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Goodyear Tire & Rubber Company 10-K 2009 Documents found in this filing:Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2008
Commission File
Number: 1-1927
THE
GOODYEAR TIRE & RUBBER COMPANY
Registrant’s telephone number, including area code:
(330) 796-2121
Securities registered pursuant to Section 12(b) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes o No þ
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 (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check One):
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
Yes o No þ
The aggregate market value of the common stock held by
nonaffiliates of the registrant, computed by reference to the
last sales price of such common stock as of the closing of
trading on June 30, 2008, was approximately $4,284,192,000.
Shares of
Common Stock, Without Par Value, outstanding at
January 31, 2009:
241,349,680
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company’s Proxy Statement for the Annual
Meeting of Shareholders to be held on April 7, 2009 are
incorporated by reference in Part III.
THE
GOODYEAR TIRE & RUBBER COMPANY
Annual Report on
Form 10-K
For the Fiscal Year Ended December 31, 2008
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PART I.
The Goodyear Tire & Rubber Company (the
“Company”) is an Ohio corporation organized in 1898.
Its principal offices are located at 1144 East Market Street,
Akron, Ohio
44316-0001.
Its telephone number is
(330) 796-2121.
The terms “Goodyear”, “Company” and
“we”, “us” or “our” wherever used
herein refer to the Company together with all of its
consolidated domestic and foreign subsidiary companies, unless
the context indicates to the contrary.
We are one of the world’s leading manufacturers of tires,
engaging in operations in most regions of the world. Our
2008 net sales were $19.5 billion, and we had a net
loss in 2008 of $77 million. Together with our
U.S. and international subsidiaries and joint ventures, we
develop, manufacture, market and distribute tires for most
applications. We also manufacture and market rubber-related
chemicals for various applications. We are one of the
world’s largest operators of commercial truck service and
tire retreading centers. In addition, we operate more than 1,600
tire and auto service center outlets where we offer our products
for retail sale and provide automotive repair and other
services. We manufacture our products in 61 manufacturing
facilities in 25 countries, including the United States, and we
have marketing operations in almost every country around the
world. We employ approximately 74,700 full-time and
temporary associates worldwide.
We make available free of charge on our website,
http://www.goodyear.com,
our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports as soon as reasonably
practicable after we file or furnish such reports to the
Securities and Exchange Commission (the “SEC”). The
information on our website is not a part of this Annual Report
on
Form 10-K.
In October 2008, we acquired the remaining 25% ownership
interest in Goodyear Dalian Tire Company Ltd., our tire
manufacturing and distribution subsidiary in China. The amount
of our additional investment and the impact on our results of
operations and financial position were not material.
On December 23, 2008, the Worker, Retiree and Employer
Recovery Act of 2008 (H.R. 7327) was signed into law. H.R.
7327 provides limited funding relief for defined benefit pension
plan sponsors affected by the steep market declines experienced
in 2008, and made technical corrections to the Pension
Protection Act of 2006. The provisions of H.R. 7327 are
estimated to reduce Company contributions to our
U.S. pension plans for
2009-2013 by
approximately $68 million cumulatively. Congress is
considering making further changes to the pension rules due to
the impact of the financial markets and the economic slowdown on
companies who sponsor defined benefit plans. However, there can
be no assurance as to whether Congress will make any such
further changes or, if made, the impact any such further changes
will have on us. Additional information regarding our defined
benefit plan obligations appears in the Note to the Consolidated
Financial Statements No. 14, Pension, Other Postretirement
Benefit and Savings Plans.
DESCRIPTION
OF GOODYEAR’S BUSINESS
During the first quarter of 2008, we formed a new strategic
business unit, Europe, Middle East and Africa Tire
(“EMEA”), by combining our former European Union Tire
and Eastern Europe, Middle East and Africa Tire business units.
Prior year amounts have been restated to conform to this change.
For the year ended December 31, 2008, we operated our
business through four operating segments representing our
regional tire businesses: North American Tire; Europe,
Middle East and Africa Tire; Latin American Tire; and Asia
Pacific Tire. As a
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result of our sale of substantially all of our Engineered
Products business on July 31, 2007, we have reported
results of that segment as discontinued operations for 2007 and
prior periods.
Financial information related to our operating segments for the
three year period ended December 31, 2008 appears in the
Note to the Consolidated Financial Statements No. 17,
Business Segments.
Our principal business is the development, manufacture,
distribution and sale of tires and related products and services
worldwide. We manufacture and market numerous lines of rubber
tires for:
In each case, our tires are offered for sale to vehicle
manufacturers for mounting as original equipment
(“OE”) and for replacement worldwide. We manufacture
and sell tires under the Goodyear, Dunlop, Kelly, Fulda, Debica
and Sava brands and various other Goodyear owned
“house” brands, and the private-label brands of
certain customers. In certain geographic areas we also:
Our principal products are new tires for most applications.
Approximately 87.1% of our sales in 2008 were for new tires,
which is consistent with 88.6% in both 2007 and 2006. The
percentages of each segment’s sales attributable to new
tires during the periods indicated were:
Each segment exports tires to other segments. The financial
results of each segment exclude sales of tires exported to other
segments, but include operating income derived from such
transactions. The financial results of each segment include
sales and operating income derived from the sale of tires
imported from other segments. Sales to unaffiliated customers
are attributed to the segment that makes the sale to the
unaffiliated customer.
Goodyear does not include motorcycle, all terrain vehicle or
consigned tires in reporting tire unit sales.
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Tire unit sales for each segment during the periods indicated
were:
Our replacement and OE tire unit sales during the periods
indicated were:
New tires are sold under highly competitive conditions
throughout the world. On a worldwide basis, we have two major
competitors: Bridgestone (based in Japan) and Michelin (based in
France). Other significant competitors include Continental,
Cooper, Hankook, Kumho, Pirelli, Toyo, Yokohama and various
regional tire manufacturers.
We compete with other tire manufacturers on the basis of product
design, performance, price, reputation, warranty terms, customer
service and consumer convenience. Goodyear and Dunlop brand
tires enjoy a high recognition factor and have a reputation for
performance and quality. The Kelly, Debica and Sava brands and
various other house brand tire lines offered by us, and tires
manufactured and sold by us to private brand customers, compete
primarily on the basis of value and price.
We do not consider our tire businesses to be seasonal to any
significant degree.
In 1999, we entered into a global alliance with Sumitomo Rubber
Industries, Ltd. (“SRI”). Under the global alliance
agreements, we acquired 75%, and SRI acquired 25%, of Goodyear
Dunlop Tires Europe B.V., a Netherlands holding company
(“GDTE”). Concurrently, the holding company acquired
substantially all of SRI’s tire businesses in Europe and
most of our tire businesses in Europe. We also acquired 75%, and
SRI acquired 25%, of Goodyear Dunlop Tires North America, Ltd.
(“GDTNA”), a holding company that purchased SRI’s
tire manufacturing operations in North America and certain of
its related tire sales and distribution operations. The global
alliance involved other transactions, including our acquisition
of 100% of the balance of SRI’s Dunlop Tire replacement
distribution and sales operations in North America. In Japan, we
own 25%, and SRI owns 75%, of two companies, one for the sale of
Goodyear-brand passenger and truck tires for replacement in
Japan and the other for the sale of Goodyear-brand and
Dunlop-brand tires to vehicle manufacturers in Japan. We also
own 51%, and SRI owns 49%, of a company that coordinates and
disseminates both commercialized tire technology and
non-commercialized technology among Goodyear and SRI, the joint
ventures and their respective affiliates, and we own 80%, and
SRI owns 20%, of a global purchasing company. The global
alliance agreements also provided for the investment by Goodyear
and SRI in the common stock of the other.
SRI has the right to require us to purchase its ownership
interests in GDTE and GDTNA if there is a change in control of
Goodyear, a bankruptcy of Goodyear or a breach, subject to
notice and the opportunity to cure, of the global alliance
agreements by Goodyear that has a material adverse effect on the
rights of SRI or its affiliates under
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the global alliance agreements, taken as a whole. In addition,
beginning in September 2009, SRI has exit rights upon the
occurrence, either prospectively or at any time during the
preceding ten years, of the following events:
SRI must give written notice to Goodyear of its intention to
exercise its exit rights no later than three months from the
date such exit rights became exercisable, except that notice of
SRI’s intention to exercise its exit rights upon the
occurrence of the event described in the last bullet point above
may be given as long as SRI’s share ownership is less than
10%. As of the date of this filing, SRI has not provided us
notice of any accrued exit rights that would become exercisable
in September 2009.
North American Tire, our largest segment in terms of revenue,
develops, manufactures, distributes and sells tires and related
products and services in the United States and Canada. North
American Tire manufactures tires in eight plants in the United
States and two plants in Canada. Certain Dunlop brand related
businesses of North American Tire are conducted by Goodyear
Dunlop Tires North America, Ltd., which is 75% owned by Goodyear
and 25% owned by SRI.
North American Tire manufactures and sells tires for
automobiles, trucks, motorcycles, buses, earthmoving and mining
equipment, commercial and military aviation and industrial
equipment, and for various other applications.
Goodyear brand radial passenger tire lines sold in the United
States and Canada include Assurance, including Assurance
featuring ComforTred Technology and TripleTred Technology for
the premium market; Eagle, including Eagle featuring ResponsEdge
Technology for the high performance market, and Run on Flat
extended mobility technology (“ROF” or
“EMT”) tires. The major lines of Goodyear brand radial
tires offered in the United States and Canada for sport utility
vehicles and light trucks are Wrangler and Fortera, including
Fortera featuring TripleTred Technology and SilentArmor
Technology. Goodyear also offers Dunlop brand radial passenger
tire lines including Signature and SP Sport performance tires,
and Dunlop brand radials for light trucks such as the Rover and
Grandtrek lines. Additionally, North American Tire also
manufactures and sells several lines of Kelly, Republic,
Remington and Fierce brands, as well as house and private brand
radial passenger and light truck tires in the United States and
Canada.
North American Tire manufactures all steel radial medium truck
tires in the Goodyear, Dunlop and Kelly brands for sale to
customers for use on commercial trucks and trailers. North
American Tire has recently added new technology product lines
— Fuel Max, Duraseal and Armor Max
— to the Goodyear brand.
North American Tire also:
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Tire unit sales to replacement customers and to OE customers
served by North American Tire during the periods indicated were:
North American Tire is a major supplier of tires to most
manufacturers of automobiles, motorcycles, trucks and aircraft
that have production facilities located in North America.
North American Tire’s primary competitors are Bridgestone
and Michelin. Other significant competitors include Continental,
Cooper and several Asian manufacturers.
Goodyear, Dunlop and Kelly brand tires are sold in the United
States and Canada through several channels of distribution. The
principal channel for Goodyear brand tires is a large network of
independent dealers. Goodyear, Dunlop and Kelly brand tires are
also sold to numerous national and regional retail marketing
firms in the United States. Several lines of house brand
tires and private label brand tires are sold to independent
dealers, national and regional wholesale marketing organizations
and various other retail marketers.
We are subject to regulation by the National Highway Traffic
Safety Administration (“NHTSA”), which has established
various standards and regulations applicable to tires sold in
the United States for highway use. NHTSA has the authority to
order the recall of automotive products, including tires, having
safety defects related to motor vehicle safety. In addition, the
Transportation Recall Enhancement, Accountability, and
Documentation Act (the “TREAD Act”) imposes numerous
requirements with respect to tire recalls. The TREAD Act also
requires tire manufacturers to, among other things, remedy tire
safety defects without charge for five years and comply with
revised and more rigorous tire standards.
Europe, Middle East and Africa Tire, our second largest segment
in terms of revenue, develops, manufactures, distributes and
sells tires for automobiles, motorcycles, trucks, farm
implements and construction equipment throughout Europe, the
Middle East and Africa, exports tires to other regions of the
world and provides miscellaneous other products and services.
EMEA manufactures tires in 16 plants in England, France,
Germany, Luxembourg, Poland, Slovenia, South Africa and Turkey.
Substantially all of the operations and assets in Western Europe
are owned and operated by Goodyear Dunlop Tires Europe B.V.,
which is 75% owned by Goodyear and 25% owned by SRI. EMEA:
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Tire unit sales to replacement customers and to OE customers
served by EMEA during the periods indicated were:
EMEA is a significant supplier of tires to most manufacturers of
automobiles, trucks and farm and construction equipment located
in Europe, the Middle East and Africa.
EMEA’s main competitors are Michelin, Bridgestone,
Continental, Pirelli, several regional and local tire producers
and imports from other regions, primarily Asia.
Goodyear and Dunlop brand tires are sold in several replacement
areas served by EMEA through various channels of distribution,
principally independent multi-brand tire dealers. In some areas,
Goodyear brand tires, as well as Dunlop, Fulda, Debica and Sava
brand tires, are distributed through independent dealers,
regional distributors and retail outlets, of which approximately
280 are owned by Goodyear.
Our Latin American Tire segment manufactures and sells
automobile, truck and farm tires throughout Central and South
America and in Mexico, sells tires to various export markets,
retreads and sells commercial truck, aviation and OTR tires, and
provides other products and services. Latin American Tire
manufactures tires in six facilities in Brazil, Chile, Colombia,
Peru and Venezuela.
Latin American Tire manufactures and sells several lines of
passenger, light and medium truck and farm tires. Latin American
Tire also:
Tire unit sales to replacement customers and to OE customers
served by Latin American Tire during the periods indicated were:
Latin American Tire is a significant supplier of tires to most
manufacturers of automobiles, trucks and farm and construction
equipment located in the region. Goodyear brand tires are sold
for replacement primarily through independent dealers.
Significant competitors include Pirelli, Bridgestone, Michelin
and Continental.
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Our Asia Pacific Tire segment manufactures and sells tires for
automobiles, light and medium trucks, farm, construction and
mining equipment and the aviation industry throughout the Asia
Pacific region. Asia Pacific Tire manufactures tires in nine
plants in China, India, Indonesia, Japan, Malaysia, Philippines,
Taiwan and Thailand. In December 2008, we closed our last
manufacturing facility in Australia. Asia Pacific Tire also:
Tire unit sales to replacement customers and OE customers served
by Asia Pacific Tire during the periods indicated were:
Asia Pacific Tire has a significant share of each of the areas
it serves. Its major competitors are Bridgestone and Michelin
along with many other global brands present in different areas,
including Continental, Dunlop, Yokohama, Pirelli, and a large
number of regional and local tire producers.
Asia Pacific Tire sells primarily Goodyear branded tires
throughout the region and also sells the Dunlop brand in
Australia and New Zealand. Other brands of tires are sold in
smaller quantities such as Kelly, Fulda and Sava. Tires are sold
through a network of licensed or franchised stores and
multi-brand retailers through a network of wholesale dealers. In
Australia and New Zealand, we also operate a network of
approximately 420 retail stores under the Beaurepaires and Frank
Allen brands.
GENERAL
BUSINESS INFORMATION
The principal raw materials used by Goodyear are synthetic and
natural rubber. We purchase all of our requirements for natural
rubber in the world market. Synthetic rubber typically accounts
for slightly more than half of all rubber consumed by us on an
annual basis. Our plants located in Beaumont, and Houston,
Texas, supply the major portion of our synthetic rubber
requirements in North America. We purchase a significant amount
of our synthetic rubber requirements outside North America from
third parties.
Significant quantities of steel cord are used for radial tires,
a portion of which we produce. Other important raw materials we
use are carbon black, fabrics and petrochemical-based
commodities. Substantially all of these raw materials are
purchased from independent suppliers, except for certain
chemicals we manufacture. We purchase most raw materials in
significant quantities from several suppliers, except in those
instances where only one or a few qualified sources are
available. We anticipate the continued availability of all raw
materials we will require during 2009, subject to spot shortages
and unexpected disruptions caused by natural disasters such as
hurricanes and other similar events.
Substantial quantities of fuel and other petrochemical-based
commodities are used in the production of tires, synthetic
rubber and other products. Supplies of such fuels and
commodities have been and are expected to continue to be
available to us in quantities sufficient to satisfy our
anticipated requirements, subject to spot shortages.
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In 2008, raw material costs increased by approximately 13% in
our tire businesses compared to 2007, primarily driven by an
increase in the cost of natural and synthetic rubber. Based on
our current projections, we expect raw material costs for the
first half of 2009 to increase about 15% to 18% when compared to
the same period of 2008. Raw material costs will peak in the
first quarter while increasing in the second quarter more
modestly. The second half of the year should reflect decreasing
raw material costs. However, natural rubber prices and
petrochemical-based commodities were at historically high levels
during much of 2008 and have experienced significant volatility,
and this estimate could change significantly based on
fluctuations in the cost of these and other key raw materials.
We own approximately 2,470 product, process and equipment
patents issued by the United States Patent Office and
approximately 4,370 patents issued or granted in other countries
around the world. We also have licenses under numerous patents
of others. We have approximately 600 applications for United
States patents pending and approximately 2,590 patent
applications on file in other countries around the world. While
such patents, patent applications and licenses as a group are
important, we do not consider any patent, patent application or
license, or any related group of them, to be of such importance
that the loss or expiration thereof would materially affect
Goodyear or any business segment.
