NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by The Goodyear Tire & Rubber Company (the “Company,” “Goodyear,” “we,” “us” or “our”) in accordance with Securities and Exchange Commission rules and regulations and generally accepted accounting principles in the United States of America ("US GAAP") and in the opinion of management contain all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014 (the “ 2014 Form 10-K”).

We are a party to shareholder agreements concerning certain of our less-than-wholly-owned consolidated subsidiaries. Under the terms of certain of these agreements, the minority shareholders have the right to require us to purchase their ownership interests in the respective subsidiaries if there is a change in control of Goodyear, a bankruptcy of Goodyear, or other circumstances. Accordingly, we have reported the minority equity in those subsidiaries outside of shareholders’ equity.

Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results expected in subsequent quarters or for the year ending December 31, 2015 .

Recently Issued Accounting Standards

In July 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update with new guidance on simplifying the measurement of inventory. Inventory within the scope of this update is required to be measured at the lower of its cost or net realizable value, with net realizable value being the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The standards update is effective prospectively for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact of adopting this standards update on our consolidated financial statements.

In April 2015, the FASB issued an accounting standards update with new guidance on whether a cloud computing arrangement includes a software license and the accounting for such an arrangement. If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for consistently with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the agreement should be accounted for as a service contract. The standards update is effective for fiscal years and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this standards update is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued an accounting standards update with new guidance on the presentation of debt issuance costs that requires all costs incurred to issue debt to be presented on the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The standards update is effective for fiscal years and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this standards update will not have a material impact on our consolidated financial statements.

In August 2014, the FASB issued an accounting standards update with new guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management must evaluate whether it is probable that known conditions or events, considered in the aggregate, would raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. If such conditions or events are identified, the standard requires management's mitigation plans to alleviate the doubt or a statement of the substantial doubt about the entity’s ability to continue as a going concern to be disclosed in the financial statements. The standards update is effective for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. The adoption of this standards update is not expected to impact our consolidated financial statements.

In May 2014, the FASB issued an accounting standards update with new guidance on recognizing revenue from contracts with customers. The standards update outlines a single comprehensive model for entities to utilize to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods and services. Additional disclosures will also be required to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB deferred the effective date of this standards update to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date

of fiscal years beginning after December 15, 2016. We are currently evaluating our significant contracts and assessing any impact of adopting this standards update on our consolidated financial statements.

Recently Adopted Accounting Standards

Effective January 1, 2015, we adopted an accounting standards update providing new guidance on the requirements for reporting a discontinued operation. The standards update allows only those disposals representing a strategic shift in operations with a major effect on the entity's operations and financial results to be reported as a discontinued operation. It also allows companies to have significant continuing involvement and continuing cash flows with the discontinued operations. Additional disclosures are also required for discontinued operations and individually material disposal transactions that do not meet the definition of a discontinued operation. The adoption of this standards update did not impact our consolidated financial statements.

Reclassifications and Adjustments

Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.

NOTE 2. COSTS ASSOCIATED WITH RATIONALIZATION PROGRAMS

In order to maintain our global competitiveness, we have implemented rationalization actions over the past several years to reduce high-cost manufacturing capacity and associate headcount. Rationalization actions initiated in the second quarter of 2015 included a plan to close our Wolverhampton, U.K. mixing and retreading facility and to transfer the production to other manufacturing facilities in Europe, Middle East and Africa ("EMEA") and a plan to transfer consumer tire production from our manufacturing facility in Wittlich, Germany to other manufacturing facilities in EMEA. We also initiated plans for selling, administrative and general expense ("SAG") headcount reductions in North America and EMEA.

The following table shows the roll-forward of our liability between periods:

The accrual balance of $108 million at June 30, 2015 is expected to be substantially utilized within the next 12 months, and includes $46 million related to the plan to exit the farm tire business in EMEA and the closure of one of our manufacturing facilities in Amiens, France and $27 million related to the plan to close our Wolverhampton, U.K. mixing and retreading facility.

Substantially all of the new charges for the three and six months ended June 30, 2015 and 2014 related to future cash outflows. Net current year plan charges for the three and six months ended June 30, 2015 include charges of $27 million related to the plan to close our Wolverhampton, U.K. mixing and retreading facility.

