on amounts borrowed. Under both
facilities, the Company may obtain loans bearing interest at reserve adjusted
LIBOR or a defined certificate of deposit rate, plus the applicable usage fee.
There were no loans outstanding under these facilities at September 30, 1999.
Funds generated by operations, together with funds available under existing
credit arrangements, are expected to exceed the Company's currently anticipated
funding requirements for operations.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
INTEREST RATE RISK
- ------------------
The Company actively manages its fixed and floating rate debt mix, within
defined limitations, using refinancings and unleveraged interest rate swaps. The
Company will enter into fixed and floating interest rate swaps to alter its
exposure to the impact of changing interest rates on consolidated results of
operations and future cash outflows for interest. Fixed rate swaps are used to
reduce the Company's risk of increased interest costs during periods of rising
interest rates. Floating rate swaps are used to convert the fixed rates of long
term borrowings into short term variable rates. Interest rate swap contracts are
thus used by the Company to separate interest rate risk management from the debt
funding decision. At September 30, 1999, the interest rate on 31% of the
Company's debt was fixed by either the nature of the obligation or through the
interest rate contracts, compared to 55% at December 31, 1998 and 50% at
September 30, 1998.
The following table presents interest rate contract information:
(Dollars in millions)
SEPTEMBER 30,
-------------
Interest Rate Contracts 1999 1998
- ----------------------- ---- ----
Notional principal amount $ 100.0 $ 100.0
Pay fixed rate 6.17% 6.17%
Receive variable LIBOR 5.26% 5.73%
Average years to maturity 1.4 2.4
Fair value - liability $ .4 $ 2.8
Carrying amount - liability .3 .1
Pro forma fair value - liability 1.1 4.1
The pro forma fair value assumes a 10% decrease in variable market interest
rates at September 30, 1999 and 1998, respectively, and reflects the estimated
fair value of contracts outstanding at that date under that assumption.
Weighted average interest rate contract information follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
(Dollars in millions) 1999 1998 1999 1998
-------- -------- -------- --------
Notional principal $ 100.0 $ 100.0 $ 100.0 $ 100.0
Pay fixed rate 6.17% 6.17% 6.17% 6.47%
Receive variable LIBOR 5.18 5.74 5.12 5.76
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The following table presents fixed rate debt information:
(In millions)
SEPTEMBER 30,
-------------
Fixed Rate Debt 1999 1998
- --------------- ---- ----
Fair value - liability $ 981.4 $888.2
Carrying amount - liability 996.1 831.6
Pro forma fair value - liability 1,029.8 947.0
The pro forma fair value assumes a 100 basis point decrease in market
interest rates at September 30, 1999 and 1998, respectively, and reflects the
estimated fair value of fixed rate debt outstanding at that date under that
assumption.
The sensitivity to changes in interest rates of the Company's interest rate
contracts and fixed rate debt was determined with a valuation model based upon
net modified duration analysis. The model assumes a parallel shift in the yield
curve, and the precision of the model decreases as the assumed change in
interest rates increases.
FOREIGN CURRENCY EXCHANGE RISK
- ------------------------------
In order to reduce the impact of changes in foreign exchange rates on
consolidated results of operations and future foreign currency denominated cash
flows, the Company was a party to various foreign currency forward exchange
contracts at September 30, 1999 and 1998. These contracts reduce exposure to
currency movements affecting existing foreign currency denominated assets,
liabilities and firm commitments resulting primarily from trade receivables and
payables, equipment acquisitions, intercompany loans and the Company's Swiss
franc debt. The contract maturities match the maturities of the currency
positions. Changes in the fair value of forward exchange contracts are
substantially offset by changes in the fair value of the hedged positions.
