Goodyear Tire & Rubber Company (GT) saw a profit of $31 million or 12 cents per share (excluding special items) in the second quarter of the year in sharp contrast to a loss of $240 million or $1.00 per share (excluding special items) in the same quarter a year ago. (See earnings call transcript.)
The company has also significantly exceeded the Zacks Consensus Estimate of a profit of 4 cents per share. The higher profit was led by an impressive rise in tire unit volume, particularly in the company’s North American Tire segment during the quarter.
Sales during the quarter grew 15% to $4.5 billion, higher than the Zacks Consensus Estimate by $120 million. This reflected a positive impact of $304 million led by a 10% increase in tire unit volume due to a strong global demand.
Sales were also boosted by $161 million from higher sales in other tire-related businesses, mainly third-party chemical sales in North America, and by a better price and product mix. These were partially offset by an unfavorable foreign currency translation effect of $37 million.
The segment operating income jumped to $219 million from $24 million in the year-ago quarter. This was positively affected by an improved price and product mix of $121 million and negatively affected by $54 million in net higher raw material costs and by an unfavorable foreign currency translation effect of $14 million.
Sales in the North American Tire segment elevated 21% to $2 billion due to a 12% increase in tire unit volume to 16.6 million units, strong price and product mix and sales gains in the consumer replacement business.
Unit sales to original equipment manufacturers (OEMs) grew 69% as a result of a rise in replacement tire unit shipments by 2% and by a positive impact of $179 million from higher sales in other tire-related businesses, primarily third-party chemical sales. The segment’s operating income increased by $107 million to $16 million, owing to improved price and product mix.
Sales in the Europe, Middle East and Africa Tire segment rose 5% to $1.5 billion on the back of a 6% rise in tire unit volume and a favorable price and product mix. Unit sales to OEMs increased 27% while replacement tire shipments inched up 1%. Operating income in the segment increased $88 million to $73 million due to a better price and product mix that more than offset the negative impact from higher raw material costs.
Sales in the Latin American Tire segment appreciated 21% to $529 million as tire unit volume increased 13% and price and product mix becomes strong. OEM unit volume rose 16% due to higher vehicle production while replacement tire unit shipments went up 11%. Operating income in the segment fell 10% to $ $66 million due to a negative impact of $32 million related to currency devaluation in Venezuela.
Goodyear continues to expect the devaluation in Venezuela to negatively affect operating income in the Latin American Tire segment by more than $75 million on a year-over-year basis for full year 2010.
Sales in the Asia-Pacific Tire segment rose 16% to $495 million, driven by a 9% increase in tire unit volume and strong replacement market volumes in China and India as well as by a favorable foreign currency translation. Unit sales to OEMs improved 22% due to higher vehicle production. Replacement tire shipments increased marginally by 2%.
Operating income in the segment scaled up 12% to $64 million due to a positive impact from better price and product mix, higher volume, cost reduction actions that more than offset the negative impact from higher raw material costs.
Goodyear had cash and cash equivalents of $1.68 billion as of June 30, 2010, a decline from $1.92 billion as of December 31, 2009. Long-term debt and capital leases were $4.42 billion as of June 30, 2010. Long-term debt (including capital leases) to capitalization ratio was as high as 87% as of the above date.
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 also targeted an additional $1 billion of gross savings by 2012. In addition, the company will benefit from its focus on 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. As a result, we continue to recommend the shares of the company as Hold (Zacks #3 rank) in the short term (1–3 months) and Neutral in the long term (6+ months).