Koppers Holdings Inc. — Form 10-Q Summary
Business context and reporting period
Koppers Holdings Inc. 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 report covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. Results are seasonal and interim performance may not represent full-year results.
Financial results and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $393.6 million | $327.1 million | $752.7 million | $601.4 million |
| Operating profit | $37.1 million | $32.8 million | $57.9 million | $49.6 million |
| Income from continuing operations | $19.9 million | $16.3 million | $28.9 million | $23.7 million |
| Net income attributable to Koppers | $19.8 million | $16.1 million | $28.7 million | $23.4 million |
| Diluted EPS | $0.96 | $0.78 | $1.39 | $1.13 |
| Operating margin | 9.4% | 10.0% | 7.7% | 8.2% |
| Net margin attributable to Koppers | 5.0% | 4.9% | 3.8% | 3.9% |
- Q2 sales increased 20%, operating profit increased 13%, and diluted EPS increased 23%. Six-month sales increased 25%, operating profit increased 17%, and diluted EPS increased 23%.
- CM&C sales increased 23% in Q2 and 29% year to date; R&UP sales increased 16% in Q2 and 19% year to date.
- Q2 CM&C operating profit was $24.5 million and R&UP operating profit was $12.8 million. Six-month operating profit was $38.1 million for CM&C and $20.3 million for R&UP.
- Cost of sales rose to 84% of sales in Q2 from 83% and to 86% year to date from 84%, primarily reflecting higher coal-tar costs and volumes.
- Six-month operating cash flow was $25.8 million, down from $32.6 million, primarily because of higher working-capital requirements, including a $54.7 million increase in accounts receivable.
- Six-month capital expenditures were $12.2 million and acquisition spending was $1.0 million. Net cash used in investing activities was $13.1 million.
- Cash and cash equivalents were $53.6 million at June 30, 2011, compared with $35.3 million at December 31, 2010. Total estimated liquidity was $336.5 million, including $267.2 million of available revolving credit and $15.7 million of other credit availability.
- Total debt was $310.0 million, including $295.5 million of 7 7/8% Senior Notes due 2019 and $14.5 million drawn under the revolving credit facility. Long-term debt fair value was $335.6 million.
- The company declared a quarterly dividend of $0.22 per share. Six-month dividends paid were $9.1 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher pricing, improved volumes, foreign-exchange benefits, and contributions from the Koppers Netherlands and Portec acquisitions.
- CM&C carbon-pitch volumes benefited from increased aluminum production and smelter restarts, while margins were pressured by higher coal-tar costs and limited price recovery.
- R&UP benefited from stronger crosstie purchases and incremental rail-joint-bar sales from the Portec acquisition.
- Profit margins declined despite higher profit dollars: consolidated operating margin fell 60 basis points in Q2 and 50 basis points for the first six months.
- The effective tax rate declined to 34.9% from 37.3% in Q2 and to 35.2% from 36.9% year to date, primarily because earnings were weighted more toward lower-tax jurisdictions.
- SG&A increased by $3.7 million in Q2 and $4.2 million year to date, driven by higher salaries, incentive accruals, stock compensation, acquisition integration, and information-technology consulting.
- The revolving credit facility was amended in March 2011 to extend its expiration to March 22, 2015. The company remained in compliance with debt covenants; the June 30 fixed-charge coverage ratio was 2.4 versus a 1.10 minimum, and the leverage ratio was 1.74 versus a 4.50 maximum.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2011 capital expenditures, excluding acquisitions, of approximately $32 million and believed operating cash flow plus available borrowing capacity would fund liquidity needs for at least the next twelve months.
- Management expected carbon-pitch margins to improve during 2011 as contracts with semiannual pricing formulas reset for higher raw-material costs.
- Railroad crosstie volumes were expected to remain stronger at least through the next quarter as customers normalized inventories.
- Key operating risks include coal-tar availability and pricing, steel and aluminum demand, oil prices, competitive carbon-pitch markets, foreign-exchange movements, seasonality, weather, and the ability to pass raw-material cost increases to customers.
- The Australian dollar reduced profitability for Australian carbon-black and naphthalene exports denominated in U.S. dollars. Chinese operations continued to face raw-material cost pressure that was not fully recovered through selling prices.
- A 60%-owned Chinese subsidiary guaranteed $18.9 million of debt supporting the company’s 30% investment in TKK. The debt matured in August 2011, and management expected joint-venture partners to provide bridge financing. The full guarantee was recorded with an offsetting equity-investment amount.
- Environmental reserves totaled $12.0 million at June 30, 2011, including a $9.1 million Australian remediation obligation offset by a $7.5 million receivable from the adjacent property owner. The company also maintained reserves for other environmental matters.
- The company was involved in coal-tar-pitch, Somerville, Grenada, Gainesville, environmental, and toxic-tort matters. Several matters had no reserve because loss probability and amount could not reasonably be estimated; an unfavorable resolution could materially affect results, cash flow, or financial condition.
- There were approximately 112 plaintiffs in 62 pending coal-tar-pitch cases at June 30, 2011. No trial dates had been set.
- The company stated that there were no material changes to previously disclosed risk factors, market-risk disclosures, or critical accounting policies, and that disclosure controls were effective.
Important facts for investors to verify
- Whether coal-tar costs, raw-material availability, and contract repricing improve CM&C margins as management anticipated.
- Whether railroad crosstie demand and Portec-related sales remain strong after inventory normalization.
- Accounts-receivable growth, working-capital conversion, and the sustainability of operating cash flow.
- Revolving-credit borrowing, covenant compliance, and liquidity after capital expenditures, dividends, and potential acquisitions.
- Resolution and potential financial exposure from environmental and toxic-tort claims, including the $18.9 million TKK guarantee.
- Actual 2011 capital expenditures and whether the company maintains the stated $336.5 million liquidity position.