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| GT > SEC Filings for GT > Form 10-Q on 3-Nov-2008 | All Recent SEC Filings |
3-Nov-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,
• aggressively limiting spending,
• re-evaluating the timing of planned capital expenditures, and
• engaging in active contingency planning.
In the third quarter of 2008, we recorded net income of $31 million
compared to net income of $668 million in the comparable period of 2007. Income
from continuing operations in the third quarter of 2008 was $31 million compared
to $159 million in the third quarter of 2007. Net sales in the third quarter of
2008 increased $108 million, or 2.1%, to $5,172 million from $5,064 million in
the third quarter of 2007.
In the third quarter of 2008, our total segment operating income was
$266 million compared to $382 million in the third quarter of 2007. See "Results
of Operations - Segment Information" for additional information.
Raw material costs continued to rise in the third quarter of 2008 and were
approximately $238 million, or 15.9%, higher than the comparable period of 2007.
For the nine months ended September 30, 2008, raw material costs rose by 8.2%
over the comparable period of 2007. During the nine month period, 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 approximately 12% compared to 2007.
In the first nine months of 2008, we recorded net income of $253 million
compared to net income of $550 million in the comparable period of 2007. Income
from continuing operations in the first nine months of 2008 was $253 million
compared to $78 million in the first nine months of 2007. Net sales in the first
nine months of 2008 increased $869 million, or 6.0%, to $15,353 million from
$14,484 million in the first nine months of 2007.
During the third quarter of 2008, we continued to make progress on several
key initiatives, including the amendment of our pan-European accounts receivable
securitization facility, funding the Voluntary Employees' Beneficiary
Association ("VEBA") and continued cost reductions under our four-point cost
savings plan.
On July 23, 2008, certain of our European subsidiaries amended and restated
our pan-European accounts receivable securitization facility to increase the
funding capacity of that facility from €275 million to €450 million and to
extend the expiration date from 2009 to 2015. As a result of this refinancing,
more than 80% of our debt maturities are now in 2011 and beyond.
On August 22, 2008, the U.S. District Court for the Northern District of
Ohio approved the settlement agreement establishing an independent VEBA for
current and future United Steelworkers ("USW") retirees. Following the District
Court's approval, we made a one-time cash contribution of approximately
$1 billion to the VEBA and, following the expiration of a 30-day appeal period,
we recorded an $11 million charge ($13 million net of minority interest) for
settlement of the related obligations and removed $1.1 billion of liabilities
for USW retiree healthcare benefits from our balance sheet.
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 September 30, 2008, we estimate we have
achieved nearly $1,090 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 announcement in the second quarter of 2008 to close our Somerton, Australia plant completed this element of our four-point cost savings plan);
• 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 September 30, 2008, we estimate we have achieved nearly $140 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 September 30, 2008, we estimate we have achieved approximately $210 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 3%, while commercial replacement volume is expected to be down 6% to 7%. In North America, we estimate consumer OE volume will be down 18% to 20%, and commercial OE volume will be down 14% to 16%. For Europe, consumer replacement volume is expected to be down 4% to 5% and commercial replacement volume is expected to be down 7% to 9%. We expect consumer OE volume to be down 2% to 4%, and commercial OE volume to be up 4% to 6%. In conjunction with the expected decline in sales volume, we have reduced planned production schedules by approximately 12 million and 8 million units in North American Tire and EMEA, respectively, of which approximately 6 million and 3 million units, respectively, have been achieved through September 30, 2008.
Other (Income) and Expense was $4 million of expense in the third quarter
of 2008, compared to $33 million of income in the third 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 England in
2008 and North America in 2007. Interest income decreased by $23 million due
primarily to lower average cash balances. Foreign currency exchange losses
increased due primarily to the effect of changing exchange rates on foreign
currency-denominated monetary items in Canada, Australia and Poland. The impact
was partially mitigated by gains of a similar nature in Brazil. Royalty income
includes 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 third quarter of 2008, we recorded tax expense of $66 million on
income from continuing operations before income taxes and minority interest of
$118 million. We record taxes based on overall estimated annual effective tax
rates. Due to our projected pre-tax income (loss) 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 third
quarter of 2008. The volatility in our effective tax rate is due primarily to
our continuing to maintain a full valuation allowance against our net Federal
and state deferred tax assets. Included in tax expense for the third quarter of
2008 was a net tax charge for discrete items of $10 million ($6 million net of
minority interest), related primarily to return-related adjustments for our
German operations. For the third quarter of 2007, we recorded tax expense of
$95 million on income from continuing operations before income taxes and
minority interest of $268 million. Included in tax expense for the third quarter
of 2007 was a net tax charge of $15 million ($12 million net of minority
interest) related primarily to a tax law change in Germany, which was enacted in
the third quarter.
