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Goodyear Tire & Rubber Company 10-K 2010 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, 2009 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:
Securities registered pursuant to Section 12(g) 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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o 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. o
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, 2009, was approximately
$2.7 billion.
Shares of Common Stock, Without Par Value, outstanding at
January 31, 2010:
242,215,323
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company’s Proxy Statement for the Annual
Meeting of Shareholders to be held on April 13, 2010 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, 2009
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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
2009 net sales were $16.3 billion, and Goodyear’s
net loss in 2009 was $375 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 approximately
1,500 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 57 manufacturing
facilities in 23 countries, including the United States, and we
have marketing operations in almost every country around the
world. We employ approximately 69,000 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.
Venezuelan Currency Devaluation. On
January 8, 2010, the Venezuelan government announced the
devaluation of its currency, the bolivar fuerte, and the
establishment of a two-tier exchange structure. The official
exchange rate has been changed from 2.15 bolivares fuertes to
each U.S. dollar to 4.30 bolivares fuertes to each
U.S. dollar, except in the case of the conversion of
bolivares fuertes to U.S. dollars to pay for the
importation of “essential goods,” for which the rate
is 2.60 bolivares fuertes to each U.S. dollar. Some of the
tires and raw materials that Goodyear’s Venezuelan
subsidiary, Compania Anonima Goodyear de Venezuela
(“Goodyear Venezuela”), imports into Venezuela have
been classified as “essential goods,” while others
have not. We are continuing to evaluate the list of goods
classified by the Venezuelan government as “essential”
to determine which exchange rate will apply to Goodyear
Venezuela’s imports.
At December 31, 2009, without giving effect to the
devaluation, we had $370 million in cash denominated in
bolivares fuertes, third-party U.S. dollar-denominated
accounts payable of $17 million, and
U.S. dollar-denominated intercompany accounts payable of
$127 million. We expect to record a charge in the first
quarter of 2010 in connection with the remeasurement of our
balance sheet to reflect the devaluation. If calculated at the
4.30 official exchange rate, the charge is expected to be
approximately $150 million, net of tax. To the extent that
any goods that Goodyear Venezuela imports are classified as
“essential,” this impact could be reduced. The
devaluation did not affect our 2009 results of operations or
financial position.
Effective January 1, 2010, Venezuela’s economy is
considered a highly inflationary economy under
U.S. generally accepted accounting principles. Accordingly,
all gains and losses resulting from the remeasurement of our
financial statements are required to be recorded directly in the
statement of operations. If in the future we convert bolivares
fuertes at a rate other than the official exchange rate, we may
realize additional gains or losses that would be recorded in the
statement of operations.
For a discussion of the risks related to our international
operations, including Venezuela, see “Item 1A. Risk
Factors” in this
Form 10-K.
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Debt Exchange Offer. On February 2, 2010,
we commenced an offer to exchange any and all of our
$650 million in aggregate principal amount of
7.857% Notes due 2011 (the “2011 Notes”) for up
to $702 million in aggregate principal amount of a new
series of 8.75% Notes due 2020. Concurrent with the
exchange offer, we are soliciting consents from the holders of
the 2011 Notes to amend the terms of the indenture that governs
the 2011 Notes. The proposed amendments, if adopted, would
delete many of the restrictive covenants and certain events of
default in the indenture governing the 2011 Notes. The new notes
will be our unsecured senior obligations and will be guaranteed
by our U.S. and Canadian subsidiaries that also guarantee
our obligations under our senior secured credit facilities. The
exchange offer and consent solicitation will expire on
March 2, 2010, unless extended or earlier terminated by us.
The completion of the exchange offer and consent solicitation is
subject to the satisfaction of certain conditions, including
that we receive valid tenders, not validly withdrawn, of at
least $260 million in aggregate principal of the 2011 Notes.
The Reserve Primary Fund. On January 29,
2010, we received a distribution of $24 million from The
Reserve Primary Fund.
DESCRIPTION
OF GOODYEAR’S BUSINESS
For the year ended December 31, 2009, 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 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.
Financial information related to our operating segments for the
three year period ended December 31, 2009 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:
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Our principal products are new tires for most applications.
Approximately 83% of our sales in 2009 were for new tires,
compared to 82% in 2008 and 84% in 2007. Sales of chemical
products and natural rubber to unaffiliated customers were 4% in
2009, 6% in 2008 and 5% in 2007 of our consolidated sales (9%,
14% and 11% of North American Tire’s total sales in
2009, 2008 and 2007, respectively). 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.
Goodyear does not include motorcycle, all terrain vehicle or
consigned tires in reporting tire unit sales.
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, 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.
Although we do not consider our tire businesses to be seasonal
to any significant degree, we historically sell more replacement
tires in North American Tire and Europe, Middle East and Africa
Tire during the third quarter.
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We have a global alliance with Sumitomo Rubber Industries, Ltd.
(“SRI”). Under the global alliance, we own 75% and SRI
owns 25% of two companies, Goodyear Dunlop Tires Europe B.V.
(“GDTE”) and Goodyear Dunlop Tires North America, Ltd.
(“GDTNA”). GDTE owns and operates substantially all of
our tire businesses in Western Europe. GDTNA owns the Dunlop
brand and operates certain related businesses 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 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, which we refer to as “exit
rights,” 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 the global alliance agreements, taken as
a whole. In addition, SRI has exit rights upon the occurrence 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%. If SRI were to exercise any of its exit rights, the global
alliance agreements provide that the purchase price would be
based on the fair value of SRI’s 25% minority
shareholder’s interest in GDTE and GDTNA. The purchase
price would be determined through a negotiation process where,
if no mutually agreed purchase price was determined, a binding
arbitration process would determine the purchase price. Goodyear
would retain the rights to the Dunlop brand in Europe and North
America following any such purchase. As of the date of this
filing, SRI has not provided us notice of any exit rights that
have become exercisable.
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.
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, Assurance Fuel Max,
Assurance featuring TripleTred Technology and Assurance
featuring ComforTred Technology for the premium market; Eagle,
for the high performance market, and RunOnFlat 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 featuring technologies including MT/R with Kevlar,
and DuraTrac; and Fortera featuring TripleTred Technology.
Goodyear also offers Dunlop brand radial passenger tire lines
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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 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 and sells all-steel, radial
medium truck tires under the Goodyear, Dunlop and Kelly brands,
for use on commercial trucks and trailers.
North American Tire also:
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 (“EMEA”), our
second largest segment in terms of revenue, develops,
manufactures, distributes and sells tires for automobiles,
motorcycles, trucks, farm implements and construction
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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. EMEA:
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
200 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:
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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.
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 eight
plants in China, India, Indonesia, Japan, Malaysia, Taiwan and
Thailand. 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’s 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 brand 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 400 retail stores under the Beaurepaires and Frank
Allen brands.
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GENERAL
BUSINESS INFORMATION
The principal raw materials used by Goodyear are natural and
synthetic rubber. Natural rubber typically accounts for
significantly more than half of all rubber consumed by us on an
annual basis. We purchase all of our requirements for natural
rubber in the world market. 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 2010, 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.
In 2009, raw material costs decreased by approximately 2% in our
tire businesses compared to 2008, primarily driven by a decrease
in the cost of natural and synthetic rubber. Based on our
current projections, we expect raw material costs for the first
half of 2010 to decrease about 5% when compared to the same
period of 2009, with a first quarter decrease of approximately
15%. The second half of the year should reflect increases
approaching 30% as compared to the same period in 2009. However,
natural rubber prices and petrochemical-based commodity prices
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 2,500 product, process and equipment
patents issued by the United States Patent Office and
approximately 3,700 patents issued or granted in other countries
around the world. We also have licenses under numerous patents
of others. We have approximately 500 applications for United
States patents pending and approximately 2,100 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 11,200 registrations and
800 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.
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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, 2009, we employed approximately
69,000 full-time and temporary people throughout the world,
including approximately 39,000 people covered under
collective bargaining agreements. At December 31, 2008, we
employed approximately 75,000 full-time and temporary
people throughout the world, including approximately
42,000 people covered under collective bargaining
agreements. Approximately 10,000 of our employees in the United
States are covered by a master collective bargaining agreement
with the United Steelworkers (“USW”), which expires in
July 2013. Approximately 17,000 of our employees outside of the
United States are covered by union contracts which currently
have expired or that will expire in 2010, primarily in Brazil,
Germany, Turkey and South Africa. In addition, approximately
1,000 of our employees in the United States are 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 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 $68 million during 2010 and
approximately $62 million during 2011.
We expended approximately $47 million during 2009, and
expect to expend approximately the same amount during both 2010
and 2011 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 23
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, 2009 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. See “Item 1A. Risk
Factors” for a discussion of the risks related to our
international operations.
