Koppers Holdings Inc. quarterly report, Q2 FY2012

Koppers Holdings Inc. 2012 Q2 Form 10-Q Summary

Business context and reporting period

Koppers Holdings Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company operates two reportable segments: Carbon Materials & Chemicals (CM&C), which processes coal tar into carbon compounds and specialty chemicals, and Railroad & Utility Products (R&UP), which supplies treated wood products, rail joint bars and related services.

Results are seasonal, with historically stronger second and third quarters. The comparable periods are the three and six months ended June 30, 2011.

Financial performance and key metrics

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Net sales	$411.3 million	$374.5 million	$792.2 million	$716.0 million
Operating profit	$40.7 million	$38.3 million	$69.9 million	$59.6 million
Operating margin	9.9%	10.2%	8.8%	8.3%
Income from continuing operations	$21.1 million	$20.4 million	$36.9 million	$29.6 million
Net income attributable to Koppers	$20.4 million	$19.8 million	$36.0 million	$28.7 million
Diluted EPS	$0.98	$0.96	$1.72	$1.39
Net cash from operating activities	Not separately provided	Not separately provided	$3.4 million	$25.8 million

CM&C sales increased 12% in Q2 and 13% for the first six months; R&UP sales increased 5% and 6%, respectively.
Q2 CM&C operating profit rose 2% to $26.2 million, but its margin declined to 9.8% from 10.8%. Six-month CM&C operating profit increased 17% to $46.7 million, with a 9.0% margin versus 8.7%.
Q2 R&UP operating profit increased 17% to $15.0 million, with a margin of 10.4% versus 9.3%. Six-month operating profit increased 19% to $24.1 million.
Cost of sales was 84% of sales in Q2 2012 versus 83% in the prior-year quarter, and 85% for both six-month periods.
Other comprehensive income attributable to Koppers declined to $12.5 million in Q2 and $34.8 million for the six months, primarily reflecting unfavorable currency translation compared with the prior-year periods.

Financial position, cash flow, debt and liquidity

At June 30, 2012, cash and cash equivalents were $50.3 million, down from $54.1 million at December 31, 2011. Approximately $50 million was held by foreign subsidiaries; repatriation was estimated to create approximately $20 million of cash tax cost.
Total assets were $765.2 million, accounts receivable were $193.5 million, inventories were $188.3 million and total equity was $134.8 million.
Total debt was $314.3 million, including $18.4 million outstanding under the revolving credit facility and $295.9 million of Senior Notes. The Senior Notes have a 2019 maturity and a stated rate of 7 7/8%.
The company had $263.8 million of available revolving credit capacity after covenant and letter-of-credit restrictions, plus $14.7 million available under other credit facilities. Reported estimated liquidity was $328.8 million.
Six-month operating cash flow fell $22.4 million year over year to $3.4 million, principally because of higher working-capital requirements, including a $31.0 million inventory investment.
Six-month capital expenditures were $9.3 million, compared with $12.2 million in 2011. Financing activities provided $1.4 million, including $12.0 million of net revolving-credit borrowings and $9.5 million of dividends paid.
The company reported compliance with its debt covenants. The June 30 fixed-charge coverage ratio was 2.0 versus a minimum of 1.10, and the leverage ratio was 1.93 versus a maximum of 4.50.

Material changes, outlook and unusual items

Sales growth was primarily driven by higher pricing that passed through higher raw-material costs, with additional volume growth. R&UP benefited from higher crosstie pricing and product mix, although crosstie volumes declined because of lower contractual demand from Class 1 railroad customers.
CM&C profitability was pressured by higher coal-tar costs and lower carbon-pitch volumes in North America, Europe and Australia. European economic weakness reduced demand and profitability, and management expected those conditions to continue for at least the next two quarters.
Management expected lower oil-linked benchmarks to negatively affect third-quarter 2012 sales and profitability for carbon-black feedstock and phthalic anhydride compared with the first six months.
In February 2012, Koppers announced a memorandum of understanding with Nippon Steel Chemical and others to develop a 300,000-metric-ton coal-tar distillation facility in China. Construction was expected to begin in 2012, with completion expected in early 2014. The filing does not provide a final investment amount.
Capital expenditures for 2012, excluding acquisitions, were expected to total approximately $32 million. Management believed operating cash flow and available revolver capacity would fund requirements for at least the next twelve months.
The Kurnell, Australia carbon-black facility was classified as discontinued operations after manufacturing ceased in December 2011. The company recorded a $41.0 million closure and impairment charge in the fourth quarter of 2011 and estimated approximately $1.1 million of remaining closure costs through 2014.
Q2 results included a $3.1 million increase in the allowance for doubtful accounts related to a European customer collection issue, approximately $3.6 million of supplier-audit refunds, and $0.8 million of costs related to an Australian pitch-tank rupture and spill. Six-month results included $2.4 million of costs related to that spill and a $0.6 million fixed-asset impairment charge.
The company declared a quarterly dividend of $0.24 per common share on August 7, 2012, payable October 9, 2012.

Risks and contingencies

Key operating risks include global economic conditions, demand in aluminum and railroad markets, coal-tar availability and pricing, oil-price volatility, competition, foreign-exchange movements, weather, raw-material supply and customer collection risk.
The company was involved in approximately 134 coal-tar-pitch plaintiffs’ claims across 75 cases as of June 30, 2012. No reserve was recorded because the probability and amount of loss could not reasonably be estimated; an unfavorable outcome could materially affect results, cash flows and financial condition.
Environmental and toxic-tort matters include the Gainesville, Florida class action and CERCLA matters at Portland Harbor and Newark Bay. Reserves and accruals were recorded for certain environmental obligations, but significant additional exposure remained uncertain.
Environmental reserves totaled $14.2 million at June 30, 2012. The company also reserved $4.9 million for remaining remediation costs at an Australian property and $6.7 million for site remediation related to the closed Kurnell facility.
Approximately 400 tons of liquid carbon pitch leaked from a Portland, Victoria, Australia storage tank in February 2012. The company reported $2.4 million of direct costs through June 30 and received two unreserved claims totaling less than $1.0 million.
Forward-looking statements are subject to risks and uncertainties, and the filing states that interim results may not be indicative of full-year performance.

Investor verification points

Verify whether working-capital usage, particularly inventory growth, improves and whether operating cash flow can support dividends, capital spending and debt service.
Monitor coal-tar availability and pricing, oil-linked product pricing, European demand and margins in CM&C.
Assess the timing, capital requirements, ownership structure and commercial commitments for the proposed China coal-tar complex.
Review debt-covenant headroom, revolving-credit availability and restrictions on dividends from Koppers Inc. to the parent company.
Track the Kurnell closure costs, Australian spill remediation, environmental reserves and unresolved litigation exposure.
Reconcile reported earnings growth with the effects of supplier refunds, doubtful-account provisions, spill costs, impairments, foreign-currency translation and discontinued operations.