Koppers Holdings Inc. — 2011 Third-Quarter Form 10-Q Summary
Business context and reporting period
Koppers is a global producer of carbon compounds and commercial wood-treatment products, operating through Carbon Materials & Chemicals (CM&C) and Railroad & Utility Products (R&UP). The filing covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Results are seasonal and are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $401.0 million, up 19% | $1,153.7 million, up 23% |
| Operating profit | $40.3 million, up 20% | $98.2 million, up 18% |
| Operating margin | 10.0%, unchanged | 8.5%, down from 8.9% |
| Net income attributable to Koppers | $22.4 million versus $15.6 million | $51.1 million versus $39.0 million |
| Diluted EPS | $1.08 versus $0.75 | $2.46 versus $1.89 |
| Income tax rate | 33.3% versus 41.3% | 34.3% versus 38.8% |
| Operating cash flow | Not separately provided | $44.5 million versus $64.3 million |
CM&C generated third-quarter sales of $265.4 million, up 22%, and operating profit of $30.9 million, up 18%. R&UP sales were $135.6 million, up 15%, and operating profit was $9.9 million, up 29%. For the first nine months, CM&C sales rose 26% and operating profit rose 19%; R&UP sales rose 17% and operating profit rose 15%.
At September 30, 2011, cash and cash equivalents were $59.2 million, accounts receivable were $179.5 million, inventories were $167.1 million, and total assets were $729.2 million. Total debt was $310.6 million, consisting primarily of $295.6 million of 7 7/8% Senior Notes due 2019 and $15.0 million drawn under the revolving credit facility. Estimated liquidity was $341.8 million, including cash, $267.5 million of available revolving credit capacity, and $15.1 million under other credit facilities.
The company’s fixed-charge coverage ratio was 2.4 against a 1.10 minimum, leverage ratio was 1.96 against a 4.50 maximum, and senior secured leverage ratio was 0.0 against a 2.75 maximum. Management stated that the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth reflected higher volumes and pricing, acquisitions completed in 2010, favorable foreign exchange, increased aluminum and railroad demand, and the Portec rail joint bar acquisition.
- Third-quarter CM&C sales growth included volume, price, and foreign-exchange increases of approximately 6%, 10%, and 6%, respectively. R&UP growth reflected approximately 9% higher volume, 5% higher pricing, and 1% favorable foreign exchange.
- Operating profit increased despite higher coal-tar costs. Nine-month consolidated operating margin declined because cost of sales increased to 85% of sales from 84%, including the absence of a favorable 2010 reduction in self-insured retention liabilities.
- SG&A increased by $4.3 million in the quarter and $8.5 million year to date, primarily from higher compensation, acquisition-related costs, information technology projects, and the inclusion of acquired businesses.
- Operating cash flow decreased $19.8 million year to date, principally because of increased accounts receivable and inventory requirements. Capital expenditures were $19.6 million versus $13.7 million in the prior-year period, while acquisition spending declined substantially from 2010.
- Equity increased to $142.0 million from $99.9 million at December 31, 2010, supported by earnings and employee stock plans, partly offset by dividends.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2011 capital expenditures, excluding acquisitions, of approximately $32 million and expected to lend approximately $12 million to its 30%-owned Chinese venture, TKK, in the fourth quarter.
- Management expected a one-time, non-cash impairment charge of approximately $22 million in the fourth quarter related to the Australian carbon black facility, following an October raw-material supply event. Restructuring and other costs over subsequent quarters could be substantial, but estimates had not been completed.
- The company expected a one-time, non-recurring income-tax charge of approximately $3.5 million in the fourth quarter related to its European integration project.
- Phthalic anhydride demand had moderated and was expected to remain weaker for at least the next quarter. Carbon-pitch margins were pressured by higher coal-tar costs and limited supply, although contract pricing adjustments were expected to provide improvement.
- Key operating risks include raw-material availability and prices, steel and aluminum production levels, oil prices, foreign-exchange movements, competitive carbon-pitch markets, seasonality, and customer demand.
- Pending coal-tar pitch, Somerville, Gainesville, environmental, toxic-tort, and product-liability matters were not fully reserved where loss probability and amounts could not reasonably be estimated. The filing warns that unfavorable resolutions could materially affect financial condition, cash flows, and results.
- Environmental reserves totaled $11.0 million at September 30, 2011. The company also reported substantial reliance on indemnification by Beazer East for certain historical environmental and other liabilities.
- The board declared a quarterly dividend of $0.22 per common share on November 2, 2011, payable January 6, 2012.
Most important facts for investors to verify
- Whether the projected $22 million Australian impairment and additional restructuring costs were recorded as anticipated in subsequent filings.
- The scale, timing, and cash impact of any restructuring or strategic action involving the Australian carbon black facility.
- Whether coal-tar supply constraints and raw-material inflation continued to pressure CM&C margins.
- Working-capital trends, particularly accounts receivable, inventories, and operating cash conversion.
- Compliance with revolving-credit and Senior Notes covenants and continued availability of the stated liquidity.
- Developments, reserves, settlements, or insurance and indemnification recoveries related to environmental and toxic-tort proceedings.
- The impact of the anticipated $3.5 million tax charge and the company’s ability to maintain its dividend under debt restrictions.