Market Overview

Cooper Tire & Rubber Company Reports Second Quarter 2018 Results In Line With Outlook; Revises Second Half Outlook

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Cooper Tire & Rubber Company (NYSE:CTB) today reported second quarter
2018 net income of $15 million, or diluted earnings per share of $0.30,
compared with $45 million, or $0.85 per share, for the same period last
year.

Second Quarter Highlights:

  • Consolidated unit volume decreased 2.1 percent compared to the prior
    year, with a decrease in the Americas segment, partially offset by an
    increase in the International segment.
  • Net sales decreased 3.1 percent to $698 million.
  • Operating profit was $33 million, or 4.7 percent of net sales.
  • Cooper repurchased $14 million of common stock at an average price of
    $26.66 per share.
  • The company began shipping the new Discoverer AT3™ all-terrain product
    line in mid-June.

"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 Brad Hughes,
President & Chief Executive Officer. "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."

Consolidated Results:

     
Cooper Tire   Q2 2018 (NYSE:M)   Q2 2017 (NYSE:M)   Change
Net Sales $698 $721 (3.1)%
Operating Profit $33 $84 (61.1)%
Operating Margin 4.7% 11.7% (7.0) ppts.
 

Second quarter net sales were $698 million, a decrease of 3.1 percent
compared with $721 million in the second quarter of 2017. 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.

Second quarter 2018 operating profit was $33 million compared with $84
million for the same period last year. Operating profit for the second
quarter of 2017 has been restated to reclassify $9 million of other
pension and postretirement 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. In addition,
operating profit decreased $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 mark-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.

The effective tax rate for the second quarter was 12.6 percent, compared
to 32.7 percent in the prior year. The second quarter 2018 tax rate
includes the benefit of a lower blended U.S. statutory tax rate as a
result of U.S. income tax reform and approximately $1 million of net
discrete items recorded in the quarter. The rate is based on forecasted
annual earnings and tax rates for the various jurisdictions in which the
company operates.

At quarter end, Cooper had $180 million in cash and cash equivalents
compared with $302 million at the end of the same period last year.
Capital expenditures in the second quarter were $38 million compared
with $45 million in the same period of last year.

Cooper generated a return on invested capital, excluding the impact of
discrete tax items in the fourth quarter of 2017, of 10.3 percent for
the trailing four quarters.

During the second quarter, 517,354 shares were repurchased for $14
million at an average price of $26.66 per share. Since share repurchases
began in August 2014, the company has repurchased a total of 15.7
million shares at an average price of $34.12 per share.

Americas Tire Operations:

     
Americas Tire Operations   Q2 2018 (NYSE:M)   Q2 2017 (NYSE:M)   Change
Net Sales $584 $615 (5.0)%
Operating Profit $40 $91 (55.5)%
Operating Margin 6.9% 14.8% (7.9) ppts.
 

Second quarter net sales in the Americas segment declined 5.0 percent as
a result of $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's second quarter total light vehicle tire shipments in the U.S.
decreased 3.3 percent. The U.S. Tire Manufacturers Association (USTMA)
reported that its member shipments of light vehicle tires in the U.S.
were down 0.6 percent. Total industry shipments (including an estimate
for non-USTMA members) increased 4.2 percent for the period.

Second quarter operating profit was $40 million, or 6.9 percent of net
sales, compared with $91 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. Operating profit was also 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.

International Tire Operations:

     
International Tire Operations   Q2 2018 (NYSE:M)   Q2 2017 (NYSE:M)   Change
Net Sales $168 $151 10.9%
Operating Profit $6 $3 110.1%
Operating Margin 3.4% 1.8% 1.6 ppts.
 

Second quarter net sales in the International segment increased 10.9
percent as a result of $5 million of favorable price and mix, $1 million
of higher unit volume and $11 million of favorable foreign currency
impact. 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.

Second quarter operating profit was $6 million, or 3.4 percent of net
sales, compared with $3 million, or 1.8 percent of net sales, a year
ago. The increase 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.