We own, control or use approximately 1,700 different trademarks,
including several using the word “Goodyear” or the
word “Dunlop.” Approximately 10,600 registrations and
840 pending applications worldwide protect these trademarks.
While such trademarks as a group are important, the only
trademarks we consider material to our business, or to the
business of any of our segments, are those using the word
“Goodyear,” and with respect to certain of our
international business segments, those using the word
“Dunlop.” We believe our trademarks are valid and most
are of unlimited duration as long as they are adequately
protected and appropriately used.
Our backlog of orders is not considered material to, or a
significant factor in, evaluating and understanding any of our
business segments or our businesses considered as a whole.
Our direct and indirect expenditures on research, development
and certain engineering activities relating to the design,
development and significant modification of new and existing
products and services and the formulation and design of new, and
significant improvements to existing, manufacturing processes
and equipment during the periods indicated were:
At December 31, 2008, we employed approximately
74,700 full-time and temporary people throughout the world,
including approximately 27,800 persons in the United
States. At December 31, 2007, we employed approximately
78,400 full-time and temporary people throughout the world.
Approximately 11,000 of our employees in the United States
are covered by a master collective bargaining agreement with the
United Steelworkers (“USW”), which expires in July
2009. Approximately 20,700 of our employees outside of the
United States are covered by union contracts expiring in 2009
primarily in Germany, France, Luxembourg and Brazil. In
addition, approximately 1,100 of our employees in the United
States were covered by other contracts with the USW and various
other unions. Unions represent the major portion of our
employees in Europe, Latin America and Asia.
We are subject to extensive regulation under environmental and
occupational health and safety laws and regulations. These laws
and regulations relate to, among other things, air emissions,
discharges to surface and underground
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waters and the generation, handling, storage, transportation and
disposal of waste materials and hazardous substances. We have
several continuing programs designed to ensure compliance with
federal, state and local environmental and occupational safety
and health laws and regulations. We expect capital expenditures
for pollution control facilities and occupational safety and
health projects will be approximately $18 million during
2009 and approximately $50 million during 2010.
We expended approximately $60 million during 2008, and
expect to expend approximately the same amount during both 2009
and 2010 to maintain and operate our pollution control
facilities and conduct our other environmental activities,
including the control and disposal of hazardous substances.
These expenditures are expected to be sufficient to comply with
existing environmental laws and regulations and are not expected
to have a material adverse effect on our competitive position.
In the future we may incur increased costs and additional
charges associated with environmental compliance and cleanup
projects necessitated by the identification of new waste sites,
the impact of new environmental laws and regulatory standards,
or the availability of new technologies. Compliance with
federal, state and local environmental laws and regulations in
the future may require a material increase in our capital
expenditures and could adversely affect our earnings and
competitive position.
We engage in manufacturing
and/or sales
operations in most countries in the world, often through
subsidiary companies. We have manufacturing operations in 25
countries, including the United States. Most of our
international manufacturing operations are engaged in the
production of tires. Certain other products are also
manufactured in plants located outside the United States.
Financial information related to our geographic areas for the
three year period ended December 31, 2008 appears in the
Note to the Consolidated Financial Statements No. 17,
Business Segments, and is incorporated herein by reference.
In addition to the ordinary risks of the marketplace, in some
countries our operations are affected by price controls, import
controls, labor regulations, tariffs, extreme inflation
and/or
fluctuations in currency values. Furthermore, in certain
countries where we operate, transfers of funds into or out of
such countries are generally or periodically subject to various
restrictive governmental regulations.
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EXECUTIVE
OFFICERS OF THE REGISTRANT
Set forth below are: (1) the names and ages of all
executive and certain other officers of the Company at
February 18, 2009, (2) all positions with the Company
presently held by each such person and (3) the positions
held by, and principal areas of responsibility of, each such
person during the last five years.
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No family relationship exists between any of the above executive
officers or between the executive officers and any director of
the Company.
Each executive officer is elected by the Board of Directors of
the Company at its annual meeting to a term of one year or until
his or her successor is duly elected. In those instances where
the person is elected at other than an annual meeting, such
person’s term will expire at the next annual meeting.
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You should carefully consider the risks described below and
other information contained in this Annual Report on
Form 10-K
when considering an investment decision with respect to our
securities. Additional risks and uncertainties not presently
known to us, or that we currently deem immaterial, may also
impair our business operations. Any of the events discussed in
the risk factors below may occur. If they do, our business,
results of operations, financial condition or liquidity could be
materially adversely affected. In such an instance, the trading
price of our securities could decline, and you might lose all or
part of your investment.
Our business continues to be impacted by trends that have
negatively affected the tire industry in general, including
industry overcapacity, which limits our ability to obtain price
relief, recessionary economic conditions in many parts of the
world, volatile and high raw material and energy costs, severe
weakness in the North American auto industry, weakness in the
demand for replacement tires in the U.S. and Europe, and
increased competition from low-cost manufacturers. Reduced
consumer confidence and spending, increases in fuel prices and
other factors have caused consumers to delay the purchase of new
tires, purchase fewer automobiles or drive fewer miles,
resulting in a significant reduction in demand for replacement
and original equipment tires. Unlike most other tire
manufacturers, we also face the continuing burden of legacy
pension and postretirement benefit costs.
In order to offset the impact of these trends, we continue to
implement various cost reduction initiatives and expect to
achieve $2.5 billion in aggregate gross cost savings from
2006 through 2009 compared with 2005 through our four-point cost
savings plan, which includes expected savings from continuous
improvement initiatives, increased low-cost country sourcing,
high-cost capacity reductions and reduced selling,
administrative and general expenses.
In response to the unprecedented deterioration in U.S. and
global economic conditions, we have announced a number of
additional cost reduction and other actions intended to impact
both our near-term performance and long-term structure. These
actions are discussed more fully in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Overview.”
Our performance is also dependent on our ability to continue to
improve the proportion, or mix, of higher margin tires we sell.
In order to continue this improvement, we must be successful in
marketing and selling products that offer higher margins such as
the Assurance, Eagle and Fortera lines of tires and in
developing additional higher margin tires that achieve broad
market acceptance in North America and elsewhere. Shifts in
consumer demand away from higher margin tires could materially
adversely affect our business.
We cannot assure you that our cost reduction and other
initiatives will be successful. If not, we may not be able to
achieve or sustain future profitability, which would impair our
ability to meet our debt and other obligations and would
otherwise negatively affect our financial condition, results of
operations and liquidity.
The adequacy of our liquidity depends on our ability to achieve
an appropriate combination of operating improvements, financing
from third parties, access to capital markets and asset sales.
We may need to undertake additional financing actions in the
capital markets in order to ensure that our future liquidity
requirements are addressed. These actions may include the
issuance of additional debt or equity.
Our access to the capital markets cannot be assured and is
dependent on, among other things, the ability and willingness of
financial institutions to extend credit on terms that are
acceptable to us, or to honor future draws on our existing lines
of credit, and the degree of success we have in implementing our
cost reduction plans and improving the results of our North
American Tire segment. Future liquidity requirements, or our
inability to access cash deposits or make draws on our lines of
credit, also may make it necessary for us to incur additional
debt. A substantial portion of our assets is subject to liens
securing our indebtedness. As a result, we are limited in our
ability to pledge our remaining assets as security for
additional secured indebtedness.
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Our inability to access the capital markets or incur additional
debt in the future could have a material adverse effect on our
liquidity and operations, and could require us to consider
further measures, including deferring planned capital
expenditures, reducing discretionary spending, selling
additional assets and restructuring existing debt.
New tires are sold under highly competitive conditions
throughout the world. We compete with other tire manufacturers
on the basis of product design, performance, price and terms,
reputation, warranty terms, customer service and consumer
convenience. On a worldwide basis, we have two major
competitors, Bridgestone (based in Japan) and Michelin (based in
France), that have large shares of the markets of the countries
in which they are based and are aggressively seeking to maintain
or improve their worldwide market share. Other significant
competitors include Continental, Cooper, Hankook, Kumho,
Pirelli, Toyo, Yokohama and various regional tire manufacturers.
Our competitors produce significant numbers of tires in low-cost
countries. Our ability to compete successfully will depend, in
significant part, on our ability to reduce costs by such means
as reduction of excess capacity, leveraging global purchasing,
improving productivity, eliminating redundancies and increasing
production at low-cost supply sources. If we are unable to
compete successfully, our market share may decline, materially
adversely affecting our results of operations and financial
condition.
Many of our U.S. and our
non-U.S. employees
participate in defined benefit pension plans, although effective
December 31, 2008 we froze our U.S. salaried pension
plans. We have experienced periods of declines in interest rates
and pension asset values. As a result, our pension plans are
significantly underfunded. Further declines in interest rates or
the market values of the securities held by the plans, or
certain other changes, could materially increase the underfunded
status of our plans and affect the level and timing of required
contributions in 2010 and beyond. The unfunded amount of the
projected benefit obligation for our U.S. and
non-U.S. pension
plans was $2,129 million and $619 million,
respectively, at December 31, 2008, and we currently
estimate that we will be required to make contributions to our
funded U.S. pension plans of approximately
$200 million to $225 million in 2009, and
$375 million to $425 million in 2010. The current
underfunded status of our pension plans will, and a further
material increase in the underfunded status of the plans would,
significantly increase our required contributions and pension
expenses, which could impair our ability to achieve or sustain
future profitability.
Raw material costs increased significantly over the past few
years driven by increases in prices of petrochemical-based
commodities and natural rubber. Market conditions may prevent us
from passing these increased costs on to our customers through
timely price increases. Additionally, higher raw material costs
around the world may offset our efforts to reduce our cost
structure. As a result, higher raw material and energy costs
could result in declining margins and operating results. The
volatility of raw material costs may cause our margins and
operating results to fluctuate.
The recent unprecedented deterioration in the U.S. and
global credit markets, the financial services industry and
overall general economic conditions has negatively impacted our
operations in several ways. For instance, market turmoil and
tightening of credit, as well as the recent and dramatic decline
in the housing market in the U.S. and Western Europe and in
the stock market, has led to a lack of consumer confidence and
widespread reduction of business activity generally and
specifically to a rapid decline in vehicle purchases from our OE
customers, which reduces our net sales. In 2008, our OE
customers, particularly in the U.S., experienced significant
difficulty due to high fuel costs and rapidly deteriorating
economic conditions.
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Although sales to our OE customers account for less than 20% of
our net sales, demand for our products by OE customers and
production levels at our facilities are directly related to
automotive vehicle production. In addition to the economic
conditions described in the preceding paragraph, automotive
production can be affected by labor relations issues, financial
difficulties or supply disruptions. Our OE customers could
experience production disruptions resulting from their own or
supplier labor, financial or supply difficulties. Such events
may cause an OE customer to reduce or suspend vehicle
production. As a result, an OE customer could halt or
significantly reduce purchases of our products, which would harm
our results of operations, financial condition and liquidity.
In addition, the bankruptcy, restructuring or consolidation of
one or more of our major OE customers, dealers or suppliers
could result in the write-off of accounts receivable, a
reduction in purchases of our products or a supply disruption to
our facilities, which could negatively affect our results of
operations, financial condition and liquidity.
Pricing pressure from vehicle manufacturers has been a
characteristic of the tire industry in recent years. Many
vehicle manufacturers have policies of seeking price reductions
each year. Although we have taken steps to reduce costs and
resist price reductions, current and future price reductions
could materially adversely impact our sales and profit margins.
If we are unable to offset future price reductions through
improved operating efficiencies and cost reductions, those price
reductions may result in declining margins and operating results.
If we
fail to extend or renegotiate our primary collective bargaining
contracts with our labor unions as they expire from time to
time, or if our unionized employees were to engage in a strike
or other work stoppage, our business, financial position,
results of operations and liquidity could be materially
adversely affected.
We are a party to collective bargaining contracts with our labor
unions, which represent a significant number of our employees.
In particular, our master collective bargaining agreement with
the USW covers approximately 11,000 employees in the United
States at December 31, 2008 and expires in July 2009.
Approximately 21,000 of our employees outside of the United
States are covered by union contracts expiring in 2009 primarily
in Germany, France, Luxembourg and Brazil. Although we believe
that our relations with our employees are satisfactory, no
assurance can be given that we will be able to successfully
extend or renegotiate our collective bargaining agreements as
they expire from time to time. If we fail to extend or
renegotiate our collective bargaining agreements, if disputes
with our unions arise, or if our unionized workers engage in a
strike or other work stoppage, we could incur higher labor costs
or experience a significant disruption of operations, which
could have a material adverse effect on our business, financial
position, results of operations and liquidity.
We have a substantial amount of debt. As of December 31,
2008, our debt (including capital leases) on a consolidated
basis was approximately $5.0 billion. Our substantial
amount of debt and other obligations could have important
consequences. For example, it could:
The agreements governing our debt, including our credit
agreements, limit, but do not prohibit, us from incurring
additional debt and we may incur a significant amount of
additional debt in the future, including additional secured
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debt. If new debt is added to our current debt levels, our
ability to satisfy our debt obligations may become more limited.
Our ability to make scheduled payments on, or to refinance, our
debt and other obligations will depend on our financial and
operating performance, which, in turn, is subject to our ability
to implement our cost reduction initiatives and other
strategies, prevailing economic conditions and certain
financial, business and other factors beyond our control. If our
cash flow and capital resources are insufficient to fund our
debt service and other obligations, including required pension
contributions, we may be forced to reduce or delay expansion
plans and capital expenditures, sell material assets or
operations, obtain additional capital or restructure our debt.
We cannot assure you that our operating performance, cash flow
and capital resources will be sufficient to pay our debt
obligations when they become due. We cannot assure you that we
would be able to dispose of material assets or operations or
restructure our debt or other obligations if necessary or, even
if we were able to take such actions, that we could do so on
terms that are acceptable to us.
The indentures and other agreements governing our secured credit
facilities, senior unsecured notes and our other outstanding
indebtedness impose significant operating and financial
restrictions on us. These restrictions may affect our ability to
operate our business and may limit our ability to take advantage
of potential business opportunities as they arise. These
restrictions limit our ability to, among other things:
Availability under our first lien revolving credit facility is
subject to a borrowing base, which is based on eligible accounts
receivable and inventory. To the extent that our eligible
accounts receivable and inventory decline, our borrowing base
will decrease and the availability under that facility may
decrease below its stated amount. In addition, if at any time
the amount of outstanding borrowings and letters of credit under
that facility exceeds the borrowing base, we are required to
prepay borrowings
and/or cash
collateralize letters of credit sufficient to eliminate the
excess.
Our ability to comply with these covenants or to maintain our
borrowing base may be affected by events beyond our control,
including deteriorating economic conditions, and these events
could require us to seek waivers or amendments of covenants or
alternative sources of financing or to reduce expenditures. We
cannot assure you that such waivers, amendments or alternative
financing could be obtained, or if obtained, would be on terms
acceptable to us.
A breach of any of the covenants or restrictions contained in
any of our existing or future financing agreements, including
the financial covenants in our secured credit facilities, could
result in an event of default under those agreements. Such a
default could allow the lenders under our financing agreements,
if the agreements so provide, to discontinue lending, to
accelerate the related debt as well as any other debt to which a
cross-acceleration or cross-default provision applies,
and/or to
declare all borrowings outstanding thereunder to be due and
payable. In addition, the lenders could terminate any
commitments they have to provide us with further funds. If any
of these events occur, we cannot assure you that we will have
sufficient funds available to pay in full the total amount of
obligations that become due as a result of any such
acceleration, or that we will be able to find additional or
alternative financing to refinance any such accelerated
obligations. Even if we obtain additional or alternative
financing, we cannot assure you that it would be on terms that
would be acceptable to us.
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We cannot assure you that we will be able to remain in
compliance with the covenants to which we are subject in the
future and, if we fail to do so, that we will be able to obtain
waivers from our lenders or amend the covenants.
Our capital expenditures are limited by our liquidity and
capital resources and the amount we have available for capital
spending is limited by the need to pay our other expenses and to
maintain adequate cash reserves and borrowing capacity to meet
unexpected demands that may arise. We believe that our ratio of
capital expenditures to sales is lower than the comparable ratio
for our principal competitors.
Productivity improvements through process re-engineering, design
efficiency and manufacturing cost improvements may be required
to offset potential increases in labor and raw material costs
and competitive price pressures. In addition, as part of our
strategy to increase the percentage of tires that are produced
at our lower-cost production facilities and to increase our
capacity to produce higher margin tires, we may need to
modernize or expand our facilities. We may not have sufficient
resources to implement planned capital expenditures with minimal
disruption to our existing manufacturing operations, or within
desired time frames and budgets. Any disruption to our
operations, delay in implementing capital improvements or
unexpected costs may materially adversely affect our business
and results of operations.
If we are unable to make sufficient capital expenditures, or to
maximize the efficiency of the capital expenditures we do make,
we may be unable to achieve productivity improvements, which may
harm our competitive position. In addition, plant modernizations
may temporarily disrupt our manufacturing operations and lead to
temporary increases in our costs.
Our variable rate indebtedness subjects us to interest
rate risk, which could cause our debt service obligations to
increase significantly.
