Cooper Tire's second quarter earnings fall as sales decline

- Aug 10, 2018-

Cooper Tire & Rubber Co.'s operating income plummeted 61.1 percent to $32.8 million as sales slipped 3.1 percent to $698.4 million in the second quarter, ended June 30, compared with the year-ago period.

Net income fell 66.9 percent to $15 million, compared with the year-ago period.

"Due to continuing industry challenges and, in particular, rising raw material costs, we are revising our expectations for the balance of the year. Cooper now anticipates unit volume to be flat in 2018 compared to 2017, with a modest sequential improvement in operating profit margin in the second half of this year," said Brad Hughes, Cooper president and CEO.

"We continue to believe that we have the right strategic plan in place and remain confident in our five-year financial targets, which include operating profit of 10 to 14 percent, as well as annual unit volume growth in the low- to mid-single digits and return on invested capital of 14 to 16 percent."

Second-quarter net sales were negatively impacted by $16 million of lower unit volume, $13 million of unfavorable price and mix and $6 million of favorable foreign currency impact, the company said.

"Cooper delivered second-quarter results in line with our stated expectations, including operating profit margin of 4.7 percent of net sales, up slightly from the previous quarter," said Hughes.

"While challenging industry conditions have continued longer than expected, we are confident in our strategic plan, as detailed at our recent investor event. We continue to make solid progress in our strategic initiatives, including expanding into new sales channels and driving sell-in with exciting new products, such as our new AT3 line. Cooper's brand strength and attractive value proposition, combined with our strategic initiatives, provide a solid foundation for volume and profit growth."

Operating profit for the second quarter of 2017 has been restated to reclassify $9 million of other pension and post-retirement benefit costs out of operating profit. Operating profit for the second quarter included $21 million of higher manufacturing costs and $20 million of unfavorable price and mix, net of raw material costs. Higher manufacturing costs reflect the alignment of production to demand in order to control inventory levels, Cooper said.

Lower unit volume also negatively impacted operating profit by $4 million related to lower unit volume. SG&A increased $6 million in the quarter due to higher professional fees related to strategic initiatives and market-to-market cost of stock based liabilities.

Cooper's second-quarter raw material index increased slightly from the second quarter of 2017. The raw material index increased 4.6 percent sequentially from 156.6 in the first quarter of 2018 to 163.8 in the second quarter of 2018.

Hughes said raw material costs were rising faster than expected and he forecast that they would continue an upward trend through the remainder of the year, due in part to tariffs and proposed tariff increases. However, he said he expects the rising costs to be offset by anticipated pricing actions in the industry.

Operating profit for the company's Americas Tire Operations decreased 55.5 percent to $40.5 million as sales fell 5 percent to $584.4 million for the quarter.

Sales in the Americas segment were impacted by $23 million of lower unit volume, $6 million of unfavorable price and mix and $2 million of unfavorable foreign currency impact.

Segment unit volume decreased 3.7 percent from the prior year, with unit volume decreases in North America and Latin America.

Cooper said its second-quarter total light vehicle tire shipments in the U.S. fell 3.3 percent.

Second-quarter operating profit was $40.5 million, or 6.9 percent of net sales, compared with $90.9 million, or 14.8 percent of net sales, a year ago. Operating profit for the second quarter was impacted by $25 million of unfavorable price and mix, as well as $2 million of higher raw materials cost, Cooper said.

Operating profit also was impacted by higher manufacturing costs of $17 million, as production was adjusted to align with demand in order to control inventory levels. Additionally, the segment incurred $4 million of lower unit volume and other costs increased $3 million in the quarter, including increased SG&A.

Cooper's International Tire Operations more than doubled its operating profit to $5.65 million as sales jumped 10.9 percent to $167.8 million for the quarter.

The sales increase was the result of $5 million of favorable price and mix, $1 million of higher unit volume and $11 million of favorable foreign currency impact, the tire maker said. Segment unit volume increased 0.7 percent from the prior year, driven by an increase in unit volume in Asia, which was partially offset by a slight unit volume decline in Europe, Cooper said.

Operating profit was driven by $6 million of lower raw material costs, net of price and mix. Manufacturing costs were $4 million unfavorable, while other costs decreased $1 million in the quarter.

Cooper's effective tax rate for the second quarter was 12.6 percent, compared with 32.7 percent in the prior year. The tax rate includes the benefit of a lower blended U.S. statutory tax rate as a result of U.S. income tax reform and about $1 million of net discrete items recorded in the quarter, the tire maker said. The rate is based on forecasted annual earnings and tax rates for the various jurisdictions in which the company operates.

Capital expenditures in the second quarter totaled $38 million, compared with $45 million in the same period of last year. Capital expenditures for the year are expected to range between $200 and $220 million.

For the first six months, Cooper's operating profit plunged 58.4 percent to $59.2 million on a 4.7 percent drop in net sales to $1.3 billion, compared with the year-ago period. Net income dropped 69.3 percent to $23.3 million.

Meanwhile, the Americas segment's operating profit fell 55.6 percent to $71.7 million on a 6.7 percent drop in net sales to $1.07 billion.

The International segment boosted its operating earnings 129 percent to $13.1 million as sales climbed 12.2 percent to $329.1 million.