Goodyear Tire & Rubber Company (GT) reported a 26.4% fall in profits to 53 cents per share in the third quarter of 2012 from 72 cents per share in the same quarter of 2011 (all excluding special items). The company's earnings per share during the quarter also lagged the Zacks Consensus Estimate by 7 cents per share. Total profit dipped 27.2% to $142.0 million from $195.0 million a year ago.

Revenues in the quarter ebbed 13% to $5.3 billion due to a negative impact of $592 million from lower tire volumes, $258 million from unfavorable foreign currency translation and lower sales in other tire related businesses, mainly third party chemical sales in North America. It was lower than the Zacks Consensus Estimate of $5.9 billion.

However, price/mix improvements boosted revenues, lifting revenue per tire by 5%, excluding the impact of foreign currency translation. Tire volumes went down 12% to 41.8 million units due to weaker volumes in Europe.
 
Operating income declined 24.8% to $348 million from $463 million a year ago due to a negative impact of $114 million from lower tire volume and associated unabsorbed overhead costs of $89 million. These unfavorable impacts were partially offset by improved price/mix of $159 million, which more than offset $47 million in raw material cost increases.

Segment Details

Revenues in the North American Tire segment fell 6% to $2.4 billion due to a 6% decrease in tire unit volume and lower pricing for chemical products. Revenue per tire went up 4%, excluding the impact of foreign currency translation. Operating income shot up 67% to $130 million due to improved price/mix of $87 million, lower raw material costs of $21 million as well as $20 million in savings related to the closure of a tire plant in Tennessee.   

Revenues in the Europe, Middle East and Africa Tire segment shrank 21% to $1.7 billion due to a 22% fall in tire unit volume and unfavorable foreign currency translation of $171 million. Revenue per tire increased 9%, excluding the impact of foreign currency translation. Operating income plunged 60% to $105 million due to a negative impact of $92 million from lower unit volume, higher manufacturing costs of $78 million mainly driven by production cuts and unfavorable foreign currency translation of $8 million.

Revenues in the Latin American Tire segment sagged 20% to $520 million due to a 7% fall in tire unit volume and unfavorable foreign currency translation of $60 million. Operating income dropped 21% to $49 million as price/mix improvements of $39 million were more than offset by lower tire volumes, higher raw material costs, unfavorable foreign currency translation and the impact of inflation on wages and other costs.

Sales in the Asia-Pacific Tire segment slipped 6% to $592 million due to a negative impact of $20 million from unfavorable foreign currency translation and a 2% fall in tire unit volume. Revenue per tire was flat on a year-over-year basis, excluding the impact of foreign currency translation. Operating income inched up 2% to $64 million due to improved price/mix of $2 million and lower raw material costs of $12 million.  

Financials

Goodyear had cash and cash equivalents of $2.3 billion as of September 30, 2012, a decline from $2.8 billion as of December 31, 2011. Long-term debt and capital leases were $5.8 billion as of September 30, 2012 compared with $4.9 billion as of December 31, 2011. Long-term debt (including capital leases)-to-capitalization ratio stood at 82.5% as of September 30, 2012, a decline from 87% as of December 31, 2011.

In the first nine months of the year, the company had a narrower operating cash outflow of $329 million compared with $972 million in the same period of 2011 due to lower accounts receivable and inventories. Capital expenditures went down marginally to $788 million from $806 million in the first nine months of 2011.

Company Outlook

Goodyear expects tire unit volume in the fourth quarter of 2012 to decline from the prior year quarter by 3%-5%. The company anticipates raw material costs in the quarter to go down by 10% from the prior year.

For the full year of 2012, Goodyear anticipates North American consumer replacement market to be down between 2% and 3%, consumer original equipment up between 8% and 10%, commercial replacement market to be down between 6% and 8% and commercial original equipment up between 6% and 8%.

In Europe, Middle East & Africa, the consumer replacement industry is expected to decline in the range of 8% to 10%, consumer original equipment 6% to 8%, commercial replacement market 6% to 8% and commercial original equipment market 5% to 7%.

The company's third quarter results have helped it achieve its target of $1 billion in cost savings ahead of plan. Further, the company intends to take additional cost reduction measures due to the ongoing economic uncertainty around the world.

The company continues to expect raw material costs to increase 7% from 2011. It has also reiterated its goal of achieving $1.6 billion of segment operating income and positive cash flow in 2013.

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), 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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Tickers in this Article: GT, CTB

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