<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
TO
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER: 1-1927
THE GOODYEAR TIRE & RUBBER COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-0253240
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1144 EAST MARKET STREET, AKRON, OHIO 44316-0001
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(330) 796-2121
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------------------
The Registrant hereby amends and restates in their entirety
the following items, financial statements, exhibits or other
portions of its Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998 as set forth in the
pages attached hereto:
PART I, ITEM 1
PART I, ITEM 2
---------------------------------
<PAGE> 2
The Goodyear Tire & Rubber Company (the "Company"), by this Form
10-Q/A, Amendment No. 1 to Form 10-Q, hereby amends and restates in their
entirety Items 1 and 2 of Part I of the Quarterly Report on Form 10-Q of the
Company for the quarterly period ended September 30, 1998 (the "Quarterly
Report").
EXPLANATORY NOTE TO AMENDMENT NO. 1 TO QUARTERLY REPORT ON FORM 10-Q
This Form 10-Q/A, Amendment No. 1 to Form 10-Q for the quarterly period
ended September 30, 1998 (the "Amendment"), which amends the Quarterly Report,
includes: (i) the cover page and this page 2 of this Amendment; (ii) Item 1,
"Financial Statements," of Part I of the Quarterly Report (pages numbered 1
through 7A, inclusive, which follow this page 2); and (iii) Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of Part I of the Quarterly Report (pages numbered 8 through 20B,
inclusive, which follow page 7A). The Quarterly Report as amended by this
Amendment is herein referred to as the "Amended Quarterly Report."
In this Amendment, the Company is expanding the note captioned
"Rationalizations" (previously captioned "Asset Writedown and Other
Rationalizations") to its financial statements set forth at Item 1 of Part I of
the Quarterly Report. The Company also amends Item 2 of Part I of the Quarterly
Report to, among other things, report additional information regarding Year 2000
information technology and process systems remediation.
In accordance with Rule 12b-5 under the Securities Exchange Act of
1934, Item 1 of Part I of the Quarterly Report as amended by this Amendment is
set forth in its entirety at pages numbered 1 through 7A, inclusive, and Item 2
of Part I of the Quarterly Report as amended by this Amendment is set forth in
its entirety at pages numbered 8 through 20B, inclusive.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment No. 1 to Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998 on Form 10-Q/A to be
signed on its behalf by the undersigned thereunto duly authorized.
THE GOODYEAR TIRE & RUBBER COMPANY
(Registrant)
Date: March 18, 1999 By: /s/JOHN W. RICHARDSON
-------------------------------
John W. Richardson, Vice President
(Signing on behalf of Registrant as a duly
authorized officer of Registrant and as
the Principal Accounting Officer of
Registrant.)
-2-
<PAGE> 3
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Unaudited
<TABLE>
<CAPTION>
(In millions, except per share) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 3,191.7 $ 3,298.7 $ 9,423.2 $ 9,797.3
Cost of Goods Sold 2,469.8 2,536.3 7,193.7 7,514.0
Selling, Administrative and General Expense 471.5 465.8 1,382.4 1,394.5
Rationalizations -- -- (29.7) --
Interest Expense 41.4 28.4 105.7 91.9
Other (Income) and Expense (44.3) 7.3 (72.5) 18.2
Foreign Currency Exchange (0.3) (10.1) (14.8) (16.3)
Minority Interest in Net Income of Subsidiaries 9.7 11.9 25.6 35.1
---------- ---------- ---------- ----------
Income from Continuing Operations before Income Taxes 243.9 259.1 832.8 759.9
United States and Foreign Taxes on Income 58.9 74.3 237.3 233.2
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 185.0 184.8 595.5 526.7
Discontinued Operations -- 9.3 (34.7) 30.0
---------- ---------- ---------- ----------
NET INCOME $ 185.0 $ 194.1 560.8 556.7
========== ==========
Retained Earnings at Beginning of Period 2,983.4 2,603.0
CASH DIVIDENDS (141.2) (131.3)
---------- ----------
Retained Earnings at End of Period $ 3,403.0 $ 3,028.4
========== ==========
PER SHARE OF COMMON STOCK - BASIC:
INCOME FROM CONTINUING OPERATIONS $ 1.19 $ 1.18 $ 3.80 $ 3.37
Discontinued Operations -- 0.07 (0.22) 0.20
---------- ---------- ---------- ----------
NET INCOME $ 1.19 $ 1.25 $ 3.58 $ 3.57
========== ========== ========== ==========
Average Shares Outstanding 156.4 156.2 156.8 156.1
PER SHARE OF COMMON STOCK - DILUTED:
INCOME FROM CONTINUING OPERATIONS $ 1.17 $ 1.16 $ 3.75 $ 3.33
Discontinued Operations -- 0.06 (0.22) 0.19
---------- ---------- ---------- ----------
NET INCOME $ 1.17 $ 1.22 $ 3.53 $ 3.52
========== ========== ========== ==========
Average Shares Outstanding 157.8 158.3 158.7 158.0
CASH DIVIDENDS PER SHARE $ 0.30 $ 0.28 $ 0.90 $ 0.84
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
-1-
<PAGE> 4
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Unaudited
<TABLE>
<CAPTION>
(In millions)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 158.3 $ 258.6
Accounts and notes receivable,
less allowance (1998-$56.3, 1997-$49.5) 2,105.9 1,733.6
Inventories:
Raw materials 412.9 307.0
Work in process 90.4 87.1
Finished product 1,714.5 1,441.1
---------- ----------
2,217.8 1,835.2
Prepaid expenses and other current assets 417.9 336.5
---------- ----------
TOTAL CURRENT ASSETS 4,899.9 4,163.9
Long Term Accounts and Notes Receivable 188.7 201.9
Investments in Affiliates, at equity 100.5 124.6
Other Assets 83.7 134.1
Deferred Charges 1,348.2 1,143.2
Properties and Plants,
less accumulated depreciation (1998-$5,313.4, 1997-$5,084.3) 4,058.2 4,149.7
---------- ----------
TOTAL ASSETS $ 10,679.2 $ 9,917.4
========== ==========
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable - trade $ 999.0 $ 1,177.8
Compensation and benefits 783.0 782.7
Other current liabilities 339.6 421.8
United States and foreign taxes 377.5 362.0
Notes payable to banks 831.7 440.2
Long term debt due within one year 57.8 66.5
---------- ----------
TOTAL CURRENT LIABILITIES 3,388.6 3,251.0
Compensation and Benefits 1,972.3 1,945.7
