March 5, 2012 / 9:45 PM / 8 years ago

TEXT-S&P revises Cooper Tire to stable from positive

Overview	
     -- While U.S. tire manufacturer Cooper Tire & Rubber's sales in 2011 rose 	
16.8% over 2010 sales, segment operating profit margin was 4.2%, compared with 	
5.6% in 2010, reflecting the effects of a steep rise in raw materials costs on 	
a decline in profit margins.	
     -- The company also generated reported negative free operating cash flow 	
of about $30 million in 2011.  	
     -- We are revising our outlook to stable from positive, reflecting our 	
view that the company's credit measures, while in line with the current 'BB-' 	
corporate credit rating, are unlikely to move in line with our expectations 	
for a higher rating this year.	
	
Rating Action	
On March 5, 2012, Standard & Poor's Ratings Services revised its outlook on 	
Cooper Tire & Rubber Co. to stable from positive.	
	
Rationale	
The outlook revision reflects our view that the company's credit measures, 	
while in line with the current 'BB-' corporate credit rating, are unlikely to 	
move in line with our expectations for a higher rating this year. For example, 	
based on the 12 months ended Dec. 31, 2011, the ratio of adjusted free 	
operating cash flow (FOCF) to adjusted debt was 1.6%, compared with 10.8% a 	
year earlier. We do not expect this credit measure will improve sufficiently 	
in 2012 to warrant an upgrade.	
	
Although we expect raw material prices to increase less steeply in 2012 than 	
in 2011, they remain volatile. Moreover, we believe the ability of the company 	
to raise prices could be limited by softening tire demand in North America in 	
2012 as a result of fewer miles driven due to rising gas prices. In addition, 	
the ending of tariffs on Chinese tire imports later in 2012 could introduce 	
tougher price competition in the economy segment of the tire market. At the 	
same time, we think the company is better positioned to deal with this 	
potential pressure today, given that it can export 3 million to 4 million 	
tires into the U.S. from its Cooper Kunshan facility in China and its 	
investment in low-cost production in Mexico. 	
	
Revenue in 2012 was $3.9 billion, up 16.8% year over year. Price and mix were 	
the primary drivers of higher sales, while unit volume decreased slightly. 	
Operating profit was $163 million, compared with $188 million a year earlier. 	
Higher raw material costs of $670 million more than offset the contribution of 	
$601 million in price and mix to operating profit. Lower sales, general, and 	
administrative costs, mainly due to lower incentive compensation, and 	
decreased product liability expenses helped profits as well, while 	
manufacturing efficiencies fell $3 million as a result of the lockout of the 	
union workforce at the Findlay, Ohio facility. On Feb. 27, 2012, the company 	
announced that USW Local 207L ratified a new five-year labor agreement, ending 	
the Findlay facility lockout. We believe the company should benefit over time 	
from productivity improvements at Findlay. In the U.S., Cooper's total unit 	
shipments of light-vehicle tires rose 0.4% during 2011, better than the 1.3% 	
and 2.2% declines for Rubber Manufacturers Association member companies and 	
the total industry, respectively. The Rubber Manufacturers Association is 	
projecting an increase of the total replacement market by less than 1% in 2012.	
	
We expect some weakness in tire sales in the near term because of persistently 	
high unemployment, historically low consumer confidence, and rising gas 	
prices. Although consumers must eventually replace worn tires, the timing of 	
the replacement cycle can be pushed out when consumer budgets are tight.	
	
Commodity price recovery is critical to Cooper's profitability and cash flow. 	
Natural rubber prices have been volatile, but are down recently, after a 30% 	
jump from late 2010 to the latter half of February 2011. At the beginning of 	
March 2012, the price was $1.68 per pound, over 40% below the 2011 high. Oil 	
prices have also been volatile throughout 2011 but have steadily risen from a 	
low of $75.67 dollars per barrel in October to $106.70 dollars per barrel at 	
the beginning of March 2012. The company uses the last-in, first-out (LIFO) 	
inventory method for its U.S. inventories and charges its most recent costs 	
against sales, so that falling raw material prices lead to improved margins 	
more quickly than under alternative inventory methods. On the other hand, the 	
company's flexibility to maintain or raise prices might suffer from industry 	
overcapacity and competitors' pricing actions in light of weak demand. 	
	