The following table presents foreign exchange contract information:
SEPTEMBER 30,
-------------
(In millions) 1999 1998
------- -------
Fair value - favorable $ 63.4 $ 72.6
Carrying amount - asset 70.2 79.4
Pro forma change in fair value 13.0 3.2
The pro forma change in fair value assumes a 10% change in foreign exchange
rates at September 30, 1999 and 1998, respectively, and reflects the estimated
change in the fair value of contracts outstanding at that date under that
assumption. The sensitivity to changes in exchange rates of the Company's
foreign currency positions was determined using current market pricing models.
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FORWARD-LOOKING INFORMATION - SAFE HARBOR STATEMENT
---------------------------------------------------
Certain information set forth in this Quarterly Report on Form 10-Q (other
than historical data and information) may constitute forward-looking statements
regarding events and trends that 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 economic conditions in the various markets served by the Company's
operations; increased competitive activity; fluctuations in the prices paid for
raw materials and energy; changes in the monetary policies of various countries
where the Company has significant operations; and other unanticipated events and
conditions. It is not possible to foresee or identify all such factors. The
Company makes no commitment to update any forward-looking statement, or to
disclose any facts, events or circumstances after the date hereof that may
affect the accuracy of any forward-looking statement.
-38-
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------- ------------------
Reference is made to the Annual Report of The Goodyear Tire & Rubber
Company (the "Company") on Form 10-K for the year ended December 31, 1998 (the
"1998 10-K"), wherein at Item 3, pages 19, 20 and 21, the Company reported
certain legal proceedings. The Company reports the following developments in
respect of the legal proceedings described at paragraph (D) of Item 3 of the
1998 10-K:
On March 15, 1995, a civil action, Orion Tire Corporation, et al. vs.
Goodyear, et al. (Cause No. SA CV 95-221), was filed in the United States
District Court for the Central District of California, against the Company,
Goodyear International Corporation, a wholly-owned subsidiary of the Company
("GIC"), and five individuals, including Samir G. Gibara, Chairman of the Board,
Chief Executive Officer and President of the Company, by Orion Tire Corporation,
a California corporation ("Orion"), China Tire Holdings Limited, a Bermuda
corporation ("China Tire"), and China Strategic Holdings Limited, a Hong Kong
corporation ("China Strategic"). The plaintiffs alleged, among other things,
that, in connection with the Company's acquisition of a 75% interest in a tire
manufacturing facility (the "Dalian Facility") in Dalian, People's Republic of
China, in 1994, the Company and GIC engaged in tortious interference with
certain alleged contractual relationships of plaintiffs involving the Dalian
Facility, committed tortious interference with certain prospective economic
advantages of the plaintiffs, violated the California Cartwright Act by engaging
in an unlawful combination and conspiracy in restraint of trade and committed
trade libel and defamation by making oral defamatory and written libelous
statements concerning the plaintiffs to various parties. In addition, all
defendants were alleged to have engaged in a civil conspiracy to induce the
entities which owned the Dalian Facility to breach their contracts with the
plaintiffs and to have engaged in civil racketeering. The plaintiffs claimed
more than $1.0 billion in actual damages and $3.0 billion in exemplary damages
from the Company and GIC and such further relief as the court may deem
appropriate. As previously reported by the Company, the court dismissed all
individual defendants from the proceeding for lack of jurisdiction, dismissed
all claims made by China Strategic and most of the claims made by Orion and
China Tire. On August 12, 1999, the court entered an order dismissing the entire
remaining cause of action. On September 9, 1999, the plaintiffs appealed the
order of the court to the United States Court of Appeals for the Ninth Circuit.
ITEM 5. OTHER INFORMATION.
- ------- ------------------
A. GLOBAL ALLIANCE. As previously reported at Item 1 of the 1998 10-K
under the caption "1999 Developments" and the subheading "Global Alliance", at
pages 2 and 3 of the 1998 10-K, on February 3, 1999 the Company entered into a
Memorandum of Understanding with Sumitomo Rubber Industries, Ltd. ("Sumitomo")
regarding the formation of a strategic global alliance for the manufacture,
distribution and sale of tires.
