Cooper Tire & Rubber Company Reports Second Quarter Results
Second Quarter Highlights
- Net sales increased 22 percent
- Market share gains realized in all key product categories
- Sales from International Tire Operations increased 124 percent
- Operating profit in International Operations increased by more than 200 percent
FINDLAY, Ohio, Aug. 3 -- Cooper Tire & Rubber Company today reported consolidated net sales of $625 million for the three-month period ended June 30, 2006, up more than 22 percent compared to the same period a year ago, in spite of continuing weak demand in the replacement tire markets in North America and Europe. The increase was driven largely by the Company's acquisition of Cooper Chengshan (Shandong) Passenger Tire Co., Ltd., and Cooper Chengshan (Shandong) Tire Company, Ltd., which was finalized with an effective date of February 4, 2006, and by improved product pricing and mix. Cooper Chengshan continued to deliver solid results and added $110 million in sales during the quarter while improved pricing and mix in North America and Europe added $36 million. These increases were partially offset by the impact of continuing weak replacement tire markets and lower unit sales in North America and Europe.
Extraordinarily weak replacement tire demand in the North American market and the resultant high inventories prompted the Company to reduce production during the quarter, resulting in $8 million in unabsorbed overhead expense. In addition, the Company announced the planned closure of its manufacturing facility in Athens, GA, which produced tire retread products and a relatively small number of racing tires. The Company recorded $8 million of restructuring costs in the second quarter in connection with the planned closure. Including these items (21 cents per share) and the negative impact of lower overall unit volumes and increasing raw material costs, the Company generated an operating loss of $26 million and a net loss of $21 million, or 34 cents per share.
For the six month period ended June 30, 2006, the Company recorded sales of $1.2 billion, up 19 percent compared to the same period a year ago, and generated an operating loss of $30 million and a net loss of $26 million.
North American Tire Operations
The Company's North American Tire operations continued to gain share during the quarter in a very difficult market. The Rubber Manufacturers Association (RMA) reported preliminary light vehicle replacement tire shipments were down 7 percent in the second quarter. Cooper's total light vehicle tire shipments were down approximately 5 percent. Cooper gained market share in virtually all product categories including broadline, high performance, ultra-high performance, SUV and light truck tires. Importantly, strong market share gains were in the Cooper brand product lines, contributing to an improved product mix. Year-over-year increases in premium product sales such as SUV and performance tires also contributed to the positive mix change. Unit sales of SUV tires increased by 2 percent and unit sales of high performance and ultra-high performance tires increased by more than 14 percent during the quarter.
In total, Cooper's North American Tire operations reported sales of $463 million in the second quarter of 2006, up 1 percent compared to sales in the second quarter of 2005. This increase is attributable to improved pricing and mix, offset by lower unit sales.
Operating results for the North American Tire operations declined year over year as a result of several key operating factors. In addition to the $8 million in restructuring charges for the Athens, GA plant closure and the $8 million in unabsorbed overhead from temporary plant shutdowns to reduce inventory, lower unit sales reduced operating profit by $7 million. Higher commodity prices further reduced operating profit by $27 million. These were partially offset by $21 million in improved pricing.
In total, North American Tire operations generated an operating loss of $30 million in the second quarter and $36 million in the first six months of 2006.
International Tire Operations
The Company's International Tire Operations reported sales of $186 million in the quarter, an increase of 124 percent compared to the second quarter of 2005. The acquisition of Cooper Chengshan contributed $110 million in sales during the period as sales remained strong within China and in certain export markets. Sales for Cooper Europe were down about 9 percent following the record sales in the first quarter and as a result of unfavorable changes in foreign currency exchange rates. Total unit sales for the International Tire Operations more than doubled compared to the second quarter of 2005.
Operating profit for the International segment was $8 million compared to $3 million in the second quarter of 2005. Cooper Chengshan added more than $9 million in operating profit. Improved pricing and mix added $5 million. These were partially offset by higher raw material costs, expenses related to the startup of Asian operations, lower overall unit volume in Europe, and higher utility and other plant costs.
For the first six months of the year, the Company's International Tire Operations recorded sales of $311 million and operating profit of $11 million compared to $162 in sales and $3 million in operating profit in the same period a year ago.
Management Commentary
Commenting on the quarter's results, Cooper's interim chief executive officer Byron O. Pond said, "The replacement tire market conditions in North America remained challenging in the second quarter. Replacement tire demand was soft, manufacturers' inventories were increasing, and raw material prices continued to escalate relentlessly. In this tough environment, we focused on customer service and sales of our premium products and were able to gain market share and improve our overall product and customer mix.
"The North American Tire Division curtailed production to adjust inventory levels rather than use price discounts in an attempt to temporarily stimulate demand. Our shutdowns did have the intended result of bringing our inventory more in line with our plans and anticipated demand.
"We are very pleased with the results of Cooper Chengshan as sales remain strong and margins are solid. We are working to further improve the efficiency and increase the capacity of Cooper Chengshan in order to take advantage of the tremendous opportunities in China. We are currently in the process of test marketing Cooper brand premium tires in China and we are excited about our future in China and the surrounding region," Pond said.
Outlook
Based on historical cyclical patterns and annual seasonal patterns for the replacement tire industry in North America, the Company expects replacement tire demand to improve somewhat in the second half of the year. However, the Company also anticipates continued increases in the prices of its key raw materials as the year progresses. For the third quarter, the Company expects sequential commodity price increases to be in the range of 5 to 7 percent, which would amount to 17 to 20 percent on a year-over-year comparison basis. In an effort to offset these increasing material costs, the Company implemented a price increase of up to 7 percent on all product lines in its North American Tire operations effective July 1, 2006.
