Cooper reports second-quarter, first-half losses

Aug. 2, 2005

Cooper Tire & Rubber Co. posted a net loss of $6.9 million on net sales of $511 million for the second quarter ended June 30, 2005. That compares to a net gain of $34 million on sales of $509 million for 2Q 2004.

Cooper cites a number of activities during the second quarter that impacted earnings.

* the work stoppage in its Texarkana, Ark., production facility, which began in March and continued into April. It reduced net income by $9 million in the second quarter and $14 million in the first half. (The work stoppage was resolved with the ratification of a five-year contract on April 10, 2005.)

* the repurchasing of $84 million of its publicly traded debt (with maturity in 2009) through a public tender offer. The company's results reflect the $8 million in debt extinguishment costs incurred with the debt retirement. The results also reflect an income tax benefit of $11 million.

For the first six months of the year, Cooper recorded a net loss of $1.9 million on net sales of $1 billion.

"We have worked hard to overcome some very difficult operating conditions during the quarter and the first half of the year," says Tom Dattilo, chairman, CEO and president. "We made good progress once the strike was behind us, and that progress was clearly evident in June, but it was not enough to offset the broad impact on sales and disruption of our manufacturing operations in the first two months of the quarter."

North American tire operations

Net sales for Cooper's North American tire operations in the second quarter were $460 million, up 1% compared to the second quarter of 2004. The increase in sales was the result "of significant improvements in price and mix, but these were almost completely offset by lower unit sales."

The lower unit volume was partly the result of weaker than expected market demand for the industry overall and, more particularly, in the light truck replacement tire market segment, according to the company.

In addition, the company's continuing reduction of broadline sales to less profitable distribution channels, as well as sales lost due to the production disruption in Texarkana and the resulting imbalance in tire inventory, contributed to the lower overall unit sales.

(Industry shipments of replacement tires for passenger vehicles from Rubber Manufacturers Association (RMA) member companies increased just over 2% in the quarter; light truck replacement tire shipments decreased by more than 3%.)

Operating profit for North American tire operations was $2 million in the second quarter compared to $22 million in the second quarter of 2004. The lower operating profit "was the result of lower overall sales volume, the impact of the strike in Texarkana and higher raw material costs," says Cooper. These were only partially offset by improved price and mix.

For the first six months of the year, North American tire operations sales were $924 million, up 5% compared to $884 million in sales during the first half of 2004. Operating profit for North American tire operations was $10 million in the first half compared to $35 million recorded in the same period a year ago.

Year-to-date, the company's tire unit volumes in North America are down 5%, industry volumes are up approximately 2%.

International tire operations

Net sales for Cooper's international tire operations were $70 million in the second quarter of 2005, an increase of more than 11% compared to the $63 million in sales achieved in the second quarter of last year. The increase was driven by a 4% increase in unit sales, the positive impact of improved product price and mix, as well as favorable foreign currency exchange rates.

Operating profit for Cooper's international tire operations was $2 million for the quarter compared to $4 million in the second quarter of last year.

Expenses as a result of the start-up of the company's operations in Asia plus higher raw material costs were the most significant factors in the lower profit margin. However, these expenses were partially offset by the higher overall unit sales volume in Cooper's European operations.

For the first six months of 2005, net sales for the international tire operations were $136 million, an increase of 6% over the first half of 2004. Operating profit was $1 million in the first half of 2005 compared to $7 million in the same period a year ago.

"After a tough start to the year, our mission is to finish the year strong," says Dattilo. "We know what we have to do and I believe that we will.

"We have made progress in our manufacturing operations and processes. We are getting better at managing higher levels of production complexity related to the SKU proliferation in the marketplace and all the new tires we now offer. We are making progress in rationalizing our customer mix and we will continue to concentrate on our core independent dealer distribution.

"More importantly, we are seeing solid improvements in our order fill rates and our customer service levels that will help us generate stronger sales in the future.

"Increasing raw material costs will continue to be a major challenge for our company and our industry through at least the end of 2005. Natural rubber prices jumped significantly in the latter part of the second quarter and we see them remaining fairly steady for the next quarter. Stubbornly high oil prices and strong demand are driving most other materials higher as well, which is a direct contrast to the modest improvement we had anticipated.

"The higher cost of raw materials, compared to the same period last year, could impact our operating profit by as much as $35 to $40 million in the third quarter alone," says Dattilo. "As we have done in the past several quarters, we will need to offset these higher costs through our lean savings initiatives, improving our efficiency and through additional tire price increases if available.

"We will likely experience some lingering impact from the Texarkana strike in the rest of the year in the form of imbalanced inventory and lost sales of our premium light truck and sport truck products. But the new, more efficient equipment we have been installing and our plant expansions overall will put us in a better position to supply our customers with the products they need, when they need them. So we expect our sales in the third and fourth quarters should improve over last year.

"Considering all these factors and our internal plans, we remain confident that our results will show continuing improvement in the second half of the year. We expect modest operating margin improvement to about 4% in the third quarter and overall earnings in the range of 10 to 14 cents, which includes an impact of approximately 8 cents per share in the third quarter from the Texarkana strike and an estimated negative impact of 4 cents per share as a result of the unusual tax rate."

Cooper's stock on the New York Stock Exchange closed at $20.77 a share on Monday, Aug. 1, 2005. That compares to a 52-week high and low of $23.89 and $16.47, respectively.