Net prior year plan charges for the three and six months ended June 30, 2015 include charges of $7 million and $19 million , respectively, for associate severance and idle plant costs related to the closure of one of our manufacturing facilities in Amiens, France and our exit from the farm business in EMEA. In addition, net prior year plan charges for the three and six months ended June 30, 2014 include charges of $14 million and $64 million , respectively, for associate severance and idle plant costs, partially offset by a pension curtailment gain of $2 million and $22 million , respectively, related to the closure of one of our manufacturing facilities in Amiens, France. Net charges for the three and six months ended June 30, 2014 included reversals of $2 million and $5 million , respectively, for actions no longer needed for their originally intended purposes.

Approximately 500 associates will be released under plans initiated in 2015, of which approximately 100 associates have been released as of June 30, 2015 . In the first six months of 2015, approximately 100 associates were released under plans initiated in prior years, primarily related to our exit from the farm tire business in EMEA and the closure of one of our manufacturing facilities in Amiens, France. In total, approximately 500 associates remain to be released under rationalization plans. At June 30, 2015 , approximately 800 former associates of the closed Amiens, France manufacturing facility have asserted wrongful termination or other claims against us. Refer to Note 12.

Royalty income in the second quarter of 2015 was $10 million , compared to $9 million in the second quarter of 2014 . Royalty income in the first six months of 2015 and 2014 was $175 million and $18 million , respectively. Royalty income is derived primarily from licensing arrangements related to divested businesses. Royalty income in the first six months of 2015 included a one-time pre-tax gain of $155 million on the recognition of deferred income resulting from the termination of a licensing agreement associated with the sale of our former Engineered Products business ("Veyance"). The licensing agreement was terminated following the acquisition of Veyance by Continental AG in January 2015.

Net foreign currency exchange losses in the second quarter of 2015 were $13 million , primarily related to Venezuela, compared to net gains of $2 million in the second quarter of 2014 . Net losses in the first six months of 2015 and 2014 were $29 million and $151 million , respectively. Net foreign currency exchange losses in the first six months of 2014 included a net remeasurement loss of $157 million in Venezuela resulting from the devaluation of the Venezuelan bolivar fuerte against the U.S. dollar. Foreign currency exchange also reflects net gains and losses resulting from the effect of exchange rate changes on various foreign currency transactions worldwide.

Effective January 24, 2014, Venezuela’s exchange rate applicable to the settlement of certain transactions, including payments of dividends and royalties, changed to an auction-based floating rate, the Complementary System of Foreign Currency Administration (“SICAD”) rate, which was 11.4 and 12.8 bolivares fuertes to the U.S. dollar at January 24, 2014 and June 30, 2015, respectively.

We are required to remeasure our bolivar-denominated monetary assets and liabilities at the rate expected to be available for future dividend remittances by our Venezuelan subsidiary. Therefore, in the first six months of 2014 we recorded a net remeasurement loss of $157 million using the then-applicable SICAD rate. All bolivar-denominated monetary assets and liabilities were remeasured at 12.8 and 12.0 bolivares fuertes to the U.S. dollar at June 30, 2015 and December 31, 2014, respectively.

The official exchange rate for imports of essential goods, such as certain raw materials needed for the production of tires, remained at 6.3 bolivares fuertes to the U.S. dollar; however, the previously existing subsidy exchange rate of 4.3 bolivares fuertes to the U.S. dollar was eliminated and, accordingly, we derecognized $11 million of previously recognized subsidy receivables as part of the $157 million remeasurement loss in the first six months of 2014.

We also recorded a subsidy receivable at January 24, 2014 of $50 million related to certain U.S. dollar-denominated payables that were expected to be settled at the official exchange rate of 6.3 bolivares fuertes to the U.S. dollar for essential goods, based on ongoing approvals for importation of such goods. In the fourth quarter of 2014, we entered into an agreement with the Venezuelan government to settle $85 million of U.S. dollar-denominated payables at the SICAD rate that we previously had expected to be settled at the official exchange rate for imports of essential goods of 6.3 bolivares fuertes to the U.S. dollar and, accordingly, derecognized the remaining subsidy receivable of $45 million . As of June 30, 2015, we have received payments of $7 million under this agreement. Going forward, subsidies received from the government related to certain U.S. dollar-denominated payables settled at the official exchange rate for imports of essential goods of 6.3 bolivares fuertes to the U.S. dollar will only be recognized in cost of goods sold (“CGS”) upon receipt.