For its International operations, the Company anticipates improvement in European markets and continued strong growth in China over the next 6 months. Initiatives to increase total production in China will continue at Cooper Chengshan, through outsource supply arrangements, and through the construction of the Cooper-Kenda joint venture plant. The Cooper-Kenda plant will be ready to begin production during the fourth quarter of 2006.
"While we are not satisfied with the results of this quarter, we are confident that our fundamental strategy is correct," Pond continued. "We are putting more effort into cost reduction and other margin improvement initiatives and are confident they will improve performance. Our gains in market share, the growth of our high-performance and premium products, and improving brand recognition will also help us put profit back on track. All of this, combined with further progress we are making in more efficient manufacturing and low-cost sourcing will position us well for the future."
Cooper's management team will discuss the financial and operating results for the quarter in a conference call today at 11:00 a.m. Eastern time. Interested parties may access the audio portion of that conference call on the investor relations page of the Company's web site at www.coopertire.com.
Company Description
Cooper Tire & Rubber Company is a global company that specializes in the design, manufacture, marketing and sales of passenger car, light truck, medium truck tires and subsidiaries that specialize in motorcycle and racing tires, as well as tread rubber and related equipment for the retread industry. With headquarters in Findlay, Ohio, Cooper Tire has 59 manufacturing, sales, distribution, technical and design facilities within its family of companies located around the world. For more information, visit Cooper Tire's web site at: www.coopertire.com.
Cooper Tire & Rubber Company
Consolidated Statements of Income
(Dollar amounts in thousands except per share amounts)
Quarter Ended Six Months Ended
June 30 June 30
2005 2006 2005 2006
Net sales $510,930 $624,785 $1,024,987 $1,221,367
Cost of products sold 473,020 595,357 938,395 1,148,570
Gross profit 37,910 29,428 86,592 72,797
Selling, general
and administrative 37,497 46,872 80,298 94,816
Restructuring charges - 8,448 - 8,212
Operating profit (loss) 413 (25,892) 6,294 (30,231)
Interest expense 13,715 11,584 27,930 22,397
Interest income (4,520) (2,097) (10,134) (5,068)
Debt extinguishment 9,075 - 9,075 (77)
Dividend from
unconsolidated subsidiary - 326 - (4,286)
Other income - net (305) 160 (1,534) 130
Loss from continuing operations
before income taxes (17,552) (35,865) (19,043) (43,327)
Income tax benefit 11,131 16,100 11,578 18,407
Loss from continuing operations
before minority interests (6,421) (19,765) (7,465) (24,920)
Minority interests 3 (3,157) 3 (3,470)
Loss from continuing operations (6,418) (22,922) (7,462) (28,390)
Income from discontinued
operations, net of income taxes (463) 2,190 5,797 2,504
Net income (loss) $(6,881) $(20,732) $(1,665) $(25,886)
Basic earnings (loss) per share
Loss from continuing
operations $(0.10) $(0.37) $(0.11) $(0.46)
Income from discontinued
operations $(0.01) $0.04 $0.09 $0.04
Net income (loss) $(0.11) $(0.34)* $(0.03)* $(0.42)
Diluted earnings (loss) per share
Loss from continuing
operations $(0.10) $(0.37) $(0.11) $(0.46)
Income from discontinued
operations $(0.01) $0.04 $0.09 $0.04
Net income (loss) $(0.11) $(0.34)* $(0.03)* $(0.42)
Weighted average shares outstanding
Basic 62,250 61,337 66,039 61,334
Diluted 62,250 61,337 66,039 61,334
Depreciation $26,704 $34,095 $52,351 $64,134
Amortization $1,095 $1,354 $2,178 $2,658
Capital expenditures $53,921 $43,271 $89,118 $76,594
Segment information
Net sales
North American Tire $458,874 $463,448 $921,729 $959,299
International Tire 82,929 185,904 162,330 310,977
Eliminations (30,873) (24,567) (59,072) (48,909)
Segment profit (loss)
North American Tire 1,330 (29,895) 7,782 (35,807)
International Tire 2,536 7,710 2,717 11,125
Eliminations (208) (844) (578) (1,672)
Unallocated corporate
charges (3,245) (2,863) (3,627) (3,877)
CONSOLIDATED BALANCE SHEETS
June 30
2005 2006
Assets
Current assets:
Cash and cash equivalents $445,047 $105,201
Short-term investments 42,065 -
Accounts receivable 364,302 460,594
Accounts receivable from sale
of automotive operations - -
Inventories 329,931 464,671
Other current assets 31,638 44,932
Deferred income taxes 28,022 23,834
Total current assets 1,241,005 1,099,232
Property, plant and equipment 765,290 966,309
Goodwill 48,172 60,361
Restricted cash 13,062 14,159
Intangibles and other assets 346,453 357,010
$2,413,982 $2,497,071
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $98 $115,397
Payable to non-controlling owner - 43,273
Trade payables and accrued liabilities 310,410 410,655
Income taxes 1,266 7,231
Liabilities of discontinued operations 2,923 2,640
Total current liabilities 314,697 579,196
Long-term debt 685,620 502,619
Postretirement benefits
other than pensions 175,879 187,281
Other long-term liabilities 198,262 236,593
Long-term liabilities of
discontinued operations 22,214 9,396
Deferred income taxes 44,227 18,891
Minority interests 2,551 59,095
Stockholders' equity 970,532 904,000
$2,413,982 $2,497,071
* Amounts do not add due to rounding
These interim statements are subject to year-end adjustments
Certain amounts from 2005 have been reclassed to conform to 2006
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