The CEO of Cooper Tire & Rubber (NYSE:CTB) fell on his sword for the company the other day, resigning after the tire maker's second-quarter results were more disappointing than expected. It seems an unnecessarily dramatic point to make.
The tire business has not been a friendly place lately. Raw material costs, particularly expenses for the rubber and oil essential to a tire's composition, have remained exceptionally high, hurting other tire makers as well. Goodyear (NYSE:GT) reported lower profits on slightly increased sales, but saw its raw material costs rise 16% year over year.
Sales of higher-margin replacement tires, which many of the tire makers rely upon for the bulk of their profits, have suffered as consumers cut back on their driving due to high gasoline prices. Goodyear's unit volume in the second quarter was 2 million less than last year, primarily due to weak replacement-tire demand in North America. And Michelin said first-half replacement-tire trends were depressed and should remain so for the rest of the year. A weak tire market won't do Cooper any favors.
Even so, the tire maker said demand for its tires was extraordinarily depressed, so much so that it shut down four plants for a two-week period to clear out inventory; Cooper produced 1 million fewer replacement tires this year than last. The $20.7 million quarterly loss was the company's fifth in a row, and while that may merit making the company a potential short, it doesn't necessarily require CEO Thomas Datillo to take one for the team, since Cooper had posted profits under his tenure for four of the past five years. Datillo did use the well-worn phrase that he was stepping down to pursue "other opportunities."
Left unsaid in the resignation announcement was just how much compensation the CEO would receive for leaving. Datillo also served as board chairman and company president while acting as Cooper's chief executive. His salary in 2005 was $850,000, a meager 3.5% increase over 2004, and he received no bonus. However, he did receive more than 82,000 shares as stock options for "long-term compensation," at $21.61 a share. That was nearly 20% of all stock options the company issued to employees last year, and added to the $273,000 he received as long-term incentive compensation. Options usually vest over a period of years, but in severance situations, they generally vest immediately.
The company's lackluster performance in the face of higher costs caused Standard & Poor's rating service to downgrade Cooper's credit rating, citing continued poor performance and a negative outlook for the immediate future. However, though the tire maker's operating losses and negative cash flows remain a concern, the ratings agency did remove Cooper from its CreditWatch list.
Despite Cooper's prognosis for continued depressing news this year, the second half tends to be seasonally better than the first half; the company might be able to report better results going forward. The interim CEO should certainly hope so, lest he feel the need to repeat his predecessor's act of hara-kiri.
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Fool contributor Rich Duprey owns shares of Goodyear, but does not own any of the other stocks mentioned in this article. The Motley Fool has a disclosure policy.
