Koppers Holdings Inc. 2010 Q3 Form 10-Q Summary
Business context and reporting period
Koppers is a global provider of carbon compounds and commercial wood-treatment products and services, operating through Carbon Materials & Chemicals (CM&C) and Railroad & Utility Products (R&UP). The filing covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Results are seasonal and the interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $336.3 million | $289.8 million | $937.7 million | $854.1 million |
| Operating profit | $33.5 million | $33.2 million | $83.1 million | $84.9 million |
| Operating margin | 10.0% | 11.5% | 8.9% | 9.9% |
| Net income attributable to Koppers | $15.6 million | $16.4 million | $39.0 million | $32.2 million |
| Diluted EPS | $0.75 | $0.80 | $1.89 | $1.57 |
| Operating cash flow | Not separately provided | Not separately provided | $64.3 million | $92.6 million |
- Q3 sales increased 16%, while nine-month sales increased 10%. Q3 net income attributable to Koppers declined 5%, primarily because of higher income taxes, while nine-month net income increased 21%.
- Cost of sales was 83% of sales in Q3 and 84% for the nine-month period, versus 82% and 83%, respectively, in the comparable periods. The decline in operating margin reflected cost pressure and weaker R&UP profitability.
- CM&C Q3 sales rose 26% to $218.4 million and operating profit rose 10% to $26.1 million. R&UP sales rose 1% to $117.9 million, but operating profit fell 23% to $7.7 million.
- For the first nine months, CM&C sales increased 25% to $600.1 million and operating profit increased 16% to $58.2 million. R&UP sales declined 10% to $337.6 million and operating profit declined 28% to $26.3 million.
- Cash from operations declined $28.3 million year over year, principally because of higher accounts receivable and working-capital requirements. Investing cash use increased to $31.7 million, including the Koppers Netherlands acquisition. Financing cash use was $59.9 million, including $40.0 million of revolving-credit repayment and $18.5 million of dividends.
- At September 30, 2010, cash and cash equivalents were $33.1 million, total debt was $296.1 million, and long-term debt was $295.9 million. The revolving credit facility had $236.9 million of unused availability after covenant and letter-of-credit restrictions; $11.3 million was utilized by letters of credit. Total estimated liquidity was $285.1 million.
- The company reported a fixed-charge coverage ratio of 2.10 versus a minimum of 1.10, a leverage ratio of 2.37 versus a maximum of 4.50, and a senior secured leverage ratio of zero versus a maximum of 2.75. Management stated that all debt covenants were satisfied.
Material changes versus the prior comparable periods
- The March 1, 2010 acquisition of Koppers Netherlands added $32.7 million of nine-month revenue and $0.2 million of operating profit after acquisition. The purchase price was $21.6 million and generated $6.9 million of goodwill.
- CM&C benefited from higher volumes, especially carbon pitch shipments to the Middle East and Europe, higher coal-tar chemical pricing, favorable foreign exchange, and the Netherlands acquisition. Chinese CM&C margins deteriorated because of higher raw-material costs and lower export selling prices.
- R&UP was adversely affected by lower treated and untreated crosstie volumes as Class I railroads reduced inventory levels. Nine-month crosstie volume declined 7%.
- Interest expense declined to $6.6 million in Q3 and $20.4 million for nine months, from $10.0 million and $30.2 million, respectively, due to lower borrowings and lower financing costs following the 2009 refinancing.
- The Q3 effective tax rate increased to 41.3% from 24.8%; the nine-month rate increased to 38.8% from 36.2%. The filing attributes the Q3 increase primarily to foreign earnings mix, nondeductible expenses, tax adjustments, and the 2009 decision not to repatriate certain European earnings.
- Environmental reserves declined to $6.5 million from $10.7 million at year-end 2009, partly because a $2.9 million Australian remediation reserve was reversed after the property was sold and the buyer assumed remediation liabilities. The reversal reduced cost of sales.
Outlook, commentary, risks, contingencies, and unusual items
- Management said global end markets had stabilized or begun recovering, with increases in aluminum, steel, rubber, and plastics production, but demand remained uncertain and recovery was expected to develop over time.
- Key operating risks include global economic conditions, demand for aluminum and steel, availability and cost of coal tar, oil-price volatility, competitive carbon-pitch pricing, foreign-exchange movements, weather, and customer use of shorter-term pricing arrangements.
- An Australian carbon-black boiler problem affected profitability by approximately $0.5 million in Q1, $1.8 million in Q2, and $0.3 million in Q3; the problem was resolved during Q3.
- Management expected 2010 capital expenditures, excluding acquisitions, of approximately $25 million and stated that operating cash flow and available revolver capacity should fund anticipated requirements for at least the next twelve months.
- The board declared a quarterly dividend of $0.22 per share payable January 7, 2011. Dividend capacity remains subject to the revolving-credit agreement and Senior Notes indenture; the filing reported $159.2 million of additional dividend capacity under the Senior Notes basket, excluding the separate $20.0 million annual allowance.
- The company faces coal-tar pitch, Somerville, Grenada, Gainesville, environmental, toxic-tort, and product-liability matters. No reserves were recorded for several lawsuits because loss probability and amounts could not reasonably be estimated. An unfavorable outcome could materially affect financial condition, cash flows, and results.
- Other recorded environmental reserves included $0.8 million for the Stickney, Illinois investigation, $1.9 million for the Clairton, Pennsylvania sewer-line project and fine, $1.8 million for Newcastle, Australia remediation, and $1.3 million for other Australian sites.
Important facts for investors to verify
- Whether CM&C volume growth and the Koppers Netherlands acquisition offset Chinese margin pressure and carbon-pitch pricing competition.
- Whether railroad customer destocking has ended and R&UP crosstie volumes and margins recover.
- The sustainability of operating cash flow given the substantial year-over-year working-capital outflow, particularly accounts receivable.
- Compliance with debt covenants, revolver availability, and restrictions on dividends from Koppers Inc. to Koppers Holdings.
- The ultimate cost and timing of unresolved litigation, environmental remediation, and indemnification matters.
- The assumptions supporting the approximately $25 million 2010 capital-expenditure estimate and management’s liquidity assessment.