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
($80 million net of minority interest).
Minority interest was $21 million in the third quarter of 2008, an increase
of $7 million compared to $14 million in the third quarter of 2007. The increase
primarily relates to increased earnings in Goodyear Dunlop Tires Europe B.V. and
Goodyear Dunlop Tires North America, Ltd.
Rationalization Activity
During the third quarter of 2008, $34 million ($33 million after-tax or $0.14
per share) of net charges were recorded. New charges of $39 million represented
$23 million for plans initiated in 2008 and $16 million for plans initiated in
2007 and prior years. New charges for the 2008 plans included $10 million
related to associate severance costs and $13 million primarily for other exit
costs and non-cancelable lease costs. These amounts included $23 million related
to cash outflows. New charges for the 2007 and prior year plans included
$14 million related to associate severance and pension termination benefit costs
and $2 million primarily for other exit costs and non-cancelable lease costs.
These amounts included $14 million related to cash outflows, $1 million for
non-cash pension termination benefit costs and $1 million for other non-cash
exit costs. The third quarter of 2008 included the reversal of $5 million of
reserves for actions no longer needed for their originally intended purpose.
In the third quarter of 2008, we reached an agreement with union members to
close fully the Tyler, Texas facility and recorded $13 million of charges
related primarily to employee severance. Also, in the third quarter of 2008, we
announced plans to exit 92 of our underperforming retail stores in the U.S. by
December 31, 2008. As a result, we recorded $12 million of charges primarily for
non-cancelable lease costs in the third quarter of 2008.
For further information, refer to Note 2, Costs Associated with
Rationalization Programs.
Discontinued Operations
Discontinued operations generated net income of $509 million, or $2.08 per
share, in the third quarter of 2007, which represented the results of operations
of our former Engineered Products business through the July 31, 2007 sale date,
including an after-tax gain on the sale of discontinued operations of
$517 million.
Nine Months Ended September 30, 2008 and 2007
Net sales in the first nine months of 2008 were $15,353 million, increasing
$869 million, or 6.0%, from $14,484 million in the first nine months of 2007. We
recorded income from continuing operations of $253 million, or $1.04 per share,
in the first nine months of 2008 compared to income from continuing operations
of $78 million, or $0.39 per share, in the first nine months of 2007. Net income
of $253 million, or $1.04 per share, was recorded in the first nine months of
2008 compared to net income of $550 million, or $2.44 per share, in the first
nine months of 2007.
Net sales in the first nine months of 2008 were favorably impacted by price
and product mix of $858 million, mainly in North American Tire, EMEA and Latin
American Tire, $759 million in foreign currency translation, primarily in EMEA,
Latin American Tire and Asia Pacific Tire, and an increase in other tire-related
business' sales of $302 million, primarily due to third party sales of chemical
products 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
$481 million in the first nine months of 2007, and decreased volume of
$568 million, primarily in North American Tire and EMEA.
Worldwide tire unit sales in the first nine months of 2008 were
144.0 million units, a decrease of 7.7 million units, or 5.1%, compared to the
2007 period. Replacement units decreased by 2.8 million units, or 2.6%,
primarily in North American Tire and EMEA. North American Tire consumer
replacement volume decreased 2.4 million units, or 6.3%, and EMEA consumer
replacement volume decreased 0.8 million units, or 1.9%. The decline in consumer
replacement volume is due in part to weakening economic conditions in the U.S.
and Europe. The decrease in replacement units was partially offset by an
increase in Asia Pacific consumer replacement units of 0.6 million, or 6.5%. OE
units decreased by 4.9 million units, or 10.8%, 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 new vehicles.
