Goodyear Tire & Rubber Company (GT) revealed a 32% decline in profit to $21 million or 7 cents per share (excluding special items) in the fourth quarter of 2010 from $31 million or 14 cents per share in the same quarter of 2010. However, the company fared well compared with the Zacks Consensus Estimate of a loss of 7 cents per share during the quarter.

The decline in profit was primarily attributable to higher raw material costs, increased selling, administrative and general expenses and unfavorable currency translation effects. The company’s cost of goods sold increased 17% to $4.19 billion, while selling, administrative and general expenses rose12% to $715 million.

Sales during the quarter appreciated 14% to $5.07 billion, higher than the Zacks Consensus Estimate of $4.88 billion. It was backed by a 4% increase in tire volume to 45 million units, which positively affected sales by $130 million.

Apart from unit volumes, sales were favorably affected by improvements in price/product mix that led revenue per tire to increase by 12% during the quarter, excluding the foreign currency translation effects. Sales were also benefited by a $159 million rise in sales in other tire-related businesses, primarily third-party chemical sales in North America. However, it was negatively affected by $111 million due to unfavorable foreign currency translation effects.

Goodyear’s total segment operating income ebbed $25 million to $224 million in the quarter. This was attributable to $397 million in net higher raw material costs ($430 million before raw material cost reduction actions) and negative impact of $17 million due to unfavorable foreign currency translation effects that more than offset the benefit of $315 million due to improved price/product mix.

Segment Details

Sales in the North American Tire segment escalated 17% to $2.2 billion, led by better price/product mix. Sales were also favorably impacted by $167 million due to higher sales in other tire-related businesses, primarily third-party chemical sales. Unit sales of original equipment (OE) tires grew 4% while replacement tires went up slightly.

The segment operating income increased $38 million to $11 million, owing to improved price/product mix, higher production volumes as well as decreased worker’s compensation and pension expense and benefits from cost reduction actions. However, these were mostly offset by $162 million of higher raw material costs.

Sales in the Europe, Middle East and Africa Tire segment scaled up 11% to $1.73 billion on the back of a 9% rise in tire unit volume and favorable price and product mix. Unit sales of OE tires rose 11% while replacement tire shipments increased 9%. Operating income in the segment reduced $65 million to $60 million due to higher raw material costs and unfavorable currency translation effects.

Sales in the Latin American Tire segment went up 15% to $582 million reflecting a 1% decline in tire unit volume and a strong price and product mix. OE unit volume rose 2% while replacement tire unit shipments declined by the same magnitude. Operating income in the segment increased $12 million to $93 million due to volume and price/mix in Brazil and other markets outside of Venezuela.

Sales in the Asia-Pacific Tire segment grew 16% to $562 million, driven by a 5% increase in tire unit volume. Unit sales of OE tires rose 12% and of replacement tire shipments increased marginally by 1%. Operating income in the segment declined $10 million to $60 million due to higher raw material costs and costs related to the planned start up of a new factory in China.

Annual Results

Goodyear’ posted a narrower loss of $216 million or 89 cents per share in 2010 compared with $375 million or $1.55 per share in 2009. This compared to the Zacks Consensus Estimate of a profit of 37 cents per share.

Sales in the year zoomed 16% to $18.8 billion reflect an 8% improvement in tire unit volume, increase in sales in other tire-related businesses, primarily third-party chemical sales by North American Tire and better price/mix, offset partially by unfavorable currency translation effects.

Segment operating income was $917 million compared with $372 million in 2009 reflecting higher sales, positive impact from cost reduction actions and a significant recovery in under-absorbed fixed costs. These factors more than offset higher marketing costs, wage inflation and unfavorable foreign currency translation effects.

Financial Position

Goodyear had cash and cash equivalents of $2.0 billion as of December 31, 2010, an improvement from $1.92 billion at the end of prior-year. Long-term debt and capital leases were $4.51 billion as of December 31, 2010. Long-term debt (including capital leases)-to-capitalization ratio rose to 87% as of the above date from 85% for the period ended December 31, 2009.

Our Take

We are optimistic about Goodyear’s cost-saving actions. The company has succeeded in achieving cost reductions of $2.5 billion by 2009 and has targeted an additional $1 billion of gross savings by 2012. In addition, the company expects to benefit from its focus in the emerging markets of Latin America, Eastern Europe and Asia.

However, Goodyear faces pricing pressure from OEMs due to weak industry demand. Further, its highly leveraged balance sheet is worrisome. These along with the disappointing results have led the company to retain a Zacks #4 Rank for the short term (1–3 months), which translated to a rating of Sell.

 
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