Long Term Debt 1,279.6 844.5
Other Long Term Liabilities 174.3 224.5
Minority Equity in Subsidiaries 195.1 256.2
---------- ----------
TOTAL LIABILITIES 7,009.9 6,521.9
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value:
Authorized 50.0 shares, unissued -- --
Common Stock, no par value:
Authorized 300.0 shares
Outstanding shares 155.9 (156.6 in 1997)
after deducting 39.8 treasury shares (39.1 in 1997) 155.9 156.6
Capital Surplus 1,014.0 1,061.6
Retained Earnings 3,403.0 2,983.4
Accumulated Other Comprehensive Income (903.6) (806.1)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 3,669.3 3,395.5
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,679.2 $ 9,917.4
========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
-2-
<PAGE> 5
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unaudited
<TABLE>
<CAPTION>
(In millions) Accumulated Other
Comprehensive Income
---------------------
Common Capital Retained Foreign Minimum Total
Stock Surplus Earnings Currency Pension Shareholders'
Translation Liability Equity
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ 156.6 $1,061.6 $2,983.4 $ (778.0) $ (28.1) $3,395.5
Comprehensive income for 1998:
Net income -- -- 560.8 -- -- --
Foreign currency translation -- -- -- (97.0)
Minimum pension liability -- -- -- -- (0.5) --
Total comprehensive income -- -- -- -- -- 463.3
Cash dividends -- -- (141.2) -- -- (141.2)
Common stock acquired (1.5) (83.7) -- -- -- (85.2)
Common stock issued 0.8 36.1 -- -- -- 36.9
-------- -------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1998 $ 155.9 $1,014.0 $3,403.0 $ (875.0) $ (28.6) $3,669.3
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
<TABLE>
<CAPTION>
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME $ 185.0 $ 194.1 $ 560.8 $ 556.7
Other comprehensive income, net of tax:
Foreign currency translation adjustment 8.0 (124.2) (97.0) (162.0)
Minimum pension liability adjustment 0.9 1.2 (0.5) 3.1
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 193.9 $ 71.1 $ 463.3 $ 397.8
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
-3-
<PAGE> 6
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
(In millions) NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 560.8 $ 556.7
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation 351.8 343.6
Discontinued operations 49.5 --
Gain on asset sales (69.9) --
Change in operating assets and liabilities, net of
asset acquisitions and dispositions:
Accounts and notes receivable (326.2) (322.9)
Inventories (376.4) (51.9)
Accounts payable-trade (197.3) (49.2)
Other assets and liabilities (302.7) 57.7
-------- --------
Total adjustments (871.2) (22.7)
-------- --------
TOTAL CASH FLOWS FROM OPERATING ACTIVITIES (310.4) 534.0
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (490.6) (377.6)
Asset sales 488.8 37.6
Asset acquisitions (197.1) (108.6)
Other transactions (87.5) 7.3
-------- --------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (286.4) (441.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term debt incurred 543.6 369.4
Short term debt paid (59.8) (106.2)
Long term debt incurred 325.6 10.4
Long term debt paid (116.9) (216.5)
Common stock issued 36.9 73.6
Common stock acquired (85.2) (78.4)
Dividends paid (141.2) (131.3)
-------- --------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 503.0 (79.0)
Effect of Exchange Rate Changes on Cash and Cash Equivalents (6.5) (25.5)
-------- --------
Net Change in Cash and Cash Equivalents (100.3) (11.8)
Cash and Cash Equivalents at Beginning of the Period 258.6 238.5
-------- --------
Cash and Cash Equivalents at End of the Period $ 158.3 $ 226.7
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
-4-
<PAGE> 7
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DISCONTINUED OPERATIONS
On July 30, 1998 the Company completed the sale of substantially all of the
assets and liabilities of its oil transportation business segment to Plains All
American Inc., a subsidiary of Plains Resources Inc. Proceeds from the sale were
$422.3 million, which included distributions to the Company prior to closing of
$25.1 million. The principal assets of the Oil Transportation segment included
the All American Pipeline System, a heated crude oil pipeline system consisting
primarily of a 1,225 mile mainline segment extending from Gaviota, California,
to McCamey, Texas and related terminal and storage facilities, and a crude oil
gathering system located in California's San Joaquin Valley.
The transaction was accounted for as a sale of discontinued operations, and
accordingly, the accompanying financial information has been restated where
required.
Operating results and the loss on sale of discontinued operations follow:
<TABLE>
<CAPTION>
(In millions, except per share) THREE NINE
MONTHS ENDED MONTHS ENDED
SEPT. 30, SEPT. 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET SALES $ -- $ 23.5 $ 22.4 $ 73.6
====== ====== ====== ======
Income before Income Taxes $ -- $ 14.5 $ 12.9 $ 46.9
United States Taxes on Income -- 5.2 4.7 16.9
------ ------ ------ ------
Income from Discontinued Operations -- 9.3 8.2 30.0
Loss on Sale of Discontinued Operations, including
income from operations during the disposal
period of $10.0 (net of tax of $24.1) -- -- (42.9) --
------ ------ ------ ------
DISCONTINUED OPERATIONS $ -- $ 9.3 $(34.7) $ 30.0
====== ====== ====== ======
INCOME (LOSS) PER SHARE - BASIC:
Income from Discontinued Operations $ -- $ .07 $ .05 $ .20
Loss on Sale of Discontinued Operations -- -- (.27) --
------ ------ ------ ------
DISCONTINUED OPERATIONS $ -- $ .07 $ (.22) $ .20
====== ====== ====== ======
INCOME (LOSS) PER SHARE - DILUTED:
Income from Discontinued Operations $ -- $ .06 $ .05 $ .19
Loss on Sale of Discontinued Operations -- -- (.27) --
------ ------ ------ ------
DISCONTINUED OPERATIONS $ -- $ .06 $ (.22) $ .19
====== ====== ====== ======
</TABLE>
PER SHARE OF COMMON STOCK
Basic per share amounts have been computed based on the average number of
common shares outstanding. Diluted per share amounts reflect the increase in
average common shares outstanding that would result from the assumed exercise of
outstanding stock options, computed using the treasury stock method.
