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| GT > SEC Filings for GT > Form 10-Q on 31-Jul-2008 | All Recent SEC Filings |
31-Jul-2008
Quarterly Report
• raising our four-point cost savings plan target to more than $2 billion,
• reducing production schedules at certain of our manufacturing facilities,
• continuing our focus on consumer-driven product development and innovation,
• improving our supply chain, and
• engaging in active contingency planning.
In the second quarter of 2008, we recorded net income of $75 million compared
to net income of $56 million in the comparable period of 2007. Income from
continuing operations in the second quarter of 2008 was $75 million compared to
$29 million in the second quarter of 2007. Net sales in the second quarter of
2008 increased $318 million, or 6.5%, to $5,239 million from $4,921 million in
the second quarter of 2007.
In the second quarter of 2008, our total segment operating income was
$330 million compared to $310 million in the second quarter of 2007. See
"Results of Operations - Segment Information" for additional information.
Raw material costs continued to rise in the second quarter of 2008 and were
approximately $124 million, or 8.5%, higher than the comparable period of 2007.
For the six months ended June 30, 2008, raw material costs rose by 4.7% over the
comparable period of 2007. All of our businesses have been successful in
offsetting higher raw material costs with price and mix improvements. In
addition, we expect raw material costs for the full year of 2008 to be up
between 10% and 12% compared to 2007.
In the first six months of 2008, we recorded net income of $222 million
compared to a net loss of $118 million in the comparable period of 2007. Income
from continuing operations in the first six months of 2008 was $222 million
compared to a loss from continuing operations of $81 million in the first six
months of 2007. Net sales in the first six months of 2008 increased
$761 million, or 8.1%, to $10,181 million from $9,420 million in the first six
months of 2007.
With respect to our four-point cost savings plan, which includes continuous
improvement programs, reducing high-cost manufacturing capacity, leveraging our
global position by increasing low-cost country sourcing, and reducing selling,
administrative and general expense, we now expect to achieve more than
$2.0 billion of aggregate gross cost savings from 2006 through 2009. The
expected cost reductions consist of:
• More than $1.4 billion of estimated savings related to continuous
improvement initiatives, including business process improvements, such as
six sigma and lean manufacturing, leverage from manufacturing upgrades,
product reformulations and safety programs, and ongoing savings that we
expect to achieve from our master labor agreement with the United
Steelworkers ("USW") (through June 30, 2008, we estimate we have achieved
more than $900 million in savings under these initiatives);
• More than $150 million of estimated savings from the reduction of high-cost manufacturing capacity by over 25 million units (the announced closing of our Somerton, Australia plant completes this element of our four-point cost savings plan and we estimate that announced reductions to date will result in approximately $170 million of savings when complete);
• Between $200 million to $300 million of estimated savings related to our sourcing strategy of increasing our procurement of tires, raw materials, capital equipment and indirect materials from low-cost countries (through June 30, 2008, we estimate we have achieved nearly $125 million in savings under this strategy);
• Between $200 million to $250 million of estimated savings from reductions in selling, administrative and general expense related to initiatives including benefit plan changes, back-office and warehouse consolidations, supply chain improvements, legal entity reductions and headcount rationalizations (through June 30, 2008, we estimate we have achieved more than $200 million in savings under these efforts).
We have updated our 2008 industry volume estimates for North America and
Europe. Our estimates are as follows: North American consumer replacement volume
is expected to be down 2% to 3%, while commercial replacement volume is expected
to be down 2% to 4%. In North America, we estimate consumer OE volume will be
down more than 15%, and commercial OE volume will be down 5% to 10%. For Europe,
consumer replacement volume is expected to be down 1% to 3% and commercial
replacement volume is expected to be down 4% to 6%. We expect consumer OE volume
to be up 1% to 3%, and commercial OE volume to be up 8% to 10%.
