Cooper Tire & Rubber Company recently reported full year 2017 net income of US$95 million, or diluted earnings per share of US$1.81, compared with US$248 million, or US$4.51 per share, last year. The 2017 results include US$68 million of discrete tax items recorded in the fourth quarter, primarily related to the impact of tax reform in the United States. Excluding these discrete tax items, earnings per share would have been US$3.10.
Full Year 2017 Highlights:
- Consolidated unit volume decreased 0.5 % year over year, as challenging conditions led to a unit volume decline in the U.S., which was nearly offset by a strong unit volume increase in Asia. Net sales were US$2.85 billion compared with US$2.92 billion in 2016.
- Operating profit of US$272 million, or 9.5 % of net sales, was near the high end of the company’s previously issued mid-term guidance range of 8 to 10 %.
- Discrete tax items, including the impact of provisional amounts related to U.S. tax reform, resulted in additional income tax expense of US$68 million in the fourth quarter.
Fourth Quarter Highlights:
- Consolidated unit volume decreased 1.9 % for the quarter compared to the prior year. Unit volume in the Americas segment was down 6.2 %, which was partially offset by unit volume growth of 15.0 % in the International segment, driven by strong performance in Asia.
- Net sales decreased 3.4 % to US$757 million.
- Cooper’s raw material index increased 4.1 % from the fourth quarter of 2016, with raw material costs increasing by US$33 million from the prior year.
- Operating profit was US$47 million, or 6.2 % of net sales, which is a decrease of US$58 million from the same period in 2016.
- The quarter included restructuring costs totalingUS$2 million related to a reduction in force in the U.S.
- Including fourth quarter discrete tax items, there was a diluted loss of US$0.82 per share. Excluding the tax items, diluted earnings per share were US$0.50 in the fourth quarter.
“We are pleased to have ended 2017 with operating profit margin of 9.5 %, which is near the high end of our previously issued 8 to 10 % guidance range. This is noteworthy given the pricing and volume challenges within the industry throughout the year, and the significant impact of higher raw material costs,” said President & Chief Executive Officer Brad Hughes. “Unit volume declines in the U.S. were caused by industry-wide conditions and our continued exit from some non-strategic private brand business, a process which is largely behind us now. We are pleased with the performance of our Asia operations, which generated a unit volume increase that nearly offset the U.S. decline. We also congratulate the Asia team for the rapid integration and production ramp of our GRT joint venture in China, which produces truck and bus radial tyres. Our prior projections called for GRT to be accretive early in 2018, but it was actually accretive to 2017 earnings.
“We have already launched several initiatives to improve unit volume in the U.S., such as expanding on our early inroads in the global original equipment business outside of Asia, where we already have a strong OE presence, entering into new channels, and speeding the cadence of new product introductions to drive growth. In addition to the volume opportunity, we are working to improve profit margin through company-wide efforts to enhance efficiencies and reduce costs, including continued balancing of production capacity within our network, automation in our plants, and a recent corporate reorganization that eliminated about 5 % of U.S. salaried positions. Our efforts will take some time to fully manifest in our results, but we are encouraged with the early progress.
“Moving forward, we expect results to improve as our initiatives begin to take hold, and as underlying macro-conditions that favourtyre industry growth have a positive impact. For 2018, we expect unit volume growth compared to 2017. Due to the reclassification of certain pension costs, we have restated upwards our mid-term operating profit margin target to be in the range of 9 to 11 %. For full year 2018, we expect to be near the low end of this range. We will provide more detail on our strategic plans, capital allocation and updated guidance when Cooper hosts an investor event planned for the middle of this year.”
Consolidated Results:
Consolidated Fourth Quarter Results:
Fourth quarter net sales were US$757 million, a decrease of 3.4 % compared with US$784 million in the fourth quarter of 2016. Fourth quarter net sales were negatively impacted by US$15 million of lower unit volume and US$14 million of unfavorable price and mix, partially offset by US$2 million of favorable foreign currency impact.
Fourth quarter 2017 operating profit was US$47 million compared with US$105 million for the same period last year. Operating profit included US$32 million of unfavorable raw material costs, net of price and mix, US$13 million of higher manufacturing costs, US$11 million of lower unit volume and US$2 million of higher product liability costs. Net SG&A expense increased by US$1 million and included US$2 million related to the reduction in force. Other costs decreased US$1 million.
Cooper’s fourth quarter raw material index increased 4.1 % from the fourth quarter of 2016. The raw material index also increased sequentially from 150.2 in the third quarter to 153.1 in the fourth quarter.
Higher manufacturing costs reflect decisions to lower production volume and control inventory levels due to the decline in unit volume shipments in the Americas segment.