Outlook

"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," Hughes said. "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."

Additional management expectations for 2018 include:

  • Effective tax rate in a range between 23 and 26 percent, and
  • Capital expenditures in a range between $200 and $220 million.

Second Quarter 2018 Conference Call Today at 10 a.m. Eastern

Management will discuss the financial and operating results for the
second quarter, as well as the company's business outlook, on a
conference call for analysts and investors today at 10 a.m. EDT. The
call may be accessed on the investor relations page of the company's
website at http://coopertire.com/Investors.aspx
or at https://services.choruscall.com/links/ctb180806.html.
Following the conference call, the webcast will be archived and
available for 90 days at these websites.

A summary slide presentation of information related to the quarter is
posted on the company's website at http://investors.coopertire.com/Quarterly-Results.

Forward Looking Statements

This release contains what the company believes are "forward-looking
statements," as that term is defined under the Private Securities
Litigation Reform Act of 1995, regarding projections, expectations or
matters that the company anticipates may happen with respect to the
future performance of the industries in which the company operates, the
economies of the U.S. and other countries, or the performance of the
company itself, which involve uncertainty and risk. Such
"forward-looking statements" are generally, though not always, preceded
by words such as "anticipates," "expects," "will," "should," "believes,"
"projects," "intends," "plans," "estimates," and similar terms that
connote a view to the future and are not merely recitations of
historical fact. Such statements are made solely on the basis of the
company's current views and perceptions of future events, and there can
be no assurance that such statements will prove to be true.

It is possible that actual results may differ materially from
projections or expectations due to a variety of factors, including but
not limited to:

  • volatility in raw material and energy prices, including those of
    rubber, steel, petroleum-based products and natural gas or the
    unavailability of such raw materials or energy sources;
  • the failure of the company's suppliers to timely deliver products or
    services in accordance with contract specifications;
  • changes to tariffs or trade agreements, or the imposition of new
    tariffs or trade restrictions, imposed on tires or materials or
    manufacturing equipment which the Company uses, including changes
    related to tariffs on automotive imports, as well as on tires, raw
    materials and tire-manufacturing equipment imported into the U.S. from
    China;
  • changes in economic and business conditions in the world, including
    changes related to the United Kingdom's decision to withdraw from the
    European Union;
  • the impact of the recently enacted tax reform legislation;
  • increased competitive activity including actions by larger competitors
    or lower-cost producers;
  • the failure to achieve expected sales levels;
  • changes in the company's customer or supplier relationships or
    distribution channels, including loss of particular business for
    competitive, credit, liquidity, bankruptcy, restructuring or other
    reasons;
  • consolidation or other cooperation by and among the company's
    competitors or customers;
  • the ultimate outcome of litigation brought against the company,
    including product liability claims, which could result in commitment
    of significant resources and time to defend and possible material
    damages against the company or other unfavorable outcomes;
  • a disruption in, or failure of, the company's information technology
    systems, including those related to cybersecurity, could adversely
    affect the company's business operations and financial performance;
  • changes in pension expense and/or funding resulting from the company's
    pension strategy, investment performance of the company's pension plan
    assets and changes in discount rate or expected return on plan assets
    assumptions, or changes to related accounting regulations;
  • government regulatory and legislative initiatives including
    environmental, healthcare, privacy and tax matters;
  • volatility in the capital and financial markets or changes to the
    credit markets and/or access to those markets;
  • a variety of factors, including market conditions, may affect the
    actual amount expended on stock repurchases; the company's ability to
    consummate stock repurchases; changes in the company's results of
    operations or financial conditions or strategic priorities may lead to
    a modification, suspension or cancellation of stock repurchases, which
    may occur at any time;
  • changes in interest or foreign exchange rates;
  • an adverse change in the company's credit ratings, which could
    increase borrowing costs and/or hamper access to the credit markets;
  • failure to implement information technologies or related systems,
    including failure by the company to successfully implement ERP systems;
  • the risks associated with doing business outside of the U.S.;
  • the failure to develop technologies, processes or products needed to
    support consumer demand or changes in consumer behavior;
  • technology advancements;
  • the inability to recover the costs to develop and test new products or
    processes;
  • the impact of labor problems, including labor disruptions at the
    company, its joint ventures, or at one or more of its large customers
    or suppliers;
  • failure to attract or retain key personnel;
  • inaccurate assumptions used in developing the company's strategic plan
    or operating plans or the inability or failure to successfully
    implement such plans or to realize the anticipated savings or benefits
    from strategic actions;
  • the costs and timing of restructuring actions and impairments or other
    charges resulting from such actions or from adverse industry, market
    or other developments;
  • risks relating to acquisitions including the failure to successfully
    integrate them into operations or their related financings may impact
    liquidity and capital resources;
  • changes in the company's relationship with its joint-venture partners
    or suppliers, including any changes with respect to its former PCT
    joint venture's production of Cooper-branded products;
  • the ability to find alternative sources for products supplied by PCT;
  • the inability to obtain and maintain price increases to offset higher
    production or material costs;
  • inability to adequately protect the company's intellectual property
    rights; and
  • inability to use deferred tax assets.