RESULTS OF OPERATIONS
CONSOLIDATED
Three Months Ended June 30, 2008 and 2007
Net sales in the second quarter of 2008 were $5,239 million, increasing
$318 million, or 6.5%, from $4,921 million in the 2007 second quarter. We
recorded income from continuing operations of $75 million, or $0.31 per share,
in the second quarter of 2008 compared to income from continuing operations of
$29 million, or $0.14 per share, in the second quarter of 2007. Net income of
$75 million, or $0.31 per share, was recorded in the second quarter of 2008
compared to $56 million, or $0.26 per share, in the second quarter of 2007.
Net sales in the second quarter of 2008 were favorably impacted by price and
product mix of approximately $307 million, mainly in North American Tire and
EMEA, foreign currency translation of approximately $302 million primarily in
EMEA, and approximately $100 million in other tire-related businesses, mainly in
North American Tire. These positive changes were partially offset by lower
volume of approximately $208 million, mostly in North American Tire and EMEA,
and a decrease in sales from the 2007 divestiture of our Tire & Wheel Assembly
operations, which contributed sales of $186 million in the second quarter of
2007.
Worldwide tire unit sales in the second quarter of 2008 were 47.9 million
units, a decrease of 2.9 million units, or 5.8%, compared to the 2007 period.
There was a decrease of 1.2 million units, or 3.8%, in replacement units,
primarily in North American Tire and EMEA. North American Tire consumer
replacement volume decreased 1.0 million units, or 7.9%, and EMEA consumer
replacement volume decreased 0.4 million units, or 3.1%. The decline in the
consumer replacement volume is due in part to weakening economic conditions in
the U.S. OE units decreased 1.7 million units, or 10.4%, primarily in North
American Tire and EMEA, partially offset by an increase in Asia Pacific Tire.
The significant decline in North American Tire OE volume was driven by difficult
U.S. economic conditions and rising fuel prices that have reduced demand for
large vehicles.
Cost of goods sold (CGS) in the second quarter of 2008 was $4,196 million, an
increase of $229 million compared to $3,967 million in the second quarter of
2007. As a percentage of sales, CGS was 80.1% compared to 80.6% in the 2007
period. CGS in the second quarter of 2008 increased due to foreign currency
translation of approximately $222 million, higher raw material costs of
approximately $124 million, approximately $98 million of increased costs related
to other tire-related businesses, approximately $75 million of higher conversion
costs, primarily in North American Tire, product mix-related cost increases of
approximately $58 million, mostly related to North American Tire and EMEA, and
higher transportation costs of $18 million. Reducing CGS were decreased costs
related to the 2007 divestiture of our Tire & Wheel Assembly operations, which
had costs of $179 million in the second quarter of 2007, and lower volume of
approximately $171 million, primarily in North American Tire. Rationalization
plans also created additional savings of approximately $19 million in the second
quarter of 2008.
Selling, administrative and general expense (SAG) was $735 million in the
second quarter of 2008, compared to $692 million in the second quarter of 2007,
an increase of $43 million, or 6.2%. The increase was driven primarily by
foreign currency translation of approximately $46 million and increased general
and product liability and other insurance costs of $12 million. Partially
offsetting these increases was approximately $20 million of reduced stock-based
compensation expense primarily attributable to a decrease in our stock price.
SAG as a percentage of sales was 14.0% in the second quarter of 2008, compared
to 14.1% in the 2007 period.
Interest expense was $76 million in the second quarter of 2008, a decrease of
$44 million compared to $120 million in the second quarter of 2007. The decrease
related primarily to lower average debt levels due to the repayment of the
$300 million term loan due March 2011 in August 2007 and the exchange of
$346 million of our 4% convertible notes in the fourth quarter of 2007. Also
decreasing debt levels was the repayment of $200 million of floating rate notes
due 2011, $450 million of 11% notes due 2011, and $100 million of 6 3/8% notes
due 2008 during the first quarter of 2008. The decrease in interest expense is
also attributable to reduced market interest rates on variable rate debt and
retirements of higher cost fixed rate debt.
