GOODYEAR TIRE & RUBBER CO annual report, FY2010

Goodyear Tire & Rubber Co. — 2010 Form 10-K

Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2010; the fourth-quarter data are unaudited supplementary information. Goodyear manufactures and sells tires and related products and services through four regional segments: North American Tire, EMEA, Latin American Tire, and Asia Pacific Tire. The company reported 2010 net sales of $18.8 billion and a Goodyear-attributable net loss of $216 million.

Financial results and liquidity

Metric	2010	2009
Net sales	$18.832 billion	$16.301 billion
Goodyear net loss	$216 million; $0.89 per share	$375 million; $1.55 per share
Segment operating income	$917 million; 4.9% margin	$372 million; 2.3% margin
Cash from operations	$924 million	$1.297 billion
Capital expenditures	$944 million	$746 million
Cash and cash equivalents at year-end	$2.005 billion	$1.922 billion
Debt, including capital leases	$4.745 billion	$4.520 billion

Net sales increased 15.5%, with higher tire volumes, improved price and product mix, and higher chemical-product sales. Worldwide tire unit sales rose 8.2% to 180.8 million. Cost of goods sold was 82.1% of sales, down from 83.9%; selling, administrative and general expense was 14.0%, down from 14.7%. Operating cash flow less capital expenditures was approximately negative $20 million, a simple derived measure.

Cash from operations declined year over year, with trade working capital providing $52 million in 2010 versus $1.081 billion in 2009. The company reported $2.475 billion of unused availability under credit agreements, though $394 million was restricted to China facility projects. Current assets were $8.045 billion and current liabilities were $5.307 billion. Goodyear issued $1.0 billion of 8.25% senior notes due 2020 and redeemed $973 million of notes, including material 2011 maturities. It reported compliance with applicable material debt covenants.

U.S. and non-U.S. pension plans were underfunded by $1.927 billion and $622 million, respectively, at year-end. Goodyear reported $1.5 billion of total shareholders’ equity, including $644 million attributable to Goodyear shareholders; no cash dividends were declared in the three most recent fiscal years.

Material changes versus the prior period

• Goodyear’s net loss narrowed by $159 million, while segment operating income increased by $545 million. Management attributed the improvement mainly to higher tire volume, stronger price and mix, and a $278 million recovery of under-absorbed fixed costs.
• Raw-material costs rose: management cited $685 million of increases, substantially offset by $689 million of price and product-mix improvements and approximately $136 million of raw-material savings included in its cost program.
• North American Tire returned to segment operating income of $18 million from a $305 million loss. EMEA, Latin American Tire, and Asia Pacific Tire reported segment operating income of $319 million, $330 million, and $250 million, respectively.
• Fourth-quarter Goodyear-attributable net loss was $177 million, compared with net income of $107 million in fourth-quarter 2009. Fourth-quarter sales were $5.072 billion versus $4.437 billion; the 2010 quarter included $212 million of after-tax-and-minority rationalization charges, primarily associated with planned capacity actions.

Outlook, risks, and unusual items

• 2011 outlook: Management expected global tire-industry growth and Goodyear unit-sales growth of 3%–5%. It forecast raw-material costs 25%–30% higher in both the first and second quarters versus the respective 2010 quarters, with costs expected to peak in the third quarter.
• Management expected cost savings and recovery of unabsorbed fixed costs to contribute approximately $1.0 billion to operating results over 2011–2012 compared with 2010; it also expected more than $500 million of cost reductions across those two years. The new China plant was expected to add $30–$40 million of start-up costs in 2011.
• Expected 2011 capital expenditures were $1.1–$1.2 billion; expected interest expense was $350–$375 million. Expected contributions to funded U.S. and non-U.S. pension plans were $250–$300 million, including estimated U.S. contributions of $200–$225 million.
• In February 2011, Goodyear approved closure of its Union City, Tennessee plant, expected to be substantially complete in fourth-quarter 2011. Estimated total charges were $270 million, including a $160 million charge recorded in fourth-quarter 2010; the plan was expected to generate about $80 million in annual savings. Separately, agreements to sell European and Latin American farm tire businesses for approximately $130 million were subject to conditions. The European sale could entail an estimated $50–$75 million loss; expected annual segment operating-income effects were positive $20–$25 million in EMEA and negative $30–$35 million in Latin America.
• Venezuela’s currency devaluations and exchange controls contributed to $159 million of net foreign-currency exchange losses in 2010, including a $110 million first-quarter loss and a $24 million fourth-quarter loss. Risks include further currency changes, restricted cash repatriation, supply constraints, and operational disruption. Approximately $627 million of subsidiary net assets were subject to transfer restrictions.
• Other key risks include substantial debt and variable-rate exposure, rising input costs, pension funding requirements, labor negotiations, competition, and covenant or borrowing-base constraints. The filing reported approximately 83,700 pending asbestos claims, a $126 million recorded gross asbestos liability and a $67 million insurance receivable; estimated reasonably possible excess net exposure was approximately $10 million. Other disclosed matters include a South African competition complaint seeking about $30 million and a Brazilian tax assessment of about $51 million, both contested.
• Unusual 2010 items included $240 million of pre-tax rationalization charges, Venezuelan currency losses, $95 million of financing fees, and $73 million of net gains on asset sales. Management said the $529 million U.S. loss received no tax benefit and reported a $3.1 billion valuation allowance against deferred tax assets.

PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management and the auditor concluded that internal controls were effective as of December 31, 2010.

Important facts for investors to verify

1. Whether 2011 price increases and product mix can offset the forecast sharp rise in raw-material costs, and whether the projected unit growth and cost savings are achieved.
2. Cash generation after capital spending, pension contributions, and rationalization payments, including whether reported liquidity is practically accessible given borrowing-base terms and restricted foreign cash.
3. The trajectory of pension-plan funding deficits and required contributions, especially the effect of discount rates, asset returns, and pension funding relief.
4. Progress, final costs, timing, and savings from the Union City and Amiens actions, and completion terms and proceeds of the farm tire business sales.
5. Developments in Venezuela, including exchange rates, supplier payments, production continuity, and potential further remeasurement losses.
6. Outcomes and reserve adequacy for asbestos claims, the South African competition matter, and the Brazilian tax assessment.