Koppers Holdings Inc. — 2013 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Koppers is a global producer of carbon compounds, specialty chemicals, treated wood products and railroad and utility products. Its two reportable segments are Carbon Materials and Chemicals (CMC) and Railroad and Utility Products and Services (RUPS). This unaudited Form 10-Q covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $370.9 million, versus $411.3 million | $741.3 million, versus $792.2 million |
| Operating profit | $28.5 million, versus $40.7 million | $53.4 million, versus $69.9 million |
| Operating margin | 7.7%, versus 9.9% | 7.2%, versus 8.8% |
| Net income attributable to Koppers | $14.4 million, versus $20.4 million | $25.4 million, versus $36.0 million |
| Diluted EPS | $0.69, versus $0.98 | $1.21, versus $1.72 |
| Operating cash flow | $20.0 million, versus $3.4 million in the comparable six-month period |
- CMC second-quarter sales declined 17% to $220.3 million and operating profit declined 52% to $12.5 million. Six-month sales declined 13% to $450.8 million and operating profit declined 45% to $25.6 million.
- RUPS second-quarter sales increased 4% to $150.6 million and operating profit increased 10% to $16.5 million. Six-month sales increased 5% to $290.5 million and operating profit increased 20% to $28.8 million.
- Cost of sales was 86% of sales in both the quarter and six-month period, compared with 84% and 85%, respectively, in the prior-year periods.
- Cash and cash equivalents were $63.2 million at June 30, 2013, compared with $66.7 million at December 31, 2012. Total estimated liquidity was $317.8 million, including $249.3 million of unused revolving-credit availability and $5.3 million under other credit facilities.
- Total debt was $301.4 million, including $5.1 million outstanding under the revolving facility and approximately $296.3 million of senior notes. The fair value of total debt was $326.9 million.
- Capital expenditures were $15.7 million for the first six months, and cash used in investing activities was $14.8 million. Dividends paid were $10.2 million; the quarterly dividend was increased to $0.25 per share from $0.24.
Material Changes Versus the Prior Comparable Period
- Consolidated sales fell 10% in the second quarter and 6% for the first six months, driven primarily by weakness in CMC.
- CMC was affected by lower volumes and prices for pitch and carbon black feedstock, weaker European markets, aluminum smelter closures in Australia, lower Chinese volumes into the Middle East, wet weather in North America and increased lower-priced European imports of phthalic anhydride.
- RUPS performance improved because of higher railroad crosstie volumes and the November 2012 acquisition of an Australian utility-pole business.
- Operating cash flow improved substantially because working-capital requirements were lower, principally due to reduced accounts-receivable growth and lower inventories.
- Other income included a $0.7 million gain on the sale of land. The second-quarter 2013 tax provision benefited from a $1.4 million discrete tax benefit related primarily to the expiration of potential tax examination periods. The effective tax rate before discrete items increased to 41.5% from 35.5%.
- Comprehensive income attributable to Koppers declined to $5.7 million from $12.5 million in the quarter and to $15.0 million from $34.8 million for the six-month period, largely reflecting unfavorable currency translation adjustments.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects difficult European economic conditions and related competitive pressure to continue through 2013.
- Management expects 2013 capital expenditures, excluding acquisitions and the China project, of approximately $38 million. Approximately $40 million of additional spending is expected during the remainder of 2013 for the majority-owned coal-tar distillation facility in Pizhou, China, which is expected to be completed in mid-2014.
- Management believes operating cash flow and available revolving-credit capacity will fund anticipated needs for at least the next twelve months. Approximately $63 million of cash was held by foreign subsidiaries; repatriation to the United States could incur estimated cash taxes of approximately $21 million.
- The company was in compliance with its debt covenants. The fixed-charge coverage ratio was 2.0 versus a minimum of 1.10, and the leverage ratio was 2.0 versus a maximum of 4.0.
- The revolving facility was extended to March 27, 2018. The $300 million senior notes mature in 2019.
- Discontinued operations relate primarily to the Kurnell, Australia carbon-black facility, which ceased manufacturing in 2011. The company estimates approximately $0.5 million of additional closure costs and expects completion by 2014; the related restructuring reserve was $10.2 million at June 30, 2013.
- Material contingencies include coal-tar-pitch toxic-tort litigation involving approximately 138 plaintiffs in 76 cases, the Gainesville environmental class action, environmental remediation matters, and a Netherlands arbitration claim involving approximately $1.7 million of alleged lost profits plus interest and costs. The company generally has not recorded reserves where loss probability and amount cannot be reasonably estimated.
- Environmental reserves totaled $12.6 million at June 30, 2013. The company also relies on indemnification from Beazer East for certain historical environmental and product liabilities; failure of indemnitors to perform could materially affect results.
- Other risks include coal-tar availability and pricing, steel and aluminum industry conditions, oil and raw-material price volatility, foreign exchange movements, weather, imports, seasonality and customer inventory decisions.
Important Facts for Investors to Verify
- Whether CMC volumes, pricing and margins recover from the 2013 decline, particularly in Europe, China and North America.
- Progress, total cost and financing of the Pizhou, China coal-tar distillation project.
- Availability of foreign subsidiary cash and the potential tax cost of repatriation.
- Debt covenant compliance, revolving-credit availability and the 2019 senior-note maturity.
- Developments and potential financial exposure from toxic-tort, environmental and arbitration matters that remain unreserved.
- Whether RUPS growth and the Australian utility-pole acquisition can offset continued weakness in CMC.
- The timing and cash cost of the Kurnell closure and other environmental remediation obligations.