Other (Income) and Expense was $22 million of income in the second quarter of
2008, compared to $39 million of expense in the second quarter of 2007. Net
gains on asset sales were $4 million and $10 million in the 2008 and 2007
periods, respectively, related primarily to the sale of properties in Germany in
2008 and Canada in 2007. Interest income decreased by $8 million due primarily
to lower cash balances. Financing fees decreased by $47 million due primarily to
the inclusion in the 2007 period of charges totaling $47 million related to
refinancing activities and debt redemption. Fire loss expense in 2007 included
expenses related to a fire at our tire manufacturing facility in Thailand. The
impact of foreign currency exchange improved by $18 million due primarily to the
effect of changing exchange rates on foreign currency denominated transactions
in Chile and Colombia. Miscellaneous items include royalties from licensing
arrangements related to divested businesses, including recognition of deferred
income from a trademark licensing agreement related to our Engineered Products
business that was divested in the third quarter of 2007.
For the second quarter of 2008, we recorded tax expense of $74 million on
income from continuing operations before income taxes and minority interest of
$167 million. We record taxes based on overall estimated annual effective tax
rates. Due to our projected marginal profitability in the United States, the
estimated annual U.S. effective tax rate is subject to wide variability
requiring us to record our U.S. taxes on a discrete item basis for the second
quarter of 2008. For the second quarter of 2007, we recorded tax expense of
$51 million on income from continuing operations before income taxes and
minority interest of $96 million. Included in tax expense for the second quarter
of 2007 was a net tax benefit of $11 million ($0.05 per share) related to prior
periods. The out-of-period adjustment, in 2007, 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.
Our losses in certain foreign locations in recent periods represented
sufficient negative evidence to require us to maintain a full valuation
allowance against our net deferred tax assets in these foreign locations.
However, 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 one-time tax benefits of up to $100 million
($85 million, net of minority interest).
Rationalization Activity
During the second quarter of 2008, $87 million ($83 million after-tax or $0.34
per share) of net charges were recorded. New charges of $87 million represent
$76 million for plans initiated in 2008 and $11 million for plans initiated in
2007 and prior years. New charges for the 2008 plans include $75 million related
to associate severance costs and $1 million primarily for other exit costs and
non-cancelable lease costs. These amounts include $75 million related to future
cash outflows and $1 million for non-cash pension curtailments. New charges for
the 2007 and prior year plans include $10 million related to associate severance
costs and $1 million primarily for other exit costs and non-cancelable lease
costs. These amounts include $11 million related to future cash outflows.
In the second quarter of 2008, we announced plans to close our Somerton,
Australia manufacturing facility by December 31, 2008 as part of our strategy to
reduce high-cost manufacturing capacity globally. We expect total restructuring
and accelerated depreciation charges related to Somerton to be approximately
$125 million, of which approximately $85 million is for cash charges. Included
in the second quarter of 2008 was $72 million of charges for employee severance
related to the closure. CGS included a charge of $4 million for accelerated
depreciation. This action will eliminate approximately 3 million units of
high-cost capacity and provide us with estimated annual cost savings of
approximately $35 million.
In addition, we completed discussions with employee unions related to our
Amiens, France tire plants and as a result have increased our previously
recorded rationalization reserve for employee severance by $7 million in the
second quarter of 2008.
For further information, refer to Note 2, Costs Associated with
Rationalization Programs.
Discontinued Operations
Discontinued operations produced net income of $27 million, or $0.12 per share,
in the second quarter of 2007.
Six Months Ended June 30, 2008 and 2007
Net sales in the first six months of 2008 were $10,181 million, increasing
$761 million, or 8.1%, from $9,420 million in the first six months of 2007. We
recorded income from continuing operations of $222 million, or $0.91 per share,
in the first six months of 2008 compared to a loss from continuing operations of
$81 million, or $0.43 per share, in the first six months of 2007. Net income of
$222 million, or $0.91 per share, was recorded in the first six months of 2008
compared to a net loss of $118 million, or $0.63 per share, in the first six
months of 2007.