It is not possible to foresee or identify all such factors. Any
forward-looking statements in this release are based on certain
assumptions and analyses made by the company in light of its experience
and perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the
circumstances. Prospective investors are cautioned that any such
statements are not a guarantee of future performance and actual results
or developments may differ materially from those projected.

The company makes no commitment to update any forward-looking statement
included herein or to disclose any facts, events or circumstances that
may affect the accuracy of any forward-looking statement. Further
information covering issues that could materially affect financial
performance is contained in the company's filings with the U.S.
Securities and Exchange Commission ("SEC").

Non-GAAP Financial Measures

This press release includes non-GAAP financial measures as defined under
SEC rules. Non-GAAP financial measures should be considered in addition
to, not as a substitute for, other financial measures prepared in
accordance with generally accepted accounting principles ("GAAP"). The
company's methods of determining these non-GAAP financial measures may
differ from the methods used by other companies for these or similar
non-GAAP financial measures. Accordingly, these non-GAAP financial
measures may not be comparable to measures used by other companies. As
required by SEC rules, detailed reconciliations between the company's
GAAP and non-GAAP financial results are provided on the attached
schedule. The company believes return on invested capital ("ROIC")
provides additional insight for analysts and investors in evaluating the
company's financial and operating performance. The company defines ROIC
as the trailing four quarters' after tax operating profit, utilizing the
company's adjusted effective tax rate excluding discrete Q4 2017 tax
items affecting comparability of results from period to period, divided
by the total invested capital, which is the average of ending debt and
equity for the last five quarters. The company believes ROIC is a useful
measure of how effectively the company uses capital to generate profits.

About Cooper Tire & Rubber Company

Cooper Tire & Rubber Company (NYSE:CTB) is the parent company of a
global family of companies that specializes in the design, manufacture,
marketing and sale of passenger car, light truck, medium truck,
motorcycle and racing tires. Cooper's headquarters is in Findlay, Ohio,
with manufacturing, sales, distribution, technical and design operations
within its family of companies located in more than one dozen countries
around the world. For more information on Cooper, visit www.coopertire.com,
www.facebook.com/coopertire
or www.twitter.com/coopertire.

 
Cooper Tire & Rubber Company
Condensed Consolidated Statements of Income
(Unaudited)
       
(Amounts in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Net sales $ 698,408 $ 720,753 $ 1,299,904 $ 1,363,778
Cost of products sold 604,185   581,202   1,121,196   1,105,642  
Gross profit 94,223 139,551 178,708 258,136
Selling, general and administrative expense 61,460   55,350   119,490   115,941  
Operating profit 32,763 84,201 59,218 142,195
Interest expense (8,417 ) (8,210 ) (16,108 ) (16,037 )
Interest income 1,988 1,755 4,303 3,557
Other pension and postretirement benefit expense (6,967 ) (9,369 ) (13,953 ) (18,693 )
Other non-operating expense (1,391 ) (255 ) (3,050 ) (491 )
Income before income taxes 17,976 68,122 30,410 110,531
Provision for income taxes 2,267   22,298   5,718   35,325  
Net income 15,709 45,824 24,692 75,206
Net income (loss) attributable to noncontrolling shareholders'
interests
701   514   1,400   (666 )
Net income attributable to Cooper Tire & Rubber Company $ 15,008   $ 45,310   $ 23,292   $ 75,872  
 
