Cooper Tire & Rubber Company today reported consolidated net sales of $739 million for the three-month period ended December 31, 2006. The record total represents an increase of more than 29 percent compared to the same period a year ago. The year-over-year increase was driven primarily by the addition of the operations of Cooper Chengshan (Shandong) Passenger Tire Co., Ltd., and Cooper Chengshan (Shandong) Tire Company, Ltd. in China, of which the Company acquired controlling interests effective February 4, 2006. Improved sales volume, pricing and mix in North America and Europe also contributed to the increase in total revenue.
Operating profit for the quarter totaled $28 million, yielding an operating margin of nearly 4 percent compared to operating profit of $6 million and a margin of 1 percent in the fourth quarter of 2005. The increase was driven largely by improved price and product mix in North America and Europe, and improved operating efficiencies in the Company's North American production facilities. These improvements were partially offset by higher raw material costs and $4 million in restructuring charges.
During the quarter the Company wrote off $52 million in goodwill and intangible assets associated with previous acquisitions within the North American Tire segment.
Including restructuring charges and the write off of goodwill and intangible assets (-86 cents per share), the Company recorded a net loss from continuing operations of $33 million or 53 cents per share. Discontinued operations generated net income of $5 million or 8 cents per share. In total, the Company recorded a net loss of $28 million or 45 cents per share.
Through these solid operating results and continued efforts to reduce working capital, the Company's continuing operations generated $177 million in cash during the fourth quarter of 2006. This compares favorably to the fourth quarter of 2005 when continuing operations generated $60 million of cash. Cash and cash equivalents totaled $222 million and Cooper's primary credit facilities remained undrawn at December 31, 2006.
For the full year 2006, the Company recorded sales of $2.7 billion, up 24 percent compared to the full year 2005, and generated an operating loss of $10 million and a net loss of $79 million compared to an operating profit of $26 million and a net loss of $9 million last year.
Adoption of New Pension Accounting Standard
During the quarter, the Company adopted Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS nos. 87, 88, 106 and 132(R)" which requires recognition of the funded status of benefit plan obligations on the balance sheet. The adoption of this accounting standard resulted in a decrease to Stockholders' equity of $197 million. This change, however, had no impact on cash, total projected benefit obligations, or future earnings potential for the Company.
North American Tire Operations
Cooper's North American Tire operations reported sales of $585 million in the fourth quarter of 2006, up 12 percent compared to sales in the fourth quarter of 2005. This increase is attributable to improved pricing and mix as well as a small improvement in tire unit sales. The increase in tire sales was partially offset by lower sales within the Oliver Rubber Division, due primarily to the cessation of custom mixing for Cooper-Standard Automotive, a former affiliated company.
The Company's North American Tire operations continued to gain share during the quarter. The Rubber Manufacturers Association (RMA) reported preliminary light vehicle replacement tire shipments were down about 4 percent in the fourth quarter. Cooper's total light vehicle tire shipments were up 1 percent compared to the same period last year. Broadline, SUV and light truck tire product categories that showed the greatest increases.
Operating profit for the North American Tire operations was $35 million in the fourth quarter of 2006 compared to $9 million in the fourth quarter of 2005. The increase was the result of improved price and product mix and improving production efficiency in the Company's North American plants. These were partially offset by raw material costs which, while down sequentially from the third quarter of 2006, were still significantly higher than in the fourth quarter of 2005, and by $3 million in restructuring costs.
The North American Tire segment was successful in reducing inventory by 1.2 million tires during the quarter, generating $57 million in cash. The inventory reduction also generated a pretax gain of nearly $9 million due to the use of the LIFO accounting method as lower, prior period costs in inventory were charged to costs of goods sold.
For the full year 2006, the North American Tire segment recorded sales of $2.096 billion and an operating loss of $4 million compared to sales of $1.955 billion and an operating profit of $33 million in the full year 2005.
International Tire Operations
The Company's International Tire Operations reported consolidated sales of $177 million in the quarter, an increase of 166 percent compared to the fourth quarter of 2005.
The acquisition of the Cooper Chengshan operations contributed $100 million in sales during the period. Sales for Cooper Europe reached $73 million, up more than 14 percent compared to the same period last year. The increase in European sales was the result of approximately 1 percent higher unit volume, the impact of price increases to offset higher raw material costs, and favorable currency exchange rates. Total unit sales for International Tire operations increased by 143 percent during the quarter compared to the fourth quarter of 2005.
The Company's International Tire Operations generated an operating loss of $5 million in the fourth quarter compared to an operating loss of $3 million in the fourth quarter of 2005. The change was the result of higher raw material costs in Europe and an increase in start-up expenses for the segment's Cooper Kenda joint venture.
For the full year 2006, the Company's International Tire Operations recorded sales of $680 million and operating profit of $9 million compared to $305 million in sales and an operating loss of $1 million for the full year 2005.
Commenting on the quarter's results, Cooper's President and Chief Executive Officer Roy Armes said, "We are pleased with the improvement in our North American Tire operations. Productivity increased and total variable costs declined as a result of a solid team effort to deliver on our profit improvement goals. Sales were relatively strong as total unit volume increased and we gained market share in virtually every product category. Strong sales and continued management focus helped drive inventory lower, as we had planned, adding to our solid cash generation in the quarter."
"We have made good progress but we have lots of opportunity to achieve the kind of results we are really capable of delivering," Armes continued. "Continued execution of our cost cutting and profit improvement initiatives will be a key focus in 2007."
The Company plans to continue implementation of projects to enhance revenue, reduce complexity and inventory, cut costs and improve operating profit. Most of these key projects have been approved for implementation and will be completed throughout 2007. The implementation of these projects may, in some cases, be temporarily disruptive to normal operations. However, each project has a short payback and the Company is confident that the combination of initiatives planned will improve overall efficiency and profitability.
Spot market prices of several key commodities declined during the fourth quarter which, based on the Company's purchasing patterns and contracts, should lead to sequentially lower raw material costs in the first quarter of 2007. The Company anticipates a sequential decline of approximately 4 percent in its overall raw materials index in the first quarter. However, on a year- over-year basis, the first quarter index is expected to be 3 percent higher than the first quarter of 2006. The Company expects more stable raw material prices in 2007 compared to 2006.
"This is an exciting time for Cooper as we begin to see the benefit of our hard work and many investments of the past couple of years," Armes continued. "We anticipate further improvement in North America as we implement our revised production strategy and the flex plant system in Texarkana. Our Chinese operations have a lot of potential and now that we started production in our Cooper Kenda joint venture plant, we expect to see progressive improvement in our International segment results throughout 2007. I am confident in our team and our ability to execute our plans. I believe we are well positioned for continued, significant improvement in 2007."
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