Cooper Tire & Rubber Company recently reported a first quarter 2020 net loss of $12 million, or diluted loss per share of $0.23, compared with net income of $7 million, or $0.14 diluted earnings per share, for the same period last year.
First Quarter Highlights
• Unit volume decreased 15.8 percent compared to the first quarter of 2019.
• Net sales decreased 14.1 percent to $532 million.
• Operating loss was $6 million, or 1.2 percent of net sales, compared to operating profit of $26 million, or 4.3 percent of net sales, in 2019.
• Operating results include approximately $11 million of restructuring charges related to the transition at the company’s now wholly owned Mexico manufacturing facility.
• At the end of the first quarter, Cooper had $433 million in unrestricted cash and cash equivalents compared with $212 million in 2019. To maximize financial flexibility, the company drew down $270 million on its revolving credit facilities during the quarter.
“Cooper’s priorities during this unprecedented time have continued to be the health and safety of our employees, responsibilities to our broader communities, and commitments to our customers as well as all other key stakeholders. I am exceedingly proud of how Cooper employees around the globe, driven by our purpose, mission and values, have risen to the challenges,” said Cooper President & Chief Executive Officer Brad Hughes.
“We entered this challenging period caused by the global pandemic with a strong team and strategic plan, a solid cash position and borrowing capacity, appropriate inventory levels and a flexible global manufacturing footprint. Cooper was tracking well against our strategic initiatives and previously stated financial goals and had considerable momentum.
“In response to the coronavirus, we temporarily shut down our manufacturing plants for various periods of time while we continued to operate our distribution centers around the world. At the same time, we took several actions to improve liquidity. As we have communicated over recent weeks, our China, U.S. and Serbia manufacturing plants are back in operation. These facilities will continue to ramp up as conditions improve. Meanwhile, our U.K. and Mexico facilities remain temporarily closed.
“Overall, we believe Cooper is in a good position to benefit when the economy recovers. Over the past two years, we have transformed our company into a consumer driven organization with Cooper products now more available where consumers want to buy tires. We believe that our value proposition — high quality tires at an affordable price — will be even more compelling for consumers in the future economy, and our heritage of manufacturing tires in the U.S. for U.S. drivers will become even more important coming out of this period of uncertainty. Our research suggests consumer confidence in the Cooper brand is growing, and we believe that we stand to be a consumer tire partner of choice.”
First quarter net sales were $532 million compared with $619 million in the first quarter of 2019, a decrease of 14.1 percent. First quarter net sales were negatively impacted by $98 million of lower unit volume and $4 million of unfavorable foreign currency impact, partially offset by $15 million of favorable price and mix. Operating loss was $6 million compared with operating profit of $26 million in the first quarter of 2019. Key drivers included $30 million of higher manufacturing costs, $18 million of lower unit volume, $6 million of higher restructuring costs and $2 million of higher other costs, which were partially offset by $12 million of favorable raw material costs, $6 million of favorable price and mix, and $6 million lower SG&A expenses.
Cooper’s first quarter raw material index decreased 6.0 percent compared to the first quarter of 2019. The raw material index increased 0.6 percent sequentially from 149.8 in the fourth quarter of 2019 to 150.7 in the first quarter of 2020.
The effective tax rate for the first quarter was (5.5) percent compared with 46.9 percent for the same period the prior year. The tax rate for the first quarter of 2020 included $4 million of additional unrecognized tax benefit related to the tax deductibility of certain business expenses incurred during the quarter. The tax rate for the first quarter of 2019 included the impact of final regulations related to U.S. income tax reform.
At the end of the first quarter, Cooper had $433 million in unrestricted cash and cash equivalents compared with $212 million at the end of the first quarter of 2019. To maximize financial flexibility, the company drew down $270 million on its revolving credit facilities during the quarter. In addition, Cooper has taken temporary actions to improve liquidity, including:
• Reduced working capital, capital expenditures and discretionary spending.
• Reduced salaries for executive leadership and the majority of salaried employees, and reduced cash retainers for members of our board of directors.
• Suspended discretionary pension contributions and company contributions to employee 401(k) plans.
• Furloughed a number of hourly and salaried employees.
Capital expenditures in the first quarter were $55 million, compared with $60 million, in the same period a year ago. First quarter selling, general and administrative (SG&A) expenses decreased 9.9 percent compared to the first quarter of 2019.
Return on invested capital was 6.3 percent for the trailing four quarters.
Americas Tire Operations
First quarter net sales in the Americas segment decreased 11.2 percent as a result of $61 million of lower unit volume and $1 million of unfavorable foreign currency impact, which were partially offset by $4 million of favorable price and mix. For the quarter, segment unit volume was down 11.9 percent compared to the same period a year ago.
Cooper’s first quarter total light vehicle tire shipments in the U.S. decreased 11.9 percent. The U.S. Tire Manufacturers Association (USTMA) reported that its member shipments of light vehicle tires in the U.S. decreased 12.3 percent. Total industry shipments (including an estimate for non-USTMA members) decreased 10.4 percent for the period.
First quarter operating profit was $10 million, or 2.3 percent of net sales, compared with $39 million, or 7.5 percent of net sales, for the same period in 2019. Operating profit included $14 million of lower unit volume, $19 million of unfavorable manufacturing and $11 million of higher restructuring costs. This was partially offset by $10 million of favorable raw material costs and $5 million of price and mix.
International Tire Operations
First quarter net sales in the International segment decreased 28.8 percent as a result of $46 million of lower unit volume and $4 million of unfavorable foreign currency impact, which were partially offset by $8 million of favorable price and mix. For the quarter, segment unit volume was down 31.8 percent compared to the same period a year ago.
The segment’s first quarter operating loss was $10 million compared with an operating loss of $1 million in the first quarter of 2019. The quarter included $11 million of higher manufacturing costs, $4 million of lower unit volume and $1 million of higher other costs. This was partially offset by $1 million of lower raw materials and $1 million of favorable price and mix compared to the same period a year ago. The first quarter of 2019 also included $5 million of restructuring costs related to Cooper Tire Europe’s decision to cease light vehicle tire production at its Melksham, England facility, positively impacting the year-over-year comparison.
Due to the rapidly evolving environment and continued uncertainties resulting from the coronavirus pandemic, Cooper withdraws its previously announced full year 2020 outlook, which was issued on February 24. “We cannot at this time predict the extent or duration of the pandemic and its impacts on our financial and operating results for the full year. Given that the coronavirus will likely have a significant impact on the second quarter, we believe it will be the most challenging quarter of our year for operating profit. We have dramatically scaled back our capital expenditure plans, and now expect full year 2020 capital expenditures to be between $140 and $160 million, but this is dependent on the duration and severity of the pandemic. With this and other actions, we do not currently believe we will have a substantial cash usage in the second quarter. Overall, we are confident in our ability to weather the storm,” said Hughes.
“Prior to the pandemic, we were on pace relative to our original outlook, validating that our strategic plan remains the right path for our future. We entered this challenging period with a strong balance sheet and financial flexibility. While we will face uncertainty and many challenges, we believe Cooper will overcome the impacts of the coronavirus and we look forward to the opportunities ahead. We expect the economy to improve as the year progresses, and that our results will reflect this. For now, we will continue to focus on doing what is right for employee health and safety, our communities, customers and other key stakeholders.”