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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, 2010, (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.
If we
do not achieve projected savings from our cost reduction
initiatives, including our new USW collective bargaining
agreement, or successfully implement other strategic initiatives
our operating results, financial condition and liquidity may be
materially adversely affected.
Our business continues to be impacted by trends that have
negatively affected the tire industry in general, and several of
these trends were made more acute during the global recession in
2009. These negative trends include industry overcapacity, which
limits our ability to obtain price relief, difficult economic
conditions in many parts of the world, which depresses demand
for original equipment tires and replacement tires in both our
consumer and commercial businesses, volatile and high raw
material and energy costs, which increase the cost of
manufacturing, and increasing competition from low-cost
manufacturers. If these overall trends continue or worsen, then
our operational and financial condition could be adversely
affected. Unlike most other tire manufacturers, we also face the
continuing burden of legacy pension costs.
In order to offset the impact of these trends, we continue to
implement various cost reduction initiatives and expect to
achieve $1.0 billion in aggregate gross cost savings from
2010 through 2012 through our four-point cost savings plan,
which includes expected savings from continuous improvement
initiatives, including savings under our USW agreement described
below, increased low-cost country sourcing, high-cost capacity
reductions and reduced selling, administrative and general
expenses.
We have entered into a new four-year contract with the USW in
September 2009 for our seven USW-represented tire plants in the
United States. The new contract enhances the competitiveness of
those plants through improvements in productivity, wage and
benefit savings and added flexibility. These changes are
expected to provide us with cost savings of approximately
$215 million over the term of the contract. Combined with
savings realized through pre-bargain agreements to reduce
staffing levels at five plants, the Company expects to realize
$555 million in total savings over the term of the
agreements. If we fail to successfully implement the
improvements in productivity and flexibility permitted by our
new USW agreements, we may be unable to realize all of the
expected cost savings and our competitive position may be
harmed. In turn, our results of operations and financial
condition could be materially adversely affected.
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, Fuel Max, 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 and access to capital markets. 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.
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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.
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, 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 continue to innovate and
manufacture the types of tires demanded by consumers, and to
reduce costs by such means as reducing 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 and effective August 29, 2009 we closed participation
in our U.S. hourly pension plans for employees covered by
the United Steelworkers master labor contract. 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 in 2010 and beyond and affect the level and timing of
required contributions in 2011 and beyond. The unfunded amount
of the projected benefit obligation for our U.S. and
non-U.S. pension
plans was $1,931 million and $784 million,
respectively, at December 31, 2009, 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 2010, and
$400 million to $450 million in 2011. 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, and may continue to do so, 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 and adversely affect our financial condition.
The volatility of raw material costs may cause our margins,
operating results and liquidity to fluctuate.
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Financial
difficulties, work stoppages, supply disruptions or economic
conditions affecting our major OE customers, dealers or
suppliers could harm our business.
The recent recessionary economic conditions in many parts of the
world have negatively impacted our operations in several ways.
For instance, market turmoil and tightening credit has led to a
lack of consumer confidence and a widespread reduction of
business activity generally and specifically to a significant
decline in vehicle purchases from our OE customers, which
reduces our net sales. In 2009, our OE customers experienced
significant difficulty, particularly in the U.S., due to the
severe weakness of the North American auto industry. As a
result, both General Motors and Chrysler filed for bankruptcy in
2009.
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. We continued to experience
declines in sales volume during 2009 compared to 2008 due to
reduced production at our OE customers in response to lower
demand for new vehicles and weakness in demand for replacement
tires. The decline in our sales volume and the resulting
production cuts have resulted in additional under-absorbed fixed
costs. We may also experience a future decline in sales volume
due to a continued decline in new vehicle sales, the
discontinuation or sale of certain OE brands, platforms or
programs or continued weakness in demand for replacement tires,
possibly resulting in additional under-absorbed fixed costs at
our production facilities. Automotive production can also be
affected by labor relation 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 further 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 or interruption, 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.
Approximately 17,000 of our employees outside of the United
States are covered by union contracts that have expired or are
expiring in 2010 primarily in Brazil, Germany, Turkey and South
Africa. 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
or interruption, we could experience a significant disruption
of, or inefficiencies in, our operations or incur higher labor
costs, which could have a material adverse effect on our
business, financial position, results of operations and
liquidity.
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We have a substantial amount of debt. As of December 31,
2009, our debt (including capital leases) on a consolidated
basis was approximately $4.5 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
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
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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.
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.
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, 2009, we had approximately $2.0 billion
of variable rate debt outstanding.
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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, 2009, approximately 90,200 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:
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. For
further information regarding our asbestos liabilities, refer to
the Note to the Consolidated Financial Statements, No. 20,
Commitments and Contingent Liabilities.
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, 2009, we had $494 million
in letters of credit issued and $892 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.
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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. 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.
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 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.
Our European operations are subject to regulation by the
European Union. In 2009, two important regulations, the Tire
Safety Regulation and the Tire Labeling Regulation, applicable
to tires sold in the European Union were adopted. The Tire
Safety Regulation sets minimum performance standards that tires
need to meet for rolling resistance, wet grip braking and noise
in order to be sold in the European Union, and will become
effective between 2012 and 2020. The Tire Labeling Regulation
applies to all tires produced after July 1, 2012 and
requires that tires be labeled to inform consumers about the
tire’s fuel efficiency, wet grip and noise characteristics.
Additional rules necessary to implement these regulations still
need to be proposed by the European Commission and agreed upon
with the national governments and the European Parliament.
These U.S. and European regulations, rules adopted to
implement these regulations, or other similar regulations that
may be adopted in the United States, Europe or elsewhere in the
future may require us to alter or increase our capital spending
and research and development plans or cease the production of
certain tires, which could have a material adverse affect on our
operating results.
Laws and regulations governing environmental and occupational
safety and health are complicated, change frequently and have
tended to become stricter over time. As a manufacturing company,
we are subject to these laws and regulations both inside and
outside the United States. We may not be in complete compliance
with such laws and regulations at all times. Our costs or
liabilities relating to them may be more than the amount we have
reserved, and that difference may be material.
In addition, our manufacturing facilities may become subject to
further limitations on the emission of “greenhouse
gases” due to public policy concerns regarding climate
change issues or other environmental or health and safety
concerns. While the form of any additional regulations cannot be
predicted, a
“cap-and-trade”
system similar to the one adopted in the European Union could be
adopted in the United States. Any such
“cap-and-trade”
system (including the system currently in place in the European
Union) or other limitations imposed on the emission of
“greenhouse gases” could require us to increase our
capital expenditures, use our cash to acquire emission credits
or restructure our manufacturing operations, which could have a
material adverse affect on our operating results, financial
condition and liquidity.
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Compliance with the laws and regulations described above or any
of the myriad of applicable foreign, Federal, state and local
laws and regulations currently in effect or that may be adopted
in the future could materially adversely affect our competitive
position, operating results, financial condition and liquidity.
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.
For example, since 2003, Venezuela has imposed currency exchange
controls that fix the exchange rate between the Venezuelan
bolivar fuerte and the U.S. dollar and restrict the ability
to exchange bolivares fuertes for dollars. These restrictions,
which were tightened in early 2009, may delay or limit our
ability to pay third-party and affiliated suppliers and to
otherwise repatriate funds from Venezuela, which could
materially adversely affect our financial condition and
liquidity. In addition, if we are unable to pay these suppliers
in a timely manner, they may cease supplying us. Venezuela has
also imposed restrictions on the importation of certain raw
materials. If these suppliers cease supplying us or we are
unable to import necessary raw materials, we may need to reduce
or halt production in Venezuela, which could materially
adversely affect our results of operations.
Furthermore, effective January 1, 2010, Venezuela’s
economy is considered highly inflationary under
U.S. generally accepted accounting principles. Accordingly,
all gains and losses resulting from the remeasurement of our
financial statements are required to be recorded directly in the
statement of operations. On January 8, 2010, the Venezuelan
government announced the devaluation of its currency, the
bolivar fuerte, and the establishment of a two-tier exchange
structure. As a result, we expect to record a charge in the
first quarter of 2010 in connection with the remeasurement of
our balance sheet to reflect the devaluation. If calculated at
the new official exchange rate of 4.30 bolivares fuertes to each
U.S. dollar, the charge is expected to be approximately
$150 million, net of tax. If in the future we convert
bolivares fuertes at a rate other than the official exchange
rate, we may realize additional gains or losses that would be
recorded in the statement of operations. For further information
regarding the Venezuelan currency devaluation and its
anticipated impact on Goodyear, see “Item 1.
Business — Recent Developments — Venezuelan
Currency Devaluation.”