Certain of our borrowings are at variable rates of interest and
expose us to interest rate risk. If interest rates increase, our
debt service obligations on the variable rate indebtedness would
increase even though the amount borrowed remained the same,
which would require us to use more of our available cash to
service our indebtedness. There can be no assurance that we will
be able to enter into swap agreements or other hedging
arrangements in the future, or that existing or future hedging
arrangements will offset increases in interest rates. As of
December 31, 2008, we had approximately $3.4 billion
of variable rate debt outstanding.
We operate with significant operating and financial leverage.
Significant portions of our manufacturing, selling,
administrative and general expenses are fixed costs that neither
increase nor decrease proportionately with sales. In addition, a
significant portion of our interest expense is fixed. There can
be no assurance that we would be able to reduce our fixed costs
proportionately in response to a decline in our net sales and
therefore our competitiveness could be significantly impacted.
As a result, a decline in our net sales would result in a higher
percentage decline in our income from operations and net income.
We are among many defendants named in legal proceedings
involving claims of individuals relating to alleged exposure to
asbestos. At December 31, 2008, approximately 99,000 claims
were pending against us alleging various asbestos-related
personal injuries purported to have resulted from alleged
exposure to asbestos in certain rubber encapsulated products or
aircraft braking systems manufactured by us in the past or to
asbestos in certain of our facilities. We expect that additional
claims will be brought against us in the future. Our ultimate
liability with respect to such pending and unasserted claims is
subject to various uncertainties, including the following:
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Because of the uncertainties related to such claims, it is
possible that we may incur a material amount in excess of our
current reserve for such claims. In addition, if any of the
foregoing risks were to materialize, the resulting costs could
have a material adverse impact on our liquidity, financial
position and results of operations in future periods.
We are subject to various legal proceedings. If we wish to
appeal any future adverse judgment in any of these proceedings,
we may be required to post an appeal bond with the relevant
court. In that case, we may be required to issue a letter of
credit to the surety posting the bond. We may issue up to an
aggregate of $800 million in letters of credit under our
$1.5 billion U.S. senior secured first lien credit
facility. As of December 31, 2008, we had $497 million
in letters of credit issued and $303 million of remaining
availability under this facility. If we are subject to a
significant adverse judgment and do not have sufficient
availability under our credit facilities to issue a letter of
credit to support an appeal bond, we may be required to pay down
borrowings under the facilities or deposit cash collateral in
order to stay the enforcement of the judgment pending an appeal.
If we are unable to post cash collateral, we may be unable to
stay enforcement of the judgment.
Surety market conditions are currently difficult as a result of
significant losses incurred by many sureties in recent periods,
both in the construction industry as well as in certain larger
corporate bankruptcies. As a result, less bonding capacity is
available in the market and terms have become more expensive and
restrictive. Further, under standard terms in the surety market,
sureties issue or continue bonds on a
case-by-case
basis and can decline to issue bonds at any time or require the
posting of collateral as a condition to issuing or renewing any
bonds. If surety providers were to limit or eliminate our access
to bonding, we would need to post other forms of collateral,
such as letters of credit or cash. As described above, we may be
unable to secure sufficient letters of credit under our credit
facilities.
If we were subject to a significant adverse judgment or
experienced an interruption or reduction in the availability of
bonding capacity, we may be required to provide letters of
credit or post cash collateral, which may have a material
adverse effect on our liquidity.
We are subject to regulation by the Department of Transportation
through the National Highway Traffic Safety Administration, or
NHTSA, which has established various standards and regulations
applicable to tires sold in the United States and tires sold in
a foreign country that are identical or substantially similar to
tires sold in the United States. NHTSA has the authority to
order the recall of automotive products, including tires, having
safety-related defects.
NHTSA’s regulatory authority was expanded in November 2000
as a result of the enactment of the Transportation Recall
Enhancement, Accountability, and Documentation Act, or TREAD
Act. The TREAD Act imposes numerous requirements with respect to
the early warning reporting of warranty claims, property damage
claims, and bodily injury and fatality claims and also requires
tire manufacturers, among other things, to conform with revised
and more rigorous tire testing standards, once the revised
standards are implemented. Compliance with the TREAD Act
regulations has increased and will continue to increase the cost
of producing and distributing tires in the United States. In
addition, while we believe that our tires are free from design
and manufacturing defects, it is possible that a recall of our
tires, under the TREAD Act or otherwise, could occur in the
future. A substantial recall could have a material adverse
effect on our reputation, operating results and financial
position.
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In addition, as required by the enactment of an omnibus energy
bill in December 2007, NHTSA will establish a national tire fuel
efficiency consumer information program. While the new Federal
law will pre-empt state tire fuel efficiency laws adopted after
January 1, 2006, we may become subject to additional tire
fuel efficiency legislation, either in the United States or
other countries, which might require us to alter or increase our
capital spending and research and development plans or cease
production of certain tires.
Compliance with these and other foreign, Federal, state and
local laws and regulations in the future may require a material
increase in our capital expenditures and could materially
adversely affect our earnings and competitive position.
We have manufacturing and distribution facilities throughout the
world. Our international operations are subject to certain
inherent risks, including:
The likelihood of such occurrences and their potential effect on
us vary from country to country and are unpredictable. Certain
regions, including Latin America, Asia, the Middle East and
Africa, are inherently more economically and politically
volatile and as a result, our business units that operate in
these regions could be subject to significant fluctuations in
sales and operating income from quarter to quarter. Because a
significant percentage of our operating income in recent years
has come from these regions, adverse fluctuations in the
operating results in these regions could have a disproportionate
impact on our results of operations in future periods.
The financial position and results of operations of our
international subsidiaries are reported in various foreign
currencies and then translated into U.S. dollars at the
applicable exchange rate for inclusion in our financial
statements. As a result, the appreciation of the
U.S. dollar against these foreign currencies has a negative
impact on our reported sales and operating margin (and
conversely, the depreciation of the U.S. dollar against
these foreign currencies has a positive impact). For the year
ended December 31, 2008, we estimate that foreign currency
translation favorably impacted sales and segment operating
income by approximately $383 million and $55 million,
respectively, compared to the year ended December 31, 2007.
The volatility of currency exchange rates may materially
adversely affect our operating results.
In 1999, we entered into a global alliance with SRI. Under the
global alliance agreements between us and SRI, beginning in
September 2009, SRI has the right to require us to purchase from
SRI its ownership interests in the European and North American
joint ventures if certain triggering events have occurred. In
addition, the occurrence of certain other events enumerated in
the global alliance agreements, including certain bankruptcy
events, changes in control of Goodyear or breaches of the global
alliance agreements, could provide SRI with the right to require
us to repurchase these interests immediately. The global
alliance agreements provide that the payment amount would
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be based on the fair value of SRI’s 25% minority
shareholder’s interest in each of the European and North
American joint ventures and the book value of net assets of the
Japanese joint ventures. The payment amount would be determined
through a negotiation process where, if no mutually agreed
amount was determined, a binding arbitration process would
determine that amount. While we have not done any current
valuation of these businesses, any payment required to be made
to SRI pursuant to an exit under the terms of the global
alliance agreements could be substantial. We cannot assure you
that our operating performance, cash flow and capital resources
would be sufficient to make such a payment or, if we were able
to make the payment, that there would be sufficient funds
remaining to satisfy our other obligations. The withdrawal of
SRI from the global alliance could also have other adverse
effects on our business, including the loss of technology and
purchasing synergies.
Our business substantially depends on the continued service of
key members of our management. The loss of the services of a
significant number of members of our management could have a
material adverse effect on our business. Our future success will
also depend on our ability to attract and retain highly skilled
personnel, such as engineering, marketing and senior management
professionals. Competition for these employees is intense, and
we could experience difficulty from time to time in hiring and
retaining the personnel necessary to support our business. If we
do not succeed in retaining our current employees and attracting
new high quality employees, our business could be materially
adversely affected.
We manage businesses and facilities worldwide. Our facilities
and operations, and the facilities and operations of our
suppliers and customers, could be disrupted by events beyond our
control, such as war, acts of terror, political unrest, public
health concerns, labor disputes or natural disasters. Any such
disruption could cause delays in the production and distribution
of our products and the loss of sales and customers. We may not
be insured against all such potential losses and, if insured,
the insurance proceeds that we receive may not adequately
compensate us for all of our losses.
None.
We manufacture our products in 61 manufacturing facilities
located around the world. There are 19 plants in the United
States and 42 plants in 24 other countries.
North American Tire
Manufacturing Facilities. North American
Tire owns (or leases with the right to purchase at a nominal
price) and operates 22 manufacturing facilities in the United
States and Canada.
These facilities have floor space aggregating approximately
24.0 million square feet.
Europe, Middle East
And Africa Tire Manufacturing
Facilities. Europe, Middle East and Africa
Tire owns and operates 20 manufacturing facilities in 9
countries, including:
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These facilities have floor space aggregating approximately
20.8 million square feet.
Latin American Tire
Manufacturing Facilities. Latin American
Tire owns and operates 8 manufacturing facilities in 5
countries, including 6 tire plants, 1 tire retread plant, and 1
aviation retread plant. These facilities have floor space
aggregating approximately 5.5 million square feet.
Asia Pacific Tire
Manufacturing Facilities. Asia Pacific
Tire owns and operates 9 tire plants and 2 aviation retread
plants in 9 countries. These facilities have floor space
aggregating approximately 5.5 million square feet.
Plant
Utilization. Our worldwide tire capacity
utilization rate was approximately 78% during 2008 compared to
approximately 86% in 2007 and 82% in 2006. Our 2008 utilization
decreased due to the production cuts made during the year. We
reduced production schedules by approximately 30 million
units globally, including 15 million and 10 million
units in North American Tire and EMEA, respectively, in 2008.
Our 2007 utilization increased due to the recovery from the 2006
USW strike.
Other
Facilities. We also own and operate three
research and development facilities and technical centers, and
three tire proving grounds. We also operate approximately 1,600
retail outlets for the sale of our tires to consumer and
commercial customers, approximately 60 tire retreading
facilities and approximately 170 warehouse distribution
facilities. Substantially all of these facilities are leased. We
do not consider any one of these leased properties to be
material to our operations. For additional information regarding
leased properties, refer to the Notes to the Consolidated
Financial Statements No. 9, Property, Plant and Equipment
and No. 10, Leased Assets.
On June 4, 2004, we entered into an amended settlement
agreement in Galanti et al. v. Goodyear (Case
No. 03-209,
United States District Court for the District of New Jersey)
that was intended to address the claims arising out of a number
of Federal, state and Canadian actions filed against us
involving a rubber hose product, Entran II, that we supplied
from 1989 to 1993 to Chiles Power Supply, Inc. (d/b/a Heatway
Systems), a designer and seller of hydronic radiant heating
systems in the United States. Heating systems using
Entran II are typically attached or embedded in either
indoor flooring or outdoor pavement, and use Entran II hose
as a conduit to circulate warm fluid as a source of heat.
Since the approval of the amended settlement by the Galanti
court in October 2004 through the end of 2008, we have made
an aggregate of $150 million of cash contributions to a
settlement fund. In addition to these payments, we contributed
approximately $174 million received from insurance proceeds
to the settlement fund. We are not required to make additional
contributions to the settlement fund under the terms of the
settlement agreement, nor will we receive any additional
insurance proceeds for Entran II related matters.
Additionally, we do not expect there will be any trust assets
remaining in the settlement fund after payments are made to
claimants. Therefore, we have derecognized $175 million of
the liability and the related amount of restricted cash from our
Consolidated Balance Sheet as of December 31, 2008.
We are currently one of several defendants in civil actions
pending in various state and federal courts involving
approximately 99,000 claimants (as of December 31,
2008) relating to their alleged exposure to materials
containing asbestos in products manufactured by us or asbestos
materials at our facilities. We manufactured, among other
things, rubber coated asbestos sheet gasket materials from 1914
through 1973 and aircraft brake assemblies containing asbestos
materials prior to 1987. Some of the claimants are independent
contractors or their employees who allege exposure to asbestos
while working at certain of our facilities. It is expected that
in a substantial portion of these cases there will be no
evidence of exposure to a Goodyear manufactured product
containing asbestos or asbestos in Goodyear facilities. The
amount expended by us and our insurers on defense and
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claim resolution was approximately $20 million during 2008.
The plaintiffs in the pending cases allege that they were
exposed to asbestos and, as a result of such exposure suffer
from various respiratory diseases, including in some cases
mesothelioma and lung cancer. The plaintiffs are seeking
unspecified actual and punitive damages and other relief.
In December 2008, the Antitrust Division of the United States
Department of Justice notified us that a grand jury
investigation concerning the closure of a portion of our former
Bowmanville, Ontario conveyor belting plant has been terminated.
In May 2007, the United States Department of Justice, Antitrust
Division, announced that it had executed search and arrest
warrants against a number of companies and their executives in
connection with an investigation into allegations of price
fixing in the marine hose industry. We received a grand jury
document subpoena in May 2007 relating to that investigation. We
have also received a similar request for information from
European antitrust authorities in connection with a similar
investigation of the marine hose industry in Europe. In
addition, in November 2007, the Brazilian antitrust authority
notified Goodyear’s Brazilian subsidiary that it was a
party to a civil investigation into alleged anticompetitive
practices in the marine hose industry in Brazil. Based on our
review, we continue to believe Goodyear and its subsidiaries did
not engage in unlawful conduct which is the subject of the
investigations described above. None of Goodyear’s
executives has been named in any criminal complaint; and no
arrest or search warrants have been executed against any of our
executives or at any of our facilities in connection with these
investigations. We are cooperating with U.S., European and
Brazilian authorities.
In addition to the legal proceedings described above, various
other legal actions, claims and governmental investigations and
proceedings covering a wide range of matters are pending against
us, including claims and proceedings relating to several waste
disposal sites that have been identified by the United States
Environmental Protection Agency and similar agencies of various
States for remedial investigation and cleanup, which sites were
allegedly used by us in the past for the disposal of industrial
waste materials. Based on available information, we do not
consider any such action, claim, investigation or proceeding to
be material, within the meaning of that term as used in
Item 103 of
Regulation S-K
and the instructions thereto. For additional information
regarding our legal proceedings, refer to the Note to the
Consolidated Financial Statements No. 20, Commitments and
Contingent Liabilities.
No matter was submitted to a vote of the security holders of the
Company during the quarter ended December 31, 2008.
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The principal market for our common stock is the New York Stock
Exchange (Stock Exchange Symbol: GT).
Information relating to the high and low sale prices of shares
of our common stock appears under the caption “Quarterly
Data and Market Price Information” in Item 8 of this
Annual Report at page 120, and is incorporated herein by
reference. Under our primary credit facilities we are permitted
to pay dividends on our common stock as long as no default will
have occurred and be continuing, additional indebtedness can be
incurred under the credit facilities following the payment, and
certain financial tests are satisfied. We have not declared any
cash dividends in the three most recent fiscal years. At
December 31, 2008, there were 21,770 record holders of the
241,289,921 shares of our common stock then outstanding.
The following table presents information with respect to
repurchases of common stock made by us during the three months
ended December 31, 2008. These shares, if any, are
delivered to us by employees as payment for the exercise price
of stock options as well as the withholding taxes due upon the
exercise of the stock options or the vesting or payment of stock
awards.
Set forth in the table below is certain information regarding
the number of shares of our common stock that were subject to
outstanding stock options or other compensation plan grants and
awards at December 31, 2008.
EQUITY
COMPENSATION PLAN INFORMATION
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The Goodyear Tire & Rubber Company is one of the
world’s leading manufacturers of tires, with one of the
most recognizable brand names in the world and operations in
most regions of the world. We have a broad global footprint with
61 manufacturing facilities in 25 countries, including the
United States. We operate our business through four operating
segments representing our regional tire businesses: North
American Tire; Europe, Middle East and Africa Tire; Latin
American Tire; and Asia Pacific Tire.
During the first quarter of 2008, we formed a new strategic
business unit, Europe, Middle East and Africa Tire, by combining
our former European Union Tire and Eastern Europe, Middle East
and Africa Tire business units and have aligned the external
presentation of our results with the current management and
operating structure. Prior year amounts have been restated to
conform to this change.
As a result of the sale of substantially all of our Engineered
Products business on July 31, 2007, we have reported the
results of that segment as discontinued operations. Unless
otherwise indicated, all disclosures in this Management’s
Discussion and Analysis of Financial Condition and Results of
Operations relate to continuing operations.
We experienced difficult industry conditions during 2008 as the
global economic slowdown increased both in severity and
geographic scope throughout the course of the year. These
industry conditions were characterized by dramatically lower
motor vehicle sales and production, weakness in the demand for
replacement tires, a trend toward lower miles driven in the
U.S. and recessionary economic conditions in many parts of
the world. In addition, raw material costs were at historically
high levels during much of 2008 and remain volatile. In spite of
these extraordinary industry conditions, we had several key
achievements during 2008:
These achievements and the business model changes we have
implemented over the last several years provide us a base from
which we can address the challenging business environment that
we are facing in 2009. We remain focused on top line growth, our
cost structure and managing cash flow, and are pursuing several
strategic initiatives in these areas, including:
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For the year ended December 31, 2008, we had a net loss of
$77 million compared to net income of $602 million in
2007. We recorded a loss from continuing operations in 2008 of
$77 million compared to income from continuing operations
of $139 million in 2007. In addition, our total segment
operating income for 2008 was $804 million compared to
$1,230 million in 2007. See “Results of
Operations — Segment Information” for additional
information.
