Goodyear Tire’s (GT) operation in Venezuela, which contributes a significant portion of the company’s Latin American Tire sales and operating income, has been significantly affected by the Venezuelan government’s decision to introduce a two-tiered exchange rate that devalues its currency, bolivar fuerte (Bs. F).
Venezuela President Hugo Chavez has revealed that the bolivar fuerte would be devalued from Bs. F 2.15 per dollar to Bs. F 4.30 per dollar in case of imports of nonessential products, including tires. However, in the case of priority goods such as food and medicine, the exchange rate would be fixed at Bs. F 2.6 per dollar.
Goodyear generated about 11% of its total sales from Latin America in the first three quarters of 2009. Of this, a substantial amount is generated from Venezuela. Thus, post the devaluation, the company’s earnings in the region will be worth half or even less when translated into dollar.
Further, Goodyear had a cash balance of $370 million denominated in bolivar fuerte, in its Venezuelan operations as of December 31, 2009. The value of this could fall to $185 million in the first quarter of 2010 after the devaluation takes effect.
Due to the devaluation, Goodyear expects to record a charge of $150 million or 62 cents per share in the first quarter of 2010. This charge relates to the re-measurement of its balance sheet, net of tax. However, it would not have any impact on the company’s 2009 results or financial position.
Goodyear posted a net income of $105 million or 45 cents per share, excluding special items, in the third quarter of 2009. This was marginally below the Zacks Consensus Estimate of 47 cents per share. The earnings were almost flat compared to the year-ago level of $106 million or 43 cents per share.
Sales for the quarter went down 15% to $4.4 billion. This reflected a 7% decline in unit tire volume due to lower industry demand as well as a $279 million reduction in sales in other tire-related businesses, primarily third-party chemical sales by North American Tire. Unfavorable foreign currency translation further reduced sales by $159 million.
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