The future results of our Venezuelan operations will be affected
by many factors, including our ability to take actions to
mitigate the effect of the devaluation, further actions of the
Venezuelan government, economic conditions in Venezuela such as
inflation and consumer spending, and the availability of raw
materials, utilities and energy. Goodyear Venezuela contributes
a significant portion of the sales and operating income of our
Latin American Tire segment. As a result, any disruption of
Goodyear Venezuela’s operations or of our ability to pay
suppliers or repatriate
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funds from Venezuela could have a material adverse impact on the
future performance of our Latin American Tire segment and could
materially adversely affect our results of operations, financial
condition and liquidity.
The financial position and results of operations of our
international subsidiaries are initially recorded in various
foreign currencies and then translated into U.S. dollars at
the applicable exchange rate for inclusion in our financial
statements. The strengthening of the U.S. dollar against
these foreign currencies ordinarily has a negative impact on our
reported sales and operating margin (and conversely, the
weakening of the U.S. dollar against these foreign
currencies has a positive impact). For the year ended
December 31, 2009, foreign currency translation unfavorably
affected sales by $699 million and favorably affected
segment operating income by $22 million compared to the
year ended December 31, 2008. The volatility of currency
exchange rates may materially adversely affect our operating
results.
Under the global alliance agreements between us and SRI, SRI has
the right to require us to purchase its ownership interests in
GDTE and GDTNA if certain triggering events have occurred,
including certain bankruptcy events, changes in control of
Goodyear or breaches of the global alliance agreements. 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. 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.”
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.
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We manufacture our products in 57 manufacturing facilities
located around the world including 17 plants in the United
States.
North American Tire
Manufacturing Facilities. North American
Tire owns (or leases with the right to purchase at a nominal
price) and operates 20 manufacturing facilities in the United
States and Canada.
These facilities have floor space aggregating approximately
24 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:
These facilities have floor space aggregating approximately
21 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 6 million square feet.
Asia Pacific Tire
Manufacturing Facilities. Asia Pacific
Tire owns and operates 9 manufacturing facilities in 7
countries, including 8 tire plants and 1 aviation retread plant.
These facilities have floor space aggregating approximately
5 million square feet.
Plant
Utilization. Our worldwide tire capacity
utilization rate was approximately 73% during 2009 compared to
approximately 78% in 2008 and 86% in 2007. Our 2009 and 2008
utilization decreased due to the production cuts we made in
response to the global recessionary economic conditions.
Other
Facilities. We also own and operate three
research and development facilities and technical centers, and
three tire proving grounds. We also operate approximately 1,500
retail outlets for the sale of our tires to consumer and
commercial customers, approximately 50 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.
We are currently one of several defendants in civil actions
pending in various state and Federal courts involving
approximately 90,200 claimants (as of December 31,
2009) 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
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containing asbestos or asbestos in Goodyear facilities. The
amount expended by us and our insurers on defense and claim
resolution was approximately $20 million during 2009. 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 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, 2009.
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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 121, 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, 2009, there were 21,326 record holders of the
242,202,419 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, 2009. 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, 2009.
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
57 manufacturing facilities in 23 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
(“EMEA”); Latin American Tire; and Asia Pacific Tire.
We experienced challenging industry conditions throughout 2009
due to recessionary economic conditions in many parts of the
world during the first half of 2009 and a slow and uncertain
recovery from those conditions in the second half of 2009. These
industry conditions were characterized by lower motor vehicle
sales and production and weakness in the demand for replacement
tires, particularly in the commercial markets, compared to 2008.
For the year ended December 31, 2009, Goodyear net loss was
$375 million, compared to a Goodyear net loss of
$77 million in 2008. Our total segment operating income for
2009 was $372 million, compared to $804 million in
2008. The decline in segment operating income was due primarily
to a significant increase in under-absorbed fixed overhead costs
and a decrease in tire volume. See “Results of
Operations — Segment Information” for additional
information.
Net sales were $16.3 billion in 2009, compared to
$19.5 billion in 2008. Net sales declined due to lower tire
volume, primarily in North American Tire and EMEA, a decrease in
other tire-related businesses, primarily in North American
Tire’s third party sales of chemical products, and foreign
currency translation, primarily in EMEA.
The impact of the global economic slowdown on our 2009 operating
results was mitigated by the success of the strategic
initiatives we announced in February 2009 which were aimed at
strengthening our revenue, cost structure and cash flow,
including:
We exceeded our inventory reduction goal through the combination
of lower raw material costs and the implementation of an
advantaged supply chain, primarily in North American Tire and
EMEA, by improving demand forecasting, increasing production
flexibility through shorter lead times and reduced production
lot sizes, reducing the quantity of raw materials required to
meet an improved demand forecast, changing the composition of
our
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logistics network by closing and consolidating certain
distribution warehouses, increasing local production and
reducing longer lead time off-shore imports, and reducing
in-transit inventory between our plants and regional
distribution centers.
In spite of the challenging global and industry economic
conditions we experienced, we had several key achievements in
2009:
We expect 2010 to be a year of modest recovery, with increases
in demand expected to improve our capacity utilization, which in
turn will result in declines in unabsorbed fixed costs in 2010
as compared to 2009. As noted below, we also expect raw material
cost pressures to intensify, particularly in the second half of
2010. In order to ensure that we are positioned to take
advantage of the economic recovery, we will control our cost
structure by increasing low-cost sourcing to more than
$900 million by the end of 2010, pursuing cost reduction
initiatives that are targeted to achieve $1.0 billion of
aggregate gross cost savings from 2010 to 2012, and continuing
our commitment to reduce high-cost manufacturing capacity by 15
to 25 million units by February 2011.
We expect raw material costs for the first half of 2010 to
decrease about 5% when compared to the same period of 2009, with
a first quarter decrease of approximately 15%. The second half
of the year should reflect increases approaching 30% as compared
to the same period in 2009.
In 2009, we completed our four-year, four-point cost savings
plan. We achieved $2.5 billion of aggregate gross cost
savings from 2006 through 2009 compared with 2005. Those cost
reductions consisted of:
We will continue to implement various cost reduction initiatives
and expect to achieve $1.0 billion in aggregate gross cost
savings from 2010 through 2012 through our four-point cost
savings plan. We will continue to focus on savings from
continuous improvement initiatives, including savings under our
new USW agreement described below, low-cost country sourcing,
high-cost capacity reductions and reduced selling,
administrative and general expenses.
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USW
Collective Bargaining Agreement
In September 2009, members of the USW ratified a new four-year
master labor contract with Goodyear. The new contract enhances
the competitiveness of our USW-represented tire plants through
improvements in productivity, wage and benefit savings and added
flexibility. These changes are expected to provide us with cost
savings of approximately $215 million over the term of the
contract. Combined with savings realized through pre-bargain
agreements to reduce staffing levels at five U.S. plants,
we expect to realize approximately $555 million in total
savings over the term of the agreements.
During 2009, our domestic pension fund experienced market gains,
which increased plan assets by $699 million and decreased
net actuarial losses included in Accumulated Other Comprehensive
Loss (“AOCL”) by $464 million. As a result,
annual domestic net periodic pension cost will decrease to
approximately $200 million to $225 million in 2010
from $300 million in 2009, primarily due to expected
returns on higher plan assets and amortization of lower net
actuarial losses from AOCL.
At December 31, 2009, we had $1,922 million in Cash
and cash equivalents as well as $2,567 million of unused
availability under our various credit agreements, compared to
$1,894 million and $1,671 million, respectively, at
December 31, 2008. Cash and cash equivalents were favorably
affected by improvements in trade working capital of
$1,081 million and proceeds from the issuance of our
$1.0 billion 10.5% senior notes due 2016. Partially
offsetting these increases in cash and cash equivalents were
capital expenditures of $746 million, the repayment at
maturity of our $500 million senior floating rate notes due
2009 and the $700 million net repayment of amounts incurred
under our first lien revolving credit facility due 2013.
We believe that our liquidity position is adequate to fund our
operating and investing needs in 2010 and to provide us with
flexibility to respond to further changes in the business
environment.
In 2009, we successfully launched the Goodyear Assurance Fuel
Max in North America. We also announced the launch of 14 new
products in our commercial truck tire business, including two
new Fuel Max products. In addition, in 2009 we announced plans
to begin production of a
63-inch,
12,000 pound
off-the-road
tire for applications on mining and earthmoving equipment. At
our North American dealer conference in early 2010, we
introduced several key products, most notably the Goodyear
Assurance ComforTred Touring tire. This premium-tier consumer
tire provides a smooth, quiet and comfortable ride primarily on
passenger cars and luxury sedans. Additionally, we are adding
key sizes to supplement new consumer products launched in recent
years, including our award-winning Fuel Max tires, which are
certified by the EPA in helping to reduce greenhouse gas
emissions.