Interest income in the second quarter of 2015 was $4 million , compared to interest income of $13 million in the second quarter of 2014. Interest income in the first six months of 2015 and 2014 was $9 million and $19 million , respectively. Interest income consisted primarily of amounts earned on cash deposits. Interest income in the three and six months ended June 30, 2014 included $9 million earned on the settlement of indirect tax claims in Latin America.

Miscellaneous expense in the six months ended June 30, 2015 included charges of $4 million and in the three and six months ended June 30, 2014 included charges of $10 million and $17 million , respectively, for labor claims related to a previously closed facility in Greece. These claims have been settled and we do not expect any additional charges.

Also included in Other (Income) Expense are financing fees and financial instruments expense consisting of the amortization of deferred financing fees, commitment fees and charges incurred in connection with financing transactions; general and product liability — discontinued products expense which includes charges for claims against us related primarily to asbestos personal injury claims, net of probable insurance recoveries; and net gains and losses on asset sales.

NOTE 4. DISSOLUTION OF GLOBAL ALLIANCE WITH SUMITOMO RUBBER INDUSTRIES

On June 4, 2015, we entered into a Framework Agreement (the “Agreement”) with Sumitomo Rubber Industries, Ltd. (“SRI”). Pursuant to the terms and subject to the conditions set forth in the Agreement, we and SRI have agreed to dissolve the global alliance between the two companies.

The Agreement provides that: (1) we will acquire SRI’s 25% interest in Goodyear Dunlop Tires Europe B.V. (“GDTE”) and SRI’s 75% interest in Nippon Goodyear Ltd. (“NGY”); (2) we will sell to SRI our 75% interest in Goodyear Dunlop Tires North America, Ltd. (“GDTNA”), as well as the Huntsville, Alabama test track used by GDTNA, and our 25% interest in Dunlop Goodyear Tires

Ltd. (“DGT”); (3) we will acquire control of the Dunlop-related trademarks for tire-related businesses in North America but will grant SRI an exclusive license to develop, manufacture and sell Dunlop tires for motorcycles and for Japanese original equipment manufacturers operating in North America; and (4) SRI will obtain exclusive rights to sell Dunlop-brand tires in those countries that were previously non-exclusive under the global alliance, including Russia, Turkey and certain countries in Africa.

We will pay SRI a net amount of approximately $271 million upon closing of the transaction. In addition, we will deliver a promissory note to GDTNA: (1) in an initial principal amount of approximately $55 million , (2) with a maturity date three years following the date of dissolution, and (3) at an interest rate of LIBOR plus 0.1% , which initial principal amount is 25% of the outstanding amount of an intercompany loan originally made in connection with the closure of GDTNA’s manufacturing facility in Huntsville, Alabama in 2003.

The Agreement also provides that we will liquidate a technology joint venture and a purchasing joint venture and distribute the remaining assets and liabilities of those entities to us and SRI in accordance with our respective ownership interests in those entities, and that we and SRI will conduct an orderly sale of the SRI common stock held by us and the Goodyear common stock held by SRI.

We expect the transaction to close in the fourth quarter of 2015. The closing of the transaction is subject to the receipt of antitrust and other governmental and third party approvals and other customary closing conditions, including SRI’s completion of a labor agreement with the United Steelworkers union for GDTNA’s Tonawanda, New York manufacturing facility.

The assets and liabilities of GDTNA, the Huntsville, Alabama test track, and our investment in DGT have been classified as held for sale as of June 30, 2015.  The carrying amount of the net assets at June 30, 2015 was $15 million . The carrying amount of major assets and liabilities related to GDTNA included in our North America business unit at June 30, 2015 consisted of $127 million of property, plant and equipment, $38 million of inventories, $26 million of accounts receivable, $11 million of goodwill and intangible assets, $71 million in compensation and benefit liabilities, $66 million of accounts payable, and $66 million of other liabilities. The carrying amount of our investment in DGT included in our Asia Pacific business unit is $11 million .

Upon classifying the assets and liabilities related to GDTNA and our investment in DGT as held for sale, we evaluated the sale of these entities both quantitatively and qualitatively and concluded that individually and in the aggregate, the disposals did not represent a strategic shift that has, or will have, a major effect on our operations and financial results, and, accordingly, do not qualify as discontinued operations. We also concluded that neither GDTNA nor DGT were individually significant components of our operations.