On December 22, 2017, the U.S. enacted comprehensive tax legislation, commonly referred to as the “Tax Act,” which made broad and complex changes to the tax code. As a result of the transition to a new tax system, Cooper recorded provisional tax amounts related to a mandatory, one-time deemed repatriation of undistributed earnings of foreign subsidiaries (the “Transition Tax”), payable over eight years, and the impact of re-measurement of its U.S. deferred tax assets and liabilities to the new lower U.S. federal income tax rate of 21 %. The provisional fourth quarter tax impact of the Transition Tax and deferred tax re-measurement was US$35 million and US$20 million (non-cash), respectively. Additionally, the fourth quarter tax provision includes the impact of the recording of a non-cash valuation allowance based upon the expected realization of certain foreign deferred tax assets related to the company’s European operations of US$19 million, partially offset by the reversal of an existing non-cash US$7 million valuation allowance in Asia.
The effective tax rate for the fourth quarter was 206.0 %, compared to 29.3 % in the prior year. Excluding these discrete tax items, the effective tax rate would have been 30.7 % for the fourth quarter of 2017.
At year end, Cooper had US$372 million in cash and cash equivalents, compared with US$504 million at the end of the same period last year. Capital expenditures in the fourth quarter were US$54 million compared with US$49 million in the same period last year.
Cooper generated a return on invested capital, excluding the impact of discrete tax items in the fourth quarter, of 12.2 % for the trailing four quarters.
In February 2017, the company announced an increased and extended US$300 million share repurchase program through December 2019. During the fourth quarter, 576,242 shares were repurchased for US$20.7 million at an average price of US$35.87 per share. For the full year 2017, Cooper repurchased 2.5 million shares for US$90.9 million. As of December 31, 2017, US$223 million remains of the US$300 million authorization. Since share repurchases began in August 2014 through December 31, 2017, the company repurchased a total of 14.8 million shares at an average price of US$34.42 per share.
Fourth quarter net sales in the Americas segment declined 7.1 % as a result of US$43 million of lower unit volume and US$7 million of unfavorable price and geographical mix within the segment, which was partially offset by US$1 million of favorable foreign currency impact. Segment unit volume decreased 6.2 % from the prior year, with unit volume decreases in both North America and Latin America.
Cooper’s fourth quarter total light vehicle tyre shipments in the United States decreased 8.3 %. The U.S. Tire Manufacturers Association (USTMA) reported that its member shipments of light vehicle tyrein the U.S. were up 0.8 %. Total industry shipments (including an estimate for non-USTMA members) increased 1.6 % for the period. Cooper’s shipments in Mexico declined 1.7 % in the fourth quarter, which drove the decline for Latin America. However, Cooper performed better than the tyreindustry as a whole in Mexico, which was down by nearly 6 % for the period.
Fourth quarter operating profit was US$61 million, or 9.4 % of net sales, compared with US$116 million, or 16.8 % of net sales, a year ago. Operating profit was impacted by US$27 million of unfavorable raw material costs, net of price and mix, US$17 million of unfavorable manufacturing costs, US$12 million of lower unit volume, US$2 million of higher product liability costs and US$5 million of increased other costs. These costs were partially offset by US$8 million of favorable SG&A expense.
The segment’s US$17 million of unfavorable manufacturing costs in the fourth quarter was primarily the result of curtailed production levels to manage inventory based on lower unit shipments in the U.S. The decreased SG&A expense for the quarter was primarily due to lower incentive compensation costs.
Fourth quarter net sales in the International segment increased by 30.5 % to US$162 million as a result of US$24 million of favorable price and mix, US$13 million of higher unit volume and US$1 million of favorable foreign currency impact. Segment unit volume was up 15.0 %, with increased unit volume in Asia that was partially offset by lower unit volume in Europe.
Fourth quarter operating profit was US$6 million compared with operating profit of US$1 million in the fourth quarter of 2016. The increase was driven by US$4 million of favorable manufacturing costs, US$2 million of higher unit volume and US$4 million of reduced other costs, which were partially offset by US$5 million of unfavorable raw material costs, net of price and mix.
Outlook
Management expectations for 2018 include:
- Unit volume growth compared to 2017.
- Full year operating profit margin near the low end of the 9 to 11 % range, with improvement throughout the year following a first quarter which is expected to be below that range.
- The adoption of Accounting Standards Update 2017-07 – Compensation – Retirement Benefits, which became effective January 1, 2018, will result in the reclassification of net periodic benefit costs, excluding service costs, outside of operating profit to other pension costs. In 2018, the company expects this to be approximately US$28 million.
- Effective tax rate in a range between 23 and 26 %. The decrease in the effective tax rate from 2017 is driven by the reduced U.S. tax rate as a result of the Tax Act and the predominance of the company’s earnings in the U.S. The 23 to 26 % range does not include the discrete impact of any tax adjustments that may be recorded during the 2018 measurement period prescribed under SAB 118 as a result of the Tax Act.
- Capital expenditures to range between US$215 and US$235 million.
(RJA)
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