Goodyear Defends Surprise Earnings Disclosure As Shares Fall Further

A day after a surprise comment on a conference call sent Goodyear Tire & Rubber Co.'s (GT) shares down more than 20%, the company's finance chief defended the way it handled the disclosure that profit in the North America divison would fall.

Investors and bank analysts were expecting better fourth-quarter results because Goodyear had cut costs significantly and a gradually recovering economy held out the promise of a pickup in business.

Goodyear Chief Executive Officer Robert Keegan began Wednesday's routine analyst conference call with an upbeat assessment of the company's health. It wasn't until almost midway through the call that the company revealed reduced financial expections for its key North America unit.

Thursday, Darren Wells, Goodyear's chief financial officer, said the company simply decided to "provide additional clarity on our businesses" during the call.

"We are committed to strong disclosure," Wells said in an interview with Dow Jones Newswires.

The thrust of Goodyear's surprise disclosure was that North America earnings will fall between $75 million and $125 million in the fourth quarter compared with the third.

The stock was punished almost immediately as some investors and analysts were expecting sequential growth. Goodyear, based in Akron, Ohio, is North America's largest tire maker.

"The information we provided was not anything different than what we have said in the past," Wells said. "There was some incremental changes based on what we saw going ahead."

Goodyear says the current quarter's main difficulties include commercial truck tire production operating at only 41% of capacity, and rising overhead costs.

What perplexed the market was that Goodyear had aggressively cut jobs and had generally been pointing to a recovery.

Bank of America/Merrill Lynch analyst John Murphy downgraded the stock to "underperform" and slashed his 2009 earnings forecast to 20 cents a share from $1.23. He also lowered 2010 earnings to 55 cents a share from $1.75.

"Following an okay third quarter, it now appears the fourth-quarter will be materially weaker than we had expected," Murphy said in a research note. He also put the company's stock target at $10.

JP Morgan analyst Himanshu Patel, saying he remains uncertain about Goodyear's overhead costs, lowered estimated fourth-quarter earnings to a loss of 16 cents a share and cut his 2010 forecast to $1 from $1.50 a share

"After much back and forth yesterday with Goodyear management, existing and potential holders, and ourselves, we have concluded that the fourth-quarter weakness is notably the result of cost timing issues," Patel said in a research note.

Goodyear's earnings press release Wednesday didn't disclose the extent of its North America shortfall, nor did a set of slides posted on its Web site. Keegan didn't mention it during the conference call's opening remarks, focusing instead on the slow global recovery.

"Overall, the world's economies are showing increasing signs of recovery, but certainly not as fast, as strong or as consistently as we'd all like to see globally," Keegan said as the call started. "Our company's strategy has again proven to be very effective in 2009 through the third quarter, and our performance provides us with a high level of confidence for the future."

It was CFO Wells who disclosed the fourth-quarter North American problem on the call. Asked why the information wasn't in the press release, and why he not Keegan discussed it on the call, Wells said presenting financial information is usually left to him during such calls.

"We tend to use the back-and-forth of two-way dialogue to give additional information, instead of using the press release," he said.

This is actually the first time Goodyear's current management has provided in-depth quarterly financial guidance. "As the market recovery became clearer we got comfortable with our expectations," Wells said.

Shares of Goodyear fell as much as 9% Thursday before recovering somewhat to end down 3.6% at a preliminary $12.97.

KeyBanc Capital Markets analyst Saul Ludwig said he was maintaining his "buy" rating on the stock.

"I think it was a smart move; had they not hung their dirty laundry it would be unlikely our analyst fraternity would have expected poor results," Ludwig said. "Its another period of disappointment and they got it out on the table and it eliminates the negative surprise potential."

--By Jeff Bennett; Dow Jones Newswires; [e-mail]; 248-204-5542