Goodyear posts narrower loss, sees "year of traction" after problems resolved

By Paul Deckelman

New York, May 19 - Goodyear Tire & Rubber Co. Inc. posted a narrower loss for the fourth quarter and for 2003 and expressed optimism Wednesday, now that an earnings restatement that caused it to delay its results by two months is behind it. The Akron, Ohio-based tiremaking giant also told investors and analysts on a conference call following the release of its results that its liquidity position is "substantial," helped by financing that it put in place during the just-completed quarter, and said it is in compliance with all financing covenants.

With the messy financial problems behind it, a new labor contract in place and brisk initial sales of its new Assurance brand premium tire, 2004 promises to be "a year of traction" for Goodyear, declared the company's chief financial officer, Robert W. Tieken, during the conference call.

Although the CFO and Goodyear's president, chairman and chief executive officer, Robert J. Keegan, declined to provide much in the way of specific guidance, the company did say the first quarter would be "strong" versus the year-earlier results.

Goodyear said that in the fourth quarter, it had a net loss of $434.4 million ($2.49 a share), substantially narrower than the year-ago net deficit of $1.2 billion ($6.96 a share). Goodyear reported sales of $3.91 billion for the 2003 fourth quarter, an increase of 11.6% from $3.51 billion in the 2002 fourth quarter.

For the full year, Goodyear's net loss was $802.1 million ($4.58 per share), versus a net loss of $1.2 billion ($7.35 per share) in 2002. Net sales for 2003 were a record $15.1 billion, an increase of 9.1 percent over $13.9 billion in 2002.

More earnings adjustments

Goodyear late last year revealed certain accounting irregularities, which forced the company to restate some earnings.

It said Wednesday that it had made $164.8 million in restatement adjustments, in addition to the $84.7 million of adjustments previously disclosed in the third quarter of 2003 and the $31.3 million in adjustments recorded in the second quarter of 2003. These adjustments include some $65 million announced back on April 12, as well as an additional adjustment of $100.1 million resulting from the company's reassessment of the discount rate used in valuing its obligations in respect to domestic pension and other post-retirement benefit plans.

The company said the total impact of the restatements, including the newly announced adjustments, increased the net loss by about $56.2 million for 2003; by $121.2 million for 2002, including a tax valuation allowance of $81.2 million; and by $50.5 million for 2001. The impact on years prior to 2001 was recorded as a $52.9 million reduction to retained earnings at Jan. 1, 2000.

New union contract to help earnings

Goodyear's bottom line will be helped, Keegan said by "a ground-breaking" new contract with the United Steel Workers union, which represents the company's unionized hourly employees; the pact, he said, will allow the company to cut over $450 million of labor costs over the next three years, with domestic headcount reduced by 1,100 through the union-sanctioned closing of its Huntsville, Ala. tire plant. Globally, he said, the company was able to reduce headcount by some 6,000 positions; Goodyear currently employs about 93,000 people worldwide, a reduction of about 25,000 positions over the past six years.

CFO Tieken said that Goodyear had interest expense of $77 million, which "reflects the higher on-balance-sheet debt that we have had in the last nine months of 2003," due to the replacement of off-balance-sheet accounts receivable financing in April last year.

3rd stage remains in debt plan

He said that "with bank agreements signed a year ago and two new debt facilities, we have completed the first two stages of our financial restructuring plan." The third stage, the executive said, would involve Goodyear continuing to extend its intermediate-term debt maturities and reducing overall leverage.

He noted that under the terms of the agreement with the union, Goodyear still has a commitment to increase capital by issuing $75 million of equity or equity-linked securities, "which we certainly intend to honor."

In the just-passed first quarter - for which Goodyear has not yet reported results, due to the delays in reporting previous quarters as a result of the restatements - "we took advantage of a relatively strong high yield market," by selling $650 million of new junk-rated bonds; Goodyear sold $450 million of 11% senior secured notes due 2011 and $200 million of senior secured floating-rate notes due 2011 in a deal that priced on Feb. 27. The company also upsized its asset-based loan facility by $650 million; the facility matures in 2006.

Goodyear used the proceeds of the twin financings to pay off its U.S. term loan early, thereby avoiding a milestone fee of $16 million. It also permanently reduced its U.S. revolving credit facility by $75 million. The remainder of the proceeds, Tieken said, will be used for general corporate purposes.

$2.1 billion liquidity

The CFO said that Goodyear has "substantial" liquidity, with a cash position at the end of March of $1.3 billion. Including available credit, total liquidity was nearly $2.1 billion. "Our position remains strong on a going-forward basis."

Goodyear plans to use some one of that cash to fulfill pension obligations; in 2003, he said, the underfunded position of the pension plan grew to $2.8 billion, even with a $707 million market gain on pension assets.

Tieken said recently passed legislation lowered the company's required 2004 domestic contribution to $160 million; including its international plans for overseas workers, the company's total pension contribution for 2004 will be around $210 million, down from the previously projected $250 million to $270 million. The domestic pension plans' obligations for 2005 will be in the neighborhood of $325 million -to-$350 million.

Company Treasurer Darren Wells told the conference call that Goodyear is in compliance with its financing covenants, including the requirement that as of the end of 2003 it have an EBITDA-to-interest coverage ratio of 2.25 x and that it maintain a minimum net worth of $2.8 billion. Wells said that both of those covenants had changed for 2004 as a result of provisions in the financing agreements, bringing the interest-coverage ratio down to 2.0 x and and lowering the net-worth covenant requirement to $2.5 billion.

He also noted that there was a third major financial requirement - that Goodyear maintain a maximum debt-to-EBITDA ratio of 4 x, and said the company was also in compliance there as well.

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