Goodyear to re-state financial results

Goodyear is to re-state its financial results for the years 1998-2002 and for the first two quarters of this year. This is due to the implementation of a new accounting system in 1999 and errors in inter-company billing systems. The adjustments will not affect Goodyear’s cash position, nor its access to credit facilities. Another effect is that Goodyear is providing estimated 3Q results, rather than a detailed announcement. The estimate is for a loss of between $90-$115 million on sales of $3.9 billion and this figure includes rationalisation charges of $56 million for a factory closure and employment reductions in North America and Europe.

Goodyear Tire & Rubber was due to release detailed financial results for the third quarter today (23rd October). Instead the company announced that it was going to re-state its financial results for the first two quarters of this year – and also for annual accounts going back to 1998.

The reasons given were “adjustments resulting from the implementation of an enterprise resource planning accounting system in 1999 and errors in inter-company billing systems.” As a result of these errors, Goodyear’s net income may have been over-stated by up to $100 million – a hefty sum, but, as one industry analyst pointed out, $100 million over a four-year period for a company the size of Goodyear is not that enormous a figure. In fact, the re-statement could reduce Goodyear’s net loss for the first half of the year, as certain charges included during these periods will now be moved back to earlier years.

A spokesman for Goodyear said that Goodyear found the errors when it was reviewing various accounts, but there were no details on exactly who discovered the errors, nor how they happened, nor whether anybody has been disciplined. More details are expected to become available in November, when Goodyear will file the amended annual and quarterly reports.

The company spokesman was keen to point out that the adjustments will have no impact on Goodyear’s net cash position, neither would they affect its access to credit facilities, which were re-negotiated earlier this year to give Goodyear more time to repay loans of around $3 billion.

One area that might be affected is the company’s share price (currently $6.83) as investors react to the news of the re-statement. As the news was released after the markets had closed, no immediate reaction was possible and industry watchers will wait to see what happens when the markets re-open.

Another effect of the re-statement was the postponement of third quarter trading figures. Instead of the planed conference call and detailed figures, Goodyear gave estimates of its 3Q performance, with the news that full results would be filed by mid-November.

The company expects a loss for 3Q of between $90-$115 million, or 51-66 cents a share. The fact that a loss is forecast will come as a surprise to nobody – it will be Goodyear’s 8th loss in the past twelve quarters – but the size of the loss caused some analysts to raise an eyebrow, with one before the announcement predicting a 14 cents-per-share-loss.

However, in mitigation, Goodyear points out that $56 million of this projected net loss is accounted for by a one-off charge for closing down a plant and in implementing employment reduction plans in North America and Europe. Some 1,360 associates will be laid off, resulting in an annual saving, says Goodyear, of $65 million. The loss figure also includes a charge for discontinued product liability of $50 million and a negative impact from currency exchanges of $10 million.

3Q results, adds Goodyear, will “reflect continued strong performance in our businesses outside North America.” A rather less charitable view is that the results reflect continued weakness inside North America, where Goodyear has been affected by a weak truck market and a weakness in private label business. The company also cites the high price of raw materials, but this is a problem facing every tyre manufacturer, not just Goodyear.

To ensure that something like the re-statement does not occur again, Goodyear says it is strengthening its accounting procedures and improving internal controls. We will have to wait to see if there is any lasting negative reaction to the news of the re-statement, but nobody is pretending that it is good news and is just another straw to add to Goodyear’s continuing burden of woes.