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Goodyear Tire & Rubber Company (GT - Analyst Report) reported a profit of $97 million or 39 cents per share in the fourth quarter of 2012 that significantly rose from $6 million or 3 cents in the same quarter of 2011 (all excluding special items).

With this, the company has beaten the Zacks Consensus Estimate of 21 cents per share. Including special items, the tire maker had a breakeven 2012-fourth quarter, which compared with a profit of $18 million or 7 cents per share in the 2011 quarter.

Revenues dipped 11.2% to $5.0 billion owing to $338 million in lower tire unit volumes, $221 million in lower sales in other tire-related businesses, mainly third party chemical sales in North America, and $85 million in unfavorable foreign currency translation. It was lower than the Zacks Consensus Estimate of $5.4 billion. Tire unit volumes declined 7% to 40 million, primarily due to lower volumes in Europe.

However, operating income surged 39% to $272 million. The increase was attributable to $191 million in lower raw material costs (prior to the benefit of cost savings actions), improved price/mix of $20 million and positive impact from cost-reduction measures, partially offset by $57 million in lower tire volume and associated unabsorbed overhead costs of $119 million.

Segment Details

Sales in the North American Tire segment shrank 10% to $2.3 billion due to a 5% fall in tire unit volume, 10% decrease in replacement tire shipments and lower third party chemical sales (which reduced sales by $161 million), partially offset by a 9% rise in original equipment volumes.  

Operating income improved significantly by $95 million to $116 million driven by a $150 million of positive impact of lower raw material costs and $20 million in savings related to the closure of a tire plant in Union City, TN, partially offset by lower volume and unabsorbed overhead from related production cuts impact of $77 million.

Sales in the Europe, Middle East and Africa Tire segment fell 16% to $1.6 billion due to a 15% fall in tire unit volumes, 17% decrease in replacement tire shipments, 9% decline in original equipment unit volume and unfavorable foreign currency translation of $48 million, partially offset by improved price/mix.

Segment income ebbed 56.8% to $38 million. The decrease was attributable to negative impact of $126 million due to lower unit volume including the impact of unabsorbed overhead from related production cuts.
 
Sales in the Latin American Tire segment dropped 9% to $541 million due to a 6% fall in original equipment volumes and unfavorable foreign currency translation of $37 million, partially offset by a 2% rise in replacement tire shipments.

However, segment income escalated 27.1% to $61 million. The increase was attributable to price/mix improvements of $35 million and lower raw material costs, partially offset by higher production costs owing to higher wages and other costs.

Sales in the Asia-Pacific Tire segment slid 0.5% to $588 million driven by a 1% fall in replacement tire shipments, unfavorable foreign currency translation and lower price/mix, partially offset by a 6% rise in tire volumes and 14% increase in original equipment volumes.

Segment operating income rose 46.2% to $57 million due to $29 million in lower raw material costs and higher volumes. It was negatively affected by $7 million in lower price/mix, $6 million rise in costs related to the start up of a new facility in China, higher wages and other costs as well as unfavorable foreign currency translation.

2012 Results

Goodyear posted a decline in profits to $183 million or 74 cents per share in 2012 from $321 million or $1.26 per share per share in the prior year. With this, the company has missed the Zacks Consensus Estimate of $1.65 per share.

Sales in the quarter fell 8% to $21 billion, nearly meeting the Zacks Consensus Estimate of $21.3 billion. The decrease was driven by unfavorable unit volume and foreign currency translation, which reduced sales by $1.6 billion and $766 million, respectively, and lower sales in other tire related businesses, mainly third party chemical sales in North America, which reduced sales by $489 million. These were partially offset by strong price/mix.

Segment operating income dipped 8.8% to $1.2 billion due to weaknesses in Europe, partially offset by improvement in the company’s North American Tire segment and improved price/mix.

Financial Position

Goodyear had cash and cash equivalents of $2.3 billion as of Dec 31, 2012, a decrease from $2.8 billion as of Dec 31, 2011. Long-term debt and capital leases were $5.0 billion as of Dec 31, 2012 compared with $4.9 billion as of Dec 31, 2011.

Guidance

Goodyear expects full-year tire unit volume to grow at a low single digit rate in 2013. The company expects the consumer replacement market to be flat to up 2% and consumer original equipment to be up 5% in North America. It expects commercial replacement and original equipment volumes to remain at 2012 levels in the region.

In Europe, Goodyear anticipates consumer replacement industry to be flat to up 2% and consumer original equipment to be down 5%. The company expects commercial replacement demand to increase 5% and original equipment volumes to be flat to up 5%.

Goodyear lowered its operating income guidance to $1.4 billion–$1.5 billion for 2013 from the prior outlook of $1.6 billion. However, the restated operating income still reflects more than 12% increase over 2012. The downward revision was mainly driven by weaknesses and related production cuts in Europe, time required to execute the announced restructuring in Amiens, France, and the recently announced devaluation of the bolivar fuerte in Venezuela.

Goodyear plans to exit the farm tire business in the Europe, Middle East and Africa region. The company has initiated a plan to shut down the Amiens North plant in France, which produces consumer and farm tires. The move would eliminate about 6 million units of high-cost capacity and result in about $75 million of annual profit improvement.

 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. The company currently retains a Zacks #4 Rank (Sell).

While we like to avoid Goodyear, stocks that are worth looking for in the same industry include Continental AG (CTTAY), Oshkosh Corporation (OSK - Snapshot Report) and Commercial Vehicle Group Inc. (CVGI - Snapshot Report). They carry a Zacks Rank #1 (Strong Buy).

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