GT

Business Context and Reporting Period

Company: The Goodyear Tire & Rubber Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Context: Goodyear reported results during a period of severe global economic slowdown, characterized by weak demand for replacement tires, lower motor vehicle sales, and recessionary conditions. The company initiated significant rationalization programs to reduce manufacturing capacity and headcount in response to lower sales volume. Major Original Equipment (OE) customers, General Motors and Chrysler, filed for and emerged from bankruptcy during the quarter, though this did not materially impact Goodyear's liquidity.

Key Financial Metrics

Note: Total Debt calculated as Long Term Debt ($4,940M) + Current Portion of Long Term Debt ($634M) + Notes Payable ($275M) as of June 30, 2009.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 24.7% in Q2 2009 and 26.5% YTD 2009 compared to 2008. This was driven by a 16.5% drop in tire unit sales (Q2) due to recessionary conditions and a 35.1% drop in OE tire volume.
• Profitability Reversal: The company swung from a net income of $75 million in Q2 2008 to a net loss of $221 million in Q2 2009. YTD 2009 shows a net loss of $554 million versus income of $222 million in 2008.
• Rationalization Charges: Net rationalization charges increased significantly to $136 million in Q2 2009 (vs. $87 million in Q2 2008) and $191 million YTD 2009 (vs. $100 million YTD 2008). These charges relate to headcount reductions and facility closures.
• Asset Sales: The company recorded net losses on asset sales of $41 million in Q2 2009, compared to gains of $4 million in the prior year period.
• Working Capital: Inventories decreased by $683 million from year-end 2008 to June 30, 2009, contributing to a positive operating cash flow of $7 million YTD 2009, a significant improvement over the $215 million cash outflow in YTD 2008.

Guidance, Outlook, and Risks

• Outlook: Management expects demand to remain weak in Q3 2009, similar to Q2. Raw material costs are expected to decline 15% to 20% in Q3 2009 compared to the prior year.
• Strategic Initiatives: Goodyear is executing a plan to achieve $2.5 billion in cost savings, reduce manufacturing capacity by 15-25 million units over two years, and reduce inventory levels. Capital expenditures for 2009 are adjusted to $700-$800 million.
• Liquidity: In May 2009, the company issued $1.0 billion of 10.5% senior notes due 2016, generating approximately $937 million in net proceeds. Total cash and cash equivalents increased to $2,366 million. Unused credit availability stands at $1,724 million.
• Key Risks:
  • Labor Negotiations: The master collective bargaining agreement with the United Steelworkers (USW) expires August 15, 2009. Failure to reach an agreement could result in work stoppages.
  • International Operations: Currency controls in Venezuela restrict the repatriation of funds and payment of suppliers.
  • Debt Covenants: While currently compliant, the company is subject to financial covenants in its credit facilities that could be triggered if available cash and credit availability fall below $150 million.
  • Asbestos Litigation: Approximately 96,600 asbestos claims remain pending, with recorded liabilities of $136 million.

Investor Verification Checklist

• USW Contract Status: Verify the outcome of negotiations with the United Steelworkers prior to the August 15, 2009 expiration date to assess strike risk.
• Debt Maturities: Confirm the repayment plan for the $500 million floating rate notes maturing in December 2009.
• Inventory Valuation: Review the adequacy of inventory reserves given the significant reduction in inventory levels and potential obsolescence risks.
• Raw Material Costs: Monitor the realization of the projected 15-20% decline in raw material costs in Q3 2009.
• Segment Performance: Analyze the continued under-absorbed fixed overhead costs in the North American and EMEA segments due to low production volumes.