FINDLAY, Ohio—When Cooper Tire & Rubber Co. completed a capacity study of its four U.S. tire plants, the news wasn't good for the workers at its Albany, Ga., passenger and light truck tire factory.
Cooper said it will close the facility and shift production to three other U.S. sites and possibly one in Mexico. The decision affects 1,400 workers in Albany, and some salaried employees may be transferred to other locales.
The firm said the phased shutdown will cost it $150 million to $175 million in restructuring charges this year, of which 50 to 60 percent will be non-cash charges. Cooper expects to save between $75 million and $80 million annually because of the decision, with some of that materializing in 2009 as production is relocated.
Cheap imports and the downturn in domestic demand has brought intense pressure on Findlay-based Cooper, as well as other domestic tire makers, the company said. Cooper posted losses of $55 million in the third quarter and $76 million for the first nine months of 2008.
“This was a difficult decision, and we regret the impact it will have on our employees in Albany and the surrounding community,” Chairman and CEO Roy Armes said in a statement. He said the capacity study was detailed, fair, objective and conclusive.
Government and community entities were involved in the study and offered “a high level of support, but the final outcome was clear,” he said.
The Albany plant will wind down operations during the next 12 months, and Cooper will improve its cost structure by continuing its Six Sigma and automation initiatives throughout its operations.
Necessary action'
The company has established a transition center in Albany to help laid-off workers with job placement, said Curtis Schneekloth, Cooper director of investor relations.
“We're deeply regretful that it had to come to this,” he said. “It's a part of our family, and it really hurts that we had to do this, but it's the necessary course of action for us at this time.”
Schneekloth said once the tire maker reviewed all the data on its plants, including operational and fixed costs, local incentives, labor costs and closure costs, the decision on which factory to eliminate became “clear-cut.” He declined to quantify Albany's operational costs.
Georgia offered Cooper about $32 million in incentives to keep the plant open, according to The Clarion-Ledger, a newspaper based in Jackson, Miss.
The Albany factory has an estimated capacity of 22,700 units per day, according to Rubber & Plastics News data. Some of that will be transferred to Cooper's plants in Findlay; Texarkana, Ark.; and Tupelo, Miss.
The company will consider moving some capacity to its El Salto, Mexico, joint venture plant as well, Schneekloth said. He wouldn't say how much overall capacity will be cut.
“It'll depend on what's happening in the market,” he said.
In October, Cooper launched a 90-day capacity review of its four U.S. plants. Since then, union workers at the Findlay and Texarkana facilities ratified contracts to help Cooper become more cost-competitive in the market.
At Findlay, union members on Dec. 8 agreed to no general wage increases or cost-of-living allowances during the term of the three-year contract. The deal calls for new hires to be paid $13 an hour, and new wage rates were installed for certain job classifications. The old contract expired Oct. 31, but workers stayed on the job during negotiations.
At Texarkana, union workers ratified a three-year contract Dec. 13 even though the old pact wouldn't have expired until 2010.
The Tupelo factory is non-union, but Mississippi offered $30 million to keep the 24-year-old plant open, according to The Clarion-Ledger. The newspaper reported Arkansas offered $2 million from the governor's “quick action closing fund,” while Ohio and local governments offered $28.5 million in tax credits and reforms, and grants and loans.
Financial impact
Analyst Saul Ludwig of KeyBanc Capital Markets Inc. in Cleveland released a report about a week prior to the Albany announcement in which he reduced his estimates for Cooper's fourth-quarter and year-end results and maintained a hold rating.
He predicted the company's fourth-quarter loss will be $1.31 per share instead of $1.02 per share, and its 2008 loss will be $2.60 per share instead of $2.30 per share.
Ludwig also estimated Cooper's year-end cash at $210 million, down from $264 million on Sept. 30. He said company debt will be about $650 million and equity about $365 million.
The report estimated tire industry replacement shipments tumbled 25 percent in November. Aftermarket shipments overall are down an estimated 6 percent, but Cooper may have experienced a 12-percent volume drop in 2008 as its product mix—heavy in light truck tires and private brand tires—was the hardest hit this year.
Cooper's investments in China also are taking a hit from excess capacity and low-price offers from Chinese tire manufacturers, the report stated. China recently raised the tax credit on exported tires to 9 percent from 5 percent, and Ludwig forecasted Cooper may only break even there after having been profitable.
He also noted that Cooper is reassessing its global strategy on manufacturing, product offerings, distribution channels and capital spending. Protecting cash is its highest priority, he wrote. Pension expenses also should be up sharply, at an estimated $35 million in 2009 versus $18 million in 2008.
Schneekloth said that Cooper's reassessment of its global strategy doesn't mean it has changed the strategic plan it unveiled in February, but the company is accelerating changes because of poor economic conditions.
Regarding pensions, Schneekloth said expenses will be higher because of the decline of plant asset values, but the cash funding part of that expense won't be significantly higher in 2009.
“We think cash uses from normal operations will be better in '09 than it was in '08 excluding one-time events,” Schneekloth said.
Ludwig did highlight some bright spots, noting Cooper's restructuring plan “actually works,” that pent-up tire demand may erupt during 2009's second quarter and expand margins, and that Cooper's recent investments in its Mexican plant capacity could be a plus.
Tony Cristello, senior vice president of BB&T Capital Markets, said he believes Cooper's closure of the Albany facility will have minimal impact on tire dealers' supply. He cited the decline of overall unit shipments and the capacity shift to the other three U.S. plants, which will be able to have higher productivity and utilization rates to meet demand.
Whether Albany's closure is enough to make Cooper profitable is hard to say because so many factors can affect it, such as consumer spending, commodity and natural rubber prices, he said. BB&T Capital Markets also is maintaining a hold rating on Cooper stock because of the macroeconomic uncertainty.
Cristello said he thinks that when consumer tire demand rebounds, Cooper will have to feed it from other places, whether it's from their Mexican or Asian investments.