-39-
41
As previously reported at Item 5 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, at page 28, on June 14, 1999 the
Company entered into a definitive general agreement and various other agreements
with Sumitomo relating to the formation and operation of the strategic global
alliance (the "Alliance Agreements"). The Alliance Agreements provide, among
other things, for the establishment and operation of tire manufacturing and
sales joint ventures in Europe and North America, tire sales joint ventures in
Japan and global technology and purchasing joint ventures. On September 1, 1999,
the global alliance was formed and the joint ventures commenced operations.
In accordance with the terms of the Alliance Agreements, on September
1, 1999 the Company acquired 75%, and Sumitomo owned 25%, of the capital stock
of Goodyear Dunlop Tires Europe B.V., a Netherlands holding company. On
September 1, 1999, this holding company purchased substantially all of
Sumitomo's tire businesses in Europe, including eight tire manufacturing plants
located in England, France and Germany and sales and distribution operations in
18 European countries, and the major portion of the Company's tire businesses in
Europe. Excluded from the European joint venture are the Company's (i) European
aircraft tire business, (ii) tire businesses in Poland (other than a sales
company), Slovenia and Turkey, and (iii) textile, steel tire cord and tire mold
manufacturing plants and technical center and related facilities located in
Luxembourg.
On September 1, 1999, the Company also acquired 75%, and Sumitomo
acquired 25%, of the capital stock of Goodyear Dunlop Tires North America, Ltd.,
a holding company that, on September 1, 1999, purchased Sumitomo's tire
manufacturing operations in North America and certain of its related tire sales
and distribution operations. The Company also acquired 100% of the balance of
Sumitomo's tire distribution and sales operations in the United States and
Canada.
The Company acquired 25% of the capital stock of each of two newly
formed tire companies in Japan, one for the distribution and sale of
Goodyear-brand passenger and truck tires in the replacement market in Japan and
the other for the distribution and sale of Goodyear-brand and Dunlop-brand tires
to original equipment manufacturers in Japan. The Company transferred certain
assets of its subsidiary located in Japan in exchange for such equity interests
and a net cash payment of approximately $27 million. Sumitomo owns the remaining
75% of the capital stock of each of these companies. The Company also owns 51%,
and Sumitomo owns 49%, of the capital stock of a newly formed company that
coordinates and disseminates commercialized tire technology among the Company,
Sumitomo, the joint ventures and their respective affiliates and the Company
owns 80%, and Sumitomo owns 20%, of the capital stock of a global purchasing
company.
The Company made payments totaling approximately $915.5 million to
Sumitomo on September 1, 1999, in connection with the formation of the European
and North American joint ventures, which payments were financed by the Company's
issuance of additional debt. The transactions involved in the formation of the
European and North American Joint Ventures have been accounted for using the
purchase method. The cost of acquiring the businesses totaled approximately
$1.22 billion, consisting of the approximately $915.5 million of cash payments
and approximately $307 million representing the fair value of the 25% net
interest of the Company's businesses contributed to Goodyear Dunlop Tires Europe
B.V. Goodwill of approximately $390 million was recorded on the transactions and
will be amortized on a straight-line basis over 40
-40-
42
years. The Company recognized a gain of $149.7 million ($143.7 million after
tax, or $.90 per share) on the businesses it contributed to Goodyear Dunlop
Tires Europe B.V.
Certain adjustments may be made to the cash payments based on the
amounts of cash, debt, accounts receivable, inventory and trade payables
contributed by Sumitomo and Goodyear to the European joint venture. In addition,
the Company is contemplating certain actions, commencing in the fourth quarter
of 1999, related to the business acquired, including associate severance costs
and non-cancelable lease termination costs, which actions are expected to result
in costs totaling $80 million to $120 million. These costs will be recorded as
an adjustment to the cost of acquiring the European and North American business
of Sumitomo and will result in increased values being assigned to non-current
assets.