Our 2008 results were impacted unfavorably by the recessionary
economic conditions, particularly in the fourth quarter,
resulting in lower sales that prompted us to reduce our global
production. For the year we reduced global production capacity
by 30 million units, of which 17 million units were
reduced in the fourth quarter. As a result, we incurred
significant under-absorbed fixed overhead costs in the fourth
quarter. In addition, raw material costs increased 28% versus
the same quarter a year ago.
We have announced a four-point cost savings plan which includes
continuous improvement programs, reducing high-cost
manufacturing capacity, leveraging our global position by
increasing low-cost country sourcing, and reducing selling,
administrative and general expense. We expect to achieve $2.5
billion of aggregate gross cost savings from 2006 through 2009
compared with 2005. The expected cost reductions consist of:
Execution of our four-point cost savings plan and realization of
the projected savings is critical to our success.
During 2008, we made cash contributions totaling
$1,007 million to an independent Voluntary Employees’
Beneficiary Association (“VEBA”), which is intended to
provide healthcare benefits for current and future domestic USW
retirees. The funding of the VEBA and subsequent settlement
accounting reduced our OPEB liability by $1,107 million.
The savings we expect to achieve from the VEBA are included in
our anticipated continuous improvement savings described above
under “Four-Point Cost Savings Plan.”
During 2008, our Company pension funds experienced market
losses, which decreased plan assets by $1,504 million
which, in addition to other actuarial losses, increased
Accumulated Other Comprehensive Loss (“AOCL”) at
December 31, 2008 by $2,014 million. The domestic
pension plan asset losses experienced during 2008 decreased
U.S. plan assets at December 31, 2008 by
$1,366 million and increased net actuarial losses included
in AOCL at December 31, 2008 by $1,737 million. As a
result, annual domestic net periodic pension cost will increase
to
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approximately $300 million to $325 million in 2009
from $75 million in 2008, primarily due to amortization of
higher net actuarial losses from AOCL and the expected return on
lower plan assets.
In 2007, we announced various changes to our
U.S.-based
retail and salaried employee pension and retiree benefit plans.
These changes were phased in over a two-year period. As a result
of the changes, we achieved after-tax savings of approximately
$90 million in 2007, and approximately $100 million in
2008, and expect to achieve after-tax savings of
$80 million to $90 million in 2009 and beyond, based
on assumptions which existed at the time the benefit plan
changes were announced. The ongoing savings are included in our
targeted savings from continuous improvement initiatives and
reductions in selling, administrative and general expense
described above under “Four-Point Cost Savings Plan.”
We recorded a curtailment charge of $64 million related to
these actions in the first quarter of 2007.
During 2008, we continued to take actions that resulted in
improvements to our capital structure by repaying higher
interest bearing debt obligations, increasing funding capacity
and extending maturities:
At December 31, 2008, we had $1,894 million in Cash
and cash equivalents as well as $1,677 million of unused
availability under our various credit agreements, compared to
$3,463 million and $2,169 million, respectively, at
December 31, 2007. Cash and cash equivalents decreased
primarily due to our planned actions, including contributions to
the VEBA of $1,007 million, capital expenditures of
$1,049 million, the early redemption of our
$650 million senior secured notes due 2011 and the maturity
and repayment of our $100 million
63/8% notes.
Partially offsetting the reductions in cash was
$700 million in borrowings on our $1.5 billion first
lien revolving credit facility during the third quarter of 2008
due to a delay in receiving funds invested in The Reserve
Primary Fund, to support seasonal working capital needs and to
enhance our cash liquidity position in an uncertain global
economic environment.
We believe that our liquidity position is adequate to fund our
operating and investing needs and debt maturities in 2009 and to
provide us with flexibility to respond to further changes in the
business environment.
At our North American dealer conference in early February 2009,
we responded to both consumer research and retail-level requests
with the introduction of several key tires — most
notably, the Goodyear Assurance Fuel Max and Goodyear Wrangler
MT/R with Kevlar. The Assurance Fuel Max is a mid-tier passenger
tire targeted at the everyday consumer who is looking for an
all-purpose tire and also wants to save on fuel costs. The
Wrangler MT/R with Kevlar is the next generation in the popular
Wrangler MT/R line, and features Kevlar-reinforced sidewalls and
an asymmetric tread design for superior off-road performance.
Complementing this new Wrangler is the Wrangler DuraTrac, which
is a versatile on-/off-road tire that is especially suited for
work applications.
In Europe, Goodyear continues to focus on tire innovations that
are relevant to consumers and unique versus our competition. The
EfficientGrip tire with Fuel Saving Technology has improved wet
braking distance, while providing better mileage and rolling
resistance to reduce fuel consumption.
We expect to introduce more than 50 new tires globally in 2009.
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Considering the current state of the global economy and the high
level of uncertainty we see in our end markets, we can’t
provide a meaningful industry outlook for the year. That being
said, we see the first quarter of 2009 similar to the industry
volumes in the fourth quarter of 2008.
See Item 1A “Risk Factors” at page 13 for a
discussion of the factors that may impact our business, results
of operations, financial condition or liquidity and
“Forward-Looking Information — Safe Harbor
Statement” at page 55 for a discussion of our use of
forward-looking statements.
RESULTS
OF OPERATIONS — CONSOLIDATED
(All per share amounts are diluted)
For the year ended December 31, 2008, we had a net loss of
$77 million, or $0.32 per share, compared to net income of
$602 million, or $2.65 per share, in the comparable period
of 2007. Loss from continuing operations in 2008 was
$77 million, or $0.32 per share, compared to income from
continuing operations of $139 million, or $0.65 per share,
in 2007.
Net sales in 2008 were $19.5 billion, decreasing
$156 million, or less than 1% compared to 2007. Net sales
in 2008 were unfavorably impacted by decreased volume of
$1,318 million, primarily in North American Tire and EMEA
and a reduction in sales from the 2007 divestiture of our tire
and wheel assembly operation, which contributed sales of
$639 million in 2007. These decreases were partially offset
by improvements in price and product mix of $1,151 million,
mainly in North American Tire, EMEA and Latin American Tire,
$383 million in foreign currency translation, primarily in
EMEA and Latin American Tire, and an increase in other
tire-related business’ sales of $268 million,
primarily due to third party sales of chemical products in North
American Tire.
The following table presents our tire unit sales for the periods
indicated:
The decrease in worldwide tire unit sales of 17.2 million
units, or 8.5% compared to 2007, included a decrease of
9.4 million OE units, or 15.7%, due primarily to decreases
in the consumer markets in North American Tire and EMEA due to
recessionary economic conditions resulting in lower demand for
new vehicles, and a decrease of 7.8 million units, or 5.5%,
in replacement units, primarily in North American Tire and EMEA.
North American Tire consumer replacement volume decreased
3.9 million units, or 7.4%, and EMEA consumer replacement
volume decreased 2.5 million units, or 4.6%. The decline in
consumer replacement volume is due in part to recessionary
economic conditions in the U.S. and Europe.
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Cost of goods sold (“CGS”) was $16.1 billion in
2008, an increase of $228 million, or 1% compared to the
2007 period. CGS was 82.8% of sales in 2008 compared to 81.0% in
2007. CGS in 2008 increased due to higher raw material costs of
$712 million, higher foreign currency translation of
$287 million, $265 million of increased costs related
to other tire-related businesses, primarily due to increased
third party sales and raw materials costs of chemical products
in North American Tire, product mix-related cost increases of
$209 million, mostly related to North American Tire and
EMEA, and higher transportation costs of $27 million. Also
negatively impacting CGS was $506 million of higher
conversion costs, including approximately $370 million of
under-absorbed
fixed overhead costs due to lower production volume in all
segments, and a VEBA-related charge of $9 million. Reducing
CGS were lower volume, primarily in North American Tire and
EMEA, of $1,069 million, savings from rationalization plans
of $53 million, and lower accelerated depreciation of
$9 million. CGS also benefited from decreased costs related
to the 2007 divestiture of our tire and wheel assembly
operation, which had costs of $614 million in 2007.
Included in 2007 was a curtailment charge of approximately
$27 million related to the benefit plan changes announced
in the first quarter of 2007.
Selling, administrative and general expense (“SAG”)
was $2.6 billion in 2008, a decrease of $162 million
or 6%. SAG in 2008 was 13.3% of sales, compared to 14.1% in
2007. The decrease was driven primarily by lower incentive
compensation costs of $156 million primarily due to changes
in estimated payouts and a decline in our stock price, lower
advertising expenses of $36 million and savings from
rationalization plans of $9 million. These were partially
offset by unfavorable foreign currency translation of
$41 million and increased wages and other benefit costs of
$32 million. Included in 2007 was $37 million related
to a curtailment charge for benefit plan changes.
Interest expense was $320 million in 2008, a decrease of
$130 million compared to $450 million in 2007. The
decrease related primarily to lower average debt levels due to
the repayment of our $300 million term loan due March 2011
in August 2007, the repayment of $175 million of
8.625% notes due 2011 and $140 million of
9% notes due 2015 in June 2007, and the exchange of
$346 million of our 4% convertible notes in the fourth
quarter of 2007 for shares of our common stock and a cash
payment. In addition, we repaid $200 million of floating
rate notes due 2011, $450 million of 11% notes due
2011, and $100 million of
63/8% notes
due 2008 during the first quarter of 2008. Also decreasing
interest expense was a decline in interest rates on variable
rate debt.
Other (Income) and Expense was $59 million of expense in
2008, compared to $8 million of expense in 2007. The
increase in expense was primarily due to lower interest income
of $60 million in 2008 due to lower average cash balances
and interest rates, and higher foreign currency exchange losses
of $26 million. In addition, we liquidated our subsidiary
in Jamaica and recognized a loss of $16 million primarily
due to recognition of accumulated foreign currency translation
losses. Other (Income) and Expense was favorably impacted by
higher net gains on asset sales of approximately
$38 million primarily as a result of a loss of
$36 million on the sale of substantially all of the assets
of North American Tire’s tire and wheel assembly operation
in the fourth quarter of 2007 and increased royalty income of
$17 million from licensing arrangements related to divested
businesses, including our Engineered Products business that was
divested in the third quarter of 2007.
For further information, refer to the Note to the Consolidated
Financial Statements No. 3, Other (Income) and Expense.
For 2008, we recorded tax expense of $209 million on income
from continuing operations before income taxes and minority
interest of $186 million. For 2007, we recorded tax expense
of $255 million on income from continuing operations before
income taxes and minority interest of $464 million.
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The difference between our effective tax rate and the
U.S. statutory rate was primarily due to our continuing to
maintain a full valuation allowance against our net Federal
and state deferred tax assets and the adjustments discussed
below.
For 2008 total discrete tax items in income tax expense were
insignificant. Income tax expense in 2007 includes a net tax
benefit totaling $6 million, which consists of a tax
benefit of $11 million ($0.04 per share) related to prior
periods offset by a $5 million charge primarily related to
recently enacted tax law changes. The 2007 out-of-period
adjustment related to our correction of the inflation adjustment
on equity of our subsidiary in Colombia as a permanent tax
benefit rather than as a temporary tax benefit dating back as
far as 1992, with no individual year being significantly
affected.
Our losses in recent periods represented sufficient negative
evidence to require us to maintain a full valuation allowance
against our net deferred tax assets. However, in certain foreign
locations, it is reasonably possible that sufficient positive
evidence required to release all, or a portion, of these
valuation allowances within the next 12 months will exist,
resulting in one-time tax benefits of up to $90 million
($75 million net of minority interest).
For further information, refer to the Note to the Consolidated
Financial Statements No. 15, Income Taxes.
To maintain global competitiveness, we have implemented
rationalization actions over the past several years to reduce
excess and high-cost manufacturing capacity and to reduce
selling, administrative and general expenses through associate
headcount reductions. We recorded net rationalization costs of
$184 million in 2008 and $49 million in 2007.
2008
Rationalization actions in 2008 consisted primarily of the
closure of the Somerton, Australia tire manufacturing facility,
the closure of the Tyler, Texas mix center, and our plan to exit
92 of our underperforming retail stores in the U.S. Other
rationalization actions in 2008 related to plans to reduce
manufacturing, selling, administrative and general expenses
through headcount reductions in all of our strategic business
units.
During 2008, net rationalization charges of $184 million
($167 million after-tax or $0.69 per share) were recorded.
New charges of $192 million were comprised of
$142 million for plans initiated in 2008, consisting of
$118 million for associate severance costs and
$24 million for other exit and non-cancelable lease costs,
and $50 million for plans initiated in 2007 and prior
years, consisting of $34 million for associate severance
costs and $16 million for other exit and non-cancelable
lease costs. The net charges in 2008 also included the reversal
of $8 million of charges for actions no longer needed for
their originally intended purposes. Approximately 3,100
associates will be released under 2008 plans, of which 1,500
were released by December 31, 2008.
In 2008, $87 million was incurred for associate severance
payments and pension curtailment costs, and $23 million was
incurred for non-cancelable lease and other exit costs.
In addition to the above charges, accelerated depreciation
charges of $28 million were recorded in CGS in 2008,
related primarily to the closure of the Somerton, Australia tire
manufacturing facility and the Tyler, Texas mix center.
Additional rationalization charges of $41 million related
to rationalization plans announced in 2008 have not yet been
recorded and are expected to be incurred and recorded during the
next twelve months.
General
Upon completion of the 2008 plans, we estimate that annual
operating costs will be reduced by approximately
$83 million ($41 million CGS and $42 million
SAG). The savings realized in 2008 for the 2008 plans totaled
approximately $5 million in SAG. In addition, savings
realized in 2008 for the 2007 plans totaled approximately
$10 million ($6 million CGS and $4 million SAG)
compared to our estimate of $28 million. 2008 savings
related to 2007 rationalization activities is less than the
prior year estimate primarily due to implementation delays.
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For further information, refer to the Note to the Consolidated
Financial Statements No. 2, Costs Associated with
Rationalization Programs.
2007
Rationalization actions in 2007 consisted primarily of a
decision to reduce tire production at two facilities in Amiens,
France in EMEA. Other rationalization actions in 2007 related to
plans to reduce manufacturing, selling, administrative and
general expenses through headcount reductions in several
strategic business units.
During 2007, net rationalization charges of $49 million
($41 million after-tax or $0.17 per share) were recorded.
New charges of $63 million were comprised of
$28 million for plans initiated in 2007, primarily related
to associate severance costs, and $35 million for plans
initiated in 2006, consisting of $9 million for associate
severance costs and $26 million for other exit and
non-cancelable lease costs. The net charges in 2007 also
included the reversal of $14 million of charges for actions
no longer needed for their originally intended purposes.
Approximately 700 associates were to be released under programs
initiated in 2007, of which approximately 400 were released
by December 31, 2008.
In 2007, $45 million was incurred for associate severance
payments, and $39 million was incurred for non-cancelable
lease and other exit costs.
In addition to the above charges, accelerated depreciation
charges of $37 million were recorded in CGS in 2007,
primarily for fixed assets taken out of service in connection
with the elimination of tire production at our Tyler, Texas and
Valleyfield, Quebec facilities in North American Tire.
For the year ended December 31, 2007, we had net income of
$602 million, or $2.65 per share, compared to a net loss of
$330 million, or $1.86 per share, in the comparable period
of 2006. Income from continuing operations in 2007 was
$139 million, or $0.65 per share, compared to a loss from
continuing operations of $373 million, or $2.11 per share,
in 2006.
Net sales in 2007 were $19.6 billion, increasing
$893 million, or 5% compared to 2006. Net sales in 2007
were impacted favorably by price and product mix of
$880 million and favorable currency translation of
$833 million, primarily in EMEA. These increases were
partially offset by decreased volume of $784 million, net
of $216 million of higher sales volume in 2007 compared to
2006 as a result of the USW strike. The decrease in volume is
primarily attributable to North American Tire, due to our June
2006 decision to exit certain segments of the private label tire
business, in addition to lower sales from other tire related
businesses of $32 million.
The following table presents our tire unit sales for the periods
indicated:
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The decrease in worldwide tire unit sales of 13.3 million
units, or 6.2% compared to 2006 is primarily driven by a
decrease of 10.1 million units, or 6.7%, in replacement
units, primarily in North American Tire and EMEA.
North American Tire consumer replacement volume decreased
6.0 million units, or 10.3% due to a strategic share
reduction in the lower value segment following our decision to
exit certain segments of the private label tire business,
partially offset by increased share of our higher value branded
products. EMEA consumer replacement volume decreased
3.7 million units, or 6.3% compared to 2006, which was
primarily market and strategy driven. OE units sales in 2007
decreased by 3.2 million units, or 5.1%, due primarily to
decreases in North American Tire, driven by lower vehicle
production, and EMEA, due to the exit of non-profitable
business. This decrease in OE unit sales was partially offset by
an increase in Latin America Tire.