In Europe, we introduced the third generation of RunOnFlat tire
technology, offering comfort, reduced mass and rolling
resistance, increased fuel economy and reduced carbon dioxide
emission levels. We also introduced our Goodyear EfficientGrip
tire with Fuel Saving Technology which has improved wet braking
distance, while providing better mileage and rolling resistance
to reduce fuel consumption. In addition, we extended our
ultra-high performance Dunlop SportMaxx TT and SportMaxx GT
lines, and our Goodyear Max Technology line of commercial tires.
In Latin America, we launched the new Eagle GT consumer tire
after its successful introduction in North America. In our
commercial business, a new design of the G32 line was launched,
offering significantly improved tread wear performance, and we
introduced the 600 series products with Duralife Technology
throughout the region.
In Asia Pacific, we launched DuraPlus with TredLife technology,
providing improved mileage, and in Australia, we introduced
several new consumer products including the Goodyear Wrangler
MT/R with Kevlar.
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The industry environment remains challenging and will continue
to impact our performance in 2010. Our outlook for the industry
for 2010 in North America is expected to be stronger as compared
to 2009, but significantly below 2007 levels. We expect consumer
replacement will improve 1% to 3%, as volumes continue to
recover slowly. We believe consumer OE will increase 20% to 30%.
Commercial replacement is expected to increase 1% to 5%, while
commercial OE, which was negatively impacted the most
significantly in 2009, is expected to increase 5% to 15%. The
net impact of higher volume in 2010 will have a positive impact
on North American Tire; however, mix pressures will increase due
to the stronger anticipated recovery in OE than in replacement.
In Europe, we anticipate less favorable conditions for recovery
in 2010. For consumer tires, we see markets that range from flat
up to a 2% increase in replacement and range from a decrease of
3% to an increase of 5% in OE. For commercial tires, we expect
an increase of 5% to 10% in replacement and an increase of 20%
to 30% in OE. Finally, we expect growth to continue in the
emerging markets our products serve.
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 and refer to Goodyear net
income (loss).
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 prior to the sale 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.
2009
Compared to 2008
For the year ended December 31, 2009, Goodyear net loss was
$375 million, or $1.55 per share, compared to
$77 million, or $0.32 per share, in 2008.
Net sales in 2009 of $16.3 billion decreased
$3.2 billion, or 16%, compared to 2008 due primarily to
lower tire volume of $1.4 billion, primarily in North
American Tire and EMEA, reduced sales in other tire-related
businesses of $924 million, primarily in North American
Tire’s third party sales of chemical products, and foreign
currency translation of $699 million, primarily in EMEA.
Net sales also decreased $124 million due to unfavorable
changes in product mix net of pricing improvements, reflecting a
lower mix of high-value-added commercial truck and
off-the-road
tires due to ongoing weakness in those markets.
The following table presents our tire unit sales for the periods
indicated:
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The decrease in worldwide tire unit sales of 17.5 million
units, or 9.5% compared to 2008, included a decrease of
11.4 million OE units, or 22.5%, 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 6.1 million units, or 4.6%,
in replacement units, primarily in North American Tire and EMEA.
North American Tire consumer replacement volume decreased
1.1 million units, or 2.3%, and EMEA consumer replacement
volume decreased 2.7 million units, or 5.1%. The decline in
consumer replacement volume is due in part to recessionary
economic conditions in the U.S. and Europe.
Cost of goods sold (“CGS”) was $13.7 billion in
2009, decreasing $2.5 billion, or 15% compared to 2008. CGS
in 2009 decreased due primarily to lower tire volume of
$1.2 billion, mainly in North American Tire and EMEA, lower
costs in other tire-related businesses of $788 million,
primarily in North American Tire’s cost of chemical
products, foreign currency translation of $616 million,
primarily in EMEA, product mix-related manufacturing cost
decreases of $331 million and lower raw material costs of
$115 million. CGS also benefited from savings from
rationalization plans of $105 million. CGS was unfavorably
impacted by increased conversion costs of $655 million, due
primarily to higher under-absorbed fixed overhead costs of
$490 million due to lower production volume. CGS in 2009
included charges for accelerated depreciation and asset
writeoffs of $43 million ($38 million after-tax or
$0.16 per share), compared to $28 million in 2008
($28 million after-tax or $0.12 per share). CGS in 2009
also included a charge of $5 million ($5 million
after-tax or $0.02 per share) related to our new labor contract
with the USW. CGS was 83.9% of sales in 2009 compared to 82.8%
in 2008.
Selling, administrative and general expense (“SAG”)
was $2.4 billion in 2009, decreasing $196 million, or
8% compared to 2008. SAG decreased due primarily to reduced
foreign currency translation of $105 million, lower
advertising expenses of $52 million, savings from
rationalization plans of $42 million, reduced
transportation and warehousing costs of $27 million, lower
costs for consultants and contract labor of $22 million and
other cost reduction actions. SAG reflected increased incentive
compensation costs of $97 million of which approximately
50% was due to an increase in our stock price. SAG in 2009 was
14.7% of sales, compared to 13.3% in 2008.
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 charges of
$227 million in 2009 ($182 million after-tax or $0.75
per share). Rationalization actions in 2009 consisted of
initiatives in North American Tire to reduce manufacturing
headcount at several facilities, including Union City,
Tennessee; Danville, Virginia and Topeka, Kansas, to respond to
lower production demand. Additional salaried headcount
reductions were initiated at our corporate offices in Akron,
Ohio, in North American Tire and throughout EMEA. We also
initiated the discontinuation of consumer tire production at one
of our facilities in Amiens, France and manufacturing headcount
reductions at each of our two facilities in Brazil. Additional
rationalization charges of $20 million related to
rationalization plans announced in 2009 have not yet been
recorded and are expected to be incurred and recorded during the
next twelve months.
We recorded net rationalization charges of $184 million in
2008 ($167 million after-tax or $0.69 per share), which
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.
Upon completion of the 2009 plans, we estimate that annual
operating costs will be reduced by approximately
$261 million ($224 million CGS and $37 million
SAG). The savings realized in 2009 for the 2009 plans totaled
$86 million ($68 million CGS and $18 million SAG)
In addition, savings realized in 2009 for the 2008 plans totaled
$76 million ($46 million CGS and $30 million SAG).
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For further information, refer to the Note to the Consolidated
Financial Statements No. 2, Costs Associated with
Rationalization Programs.
Interest expense was $311 million in 2009, decreasing
$9 million compared to 2008. The decrease was due primarily
to lower weighted average interest rates in 2009, partially
offset by higher average debt levels.
Other
Expense
Other Expense was $40 million in 2009 compared to
$59 million in 2008. Other Expense in 2009 decreased due
primarily to lower expenses for financing fees and financial
instruments, general and product liability —
discontinued products, and foreign currency exchange. Other
Expense in 2009 was adversely affected by net losses on asset
sales and lower interest income. Other Expense in 2009 included
a gain of $26 million ($13 million after-tax or $0.05
per share) from the recognition of insurance proceeds related to
the settlement of a claim as a result of a fire at our
manufacturing facility in Thailand, net losses on asset sales of
$30 million ($30 million after tax or $0.13 per share)
due primarily to the sale of properties in Akron, Ohio, a loss
on the liquidation of our subsidiary in Guatemala of
$18 million ($18 million after-tax or $0.08 per
share), and a charge for a legal reserve for a closed facility
of $5 million ($4 million after-tax or $0.02 per
share).
For further information, refer to the Note to the Consolidated
Financial Statements No. 3, Other Expense.
Tax expense in 2009 was $7 million on a loss from
continuing operations before income taxes of $357 million.
For 2008, we recorded tax expense of $209 million on income
from continuing operations before income taxes of
$186 million. Our income tax expense or benefit is
allocated among operations and items charged or credited
directly to shareholders’ equity. Pursuant to this
allocation requirement, for 2009, a $100 million non-cash
tax benefit ($0.42 per share) has been allocated to the loss
from our U.S. operations, with offsetting tax expense
allocated to items, primarily attributable to employee benefits,
charged directly to shareholders’ equity. Income tax
expense in 2009 also included net tax benefits of
$42 million ($0.18 per share) primarily related to a
$29 million benefit resulting from the release of a
valuation allowance on our Australian operations and a
$19 million benefit resulting from the settlement of our
1997 through 2003 Competent Authority claim between the United
States and Canada.
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 above.
Our losses in various taxing jurisdictions in recent periods
represented sufficient negative evidence to require us to
maintain a full valuation allowance against certain of 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 possible one-time tax benefits of up to $20 million
($20 million net of minority interest).
For further information, refer to the Note to the Consolidated
Financial Statements No. 15, Income Taxes.
