Cooper Tire & Rubber has reported third quarter 2017 net income of $62 million, or diluted earnings per share of $1.18, compared with $49 million, or $0.90 per share, last year.
The quarter included a $39 million benefit from lower product liability costs. For comparison purposes, the third quarter of 2016 included a non-cash pension settlement charge of $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 percent 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 percent to $734 million.
- Operating profit was $101 million, or 13.8 percent of net sales, which is an increase of $23 million from the prior year.
- The quarter included a $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 percent from the third quarter of 2016, with raw material costs increasing by $19 million from the prior year.
- The company repurchased $32 million of its common stock during the quarter at an average price of $35.05 per share. Average shares outstanding have decreased 4.1 percent from the third quarter of 2016.
Total company unit volume was down 2.0 percent for the quarter. Unit volume in the Americas segment was down 7.5 percent compared to the prior year, with decreases in both North America and Latin America. International segment unit volume was up 31.3 percent, 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 $734 million, a decrease of 2.3 percent compared with $751 million in the third quarter of 2016. Third quarter net sales were negatively impacted by $19 million of lower unit volume and $1 million of unfavorable price and mix, partially offset by $3 million of favorable foreign currency impact.
Third quarter 2017 operating profit was $101 million compared with $78 million for the same period last year. Operating profit included $15 million in unfavorable raw material costs, net of price and mix, $8 million of lower unit volume, and $7 million of higher manufacturing costs. These higher costs were offset by $39 million of lower product liability costs, the $11.5 million non-cash pension settlement charge that was recorded in 2016, and lower other costs of $3 million.
As part of its regular review, Cooper monitors trends and analyzes 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 $39 million lower than the third quarter of 2016.
Cooper’s third quarter raw material index increased 6.4 percent 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 percent, compared to 32.0 percent 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 $258 million in cash and cash equivalents, compared with $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 $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 $53 million compared with $41 million in the same period last year.
Cooper generated a 15.2 percent return on invested capital for the trailing four quarters.
In February 2017, the company announced an increased and extended $300 million share repurchase program through December 2019. During the third quarter, 902,494 shares were repurchased for $31.6 million at an average price of $35.05 per share. Through the first nine months of 2017, Cooper has repurchased 1,943,685 shares for $70.2 million. As of September 30, 2017, $244 million remains of the $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 $34.36 per share.