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Goodyear Tire & Rubber Company (GT - Analyst Report) saw a 12% fall in profits to 57 cents per share in the second quarter of the year from 65 cents in the prior-year quarter (all excluding special items) due to lower tire volumes on the back economic uncertainty across the globe.

However, profits blew away the Zacks Consensus Estimate of 46 cents during the quarter. Total profit dipped 7% to $148 million from $159 million (all excluding special items) in the second quarter of 2011.

Revenues dropped 8% to $5.2 billion below the Zacks Consensus Estimate of $5.7 billion, driven by weak economic conditions and unfavorable foreign currency translation. Tire unit volumes ebbed 9% to 39.2 million due to weaker replacement industry volumes, mainly in Europe. Unfavorable foreign currency translation reduced sales by 6% or $315 million.

Segment operating income slid 12% to $336 million from $382 million a year ago. The decrease was attributable to lower tire volumes and associated unabsorbed overhead, along with unfavorable foreign currency translation. Price/mix improvement of $313 million more than offset $238 million in higher raw material costs ($171 million, net of raw material cost reduction actions).

Segment Results

North American Tire: Revenues inched up 2% to $2.5 billion due to improved price/mix. Original equipment unit volume grew 24% while replacement tire shipments went down 10%.

Segment operating income surged 37% to $188 million as improved price/mix of $176 million more than offset $114 million of higher raw material costs. It was also benefited by $20 million in savings related to the closure of a tire plant in Tennessee, partially offset by lower other tire related income and higher pension expenses.

Europe, Middle East and Africa Tire: Revenues went down 18% to $1.6 billion on the back of a 17% fall in tire unit volume and unfavorable foreign currency translation of $194 million. Replacement tire shipments decreased 20% while original equipment unit volume dipped 7%.

Operating income in the segment significantly declined to $19 million from $126 million a year ago driven by lower unit volume, higher raw material costs, partially offset by improved price/mix.

Latin American Tire: Revenues dropped 21% to $503 million, driven by a 14% decline in tire unit volumes and unfavorable foreign currency translation of $77 million, partially offset by improved price/mix. Both replacement and original equipment tire shipments went down 14% during the quarter.

Operating income rose 7% to $58 million driven by price/mix improvements of $56 million, largely offset by the impact of cost and wage inflation, lower tire volumes, higher raw material costs and unfavorable foreign currency translation.

Asia-Pacific Tire: Revenues fell 4% to $600 million due to unfavorable foreign translation effect of $38 million, partially offset by the impact of a 2% increase in tire unit volumes and improved price/mix. Replacement tire shipments fell 8% while original equipment unit volumes rose 19%.

Operating income increased 9% to $71 million, driven by improved price/mix of $21 million and higher volumes. However, it was negatively impacted by $5 million due to costs related to the start up of a new factory in China as well as unfavorable foreign currency translation.

Financial Position

Goodyear had cash and cash equivalents of $2.2 billion as of June 30, 2012, a decline from $2.8 billion as of December 31, 2011. Long-term debt and capital leases were $5.5 billion as of June 30, 2012 compared with $4.9 billion as of December 31, 2011. Long-term debt (including capital leases) to capitalization ratio was as high as 85% as of June 30, 2012, but slightly down from 87% as of December 31, 2011.

Guidance

Good year expects sluggish growth in the global tire industry. The company expects unit tire volumes for the year to decrease between 5% and 7% from 2011.

In North America, the company expects consumer replacement industry to decrease by 1%–3%, consumer original equipment industry volume to increase by 5%–10%, commercial replacement volume to fall 5%–10% and commercial original equipment volume to increase 10%–15%.

In Europe, Middle East & Africa, the consumer replacement industry volume is expected to go down between 8% and 10%, consumer original equipment volume down between 5% and 10%, commercial replacement volume down between 3% and 8% and commercial original equipment down between 5% and 10%.

Goodyear also anticipates flat raw material costs in the third quarter of 2012 compared with the prior year. However, the company expects raw material costs to increase 7% for full year 2012.

The company is on track to achieve segment operating income of $1.6 billion in 2013, including $450 million in North America.

Our Take

Goodyear Tire & Rubber Company is one of the largest tire manufacturing companies worldwide, selling its products under the Goodyear, Kelly, Dunlop, Fulda, Debica, Sava and various other “house” brand names as well as private-label brands.

On a worldwide basis, there are two major competitors for Goodyear – Bridgestone of Japan, and Michelin of France, both of which command about 55% of the global market together. Other significant competitors include Cooper Tire & Rubber Co. (CTB - Analyst Report), Continental Tires, Pirelli, Toyo Tires, Yokohama Tire, Kumho Tires, Hankook Tire and various regional tire manufacturers.

We are optimistic about Goodyear’s cost-saving actions. However, due to pricing pressure from OEMs and a weak global economic scenario the company retains a Zacks #3 Rank, which translates to a Hold rating 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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