GT

Business Context and Reporting Period

Company: The Goodyear Tire & Rubber Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Overview: Goodyear operates four regional tire segments: North American Tire, Europe, Middle East and Africa Tire (EMEA), Latin American Tire, and Asia Pacific Tire. The reporting period reflects difficult industry conditions, including lower motor vehicle sales, high fuel prices, and historically high raw material costs. The Engineered Products business was sold in July 2007 and is reported as discontinued operations.

Key Financial Metrics

Note: 2007 Net Income includes a $517 million after-tax gain from the sale of discontinued operations. 2008 Operating Cash Flow is negative primarily due to a $980 million VEBA contribution.

Material Changes vs. Prior Period

• Profitability Decline: Net income for the quarter dropped from $668 million in 2007 to $31 million in 2008. The 2007 figure was significantly boosted by the gain on the sale of the Engineered Products business. Income from continuing operations fell from $159 million to $31 million.
• Revenue Growth: Net sales increased 2.1% in the quarter and 6.0% for the nine-month period, driven by price and product mix improvements and favorable foreign currency translation, which offset lower sales volumes.
• Cost Pressures: Cost of Goods Sold (CGS) increased due to raw material costs rising 15.9% in the quarter and 8.2% for the nine months. Conversion costs also increased due to lower production volumes and inflation.
• Cash Flow Impact: Operating cash flow turned significantly negative ($1.4 billion used) for the nine months ended September 30, 2008, compared to $693 million used in the prior year. This was primarily driven by a one-time $980 million cash contribution to a Voluntary Employees' Beneficiary Association (VEBA) to settle retiree healthcare obligations.
• Segment Performance: North American Tire operating income turned negative ($19 million loss) in the quarter, down from $66 million in 2007, due to volume declines and higher costs. EMEA and Latin American segments saw operating income declines or modest growth, while Asia Pacific showed strong growth.

Guidance, Outlook, and Risks

• Cost Savings Plan: Management raised its four-point cost savings plan target to more than $2 billion in aggregate gross savings from 2006 through 2009. Initiatives include continuous improvement, reducing high-cost capacity, low-cost country sourcing, and SG&A reductions.
• Production Adjustments: In response to declining sales volume, Goodyear reduced planned production schedules by approximately 12 million units in North America and 8 million units in EMEA.
• Capital Expenditures: Due to tightening credit markets and difficult economic conditions, the company expects capital investments to be at the lower end of its previously disclosed range ($1 billion to $1.3 billion) for 2008 and less than $1 billion for 2009.
• Liquidity and Debt: The company drew $600 million on its revolving credit facility to support liquidity after a temporary delay in accessing $360 million invested in The Reserve Primary Fund. Total credit arrangements are $7.34 billion with $1.46 billion unused. The company remains in compliance with debt covenants.
• Risks: Key risks include deteriorating economic conditions, inability to access capital markets, higher raw material costs, underfunded pension plans, and significant litigation exposure (asbestos and product liability).

Investor Verification Checklist

• VEBA Settlement: Verify the impact of the $980 million VEBA contribution on long-term liquidity and the reduction of the $1.1 billion OPEB liability.
• Reserve Primary Fund: Monitor the status of the $360 million investment in The Reserve Primary Fund; a partial distribution of $183 million was received in October 2008.
• North American Volume: Assess the sustainability of the 12.4% decline in North American tire unit sales and the impact of reduced vehicle production on OE (Original Equipment) demand.
• Raw Material Costs: Track the ability to pass through the 12% expected full-year increase in raw material costs to customers via price increases.
• Debt Covenants: Confirm continued compliance with the EBITDA to Interest Expense ratio (2.0 to 1.0) required by credit facilities, especially given the volatility in operating income.
• Asbestos Litigation: Review the $123 million recorded liability for asbestos claims and the potential for additional costs exceeding reserves by $50-$60 million.