Minority
Shareholders’ Net Income
Minority shareholders’ net income was $11 million in
2009, compared to $54 million in 2008. The decrease was due
primarily to decreased earnings in our joint venture in Europe.
For the year ended December 31, 2008, Goodyear net loss was
$77 million, or $0.32 per share, compared to net income of
$583 million, or $2.84 per share, in the comparable period
of 2007. Goodyear loss from continuing
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operations in 2008 was $77 million, or $0.32 per share,
compared to income from continuing operations of
$120 million, or $0.59 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.
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.
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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.
We recorded net rationalization charges of $184 million in
2008 which consisted primarily of the closure of the Somerton,
Australia tire manufacturing facility, Tyler, Texas mix center,
and 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.
We recorded net rationalization charges of $49 million
($41 million after-tax or $0.20 per share) in 2007 and
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.
For further information, refer to the Note to the Consolidated
Financial Statements No. 2, Costs Associated with
Rationalization Programs.
Interest expense was $320 million in 2008, a decrease of
$148 million compared to $468 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
Expense
Other Expense was $59 million in 2008, compared to
$9 million 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, charges of
$43 million ($43 million after-tax or $0.18 per share)
related to the redemption of long term debt, and higher foreign
currency exchange losses of $26 million. In addition, we
liquidated our subsidiary in Jamaica and recognized a loss of
$16 million ($16 million after-tax or $0.07 per share)
primarily due to recognition of accumulated foreign currency
translation losses. Net gains on asset sales of $53 million
($50 million after-tax or $0.21 per share) in 2008,
compared to net gains on asset sales of $15 million
($11 million after-tax or $0.05 per share) in 2007,
primarily related to the sale of certain properties in England,
Germany, Morocco, Argentina and New Zealand in 2008 and the sale
of certain properties in England and Australia offset by the
loss on the sale of substantially all of the assets of North
American Tire’s tire and wheel assembly operation in 2007.
Other Expense in 2008 also included 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 Expense.
For 2008, we recorded tax expense of $209 million on income
from continuing operations before income taxes of
$186 million. For 2007, we recorded tax expense of
$255 million on income from continuing operations before
income taxes of $445 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 ($0.06 per share) related to prior
periods offset by a $5 million charge primarily related to
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.
For further information, refer to the Note to the Consolidated
Financial Statements No. 15, Income Taxes.
Minority
Shareholders’ Net Income
Minority shareholders’ net income was $54 million in
2008, a decrease of $16 million compared to
$70 million in 2007. The decrease primarily relates to
decreased earnings in our joint venture in Europe.
See Note to the Consolidated Financial Statements No. 1,
Accounting Policies for a discussion of recently issued
accounting pronouncements.
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 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.
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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
$136 million at December 31, 2009. The portion of the
liability associated with unasserted asbestos claims and related
defense costs was $70 million. At December 31, 2009,
we estimate that it is reasonably possible that our gross
liabilities, net of our estimate for probable insurance
recoveries, could exceed our recorded amounts by
$15 million.
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, 2009, (i) we had recorded a
receivable related to asbestos claims of $69 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, $11 million
was included in Current Assets as part of Accounts receivable at
December 31, 2009.
Workers’ Compensation. We had recorded
liabilities, on a discounted basis, of $301 million for
anticipated costs related to U.S. workers’
compensation claims at December 31, 2009. 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.
Goodwill totaled $706 million at December 31, 2009.
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, 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.
There have been no changes to our reporting units or in the
manner in which goodwill was allocated.
Our annual impairment testing is conducted as of
July 31st each year and for 2009 our analysis
indicated no impairment of goodwill. For purposes of our annual
testing in 2009, we determined the estimated fair values using a
discounted cash flow approach. We believe this methodology is
appropriate in the determination of fair value. We may also use
different fair value techniques when we believe a discounted
cash flow approach may not provide an appropriate determination
of fair value.
The discounted cash flow model of the reporting units is based
on the forecasted operating cash flow for the current year,
projected operating cash flows for the next nine years
(determined using forecasted amounts as well as an estimated
growth rate) and a terminal value beyond ten years. Discounted
cash flows consist of the operating cash flows for each business
unit less an estimate for capital expenditures. The key
assumptions incorporated in the discounted cash flow approach
include growth rates, projected segment operating income,
changes in working capital, our plan for capital expenditures,
anticipated funding for pensions, and a discount rate equal to
our assumed long term cost of capital. Corporate administrative
expenses are allocations of corporate overhead that we make to
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each strategic business unit and are excluded from the
discounted cash flow model. Cash flows may be adjusted to
exclude certain non-recurring or unusual items. As segment
operating income was the starting point for determining
operating cash flow, which excludes non-recurring or unusual
items, there were no other non- recurring or unusual items
excluded from the calculations of operating cash flow in any of
the periods included in our determination of fair value.
We consider significant decreases in forecasted cash flows in
future periods to be an indication of a potential impairment. At
the time of our annual impairment testing, fair value would have
to decline in excess of 65% for North American Tire, over 30%
for EMEA and in excess of 20% for Asia Pacific Tire to indicate
potential goodwill impairment. The discount rate used would have
to increase over five percentage points for North American Tire,
over four percentage points for EMEA and over two percentage
points for Asia Pacific Tire and the assumed growth rate would
have to be negative for each of the business units to indicate a
potential impairment.
Deferred Tax Asset Valuation Allowance and Uncertain Income
Tax Positions. At December 31, 2009, we had
a valuation allowance aggregating $3.0 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 due. 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. We derecognize tax benefits when based on new
information we determine that it is no longer more likely than
not that our position will be sustained. To the extent we
prevail in matters for which liabilities have been established,
or determine we need to derecognize tax benefits recorded in
prior periods, or that we are required to pay amounts in excess
of our liabilities, our effective tax rate in a given period
could be materially affected. An unfavorable tax settlement
would require use of our cash, and result in an increase in our
effective tax rate in the period of resolution. A favorable tax
settlement would be recognized as a reduction in our effective
tax rate in the period 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
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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 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 weighted average discount rate used in estimating the total
liability for our U.S. pension and other postretirement
plans was 5.75% and 5.45%, respectively, at December 31,
2009, compared to 6.50% for our U.S pension and other
postretirement plans at December 31, 2008. The decrease in
the discount rate at December 31, 2009 was due primarily to
lower interest rate yields on highly rated corporate bonds.
Interest cost included in our U.S. net periodic pension
cost was $314 million in 2009, compared to
$312 million in 2008 and $306 million in 2007.
Interest cost included in our worldwide net periodic other
postretirement benefits cost was $32 million in 2009,
compared to $84 million in 2008 and $109 million in
2007. Interest cost was lower in 2009 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
2010 expense to the indicated increase/decrease in key
assumptions:
A significant portion of the net actuarial loss included in AOCL
of $2,311 million in our U.S. pension plans as of
December 31, 2009 is a result of 2008 plan asset losses and
the overall decline in U.S. discount rates over time. For
purposes of determining our 2009 U.S. net periodic pension
expense, our funded status was such that we recognized
$154 million of the net actuarial loss in 2009. We will
recognize approximately $135 million of net actuarial
losses in 2010. If our future experience is consistent with our
assumptions as of December 31, 2009, actuarial loss
recognition will remain at an amount near that to be recognized
in 2010 over the next few years before it begins to gradually
decline.
The actual rate of return on our U.S. pension fund was
25.6%, (31.7)% and 8.1% in 2009, 2008 and 2007, respectively, as
compared to the expected rate of 8.5% for all three years. We
use the fair value of our pension assets in the calculation of
pension expense for all of our U.S. pension plans.
We experienced a decrease in our U.S. discount rate at the
end of 2009 and a large portion of the net actuarial loss
included in AOCL of $139 million in our worldwide other
postretirement benefit plans as of December 31, 2009 is a
result of the overall decline in U.S. discount rates over
time. The net actuarial loss increased from 2008 due to the
decrease in the discount rate at December 31, 2009. For
purposes of determining 2009 worldwide net periodic
postretirement benefits cost, we recognized $5 million of
the net actuarial losses in 2009. We will recognize
approximately $9 million of net actuarial losses in 2010.
If our future experience is consistent with our assumptions
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as of December 31, 2009, actuarial loss recognition will
remain at an amount near that to be recognized in 2010 over the
next few years before it begins to gradually decline.
The weighted average amortization period for our U.S. plans
is approximately 14 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 and are segmented on a
regional basis.
Results of operations are measured based on net sales to
unaffiliated customers and segment operating income. 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. Segment operating income is computed as follows:
Net Sales less CGS (excluding asset write-off and accelerated
depreciation 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 net
rationalization charges (credits), asset sales and certain other
items.