B. ADDITION OF NEW BUSINESS SEGMENTS. Effective July 1, 1999, the
Company realigned its European operations and, in that connection, divided its
previously existing Europe Tire Segment into two separate operating segments,
the European Union Tire Segment ("EU Tire") and the Eastern Europe, Africa and
Middle East Tire Segment ("EEAME Tire").
EUROPEAN UNION TIRE
EU Tire develops, manufactures, distributes and sells a broad line of
tires for automobiles, motorcycles, trucks, farm implements and construction
equipment throughout the European Union member states, Norway and Switzerland,
exports tires for sale in other regions of the world and provides related
products and services. Tires are manufactured by the EU Tire segment in 14
plants located in England, Germany, Italy, France and Luxembourg. EU Tire
includes the Dunlop operations acquired from Sumitomo on September 1, 1999,
which are a part of the holdings of Goodyear Dunlop Tires Europe B.V., a 75%
owned subsidiary of the Company that is 25% owned by Sumitomo.
The table below sets forth the percentage of the Company's consolidated
net sales and operating income attributable to EU Tire, and the percentage of EU
Tire sales attributable to the sale of new tires, for the three and nine month
periods ended September 30, 1999 and for each year in the three year period
ended December 31, 1998:
Year Ended December 31,
Three Months Nine Months -----------------------------
Ended 9/30/99 Ended 9/30/99 1998 1997 1996
------------- ------------- ----- ----- -----
European Union Tire Segment sales 20.1% 17.5% 16.3% 15.5% 17.6%
European Union Tire Segment operating income 402.8%* 31.1% 17.7% 13.9% 18.8%
Tire sales 98.0% 95.0% 93.0% 92.0% 91.0%
* The Company's total segment operating income for the quarter ended
September 30, 1999 was $10.6 million, including the $108.6 million operating
loss incurred by the Company's North American Tire segment.
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43
EU Tire manufactures and sells Goodyear-brand, Dunlop-brand (since
September 1, 1999), Fulda-brand and Kelly-brand tires, and sells Debica-brand
and Sava-brand tires manufactured by the EEAME Tire Segment. EU Tire also sells
new, and manufactures and sells retreaded, aircraft tires, provides various
retreading and related services for truck and heavy equipment tires, sells tires
and offers automotive repairs and related services through certain retail
outlets in which it owns a controlling interest, and provides other related
products and services. Approximately 7.0% of the tires produced by EU Tire
during 1998 were delivered to the Company's other Tire segments, primarily the
EEAME Tire and North American Tire segments, and approximately 6.3% of the tires
sold by EU Tire were imported from other Tire segments, primarily EEAME Tire.
EU Tire is a significant supplier of tires to most manufacturers of
automobiles, trucks and farm and construction equipment located in the European
Union member states. Goodyear-brand tires, as well as Dunlop-brand, Kelly-brand
and Fulda-brand tires (which are brands owned or controlled by the Company), are
sold in the replacement market through various channels of distribution. The
principal methods of distribution is through independent tire dealers who sell
several brands of tires and regional distributors. In some countries, primarily
Germany and the United Kingdom, the Company's tires are sold through
approximately 181 retail outlets operated by multi-brand tire retailing chains
controlled by the Company.
No customer or group of affiliated customers accounted for as much as
2.7% of the sales of EU Tire during 1998. Sales to the ten largest customers of
EU Tire represented less than 17% of its sales during 1998.
EASTERN EUROPE, AFRICA AND MIDDLE EAST TIRE
EEAME Tire develops, manufactures, distributes and sells a broad line
of passenger, truck and farm tires in Eastern Europe, the Middle East and
Africa. EEAME Tire manufactures tires at plants located in Morocco, Poland,
Slovenia, South Africa and Turkey, maintains sales operations in most countries
in Eastern Europe, including Russia, and exports tires for sale in other
countries in Eastern Europe, the Middle East and Africa and in other regions of
the world and provides related products and services in certain markets. EEAME
Tire sells tires primarily in the replacement market, except in Poland and South
Africa where it supplies automobile and truck manufacturers.
