Koppers Holdings Inc. 2013 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Koppers Holdings is a global provider of chemicals, carbon compounds, treated wood products and related services. Its two reportable segments are Carbon Materials and Chemicals (CMC) and Railroad and Utility Products and Services (RUPS). The filing covers the three months ended March 31, 2013, compared with the same period in 2012. Results are seasonal and first-quarter performance is generally weaker than second- and third-quarter performance.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $370.4 million | $380.9 million | Down 3% |
| Operating profit | $24.9 million | $29.2 million | Down 15% |
| Operating margin | 6.7% | 7.7% | Down 1.0 percentage point |
| Income from continuing operations | $11.4 million | $15.8 million | Down $4.4 million |
| Net income attributable to Koppers | $11.0 million | $15.6 million | Down 29% |
| Diluted EPS from continuing operations | $0.53 | $0.74 | Down $0.21 |
| Net cash from operating activities | $5.7 million | $(15.8) million | Improved $21.5 million |
| Capital expenditures | $6.4 million | $3.4 million | Up $3.0 million |
- CMC sales were $230.5 million, down 8%, and operating profit was $13.1 million, down 36%. Its operating margin declined to 5.7% from 8.2%.
- RUPS sales were $139.9 million, up 6%, and operating profit was $12.3 million, up 35%. Its operating margin increased to 8.8% from 6.9%.
- Cost of sales increased to 87% of sales from 86%, primarily because lower CMC production reduced fixed-cost absorption.
- Income taxes were $7.1 million, with an effective tax rate of approximately 38.5% before discrete items, compared with 32.8% in the prior-year quarter.
- Comprehensive income attributable to Koppers was $9.3 million, compared with $22.3 million, primarily reflecting an unfavorable currency translation adjustment.
- Cash and cash equivalents were $56.7 million at March 31, 2013, compared with $66.7 million at December 31, 2012. Total assets were $774.2 million and total equity was $172.7 million.
- Long-term debt was $296.2 million, consisting primarily of $300 million principal amount of Senior Notes due 2019. Debt fair value was $331.3 million.
- The company had $290.9 million of unused revolving-credit availability, $5.3 million available under other credit facilities and reported total estimated liquidity of $352.9 million.
Material Changes Versus the Prior Comparable Period
- CMC performance weakened because of lower global volumes, lower European pricing, smelter closures in Europe and Australia, lower production and reduced fixed-cost absorption. The prior-year period also included $1.7 million of costs related to a carbon-pitch tank leak, which did not recur.
- CMC carbon-pitch volumes declined in North America and China as the company redirected production toward other customers, end markets and carbon-black feedstock.
- RUPS benefited from the November 2012 acquisition of an Australian utility-pole business, higher railroad crosstie volumes and favorable product mix.
- Operating cash flow turned positive because working-capital usage was substantially lower than in Q1 2012, including a smaller increase in receivables and a reduction in inventories.
- Investing cash use increased because of higher capital expenditures. Financing cash flow changed from a $6.5 million inflow to a $7.5 million outflow, primarily because the prior-year period included $12.1 million of net borrowings.
- The quarterly dividend increased to $0.25 per share declared in May 2013, from $0.24 per share declared during Q1 2013 and $0.22 per share in Q1 2012. No shares were repurchased under the current program during the quarter.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2013 capital expenditures, excluding acquisitions and the China coal-tar facility, of approximately $38 million.
- The majority-owned coal-tar facility in Pizhou, China was under construction, with completion expected in mid-2014. The company expected its future capital commitment to be approximately $50 million, financed with available cash and incremental financing.
- Management stated that operating cash flow and available revolving-credit borrowings should be sufficient to fund anticipated requirements for at least the next twelve months, while noting that additional financing could be required if those sources are insufficient.
- Management expected difficult European economic conditions and reduced demand to continue through 2013. Key sensitivities include coal-tar availability and pricing, steel and aluminum production, oil prices, foreign-exchange rates, competitive conditions and customer demand.
- The company’s revolving-credit facility was extended to March 27, 2018. At March 31, 2013, the fixed-charge coverage ratio was 2.3 versus a 1.10 minimum, and the leverage ratio was 1.81 versus a 4.0 maximum. The company reported compliance with its debt covenants.
- Approximately $54 million of cash was held by foreign subsidiaries; repatriation to the United States would have an estimated cash-tax cost of approximately $20 million.
- The company ceased manufacturing at its Kurnell, Australia carbon-black facility in 2011. Remaining closure costs were estimated at approximately $0.6 million, with completion expected by 2014. The company recorded $0.1 million of income from discontinued operations in Q1 2013.
- Environmental reserves totaled $14.0 million at March 31, 2013. The company also reported $5.0 million of expected remaining remediation costs at a Newcastle, Australia site and $6.7 million accrued for remediation related to the Kurnell closure.
- Coal-tar pitch lawsuits involved approximately 138 plaintiffs in 76 cases. No reserve was recorded because the probability and amount of loss could not reasonably be estimated. An unfavorable outcome could materially affect results.
- The company identified additional environmental exposure at Portland Harbor, Newark Bay and other sites. Portland Harbor and Newark Bay participation costs were estimated at $0.4 million, but broader liabilities were not reasonably estimable.
- A business-interruption claim of approximately $1.7 million was asserted by an adjacent plant in the Netherlands; management had not recorded a reserve and did not currently believe the matter would be material.
- Forward-looking results remain subject to demand, raw-material availability and pricing, economic conditions, competition, interest rates, foreign currency movements, litigation and environmental contingencies.
Most Important Facts for Investors to Verify
- Whether CMC volumes and margins stabilize after European smelter closures, Chinese production changes and lower fixed-cost absorption.
- Whether RUPS acquisition-related growth and railroad demand continue to offset weakness in CMC.
- Progress, capital spending and financing requirements for the approximately $50 million China facility.
- Available liquidity after considering foreign-held cash, repatriation taxes, letters of credit and debt-covenant restrictions.
- Developments in coal-tar pitch litigation and environmental matters, including Portland Harbor, Newark Bay, Australian remediation and the Gainesville case.
- Actual full-year tax rate, operating cash flow and capital expenditures relative to management’s expectations.