NOTE 5. INCOME TAXES

In the second quarter of 2015 , we recorded tax expense of $120 million on income before income taxes of $328 million . For the first six months of 2015, we recorded tax expense of $243 million on income before income taxes of $687 million . Income tax expense for the three months ended June 30, 2015 was unfavorably impacted by $3 million of discrete tax adjustments, primarily related to the establishment a valuation allowance in EMEA. Income tax expense for the six months ended June 30, 2015 was unfavorably impacted by $8 million of discrete tax adjustments, primarily related to an audit of prior tax years and the establishment of a valuation allowance, both in EMEA. In the second quarter of 2014, we recorded tax expense of $60 million on income before income taxes of $292 million . For the first six months of 2014, we recorded tax expense of $68 million on income before income taxes of $262 million . The increase in income taxes for the three and six months ended June 30, 2015 compared to 2014 was primarily due to recording tax expense on our U.S. income as a result of the reversal of the valuation allowance on our U.S. deferred tax assets in the fourth quarter of 2014.

We record taxes based on overall estimated annual effective tax rates. In 2014, the difference between our effective tax rate and the U.S. statutory rate was primarily attributable to maintaining a full valuation allowance on certain deferred tax assets, including those in the U.S., and charges that were not deductible for tax purposes related to the devaluation of the bolivar fuerte in Venezuela.

Our losses in various foreign taxing jurisdictions in recent periods represented sufficient negative evidence to require us to maintain a full valuation allowance against certain of our net deferred tax assets. Each reporting period we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize these existing deferred tax assets. If recent positive evidence provided by the profitability in certain EMEA subsidiaries continues, it will provide us the opportunity to apply greater significance to our forecasts in assessing the need for a valuation allowance. We believe it is reasonably possible that sufficient positive evidence required to release all, or a portion, of these valuation allowances will exist within the next twelve months. This may result in a reduction of the valuation allowance by up to $300 million .

At January 1, 2015 , we had unrecognized tax benefits of $81 million that if recognized, would have a favorable impact on our tax expense of $65 million . We had accrued interest of $15 million as of January 1, 2015 . If not favorably settled, $26 million of the unrecognized tax benefits and all of the accrued interest would require the use of our cash. It is reasonably possible that $15 million

of our unrecognized tax benefits and $5 million our accrued interest will be paid or favorably settled during the next 12 months. We do not expect these changes to have a significant impact on our financial position or results of operations.

Generally, years from 2010 onward are still open to examination by foreign taxing authorities. We are open to examination in Germany from 2006 onward and in the United States for 2014.

Weighted average shares outstanding - diluted for the three and six months ended June 30, 2014 excludes approximately 1 million and 2 million equivalent shares, respectively, related to options with exercise prices greater than the average market price of our common shares (i.e., “underwater” options).

On April 1, 2014, all outstanding shares of mandatory convertible preferred stock automatically converted into 27,573,735 shares of common stock, net of fractional shares, at a conversion rate of 2.7574 shares of common stock per share of preferred stock.

 

Substantially all of the pension curtailment charges of $33 million for the six months ended June 30, 2014 noted above related to our North America strategic business unit ("SBU"); however, such costs were not included in North America segment operating income for purposes of management's assessment of SBU operating performance. In addition, rationalizations, as described in Note 2, Costs Associated with Rationalization Programs; net (gains) losses on asset sales; and asset write-offs and accelerated depreciation are not (credited) charged to the SBUs for performance evaluation purposes, but were attributable to the SBUs as follows:

	Three Months Ended								Six Months Ended
	June 30,								June 30,
(In millions)	2015				2014				2015				2014
Rationalizations:
North America	$	5			$	—			$	5			$	(1	)
Europe, Middle East and Africa	39				20				54				58
Asia Pacific	2				3				3				7
Latin America	—				1				—				1
Total Segment Rationalizations	$	46			$	24			$	62			$	65
Net (Gains) Losses on Asset Sales:
North America	$	—			$	(1	)		$	—			$	(1	)
Europe, Middle East and Africa	3				(2		)		$	5			$	—
Asia Pacific	(6		)		—				(6		)		—
Latin America	—				—				(1		)		—
Total Segment Asset Sales	$	(3	)		$	(3	)		$	(2	)		$	(1	)
Corporate	2				(2		)		1				(2		)
	$	(1	)		$	(5	)		$	(1	)		$	(3	)