-5-
<PAGE> 8
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RATIONALIZATIONS
1998 - The Company recorded a benefit totaling $22 million ($14.7 million after
tax or $.09 per share) in the second quarter resulting from the favorable
settlement of obligations related to the Company's withdrawal of support for the
worldwide Formula 1 racing series. Additionally, the Company reversed certain
reserves totaling $7.7 million ($4.9 million after tax or $.03 per share)
related to plant downsizing and closure activities in North America, due to a
change in the 1997 rationalization plan.
During 1998, the Company continued to implement the 1997 and 1996
rationalization programs. The following reflects the activity and progress of
those programs in the first nine months of 1998.
1997 Program - During the first nine months of 1998, approximately 900
associates, primarily hourly associates, were released at a cost of
approximately $26 million. The Company plans to release approximately 1,700 more
associates, employed primarily at manufacturing and distribution operations in
North America. At September 30, 1998, the Company had reserved $63.1 million for
that cost compared to $89.1 million at December 31, 1997.
Optimization, downsizing, consolidation and withdrawal costs, other than
associate-related costs, were recorded, and were incurred through September 30,
1998, as follows:
<TABLE>
<CAPTION>
(In millions)
Recorded Incurred
-------- --------
<S> <C> <C>
Withdrawal of support for the Formula 1 racing series $ 63.4 $ 43.2
Plant downsizing and closure activities 23.0 1.4
Kelly-Springfield consolidation 12.9 --
Consolidation of North American distribution facilities 12.3 7.6
Commercial tire outlet consolidation 4.7 1.8
Production realignments 2.8 2.8
-------- --------
$ 119.1 $ 56.8
</TABLE>
During the first nine months of 1998, approximately $50.5 million was
charged to the reserve and $29.7 million was reversed ($22 million in respect of
withdrawal of support for Formula 1 racing and $7.7 million for plant downsizing
and closure activities that were changed). At September 30, 1998, the balance of
the reserve for these costs totaled $32.6 million, compared to $112.8 million at
December 31, 1997. The Company expects that the major portion of the actions
will be completed during 1999, with the balance to be completed in 2000.
1996 Program - During the first nine months of 1998, approximately 70
associates, primarily salaried associates in the United States, were released at
a cost of approximately $9 million. The Company plans to release approximately
400 more associates under the 1996 program. At September 30, 1998, the Company
had reserved $18.5 million for that cost, compared to $27.5 million at December
31, 1997.
Rationalization costs, other than for associate-related costs, were
recorded, and were incurred through September 30, 1998, as follows:
<TABLE>
<CAPTION>
(In millions)
Recorded Incurred
-------- --------
<S> <C> <C>
Discontinuance of PVC production $ 10.6 $ 2.3
Canadian retail store closures 9.0 4.6
International production rationalization 8.5 7.6
North American Tire production rationalization 7.1 6.2
-------- --------
$ 35.2 $ 20.7
</TABLE>
-6-
<PAGE> 9
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RATIONALIZATIONS (CONTINUED)
During the first nine months of 1998, approximately $7.6 million was
charged to the reserve. The balance of these provisions at September 30, 1998
totaled $14.5 million compared to $22.1 million at December 31, 1997. The
Company plans to substantially complete these plans in 1999.
NON-CONSOLIDATED OPERATIONS - SOUTH PACIFIC TYRE
In addition to its consolidated operations in the Asia region, the Company
also owns a 50% interest in South Pacific Tyres Ltd (SPT), a partnership with
Pacific Dunlop Ltd of Australia. SPT is the largest tire manufacturer, marketer
and exporter in Australia and New Zealand. The Company is required to use the
equity method to account for its interest in the results of operations and
financial position of SPT.
The following table presents sales and operating income of the Company's
consolidated Asian operations and 100% of the operations of SPT:
<TABLE>
<CAPTION>
(In millions) THREE MONTHS ENDED SEPT. 30 NINE MONTHS ENDED SEPT. 30
----------------------------- -------------------------------
Asia Asia
Segment SPT Total Segment SPT Total
------- ------ ------ ------- ------ --------
NET SALES:
<S> <C> <C> <C> <C> <C> <C>
1998 $146.8 $147.0 $293.8 $426.0 $470.6 $ 896.6
1997 201.6 180.3 381.9 610.3 568.1 1,178.4
OPERATING INCOME:
1998 $ 18.1 $ 12.1 $ 30.2 $ 43.7 $ 35.1 $ 78.8
1997 21.6 12.7 34.3 71.9 47.8 119.7
</TABLE>
OTHER (INCOME) AND EXPENSE
Other (income) and expense in 1998 included a first quarter gain of $61.1
million on the sale of the Company's Calhoun, Georgia latex processing facility.
The second quarter of 1998 included a charge of $17.4 million for the settlement
of several related lawsuits involving employment matters in Latin America. The
third quarter of 1998 included gains totaling $53.2 million resulting from the
disposition of five distribution facilities in North America and the sale of
certain other real estate.
SUPPLEMENTAL INFORMATION ABOUT NONCASH INVESTING ACTIVITIES
In the third quarter of 1998 the Company acquired a majority ownership
interest in an Indian tire manufacturer and assumed $103 million of debt. In
1997 the Company acquired a majority ownership interest in a South African tire
and industrial rubber products business and assumed $29 million of debt.
Information in the Consolidated Statement of Cash Flows is presented net of the
effects of these transactions.
ADJUSTMENTS
All adjustments, consisting of normal recurring adjustments, necessary for
a fair statement of the results of these unaudited interim periods have been
included.
RECLASSIFICATION
Certain items previously reported in specific financial statement captions
have been reclassified to conform to the 1998 presentation.
