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Business Context and Reporting Period

Company: The Goodyear Tire & Rubber Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Overview: Goodyear is a global manufacturer of tires and rubber-related chemicals, operating 57 facilities in 23 countries. The company operates through four segments: North American Tire, Europe, Middle East and Africa (EMEA), Latin American Tire, and Asia Pacific Tire. The 2009 fiscal year was characterized by severe global recessionary conditions, leading to reduced vehicle production and weak demand for replacement tires.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales dropped 16% primarily due to a 9.5% decrease in worldwide tire unit sales (167.0 million units in 2009 vs. 184.5 million in 2008). The decline was driven by a 22.5% drop in Original Equipment (OE) units and a 4.6% drop in replacement units, exacerbated by unfavorable foreign currency translation of $699 million.
• Profitability Erosion: The net loss widened significantly from $77 million in 2008 to $375 million in 2009. Segment operating income fell by $432 million, driven by higher under-absorbed fixed overhead costs ($490 million increase) due to lower production volumes and increased pension expenses.
• Cost Reductions: Despite the loss, the company achieved approximately $730 million in cost savings in 2009 through its four-point cost savings plan, including personnel reductions of approximately 5,700 employees. Inventory levels were reduced by $1.1 billion compared to 2008.
• Segment Performance:
  • North American Tire: Recorded an operating loss of $305 million (vs. $156 million loss in 2008) due to a 35.5% drop in OE volume.
  • EMEA: Operating income fell 61% to $166 million due to volume declines and currency translation.
  • Latin American Tire: Operating income declined 18% to $301 million.
  • Asia Pacific Tire: The only segment to increase operating income, rising 25% to $210 million, driven by improved price/mix and lower raw material costs.

Guidance, Outlook, and Risks

• 2010 Outlook: Management expects a year of "modest recovery" with improved capacity utilization. However, raw material costs are projected to decrease ~5% in the first half of 2010 but increase ~30% in the second half compared to 2009.
• Cost Initiatives: The company targets an additional $1.0 billion in aggregate gross cost savings from 2010 through 2012. Plans include increasing low-cost country sourcing to over $900 million and reducing high-cost manufacturing capacity by 15 to 25 million units by February 2011.
• Venezuela Devaluation: A significant subsequent event occurred on January 8, 2010, when Venezuela devalued its currency. Goodyear expects to record a charge of approximately $150 million (net of tax) in Q1 2010 related to the remeasurement of its balance sheet. This is expected to adversely impact Latin American Tire operating results by $50 million to $75 million in 2010.
• Debt Exchange: In February 2010, Goodyear commenced an exchange offer to swap $650 million of 2011 notes for new 2020 notes to extend maturities and remove restrictive covenants.
• Pension Obligations: Pension plans remain significantly underfunded. The company estimates required contributions of $275 million to $325 million for 2010. Further declines in interest rates or asset values could materially increase these costs.
• Liquidity: Management believes liquidity is adequate for 2010 needs, supported by $1.9 billion in cash and $2.6 billion in unused credit availability. However, access to capital markets is not assured.

Key Facts for Investor Verification

• Venezuela Exposure: Verify the final impact of the January 2010 currency devaluation on Q1 2010 earnings and the ability to repatriate funds from Venezuela, where $370 million in cash was held at year-end.
• Pension Funding: Monitor the actual cash contributions required for 2010 and 2011, as the underfunded status of U.S. and non-U.S. plans ($1.9 billion and $784 million respectively) poses a significant cash flow risk.
• Raw Material Volatility: Track the trajectory of natural rubber and petrochemical prices, as management forecasts a sharp 30% cost increase in the second half of 2010 which could compress margins.
• Debt Covenants: Review compliance with financial covenants in credit facilities, particularly the EBITDA to Interest Expense ratio, which becomes applicable if available cash plus credit availability falls below $150 million.
• Asbestos Litigation: Note the $136 million recorded liability for asbestos claims and the uncertainty regarding future claims and insurance recoveries, which could exceed current reserves.