Cooper Tire & Rubber Co. has reported full year 2017 net income of $95 million, or diluted earnings per share of $1.81, compared with $248 million, or $4.51 per share, last year. The 2017 results include $68 million of tax items recorded in the fourth quarter, primarily related to the impact of U.S. tax reform. Excluding these tax items, earnings per share would have been $3.10.

Consolidated Fourth Quarter Results

Fourth quarter net sales were $757 million, a decrease of 3.4 percent compared with $784 million in the fourth quarter of 2016. Fourth quarter net sales were negatively impacted by $15 million of lower unit volume and $14 million of unfavorable price and mix, partially offset by $2 million of favorable foreign currency impact.

Fourth quarter 2017 operating profit was $47 million compared with $105 million for the same period last year. Operating profit included $32 million of unfavorable raw material costs, net of price and mix, $13 million of higher manufacturing costs, $11 million of lower unit volume and $2 million of higher product liability costs. Net SG&A expense increased by $1 million and included $2 million related to the reduction in force. Other costs decreased $1 million.

On Dec. 22, 2017, the U.S. enacted comprehensive tax legislation, commonly referred to as the “Tax Act.” 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, 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 percent. The provisional fourth quarter tax impact of the Transition Tax and deferred tax re-measurement was $35 million and $20 million (non-cash), respectively. In addition, 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 $19 million, partially offset by the reversal of an existing non-cash $7 million valuation allowance in Asia.

The effective tax rate for the fourth quarter was 206 percent, compared to 29.3 percent in the prior year. Excluding these discrete tax items, the effective tax rate would have been 30.7 percent for the fourth quarter of 2017.

At year-end, Cooper had $372 million in cash and cash equivalents, compared with $504 million at the end of the same period last year. Capital expenditures in the fourth quarter were $54 million compared with $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 percent 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 fourth quarter, 576,242 shares were repurchased for $20.7 million at an average price of $35.87 per share. For the full year 2017, Cooper repurchased 2.5 million shares for $90.9 million. As of Dec. 31, 2017, $223 million remains of the $300 million authorization. Since share repurchases began in Aug. 2014 through Dec. 31, 2017, the company repurchased a total of 14.8 million shares at an average price of $34.42 per share.

“We are pleased to have ended 2017 with operating profit margin of 9.5 percent, which is near the high end of our previously issued 8 to 10 percent 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 Brad Hughes, president and CEO. “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 (Ge Rui Da Rubber Co. Ltd.) joint venture in China, which produces truck and bus radial tires. 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 percent 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 favor tire 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 percent. 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.”

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 percent 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 Jan. 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 $28 million.
• Effective tax rate in a range between 23 and 26 percent. 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 percent 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 $215 million and $235 million.