Total segment operating income was $372 million in 2009,
$804 million in 2008 and $1.2 billion in 2007. Total
segment operating margin (segment operating income divided by
segment sales) in 2009 was 2.3%, compared to 4.1% in 2008 and
6.3% in 2007.
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 (Loss) Income from Continuing Operations before Income
Taxes.
2009
Compared to 2008
North American Tire unit sales in 2009 decreased
8.4 million units or 11.9% from the 2008 period. The
decrease was primarily related to a decline in OE volume of
7 million units or 35.5% primarily in our consumer
business, due to reduced vehicle production. Replacement volume
decreased 1.4 million units or 2.9%, primarily in the
consumer business, due to continuing recessionary economic
conditions.
Net sales in 2009 decreased $1.3 billion or 15.5% compared
to 2008 due primarily to decreased sales in other tire-related
businesses of $729 million, primarily related to third
party sales of chemical products, lower tire volume of
$635 million and unfavorable foreign currency translation
of $38 million. Net sales were favorably affected by
improved price and product mix of $124 million.
Operating loss in 2009 increased $149 million or 95.5%
compared to 2008 due primarily to higher conversion costs of
$220 million, decreased sales volume of $77 million
and lower operating income in chemical and other tire-related
businesses of $82 million. Conversion costs increased due
primarily to higher under-absorbed fixed overhead costs of
$245 million as a result of reduced production volume, and
increased pension expense as a result of lower 2008 returns on
plan assets and higher amortization of net losses. Increased
pension and defined
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contribution expense of $159 million more than offset
savings resulting from the implementation of the VEBA of
$89 million. Conversion costs were favorably impacted by
savings from rationalization plans of $60 million and lower
utility costs of $21 million. Operating income was
favorably affected by lower raw material costs of
$85 million, improved price and product mix of
$78 million, reduced SAG of $38 million and lower
transportation costs of $19 million. SAG decreased due
primarily to reduced warehousing costs and savings from
rationalization programs.
Operating loss in 2009 excluded net rationalization charges of
$112 million, $16 million of charges for accelerated
depreciation and asset write-offs, and net gains on asset sales
of $4 million. Operating income in 2008 excluded net
rationalization charges of $54 million, net gains on asset
sales of $18 million and $3 million of charges for
accelerated depreciation.
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 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 $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 $3 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.
2009
Compared to 2008
Europe, Middle East and Africa Tire unit sales in 2009 decreased
7.6 million units or 10.3% from the 2008 period. OE volume
decreased 4.5 million units or 25.4%, primarily in our
consumer business, due to reduced vehicle
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production. Replacement volume decreased 3.1 million units
or 5.5%, primarily in the consumer business, due to continuing
recessionary economic conditions.
Net sales in 2009 decreased $1.5 billion or 20.7% compared
to 2008, due primarily to lower volume of $665 million,
foreign currency translation of $450 million and lower
sales in other tire-related businesses of $150 million. Net
sales also decreased by $250 million as a result of
unfavorable changes in product mix, net of pricing improvements.
Operating income in 2009 decreased $259 million or 60.9%
compared to 2008, due primarily to higher conversion costs of
$258 million, decreased volume of $148 million, and
decreased operating income in other tire-related businesses of
$44 million. Conversion costs increased due primarily to
higher under-absorbed fixed overhead costs of $195 million
due to reduced production volume. Conversion costs included
savings from rationalization plans of $19 million.
Operating income was favorably affected by lower SAG expenses of
$113 million, improved price and mix of $22 million,
lower raw material costs of $16 million and favorable
foreign currency translation of $16 million. SAG savings
included lower advertising expenses of $45 million, savings
from rationalization plans of $20 million, lower consulting
and contract labor costs of $16 million and reduced
travel-related expenses of $16 million.
Operating income in 2009 excluded net rationalization charges of
$82 million and net gains on asset sales of
$1 million. Operating income in 2008 excluded net
rationalization charges of $41 million and net gains on
asset sales of $20 million.
EMEA’s results are highly dependent upon Germany, which
accounted for approximately 33% and 32% of EMEA’s net sales
in 2009 and 2008, respectively. Accordingly, results of
operations in Germany will have a significant impact on
EMEA’s future performance.
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.
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2009
Compared to 2008
Latin American Tire unit sales in 2009 decreased
0.9 million units or 4.5% from the 2008 period. Replacement
tire volume decreased 0.8 million units or 5.9%, reflecting
reduced volume in both consumer and commercial businesses. OE
volume decreased 0.1 million units or 1.3%, primarily due
to a decrease in our commercial business.
Net sales in 2009 decreased $274 million or 13.1% from the
2008 period, due primarily to foreign currency translation of
$123 million, decreased volume of $92 million, lower
sales of other tire-related businesses of $33 million, and
$26 million as a result of unfavorable changes in product
mix, net of pricing improvements.
Operating income in 2009 decreased $66 million or 18.0%
from the same period in 2008, due primarily to higher conversion
costs of $43 million, lower volume of $28 million,
lower profitability on intersegment transfers of
$21 million, higher inventory reserves of $4 million
and costs related to manufacturing
start-up
activities of $3 million. Conversion costs increased due
primarily to higher under-absorbed fixed overhead costs of
$43 million and other inflation of $10 million.
Conversion costs also included savings from rationalization
plans of $15 million. Operating income was favorably
affected by improvements in price and product mix of
$69 million, which more than offset higher raw material
costs of $16 million. Operating income in 2008 included a
gain of $12 million related to the favorable settlement of
an excise tax case.
Operating income in 2009 excluded net rationalization charges of
$20 million and net gains on asset sales of
$2 million. Operating income in 2008 excluded net gains on
asset sales of $5 million and net rationalization charges
of $4 million. In addition, operating income excluded
charges of $18 million and $16 million in 2009 and
2008, respectively, resulting from the recognition of
accumulated foreign currency translation losses in connection
with the liquidation of our subsidiaries in Guatemala and
Jamaica.
Latin American Tire’s results are highly dependent upon
Brazil, which accounted for approximately 51% and 52% of Latin
American Tire’s net sales in 2009 and 2008, respectively.
Accordingly, results of operations in Brazil will have a
significant impact on Latin American Tire’s future
performance.
Goodyear Venezuela contributed a significant portion of Latin
American Tire’s sales and operating income in 2009. The
devaluation of the Venezuelan bolivar fuerte against the
U.S. dollar in January 2010 and weak economic conditions
are expected to adversely impact Latin American Tire’s
operating results by $50 million to $75 million as
compared to 2009. For further information see “Item 1.
Business — Recent Developments — Venezuelan
Currency Devaluation,” “Item 1A. Risk
Factors” and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital
Resources — Overview” in this
Form 10-K.
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
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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 of accumulated foreign currency translation losses
on the liquidation of our subsidiary in Jamaica.
2009
Compared to 2008
Asia Pacific Tire unit sales in 2009 decreased 0.6 million
units or 2.9% from the 2008 period. Replacement unit sales
decreased 0.8 million units or 6.3%, while OE volumes
increased 0.2 million units or 3.4%, primarily in the
consumer business. The net decrease in units is due to
continuing recessionary economic conditions, primarily in
Australia, that were partially offset by increased growth in
vehicle production in China.
Net sales in 2009 decreased $120 million or 6.6% compared
to the 2008 period, due primarily to foreign currency
translation of $88 million, lower volume of
$48 million and decreased sales in other tire-related
businesses of $12 million, primarily in the retail
business. Net sales were favorably affected by improved price
and product mix of $28 million.
Operating income in 2009 increased $42 million or 25.0%
compared to the 2008 period, due primarily to improved price and
mix of $38 million, lower raw material costs of
$30 million and decreased conversion costs of
$6 million. Conversion costs included savings from
rationalization plans of $12 million, partially offset by
$7 million of under-absorbed fixed overhead costs due to
reduced production volume. Operating income in 2009 included a
gain of $7 million from insurance proceeds related to the
settlement of a claim as a result of a fire at our manufacturing
facility in Thailand in 2007. Operating income was adversely
affected by lower volume of $13 million, decreased
operating income in other tire-related businesses of
$8 million, and increases in incentive compensation expense
of $9 million and in the cost of imported finished tires of
$6 million.
Operating income in 2009 and 2008 excluded charges for
accelerated depreciation and asset writeoffs of $26 million
and $24 million, and net rationalization charges of
$10 million and $83 million, respectively, primarily
related to the closure of our manufacturing facilities in Las
Pinas, Philippines and Somerton, Australia. In addition,
operating income excluded net gains on asset sales of
$5 million and $10 million in 2009 and 2008,
respectively.
Asia Pacific Tire’s results are highly dependent upon
Australia, which accounted for approximately 45% and 47% of Asia
Pacific Tire’s net sales in 2009 and 2008, respectively.
