Cooper Tire & Rubber Co. today reported third quarter 2017 net income of $62 million compared with $49 million last year. Net sales decreased 2.3% to $734 million, compared with $751 million in the third quarter of 2016.
Operating profit was $101 million, or 13.8% of net sales, which is an increase of $23 million from the prior year.
Total company unit volume was down 2% 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,” says CEO and President 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,” says Hughes.
“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.”
Raw material costs increased by $19 million from the prior year, the company reports.
Consolidated results:
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% 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.
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.
Americas Tire operations:
Third quarter net sales in the Americas segment declined 7% as a result of $51 million of lower unit volume, partially offset by $2 million of favorable price and mix, primarily due to net price increases related to higher raw material costs, and $1 million of favorable 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 $117 million, or 18.8% of net sales, compared with $102 million, or 15.1% of net sales, a year ago. Operating profit was impacted by $12 million of lower unit volume, $8 million of unfavorable manufacturing costs, and $7 million of unfavorable raw material costs, net of price and mix. These were offset by $39 million of lower product liability costs, $2 million of favorable SG&A costs, and $1 million of reduced other expense, including foreign currency impact. The segment's $8 million of unfavorable 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.
International Tire operations:
Third quarter net sales in the International segment increased 44.8% as a result of $27 million of higher unit volume and $22 million of favorable price and mix, primarily due to net price increases related to higher raw material costs, and $1 million of favorable foreign currency impact. Segment unit volume was up 31.3 percent, with increased unit volume in Asia that was partially offset by a small unit volume decline in Europe.
Third quarter operating profit was $1 million compared with operating profit of $3 million in the third quarter of 2016. The decline was driven by $7 million of unfavorable raw material costs, net of price and mix, which were partially offset by $4 million of higher unit volume and $1 million of favorable 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.”
Management expectations for the fourth quarter include:
- Operating margin below the previously announced mid-term target of 8% to 10%.
- A modest sequential increase in raw material costs.
- Unit volume in the Americas segment will improve sequentially from the third quarter, but U.S. unit volume is expected to lag the industry. Unit volume growth is expected in the International segment.
- The International segment is expected to continue to improve profitability relative to 2016, inclusive of the recently acquired majority interest in GRT.
Management expectations for the full year 2017 include:
- Consolidated operating margin near the high end of the company’s previously announced mid-term target of 8% to 10%.
- Effective tax rate in a range between 30% and 33%.
- Capital expenditures to range between $190 and $210 million.