-7-
<PAGE> 10
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
Unaudited
<TABLE>
<CAPTION>
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INDUSTRY SEGMENTS
Sales to Unaffiliated Customers:
Tires $2,560.9 $2,616.9 $7,431.5 $7,729.3
Related products and services 219.2 232.4 710.6 701.2
-------- -------- -------- --------
Total Tires 2,780.1 2,849.3 8,142.1 8,430.5
General products 411.6 449.4 1,281.1 1,366.8
-------- -------- -------- --------
NET SALES $3,191.7 $3,298.7 $9,423.2 $9,797.3
======== ======== ======== ========
Income:
Tires $ 281.4 $ 264.0 $ 831.3 $ 796.0
General products 39.1 54.7 202.3 159.5
-------- -------- -------- --------
OPERATING INCOME 320.5 318.7 1,033.6 955.5
Exclusions from operating income (76.6) (59.6) (200.8) (195.6)
-------- -------- -------- --------
Income from continuing operations $ 243.9 $ 259.1 $ 832.8 $ 759.9
======== ======== ======== ========
before income taxes
GEOGRAPHIC SEGMENTS
Sales to Unaffiliated Customers:
United States $1,742.1 $1,774.1 $5,105.8 $5,156.6
Europe 802.5 750.5 2,303.9 2,320.3
Latin America 337.3 403.2 1,078.8 1,188.2
Asia 146.8 201.6 426.0 610.3
Canada 163.0 169.3 508.7 521.9
-------- -------- -------- --------
NET SALES $3,191.7 $3,298.7 $9,423.2 $9,797.3
======== ======== ======== ========
Operating Income:
United States $ 156.3 $ 154.7 $ 499.3 $ 404.1
Europe 78.1 62.4 276.6 233.7
Latin America 52.4 65.4 167.6 205.5
Asia 18.1 21.6 43.7 71.9
Canada 15.6 14.6 46.4 40.3
-------- -------- -------- --------
OPERATING INCOME $ 320.5 $ 318.7 $1,033.6 $ 955.5
======== ======== ======== ========
</TABLE>
-7A-
<PAGE> 11
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED
INCOME STATEMENT
(All per share amounts are diluted)
Sales in the third quarter of 1998 were $3.19 billion, decreasing 3.2% from
$3.30 billion in the 1997 quarter. Income from continuing operations in the 1998
quarter was $185.0 million or $1.17 per share, compared to $184.8 million or
$1.16 per share in the 1997 period.
In the nine months, sales of $9.42 billion decreased 3.8% from $9.80
billion in 1997. Income from continuing operations was $595.5 million or $3.75
per share, increasing 13.1% from $526.7 million or $3.33 per share in 1997.
Net income in the quarter of $185.0 million or $1.17 per share decreased
4.7% from $194.1 million or $1.22 per share in the 1997 quarter. Net income in
the nine months of $560.8 million or $3.53 per share increased slightly from
$556.7 million or $3.52 per share in the 1997 period. Net income reflected the
discontinued operations of the oil transportation segment, as discussed below.
Worldwide tire unit sales in the third quarter rose 2.5% from 1997's
levels. Domestic volume increased 2.4% and international unit sales increased
2.6% in the 1998 quarter. Replacement unit sales were 6.3% higher than in the
1997 quarter. Original equipment unit sales decreased due primarily to adverse
economic conditions in Latin America and Asia. Unit sales in the first nine
months of 1998 increased 1.7% from the 1997 period, with domestic units up 2.3%
and international units up 1.0%.
Revenues decreased in the quarter and nine months due primarily to the
strengthening of the U.S. dollar versus international currencies. The Company
estimates that versus 1997, currency movements adversely affected revenues in
1998 by approximately $110 million in the third quarter and $385 million in the
nine months. In addition, revenues decreased due to continued worldwide
competitive pricing pressures, lower tire unit sales in Latin America and Asia,
lower unit sales of other automotive and industrial rubber products and strikes
in the U.S. against General Motors, which strikes ended prior to September 30,
1998.
Operating income was also reduced by the adverse affect of currency
movements versus 1997. The Company estimates the impact to be approximately $15
million in the quarter and $50 million in
-8-
<PAGE> 12
the nine months. In addition, the transition to seven-day operations at certain
North American tire production facilities and the strike against General Motors
reduced operating income.
The Company is unable to predict the impact of currency fluctuations on its
sales and operating income in future periods. If the dollar continues to
strengthen, reported sales in future periods are likely to be unfavorably
impacted. The continuing economic downturns in Asia and Latin America are
expected to adversely affect the Company's sales and operating income in future
periods.
The following table presents cost of goods sold (CGS) and selling, general
and administrative expense (SAG) as a percent of sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CGS 77.4% 76.9% 76.3% 76.7%
SAG 14.8 14.1 14.7 14.2
</TABLE>
Cost of goods sold was favorably impacted in both 1998 periods by lower raw
material costs, the effects of ongoing cost containment measures and improved
productivity. CGS was adversely affected by costs associated with the transition
to seven-day operations, and a second quarter tire recall charge of $5.0 million
($3.3 million after tax or $.02 per share).
SAG decreased in the nine months, but was higher in the quarter due in part
to acquisitions and costs associated with software reengineering. SAG increased
as a percent to sales in both 1998 periods due primarily to lower revenues.
Interest expense rose in 1998 due primarily to higher debt levels incurred
to fund acquisitions and support increased working capital levels.
Other income and expense in 1998 included third quarter gains on
dispositions of real estate totaling $53.2 million ($32.0 million after tax or
$.20 per share). In addition, 1998 included a first quarter gain on an asset
sale totaling $61.1 million ($37.9 million after tax or $.24 per share). The
1998 second quarter included a charge of $17.4 million ($11.4 million after tax
or $.07 per share) for the settlement of several related lawsuits involving
employment matters in Latin America. For further discussion, refer to the note
to the financial statements, Other (Income) and Expense.
U.S. and foreign taxes on income in 1998 reflected a reduction in the
Company's estimated annual effective tax rate to 27.6%, as the Company continued
to benefit from strategies which allowed it to manage global cash flows and
minimize tax expense.
-9-
<PAGE> 13
On July 30, 1998 the Company completed the sale of substantially all of the
assets and liabilities of its oil transportation business segment. The loss on
the sale, net of income from operations during 1998, totaled $34.7 million after
tax or $.22 per share. This transaction has been accounted for as a sale of
discontinued operations, and accordingly, the accompanying financial information
has been restated where required. For further information, refer to the note to
the financial statements, Discontinued Operations.
RATIONALIZATIONS
During 1998, the Company continued to implement the 1997 and 1996
rationalization programs. The following reflects the activity and progress of
those programs in the first nine months of 1998.
1997 Program. During the first nine months of 1998, approximately 900 associates
were released at a cost of approximately $26 million. The Company plans to
release approximately 1,700 more associates and had reserved $63.1 million for
that cost at September 30, 1998.
Rationalization costs, other than for associate-related costs of $119.1
million were recorded, of which $56.8 million were incurred through September
30, 1998.