CGS was $15.9 billion in 2007, an increase of
$185 million, or 1% compared to the 2006 period. CGS
decreased to 81.0% of sales in 2007 compared to 83.9% in 2006.
CGS increased in 2007 due to higher foreign currency translation
of $606 million, product mix-related cost increases of
$241 million, primarily related to North America Tire and
EMEA, higher raw material costs of $195 million, and
increased conversion costs of $94 million. Also increasing
CGS were increased research and development expenses of
$30 million, a curtailment charge of $27 million
related to the benefit plan changes announced in the first
quarter of 2007, and increased costs of approximately
$25 million related to production inefficiencies and a
strike in South Africa. Partially offsetting these increases was
lower volume of $883 million, primarily related to North
American Tire, higher savings from restructuring plans of
$49 million, lower accelerated depreciation of
$46 million, and decreased costs related to other tire
related businesses of $39 million. 2006 was also affected
by a pension plan curtailment gain of $13 million and
$29 million related to favorable settlements with certain
raw material suppliers. In addition, the net impact of the USW
strike increased volume and product mix by approximately
$125 million, and decreased conversion costs and costs
related to other tire-related businesses by approximately
$180 million in 2007 compared to 2006.
SAG was $2.8 billion in 2007, an increase of
$216 million or 8%. SAG in 2007 was 14.1% of sales,
compared to 13.6% in 2006. The increase was driven primarily by
unfavorable foreign currency translation of $111 million, a
curtailment charge of $37 million related to the benefit
plan changes announced in the first quarter of 2007, and higher
incentive stock compensation expense of $33 million. Also
unfavorably impacting SAG were higher advertising expenses of
$24 million, primarily in North American Tire and Asia
Pacific Tire, increased general and product liability expenses
of $14 million, increased consulting and contract labor
expenses of $9 million, and higher bad debt expenses of
approximately $6 million, primarily in EMEA. These
increases were partially offset by decreases in employee benefit
costs of $26 million, primarily related to
North American Tire, and higher savings from restructuring
plans of $16 million.
Interest expense was $450 million, an increase of
$3 million during 2007 as compared to 2006. Interest
expense in 2007 was adversely impacted by higher debt levels
incurred during the USW strike, but was favorably affected by a
reduction in outstanding debt following the end of the strike
and the early retirement of various debt obligations during 2007.
Other (Income) and Expense was $8 million of expense in
2007, a decrease of $85 million compared to
$77 million of income in 2006. The decrease was primarily
due to higher financing fees of $66 million primarily
relating to our redemption of $315 million of long term
debt, our exchange offer for our outstanding 4% convertible
senior notes and our refinancing activities in April 2007. In
addition, we incurred higher losses of $33 million on
foreign currency exchange in 2007 primarily as a result of the
weakening U.S. dollar versus the euro, Chilean peso and
Brazilian real. Other income was also unfavorably impacted by
lower net gains on asset sales of approximately $25 million
in 2007 compared to 2006 primarily as a result of a loss of
$36 million on the sale of substantially all of the assets
of North American Tire’s tire and wheel assembly operation
in the fourth quarter of 2007. In 2007 there
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was a fire in our Thailand facility, which resulted in a loss of
$12 million, net of insurance proceeds. The decrease in
other income was partially offset by an increase in interest
income of approximately $42 million due primarily to higher
cash balances in 2007. In addition, other income was favorably
impacted by a decrease of approximately $11 million in
expenses related to general and product liabilities, including
asbestos and Entran II claims.
For further information, refer to the Note to the Consolidated
Financial Statements No. 3, Other (Income) and Expense.
For 2007, we recorded tax expense of $255 million on income
from continuing operations before income taxes and minority
interest of $464 million. For 2006, we recorded tax expense
of $60 million on a loss from continuing operations before
income taxes and minority interest of $202 million.
The difference between our effective tax rate and the
U.S. statutory rate was primarily due to our continuing to
maintain a full valuation allowance against our net Federal
and state deferred tax assets and the adjustments discussed
below.
Income tax expense in 2007 includes a net tax benefit totaling
$6 million, which consists of a tax benefit of
$11 million ($0.04 per share) related to prior periods
offset by a $5 million charge primarily related to recently
enacted tax law changes. The 2007 out-of-period adjustment
related to our correction of the inflation adjustment on equity
of our subsidiary in Colombia as a permanent tax benefit rather
than as a temporary tax benefit dating back as far as 1992, with
no individual year being significantly affected. Income tax
expense in 2006 included net favorable tax adjustments totaling
$163 million. The adjustments for 2006 related primarily to
the resolution of an uncertain tax position regarding a
reorganization of certain legal entities in 2001, which was
partially offset by a charge of $47 million to establish a
foreign valuation allowance, attributable to a rationalization
plan.
For further information, refer to the Note to the Consolidated
Financial Statements No. 15, Income Taxes.
To maintain global competitiveness, we have implemented
rationalization actions over the past several years to reduce
excess and high-cost manufacturing capacity and to reduce
associate headcount. We recorded net rationalization costs of
$49 million in 2007 and $311 million in 2006.
2007
Rationalization actions in 2007 consisted primarily of a
decision to reduce tire production at two facilities in Amiens,
France in EMEA. Other rationalization actions in 2007 related to
plans to reduce manufacturing, selling, administrative and
general expenses through headcount reductions in several
segments.
During 2007, net rationalization charges of $49 million
($41 million after-tax or $0.17 per share) were recorded.
New charges of $63 million were comprised of
$28 million for plans initiated in 2007, primarily related
to associate severance costs, and $35 million for plans
initiated in 2006, consisting of $9 million for associate
severance costs and $26 million for other exit and
non-cancelable lease costs. The net charges in 2007 also
included the reversal of $14 million of charges for actions
no longer needed for their originally intended purposes.
Approximately 700 associates were to be released under programs
initiated in 2007, of which approximately 400 were released
by December 31, 2008.
In 2007, $45 million was incurred for associate severance
payments, and $39 million was incurred for non-cancelable
lease and other exit costs.
In addition to the above charges, accelerated depreciation
charges of $37 million were recorded in CGS in 2007,
primarily for fixed assets taken out of service in connection
with the elimination of tire production at our Tyler, Texas and
Valleyfield, Quebec facilities in North American Tire.
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2006
Rationalization actions in 2006 consisted of plant closures in
EMEA of a passenger tire manufacturing facility in Washington,
United Kingdom, and in Asia Pacific Tire of the Upper Hutt, New
Zealand passenger tire manufacturing facility. Charges were also
incurred for a plan in North American Tire to cease tire
manufacturing at our Tyler, Texas facility, which was
substantially complete in December 2007, and a plan in EMEA to
close our tire manufacturing facility in Casablanca, Morocco,
which was completed in the first quarter of 2007. Charges were
also recorded for a partial plant closure in North American Tire
involving a plan to discontinue tire production at our
Valleyfield, Quebec facility, which was completed by the second
quarter of 2007. In conjunction with these charges we also
recorded a $47 million tax valuation allowance. Other plans
in 2006 included an action in EMEA to exit the bicycle tire and
tube production line in Debica, Poland, retail store closures in
EMEA as well as plans in most segments to reduce selling,
administrative and general expenses through headcount
reductions, all of which were substantially completed.
For 2006, $311 million ($328 million after-tax or
$1.85 per share) of net charges were recorded. New charges of
$322 million are comprised of $315 million for plans
initiated in 2006 and $7 million for plans initiated in
2005 for associate-related costs. The $315 million of
charges for 2006 plans consisted of $286 million of
associate-related costs, of which $159 million related to
associate severance costs and $127 million related to
non-cash pension and postretirement benefit costs, and
$29 million of non-cancelable lease costs. The net charges
in 2006 also included reversals of $11 million for actions
no longer needed for their originally intended purposes.
Approximately 4,800 associates were to be released under
programs initiated in 2006, of which approximately 4,700 were
released by December 31, 2008.
In 2006, $98 million was incurred for associate severance
payments, $127 million for non-cash pension and
postretirement termination benefit costs, and $21 million
for non-cancelable lease and other exit costs.
In addition to the above charges, accelerated depreciation
charges of $81 million and asset impairment charges of
$2 million were recorded in CGS related to fixed assets
that were taken out of service primarily in connection with the
Washington, Casablanca, Upper Hutt and Tyler plant closures. We
also recorded charges of $2 million of accelerated
depreciation and $3 million of asset impairment in SAG.
Discontinued
Operations
Discontinued operations had income of $463 million, or
$2.00 per share, in 2007 compared to income of $43 million,
or $0.25 per share, in 2006, representing an increase of
$420 million. The increase in 2007 is primarily due to a
gain of $508 million on the sale of our Engineered Products
business. For further information, refer to the Note to the
Consolidated Financial Statements No. 18, Discontinued
Operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 157, “Fair
Value Measurements” (“SFAS No. 157”).
SFAS No. 157 addresses how companies should measure
fair value when they are required to use a fair value measure
for recognition and disclosure purposes under generally accepted
accounting principles. SFAS No. 157 requires the fair
value of an asset or liability to be based on market-based
measures which will reflect the credit risk of the company.
SFAS No. 157 expands the disclosure requirements to
include the methods and assumptions used to measure fair value
and the effect of fair value measures on earnings. The adoption
of SFAS No. 157 effective January 1, 2008 did not
have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115” (“SFAS No. 159”).
SFAS No. 159 permits a company to choose to measure
many financial instruments and other items at fair value that
are not currently required to be measured at fair value. We did
not elect the fair value measurement option for any of our
existing financial instruments other than those that are already
being measured at fair value. As such, the adoption of
SFAS No. 159 effective January 1, 2008 did not
have a material impact on our consolidated financial statements.
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In December 2007, the FASB issued SFAS No. 141
(Revised), “Business Combinations”
(“SFAS No. 141(R)”), replacing
SFAS No. 141, “Business Combinations”
(“SFAS No. 141”), and
SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an Amendment of
ARB No. 51” (“SFAS No. 160”).
SFAS No. 141(R) retains the fundamental requirements
of SFAS No. 141, broadens its scope by applying the
acquisition method to all transactions and other events in which
one entity obtains control over one or more other businesses,
and requires, among other things, that assets acquired and
liabilities assumed be measured at fair value as of the
acquisition date, that liabilities related to contingent
consideration be recognized at the acquisition date and
remeasured at fair value in each subsequent reporting period,
that acquisition-related costs be expensed as incurred, and that
income be recognized if the fair value of the net assets
acquired exceeds the fair value of the consideration
transferred. SFAS No. 160 establishes accounting and
reporting standards for noncontrolling interests (i.e., minority
interests) in a subsidiary, including changes in a parent’s
ownership interest in a subsidiary and requires, among other
things, that noncontrolling interests in subsidiaries be
classified as shareholders’ equity. SFAS No. 141
(R) and the recognition and measurement provisions of
SFAS No. 160 are to be applied prospectively in
financial statements issued for fiscal years beginning on or
after December 15, 2008. The presentation and disclosure
provisions of SFAS No. 160 are to be applied
retrospectively for all periods presented. We adopted
SFAS No. 141(R) and SFAS No. 160 on
January 1, 2009. We will reflect the presentation and
disclosure requirements of SFAS No. 160 in our
Form 10-Q
for the period ending March 31, 2009.
In February 2008, the FASB issued FSP
FAS 157-2,
“Effective Date of FASB Statement No. 157”. The
FSP defers the provisions of SFAS No. 157 with respect
to nonfinancial assets and nonfinancial liabilities that are
measured at fair value on a nonrecurring basis subsequent to
initial recognition until fiscal years beginning after
November 15, 2008. Items in this classification include
goodwill, asset retirement obligations, rationalization
accruals, intangible assets with indefinite lives, guarantees
and certain other items. The adoption of FSP
FAS 157-2
effective January 1, 2009 will not have a material impact
on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities” (“SFAS No. 161”).
SFAS No. 161 requires companies with derivative
instruments to disclose information that would enable financial
statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities,” and how derivative instruments and related
hedged items affect a company’s financial position,
financial performance and cash flows. The new requirements apply
to derivative instruments and nonderivative instruments that are
designated and qualify as hedging instruments and related hedged
items accounted for under SFAS No. 133.
SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after
November 15, 2008; however, early application is
encouraged. We adopted SFAS No. 161 effective
January 1, 2009 and will report the required disclosures in
our
Form 10-Q
for the period ending March 31, 2009.
In April 2008, the FASB issued Staff Position FSP
FAS 142-3,
“Determination of the Useful Life of Intangible
Assets” (“FSP
FAS 142-3”).
The FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under
SFAS No. 142, “Goodwill and Other Intangible
Assets”. The intent of the FSP is to improve the
consistency between the useful life of a recognized intangible
asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under
other accounting principles generally accepted in the United
States of America. The FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is
prohibited. The guidance for determining the useful life of a
recognized intangible asset shall be applied prospectively to
intangible assets acquired after the effective date. Certain
disclosure requirements shall be applied prospectively to all
intangible assets recognized as of, and subsequent to, the
effective date. We adopted FSP
FAS 142-3
effective January 1, 2009 and will report the required
disclosures in our
Form 10-Q
for the period ending March 31, 2009.
In May 2008, the FASB issued Staff Position APB
14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (“FSP APB
14-1”).
The FSP specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately
account for the liability and equity components in a manner that
will reflect the entity’s nonconvertible debt borrowing
rate. The FSP is effective for financial statements issued for
fiscal years beginning after December 15,
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2008, and interim periods within those fiscal years. Early
adoption is not permitted. The FSP is to be applied
retrospectively. In July 2004, we issued $350 million of 4%
convertible senior notes due 2034, and subsequently exchanged
$346 million of those notes for common stock and a cash
payment in December 2007. The remaining $4 million of notes
were converted into common stock in May 2008. The adoption of
APB 14-1
effective January 1, 2009 will result in a reclassification
in our consolidated statements of shareholders’ equity
between retained earnings and capital surplus, however the
adoption will not impact our financial position.
In June 2008, the FASB issued Staff Position
EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities”
(“FSP
EITF 03-6-1”).
The FSP addresses whether instruments granted in share-based
payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share under the two-class
method described in SFAS No. 128, “Earnings Per
Share”. The FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. All prior-period
earnings per share data presented shall be adjusted
retrospectively. The adoption of FSP
EITF 03-6-1
effective January 1, 2009 will not have a material impact
on our consolidated financial statements.
In October 2008, the FASB issued FSP
FAS 157-3,
“Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active”. The FSP was effective
upon issuance. The FSP clarifies the application of FASB
Statement No. 157, “Fair Value Measurements”, in
a market that is not active. Our fair value measurements
classified as Level 3 were determined in accordance with
the provisions of the FSP.
In December 2008, the FASB issued FSP FAS 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit
Plan Assets”. The FSP requires disclosure of additional
information about investment allocation, fair values of major
categories of assets, the development of fair value
measurements, and concentrations of risk. The FSP is effective
for fiscal years ending after December 15, 2009; however,
earlier application is permitted. We will adopt the FSP upon its
effective date and will report the required disclosures in our
Form 10-K
for the period ending December 31, 2009.
CRITICAL
ACCOUNTING POLICIES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and related notes to
the financial statements. On an ongoing basis, management
reviews its estimates, based on currently available information.
Changes in facts and circumstances may alter such estimates and
affect results of operations and financial position in future
periods. Our critical accounting policies relate to:
General and Product Liability and Other
Litigation. General and product liability and
other recorded litigation liabilities are recorded based on
management’s assessment that a loss arising from these
matters is probable. If the loss can be reasonably estimated, we
record the amount of the estimated loss. If the loss is
estimated within a range and no point within the range is more
probable than another, we record the minimum amount in the
range. As additional information becomes available, any
potential liability related to these matters is assessed and the
estimates are revised, if necessary. Loss ranges are based upon
the specific facts of each claim or class of claims and are
determined after review by counsel. Court rulings on our cases
or similar cases may impact our assessment of the probability
and our estimate of the loss, which may have an impact on our
reported results of operations, financial position and
liquidity. We record receivables for insurance recoveries
related to our litigation claims when it is probable that we
will receive reimbursement from the insurer. Specifically, we
are a defendant in numerous lawsuits alleging various
asbestos-related personal injuries purported to result from
alleged exposure to asbestos 1) in certain
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rubber encapsulated products or aircraft braking systems
manufactured by us in the past, or 2) in certain of our
facilities. Typically, these lawsuits have been brought against
multiple defendants in Federal and state courts.
We engage an independent asbestos valuation firm, Bates White,
LLC (“Bates”), to review our existing reserves for
pending asbestos claims, provide a reasonable estimate of the
liability associated with unasserted asbestos claims, and
estimate our receivables from probable insurance recoveries
related to such claims.
A significant assumption in our estimated asbestos liability is
the period over which the liability can be reasonably estimated.
Due to the difficulties in making these estimates, analysis
based on new data
and/or
changed circumstances arising in the future may result in an
increase in the recorded obligation in an amount that cannot be
reasonably estimated, and that increase may be significant. We
had recorded liabilities for both asserted and unasserted
asbestos claims, inclusive of defense costs, totaling
$132 million at December 31, 2008. The portion of the
liability associated with unasserted asbestos claims and related
defense costs was $71 million. At December 31, 2008,
we estimate that it is reasonably possible that our gross
liabilities could exceed our recorded reserve by
$40 million to $50 million, approximately 50% of which
would be recoverable by our accessible policy limits.
