Goodyear Ignores Raw Materials Pricing

The Goodyear Tire and Rubber Company (GT) yesterday reported Q1 2009 financial results (Q1 conference call transcript). Demand for tires is down as new car sales dropped dramatically. Also, I suspect replacement tires are not selling as well as cash-strapped consumers stretch their budgets. So if sales are down, their purchases of raw materials must also be dropping. But Goodyear reports that the cost of raw materials has increased. Read this quote in a Q1 context:

“Higher raw material costs, which increased 31 percent, or approximately $332 million, more than offset improved price/mix of $161 million.”

No further comment or discussion was offered in the press release. Something is seriously wrong with the pricing model on raw materials. Management needs to step up and explain this one. Yes the problem has been disclosed but not explained.

Comments

[Bharper:]

There is typically a lag between when raw materials flows are purchased and when they flow through their cost of goods sold for GT. In GT's 4Q earnings announcement, they stated that raw material costs would peak in 1Q. This largely explains their 1Q results versus analyst estimates for 2Q (loss of $0.13)

Apr 30 11:01 AM

[keithp41:]

Goodyear has been very open in explaining this for quite some time and explained fully on Q1 conference call. There is a time lag of several months from the time raw materials are purchased (natural rubber in Singapore for example) and the time a tire is sold that contains that rubber. So, in Q1, Goodyear, which is on FIFO accounting, sold tires with raw materials purchased last summer when costs were at record highs. On the call, the company said raw material costs for Q2 will probably be up only 5-7%.

Apr 30 11:08 AM

[User 405060:]

Both of the previous posts are right on. Who is this author and how can he make such a ridiculous statement. Is it possible that a person writing about finance has no grasp of accounting?

Apr 30 02:38 PM