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Goodyear Beats but Profits Fall

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Goodyear Tire & Rubber Company (GT - Analyst Report) reported a 34% decline in profits to $84 million or 34 cents per share in the first quarter of 2012, from $127 million or 51 cents in the same quarter of 2011 (all excluding special items). However, profits were significantly higher than the Zacks Consensus Estimate of 8 cents per share during the quarter.

Including special items, the company reported a loss of $11 million or 5 cents per share in the quarter, compared with a profit of $103 million or 42 cents per share a year ago. The shortfall in profit was driven by weak industry demand.

Revenues in the quarter increased marginally by 2% to $5.5 billion from $5.4 million in the first quarter of prior year. The company’s sales were negatively affected by an 8% fall in tire volumes to 43 million units. Consequently, revenues were lower than Zacks Consensus Estimate of $5.9 billion.

Revenue per tire hiked 16% due to strong price/mix performance in the quarter, excluding the impact of foreign currency translation. However, unfavorable unit volume and foreign currency translation reduced sales by $345 million and $108 million, respectively.

The company had $292 million of segment operating income, a 10.7% decline from $327 million in the same quarter last year. The positive impact from improved price/mix of $525 million was more than offset by $482 million of higher raw material costs ($420 million, net of raw material cost reduction actions). 

The segment operating income was also adversely affected by $54 million in lower volumes and $6 million due to higher under-absorbed fixed cost. The other factors that negatively affected operating income include inefficiencies and higher costs related to a plant closure in North America and poor productivity at factories in France.

Segment Details

Revenues in the North American Tire segment increased 8% to $2.5 billion, reflecting improved price/mix. Tire unit volumes fell 8% while original equipment unit volume rose 11%. Replacement tire shipments went down 14% reflecting lower industry demand.  Sales were positively impacted by price/mix, which resulted in a 21% increase in revenue per tire, excluding the impact of foreign currency translation.

Operating income in the segment doubled to $80 million from the prior-year quarter. The improvement was driven by $246 million of favorable price mix, which offset the negative impact of $184 million of higher raw material cost.

The other factors contributing $13 million to the income are higher earnings from other tire related business. However, the income was adversely affected by $13 million of lower volumes and $24 million of higher conversion costs due to inflation and costs related with plant closure.

Revenues in the Europe, Middle East and Africa Tire segment decreased 1% to $1.9 billion. Tire unit volumes dipped 9%, whereas original equipment unit volume was flat compared with the last quarter.  Replacement tire shipments declined 11%, reflecting lower industry demand. Meanwhile, revenue per tire swelled 16% in the quarter, excluding the impact of foreign currency translation.

Segment operating income declined 41% to $90 million in the quarter. The operating income was boosted by $209 million of better price/mix. However, it was adversely affected by $177 million due to a rise in raw material costs.

Other factors that negatively affected operating income are $65 million of lower volume and higher conversion costs as well as $26 million of selling, general and administrative expenses, incorporating warehousing costs due to higher inventory level.

Revenues in the Latin American Tire segment fell 11% to $521 million. Original equipment unit volume went down 11% and replacement tire shipments fell 12%. The downfall in volume was primarily driven by weak industry demand as well as strong competition. Meanwhile, revenue per tire increased 4%, excluding the impact of foreign currency translation.

Segment operating income slid 18% to $55 million. Benefits from price/mix of $41 million were more than offset by higher raw material costs of $37 million. They were also negatively impacted by $12 million, resulting from lower volumes and $4 million due to the sale of the farm tire business.

Sales in the Asia-Pacific Tire segment grew 5% to $591 million. Original equipment unit volume rose 7% while replacement tire shipments dipped 11%. Floods in Thailand and weaker consumer replacement demand in Asia offset the improvement in China. Meanwhile, revenue per tire increased 9% from the prior year. Foreign currency translation had favorable impact of $7 million on sales.

Segment operating income was flat at $67 million compared with 2011. The quarter had favorable impact from improvement in price/mix of $29 million. This was offset by $22 million of higher raw material prices. Other negative factors include costs related with the factory start up in China of $7 million.

Operating income in the segment benefited from insurance recovery of $3 million. This was due to temporary closure of company’s factory in Thailand due to floods. The factory will be in full operations in the second quarter of 2012.

Financial Position

Goodyear had cash and cash equivalents of $2.1 billion as of March 31, 2012, down from $2.8 billion as of December 31, 2011. Long-term debt and capital leases were $6.0 billion as of March 31, 2012 compared with $4.9 billion as of December 31, 2011.

The company has financed $3.9 billion notes in the first quarter of 2012. In the month of February 2012, the company issued $700 million senior notes of 7.0% due in 2022. The return will be used in refinancing the outstanding $650 million senior notes of 10.5% due in 2016.

The company’s asset-based revolving credit facility of $1.5 billion was enhanced to $2.0 billion while its maturity period was extended from 2013 to 2017. It also extended the maturity of its $1.2 billion term loan from 2014 to 2019.

Guidance

Goodyear expects full-year tire unit volume to grow moderately in 2012. This is driven by weak demand in different economies. The company expects tire volume for the full year 2012 to decline by 2% from 2011.

In North America, the company expects the consumer replacement market to be down within 1% to 3%, consumer original equipment up 2% to 7%, commercial replacement between down 2% and up 2%, and commercial original equipment up between 10% and 15%.

In Europe, the company expects consumer replacement industry to be down between 3% and 5%, consumer original equipment down between 5% and 9%, commercial replacement down between 3% and 8% and commercial original equipment to fall between 10% and 15%.

Goodyear anticipates raw material costs to increase 12% for the second quarter of 2012 and to be in line in the second half of 2012 compared with 2011. For the full year, raw material cost is expected to hike 9% from 2011.

Our Take

Goodyear Tire & Rubber Company is one of the largest tire manufacturing companies worldwide. The company produces tires for automobiles, commercial trucks, light trucks, SUVs, race cars, airplanes, farm equipment and for heavy earth-mover machinery. Itsells its products under the Goodyear, Kelly, Dunlop, Fulda, Debica, Sava and various other “house” brands as well as private-label brands.

The company has two major competitors – Bridgestone of Japan and Michelin of France. These two companies command about 55% of the global market. Other significant competitors include Cooper Tire & Rubber Co. (CTB - Analyst Report). Its brands include Continental Tires, Pirelli, Toyo Tires, Yokohama Tire, Kumho Tires, Hankook Tire, and various regional tires.

We are optimistic about Goodyear’s benefit from its focus in the emerging markets of Latin America, Eastern Europe and Asia. However, the company faces pricing pressure from original equipment manufacturers due to weak industry demand. Further, its highly leveraged balance sheet is worrisome.

These factors have led the company retain a Zacks #3 Rank, which translates to a rating of Hold for the short term (1 to 3 months) and we reiterate our Neutral recommendation on its shares for the long term (more than 6 months).

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