During the first nine months of 1998, approximately $50.5 million was
charged to the reserve and $29.7 million was reversed ($22 million in respect of
withdrawal of support for Formula 1 racing and $7.7 million for plant downsizing
and closure activities that were changed). At September 30, 1998, the remaining
balance of the reserve was $32.6 million. The Company expects that the major
portion of the actions will be completed during 1999 with the balance to be
completed in 2000.
1996 Program. During the first nine months of 1998, approximately 70 associates
were released at a cost of approximately $9 million. The Company plans to
release approximately 400 more associates under the plan and had reserved $18.5
million for that cost at September 30, 1998, compared to $27.5 million at
December 31, 1997.
Rationalization costs, other than for associate-related costs, of $35.2
million were recorded, of which $20.7 million were incurred through September
30, 1998.
During the first nine months of 1998, approximately $7.6 million was
charged to the reserve. The remaining balance of these provisions at September
30, 1998 totaled $14.5 million. The Company plans to substantially complete
these plans in 1999.
For further information, refer to the note to the financial statements,
Rationalizations.
-10-
<PAGE> 14
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer program
that has date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a temporary inability to
process transactions or engage in normal manufacturing or other business
activities.
The Company, on a coordinated basis and with the assistance of IBM and
other consultants, is addressing the Year 2000 Issue. The Company has
inventoried and assessed all date sensitive technical infrastructure and
information and transaction processing computer systems ("I/T Systems") and
determined that a substantial portion of its software and some hardware must be
modified or replaced. Plans are being implemented to correct and test all
affected I/T Systems, with priorities assigned based on the importance of the
activity. The Company has also inventoried and assessed its manufacturing and
other operating systems that may be date sensitive ("Process Systems"),
including those that use embedded technology such as micro-controllers and
micro-processors. The Company has identified substantially all of the software
and hardware installations that will be necessary to achieve Year 2000
compliance and has made substantial progress in repairing the existing and
acquiring and installing the new I/T Systems and Process Systems necessary to
achieve Year 2000 compliance.
The Company monitors its Year 2000 compliance efforts with respect to I/T
Systems and Process Systems in three phases: (1) the identification and
inventory of date sensitive transactions, processes and systems (the "Inventory
Phase"), (2) the determination of repairs and replacements required, if any,
through testing, analysis and design (the "Analysis Phase"), and (3) the repair
or acquisition, installation and testing of Year 2000 compliant systems (the
"Remediation Phase"). All I/T Systems and Process Systems are scheduled to have
been repaired or acquired and installed, tested and determined to be Year 2000
compliant by November of 1999.
The Company has completed the Inventory Phase and the Analysis Phase, and
substantially completed the Remediation Phase, in respect of the critical I/T
Systems, including its order entry, shipping and billing systems and technical
infrastructure, and the critical Process Systems located in its tire
manufacturing facilities. The following table indicates the Company's progress
in its Year 2000 compliance program.
-11-
<PAGE> 15
Estimated Percentage of Year 2000 Compliance Activity Completed:
<TABLE>
<CAPTION>
Inventory Phase Analysis Phase Remediation Phase
Percentage Completed at Percentage Completed at Percentage Completed at
12/31/97 9/30/98 12/31/97 9/30/98 12/31/97 9/30/98
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
I/T Systems 75% 100% 50% 100% 25% 60%
Process Systems 25% 100% 10% 90% 0% 57%
</TABLE>
The cost of repairing the Company's existing I/T Systems that will be
modified in order to achieve Year 2000 compliance is estimated to be $80 million
to $100 million, including the $16 million expended in 1997 and the
approximately $30 million expended during the first nine months of 1998. The
remaining $34 million to $54 million will be spent during the balance of 1998
and 1999 as the Company completes the repair, installation and testing of
software and hardware and, in a few instances, the purchase and installation of
new hardware. All of the costs of repairing such existing I/T Systems will be
for consulting fees and software and hardware modifications, which costs have
been and will be expensed in the period incurred. The cost of new hardware has
been and will be capitalized.
In addition, for several years the Company, with the assistance of
PricewaterhouseCoopers LLP and other consultants, has also been designing,
acquiring, and installing various business transactions processing I/T Systems.
The software and hardware purchased and installed in connection with these new
I/T Systems in each case provide significant new functionality and, in some
instances, will also replace non-compliant I/T Systems with new Year 2000
compliant I/T Systems. Due to the integrated nature of these I/T Systems
enhancement projects, it is not practicable to segregate the costs associated
with the elements of these new I/T Systems that may have been accelerated to
facilitate Year 2000 compliance. The Company estimates that prior to January 1,
2000 it will have spent approximately $205 million to $240 million for
consulting, software and hardware costs incurred in connection with the I/T
Systems enhancement projects in process since 1996, of which amount
approximately $115 million has been expended through September 30, 1998,
including approximately $92 million during the first nine months of 1998. The
Company anticipates that costs incurred in respect of such projects will be
approximately $90 million to $125 million during the balance of 1998 and 1999.
Through September 30, 1998, approximately $15 million of these costs have been
expensed and $100 million of these costs have been capitalized. Substantially
all of the remaining consulting, software and hardware costs for these I/T
System enhancement projects will be capitalized.
-12-
<PAGE> 16
The Company is modifying or replacing and testing its Process Systems at an
anticipated cost of between $25 million and $30 million, substantially all of
which is for the acquisition of replacement systems. The cost of the Process
Systems has been and will be capitalized. Through September 30, 1998, the cost
of Process Systems installed by the Company has totaled $5 million, all of which
was incurred during 1998.
The Company's Year 2000 compliance cost (including the cost of all I/T
Systems enhancement projects) are expected to total approximately $310 million
to $370 million, of which amount $166 million has been expended through
September 30, 1998. All Year 2000 costs have been and will be funded from
operations.
For 1998, costs for repairing existing I/T Systems for Year 2000 compliance
is expected to be approximately 12% of Company's budget for information
technology and it is expected that such Year 2000 compliance efforts will
represent approximately 9% of the Company's information technology budget during
1999. The total cost of repairing existing I/T Systems and of the I/T Systems
enhancement projects is expected to represent 47% of the Company's information
technology budget during 1998 and will represent approximately 33% of its 1999
information technology budget.
While a few information technology projects have been deferred or
reprioritized, the impact of any delays in implementing these projects due to
Year 2000 compliance efforts has not affected, and is not expected to affect,
the Company's financial condition or to have any significant impact on its
results of operations during the fourth quarter of 1998 or thereafter.
