CTB Cooper Tire and Rubber Co

Goodyear Tire & Rubber Company (GT) revealed a sharp 71% decline in profit to $6 million or 3 cents per share in the fourth quarter of 2011 from $21 million or 7 cents per share in the same quarter of 2010 (all excluding special items).

With this, the company failed to meet the Zacks Consensus Estimate of 26 cents per share during the quarter. Including special items, the company’s profit was $18 million or 7 cents per share in the quarter compared with a loss of $177 million or 73 cents per share a year ago.

The decline in profit was primarily attributable to higher raw material costs, lower replacement industry volumes in mature markets along with business challenges in Latin America and flooding in Thailand.

Sales in the quarter went up 12% to $5.7 billion despite a 5% fall in tire volumes to 43.2 million units reflecting the above mentioned factors. It was also lower than the Zacks Consensus Estimate of $5.9 billion.

Strong price/mix performance led to a 19% rise in revenue per tire during the quarter, excluding the impact of foreign currency translation. Unfavorable unit volume and foreign currency translation reduced sales by $174 million and $49 million, respectively.

Segment operating income went down $28 million to $196 million in the quarter as positive impact from improved price/mix of $702 million was more than offset by $631 million in higher raw material costs ($583 million net of raw material cost reduction actions). 

Segment operating income was also adversely impacted by $37 million in lower volumes and $19 million due to lower profits from other tire-related businesses, primarily third-party chemical sales in North America. The other factors that negatively affected operating income include business disruptions and the temporary closure of the company’s factory in Thailand due to flooding, inefficiencies related to a plant closing in North America and poor productivity at factories in France.

Segment Details

Sales in the North American Tire segment increased 17% to $2.6 billion reflecting improved price/mix. Tire unit volumes fell 2% while original equipment unit volume rose 7%. Replacement tire shipments went down 3% reflecting lower industry demand.  Sales were positively impacted by $118 million from higher sales in other tire-related businesses, primarily third-party chemical sales.

Operating income in the segment almost doubled to $21 million due to improved price/mix of $289 million that more than offset $241 million of higher raw material costs.  Further, operating income was boosted by fixed cost recovery of $15 million due to higher utilization rates, $21 million reduction in selling, general and administrative (SG&A) expenses, offset by costs resulting from manufacturing inefficiencies related to the closure of a plant in Tennessee. 

It was also negatively impacted by $20 million in lower profits from other tire-related businesses, primarily third-party chemical sales, and $15 million in higher USW profit sharing expense. 

Sales in the Europe, Middle East and Africa Tire segment went up 11% to $1.9 billion reflecting improved price/mix. Tire unit volumes dipped 5% while original equipment unit volume increased 6%.  Replacement tire shipments went down 8%, reflecting lower industry demand. 

Segment operating income rose 47% to $88 million due to improved price/mix of $280 million that more than offset $201 million of higher raw material costs.  Further, fixed cost recovery due to higher production levels contributed $16 million to segment operating income, partially offset by higher SG&A expenses and poor productivity at the company’s factories in France.

Sales in the Latin American Tire segment inched up 2% to $596 million reflecting better price/mix. Tire unit volumes decreased 8%, original equipment unit volume went down 6% and replacement tire shipments fell 9%. Sales were also negatively impacted by $25 million due to unfavorable foreign currency translation and $19 million resulting from the sale of the farm tire business. 

Segment operating income ebbed 48% to $48 million due to raw material cost increases of $82 million that more than offset price/mix improvements of $66 million. It was also negatively impacted by $16 million resulting from lower volume and $9 million due to the sale of the farm tire business.

Sales in the Asia-Pacific Tire segment grew 5% to $591 million reflecting strong price/mix and favorable foreign currency translation.  Tire unit volumes fell 10%, original equipment unit volume decreased 11% and replacement tire shipments dipped 10%, reflecting lower industry demand in Australia and flooding in Thailand. 

Segment operating income decreased 35% to $39 million due to $59 million of higher raw material costs and $10 million in higher costs related to the start up of a new factory in China that more than offset the improved price/mix of $67 million. Further, business disruptions in Thailand reduced segment operating income by $12 million. 

Annual Results

Goodyear posted a profit of $321 million or $1.26 per share in full year 2011 compared with a loss of $216 million or 89 cents per share in 2010. Sales in the quarter appreciated 21% to $22.8 billion from $18.8 billion in 2010, reflecting strong price/mix, positive impact from increase in sales in other tire-related businesses, primarily third-party chemical sales in North America, favorable foreign currency translation effects. 

Operating income increased 49% to $1.4 billion in 2011, reflecting strong sales in all the company’s business units.  Segment operating income was also benefited from $2.4 billion in improved price/mix, which more than offset $1.8 billion in higher raw material costs. 

Financial Position

Goodyear had cash and cash equivalents of $2.8 billion as of December 31, 2011, an improvement from $2.0 billion as of December 31, 2010. Long-term debt and capital leases were $4.9 billion as of December 31, 2011 compared with $4.5 billion as of December 31, 2010.

Guidance

Goodyear expects full-year tire unit volume to be flat in 2012 compared with 2011. In North America, the company expects the consumer replacement market to be flat to down 2%, consumer original equipment flat to be up 3%, commercial replacement up between 2% and 6% and commercial original equipment up between 10% and 15%.

In Europe, the company expects consumer replacement industry to be flat to down 2%, consumer original equipment down between 5% and 9%, commercial replacement down between 3% and 8% and commercial original equipment to fall between 20% and 25%.

Goodyear anticipates raw material costs to increase between 20% and 25% for the first quarter of 2012 from the prior year while smaller increases are expected for the second quarter of 2012.  It also expects raw material costs to decrease in the second half of 2012 compared with the second half of 2011 and increase 5% in full year 2012 compared with 2011.

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” brands as well as private-label brands.

On a worldwide basis, there are two major competitors for Goodyear – Bridgestone, Japan, and Michelin, France, who 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. The company has targeted $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 original equipment manufacturers due to weak industry demand. Further, its highly leveraged balance sheet is worrisome. These factors have led the company retain a Zacks #3 Rank, which translates to a rating of “Hold” for the short term (1 to 3 months) and we reiterate our “Neutral” recommendation for the long term (more than 6 months).

 
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