Net sales in the first six months of 2008 were favorably impacted by
$642 million in foreign currency translation, primarily in EMEA, by price and
product mix of $550 million, mainly in North American Tire and EMEA, and an
increase in other tire-related business' sales of $206 million, primarily in
North American Tire. These were offset by a decrease due to the 2007 divestiture
of our Tire & Wheel Assembly operations, which contributed sales of $336 million
in the first six months of 2007, and decreased volume of approximately
$299 million, primarily in North American Tire and EMEA.
Worldwide tire unit sales in the first six months of 2008 were 95.8 million
units, a decrease of 4.2 million units, or 4.2%, compared to the 2007 period.
Replacement units decreased by 1.2 million units, or 1.7%, primarily in North
American Tire and EMEA. North American Tire consumer replacement volume
decreased 1.3 million units, or 5.4%, and EMEA consumer replacement volume
decreased 0.3 million units, or 1.1%. The decline in the consumer replacement
volume is due in part to weakening economic conditions in the U.S. The decrease
in replacement units was partially offset by an increase in Asia Pacific
consumer replacement units of 0.5 million, or 9.1%. OE units decreased by
3.0 million units, or 9.8%, primarily in North American Tire and EMEA, partially
offset by an increase in Asia Pacific Tire. The significant decline in North
American Tire OE volume was driven by difficult U.S. economic conditions and
rising fuel prices that have reduced demand for large vehicles.
Cost of goods sold (CGS) in the first six months of 2008 was $8,157 million,
an increase of $449 million, or 5.8%, compared to $7,708 million in the first
six months of 2007. CGS as a percentage of sales was 80.1% and 81.8% in the
first six months of 2008 and 2007, respectively. CGS in the first six months of
2008 increased due to higher foreign currency translation of approximately
$496 million, $211 million of increased costs related to other tire-related
businesses, primarily in North American Tire, product mix-related cost increases
of approximately $143 million, mostly related to North American Tire and EMEA,
higher raw material costs of approximately $137 million, and higher
transportation costs of $33 million. Also unfavorably impacting CGS was
approximately $128 million of higher conversion costs, mainly in North American
Tire. Reducing CGS were lower volume, primarily in North American Tire and EMEA,
of approximately $251 million, savings from rationalization plans of
approximately $42 million, and lower accelerated depreciation of approximately
$21 million. CGS also benefited from decreased costs related to the 2007
divestiture of our Tire & Wheel Assembly operations, which had costs of
$326 million in the first six months of 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.
Selling, administrative and general expense (SAG) was $1,370 million in the
first six months of 2008, compared to $1,355 million in the first six months of
2007, an increase of $15 million, or 1.1%. The increase was driven primarily by
unfavorable foreign currency translation of approximately $91 million. These
were partially offset by decreased stock compensation expense of $28 million
primarily due to a decline in our stock price, and lower advertising expenses of
$8 million. Included in 2007 was $37 million related to a curtailment charge for
the benefit plan changes announced in the first quarter of 2007. SAG as a
percentage of sales was 13.5% and 14.4% in the first six months of 2008 and
2007, respectively.
Interest expense was $165 million in the first six months of 2008, a decrease
of $80 million compared to $245 million in the first six months of 2007. The
decrease related primarily to lower average debt levels due to the repayment of
the $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. Also decreasing debt levels was the repayment of
$200 million of floating rate notes due 2011, $450 million of 11% notes due
2011, and $100 million of 6 3/8% notes due 2008 during the first quarter of
2008. Also decreasing interest expense was a decline in interest rates due to
reduced market interest rates on variable rate debt and retirements of higher
cost fixed rate debt.
Other (Income) and Expense was $28 million of income in the first six months
of 2008, compared to $19 million of expense in the first six months of 2007. Net
gains on asset sales were $37 million in 2008 and $19 million in 2007, related
primarily to the sale of properties in Germany, Morocco, Argentina and New
Zealand in 2008 and Canada and Australia in 2007. Interest income decreased by
$9 million due primarily to lower cash balances. Financing fees included
$43 million and $47 million of charges in the first six months of 2008 and 2007,
respectively, related to refinancing activities and debt redemption. Fire loss
expense in 2007 included expenses related to a fire at our tire manufacturing
facility in Thailand. The impact of foreign currency exchange improved by
$12 million due primarily to the impact of changing exchange rates on foreign
currency denominated transactions in Chile, Colombia and Turkey. Miscellaneous
items include royalties from licensing arrangements related to divested
businesses, including recognition of deferred income from a trademark licensing
agreement related to our Engineered Products business that was divested in the
third quarter of 2007.