The table below sets forth the percentage of the Company's consolidated
net sales and operating income attributable to EEAME Tire, and the percentage of
EEAME Tire sales attributable to the sale of new tires, for the three and nine
month periods ended September 30, 1999 and for each year in the three year
period ended December 31, 1998:
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Year Ended December 31,
Three Months Nine Months --------------------------------
Ended 9/30/99 Ended 9/30/99 1998 1997 1996
------------- ------------- ----- ----- -----
EEAME Tire Segment sales 6.5% 6.2% 6.7% 6.9% 4.5%
EEAME Tire Segment operating income 123.6%* 8.7% 9.1% 8.5% 6.8%
Tire sales 96.0% 95.0% 95.0% 97.4% 94.0%
* The Company's total segment operating income for the quarter ended
September 30, 1999 was $10.6 million, including the $108.6 million operating
loss incurred by the Company's North American Tire segment.
EEAME Tire manufactures and sells Goodyear-brand, Kelly-brand,
Debica-brand and Sava-branch tires and sells Fulda-brand and, since September 1,
1999, Dunlop-brand tires manufactured by EU Tire. EEAME Tire also sells new and
retreaded aircraft tires, provides various retreading and related services for
truck and heavy equipment tires, sells tires through certain retail outlets
owned by the Company, and provides other products and services. During 1998,
EEAME Tire exported and sold approximately 8% of its production to unaffiliated
customers located outside of Eastern Europe, Morocco, Turkey and South Africa.
Less that 1% of the tires produced by EEAME Tire during 1998 were delivered to
the Company's other Tire segments, primarily EU Tire, and approximately 2.7% of
the tires it sold were imported from the Company's other Tire segments.
EEAME Tire is a significant supplier of tires to manufacturers of
automobiles, trucks and farm and construction equipment in Poland and South
Africa. Goodyear-brand tires, as well as Debica-brand, Kelly-brand, Sava-brand
and, since September 1, 1999, Dunlop-brand tires, are sold in the replacement
markets in Eastern Europe, primarily through distributors or, in some instances,
independent dealers. In the Middle East and most of Africa, the Company sells
Goodyear-brand and Kelly-brand tires in the replacement markets, primarily
through regional distributors and, in some instances, independent dealers. In
South Africa, tires are also sold through a chain of approximately 220 retail
tire stores owned by the Company.
No customer or group of affiliated customers accounted for as much as
4.1% of the sales by EEAME Tire during 1998. Sales to the ten largest customers
of EEAME Tire represented less than 15.2% of its sales during 1998.
C. SUPPLEMENTAL SEGMENT DATA. Reference is made to the financial
statements set forth at Part I of this Quarterly Report on Form 10-Q and to the
Note thereto captioned "Business Segments", set forth at pages 8 and 9 of this
Quarterly Report. Reference is also made to Exhibits 99.1, 99.2, 99.3 and 99.4
to this Quarterly Report, wherein unaudited segment information for the Company
and its subsidiaries are set forth in respect of various annual and interim
periods,in each case presented to reflect the division of the Company's Europe
Tire segment into the European Union Tire segment and the Eastern Europe,
Africa and Middle East Tire segment.
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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, 1999.
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 12, 1999 By /s/ Robert W Tieken
-------------------------------------
Robert W Tieken
Executive Vice President and
Chief Financial Officer
(Signing on behalf of Registrant as a duly
authorized officer of Registrant and signing
as the Principal Financial Officer of
Registrant.)
