Goodyear marked the first anniversary of its return to profitability after years awash in red ink with the proper paper gift: another second quarter financial report all in black.
The tire maker posted net income in the second quarter of $69 million-more than double the $30 million profit posted a year ago after Goodyear lost billions in 2002 and 2003. Its North American Tire (NAT) unit, for years Goodyear's Achilles heel, also reported its fifth consecutive quarterly profit.
But just as they have each of those last four quarters, Goodyear officials again were careful to indicate that they don't consider the company's turnaround a done deal in the face of rising raw material costs, still-high debt levels and looming pension expenses.
``We are making continuous progress,'' Chairman and CEO Robert Keegan told analysts during a conference call. ``...I can assure you we are not satisfied.''
The Akron-based tire maker posted net sales of $4.99 billion, up from $4.52 billion last year. For the first half of the year, sales rose to $9.76 billion from $8.82 billion a year ago, while net income improved to $137 million from a $48 million loss.
Tire unit volume in the second quarter rose 2.5 percent to 56.4 million units from 55 million units in 2004. Volume increases were driven by gains in the European, Latin American and Asia/Pacific markets. Total segment operating income in the quarter grew to $316 million from $254 million in 2004.
``Five of our businesses had record second quarter sales, and margins improved in our North American and European Union tire businesses,'' said Robert Keegan, chairman and CEO.
``This success is further evidence that our strategies are working and that our unwavering focus on key products, customers and markets is paying off. We continue to gain share in targeted markets.''
Mr. Keegan specifically pointed to the success of new products, including two Assurance tires and the Wrangler and Fortera light truck tires with SilentArmor technology. Sales of Assurance tires are outperforming 2004's levels. The tires, launched in 2003, were heralded as the most successful product launch in company history.
``Sales of our new Fortera and Wrangler SilentArmor light truck and SUV tires with Kevlar are above planned sales levels and frankly are challenging the record launch numbers of the Assurance family,'' Mr. Keegan told analysts.
Randy Gregg, president of Gregg Tire in Topeka, Kan., said his sales of Assurance's ComforTred and both SilentArmor tires have been brisk. He credits Goodyear's national advertising, which has also spurred him to advertise more as well.
The tire maker has done well improving dealer relations despite some hiccups along the way and supply of some older tire lines have suffered in the Assurance and SilentArmor push, but Mr. Gregg said he's confident in Goodyear's abilities.
``They've still got some problems,'' he acknowledged. ``At least if they continue to show a profit they can work on those problem areas. Everything was a problem area two to three years ago.''
NAT also posted quarterly segment operating income of $55 million, up from $41 million in 2004. Sales were up 5.8 percent to $2.3 billion from $2.17 billion a year ago. But tire unit volume fell 1.6 percent to 25.3 million units from 25.7 million units.
For the six months, NAT posted segment operating income of $66 million up from $17 million as sales jumped to $4.43 billion from $4.11 billion. Tire unit volume grew modestly to 50.6 million units from 50.4 million units.
While some cheer Goodyear's accomplishments-including its stock price, which closed at $18.49 Aug. 5, the highest mark since August 2002-other signs continue to concern some company watchers.
One such issue is Goodyear's reliance on other business units besides NAT for profitability. For the first half of the year, Goodyear's two largest units-NAT and European Union-contributed almost 70 percent of the total segment sales yet accounted for only 43 percent of the profit, about three-fourths of which came from Europe. Latin American Tire continues to contribute more profit than its sales share, accounting for 27 percent of the total segment profits on only 7 percent of the sales. NAT represents 45 percent of the sales and 11 percent of the profit.
This scenario raises concerns for some analysts that a shift in the equation's balance could likewise shift the profitability scales.
An analyst also questioned during the company's conference call whether the inclusion of the Chemical business into NAT artificially inflated results. Goodyear made the shift Jan. 1. In March, Goodyear had reported 2004 segment operating income for NAT of $31.5 million, but in June that was restated along with the chemical change to $73 million.
Chemical posted 2004 sales of $1.53 billion and income of $177 million, 53.4 percent and 75.2 percent of which, respectively, was the result of intracompany sales, which are no longer counted.
But Mr. Keegan said in the conference call that NAT still would have been profitable in the second quarter even without the addition of the chemical unit.
A remaining concern also is pension obligations. Goodyear expects to pay $400 million to $425 million in domestic pension contributions by year-end, but has spent only $96 million so far. The expected tally is well above 2004's $160 million contribution. And Goodyear's debt stands at $5.5 billion, down from $5.68 billion at year-end 2004.
Efraim Levy, an analyst with Standard & Poor's, has a hold rating on Goodyear's stock and expects revenues to climb 9-10 percent this year. ``We believe that revenue gains and restructuring savings should help the company return to profitability in the U.S. for the year,'' he wrote in a note to investors though he also cautioned about the long-term challenges from the debt and pension obligations.
But Goodyear said it has several key factors indicating its health as well. The tire maker estimates its North American replacement market share has remained steady at 25 percent in the first quarter, the same amount estimated for all of 2004. Original equipment's share has fallen slightly to 38 percent from 40 percent as Goodyear seeks more profitable OE business.
The company's available cash stands at $1.62 billion and hits $3.2 billion when funds available from credit agreements are factored in. That's a $1 billion improvement over the available cash from June 30, 2004. Also, Goodyear has extended debt maturities and scored revenue-per-tire increases in four of its five tire segments, leading to an overall 5-percent increase.
Also, Goodyear said it has been able to overcome increasing raw material costs. Those expenditures in the first half are up about $239 million over the first six months of 2004, but the tire maker was able to offset the costs through improved mix, productivity gains and price increases. The company expects raw material costs to rise 10 percent in 2005.