The Company has surveyed its significant suppliers to determine the extent
to which the Company may be vulnerable to their failure to correct their own
Year 2000 issues. Based on responses to its survey and other communications the
Company is able to assess the Year 2000 readiness of approximately 5% of its
significant suppliers. Failure of the Company's significant trading partners to
address Year 2000 issues could have a material adverse effect on the Company's
operations, although it is not possible at this time to quantify the amount of
revenues and profits that might be lost, or the costs that could be incurred by
the Company.
In addition, parts of the global infrastructure, including national banking
systems, electrical power, transportation facilities, communications and
governmental activities, may not be fully functional after 1999. Infrastructure
failures could significantly reduce the Company's ability to manufacture its
products at affected locations and its ability to serve its customers as
effectively as they are now being served. The Company reviews available
information, including governmental and industry reports, regarding elements of
the global infrastructure
-13-
<PAGE> 17
that may affect its operations, to evaluate their expected year 2000 readiness.
While the Company believes its efforts to address the Year 2000 Issue will
be successful in avoiding any material adverse effect on the Company's
operations or financial condition, it recognizes that failing to resolve Year
2000 Issues on a timely basis would, in a "most reasonably likely worst case
scenario", significantly limit its ability to manufacture and distribute certain
of its products for a period of time, which is most likely to arise in the event
of the failure of one or more significant suppliers or essential components of
the global infrastructure, such as power sources. The Company is not able to
estimate its lost revenues, lost profits and costs incurred in the event of the
occurrence of the "most reasonably likely worst case scenario." If the Company's
systems are not Year 2000 compliant in a timely manner, the Company may also
incur liability for breach of contract or other harm. It is not possible at this
time to estimate either the risk of incurring any such liability or the nature
or amount of any such liability.
The Company has started its contingency planning for its critical
operational areas that might be affected by the Year 2000 Issue if its
compliance is delayed. In early 1999, the Company will also review the extent to
which contingency plans may be required for any suppliers, components of the
global infrastructure or other third parties that fail to achieve Year 2000
compliance. While only limited portions of the Company's contingency planning
had been undertaken at September 30, 1998, the Company's contingency plans are
expected to be completed by June 30, 1999. The contingency plans will include
identification of critical processes, risk assessment and response techniques in
the event of a system failure. Planned responses to system failures include
emergency response teams designed to produce prompt corrective action,
identification of alternate sources of supply, manual processing of
transactions, manual control of production processes and the stock piling of raw
materials and finished goods in those instances where a high risk of a supply
failure is suspected. In certain cases, especially global infrastructure
failures, there may be no practical alternative course of action available to
the Company that will permit resumption of an interrupted business activity.
The foregoing discussion regarding Year 2000 project timing, effectiveness,
implementation and costs are based on management's current evaluation using
available information. Factors that might cause material changes include, but
are not limited to, the availability of key Year 2000 personnel, the readiness
of third parties, and the Company's ability to respond to unforeseen Year 2000
complications.
-14-
<PAGE> 18
THE EURO
Effective January 1, 1999 member states of the European Economic and
Monetary Union will convert to a common currency known as the Euro.
Modifications to certain of the Company's information systems software were
required in connection with this conversion. The Company has completed these
modifications at a nominal cost, and does not anticipate that the conversion to
the Euro will have any significant operational impact. Additionally, the Company
does not expect the conversion to the Euro to have a material impact on results
of operations, financial position or liquidity of its European businesses.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 requires all derivatives to be recognized as
either assets or liabilities on the balance sheet and be measured at fair value.
Changes in such fair value are required to be recognized in earnings to the
extent the derivatives are not effective as hedges. SFAS 133 is effective for
fiscal years beginning after June 15, 1999, and is effective for interim periods
in the initial year of adoption. At the present time the Company is studying the
financial statement impact of the adoption of SFAS 133.
SEGMENT INFORMATION
Segment operating income in the third quarter of 1998 was $320.5 million,
increasing slightly from $318.7 million in the 1997 quarter. Segment operating
margin rose to 10.0% of sales from 9.7% in the 1997 period.
Segment income in the 1998 third quarter included $53.2 million of gains on
asset sales. Gains were recorded totaling $34.5 million on the sale of five
warehouses in North America, $9.6 million on the sale of land in Asia, $3.6
million on the sale of land in Latin America and $5.5 million on the sale of the
Company's former blimp base in Houston, Texas.
In the nine months, segment operating income was $1.03 billion, increasing
8.2% from $955.5 million in the 1997 period. Segment operating margin rose to
11.0% of sales from 9.8% in the 1997 period.
In addition to the previously mentioned third quarter gains on asset sales
in 1998, a gain of $61.1 million on the sale of the Calhoun, Georgia latex
processing facility was recorded in the first quarter of 1998. Segment income in
1998 was also increased by the second quarter reversal of $29.7 million of
accrued costs related to Formula 1 racing and production rationalization in
North America, but was reduced by a second quarter charge of $17.4 million
related to the settlement of the lawsuits in Latin America.
-15-
<PAGE> 19
INDUSTRY SEGMENTS
TIRES
Sales in the third quarter of 1998 of $2.78 billion decreased 2.4% from
$2.85 billion in the 1997 period. In the nine months, sales of $8.14 billion
decreased 3.4% from $8.43 billion in 1997.
Revenues decreased in the quarter and nine months due primarily to the
strengthening of the U.S. dollar versus international currencies, worldwide
competitive pricing pressures and lower tire unit sales in Latin America and
Asia. In addition, strikes in the U.S. against General Motors adversely affected
revenues in the third quarter.
The following table presents changes in Company tire unit sales compared to
the 1997 period:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
--------------------- ---------------------
<S> <C> <C>
U.S. 2.4% 2.3%
International 2.6 1.0
Worldwide 2.5 1.7
</TABLE>
Third quarter unit sales in the mature markets of North America and Europe
were 6.1% higher than the 1997 period, increasing 9.8% in the replacement market
while decreasing 3.0% in the original equipment market. Third quarter
replacement unit sales in the emerging markets of Latin America and Asia
decreased 7.8% from the 1997 period, and original equipment unit sales were 28%
lower.
Tire segment operating income in the third quarter of 1998 was $281.4
million, increasing 6.6% from $264.0 million in the 1997 period. Operating
margin rose to 10.1% of sales from 9.3%.
