Koppers Holdings Inc. 2010 Form 10-K Summary
Business context and reporting period
Koppers Holdings Inc. is a global producer of carbon compounds and treated and untreated wood products. Its two reportable segments are Carbon Materials & Chemicals (CM&C) and Railroad & Utility Products (R&UP). The filing covers the fiscal year ended December 31, 2010, including fourth-quarter results. Koppers Holdings is primarily a holding company dependent on dividends and other transfers from Koppers Inc. and its subsidiaries.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $1,245.5 million | $1,124.4 million | +11% |
| Operating profit | $99.0 million | $94.9 million | +4% |
| Operating margin | 7.9% | 8.4% | Down 0.5 percentage points |
| Income from continuing operations | $44.7 million | $21.7 million | +106% |
| Net income attributable to Koppers | $44.1 million | $18.8 million | +135% |
| Diluted EPS from continuing operations | $2.14 | $0.92 | +133% |
| Cash flow from operations | $105.3 million | $112.3 million | Down $7.0 million |
| Capital expenditures | $29.9 million | $18.0 million | +$11.9 million |
| Total debt | $296.4 million | $335.3 million | Down $38.9 million |
| Cash and cash equivalents | $35.3 million | $58.4 million | Down $23.1 million |
CM&C sales increased 21% to $795.6 million and operating profit increased 33% to $77.6 million, with higher volumes, acquisitions and improved end-market stability. R&UP sales declined 4% to $449.9 million and operating profit declined 40% to $23.0 million, reflecting lower railroad crosstie demand, lower capacity utilization, a $2.2 million impairment and related charge, and a $3.0 million legal settlement.
Fourth-quarter 2010 net sales were $307.8 million, operating profit was $15.9 million, net income attributable to Koppers was $5.1 million, and diluted EPS was $0.24. The company declared quarterly dividends of $0.22 per share, or $0.88 for the year.
Material changes versus the prior comparable period
- Sales recovered from 2009 recessionary levels, primarily through higher CM&C volumes and pricing. Carbon pitch volumes benefited from increased aluminum demand and Chinese production serving Middle Eastern smelters.
- Carbon pitch pricing declined in several markets because of excess product availability, while coal tar costs increased. Chinese CM&C operations moved to a $1.1 million operating loss from $5.9 million of profit in 2009.
- R&UP performance weakened as Class I railroad customers reduced untreated crosstie purchases and treating volumes to lower inventories. Utility pole markets remained competitive and low margin.
- Interest expense declined $9.2 million to $27.1 million, primarily because of lower average borrowings and the 2009 refinancing at a 7 7/8% interest rate.
- The 2009 $22.4 million loss on extinguishment of debt did not recur in 2010, materially improving pretax income and EPS comparisons.
- Cash used in investing activities increased to $63.4 million, including $35.5 million of acquisition spending. Cash used in financing activities was $64.3 million, including $40.0 million of net debt repayments and $23.1 million of dividends.
- The company acquired Koppers Netherlands, the Midwestern refined tar business of Stella Jones, and Portec’s rail joint bar business. Koppers Netherlands contributed approximately $48.4 million of 2010 revenue and $0.8 million of operating profit.
Debt, liquidity and financial condition
Debt consisted principally of $300.0 million principal amount of 7 7/8% Senior Notes due 2019. The company had no revolving-credit borrowings at December 31, 2010, with $252.4 million of available borrowing capacity after covenant and letter-of-credit restrictions. Including cash and other credit facilities, estimated liquidity was $302.6 million. The company reported compliance with all revolving-credit and Senior Notes covenants; the fixed-charge coverage ratio was 2.3 versus a 1.10 minimum, and the leverage ratio was 2.31 versus a 4.50 maximum.
Contractual cash obligations totaled $2.30 billion, including $301.1 million of debt maturities, $210.7 million of interest, $119.2 million of operating leases and $1.67 billion of purchase commitments, primarily raw-material contracts. Management expected 2011 capital expenditures, excluding acquisitions, of approximately $32 million and believed operating cash flow and available borrowings would fund requirements for at least the next twelve months.
Guidance, outlook, commentary and unusual items
- Management expected aluminum demand and planned smelter restarts to support carbon pitch volumes, but warned that higher coal tar costs and excess Asian pitch supply could pressure margins.
- Railroad and utility markets remained uncertain. Railroad demand was expected to reflect customer inventory management, while utility pole demand was expected to remain low because of deregulation, overcapacity and constrained utility budgets.
- The company reported a $2.6 million negative operating-profit impact from boiler problems at its Australian carbon black facility and a $2.2 million impairment and related charge for a U.S. wood-treating plant.
- Operations are seasonal, with historically lower results in the first and fourth quarters because of weather and reduced railroad installation activity.
- Environmental reserves were $6.6 million at year-end, compared with $10.7 million in 2009. Management expected approximately $14.1 million of 2011 environmental-control capital expenditures and approximately $12.5 million of average annual environmental operating expenses, excluding depreciation.
- Pension obligations exceeded plan assets by approximately $74.3 million, and other post-retirement obligations were approximately $12.8 million. Expected 2011 contributions were approximately $14.0 million for pension plans and $1.3 million for other benefit plans.
- Material legal and environmental contingencies include coal-tar-pitch, Somerville and Grenada toxic-tort cases, CERCLA matters, and reliance on Beazer East indemnification for certain pre-1988 liabilities. The filing states that some matters are not reasonably estimable and may have a material adverse effect if resolved unfavorably.
- Management and Ernst & Young reported effective disclosure controls and internal control over financial reporting, with unqualified audit opinions.
Most important facts for an investor to verify
- Whether CM&C volume growth and aluminum-sector recovery can offset coal tar cost inflation and carbon pitch price pressure.
- Whether railroad crosstie volumes and R&UP margins recover from the 2010 decline, and whether additional plant impairments or closures are required.
- The terms, available capacity and covenant headroom of the $300.0 million revolving facility and the company’s ability to refinance or repay the $300.0 million Senior Notes due 2019.
- Future cash requirements for pension funding, environmental remediation, legal settlements, acquisitions and purchase commitments.
- The final cost and scope of the Grenada settlement and the potential exposure from unreserved litigation and environmental matters.
- Whether Beazer East and Beazer Limited continue to perform their indemnification obligations through the applicable indemnity periods.
- The sustainability of the $0.88 annual dividend given holding-company dependence on subsidiary distributions and debt-agreement restrictions.