We maintain primary insurance coverage under
coverage-in-place
agreements as well as excess liability insurance with respect to
asbestos liabilities. We record a receivable with respect to
such policies when we determine that recovery is probable and we
can reasonably estimate the amount of a particular recovery.
This determination is based on consultation with our outside
legal counsel and taking into consideration relevant factors or
agreements in principle, including ongoing legal proceedings
with certain of our excess coverage insurance carriers, their
financial viability, their legal obligations and other pertinent
facts.
Bates also assists us in valuing receivables to be recorded for
probable insurance recoveries. Based upon the model employed by
Bates, as of December 31, 2008, (i) we had recorded a
receivable related to asbestos claims of $65 million, and
(ii) we expect that approximately 50% of asbestos claim
related losses would be recoverable through insurance through
the period covered by the estimated liability. The receivables
recorded consist of an amount we expect to collect under
coverage-in-place
agreements with certain primary carriers as well as an amount we
believe is probable of recovery from certain of our excess
coverage insurance carriers. Of this amount, $10 million
was included in Current Assets as part of Accounts receivable at
December 31, 2008.
Workers’ Compensation. We had recorded
liabilities, on a discounted basis, of $288 million for
anticipated costs related to workers’ compensation claims
at December 31, 2008. The costs include an estimate of
expected settlements on pending claims, defense costs and a
provision for claims incurred but not reported. These estimates
are based on our assessment of potential liability using an
analysis of available information with respect to pending
claims, historical experience, and current cost trends. The
amount of our ultimate liability in respect of these matters may
differ from these estimates. We periodically, and at least
annually, update our loss development factors based on actuarial
analyses. The liability is discounted using the risk-free rate
of return.
For further information on general and product liability and
other litigation, and workers’ compensation, refer to the
Note to the Consolidated Financial Statements No. 20,
Commitments and Contingent Liabilities.
Recoverability of Goodwill. Goodwill is not
amortized. Rather, goodwill is tested for impairment annually or
more frequently if an indicator of impairment is present.
We have determined our reporting units to be consistent with our
operating segments comprised of four strategic business units:
North American Tire, Europe, Middle East and Africa Tire (which
was formed in the first quarter of 2008 by combining our former
European Union Tire and Eastern Europe, Middle East and Africa
Tire business units), Latin American Tire, and Asia Pacific
Tire. Goodwill is allocated to these reporting units based on
the original purchase price allocation for acquisitions within
the various reporting units. Other than the formation of the new
Europe, Middle East and Africa business unit during 2008, there
have been no changes to our reporting units or in the manner in
which goodwill was allocated.
For purposes of our annual impairment testing, which is
conducted as of July 31 each year, we determine the estimated
fair values of our reporting units using a valuation methodology
based on an earnings before interest, taxes, depreciation and
amortization (“EBITDA”) multiple of comparable
companies. The EBITDA multiple is adjusted if necessary to
reflect local market conditions and recent transactions. The
EBITDA of the reporting units
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is based on a combination of historical and forecasted results
and is adjusted to exclude certain non-recurring or unusual
items and corporate charges. We consider significant decreases
in forecasted EBITDA in future periods to be an indication of a
potential impairment. At the time of our determination,
valuation multiples of comparable companies would have to
decline in excess of 40% to indicate a potential goodwill
impairment. However, at December 31, 2008, as a result of
the emergence of certain impairment indicators including the
decrease in our market capitalization and the economic outlook
in the United States, we performed an interim goodwill
impairment analysis for our North American Tire business unit.
Goodwill was $683 million at December 31, 2008. Our
annual impairment analysis for 2008 as well as our interim
analysis for North American Tire at December 31, 2008,
indicated no impairment of goodwill. In addition, there were no
events or circumstances that indicated the impairment test
should be re-performed for goodwill for segments other than
North American Tire at December 31, 2008.
Deferred Tax Asset Valuation Allowance and Uncertain Income
Tax Positions. At December 31, 2008, we had
a valuation allowance aggregating $2.7 billion against all
of our net Federal and state and certain of our foreign net
deferred tax assets.
We assess both negative and positive evidence when measuring the
need for a valuation allowance. Evidence, such as operating
results during the most recent three-year period, is given more
weight than our expectations of future profitability, which are
inherently uncertain. Our losses in the U.S. and certain
foreign locations in recent periods represented sufficient
negative evidence to require a full valuation allowance against
our net Federal, state and certain of our foreign deferred
tax assets. We intend to maintain a valuation allowance against
our net deferred tax assets until sufficient positive evidence
exists to support the realization of such assets.
The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We
recognize liabilities for anticipated tax audit issues based on
our estimate of whether, and the extent to which, additional
taxes will be required. If we ultimately determine that payment
of these amounts is unnecessary, we reverse the liability and
recognize a tax benefit during the period in which we determine
that the liability is no longer necessary. We also recognize tax
benefits to the extent that it is more likely than not that our
positions will be sustained when challenged by the taxing
authorities. To the extent we prevail in matters for which
liabilities have been established, or are required to pay
amounts in excess of our liabilities, our effective tax rate in
a given period may be materially affected. An unfavorable tax
settlement would require cash payments and result in an increase
in our effective tax rate in the year of resolution. A favorable
tax settlement would be recognized as a reduction in our
effective tax rate in the year of resolution. We report interest
and penalties related to uncertain income tax positions as
income taxes. For additional information regarding uncertain
income tax positions, refer to the Note to the Consolidated
Financial Statements No. 15, Income Taxes.
Pensions and Other Postretirement
Benefits. Our recorded liabilities for pensions
and other postretirement benefits are based on a number of
assumptions, including:
Certain of these assumptions are determined with the assistance
of independent actuaries. Assumptions about life expectancies,
retirement rates, future compensation levels and future health
care costs are based on past experience and anticipated future
trends, including an assumption about inflation. The discount
rate for our U.S. plans is derived from a portfolio of
corporate bonds from issuers rated AA- or higher by
Standard & Poor’s as of December 31 and is
reviewed annually. The total cash flows provided by the
portfolio are similar to the timing of our expected
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benefit payment cash flows. The long term rate of return on plan
assets is based on the compound annualized return of our
U.S. pension fund over a period of 15 years or more,
estimates of future long-term rates of return on assets similar
to the target allocation of our pension fund and long term
inflation. Actual domestic pension fund asset allocations are
reviewed on a monthly basis and the pension fund is rebalanced
to target ranges on an as needed basis. These assumptions are
reviewed regularly and revised when appropriate. Changes in one
or more of them may affect the amount of our recorded
liabilities and net periodic costs for these benefits. Other
assumptions involving demographic factors such as retirement
age, mortality and turnover are evaluated periodically and are
updated to reflect our experience and expectations for the
future. If the actual experience differs from expectations, our
financial position, results of operations and liquidity in
future periods may be affected.
The discount rate used in estimating the total liability for
both our U.S. pension and other postretirement plans was
6.50% at December 31, 2008, compared to 6.25% and 6.00%,
respectively, at December 31, 2007. The increase in the
discount rate at December 31, 2008 was due primarily to
higher interest rate yields on highly rated corporate bonds.
Interest cost included in our U.S. net periodic pension
cost was $312 million in 2008, compared to
$306 million in 2007 and $295 million in 2006.
Interest cost included in our worldwide net periodic other
postretirement benefits cost was $84 million in 2008,
compared to $109 million in 2007 and $133 million in
2006. Interest cost was lower in 2008 as a result of the
reduction in the postretirement liability due to the VEBA
settlement.
The following table presents the sensitivity of our
U.S. projected pension benefit obligation, accumulated
other postretirement obligation, shareholders’ equity, and
2009 expense to the indicated increase/decrease in key
assumptions:
A significant portion of the net actuarial loss included in AOCL
of $2,550 million in our U.S. pension plans as of
December 31, 2008 is a result of 2008 plan asset losses and
the overall decline in U.S. discount rates over time. For
purposes of determining our 2008 U.S. net periodic pension
expense, our funded status was such that we recognized
$38 million of the net actuarial loss in 2008. We will
recognize approximately $157 million of net actuarial
losses in 2009. If our future experience is consistent with our
assumptions as of December 31, 2008, actuarial loss
recognition will remain at an amount near that to be recognized
in 2009 over the next few years before it begins to gradually
decline.
The actual rate of return on our U.S. pension fund was
(31.7)%, 8.1% and 14.0% in 2008, 2007 and 2006, respectively, as
compared to the expected rate of 8.5% for all three years. The
negative return of our U.S. pension fund in 2008 was due to
the steep market losses experienced during the year. Despite the
losses experienced by the U.S. pension fund in 2008, the
expected long term rate of return on assets will remain at 8.5%
for 2009. We use the fair value of our pension assets in the
calculation of pension expense for all of our U.S. pension
plans.
The service cost of our U.S. pension plans was
$60 million in 2008 and is expected to decrease in 2009 and
beyond as the number of active participants accruing service
declines.
Although we experienced an increase in our U.S. discount
rate at the end of 2008, a large portion of the net actuarial
loss included in AOCL of $109 million in our worldwide
other postretirement benefit plans as of December 31, 2008
is a result of the overall decline in U.S. discount rates
over time. The net actuarial loss increased
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from 2007 due to the VEBA settlement, which resulted in the
recognition of net actuarial gains previously included in AOCL
for the affected plans, offset somewhat by the increase in the
discount rate at December 31, 2008. For purposes of
determining 2008 worldwide net periodic postretirement benefits
cost, we recognized $7 million of the net actuarial losses
in 2008. We will recognize approximately $7 million of net
actuarial losses in 2009. If our future experience is consistent
with our assumptions as of December 31, 2008, actuarial
loss recognition will remain at an amount near that to be
recognized in 2009 over the next few years before it begins to
gradually decline.
The weighted average amortization period for employees covered
by our U.S. plans is approximately 15 years.
For further information on pensions and other postretirement
benefits, refer to the Note to the Consolidated Financial
Statements No. 14, Pension, Other Postretirement Benefit
and Savings Plans.
Segment information reflects our strategic business units
(“SBUs”), which are organized to meet customer
requirements and global competition. The Tire businesses are
segmented on a regional basis. As previously mentioned, during
the first quarter of 2008, we formed a new strategic business
unit, Europe, Middle East and Africa Tire, by combining our
former European Union Tire and Eastern Europe, Middle East and
Africa Tire business units. Prior year amounts have been
restated to conform to this change.
Results of operations are measured based on net sales to
unaffiliated customers and segment operating income. Segment
operating income includes transfers to other SBUs. Segment
operating income is computed as follows: Net Sales less CGS
(excluding certain accelerated depreciation charges and asset
impairment charges) and SAG (including certain allocated
corporate administrative expenses). Segment operating income
also includes certain royalties and equity in earnings of most
affiliates. Segment operating income does not include
rationalization charges (credits), assets sales and certain
other items.
Total segment operating income was $804 million in 2008,
$1.2 billion in 2007 and $710 million in 2006. Total
segment operating margin (segment operating income divided by
segment sales) in 2008 was 4.1%, compared to 6.3% in 2007 and
3.8% in 2006.
Management believes that total segment operating income is
useful because it represents the aggregate value of income
created by our SBUs and excludes items not directly related to
the SBUs for performance evaluation purposes. Total segment
operating income is the sum of the individual SBUs’ segment
operating income. Refer to the Note to the Consolidated
Financial Statements No. 17, Business Segments, for further
information and for a reconciliation of total segment operating
income to Income (Loss) from Continuing Operations before Income
Taxes and Minority Interest.
North American Tire unit sales in 2008 decreased
10.2 million units or 12.4% from the 2007 period. The
decrease was due to a decline in replacement volume of
4.3 million units or 7.7%, primarily in the consumer market
due in part to recessionary economic conditions in the U.S., and
a decline in OE volume of 5.9 million units or 22.9%,
primarily in our consumer business due to reduced vehicle
production.
Net sales decreased $607 million or 6.8% in 2008 from the
2007 period due primarily to decreased volume of
$718 million and the 2007 divestiture of our tire and wheel
assembly operation, which contributed sales of $639 million
in 2007. This was offset in part by favorable price and product
mix of $537 million, increased sales in
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other tire-related businesses of $207 million, primarily
due to third party sales of chemical products, and favorable
foreign currency translation of $6 million.
Operating loss in 2008 was $156 million compared to
operating income in 2007 of $139 million, a decrease of
$295 million. The 2008 period was unfavorably impacted by
decreased volume of $115 million, lower operating income of
chemical and other tire-related businesses of $27 million,
and the 2007 divestiture of our tire and wheel assembly
operation, which generated operating income of $25 million
in 2007. Also unfavorably impacting operating income were higher
conversion costs of $231 million. The higher conversion
costs were caused primarily by under-absorbed fixed overhead
costs of approximately $240 million due to lower production
volume, higher plant changeover costs and general inflation,
which were partially offset by savings from reduced employee
benefit costs, and lower average labor rates. Offsetting these
negative factors were price and product mix improvements of
$360 million, which more than offset increased raw material
costs of $334 million, lower SAG expenses of
$48 million driven primarily by decreased advertising costs
and lower incentive compensation costs, and increased royalty
income of $11 million.
Operating income in 2008 excludes $4 million of accelerated
depreciation primarily related to the closure of the Tyler,
Texas mix center and our plan to exit 92 retail stores.
Operating income in 2007 excludes $35 million of
accelerated depreciation primarily related to the elimination of
tire production at our Tyler, Texas and Valleyfield, Quebec
facilities. Operating income also excludes net rationalization
charges totaling $54 million in 2008 and $11 million
in 2007 and (gains) losses on asset sales of $(18) million
in 2008 and $17 million in 2007.
North American Tire unit sales in 2007 decreased
9.6 million units or 10.5% from 2006. The decrease was
primarily due to a decline in replacement unit sales of
5.9 million units or 9.6% due to a strategic share
reduction in the lower value segment, following our decision to
exit certain segments of the private label tire business,
partially offset by increased share of our higher value branded
products. In addition, OE volume in 2007 decreased
3.7 million units or 12.6% in our consumer and commercial
businesses as a result of lower vehicle production.
Net sales in 2007 decreased $227 million or 2.5% from 2006.
The decrease was driven by a decline in volume of
$739 million primarily due to exiting certain segments of
the private label tire business in addition to decreased OE
volume in our consumer and commercial businesses as a result of
lower vehicle production. Sales in other tire related businesses
also decreased approximately $66 million. Partially
offsetting these were favorable price and product mix of $338
and favorable foreign currency translation of $24 million.
In addition, net sales in 2007 were $216 million higher
compared to 2006 as a result of the USW strike.
Operating income in 2007 was $139 million compared to an
operating loss in 2006 of $233 million, an increase of
$372 million. Operating income improved in 2007 by
approximately $279 million as a result of returning to
normal sales and production levels following the USW strike,
which negatively impacted the fourth quarter of 2006 and part of
the first half of 2007. Operating income in 2007 was also
favorably impacted by price and product mix of
$235 million, increased operating income in other tire
related businesses of $27 million, and lower conversion
costs of $19 million. Conversion costs were driven by lower
employee benefit expenses partially offset by under-absorbed
fixed costs due to lower production volume, training of new
workers and plant changeovers. This performance was partially
offset by increased raw material costs of $97 million,
decreased sales volume of $65 million, and higher SAG costs
of approximately $11 million. Also, included in 2006 was
$21 million of favorable settlements with certain raw
material suppliers.
Operating income in 2007 excludes $35 million of
accelerated depreciation primarily related to the elimination of
tire production at our Tyler, Texas and Valleyfield, Quebec
facilities. Operating income in 2006 excludes $14 million
of accelerated depreciation primarily related to the elimination
of tire production at our Tyler, Texas facility. Operating
income also excludes net rationalization charges (credits)
totaling $11 million in 2007 and $187 million in 2006
and (gains) losses on asset sales of $17 million in 2007
and $(11) million in 2006.
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Europe, Middle East and Africa Tire unit sales in 2008 decreased
6.0 million units or 7.5% from the 2007 period. Replacement
volume decreased 2.9 million units or 4.9%, mainly in
consumer replacement due in part to recessionary economic
conditions in Europe, while OE volume decreased 3.1 million
units or 14.9%, primarily in our consumer business due to
reduced vehicle production.
Net sales in 2008 increased $99 million or 1.4% compared to
the 2007 period. Favorably impacting the 2008 period were
improved price and product mix of $306 million, foreign
currency translation of $285 million, and higher sales in
the other tire-related businesses of $11 million. Partially
offsetting these improvements was lower volume of
$503 million.
For 2008, operating income decreased $157 million or 27.0%
compared to 2007 due to higher conversion costs of
$173 million, lower volume of $107 million, and higher
transportation costs of $17 million. The higher conversion
costs related primarily to under-absorbed fixed overhead costs
of approximately $100 million due to reduced production
volume, inflation, a strike at our plants in Turkey in the
second quarter of 2008 and ongoing labor issues at our
manufacturing plants in Amiens, France. These were offset in
part by improvement in price and product mix of
$261 million, which more than offset increased raw material
costs of $185 million, favorable foreign currency
translation of $32 million, increased operating income in
other tire-related businesses of $21 million primarily due
to improvements in our company-owned retail businesses,
decreased SAG expenses of $7 million and favorable supplier
settlements of $7 million.