Accordingly, results of operations in Australia will have a
significant impact on Asia Pacific Tire’s future
performance.
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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.
LIQUIDITY
AND CAPITAL RESOURCES
Our primary sources of liquidity are cash generated from our
operating and financing activities. Our cash flows from
operating activities are driven primarily by our operating
results and changes in our working capital requirements and our
cash flows from financing activities are dependent upon our
ability to access credit or other capital.
We experienced challenging industry conditions throughout 2009
due to recessionary economic conditions in many parts of the
world during the first half of 2009 and a slow and uncertain
recovery from those conditions in the second half of 2009. These
industry conditions were characterized by lower motor vehicle
sales and production and weakness in the demand for replacement
tires, particularly in the commercial markets, compared to 2008.
Given the difficult economic environment and the uncertainty in
the capital markets, we took several actions to strengthen our
liquidity in 2009, including strong working capital management.
We also successfully completed a $1.0 billion senior
unsecured notes offering in the second quarter of 2009 that
addressed a December 2009 debt maturity and further enhanced our
liquidity position.
The impact of the global economic slowdown on our 2009 operating
results was also mitigated by the success of the strategic
initiatives we announced in February 2009 which were aimed at
strengthening our revenue, cost structure and cash flow,
including:
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We exceeded our inventory reduction goal through the combination
of lower raw material costs and the implementation of an
advantaged supply chain, primarily in North American Tire and
EMEA, by improving demand forecasting, increasing production
flexibility through shorter lead times and reduced production
lot sizes, reducing the quantity of raw materials required to
meet an improved demand forecast, changing the composition of
our logistics network by closing and consolidating certain
distribution warehouses, increasing local production and
reducing longer lead time off-shore imports, and reducing
in-transit inventory between our plants and regional
distribution centers.
At December 31, 2009, we had $1,922 million in Cash
and cash equivalents, compared to $1,894 million at
December 31, 2008. Cash and cash equivalents were favorably
affected by improvements in trade working capital of
$1,081 million and proceeds from the issuance of our
$1.0 billion 10.5% senior notes due 2016. Partially
offsetting these increases in cash and cash equivalents were
capital expenditures of $746 million, the repayment at
maturity of our $500 million senior floating rate notes due
2009 and the $700 million net repayment of amounts incurred
under our first lien revolving credit facility due 2013.
At December 31, 2009 and 2008, we had $2,567 million
and $1,671 million, respectively, of unused availability
under our various credit agreements. The table below provides
unused availability by our significant credit facilities as of
December 31:
At December 31, 2009, our unused availability included
approximately $530 million which can only be used to
finance the relocation and expansion of our manufacturing
facilities in China. These financing arrangements along with
government grants should provide funding for most of the cost
related to the relocation and expansion of these manufacturing
facilities. There were no borrowings outstanding under these
financing agreements at December 31, 2009.
In 2010, we expect our operating needs to include global
contributions to our funded pension plans of approximately
$275 million to $325 million and our investing needs
to include capital expenditures of approximately
$1.0 billion to $1.1 billion. We also expect interest
expense to range between $350 million and
$375 million. The strategic initiatives described above are
intended to permit us to operate the business in a way that
allows us to address these needs with our existing cash and
available credit if they cannot be funded by cash generated from
operations. If market opportunities exist, we may choose to
undertake additional financing actions in order to further
enhance our liquidity position which could include obtaining new
bank debt or capital markets transactions.
In order to effectively extend the maturity date of a portion of
our indebtedness coming due in 2011, in February 2010, we
commenced an offer to exchange any and all of our
$650 million in aggregate principal amount of
7.857% Notes due 2011 for up to $702 million in
aggregate principal amount of a new series of 8.75% Notes
due
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2020. The completion of the exchange offer is subject to the
satisfaction of certain conditions, including that we receive
valid tenders, not validly withdrawn, of at least
$260 million in aggregate principal of the
7.857% Notes due 2011.
In addition, 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 GDTE and GDTNA
following the determination of the fair value of SRI’s
interests. 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 exit rights that have become exercisable.
Our ability to service debt and operational requirements are
also dependent, in part, on 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, such as
Venezuela, transfers of funds into or out of such countries by
way of dividends, loans, advances or payments to third-party or
affiliated suppliers are generally or periodically subject to
various restrictions, such as obtaining 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, 2009, approximately $563 million of net
assets were subject to such restrictions.
At December 31, 2009, we had cash denominated in Venezuelan
bolivares fuertes of $370 million (calculated at the
December 31, 2009 official exchange rate of 2.15 bolivares
fuertes to each U.S. dollar), third-party
U.S. dollar-denominated accounts payable of
$17 million, and U.S. dollar-denominated intercompany
accounts payable of $127 million. Effective January 1,
2010, Venezuela’s economy is considered a highly
inflationary economy under U.S. generally accepted
accounting principles. Accordingly, all gains and losses
resulting from the remeasurement of our financial statements are
required to be recorded directly in the statement of operations.
On January 8, 2010, the Venezuelan government announced the
devaluation of the bolivar fuerte and the establishment of a
two-tier exchange structure. As a result, we expect to record a
charge in the first quarter of 2010 in connection with the
remeasurement of our balance sheet to reflect the devaluation.
If calculated at the new official exchange rate of 4.30
bolivares fuertes to each U.S. dollar, the charge is
expected to be approximately $150 million, net of tax. If
in the future we convert bolivares fuertes at a rate other than
the official exchange rate, we may realize additional gains or
losses that would be recorded in the statement of operations.
Goodyear Venezuela contributed a significant portion of Latin
American Tire’s sales and operating income in 2009. The
devaluation of the bolivar fuerte and weak economic conditions
are expected to adversely impact Latin American Tire’s
operating results by $50 million to $75 million as
compared to 2009. For further information regarding the
Venezuelan currency devaluation and its anticipated impact on
Goodyear, see “Item 1. Business — Recent
Developments — Venezuelan Currency Devaluation,”
and for a discussion of the risks related to our international
operations, including Venezuela, see “Item 1A. Risk
Factors”.
We believe that our liquidity position is adequate to fund our
operating and investing needs and debt maturities in 2010 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” for a more detailed discussion of these
challenges.
Cash
Position
At December 31, 2009, significant concentrations of cash
and cash equivalents held by our international subsidiaries
included the following amounts:
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Net cash provided by continuing operations was
$1,297 million in 2009, compared to cash used of
$739 million in 2008 and cash provided of $92 million
in 2007. Cash flows in 2009 included a net cash inflow of
$1,081 million for trade working capital, compared with net
cash outflows of $127 million and $204 million in 2008
and 2007, respectively. Operating cash flows in 2008 included
the $1,007 million contribution made to the VEBA.
Net cash used in continuing operations was $663 million in
2009, compared to $1,058 million in 2008 and
$606 million in 2007. Capital expenditures were
$746 million in 2009, compared to $1,049 million in
2008 and $739 million in 2007. The increase in capital
expenditures in 2008 primarily related to projects targeted at
increasing our capacity for high value-added tires, which were
scaled back in 2009 due to the recessionary economic conditions.
Investing cash flows included a cash inflow of $47 million
and a net cash outflow of $76 million in 2009 and 2008,
respectively related to The Reserve Primary Fund. Investing cash
flows also reflect cash provided from the disposition of assets
each year as a result of the realignment of operations under
rationalization programs and the divestiture of non-core assets.
Investing cash flows provided by discontinued operations in 2007
of $1,435 million related primarily to the proceeds from
the sale of our Engineered Products business.
Net cash used in continuing operations was $654 million in
2009, compared to cash provided of $264 million in 2008 and
cash used of $1,426 million in 2007. Financing cash flows
in 2009 included the net proceeds from the issuance of our
$1 billion 10.5% senior notes due 2016, the
$700 million net repayment of amounts incurred under our
first lien revolving credit facility due 2013, and the repayment
at maturity of our $500 million senior floating rate notes
due 2009. Consolidated debt at December 31, 2009 was
$4,520 million, compared to $4,979 million at
December 31, 2008.
Financing cash flows 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.
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.
Credit
Sources
In aggregate, we had total credit arrangements of
$7,579 million available at December 31, 2009, of
which $2,567 million were unused, compared to
$7,127 million available at December 31, 2008, of
which $1,671 million were unused. At December 31,
2009, we had long term credit arrangements totaling
$7,046 million, of which $2,258 million were unused,
compared to $6,646 million and $1,455 million,
respectively, at December 31, 2008. At December 31,
2009, we had short term committed and uncommitted credit
arrangements totaling $533 million, of which
$309 million were unused, compared to $481 million and
$216 million, respectively, at December 31, 2008. The
continued availability of the short term uncommitted
arrangements is at the discretion of the relevant lender and may
be terminated at any time.