Earnings per share:
Basic $ 0.30 $ 0.86 $ 0.46 $ 1.44
Diluted $ 0.30 $ 0.85 $ 0.46 $ 1.42
 
Weighted average shares outstanding:
Basic 50,436 52,796 50,636 52,815
Diluted 50,590 53,191 50,883 53,357
 
Segment information:
Net Sales
Americas Tire $ 584,412 $ 615,356 $ 1,069,804 $ 1,146,715
International Tire 167,839 151,370 329,083 293,335
Eliminations (53,843 ) (45,973 ) (98,983 ) (76,272 )
 
Operating profit (loss):
Americas Tire $ 40,480 $ 90,884 $ 71,715 $ 161,669
International Tire 5,652 2,690 13,086 5,715
Unallocated corporate charges (13,705 ) (9,199 ) (25,670 ) (24,663 )
Eliminations 336 (174 ) 87 (526 )
 
 
Cooper Tire & Rubber Company
Condensed Consolidated Balance Sheets
(Unaudited)
   
(Dollar amounts in thousands)
June 30,
2018 2017
Assets
Current assets:
Cash and cash equivalents $ 180,493 $ 302,386
Notes receivable 24,022 12,542
Accounts receivable 582,524 568,050
Inventories 580,095 578,763
Other current assets 59,600 44,853
Total current assets 1,426,734 1,506,594
 
Property, plant and equipment, net 964,158 899,589
Goodwill 53,960 53,673
Intangibles 125,979 138,210
Deferred income tax assets 54,006 137,247
Other assets 7,942 7,103
Total assets $ 2,632,779 $ 2,742,416
 
Liabilities and Equity
Current liabilities:
Notes payable $ 47,378 $ 38,374
Accounts payable 240,506 261,814
Accrued liabilities 262,233 272,016
Income taxes payable 2,295 25,451
Current portion of long-term debt 1,398 1,514
Total current liabilities 553,810 599,169
 
Long-term debt 295,017 296,179
Postretirement benefits other than pensions 255,527 247,258
Pension benefits 198,421 274,510
Other long-term liabilities 152,736 131,592
Deferred income tax liabilities 786
Total parent stockholders' equity 1,118,347 1,135,187
Noncontrolling shareholders' interests in consolidated subsidiaries 58,921 57,735
Total liabilities and equity $ 2,632,779 $ 2,742,416
 
 
Cooper Tire & Rubber Company
Condensed Consolidated Statements of Cash Flows
(Unaudited)
   
(Dollar amounts in thousands)
Six Months Ended
June 30,
2018 2017

Operating activities:

Net income $ 24,692 $ 75,206

Adjustments to reconcile net income to net cash used in operations:

