Business Context and Reporting Period
Koppers Holdings Inc. filed its Form 10-Q for the quarterly period ended September 30, 2008. The company operates as a global provider of carbon compounds and commercial wood treatment products through two primary segments: Carbon Materials & Chemicals and Railroad & Utility Products. The reporting period includes the classification of the Monessen metallurgical furnace coke facility as a discontinued operation, with the sale closing in October 2008.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Net Sales | $369.4 million | $1,075.9 million |
| Operating Profit | $51.6 million | $129.4 million |
| Net Income | $25.5 million | $63.0 million |
| Diluted EPS | $1.24 | $3.03 |
| Operating Cash Flow (9mo) | $58.3 million | |
| Total Debt | $450.7 million | |
| Cash & Equivalents | $12.6 million | |
| Unused Credit Availability | $80.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 12% year-over-year for the quarter and 14% for the nine-month period. The Carbon Materials & Chemicals segment drove this growth with a 19% quarterly increase, attributed to higher pricing and volumes in carbon pitch and distillates. Conversely, Railroad & Utility Products sales remained flat for the quarter and declined 3% for the nine-month period due to reduced railroad crosstie purchasing.
- Profitability: Operating profit rose 32% for the quarter and 19% for the nine-month period. The Carbon Materials & Chemicals segment operating profit increased 52% (quarterly) and 44% (nine-month), while Railroad & Utility Products profit declined 26% and 31% respectively due to lower production levels and a boiler outage.
- Discontinued Operations: The company reported income from discontinued operations of $0.9 million for the quarter and $3.9 million for the nine months, primarily related to the Monessen facility prior to its sale.
- Cost Structure: Cost of sales as a percentage of net sales improved slightly to 80% for the quarter (from 81%) but increased to 82% for the nine-month period (from 81%) due to higher raw material costs and foreign exchange impacts.
Outlook, Risks, and Unusual Items
- Divestiture: The sale of the Monessen facility to ArcelorMittal S.A. closed on October 1, 2008. The company expects to recognize an after-tax gain of approximately $85.0 million. Proceeds were used to repay term loans and revolving credit.
- Capital Markets: On October 31, 2008, the company entered into a new $300.0 million revolving credit facility, replacing the expiring $125.0 million facility. The company also repurchased $17.5 million of Senior Secured Notes in October 2008.
- Share Repurchases: Under a $75.0 million program approved in February 2008, the company repurchased 477,918 shares totaling $19.9 million as of September 30, 2008.
- Risks: Management highlights risks related to raw material pricing (coal tar, lumber), cyclical demand in aluminum and railroad industries, and significant environmental and product liability litigation (including Somerville and Grenada cases) where reserves are not established due to uncertainty in loss estimation.
- Seasonality: Results are subject to seasonal fluctuations, with historically lower performance in the first and fourth quarters.
Investor Verification Checklist
- Monessen Sale Closing: Verify the final post-closing adjustments and the actual recognition of the ~$85 million gain in the Q4 2008 results.
- Debt Covenant Compliance: Confirm continued compliance with the new $300 million credit facility covenants (leverage and fixed charge coverage) given the economic environment.
- Raw Material Costs: Monitor the ability to pass through increased coal tar and lumber costs to customers without volume erosion.
- Legal Reserves: Review updates on the Somerville and Grenada toxic tort litigation, as the company currently holds no reserves for these matters.
- China Operations: Assess the operational ramp-up and margin performance of the new Tangshan Koppers Kailuan Carbon Chemical Company Limited (TKK) joint venture expected to commission in early 2009.