For the first six months of 2008, we recorded tax expense of $151 million on
income from continuing operations before income taxes and minority interest of
$417 million. The difference between our effective tax rate and the U.S.
statutory rate was primarily attributable to continuing to maintain a full
valuation allowance against our net Federal and state deferred tax assets. For
the first six months of 2007, we recorded tax expense of $114 million on income
from continuing operations before income taxes and minority interest of
$71 million. Included in tax expense for the first six months of 2007 was a tax
benefit of $11 million ($0.05 per share) related to prior periods. The
out-of-period adjustment, in 2007, 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.
Rationalization Activity
For the first six months of 2008, $100 million ($95 million after-tax or $0.39
per share) of net charges were recorded. New charges of $101 million were
comprised of $78 million for plans initiated in 2008 and $23 million for plans
initiated in 2007 and prior years. New charges for the 2008 plans include
$77 million related to associate severance costs and $1 million primarily for
other exit costs and non-cancelable lease costs. These amounts include
$77 million related to future cash outflows and $1 million for non-cash pension
curtailments. The $23 million of new charges for 2007 and prior year plans
consist of $12 million of associate-related costs and $11 million primarily for
other exit costs and non-cancelable lease costs. These amounts include
$19 million related to future cash outflows and $4 million for other non-cash
exit costs. The first six months of 2008 includes the reversal of $1 million of
reserves for actions no longer needed for their originally-intended purposes.
Approximately 700 associates will be released under programs initiated in 2008,
most of whom will be released within the next 12 months.
During the first six months of 2008, we announced plans to close our
Somerton, Australia manufacturing facility by December 31, 2008 as part of our
strategy to reduce high-cost manufacturing capacity globally. We expect total
restructuring and accelerated depreciation charges related to Somerton to be
approximately $125 million, of which approximately $85 million is for cash
charges. Included in the second quarter of 2008 was $72 million of charges for
employee severance related to the closure. CGS included a charge of $4 million
for accelerated depreciation. This action will eliminate approximately 3 million
units of high-cost capacity and provide us with annual cost savings of
approximately $35 million.
In addition, we completed discussions with employee unions related to our
Amiens, France tire plant and as a result have increased our previously recorded
rationalization reserve for employee severance by $7 million.
For further information, refer to Note 2, Costs Associated with
Rationalization Programs.
Discontinued Operations
Discontinued operations produced a net loss of $37 million, or $0.20 per share,
in the first six months of 2007, which included a curtailment charge of
$72 million.
SEGMENT INFORMATION
Segment information reflects our strategic business units ("SBUs"), which are
organized to meet customer requirements and global competition. The Tire
businesses are segmented on a regional basis. As previously mentioned, during
the first quarter of 2008, we formed a new strategic business unit, Europe,
Middle East and Africa Tire, by combining our former European Union Tire and
Eastern Europe, Middle East and Africa Tire business units.
Results of operations are measured based on net sales to unaffiliated
customers and segment operating income. Segment operating income includes
transfers to other SBUs. Segment operating income is computed as follows: Net
Sales less CGS (excluding certain accelerated depreciation charges and asset
impairment charges) and SAG (including certain allocated corporate
administrative expenses). Segment operating income also includes equity in
earnings of most affiliates. Segment operating income does not include
rationalization charges (credits), assets sales and certain other items.
The percentage change in tire units is calculated based on the actual number
of units sold.
Total segment operating income was $330 million in the second quarter of
2008, increasing from $310 million in the second quarter of 2007. Total segment
operating margin (total segment operating income divided by segment sales)
remained consistent in the second quarter of 2008 and 2007 at 6.3%.
In the first six months of 2008, total segment operating income was
$697 million, increasing from $536 million in the first six months of 2007.
. . .
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