In the nine months, operating income of $831.3 million increased 4.4% from
$796.0 million in 1997. Operating margin rose to 10.2% of sales from 9.4%.
Operating income in both periods benefited from lower raw material costs,
improved productivity and the effects of cost containment measures. Operating
income increased in the quarter due primarily to the inclusion of gains on asset
sales totaling $52.2 million. The 1998 nine months also included gains of $29.7
million from the reversal of accrued Formula 1 and rationalization costs.
Operating income in 1998 was reduced by the effects of currency translations,
the transition to seven-day operations at certain production facilities, the
consolidation of warehouse operations and software reengineering costs. In
addition, operating income in 1998 was reduced by $15.6 million of the charge
for the settlement of the employment lawsuits in Latin America, a $5.0 million
charge for the tire recall, and the impact of the
-16-
<PAGE> 20
strike against General Motors.
GENERAL PRODUCTS
Sales in the third quarter of 1998 of $411.6 million decreased 8.4% from
$449.4 million in the 1997 period. Operating income in the third quarter of 1998
was $39.1 million, decreasing 28.4% from $54.7 million in the 1997 period.
Operating margin decreased to 9.5% of sales from 12.2%. Operating income in the
1998 quarter included a gain of $1.0 million from asset sales.
In the nine months, sales of $1.28 billion decreased 6.3% from $1.37
billion in 1997. Operating income of $202.3 million increased 26.9% from $159.5
million in 1997. Operating margin rose to 15.8% of sales from 11.7%. The 1998
nine months included the gain of $61.1 million on the sale of the Calhoun,
Georgia latex processing facility and a $1.8 million charge for the Latin
American lawsuit settlement.
Sales and operating income also reflect the absence of both the Jackson,
Ohio automotive molded plastics plant, which was sold in the third quarter of
1997, and the Calhoun facility. Together these businesses accounted for sales of
$14.1 million and operating income of $1.4 million in the third quarter of 1997.
In the 1997 nine months, these businesses accounted for sales of $72.2 million
and operating income of $7.8 million.
Revenues in engineered products decreased in the quarter and nine months
due primarily to adverse economic conditions in Latin America. Operating income
was lower in both 1998 periods due to lower sales volume and competitive pricing
conditions.
Sales in chemical products decreased in the quarter and nine months, and
operating income was lower in the quarter. Chemical results reflected reduced
unit volume and competitive pricing conditions. Operating income increased in
the nine months due to the gain on the sale of the Calhoun facility.
GEOGRAPHIC SEGMENTS
UNITED STATES
Sales in the third quarter of 1998 of $1.74 billion decreased 1.8% from
$1.77 billion in the 1997 period. Operating income in the third quarter of 1998
was $156.3 million, increasing 1.0% from $154.7 million in the 1997 period.
Operating margin increased to 9.0% of sales from 8.7%.
In the nine months, sales of $5.11 billion decreased 1.0% from $5.16
billion in 1997. Operating income of $499.3 million increased 23.6% from $404.1
million in 1997. Operating margin rose to 9.8% of sales from 7.8%.
-17-
<PAGE> 21
Operating income in 1998 included the first quarter gain of $61.1 million
on the sale of the Calhoun, Georgia latex processing facility, $7.7 million of
the second quarter gain related to the reversal of accrued costs related to
production rationalization, and third quarter gains from asset sales totaling
$40.0 million.
Tire unit sales increased in both 1998 periods. Revenues in the quarter and
nine months decreased and operating income was adversely affected by competitive
tire pricing pressures, reduced volume in chemical products, the strike against
General Motors and the absence of the Jackson and Calhoun facilities. Operating
income in both 1998 periods increased due to gains on asset sales. Operating
income in 1998 benefited from lower raw material costs, improved productivity,
and the effects of cost containment measures. Operating income in the 1998 nine
months was reduced by the previously mentioned charge for the tire recall, costs
associated with the transition to seven-day operations at certain production
facilities and the effects of the strike against General Motors.
EUROPE
Sales in the third quarter of 1998 of $802.5 million increased 6.9% from
$750.5 million in the 1997 period. Operating income in the third quarter of 1998
was $78.1 million, increasing 25.2% from $62.4 million in the 1997 period.
Operating margin increased to 9.7% of sales from 8.3%.
In the nine months, sales of $2.30 billion decreased 0.7% from $2.32
billion in 1997. Operating income of $276.6 million increased 18.4% from $233.7
million in 1997. Operating margin rose to 12.0% of sales from 10.1%.
Revenues increased in the quarter due primarily to higher tire unit sales
resulting in part from acquisitions made in 1998. Revenues were adversely
affected in both 1998 periods by the effects of currency translation and
competitive pricing. Operating income in both periods reflected higher tire unit
volume, productivity improvements, lower raw material costs and the effects of
cost containment measures. Operating income included a $15.1 million second
quarter gain resulting from favorable experience in implementation of the
Company's program to exit the Formula 1 racing series.
LATIN AMERICA
Sales in the third quarter of 1998 of $337.3 million decreased 16.3% from
$403.2 million in the 1997 period. Operating income in the third quarter of 1998
was $52.4 million, decreasing 20.0% from $65.4 million in the 1997 period.
Operating margin decreased to 15.5% of sales from 16.2%.
In the nine months, sales of $1.08 billion decreased 9.2% from $1.19
billion in 1997. Operating income of $167.6 million
-18-
<PAGE> 22
decreased 18.5% from $205.5 million in 1997. Operating margin decreased to 15.5%
of sales from 17.3%.
Operating income in 1998 included the third quarter gain of $3.6 million on
the sale of real estate, the second quarter charge of $17.4 million for the
anticipated settlement of employment-related lawsuits, and a second quarter gain
of $2.8 million resulting from the Formula 1 exit program.
Sales and operating income decreased in both 1998 periods due to lower unit
sales of tires and engineered products, the effects of currency translations and
competitive pricing pressures. Sales and operating income in Latin America in
future periods are likely to be adversely affected by the expected continuing
unfavorable economic conditions in the region.
ASIA
Sales in the third quarter of 1998 were $146.8 million, decreasing 27.1%
from $201.6 million in the 1997 period. Operating income in the third quarter of
1998 was $18.1 million, decreasing 16.0% from $21.6 million in the 1997 period.
Operating margin increased to 12.3% of sales from 10.7%. Operating income in the
1998 third quarter included a gain on the sale of real estate totaling $9.6
million.
