Koppers Holdings Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
Koppers is a global producer of carbon compounds and treated wood products, operating through Carbon Materials & Chemicals (CM&C) and Railroad & Utility Products (R&UP). The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011. Results are seasonal, with historically weaker first- and fourth-quarter performance.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $380.9 million | $341.5 million | +12% |
| Operating profit | $29.2 million | $21.3 million | +37% |
| Operating margin | 7.7% | 6.2% | +1.5 percentage points |
| Income from continuing operations | $15.8 million | $9.2 million | +72% |
| Net income attributable to Koppers | $15.6 million | $8.9 million | +75% |
| Diluted EPS | $0.75 | $0.43 | +$0.32 |
| Cash used in operating activities | $15.8 million | $9.5 million | Greater use of $6.3 million |
| Capital expenditures | $3.4 million | $4.4 million | -$1.0 million |
| Cash and equivalents | $42.6 million | $54.1 million at December 31, 2011 | -$11.5 million during Q1 |
| Total debt | $314.3 million | $302.1 million at December 31, 2011 | +$12.2 million |
Cost of sales excluding depreciation and amortization was 86% of sales versus 87% in the prior-year quarter. The resulting gross margin before depreciation and amortization was approximately 14.2% versus 13.3%. Net income attributable to Koppers represented approximately 4.1% of sales versus 2.6%.
- CM&C sales increased 14% to $249.5 million; operating profit increased 45% to $20.5 million, with margin rising to 8.2% from 6.5%.
- R&UP sales increased 7% to $131.4 million; operating profit increased 21% to $9.1 million, with margin rising to 6.9% from 6.1%.
- Working capital consumed cash, including a $28.5 million increase in accounts receivable and a $16.7 million increase in inventories.
- Financing activities provided $6.5 million, including $12.1 million of net revolving-credit borrowings, offset by $4.5 million of dividends and $1.7 million of share repurchases.
Material changes versus the prior comparable period
- Revenue and operating profit improved in both reportable segments. CM&C benefited from higher carbon pitch and phthalic anhydride pricing and increased carbon black feedstock volumes, while R&UP benefited from higher commercial crosstie, treating-service and utility-pole activity.
- Carbon pitch volumes declined in Europe and Australia, and naphthalene pricing weakened in European and Chinese markets. Higher coal tar costs affected most regions.
- Interest expense remained $6.9 million, while the effective tax rate before discrete items declined to 32.8% from 36.3%, partly due to lower tax expense associated with a European consolidation project.
- The Kurnell, Australia carbon black facility was classified as discontinued operations after manufacturing ceased in December 2011. Discontinued operations contributed $0.1 million in Q1 2012 versus a $0.2 million loss in Q1 2011. Remaining closure costs are estimated at approximately $1.6 million, with completion expected by 2014.
- Comprehensive income attributable to Koppers increased to $22.3 million from $16.6 million, primarily reflecting currency translation and pension-related adjustments.
Guidance, outlook, commentary, risks and unusual items
- Management expects 2012 capital expenditures, excluding acquisitions, of approximately $32 million and believes operating cash flow plus available revolver capacity will fund anticipated needs for at least the next twelve months.
- Management expects construction of the planned 250,000-metric-ton China tar distillation facility to begin in 2012 and be completed in early 2014. No earnings or revenue guidance was provided.
- Reported liquidity was $321.5 million, comprising $42.6 million of cash, $263.6 million of available revolver capacity and $15.3 million available under other credit facilities. Approximately $39 million of cash was held by foreign subsidiaries and would incur an estimated $17 million cash tax cost if repatriated.
- The revolving credit facility had $18.5 million outstanding, with a $300 million commitment and $9.9 million of letter-of-credit utilization. The company reported compliance with all debt covenants; the fixed-charge coverage ratio was 2.2 versus a 1.10 minimum, and the leverage ratio was 2.01 versus a 4.50 maximum.
- Approximately 400 tons of liquid carbon pitch leaked from a Portland, Victoria, Australia storage tank on February 18, 2012. The material was contained, but direct costs were $1.7 million. Additional claims totaling less than $1.0 million had not been reserved because the probability and amount of loss could not be reasonably estimated.
- Material risks include coal tar availability and pricing, steel and aluminum production levels, oil prices, foreign exchange, Asian market conditions, weather, customer inventory decisions, environmental remediation, litigation and reliance on indemnification from former owners.
- Coal tar pitch litigation involved approximately 131 plaintiffs in 74 cases at March 31, 2012. No reserve was recorded because a loss could not reasonably be estimated. The company stated that an unfavorable resolution could materially affect results.
- Environmental reserves totaled $16.2 million at March 31, 2012. The company also reported $6.0 million of remaining expected remediation costs at Newcastle, Australia, $6.9 million accrued for Kurnell site remediation and $0.6 million for estimated participation costs at the Portland Harbor and Newark Bay CERCLA sites.
Facts investors should verify
- Whether improved pricing and segment margins persist after accounting for raw-material inflation and weaker carbon pitch volumes in Europe and Australia.
- The pace of working-capital normalization, particularly accounts receivable and inventory, and its effect on operating cash flow.
- Progress, cost, ownership structure and funding requirements for the proposed China carbon-products complex.
- Cash accessibility, including the tax cost of repatriating foreign cash, and compliance with revolver and senior-note covenants.
- Actual closure and remediation costs for Kurnell and other Australian sites.
- Developments in coal tar pitch litigation, environmental proceedings, Portland Harbor matters and the company’s indemnification arrangements.
- Whether the company maintains the declared quarterly dividend of $0.24 per share and has sufficient subsidiary dividend capacity to fund it.