-44-
46
THE GOODYEAR TIRE & RUBBER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX OF EXHIBITS (1)
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * DESCRIPTION OF EXHIBIT NUMBER PAGE
- ---------------- --------------------------------------- ------ ----
3 ARTICLES OF INCORPORTATION AND BY-LAWS
---------------------------------------------
(a) Certificate of Amended Articles of
Incorporation of The Goodyear Tire & Rubber
Company (the "Registrant"), dated December
20, 1954, and Certificate of Amendment to
Amended Articles of Incorporation of
Registrant, dated April 6, 1993, and
Certificate of Amendment to Amended Articles
of Incorporation of Registrant dated June 4,
1996, three documents comprising Registrant's
Articles of Incorporation as amended
(incorporated by reference, filed with the
Securities and Exchange Commission as Exhibit
3.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996,
File No. 1-1927).
(b) Code of Regulations of The Goodyear Tire
& Rubber Company, adopted November 22, 1955,
as amended April 5, 1965, April 7, 1980,
April 6, 1981 and April 13, 1987
(incorporated by reference, filed as Exhibit
4.1(B) to Registrant's Registration Statement
on Form S-3, File No. 333-1995).
4 INSTRUMENTS DEFINING
THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
---------------------------------------------
(a) Conformed copy of Rights Agreement, dated
as of June 4, 1996, between Registrant and
First Chicago Trust Company of New York,
rights Agent (incorporated by reference,
filed with the Securities and Exchange
Commission as Exhibit 1 to Registrant's
Registration Statement on Form 8-A dated June
11, 1996 and as Exhibit 4(a) to Registrant's
Current Report on Form 8-K dated June 4,
1996, File No. 1-1927).
- ----------
*Pursuant to Item 601 of Regulation S-K.
E-1
47
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * DESCRIPTION OF EXHIBIT NUMBER PAGE
- ---------------- --------------------------------------- ------ ----
4 (b) Specimen nondenominational Certificate
for shares of the Common Stock, Without Par
Value, of Registrant; First Chicago Trust
Company of New York as transfer agent and
registrar (incorporated by reference, filed
with the Securities and Exchange Commission
as Exhibit 4.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1996, File No. 1-1927).
(c) Conformed copy of Revolving Credit
Facility Agreement, dated as of July 15,
1994, among Registrant, the Lenders named
therein and Chemical Bank, as Agent
(incorporated by reference, filed with the
Securities and Exchange Commission as Exhibit
A to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30,
1994, File No. 1-1927).
(d) Conformed copy of Replacement and
Restatement Agreement, dated as of July 15,
1996, among Registrant, the Lenders named
therein and The Chase Manhattan Bank
(formerly Chemical Bank), as Agent
(incorporated by reference, filed with the
Securities and Exchange Commission as Exhibit
4.5 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996,
File No. 1-1927).
(e) Conformed copy of First Amendment to
Replacement and Restatement Agreement, dated
as of March 31, 1997, among Registrant, the
Lenders named therein and The Chase Manhattan
Bank (formerly Chemical Bank), as Agent
(incorporated by reference, filed as Exhibit
4.5 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997,
File No. 1-1927).
(f) Form of Indenture, dated as of March 15,
1996, between Registrant and Chemical Bank
(now The Chase Manhattan Bank), as Trustee,
as supplemented on December 3, 1996, March
11, 1998 and March 17, 1998 (incorporated by
reference, filed as Exhibit 4.1 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, File
No. 1-1927).
- ----------
*Pursuant to Item 601 of Regulation S-K.
E-2
48
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * DESCRIPTION OF EXHIBIT NUMBER PAGE
- ---------------- --------------------------------------- ------ ----
4 (g) Conformed copy of Second Replacement and
Restatement Agreement, dated as of July 13,
1998, among Registrant, the Lenders named
therein and The Chase Manhattan Bank, as
Agent (incorporated by reference, filed with
the Securities and Exchange Commission as
Exhibit 4 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1998, File No. 1-1927).
(h) Form of Indenture, dated as of March 1,
1999, between Registrant and The Chase
Manhattan Bank, as Trustee (incorporated by
reference, filed as Exhibit 4.2, with
Amendment No. 1, to Registrant's Registration
Statement on Form S-3, File No. 333-67145).