Cost of goods sold (CGS) in the first nine months of 2008 was
$12,473 million, an increase of $714 million, or 6.1%, compared to
$11,759 million in the first nine months of 2007. CGS as a percentage of sales
was 81.2% in the first nine months of 2008 and 2007. CGS in the first nine
months of 2008 increased due to higher foreign currency translation of
$601 million, higher raw material costs of $361 million, $286 million of
increased costs related to other tire-related businesses, primarily due to third
party sales of chemical products in North American Tire, product mix-related
cost increases of $176 million, mostly related to North American Tire and EMEA,
and higher transportation costs of $45 million. Also unfavorably impacting CGS
was $309 million of higher conversion costs, mainly in North American Tire and
EMEA including about $70 million of period charges due to abnormally low
production, and a VEBA-related charge of $11 million. Reducing CGS were lower
volume, primarily in North American Tire and EMEA, of $466 million, savings from
rationalization plans of $56 million, and lower accelerated depreciation of
$14 million. CGS also benefited from decreased costs related to the 2007
divestiture of our Tire & Wheel Assembly operations, which had costs of
$465 million in the first nine 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 $1,997 million in the
first nine months of 2008, compared to $2,025 million in the first nine months
of 2007, a decrease of $28 million, or 1.4%. The decrease was driven primarily
by lower executive compensation costs of $90 million primarily due to changes in
estimated payouts and a decline in our stock price, lower advertising expenses
of $26 million, savings from rationalization plans of $10 million, and lower
discretionary spending. These were partially offset by unfavorable foreign
currency translation of $106 million and increased wages and other benefit costs
of $27 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 13.0% and 14.0% in the first nine months of 2008 and
2007, respectively.
Interest expense was $238 million in the first nine months of 2008, a
decrease of $113 million compared to $351 million in the first nine 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. In addition, we repaid $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.
Other (Income) and Expense was $24 million of income in the first nine
months of 2008, compared to $14 million of income in the first nine months of
2007. Net gains on asset sales were $41 million in 2008 and $29 million in 2007,
related primarily to the sale of properties in England, Germany, Morocco,
Argentina and New Zealand in 2008 and North America and Australia in 2007.
Interest income decreased by $32 million due primarily to lower average cash
balances. Financing fees included charges of $43 million and $47 million in the
first nine 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. Foreign
currency exchange losses decreased due primarily to the effect of changing
exchange rates on foreign-currency denominated monetary items in Brazil, Chile
and Turkey. The impact was partially offset by losses of a similar nature in
Australia and Canada. Royalty income increased $16 million and included
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 nine months of 2008, we recorded tax expense of $217 million
on income from continuing operations before income taxes and minority interest
of $535 million. We record taxes based on overall estimated annual effective tax
rates. Due to our projected pre-tax income (loss) 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 first
nine months of 2008. The volatility in our effective tax rate is due primarily
to our continuing to maintain a full valuation allowance against our net Federal
and state deferred tax assets. Included in tax expense for the first nine months
of 2008 was a net tax charge for discrete items of $10 million ($6 million net
of minority interest), related primarily to return-related adjustments for our
German operations. For the first nine months of 2007, we recorded tax expense of
$209 million on income from continuing operations before income taxes and
minority interest of $339 million. Included in tax expense for the first nine
months of 2007 was a net tax charge of $4 million, consisting of $15 million
($12 million net of minority interest) related primarily to a tax law change in
Germany, which was enacted in the third quarter, and a tax benefit of
$11 million ($0.05 per share) related to prior periods. The 2007 out-of-period
adjustment 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.
Minority interest was $65 million in the first nine months of 2008, an
increase of $13 million compared to $52 million in the third quarter of 2007.
The increase related primarily to higher earnings in Goodyear Dunlop Tires
Europe B. V. and Goodyear Dunlop Tires North America, Ltd.
Rationalization Activity
For the first nine months of 2008, $134 million ($128 million after-tax or $0.53
per share) of net charges were recorded. New charges of $140 million were
comprised of $101 million for plans initiated in 2008 and $39 million for plans
initiated in 2007 and prior years. New charges for the 2008 plans included
$87 million related to associate severance and pension curtailment costs and
$14 million primarily for other exit costs and non-cancelable lease costs. These
amounts included $100 million related to cash outflows and $1 million for
non-cash pension curtailment costs. The $39 million of new charges for 2007 and
prior year plans consisted of $26 million of associate severance and pension
termination benefit costs and $13 million primarily for other exit costs and
non-cancelable lease costs. These amounts included $33 million related to cash
outflows, $5 million for other non-cash exit costs and $1 million for non-cash
pension termination benefit costs. The first nine months of 2008 included the
reversal of $6 million of reserves for actions no longer needed for their
originally intended purpose. Approximately 1,400 associates remain to be
released under programs initiated in 2008, most of whom will be released within
the next 12 months.
During the first nine months of 2008, we reached an agreement with union
members to close fully the Tyler, Texas facility and recorded $13 million of
. . .
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