Outstanding
Notes
At December 31, 2009, we had $2,345 million of
outstanding notes, compared to $1,882 million at
December 31, 2008.
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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 Standard & Poor’s
(“S&P”) and no default has occurred or is
continuing, certain covenants will be suspended.
On May 11, 2009, we issued $1.0 billion aggregate
principal amount of 10.5% senior notes due 2016. The senior
notes were sold at 95.846% of the principal amount and will
mature on May 15, 2016. The senior notes are our unsecured
senior obligations and are guaranteed by our U.S. and
Canadian subsidiaries that also guarantee our obligations under
our senior secured credit facilities.
For additional information on our outstanding notes, refer to
“Part I — Business — Recent
Developments” and 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 of The Goodyear Tire & Rubber Company
(the “Parent Company”) and certain of its
U.S. and Canadian subsidiaries, after adjusting for
customary factors which are subject to modification from time to
time by the administrative agent and the majority lenders at
their discretion (not to be exercised unreasonably).
Modifications are based on the results of periodic collateral
and borrowing base evaluations and appraisals. 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
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. As of December 31, 2009, our borrowing base under
this facility was $114 million below the stated amount of
$1.5 billion.
At December 31, 2009, we had no borrowings outstanding and
$494 million of letters of credit issued under the
revolving credit facility. At December 31, 2008, we had
$700 million outstanding and $497 million of letters
of credit 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 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, 2009 and
December 31, 2008, 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
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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, 2009 and December 31, 2008, there
were no borrowings under the German revolving credit facility.
Under the European revolving credit facility, there were no
borrowings as of December 31, 2009 and there were
$182 million (€130 million) of borrowings,
including $84 million (€60 million) of borrowings
by the non-German borrowers, as of December 31, 2008.
Letters of credit issued under the European revolving credit
facility totaled $14 million (€10 million) as of
December 31, 2009 and $16 million
(€11 million) as of December 31, 2008.
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 “Covenant Compliance” below and the Note to
the Consolidated Financial Statements No. 12, Financing
Arrangements and Derivative Financial Instruments.
International
Accounts Receivable Securitization Facilities (On-Balance
Sheet)
GDTE and certain of its subsidiaries are parties to a
pan-European accounts receivable securitization facility that
provides up to €450 million of funding and expires in
2015. Utilization under this facility is based on current
available receivable balances. The facility is subject to
customary annual renewal of
back-up
liquidity commitments.
The 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 is substantially similar to the
covenant included in the European credit facilities.
As of December 31, 2009 and 2008, the amount available and
fully utilized under this program totaled $437 million
(€304 million) and $483 million
(€346 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 $68 million and $61 million at
December 31, 2009 and December 31, 2008, 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 2009 and 2008. The
receivable financing programs of these subsidiaries did not
utilize a special purpose entity (“SPE”). At
December 31, 2009 and 2008, the gross amount of receivables
sold was $113 million and $116 million, respectively.
Other
Foreign Credit Facilities
Our credit facilities in China provide for availability of up to
3.66 billion renminbi (approximately $530 million and
$535 million at December 31, 2009 and
December 31, 2008, respectively) 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, 2009 and December 31, 2008.
Covenant
Compliance
Our amended and restated first lien revolving and second lien
credit facilities contain certain covenants that, among other
things, limit our ability to incur additional debt or issue
redeemable preferred stock, make certain restricted payments or
investments, incur liens, sell assets, incur restrictions on the
ability of our subsidiaries to pay dividends to us, enter into
affiliate transactions, engage in sale and leaseback
transactions, and consolidate, merge, sell or
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otherwise dispose of all or substantially all of our assets.
These covenants are subject to significant exceptions and
qualifications.
We have additional financial covenants in our first lien
revolving and second lien credit facilities that are currently
not applicable. We only become subject to these financial
covenants when certain events occur. These financial covenants
and related events are as follows:
In addition, our €505 million senior secured European
and German revolving credit facilities contain non-financial
covenants similar to the non-financial covenants in our first
lien revolving and second lien credit facilities that are
described above and a financial covenant applicable only to GDTE
and its subsidiaries. This financial covenant provides that we
are not permitted to allow GDTE’s ratio of Consolidated Net
J.V. Indebtedness to Consolidated European J.V. EBITDA to be
greater than 3.0 to 1.0 at the end of any fiscal quarter.
Consolidated Net J.V. Indebtedness is determined, through
March 31, 2011, net of the sum of (1) cash and cash
equivalents in excess of $100 million held by GDTE and its
subsidiaries, (2) cash and cash equivalents in excess of
$150 million held by the Parent Company and its
U.S. subsidiaries and (3) availability under our first
lien revolving credit facility if the ratio of EBITDA to
Consolidated Interest Expense described above is not applicable
and the conditions to borrowing under the first lien revolving
credit facility are met. Consolidated Net J.V. Indebtedness also
excludes loans from other consolidated Goodyear entities. This
financial covenant is also included in our pan-European accounts
receivable securitization facility. As of December 31,
2009, we were in compliance with this financial covenant.
There are no known future changes or new covenants to any of our
existing debt obligations. Covenants could change based upon a
refinancing or amendment of an existing facility, or additional
covenants may be added in connection with the incurrence of new
debt.
As of December 31, 2009, we were in compliance with the
currently applicable material covenants imposed by our principal
credit facilities.
The terms “Available Cash,” “EBITDA,”
“Consolidated Interest Expense,” “Consolidated
Net Secured Indebtedness,” “Pro Forma Senior Secured
Leverage Ratio,” “Consolidated Net J.V.
Indebtedness” and “Consolidated European J.V.
EBITDA” have the meanings given them in the respective
credit facilities.
EBITDA
(per our Amended and Restated Credit Facilities)
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 EBITDA (as defined in that facility) (“Covenant
EBITDA”) to Consolidated Interest Expense (as defined in
that facility) to be less than 2.0 to 1.0 for any period of four
consecutive fiscal quarters. Since our availability under our
first lien revolving credit facility plus our Available Cash is
in excess of $150 million, this financial covenant is not
currently applicable. Our amended and restated credit facilities
also 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 Covenant EBITDA to Consolidated Interest
Expense 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. Our credit facilities and indentures also permit the
incurrence of additional debt through other provisions in those
agreements without regard to our ability to satisfy the
ratio-based incurrence test described above. We believe that
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these other provisions provide us with sufficient flexibility to
incur additional debt without regard to our ability to satisfy
the ratio-based incurrence test.
Covenant EBITDA is a non-GAAP financial measure that is
presented not as a measure of operating results, but rather as a
measure of 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.
Limitations on our ability to incur debt in accordance with our
credit facilities could affect our liquidity, and we believe
that the presentation of Covenant EBITDA provides investors with
important information.
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.
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.
Asset
Dispositions
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.
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COMMITMENTS
AND CONTINGENT LIABILITIES
Contractual
Obligations
The following table presents our contractual obligations and
commitments to make future payments as of December 31, 2009:
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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:
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:
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We have entered into certain arrangements under which we have
provided guarantees that are off-balance sheet arrangements.
Those guarantees totaled approximately $40 million at
December 31, 2009 and expire at various times through 2023.
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.
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, 2009, 44% of our debt was at variable interest
rates averaging 3.13% compared to 68% at an average rate of
3.83% at December 31, 2008. 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 were no
interest rate contracts at December 31, 2009. There was one
such interest rate contract outstanding at December 31,
2008. In October 2008, we entered into a basis swap contract
under which we paid six-month LIBOR and received one-month LIBOR
plus a premium. The notional principal amount of the swap was
$1.2 billion and it matured in October 2009. During 2009,
the weighted average interest rates paid and received were 2.35%
and 0.83%, respectively. During 2008, the weighted average
interest rates paid and received were 3.48% and 2.60%,
respectively. Fair value gains and losses on the contract are
recorded in Other Expense. The fair value of the contract at
December 31, 2008 was a liability of $10 million.
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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 our consolidated
results of operations and future foreign currency-denominated
cash flows. Foreign currency forward and option 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.
The following table presents foreign currency derivative
information at December 31:
The pro forma decrease 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 positions 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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Schedules not listed above have been omitted since they are not
applicable or are not required, or the information required to
be set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
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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, 2009 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, 2009.
The effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009 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 accompanying 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, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2009 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, 2009, 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 non-controlling interests as of January 1, 2009
(Note 1), convertible debt instruments as of
January 1, 2009 (Note 1) and uncertain tax
positions as of January 1, 2007 (Note 15).
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, 2010
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THE
GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these
consolidated financial statements.
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THE
GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these
consolidated financial statements.
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THE
GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
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