Cooper Tire & Rubber Company reported third quarter 2017 net income of US$62 million, or diluted earnings per share of US$1.18, compared with US$49 million, or US$0.90 per share, last year. The quarter included a US$39 million benefit from lower product liability costs. For comparison purposes, the third quarter of 2016 included a non-cash pension settlement charge of US$11.5 million related to the lump-sum distribution of benefits offered to certain former employees.
Third Quarter Highlights:
- Consolidated unit volume decreased 2.0 % compared to the prior year, with strong growth in the International segment that was more than offset by lower volume in the Americas segment.
- Net sales decreased 2.3 % to US$734 million.
- Operating profit was US$101 million, or 13.8 % of net sales, which is an increase of US$23 million from the prior year.
- The quarter included a US$39 million benefit in operating profit from lower product liability costs, primarily related to a reduction of the company’s product liability reserves.
- Cooper’s raw material index increased 6.4 % from the third quarter of 2016, with raw material costs increasing by US$19 million from the prior year.
- The company repurchased US$32 million of its common stock during the quarter at an average price of US$35.05 per share. Average shares outstanding have decreased 4.1 % from the third quarter of 2016.
Total company unit volume was down 2.0 % for the quarter. Unit volume in the Americas segment was down 7.5 % compared to the prior year, with decreases in both North America and Latin America. International segment unit volume was up 31.3 %, driven by a significant increase in Asia.
“Our third quarter performance, particularly the decline in North America unit volume, reflects continued challenges within the tire industry, including raw material cost variability, weak trends in retail sell-out of tires to consumers, elevated inventory in the channels and a fluid promotional landscape,” said President & Chief Executive Officer Brad Hughes. “These conditions were exacerbated by the hurricanes in Texas and Florida.
“In North America, we continue to respond to current market conditions by being competitive on pricing and promotions. We are addressing the unit volume decline, which was partially the result of the ongoing reduction in our private brand business, by expanding into additional channels with new positions in the car dealer and e-commerce channels, as well as new OE fitments that we will announce in the future. In addition, we have an aggressive schedule of new product introductions underway that continues throughout 2018 and 2019.
“Cooper continues to believe that positive macro-economic factors, such as gas prices, miles driven, low unemployment, growing wages and others will support growth for the tire industry. We think our strong business model and global footprint position us well going forward.”
Third quarter net sales were US$734 million, a decrease of 2.3 % compared with US$751 million in the third quarter of 2016. Third quarter net sales were negatively impacted by US$19 million of lower unit volume and US$1 million of unfavourable price and mix, partially offset by US$3 million of favourable foreign currency impact.
Third quarter 2017 operating profit was US$101 million compared with US$78 million for the same period last year. Operating profit included US$15 million in unfavourable raw material costs, net of price and mix, US$8 million of lower unit volume, and US$7 million of higher manufacturing costs. These higher costs were offset by US$39 million of lower product liability costs, the US$11.5 million non-cash pension settlement charge that was recorded in 2016, and lower other costs of US$3 million.
As part of its regular review, Cooper monitors trends and analyses developments and variables likely to impact pending and anticipated product liability claims against the company. Based on the review completed in the third quarter, the company reduced its estimate of pending and anticipated product liability claims. Primarily as a result of this review, product liability expense was US$39 million lower than the third quarter of 2016.
Cooper’s third quarter raw material index increased 6.4 % from the third quarter of 2016. The raw material index decreased from 163.5 in the second quarter to 150.2 in the third quarter.
Higher manufacturing costs were driven by increases in the Americas segment, primarily due to lower production volumes, an outcome of the decline in unit volume year over year, and the pull ahead of production down days into September out of concern for potential hurricane related disruption of raw material supply. SG&A expense for the quarter was flat compared to the prior year.
The effective tax rate for the third quarter was 33.8 %, compared to 32.0 % in the prior year. The increase in tax rate was primarily due to improved domestic results, which increased earnings in a higher rate tax jurisdiction. 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 US$258 million in cash and cash equivalents, compared with US$450 million at the end of the same period last year. Since the end of the third quarter of 2016, cash has continued to be invested in the company, including US$87 million spent to acquire and fund the capital requirements of Qingdao Ge Rui Da Rubber Company (GRT), and in the continuation of the company’s share repurchase program. Capital expenditures in the third quarter were US$53 million compared with US$41 million in the same period last year.
Cooper generated a 15.2 % return on invested capital 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 third quarter, 902,494 shares were repurchased for US$31.6 million at an average price of US$35.05 per share. Through the first nine months of 2017, Cooper has repurchased 1,943,685 shares for US$70.2 million. As of September 30, 2017, US$244 million remains of the US$300 million authorization. Since share repurchases began in August 2014, the company has repurchased a total of 14.2 million shares at an average price of US$34.36 per share.
Third quarter net sales in the Americas segment declined 7.0 % as a result of US$51 million of lower unit volume, partially offset by US$2 million of favourable price and mix, primarily due to net price increases related to higher raw material costs, and US$1 million of favourable foreign currency impact. Segment unit volume decreased 7.5 % from the prior year, with unit volume decreases in North America and Latin America.
Cooper’s third quarter total light vehicle tire shipments in the United States decreased 10.4 % in a competitive pricing and promotional environment, as the industry experienced weak sell-out volume. In addition, shipments were negatively impacted by the hurricanes in Texas and Florida. The U.S. Tire Manufacturers Association (USTMA) reported that its member shipments of light vehicle tires in the U.S. were down 1.7 %. Total industry shipments (including an estimate for non-USTMA members) decreased 1.4 % for the period. Cooper’s shipments in Mexico declined 8.6 % in the quarter, which drove a decline for Latin America. However, Cooper performed better than the tire industry as a whole in Mexico, which was down by nearly 15 % for the quarter.
Third quarter operating profit was US$117 million, or 18.8 % of net sales, compared with US$102 million, or 15.1 % of net sales, a year ago. Operating profit was impacted by US$12 million of lower unit volume, US$8 million of unfavourable manufacturing costs, and US$7 million of unfavourable raw material costs, net of price and mix. These were offset by US$39 million of lower product liability costs, US$2 million of favourable SG&A costs, and US$1 million of reduced other expense, including foreign currency impact.
The segment’s US$8 million of unfavourable manufacturing costs in the third quarter was primarily the result of curtailed production levels to manage inventory based on lower unit shipments in the U.S. and the pull ahead of production down days into September.
Third quarter net sales in the International segment increased 44.8 % as a result of US$27 million of higher unit volume and US$22 million of favourable price and mix, primarily due to net price increases related to higher raw material costs, and US$1 million of favourable foreign currency impact. Segment unit volume was up 31.3 %, with increased unit volume in Asia that was partially offset by a small unit volume decline in Europe.
Third quarter operating profit was US$1 million compared with operating profit of US$3 million in the third quarter of 2016. The decline was driven by US$7 million of unfavourable raw material costs, net of price and mix, which were partially offset by US$4 million of higher unit volume and US$1 million of favourable manufacturing costs.
Outlook
“Weak sell-out of tires to consumers and heavy promotional activity are likely to persist into the fourth quarter in North America,” Hughes said. “As a result, we expect that operating margin in the fourth quarter will be below our previously stated expectations. Cooper will continue to price our products appropriately given market conditions and will remain focused on executing the programs we have in place to expand into additional channels. In addition, we will continue to manage our production levels and inventories, helping to position Cooper for a strong start to 2018.”