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Cooper Tire & Rubber Company (CTB - Analyst Report) reported a profit of $74.1 million or $1.17 per share in the third quarter of 2012, up significantly from $17.3 million or 27 cents in the year-ago quarter. Earnings per share in the quarter trounced the Zacks Consensus Estimate by 30 cents.

The year-over-year growth was attributable to a $144.0 million reduction in raw material costs as well as higher sales volumes and improved manufacturing efficiencies, which contributed $9.0 million and $7.0 million, respectively to the earnings growth. However, these were partially offset by unfavorable price and mix for $36 million and a 67.7% increase in selling, general and administrative expenses (SG&A) to $68.6 million due to a rise in incentive compensation costs on the back of higher profits.

The company’s revenues increased 4.5% year over year to $1.10 billion in the quarter, but marginally fell short of the Zacks Consensus Estimate of $1.11 billion. The increase was due to higher revenues from North America, partially offset by a decline in revenues from the International segment.

Cost of goods sold fell 6.6% to $897.5 million from $960.5 million a year ago. As a result, gross profit increased significantly to $198.2 million from $88.1 million in the third quarter of 2011. Gross margin was 18.1% compared with 8.4% in the year-ago quarter. Operating income more than doubled to $129.6 million from $47.2 million, while operating margin was 11.8% versus 4.5% in the prior year.
Segment Results

Revenues from North America Tire Operations rose 7.4% to $816.3 million, driven by higher sales volumes (4%) and strong price and mix. According to Rubber Manufacturers Association, total light vehicle tire shipments by the company in the U.S. increased 6% compared to a 3% decline in total industry shipments.

Operating profit jumped to $104.8 million from $17.3 million in the year-ago quarter. The year-over-year improvement was due to decline in raw material costs of $102.0 million, higher unit volumes of $6 million and manufacturing efficiencies of $9 million, partially offset by higher SG&A costs of $14 million.

Revenues from International Tire Operations declined 2.5% to $411.3 million due to adverse impacts of price and mix for $60 million, offset by positive impacts from increase in unit volumes of $45 million and currency translation of $4 million.

Operating profit in the segment went up 16.6% to $35.5 million from $30.4 million a year ago. The year-over-year improvement was driven by lower raw material costs of $64 million and higher unit volumes of $3 million. These were partially offset by unfavorable price and mix of $53 million and higher SG&A of $7 million, due to investments on expansion of distribution network in China and higher promotional costs.
Financial Position

Cooper Tire had cash and cash equivalents of $271.5 million as of September 30, 2012, up from $90.6 million as of September 30, 2011. Long-term debt stood at $338.9 million as of September 30, 2012 compared with $356.1 million as of September 30, 2011. Long-term debt to capitalization ratio improved to 27.9% as of September 30, 2012 from 40.8% as of September 30, 2011.


The company believes that raw material prices will remain flat in the fourth quarter compared to the third quarter of 2012. Capital expenditures for 2012 will be in the range of $180 million to $210 million, due to the company’s investment in Enterprise Resource Planning (ERP) system and Serbian operations.

Our Take

Headquartered in Findlay, Ohio, Cooper Tire & Rubber Company engages in design, manufacturing, marketing, and sales of passenger car and light truck tires. The company competes with Goodyear Tire & Rubber Company (GT - Analyst Report) and maintains a Zacks #1 Rank, which translates into a Strong-Buy rating for the short term (1 to 3 months).

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