How will the recent currency devaluation in Venezuela affect the Goodyear Tire & Rubber Co., one of the tire manufacturers with plants in that country?
Industry analysts already have broached the subject (see "Ludwig: Goodyear stock remains at Buy."). Here is Goodyear's official release commenting on the currency devaluation:
On Jan. 8, 2010, the Venezuelan government announced the devaluation of its currency (the bolivar fuerte) and the establishment of a two-tier exchange structure.
The official exchange rate has been devalued from 2.15 bolivar fuerte to each U.S. dollar to 4.30, except in the case of essential goods, for which the rate is 2.60. Some of the tires and raw materials the Goodyear Tire & Rubber Co. imports into Venezuela have been classified as essential, while others have not. The company is evaluating the list of goods classified by the Venezuelan government as essential to determine the exchange rates applicable to its imports.
Separately, Venezuela has been designated hyper-inflationary effective Jan. 1, 2010, and as such, all future foreign currency fluctuations will be recorded in income.
While Goodyear continues to evaluate the impact of these actions by the Venezuelan government, it expects to record a charge associated with the devaluation, which if calculated at the 4.30 exchange rate would be approximately $150 million (62 cents per share) in the first quarter of 2010. This charge relates to the remeasurement of its balance sheet, net of tax. To the extent that Goodyear imports are classified as essential, this impact could be reduced.
At Dec. 31, 2009, without giving effect to the devaluation, Goodyear had approximately $370 million in cash denominated in bolivar fuerte in Venezuela. The devaluation will not have any impact on Goodyear’s 2009 results of operations or financial position.
The future results of Goodyear’s Venezuelan operations will be affected by many factors, including the company’s ability to take actions to mitigate the effect of the devaluation, further actions of the Venezuelan government, economic conditions in Venezuela such as inflation and consumer spending, and the availability of raw materials, utilities and energy.
“We have a strong business in Venezuela with an outstanding and experienced leadership team that is focused on managing through the changes taking place in the Venezuelan market,” said Robert Keegan, Goodyear’s chairman and chief executive officer.