In the nine months sales were $426.0 million, decreasing 30.2% from $610.3
million in 1997. Operating income was $43.7 million, decreasing 39.2% from $71.9
million in 1997. Operating margin decreased to 10.3% of sales from 11.8%.
Operating income in the 1998 second quarter included a gain of $2.8 million
resulting from the Formula 1 exit program.
Sales and operating income were adversely affected in both 1998 periods by
the effects of currency translation and lower tire unit sales resulting from the
severe economic downturn in the region and competitive pricing conditions. Sales
and operating income in Asia in future periods are likely to be adversely
affected by the expected continuing unfavorable economic conditions in the
region.
Sales and operating income of the Asia segment reflect the results of the
Company's majority-owned tire business and other operations in the region,
principally the engineered products and natural rubber businesses. In addition,
the Company owns a 50% interest in South Pacific Tyres Ltd. (SPT), the largest
tire manufacturer, marketer and exporter in Australia and New Zealand. Results
of operations of SPT are not reported in segment results, and are reflected in
the Company's consolidated statement of income using the equity method.
-19-
<PAGE> 23
The following table presents the sales and operating income of the
Company's Asian segment together with 100% of the sales and operating income of
SPT:
<TABLE>
<CAPTION>
(In millions) Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales:
Asia Segment $ 146.8 $ 201.6 $ 426.0 $ 610.3
SPT 147.0 180.3 470.6 568.1
-------- -------- -------- --------
Total $ 293.8 $ 381.9 $ 896.6 $1,178.4
Operating Income:
Asia Segment $ 18.1 $ 21.6 $ 43.7 $ 71.9
SPT 12.1 12.7 35.1 47.8
-------- -------- -------- --------
Total $ 30.2 $ 34.3 $ 78.8 $ 119.7
</TABLE>
CANADA
Sales in the third quarter of 1998 were $163.0 million, decreasing 3.8%
from $169.3 million in the 1997 period. Operating income of $15.6 million in the
third quarter of 1998 increased 7.2% from $14.6 million in the 1997 period.
Operating margin increased to 9.6% of sales from 8.6%.
In the nine months, sales of $508.7 million decreased 2.5% from $521.9
million in 1997. Operating income was $46.4 million, increasing 15.2% from $40.3
million in 1997. Operating margin increased to 9.1% of sales from 7.7%.
Sales decreased in the quarter and nine months due primarily to the effects
of currency translations. Operating income increased in both 1998 periods due to
higher tire unit sales, lower raw material costs, the effects of ongoing cost
containment measures and a second quarter gain of $1.3 million resulting from
the lower than expected costs of the Formula 1 exit program.
-20-
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $310.4 million during the first
nine months of 1998, as reported on the Consolidated Statement of Cash Flows.
Working capital requirements increased for accounts receivable, inventories and
payables.
Net cash used in investing activities was $286.4 million during the first
nine months of 1998. Capital expenditures were $490.6 million, primarily for
plant modernizations and expansions and new tire molds.
<TABLE>
<CAPTION>
(In millions) Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Capital Expenditures $199.9 $146.9 $490.6 $377.6
Depreciation 121.4 114.8 351.8 343.6
</TABLE>
Other investing activities in 1998 included the acquisition of a majority
interest in tire manufacturers in Slovenia, India and Japan and a tire and
engineered products manufacturing and distribution business in South Africa. In
addition, investing activities in 1998 included the divestitures of the oil
transportation segment, the Calhoun, Georgia latex processing facility,
distribution facilities in North America and other miscellaneous real estate.
The decrease in minority equity in subsidiaries on the Consolidated Balance
Sheet was due primarily to the Company's program to increase ownership in
certain subsidiaries. The decrease in property, plant and equipment and other
assets on the Consolidated Balance Sheet was due primarily to the sale of the
net assets of the oil transportation segment.
Net cash provided by financing activities was $503.0 million during the
first nine months of 1998, which was used primarily to support the previously
mentioned working capital requirements.
<TABLE>
<CAPTION>
(Dollars in millions) 9/30/98 12/31/97 9/30/97
-------- -------- --------
<S> <C> <C> <C>
Consolidated Debt $2,169.1 $1,351.2 $1,457.2
Debt/Debt+Equity 37.2% 28.5% 29.2%
</TABLE>
During the first quarter of 1998, the Company issued domestic long term
fixed rate debt totaling $250 million. In addition, the consolidation of the
Indian subsidiary increased debt by approximately $103 million.
During the first nine months of 1998, 1,500,000 shares of the Company's
Common Stock were repurchased by the Company at an average cost of $56.82 per
share.
20A
<PAGE> 25
Substantial short term and long term credit sources are available to the
Company globally under normal commercial practices. At September 30, 1998 the
Company had short term uncommitted credit arrangements totaling $1.7 billion, of
which $.6 billion were unused. The Company also had available long term credit
arrangements at September 30, 1998 totaling $2.1 billion, of which $1.0 billion
were unused.
In July 1998, the Company's revolving credit facility agreements,
consisting of a $900 million three year revolving credit facility and a $300
million 364-day revolving credit facility, were extended and reduced to a total
facility of $1.0 billion. Each of the facility agreements are with 24 domestic
and international banks. Effective July 13, 1998, the $900 million facility,
which would have matured on July 14, 2001, was reduced to $700 million and
extended to provide that the Company may borrow at any time until July 13, 2003,
when the commitment terminates and any outstanding loans mature. No other terms
of the facility were changed. The Company pays currently a commitment fee of 10
basis points on the entire amount of the commitment and would pay a usage fee of
20 basis points on amounts borrowed. The $300 million 364-day credit facility
agreement was extended to permit the Company to borrow until July 12, 1999, on
which date the facility commitment terminates, except as it may be extended on a
bank by bank basis. If a bank does not extend its commitment if requested to do
so, the Company may obtain from such bank a two year term loan up to the amount
of such bank's commitment. The Company pays currently a commitment fee of 8
basis points on the entire amount of the commitment and would pay a usage fee of
22 basis points on amounts borrowed. There were no borrowings outstanding under
these agreements at September 30, 1998.
Funds generated by operations, together with funds available under existing
credit arrangements, are expected to exceed the Company's currently anticipated
funding requirements.
The Company utilizes financial instruments in managing interest rate and
currency exchange risks. Refer to the section entitled 'Quantitative and
Qualitative Disclosures About Market Risk'.
20B
