Accounting problems have deflated
The struggling tire company announced late Wednesday that fresh accounting problems will delay its amended annual report and, more important, put a hold on a big securities offering scheduled for this month. The company had planned to raise more than $325 million -- and, some speculated, up to $1 billion -- in the capital markets by year-end to help finance a turnaround in its weak, but critical, North American business.
Instead, Goodyear must now wait until next year to file its annual report due to "possible improper accounting issues" detected at its European unit. The company -- which restated past financial statements just last month due to $84.7 million in accounting mistakes -- said on Wednesday that it has not yet determined whether the new accounting issues will have a material impact on its financial statements. In any case, though, the company won't be able to sell stock or bonds until it files with regulators.
Goodyear already faces an informal probe by the
Securities and Exchange Commission
, as well as a shareholder lawsuit, due to the prior accounting problems. The company blamed the errors on "a material weakness in internal controls that required strengthening procedures for account reconciliation, internal reporting and monitoring."
Goodyear shares, which dropped 9% the day the original mistakes were announced in October, slid more than 10% in heavy early action Thursday before regaining some ground to trade at $6.99, down 5%. The plunge came just days after Goodyear's stock and bonds began to rally over optimism that the big debt offering would salve the cash-strapped company.
UBS analyst Saul Rubin, who helped launch that rally with an upgrade last week, is now having second thoughts.
"We recently upgraded Goodyear on the premise a sizable debt offering was close at hand and would inject extra life into the company," wrote Rubin, who raised Goodyear from reduce to neutral last week. "In our opinion, there's little doubt Goodyear needs to tap the capital markets soon to be able to run operations effectively. ... With the bond offering on ice -- perhaps in jeopardy -- we will reconsider our position."
The company, which swung to a big quarterly loss in the latest period, agreed with union workers in September to raise at least $250 million in debt and $75 million in equity by Dec. 31 in order to finance its obligations and strengthen the company. It had planned to use at least half of that cash to pay down bank debt refinanced earlier this year.
The United Steelworkers of America -- the union that pushed the securities offering -- is entitled to strike if the deal falls through. However, the union issued a press release late Wednesday indicating that it will give the company a little breathing room.
"While we will be vigilant in protecting the rights of our members and retirees, acting precipitously would be inconsistent with the commitments the company made during the recent negotiations to revitalize Goodyear by investing in North American production," USWA International Vice President Andrew Palm stated. "We expect that the company will quickly resolve this situation and move on to complete their financing commitments in the near future."
Rubin is more pessimistic.
"Goodyear cannot go into the capital markets before the restated 10-K is filed," he wrote Thursday. "Even if the current review has few material financial consequences, there is no certainty that the window of opportunity to do a deal will remain open for much longer."
In the meantime, the company continues to bleed, as evidenced by last month's third-quarter earnings report. Even as sales jumped 11% from a year ago to a record $3.9 billion, the company -- dragged down by its troubled domestic business -- posted a loss of $106 million, or 60 cents a share. Year-ago profits were $32.7 million, or 20 cents a share.
Even so, the company insisted that its business is improving.
"Five of our businesses have achieved year-over-year segment operating income growth," CEO Robert Keegan said last month. And "North American Tire achieved its highest quarterly sales in two years."
But Moody's, for one, remained unimpressed. The ratings agency pushed Goodyear's credit further into junk territory just weeks after the company released its latest financial results.
Goodyear's "largest and most critical unit, North American Tire, continues to struggle," Moody's noted. "Despite five months of improvement in North American replacement tire volumes, early signs of improved revenue-per-tire, gains in the Goodyear and Dunlop brands and a favorable new labor contract, profitability remains elusive."
Moody's doubts that Goodyear can turn the unit around "until late 2004 at the earliest." In the meantime, Moody's noted, Goodyear faces significant cash obligations -- including a $270 million pension contribution -- in the coming year.
By now, Goodyear's management has come under significant fire for its inability to return the company to health. Wednesday's announcement, analysts believe, only hurt that leadership more.
"The potential emergence of a second, and distinct, accounting issue following November's restatement could sap investor confidence," wrote Morgan Stanley analyst Stephen Girsky, who has an equal-weight rating on the stock. "This announcement is likely to further depress Goodyear management's already low credibility with investors."
Rubin tends to agree.
"At this point, it is impossible to ascertain the materiality of this issue from a financial perspective," he wrote. "However, it cannot be good for the company's reputation."