Koppers Holdings Inc. — Form 10-Q Summary
Business Context and Reporting Period
Koppers Holdings Inc. is a global provider of carbon compounds and commercial wood treatment products and services. Its two reportable segments are Carbon Materials & Chemicals (CM&C) and Railroad & Utility Products (R&UP). This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the same periods in 2011; balance-sheet comparisons are with December 31, 2011.
Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $387.9 million | $381.2 million | $1,180.1 million | $1,097.2 million |
| Operating profit | $30.8 million | $40.1 million | $100.7 million | $99.7 million |
| Operating margin | 7.9% | 10.5% | 8.5% | 9.1% |
| Net income attributable to Koppers | $16.0 million | $22.4 million | $52.0 million | $51.1 million |
| Diluted EPS | $0.77 | $1.08 | $2.49 | $2.46 |
| Cash flow from operations | Not separately provided | Not separately provided | $54.5 million | $44.5 million |
- Q3 net margin attributable to Koppers was approximately 4.1%, versus approximately 5.9% in the prior-year quarter. Nine-month net margin was approximately 4.4%, versus approximately 4.7%.
- Q3 CM&C sales declined 2% to $241.1 million and operating profit fell 40% to $18.4 million. R&UP sales increased 8% to $146.8 million and operating profit increased 29% to $12.8 million.
- At September 30, 2012, cash and cash equivalents were $68.9 million, total assets were $766.8 million, total liabilities were $616.0 million, and total equity was $150.8 million.
- Debt consisted primarily of $296.0 million of 7 7/8% senior notes due 2019 and $1.4 million outstanding under the revolving credit facility. Total debt was $297.4 million, compared with $302.1 million at December 31, 2011.
- Estimated liquidity was $365.0 million, consisting of cash of $68.9 million, $280.7 million of available revolving-credit capacity and $15.4 million under other credit facilities. Approximately $11.5 million of revolving commitments supported letters of credit.
- The company was in compliance with its debt covenants. The fixed-charge coverage ratio was 2.1 versus a 1.10 minimum, and the leverage ratio was 1.80 versus a 4.50 maximum.
- Inventories increased to $190.5 million from $159.0 million at year-end, contributing to working-capital cash usage.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 2%, but operating profit decreased 23% and diluted EPS decreased 29%, primarily because of lower CM&C volumes, higher coal-tar costs and operating disruptions.
- CM&C results were pressured by lower carbon-pitch volumes in North America and Australia, lower naphthalene prices, higher raw-material costs and a 3% negative foreign-currency translation effect. Higher selling prices only partly offset these pressures.
- R&UP benefited from higher railroad-crosstie prices and favorable product mix, despite lower crosstie volumes from Class 1 railroad customers.
- For the first nine months, sales increased 8% and operating profit increased 1%. CM&C operating profit declined 8%, while R&UP operating profit increased 22%.
- Operating cash flow increased $10.0 million year over year to $54.5 million. Investing cash use declined to $15.1 million from $19.9 million, while financing cash use increased to $27.0 million from $0.1 million due mainly to stock repurchases and net revolving-credit repayments.
- The quarterly dividend increased to $0.24 per share from $0.22. The board declared another $0.24-per-share dividend on November 6, 2012.
Outlook, Unusual Items, Risks and Contingencies
- Management expected difficult European economic conditions and reduced demand to continue for at least the next two quarters. The filing provides no clear formal earnings or revenue guidance.
- Expected 2012 capital expenditures, excluding acquisitions, were approximately $32 million. Management expected to spend approximately $25 million in the fourth quarter on an Australian acquisition and initial funding for a Chinese coal-tar distillation facility.
- The company committed approximately $70 million for its 75%-owned Chinese facility, with construction expected to begin in late 2012 and finish by mid-2014. Funding is expected from available cash and incremental financing.
- The filing identifies seasonality and weather-related volatility, coal-tar availability and pricing, oil prices, aluminum and steel demand, competitive conditions, foreign exchange, customer inventory decisions and raw-material cost recovery as key operating risks.
- Q3 cost of sales included approximately $3.1 million related to a Netherlands plant outage and the Australian pitch-tank rupture and spill. Nine-month results also included a $3.1 million increase in the allowance for doubtful accounts related to a European customer collection issue, $3.7 million of Australian spill costs and $1.9 million of Netherlands outage charges, partly offset by a $3.6 million supplier-audit refund.
- The Kurnell, Australia carbon-black facility was shut down in December 2011 and classified as discontinued operations in 2012. Remaining closure costs were estimated at approximately $1.0 million, with completion expected by 2014; the September 30, 2012 restructuring reserve was $13.8 million.
- Coal-tar pitch litigation, the Gainesville environmental class action, CERCLA matters, environmental remediation obligations and other claims could materially affect results. The company recorded no reserve for several matters because loss probability and amount could not reasonably be estimated.
- Direct costs from the February 2012 Australian pitch leak totaled $3.7 million through September 30, net of estimated insurance recoveries. The company also received an approximately $1.7 million business-interruption claim related to the Netherlands outage; no reserve was recorded because the claim had not been substantiated.
- Approximately $70 million of cash was held by foreign subsidiaries; repatriation to the United States was estimated to incur approximately $30 million of cash tax.
Important Facts for Investors to Verify
- Whether CM&C margins recover as coal-tar costs, European demand pressures and carbon-pitch volumes stabilize.
- The timing, total cost and financing of the approximately $70 million Chinese facility and the status and purchase price of the Australian utility-pole acquisition.
- Inventory levels, customer collections and the adequacy of the $3.7 million accounts-receivable allowance increase.
- Available borrowing capacity, covenant compliance and restrictions on dividends from Koppers Inc. to Koppers Holdings.
- Potential cash exposure from environmental remediation, coal-tar pitch litigation, the Gainesville action and other unreserved contingencies.
- The effect of foreign-subsidiary cash balances and potential repatriation taxes on usable liquidity.