Operating income in 2008 excludes rationalization charges of
$41 million and net gains on asset sales of
$20 million. Operating income in 2007 excludes net
rationalization charges of $33 million and net gains on
asset sales of $20 million. Operating income in 2007
excludes $2 million of accelerated depreciation primarily
related to the closure of the Washington, UK facility.
EMEA’s results are highly dependent upon Germany, which
accounted for approximately 32% and 33% of EMEA’s net sales
in 2008 and 2007, respectively. Accordingly, results of
operations in Germany will have a significant impact on
EMEA’s future performance.
Europe, Middle East and Africa Tire Segment unit sales in 2007
decreased 3.9 million units or 4.7% from 2006. Replacement
volume decreased 3.7 million units or 5.9%, mainly in
consumer replacement, which was primarily market and strategy
driven, while OE volume decreased 0.3 million units or 1.4%.
Net sales in 2007 increased $665 million or 10.1% from
2006. Favorably impacting sales was foreign currency translation
of $542 million, and improved price and product mix of
$399 million. Lower volume of $278 million unfavorably
impacted net sales.
Operating income in 2007 increased $69 million or 13.5%
compared to 2006 due to improvement in price and mix of
$276 million and favorable foreign currency translation of
$30 million. These were offset in part by lower volume of
$58 million, higher raw material costs of $53 million,
higher SAG expenses of $23 million and lower operating
income from other tire related businesses of $13 million.
In addition, increased conversion costs of $33 million,
increased research and development expenses of $23 million,
and increased costs of approximately $25 million related to
a strike and production inefficiencies in South Africa also had
an unfavorable impact on
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operating income in 2007. Operating income in 2006 also included
$6 million in favorable settlements with certain raw
material suppliers.
Operating income in 2007 and 2006 excludes $2 million and
$62 million, respectively, of accelerated depreciation
primarily related to the closure of the Washington, UK facility
and the closure of the Morocco facility. Operating income also
excludes net rationalization charges totaling $33 million
in 2007 and $94 million in 2006 and gains on asset sales of
$20 million in 2007 and $28 million in 2006.
Latin American Tire unit sales in 2008 decreased
1.8 million units or 8.3% from the 2007 period. Replacement
volume decreased 0.8 million units or 5.8% primarily in the
commercial market due to an overall decline in industry volumes,
while OE volume decreased 1.0 million units or 13.4%
primarily in the consumer market.
Net sales in 2008 increased $216 million or 11.5% from the
2007 period. Net sales increased in 2008 due to favorable price
and product mix of $237 million, the favorable impact of
foreign currency translation, mainly in Brazil, of approximately
$85 million, and higher sales of other tire-related
businesses of $47 million. Partially offsetting these
increases was lower volume of $152 million.
Operating income in 2008 increased $8 million or 2.2% from
the same period in 2007. Favorably impacting operating income
were price and product mix of $214 million, which more than
offset increased raw material costs of $109 million, and
foreign currency translation of $17 million. Operating
income was unfavorably impacted by higher conversion costs of
$57 million, decreased volume of $41 million,
increased transportation costs of $12 million, increased
tire recycling fees, duties and other charges of
$9 million, and increased SAG expenses of $5 million,
primarily related to advertising expenses. The higher conversion
costs related primarily to under-absorbed fixed overhead costs
of approximately $20 million due to reduced production
volume in the fourth quarter of 2008 and higher utility and
engineering costs. Operating income in 2008 also included a gain
of $12 million related to the favorable settlement of a
transactional excise tax case.
Operating income excludes net rationalization charges totaling
$4 million in 2008 and $2 million in 2007. Operating
income also excludes gains on asset sales of $5 million in
2008 and $1 million in 2007. Operating income in 2008
excludes a $16 million loss primarily due to the
recognition accumulated foreign currency translation losses on
the liquidation of our subsidiary in Jamaica.
Latin American Tire’s results are highly dependent upon
Brazil, which accounted for approximately 52% and 49% of Latin
American Tire’s net sales in 2008 and 2007, respectively.
Accordingly, results of operations in Brazil will have a
significant impact on Latin American Tire’s future
performance.
Latin American Tire unit sales in 2007 increased
0.6 million units or 2.9% compared to 2006. OE volume
increased 0.8 million units or 12.0% as a result of
improving market conditions, offset by a decline in replacement
units of 0.2 million units or 1.0%.
Net sales in 2007 increased $265 million, or 16.5% compared
to 2006. Net sales increased in 2007 due to the favorable impact
of foreign currency translation, mainly in Brazil, of
approximately $123 million, favorable price and product mix
of $73 million, and increased volume of $43 million.
Also increasing net sales was higher sales of other tire-related
businesses of approximately $29 million.
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Operating income in 2007 increased $33 million, or 10.1%
compared to 2006. Operating income was favorably impacted by
$74 million from the impact of currency translation,
$60 million due to improved price and product mix, and
$11 million due to increased volume. Operating income was
unfavorably impacted by higher raw material costs of
$41 million and higher conversion costs of
$32 million. Lower operating income in other tire related
businesses of $11 million and higher SAG expenses of
$8 million also had an unfavorable impact on operating
income in 2007. In addition, included in 2006 was a pension plan
curtailment gain of $17 million.
Operating income excludes net rationalization charges totaling
$2 million in both 2007 and 2006. Operating income also
excludes gains on asset sales of $1 million in 2007 and
2006. In addition, operating income in 2006 excludes a gain of
$13 million resulting from the favorable resolution of a
legal matter in Brazil.
Asia Pacific Tire unit sales in 2008 increased 0.8 million
units or 4.1% from the 2007 period. Replacement unit sales
increased 0.2 million units or 1.8% and OE volume increased
0.6 million units or 8.6%. The increase in OE volume in
2008 relates primarily to supply constraints in 2007 due to the
Thailand fire.
Net sales in 2008 increased $136 million or 8.0% compared
to the 2007 period due to favorable price and product mix of
$71 million, increased volume of $55 million, and
favorable foreign currency translation of $7 million.
Operating income in 2008 increased $18 million or 12.0%
compared to the 2007 period due to improved price and product
mix of $107 million, which more than offset increased raw
material costs of $84 million, increased volume of
$14 million and increased operating income in other
tire-related businesses of $8 million primarily due to
improved results in our company-owned retail businesses in
Australia. Unfavorably impacting operating income was increased
conversion costs of $26 million. The higher conversion
costs related primarily to under-absorbed fixed overhead costs
of approximately $10 million due to reduced production
volume in the fourth quarter of 2008, inflation and higher
utility and engineering costs.
Operating income excludes net rationalization charges totaling
$83 million in 2008 and $1 million in 2007 and gains
on assets sales of $10 million in 2008 and $8 million
in 2007. Operating income in 2007 also excludes a
$12 million loss, net of insurance proceeds, as a result of
the Thailand fire. In addition, operating income in 2008
excludes approximately $24 million of accelerated
depreciation related to the closure of the Somerton, Australia
facility.
Asia Pacific Tire’s results are highly dependent upon
Australia, which accounted for approximately 47% and 46% of Asia
Pacific Tire’s net sales in 2008 and 2007, respectively.
Accordingly, results of operations in Australia will have a
significant impact on Asia Pacific Tire’s future
performance.
Asia Pacific Tire unit sales in 2007 decreased 0.4 million
units or 2.1% compared to 2006. Replacement units decreased
0.4 million units or 3.1% driven by reduced participation
in low margin segments of the market and reduced production
volume resulting from the Thailand fire.
Net sales in 2007 increased $190 million or 12.6% from 2006
due to favorable foreign currency translation of
$144 million and favorable price and product mix of
$70 million. Partially offsetting these increases was lower
volume of approximately $26 million.
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Operating income in 2007 increased $46 million or 44.2%
from 2006 primarily due to improved price and product mix of
$67 million and $8 million of favorable foreign
currency translation. These were offset in part by higher SAG
expenses of $11 million primarily related to increased
advertising costs, lower sales volume of $5 million, and
increased conversion costs of $5 million related to lower
production volume as a result of the Thailand fire. Higher raw
material prices of $4 million and increased research and
development costs of $4 million also had an unfavorable
impact on operating income. In addition, operating income in
2006 included approximately $2 million in favorable
settlements with certain raw material suppliers.
Operating income excludes net rationalization charges totaling
$1 million in 2007 and $28 million in 2006 and gains
on assets sales of $8 million in 2007 and $2 million
in 2006. Operating income in 2007 also excludes a
$12 million loss, net of insurance proceeds, as a result of
the Thailand fire. In addition, operating income in 2006
excludes approximately $12 million of accelerated
depreciation related to the closure of the Upper Hutt,
New Zealand facility.
At December 31, 2008, we had $1,894 million in Cash
and cash equivalents as well as $1,677 million of unused
availability under our various credit agreements, compared to
$3,463 million and $2,169 million, respectively, at
December 31, 2007. At December 31, 2008, our
availability included approximately $535 million which can
only be used to finance the relocation and expansion of our
manufacturing facility in China.
Cash and cash equivalents decreased primarily due to our planned
actions, including contributions to the VEBA of
$1,007 million, capital expenditures of
$1,049 million, the early redemption of our
$650 million senior secured notes due 2011 and the maturity
and repayment of our $100 million
63/8% notes.
Partially offsetting the reductions in cash was
$700 million in borrowings on our $1.5 billion first
lien revolving credit facility during the third quarter of 2008
due to a delay in receiving funds invested in The Reserve
Primary Fund, to support seasonal working capital needs and to
enhance the company’s cash liquidity position in an
uncertain global economic environment.
At December 31, 2008, significant concentrations of cash
and cash equivalents held by our international subsidiaries
included the following amounts:
In the third quarter of 2008, we sought redemption of
$360 million invested in The Reserve Primary Fund. Due to
reported losses in its investment portfolio and other liquidity
issues, the fund ceased honoring redemption requests. The Board
of Trustees of the fund subsequently voted to liquidate the
assets of the fund and approved periodic distributions of cash
to its shareholders. In the fourth quarter of 2008, we received
partial distributions of $284 million. At December 31,
2008, $71 million, net of a $5 million valuation
allowance recorded in the fourth quarter, was classified as
Prepaid expenses and other current assets, which represents the
remaining funds still to be redeemed by The Reserve Primary Fund.
We believe that our liquidity position is adequate to fund our
operating and investing needs and debt maturities in 2009 and to
provide us with flexibility to respond to further changes in the
business environment. The challenges of the present business
environment may cause a material reduction in our liquidity as a
result of an adverse change in our cash flow from operations or
our access to credit or other capital (see “Item 1A.
Risk Factors”). In December 2009, $500 million of
floating rate notes mature. In addition, beginning in September
2009, SRI has certain minority exit rights, that if triggered
and exercised, could require us to make a substantial payment to
acquire SRI’s interests in our global alliance with them
following the determination of the fair value of SRI’s
interest. For further information regarding our global alliance
with SRI, including the events that could trigger SRI’s
exit rights, see “Item 1. Business. Description of
Goodyear’s Business — Global Alliance.” As
of the date of this filing, SRI has not provided us notice of
any accrued exit rights that would become exercisable in
September 2009.
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Our ability to service debt and operational requirements depends
in part on the results of operations of our subsidiaries and
upon the ability of our subsidiaries to make distributions of
cash to various other entities in our consolidated group,
whether in the form of dividends, loans or otherwise. In certain
countries where we operate, transfers of funds into or out of
such countries by way of dividends, loans or advances are
generally or periodically subject to various restrictions. The
primary restriction is that, in certain countries, we must
obtain approval from the foreign government
and/or
currency exchange board before net assets can be transferred out
of the country. In addition, certain of our credit agreements
and other debt instruments restrict the ability of foreign
subsidiaries to make distributions of cash. Thus, we would have
to repay
and/or amend
these credit agreements and other debt instruments in order to
use this cash to service our consolidated debt. Because of the
inherent uncertainty of overcoming these restrictions, we do not
consider the net assets of our subsidiaries that are subject to
such restrictions to be integral to our liquidity or readily
available to service our debt and operational requirements. At
December 31, 2008, approximately $331 million of net
assets were subject to such restrictions, compared to
approximately $308 million at December 31, 2007.
Net cash provided by (used in) operating activities of
continuing operations was $(745) million in 2008, compared
to $92 million in 2007. The increase in net cash used in
operating activities was due primarily to the
$1,007 million contributions made to the VEBA partially
offset by lower pension contributions and direct payments.
Net cash provided by operating activities of continuing
operations was $92 million in 2007, decreasing
$353 million from $445 million in 2006. The decrease
was due primarily to increased working capital requirements
following the end of the USW strike. Operating cash flows from
continuing operations in 2007 were favorably impacted by
improved operating results.
Net cash used in investing activities of continuing operations
was $1,136 million during 2008, compared to
$606 million in 2007 and $498 million in 2006. Capital
expenditures were $1,049 million, $739 million and
$637 million in 2008, 2007 and 2006, respectively. The
increase in capital expenditures primarily relates to projects
targeted at increasing our capacity for high value-added tires.
Investing activities exclude $33 million and
$132 million of accrued capital expenditures for 2008 and
2007, respectively. Investing activities includes a net cash
outflow of $76 million for the reclassification of funds
invested in The Reserve Primary Fund due to the delay in
accessing our cash mentioned above. Cash flows from investing
activities in 2008 included outflows of $84 million for the
acquisition of approximately 6% of the outstanding shares of our
tire manufacturing subsidiary in Poland and the acquisition of
the remaining 25% ownership in our tire manufacturing and
distribution subsidiary in China. This was partially offset by
cash provided from the sale of assets each year as a result of
the realignment of operations under rationalization programs.
Cash was used in 2006 for the acquisition of the remaining
outstanding shares that we did not already own of South Pacific
Tyres Ltd., a joint venture tire manufacturer and distributor in
Australia.
Cash flows from investing activities of discontinued operations
in 2007 was $1,435 related primarily to the sale of our
Engineered Products business.
Net cash provided by (used in) financing activities of
continuing operations was $348 million in 2008,
$(1,426) million in 2007, and $1,648 million in 2006.
Non-cash financing activities in 2007 included the issuance of
28.7 million shares of our common stock in exchange for
approximately $346 million principal amount of our 4%
convertible senior notes due 2034.
Consolidated debt at December 31, 2008 was
$4,979 million, compared to $4,725 million at
December 31, 2007. Cash flows in 2008 included debt
incurred of approximately $1.8 billion offset by the
repayment of approximately $1.5 billion of long term debt.
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Consolidated debt at December 31, 2007 was
$4,725 million, compared to $7,210 million at
December 31, 2006. Cash flows in 2007 included the
repayment of approximately $2.3 billion of long term debt
offset by net proceeds from our public equity offering of
approximately $833 million.
Credit
Sources
In aggregate, we had credit arrangements of $7,127 million
available at December 31, 2008, of which
$1,677 million were unused, compared to $7,392 million
available at December 31, 2007, of which
$2,169 million were unused.
Outstanding
Notes
At December 31, 2008, we had $1,882 million of
outstanding notes as compared to $2,634 million at
December 31, 2007.
Certain of our notes were issued pursuant to indentures that
contain varying covenants and other terms. In general, the terms
of our indentures, among other things, limit our ability and the
ability of certain of our subsidiaries to (i) incur
additional debt or issue redeemable preferred stock,
(ii) pay dividends, or make certain other restricted
payments or investments, (iii) incur liens, (iv) sell
assets, (v) incur restrictions on the ability of our
subsidiaries to pay dividends to us, (vi) enter into
affiliate transactions, (vii) engage in sale and leaseback
transactions, and (viii) consolidate, merge, sell or
otherwise dispose of all or substantially all of our assets.
These covenants are subject to significant exceptions and
qualifications. For example, under certain of our indentures, if
the notes are assigned an investment grade rating by
Moody’s and S&P and no default has occurred or is
continuing, certain covenants will be suspended.
On March 3, 2008, we redeemed $450 million in
aggregate principal amount of our 11% senior secured notes
due 2011 at a redemption price of 105.5% of the principal amount
thereof and $200 million in aggregate principal amount of
our senior secured floating rate notes due 2011 at a redemption
price of 104% of the principal amount thereof, plus in each case
accrued and unpaid interest to the redemption date.
On March 17, 2008, we repaid our $100 million
63/8% senior
notes at their maturity.
In the second quarter of 2008, the remaining $4 million of
convertible notes were converted into approximately
0.3 million shares of Goodyear common stock.
For additional information on our outstanding notes, refer to
the Note to Consolidated Financial Statements, No. 12,
Financing Arrangements and Derivative Financial Instruments.