To enhance long-term sales growth and to have access to low-cost 	
manufacturing, Cooper continues to focus on its Asian expansion strategy. With 	
the ramp-up of production at the Cooper Kunshan Tire, the facility should be 	
able to produce at least 3 million to 4 million tires during 2012. 	
Furthermore, the company upped its ownership stake in Corporacion de Occidente 	
from 38% to 58%. Through this Mexican tire manufacturing entity, Cooper Tire 	
secures a source of low-cost production to serve both the Mexican and North 	
American markets.	
	
Liquidity	
We believe the company has "adequate" (as defined in our criteria) sources of 	
liquidity to cover its needs in the near term, even in the event of unforeseen 	
EBITDA declines. Our assessment of the company's liquidity incorporates the 	
following expectations and assumptions:	
     -- We expect the company's sources of liquidity, including cash and 	
facility availability, to exceed its uses by 1.2x or more over the next 12 to 	
18 months.	
     -- We expect net sources to remain positive, even if EBITDA declines more 	
than 15%.	
     -- Because of the company's good conversion of EBITDA to discretionary 	
cash flow, we believe it could absorb low-probability, high-impact shocks.	
 	
Liquidity sources include, as of Dec. 31, 2011, cash and cash equivalents 	
totaling $234 million and availability of $293 million under both the 	
company's $200 million, asset-based revolving credit facility that expires in 	
July 2016 and its $175 million accounts receivable securitization program that 	
expires in June 2014. A borrowing base governs these facilities, which have no 	
financial covenants. Moreover, as of Dec. 31, 2011, the company's Asian 	
consolidated operations had unsecured credit lines of up to $428 million 	
subject to annual renewal; additional borrowing capacity on these credit lines 	
totaled $239.5 million.  	
	
The company expects capital expenditures for 2012 to be in the $180 million to 	
$210 million range. 	
	
Outlook	
The outlook is stable, reflecting our view that Cooper's credit measures will 	
remain in line with the expectations for the current rating. We expect the 	
company's leverage to stay below 4x and for funds from operations to debt to 	
exceed 15%. 	
	
We could lower the ratings if Cooper can't cover rising raw material costs by 	
price increases or if end-market demand weakens, leading us to believe that 	
the company would use cash of $75 million or if leverage rose above 4x on a 	
sustained basis. For instance, this could occur if revenue fell over 15% and 	
gross margins moved below 7%.	
	
If tire demand strengthens and the company is successful with recovering raw 	
material price increases, we could raise our current rating if we thought 	
leverage would remain below 3x and FOCF would be at least 10% of adjusted 	
debt. At current debt levels, this equates to around $90 million of FOCF. We 	
would also expect to see the company's business position strengthen, as 	
reflected in adjusted EBITDA margins comfortably in the double digits on a 	
sustainable basis. However, we believe it is unlikely that we would upgrade 	
the company in the near term. 	
	
Related Criteria And Research	
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- Key Credit Factors: Business And Financial Risks In The Auto Component 	
Suppliers IndustryS, Jan. 28, 2009	
	
Ratings List	
	
Ratings Affirmed; Outlook Action	
                                        To                 From	
Cooper Tire & Rubber Co.	
 Corporate Credit Rating                BB-/Stable/--      BB-/Positive/--	
	
Ratings Affirmed; Recovery Ratings Unchanged	
	
Cooper Tire & Rubber Co.	
 Senior Unsecured                       BB-                	
   Recovery Rating                      4                  	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
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