-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UrVwkp+pWrKNp9tQVe2xRK9jO7vbLt8QcDGJIJasGeTMYO/6vwZ8Eez62OZJYltC kywFve9TbBXFK+yZwAlrUA== 0000950152-99-002153.txt : 19990322 0000950152-99-002153.hdr.sgml : 19990322 ACCESSION NUMBER: 0000950152-99-002153 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOODYEAR TIRE & RUBBER CO /OH/ CENTRAL INDEX KEY: 0000042582 STANDARD INDUSTRIAL CLASSIFICATION: TIRES AND INNER TUBES [3011] IRS NUMBER: 340253240 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-01927 FILM NUMBER: 99569023 BUSINESS ADDRESS: STREET 1: 1144 E MARKET ST CITY: AKRON STATE: OH ZIP: 44316 BUSINESS PHONE: 2167962121 MAIL ADDRESS: STREET 1: 1144 E MARKET ST CITY: AKRON STATE: OH ZIP: 44316 10-Q/A 1 THE GOODYEAR TIRE & RUBBER COMPANY 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 --------------------------------- 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- 3 THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS Unaudited
(In millions, except per share) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- 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 ========== ========== ========== ==========
The accompanying notes are an integral part of this financial statement. -1- 4 THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET Unaudited
(In millions) SEPTEMBER 30, DECEMBER 31, 1998 1997 ---------- ---------- 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 ========== ==========
The accompanying notes are an integral part of this financial statement. -2- 5 THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Unaudited
(In millions) Accumulated Other Comprehensive Income --------------------- Common Capital Retained Foreign Minimum Total Stock Surplus Earnings Currency Pension Shareholders' Translation Liability Equity -------- -------- -------- -------- -------- -------- 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 ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this financial statement. THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Unaudited
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 -------- -------- -------- -------- 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 ======== ======== ======== ========
The accompanying notes are an integral part of this financial statement. -3- 6 THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited
(In millions) NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 -------- -------- 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 ======== ========
The accompanying notes are an integral part of this financial statement. -4- 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:
(In millions, except per share) THREE NINE MONTHS ENDED MONTHS ENDED SEPT. 30, SEPT. 30, 1998 1997 1998 1997 ------ ------ ------ ------ 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 ====== ====== ====== ======
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- 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:
(In millions) Recorded Incurred -------- -------- 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
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:
(In millions) Recorded Incurred -------- -------- 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
-6- 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:
(In millions) THREE MONTHS ENDED SEPT. 30 NINE MONTHS ENDED SEPT. 30 ----------------------------- ------------------------------- Asia Asia Segment SPT Total Segment SPT Total ------- ------ ------ ------- ------ -------- NET SALES: 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
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- 10 THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES SEGMENT INFORMATION Unaudited
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 -------- -------- -------- -------- 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 ======== ======== ======== ========
-7A- 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- 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:
Three Months Ended Nine Months Ended Sept. 30, Sept. 30, 1998 1997 1998 1997 ---- ---- ---- ---- CGS 77.4% 76.9% 76.3% 76.7% SAG 14.8 14.1 14.7 14.2
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- 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- 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- 15 Estimated Percentage of Year 2000 Compliance Activity Completed:
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 -------- ------- -------- ------- -------- ------- I/T Systems 75% 100% 50% 100% 25% 60% Process Systems 25% 100% 10% 90% 0% 57%
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- 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- 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- 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- 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:
Three Months Ended Nine Months Ended Sept. 30 Sept. 30 --------------------- --------------------- U.S. 2.4% 2.3% International 2.6 1.0 Worldwide 2.5 1.7
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- 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- 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- 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- 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:
(In millions) Three Months Ended Nine Months Ended Sept. 30, Sept. 30, 1998 1997 1998 1997 -------- -------- -------- -------- 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
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- 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.
(In millions) Three Months Ended Nine Months Ended Sept. 30, Sept. 30, 1998 1997 1998 1997 ------ ------ ------ ------ Capital Expenditures $199.9 $146.9 $490.6 $377.6 Depreciation 121.4 114.8 351.8 343.6
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.
(Dollars in millions) 9/30/98 12/31/97 9/30/97 -------- -------- -------- Consolidated Debt $2,169.1 $1,351.2 $1,457.2 Debt/Debt+Equity 37.2% 28.5% 29.2%
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 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 -----END PRIVACY-ENHANCED MESSAGE-----