$1.5
Billion Amended and Restated First Lien Revolving Credit
Facility due 2013
Our amended and restated first lien revolving credit facility is
available in the form of loans or letters of credit, with letter
of credit availability limited to $800 million. Subject to
the consent of the lenders whose commitments are to be
increased, we may request that the facility be increased by up
to $250 million. Our obligations under the facility are
guaranteed by most of our wholly-owned U.S. and Canadian
subsidiaries. Our obligations under the facility and our
subsidiaries’ obligations under the related guarantees are
secured by first priority security interests in various
collateral. Availability under the facility is subject to a
borrowing base, which is based on eligible accounts receivable
and inventory. To the extent that our eligible accounts
receivable and inventory decline, our borrowing base will
decrease and the availability under the facility may decrease
below $1.5 billion. In addition, if at any time the amount
of outstanding borrowings and letters of credit under the
facility exceeds the borrowing base, we are required to prepay
borrowings
and/or cash
collateralize letters of credit sufficient to eliminate the
excess.
At December 31, 2008, we had $700 million outstanding
and $497 million of letters of credit issued under the
revolving credit facility. At December 31, 2007, there were
no borrowings and $526 million of letters of credit were
issued under the revolving credit facility.
$1.2
Billion Amended and Restated Second Lien Term Loan Facility due
2014
Our amended and restated second lien term loan facility is
subject to the consent of the lenders making additional term
loans, whereby, we may request that the facility be increased by
up to $300 million. Our obligations under this
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facility are guaranteed by most of our wholly-owned
U.S. and Canadian subsidiaries and are secured by second
priority security interests in the same collateral securing the
$1.5 billion first lien credit facility. At
December 31, 2008 and December 31, 2007, this facility
was fully drawn.
€505
Million Amended and Restated Senior Secured European and German
Revolving Credit Facilities due 2012
Our amended and restated facilities consist of a
€155 million German revolving credit facility, which
is only available to certain of the German subsidiaries of GDTE
(collectively, “German borrowers”) and a
€350 million European revolving credit facility, which
is available to the same German borrowers and to GDTE and
certain of its other subsidiaries, with a €125 million
sublimit for non-German borrowers and a €50 million
letter of credit sublimit. Goodyear and its subsidiaries that
guarantee our U.S. facilities provide unsecured guarantees
to support the European revolving credit facilities and GDTE and
certain of its subsidiaries in the United Kingdom, Luxembourg,
France and Germany also provide guarantees. GDTE’s
obligations under the facilities and the obligations of its
subsidiaries under the related guarantees are secured by first
priority security interests in a variety of collateral.
As of December 31, 2008, there were no borrowings under the
German revolving credit facility and there were $10 million
(€7 million) of letters of credit issued and
$182 million (€130 million) of borrowings
(including $84 million (€60 million) of
borrowings by the non-German borrowers) under the European
revolving credit facility. As of December 31, 2007, there
were $12 million (€8 million) of letters of
credit issued and no borrowings under the European revolving
credit facility and no borrowings under the German revolving
credit facility.
Each of our first lien revolving credit facility and our
European and German revolving credit facilities have customary
representations and warranties including, as a condition to
borrowing, that all such representations and warranties are true
and correct, in all material respects, on the date of the
borrowing, including representations as to no material adverse
change in our financial condition since December 31, 2006.
For a description of the collateral securing the above
facilities as well as the covenants applicable to them, please
refer to the Note to the Consolidated Financial Statements
No. 12, Financing Arrangements and Derivative Financial
Instruments.
Covenant
Compliance
As of December 31, 2008, we were in compliance with the
material covenants imposed by our principal credit facilities.
EBITDA
(per our Amended and Restated Credit Facilities)
Our amended and restated credit facilities state that we may
only incur additional debt or make restricted payments that are
not otherwise expressly permitted if, after giving effect to the
debt incurrence or the restricted payment, our ratio of EBITDA
(as defined in those facilities) (“Covenant EBITDA”)
to Consolidated Interest Expense (as defined in those
facilities) for the prior four fiscal quarters would exceed 2.0
to 1.0. Certain of our senior note indentures have substantially
similar limitations on incurring debt and making restricted
payments. In addition, if the amount of availability under our
first lien revolving credit facility plus our Available Cash (as
defined in that facility) is less than $150 million, we may
not permit our ratio of Covenant EBITDA to Consolidated Interest
Expense to be less than 2.0 to 1.0 for any period of four
consecutive fiscal quarters.
Covenant EBITDA is a non-GAAP financial measure that is
presented not as a measure of operating results, but rather as a
measure of these limitations imposed under our credit
facilities. Covenant EBITDA should not be construed as an
alternative to either (i) income from operations or
(ii) cash flows from operating activities. Our failure to
comply with the financial covenants in our credit facilities
could have a material adverse effect on our liquidity and
operations. As a limitation on our ability to incur debt in
accordance with our credit facilities could affect our
liquidity, we believe that the presentation of Covenant EBITDA
provides investors with important information.
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The following table presents the calculation of EBITDA and the
calculation of Covenant EBITDA in accordance with the
definitions in our amended and restated credit facilities for
the periods indicated. Other companies may calculate similarly
titled measures differently than we do. Certain line items are
presented as defined in the credit facilities and do not reflect
amounts as presented in the Consolidated Financial Statements.
Those line items also include discontinued operations.
Notes
Payable and Overdrafts
At December 31, 2008, we had short term committed and
uncommitted bank credit arrangements totaling $481 million,
of which $216 million were unused, compared to
$564 million and $339 million at December 31,
2007. The continued availability of these arrangements is at the
discretion of the relevant lender, and a portion of these
arrangements may be terminated at any time.
Other
Foreign Credit Facilities
During the third quarter of 2008, we executed financing
agreements in China. The facilities will provide for
availability of up to 3.66 billion renminbi (approximately
$535 million at December 31, 2008) and can only
be used to finance the relocation and expansion of our
manufacturing facilities in China. There were no amounts
outstanding at December 31, 2008.
International
Accounts Receivable Securitization Facilities (On-Balance
Sheet)
On July 23, 2008, certain of our European subsidiaries
amended and restated the pan-European accounts receivable
securitization facility. The amendments increased the funding
capacity of the facility from €275 million to
€450 million and extended the expiration date from
2009 to 2015. The facility is subject to customary annual
renewal of
back-up
liquidity commitments.
The amended facility involves an ongoing daily sale of
substantially all of the trade accounts receivable of certain
GDTE subsidiaries to a bankruptcy-remote French company
controlled by one of the liquidity banks in the facility. These
subsidiaries retain servicing responsibilities. It is an event
of default under the facility if the ratio of GDTE’s
consolidated net indebtedness to its consolidated EBITDA is
greater than 3.0 to 1.0. This financial covenant will
automatically be amended to conform to the European credit
facilities upon any amendment of such covenant in the European
credit facilities. The defined terms used for this financial
covenant are substantially similar to those included in the
European credit facilities.
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As of December 31, 2008 and 2007, the amount available and
fully utilized under this program totaled $483 million
(€346 million) and $403 million
(€275 million), respectively. The program did not
qualify for sale accounting, and accordingly, these amounts are
included in Long-term debt and capital leases.
In addition to the pan-European accounts receivable
securitization facility discussed above, subsidiaries in
Australia have accounts receivable securitization programs
totaling $61 million and $78 million at
December 31, 2008 and December 31, 2007, respectively.
These amounts are included in Notes payable and overdrafts.
Accounts
Receivable Factoring Facilities (Off-Balance
Sheet)
Various subsidiaries sold certain of their trade receivables
under off-balance sheet programs during 2008 and 2007. The
receivable financing programs of these subsidiaries did not
utilize a special purpose entity (“SPE”). At
December 31, 2008 and 2007, the gross amount of receivables
sold was $116 million and $152 million, respectively.
Credit
Ratings
Our credit ratings as of the date of this report are presented
below:
Although we do not request ratings from Fitch, the rating agency
rates our secured debt facilities (BB+) and our unsecured debt
(B+).
A rating reflects only the view of a rating agency, and is not a
recommendation to buy, sell or hold securities. Any rating can
be revised upward or downward at any time by a rating agency if
such rating agency decides that circumstances warrant such a
change.
Potential
Future Financings
In addition to our previous financing activities, we may seek to
undertake additional financing actions which could include
restructuring bank debt or a capital markets transaction,
possibly including the issuance of additional debt or equity.
Given the challenges that we face and the uncertainties of the
market conditions, access to the capital markets cannot be
assured.
Our future liquidity requirements may make it necessary for us
to incur additional debt. However, a substantial portion of our
assets are already subject to liens securing our indebtedness.
As a result, we are limited in our ability to pledge our
remaining assets as security for additional secured
indebtedness. In addition, no assurance can be given as to our
ability to raise additional unsecured debt.
Dividends
Under our primary credit facilities we are permitted to pay
dividends on our common stock as long as no default will have
occurred and be continuing, additional indebtedness can be
incurred under the credit facilities following the payment, and
certain financial tests are satisfied.
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Asset
Acquisitions and Dispositions
In March 2008, we acquired an additional 6.12% ownership of TC
Debica S.A., our tire manufacturing subsidiary in Poland, by
purchasing outstanding shares held by minority shareholders for
$46 million. As a result of the acquisition, we recorded
goodwill totaling $28 million. We have agreed to use our
reasonable best efforts to procure from our Board of Directors,
between March 2008 and August 2009, the approval to announce a
tender offer for the remaining outstanding shares of that
subsidiary that we do not already own, provided that such tender
offer can be accomplished without the use of substantial cash
financing from Goodyear. We also have agreed to facilitate the
expansion of the daily commercial truck tire production capacity
in Debica.
In October 2008, we acquired the remaining 25% ownership
interest in Goodyear Dalian Tire Company Ltd., our tire
manufacturing and distribution subsidiary in China. The amount
of our additional investment and the impact on our results of
operations and financial position were not material.
Given tightening credit markets and difficult economic
conditions in certain of our major markets that have led to
lower customer demand, we are deferring certain capital
investments until circumstances improve. We now expect capital
investments of between $700 million and $800 million
in 2009.
The restrictions on asset sales imposed by our material
indebtedness have not affected our strategy of divesting
non-core businesses, and those divestitures have not affected
our ability to comply with those restrictions.
COMMITMENTS
AND CONTINGENT LIABILITIES
Contractual
Obligations
The following table presents our contractual obligations and
commitments to make future payments as of December 31, 2008:
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Additional other long term liabilities include items such as
general and product liabilities, environmental liabilities and
miscellaneous other long term liabilities. These other
liabilities are not contractual obligations by nature. We
cannot, with any degree of reliability, determine the years in
which these liabilities might ultimately be settled.
Accordingly, these other long term liabilities are not included
in the above table.
In addition, the following contingent contractual obligations,
the amounts of which cannot be estimated, are not included in
the table above:
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We do not engage in the trading of commodity contracts or any
related derivative contracts. We generally purchase raw
materials and energy through short term, intermediate and long
term supply contracts at fixed prices or at formula prices
related to market prices or negotiated prices. We may, however,
from time to time, enter into contracts to hedge our energy
costs.
An off-balance sheet arrangement is any transaction, agreement
or other contractual arrangement involving an unconsolidated
entity under which a company has:
We have entered into certain arrangements under which we have
provided guarantees that are off-balance sheet arrangements.
Those guarantees were not significant at December 31, 2008.
For further information about our guarantees, refer to the Note
to the Consolidated Financial Statements No. 20,
Commitments and Contingent Liabilities.
Certain information in this
Form 10-K
(other than historical data and information) may constitute
forward-looking statements regarding events and trends that may
affect our 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. You are cautioned not to
place undue reliance on forward-looking statements, which speak
only as of the date of this
Form 10-K.
Such statements are based on current expectations and
assumptions, 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:
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It is not possible to foresee or identify all such factors. We
will not revise or update any forward-looking statement or
disclose any facts, events or circumstances that occur after the
date hereof that may affect the accuracy of any forward-looking
statement.
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The raw materials costs to which our operations are principally
exposed include the cost of natural rubber, synthetic rubber,
carbon black, fabrics, steel cord and other petrochemical-based
commodities. Approximately two-thirds of our raw materials are
oil-based derivatives, whose cost may be affected by
fluctuations in the price of oil. We currently do not hedge
commodity prices. We do, however, use various strategies to
partially offset cost increases for raw materials, including
centralizing purchases of raw materials through our global
procurement organization in an effort to leverage our purchasing
power and expand our capabilities to substitute lower-cost raw
materials.
We continuously monitor our fixed and floating rate debt mix.
Within defined limitations, we manage the mix using refinancing
and unleveraged interest rate swaps. We will enter into fixed
and floating interest rate swaps to alter our 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 our risk of increased interest costs
during periods of rising interest rates, and are normally
designated as cash flow hedges. Floating rate swaps are used to
convert the fixed rates of long term borrowings into short term
variable rates, and are normally designated as fair value
hedges. Interest rate swap contracts are thus used to separate
interest rate risk management from debt funding decisions. At
December 31, 2008, 68% of our debt was at variable interest
rates averaging 3.83% compared to 56% at an average rate of
7.46% at December 31, 2007. We also have from time to time
entered into interest rate lock contracts to hedge the risk-free
component of anticipated debt issuances.
We may also enter into interest rate contracts that change the
basis of our floating interest rate exposure. There was one such
interest rate contract outstanding at December 31, 2008. In
October 2008, we entered into a basis swap with a counterparty
under which we pay six-month LIBOR and receive one-month LIBOR
plus a premium. This swap applies to $1.2 billion of
notional principal and matures in October 2009. During 2008, the
weighted average interest rates paid and received were 3.48% and
2.60%, respectively. Fair value gains and losses on this basis
swap are recorded in Other (Income) and Expense. The fair value
of this swap at December 31, 2008 was a liability of
$10 million.
There were no interest rate swap contracts at December 31,
2007. During 2006, our weighted average interest rate swap
contract notional principal amount was $183 million,
LIBOR-based payments averaged 6.67% and fixed-rate receipts
averaged 6.63%.
The following table presents information about long term fixed
rate debt, excluding capital leases, at December 31:
The pro forma information assumes a 100 basis point
decrease in market interest rates at December 31 of each year,
and reflects the estimated fair value of fixed rate debt
outstanding at that date under that assumption. The sensitivity
of our fixed rate debt to changes in interest rates was
determined using current market pricing models.
We enter into foreign currency contracts in order to reduce the
impact of changes in foreign exchange rates on consolidated
results of operations and future foreign currency-denominated
cash flows. These contracts reduce exposure to currency
movements affecting existing foreign currency-denominated
assets, liabilities, firm commitments and forecasted
transactions resulting primarily from trade receivables and
payables, equipment acquisitions, intercompany loans and royalty
agreements and forecasted purchases and sales. Contracts hedging
short term trade receivables and payables normally have no
hedging designation.
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The following table presents foreign currency forward contract
information at December 31:
The pro forma change in fair value assumes a 10% adverse change
in underlying foreign exchange rates at December 31 of each
year, and reflects the estimated change in the fair value of
contracts outstanding at that date under that assumption. The
sensitivity of our foreign currency positions to changes in
exchange rates was determined using current market pricing
models.
Fair values are recognized on the Consolidated Balance Sheets at
December 31 as follows:
The counterparties to our interest rate and foreign exchange
contracts were substantial and creditworthy multinational
commercial banks or other financial institutions that are
recognized market makers. We control our credit exposure by
diversifying across multiple counterparties and by setting
counterparty credit limits based on long term credit ratings and
other indicators of counterparty credit risk such as credit
default swap spreads. We also enter into master netting
agreements with counterparties when possible. Based on our
analysis, we consider the risk of counterparty nonperformance
associated with these contracts to be remote. However, the
inability of a counterparty to fulfill its obligations when due
could have a material effect on our consolidated financial
position, results of operations or liquidity in the period in
which it occurs.
For further information on interest rate contracts and foreign
currency contracts, refer to the Note to the Consolidated
Financial Statements No. 12, Financing Arrangements and
Derivative Financial Instruments.
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Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as such term is defined under
Rule 13a-15(f)
promulgated under the Securities Exchange Act of 1934, as
amended.
Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company’s
consolidated financial statements for external purposes in
accordance with generally accepted accounting principles.
Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit the preparation
of the consolidated financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance
with appropriate authorizations of management and directors of
the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets
that could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the Company’s
internal control over financial reporting as of
December 31, 2008 using the framework specified in
Internal Control — Integrated Framework,
published by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on such assessment, management has
concluded that the Company’s internal control over
financial reporting was effective as of December 31, 2008.
The effectiveness of the Company’s internal control over
financial reporting as of December 31, 2008 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which is
presented in this Annual Report on
Form 10-K.
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To The Board of Directors and Shareholders of The Goodyear
Tire & Rubber Company
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of The Goodyear Tire & Rubber
Company and its subsidiaries at December 31, 2008 and 2007,
and the results of their operations and their cash flows for
each of the three years in the period ended December 31,
2008 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our
opinion, the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. Also in our opinion,
the Company maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for these
financial statements and financial statement schedules, for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial
Reporting, appearing under Item 8. Our responsibility is to
express opinions on these financial statements, on the financial
statement schedules, and on the Company’s internal control
over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in the notes to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions as of January 1, 2007
(Note 15) and defined benefit pension and other
postretirement plans as of December 31, 2006 (Note 14).
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
February 18, 2009
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THE
GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
The accompanying notes are an integral part of these
consolidated financial statements.
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THE
GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
THE
GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
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