Depreciation and amortization 73,587 70,676
Stock-based compensation 2,627 2,575
Change in LIFO inventory reserve 2,411 (3,484 )
Amortization of unrecognized postretirement benefits 18,396 20,939
Changes in operating assets and liabilities:
Accounts and notes receivable (68,485 ) (61,691 )
Inventories (74,104 ) (94,490 )
Other current assets (12,572 ) (15,541 )
Accounts payable (12,622 ) (23,202 )
Accrued liabilities (13,970 ) (21,011 )
Other items (18,599 ) (33,223 )
Net cash used in operating activities (78,639 ) (83,246 )
Investing activities:
Additions to property, plant and equipment and capitalized software (97,759 ) (89,803 )
Proceeds from the sale of assets 160   43  
Net cash used in investing activities (97,599 ) (89,760 )
Financing activities:
Net payments on short-term debt 10,718 (359 )
Repayments of long-term debt (1,013 ) (600 )
Payment of financing fees (1,230 )
Repurchase of common stock (29,355 ) (38,567 )
Payments of employee taxes withheld from shared-based awards (1,894 ) (6,429 )
Payment of dividends to Cooper Tire & Rubber Company stockholders (10,623 ) (11,081 )
Issuance of common shares related to stock-based compensation 270   4,122  
Net cash used in financing activities (33,127 ) (52,914 )
Effects of exchange rate changes on cash 1,344   6,008  
Changes in cash, cash equivalents, and restricted cash (208,021 ) (219,912 )
Cash, cash equivalents, and restricted cash at beginning of year 392,306   524,249  
Cash, cash equivalents, and restricted cash at end of period $ 184,285   $ 304,337  
 
 
Cooper Tire & Rubber Company
Reconciliation of Non-GAAP Financial Measures
(Unaudited)
             
(Amounts in thousands)
 
RETURN ON INVESTED CAPITAL (ROIC)
 
Trailing Four Quarters Trailing Four Quarters
Ended June 30, 2018 Ended June 30, 2018

Calculation of ROIC

Calculation of Effective Tax Rate

Adjusted operating profit $ 226,265 Adjusted (non-GAAP) provision for income taxes (c) $ 49,537
Adjusted (non-GAAP) effective tax rate 30.2 % Income before income taxes (d) 163,803  

Income tax expense on adjusted operating profit

68,427   Adjusted (non-GAAP) effective tax rate (c)/(d) 30.2 %

Adjusted operating profit after taxes(a)

157,838

Total invested capital(b)

$ 1,536,044  

ROIC, including noncontrolling equity(a)/(b)

10.3 %
 

Calculation of Invested Capital (five
quarter average)

Current
portion of Total
long-term Notes invested
Equity Long-term debt debt payable capital
June 30, 2018 $ 1,177,268 $ 295,017 $ 1,398 $ 47,378 $ 1,521,061
March 31, 2018 1,204,026 295,221 1,446 41,043 1,541,736
December 31, 2017 1,185,756 295,987 1,413 39,450 1,522,606
September 30, 2017 1,232,225 296,084 1,464 36,056 1,565,829
June 30, 2017 1,192,922   296,179   1,514   38,374   1,528,989  
Five quarter average $ 1,198,439   $ 295,698   $ 1,447   $ 40,460   $ 1,536,044  

 

Calculation of Trailing Four Quarter Income
and Expense Inputs

Adjusted

Provision

Adjustments

(non-GAAP)

Income
Operating Adjusted for income

to provision

provision for

before
profit as ASU 2017-07 operating taxes as

for income

income

income
Quarter-ended: reported* Reclassification* profit reported

taxes**

taxes**

taxes
June 30, 2018 $ 32,763 $ $ 32,763 $ 2,267 $ $ 2,267 $ 17,976
March 31, 2018 26,454 26,454 3,451 3,451 12,434
December 31, 2017 46,844 9,423 56,267 79,929 68,034 11,895 38,809
September 30, 2017 101,377   9,404   110,781   31,924     31,924   94,584
Trailing four quarters $ 207,438   $ 18,827   $ 226,265   $ 117,571   $ 68,034   $ 49,537   $ 163,803

* - Prior to the adoption of ASU 2017-07 on January 1, 2018, all
net periodic pension benefit costs were included within operating
profit. Prior year quarters have been adjusted to reflect the
adoption of the new accounting standard.

** - Fourth quarter 2017 provision for income taxes included
$35,378 of deemed repatriation tax and $20,413 for the
re-measurement of deferred tax assets related to U.S. tax reform.
Q4 2017 also included a U.K. valuation allowance charge of
$18,915, less the reversal of an Asia valuation allowance of
$6,672. These items have been excluded from the provision for
income taxes as they are deemed to impact the comparability of
results from period to period.

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