(i) Conformed copy of Credit Agreement 4.1 X-4.1-1
[364-Day Facility], dated as of August 20,
1999, among Registrant, the Lenders named
therein and The Chase Manhattan Bank, as
Agent.
No other instrument defining the rights of
holders of long-term debt which relates to
securities having an aggregate principal
amount in excess of 10% of the consolidated
assets of Registrant and its subsidiaries was
entered into during the quarter ended
September 30, 1999. In accordance with
paragraph (iii) to Part 4 of Item 601 of
Regulation S-K, agreements and instruments
defining the rights of holders of certain
items of long term debt entered into during
the quarter ended September 30, 1999 which
relate to securities having an aggregate
principal amount less than 10% of the
consolidated assets of Registrant and its
Subsidiaries are not filed herewith. The
Registrant hereby agrees to furnish a copy of
any such agreements or instruments to the
Securities and Exchange Commission upon
request.
10 MATERIAL CONTRACTS
-----------------------------------------------
(a) Umbrella Agreement, dated as of June 14,
1999, between Registrant and Sumitomo Rubber
Industries, Ltd. (incorporated by reference,
filed as Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, File No. 1-1927).
- ----------
*Pursuant to Item 601 of Regulation S-K.
E-3
49
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * DESCRIPTION OF EXHIBIT NUMBER PAGE
- ---------------- --------------------------------------- ------ ----
(b) Joint Venture Agreement For Europe, 10.1 X-10.1-1
dated as of June 14, 1999 (and Amendment No.
1 dated as of September 1, 1999), among
Registrant, Goodyear S.A., a French
corporation, Goodyear S.A., a Luxembourg
corporation, Goodyear Canada, Inc., Sumitomo
Rubber Industries, Ltd., and Sumitomo Rubber
Europe B.V.
(c) Shareholders Agreement For the Europe 10.2 X-10.2-1
JVC, dated as of June 14, 1999, among
Registrant, Goodyear S.A., a French
corporation, Goodyear S.A., a Luxembourg
corporation, Goodyear Canada, Inc., and
Sumitomo Rubber Industries, Ltd.
12 STATEMENT RE COMPUTATION
OF RATIOS
-----------------------------------------
Statement setting forth the computation 12 X-12-1
of Ratio of Earnings to Fixed Charges.
27 FINANCIAL DATA SCHEDULE
-------------------------------------------
Financial Data Schedule for quarter ended 27 X-27-1
September 30, 1999.
99 ADDITIONAL EXHIBITS
-------------------------------------------
(a) Supplemental Segment Information for 99.1 X-99.1-1
Registrant and Subsidiaries (unaudited)
for the (i) three month periods ended March
31, 1999 and June 30, 1999 and (ii) the six
month period ended June 30, 1999.
(b) Supplemental Segment Information for 99.2 X-99.2-1
Registrant and Subsidiaries (unaudited) for
the (i) three month period ended March 31,
1998, (ii) three month period ended June
30, 1998, (iii) three month period ended
September 30, 1998, and (iv) three month
period ended December 31, 1998.
- ----------
*Pursuant to Item 601 of Regulation S-K.
E-4
50
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * DESCRIPTION OF EXHIBIT NUMBER PAGE
- ---------------- --------------------------------------- ------ ----
(c) Supplemental Segment Information for 99.3 X-99.3-1
Registrant and Subsidiaries (unaudited) for
the (i) three month period ended March 31,
1998, (ii) six month period ended June 30,
1998, (iii) nine month period ended September
30, 1998, and (iv) twelve month period ended
December 31, 1998.
(d) Supplemental Segment Information for 99.4 X-99.4-1
Registrant and Subsidiaries (unaudited) for
the years ended December 31, 1998, 1997 and
1996, respectively.
- ----------
*Pursuant to Item 601 of Regulation S-K.
E-5