Koppers Holdings Inc. — Form 10-Q Summary
Business context and reporting period
Koppers Holdings Inc. is a global supplier of carbon compounds and commercial wood-treatment products. Its two reportable segments are Carbon Materials & Chemicals and Railroad & Utility Products. This unaudited filing covers the quarter and six months ended June 30, 2010, compared with the corresponding 2009 periods. Results are seasonal and may not be indicative of full-year performance.
Financial performance and position
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Net sales | $327.1 million | $291.6 million | $601.4 million | $564.3 million |
| Operating profit | $32.8 million | $33.3 million | $49.6 million | $51.7 million |
| Income from continuing operations | $16.3 million | $12.6 million | $23.7 million | $17.4 million |
| Net income attributable to Koppers | $16.1 million | $11.7 million | $23.4 million | $15.8 million |
| Diluted earnings per share | $0.78 | $0.57 | $1.13 | $0.77 |
| Operating margin | 10.0% | 11.4% | 8.2% | 9.2% |
- Quarterly net sales increased 12%; six-month sales increased 7%. Carbon Materials & Chemicals sales increased 30% for the quarter and 25% year to date, while Railroad & Utility Products sales declined 9% and 15%, respectively.
- Quarterly net income attributable to Koppers rose 38%; six-month net income rose 48%. Lower interest expense and lower effective tax rates more than offset weaker operating profit.
- Effective income tax rates were 37.3% versus 45.6% in the quarter and 36.9% versus 44.5% for the six months.
- Net cash provided by operating activities was $32.6 million for the six months, down from $62.8 million, primarily because of higher working-capital requirements, including a $35.7 million increase in accounts receivable.
- Investing cash use was $28.3 million, including $22.3 million for acquisitions and $7.7 million of capital expenditures. Financing cash use was $41.4 million, including $26.0 million of net revolving-credit repayments and $14.0 million of dividends.
- Cash and cash equivalents declined to $18.1 million from $58.4 million at December 31, 2009. Total estimated liquidity was $243.2 million, including $210.1 million of unused revolving-credit availability and $15.0 million under other credit facilities.
- Total debt was $309.9 million, consisting primarily of $295.1 million of 7 7/8% Senior Notes due 2019 and $14.0 million drawn on the revolving credit facility. The company reported compliance with all debt covenants.
- At June 30, 2010, total equity was $63.7 million and total liabilities were $568.2 million.
Material changes versus the prior comparable periods
- The March 1, 2010 acquisition of Cindu Chemicals B.V., renamed Koppers Netherlands B.V., added $13.7 million of second-quarter revenue and $18.4 million of six-month revenue, but reported operating losses of $0.7 million and $0.4 million, respectively, for those periods. The purchase price was $21.6 million.
- Carbon Materials & Chemicals operating profit increased 8% in the quarter and 22% for the six months. Railroad & Utility Products operating profit declined 16% and 30%, respectively, primarily because of lower untreated crosstie volumes from Class I railroads.
- Operating profit margins declined in both periods. Quarterly margin pressure reflected higher raw-material costs, lower carbon-pitch pricing, weaker railroad volumes and operating problems at the Australian carbon black facility.
- Interest expense declined $3.1 million in the quarter and $6.4 million for the six months, primarily because of lower average borrowings and the 2009 refinancing.
- Goodwill increased to $66.4 million from $61.6 million, primarily because of the Koppers Netherlands acquisition. Currency translation reduced accumulated other comprehensive income by $13.3 million in the first six months.
Guidance, outlook, risks and unusual items
- Management expected 2010 capital expenditures, excluding acquisitions, of approximately $26 million and stated that operating cash flow plus available revolver capacity should fund anticipated requirements for at least the next twelve months.
- Management described global end markets as stabilized or recovering in some areas but noted continued uncertainty and reduced demand in certain products. Key exposures include steel, aluminum, rubber, concrete and plastics production; coal-tar availability and pricing; oil prices; carbon-pitch competition; foreign exchange; and low utility-pole margins.
- An Australian carbon black facility boiler problem reduced operating profit by approximately $1.6 million in the second quarter. Management expected the issue to be resolved in the third quarter but anticipated an additional approximately $0.5 million impact in that quarter.
- Heavy U.S. snowstorms in January and February 2010 increased operating and logistics costs and reduced production and shipments. Railroad crosstie volumes also remained below 2009 levels because of customer inventory reductions and weather-related supply constraints.
- A $2.9 million environmental reserve reversal related to a sold Australian property reduced cost of sales. The company also recorded reserves of $2.2 million for a Clairton, Pennsylvania sewer-line project and regulatory fine and $1.6 million for the Stickney, Illinois environmental investigation.
- The company faces coal-tar-pitch, Somerville, Grenada, environmental and other litigation. No reserves were recorded for several significant matters because loss probability and amounts could not reasonably be estimated; an unfavorable outcome could materially affect results, cash flows or financial condition.
- The company had a $1.6 million reserve for Australian remediation at Newcastle and other sites, plus $1.2 million for remaining Australian environmental matters. Total environmental reserves were $7.3 million at June 30, 2010.
- The board declared a quarterly dividend of $0.22 per common share on August 4, 2010, payable October 4, 2010.
Important facts for investors to verify
- Whether the Koppers Netherlands acquisition achieves expected profitability and operating synergies after its initial operating losses.
- Recovery in untreated railroad crosstie demand and the effect of Class I railroad inventory levels on Railroad & Utility Products margins.
- Resolution and remaining financial impact of the Australian carbon black boiler problem.
- Working-capital conversion, particularly the significant increase in accounts receivable and the decline in operating cash flow.
- Compliance with revolving-credit and Senior Note covenants, available borrowing capacity and restrictions on dividends from Koppers Inc. to Koppers Holdings.
- Potential exposure from unresolved toxic-tort, product-liability and environmental matters, including the Portland Harbor and Grenada proceedings and liabilities that could become payable if indemnitors fail to perform.
- The sustainability of reported earnings improvement, given that lower interest expense, lower tax rates and reserve adjustments offset weaker operating profit and lower margins.