Koppers Holdings Inc. quarterly report, Q3 FY2022

Koppers Holdings Inc. — Q3 2022 Form 10-Q Summary

Business context and reporting period

Koppers is a global provider of treated wood products, wood-preservation chemicals, and carbon compounds, operating through Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). The filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Results are seasonal and interim results may not indicate full-year performance.

Financial performance and key metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Net sales	$536.1 million	$424.8 million	$1,497.9 million	$1,273.3 million
Operating profit	$42.8 million	$24.6 million	$110.1 million	$112.8 million
Net income attributable to Koppers	$19.1 million	$10.2 million	$49.6 million	$63.0 million
Diluted EPS	$0.91	$0.47	$2.32	$2.87
Adjusted EBITDA	$68.8 million	$53.9 million	$176.0 million	$174.7 million
Adjusted EBITDA margin	12.8%	12.7%	11.7%	13.7%

Q3 GAAP operating margin improved to approximately 8.0% from 5.8%; nine-month operating margin declined to approximately 7.3% from 8.9%.
Q3 sales increased 26%, led by RUPS up 11%, PC up 33%, and CMC up 43%. Nine-month sales increased 18%, led by CMC up 47%, PC up 14%, and RUPS up 4%.
Q3 net income attributable to Koppers increased 87%; nine-month net income declined 21.3%, reflecting weaker first-half performance, higher taxes, and the prior-year benefit from asset-sale gains.
Operating cash flow for the first nine months was $67.4 million, compared with $59.6 million in 2021. Capital expenditures were $80.0 million, producing negative free cash flow before financing of approximately $12.6 million.
Cash and cash equivalents, including restricted cash, were $42.8 million at September 30, 2022, versus $45.5 million at December 31, 2021.
Total debt was $826.8 million, including $500.0 million of 6.00% senior notes due 2025 and $326.8 million outstanding under the new revolving facility. Long-term debt reported on the balance sheet was $818.7 million after debt issuance costs.
The new $800 million revolving credit facility matures in June 2027, subject to a springing maturity related to the 2025 notes. Approximately $400 million of borrowing capacity was available after covenant and letter-of-credit restrictions.
The total net leverage ratio was 3.33 versus a maximum of 5.0, and the cash interest coverage ratio was 5.68 versus a minimum of 2.0. The company stated that it was in compliance with all debt covenants.

Material changes versus the prior comparable period

Q3 performance benefited from price increases across the businesses, stronger CMC pricing, higher PC volumes in the Americas, and improved RUPS pricing and absorption.
PC profitability weakened materially: Q3 adjusted EBITDA fell 17% and nine-month adjusted EBITDA fell 30%. Higher raw-material costs and the use of higher-cost copper inventory in a falling copper-price environment more than offset pricing and volume gains.
CMC adjusted EBITDA increased 63% in Q3 and 51% for the nine months, supported by favorable pricing, although foreign exchange and higher input costs were headwinds.
Nine-month gross margin deteriorated as cost of sales rose to 82% of sales from 79%, with inflation in raw materials, fuel, shipping, and other operating costs outpacing price increases earlier in the year.
The company entered into the new revolving credit facility in June 2022, replacing its prior $600 million revolving facility and $100 million term loan facility. The term loan was fully repaid by March 31, 2022.
The company sold its Sweetwater, Tennessee utility-pole facility in March 2022 and recorded a $2.5 million gain. The prior-year period included larger gains from divestitures, including the Denver facility sale.
Accumulated other comprehensive loss increased to $116.7 million from $40.0 million at year-end 2021, principally due to currency translation losses and unrealized losses on cash-flow hedges.

Outlook, risks, contingencies, and unusual items

Management expected 2022 capital expenditures, excluding acquisitions, of approximately $95 million and stated that liquidity should be adequate for the next twelve months.
Management expects infrastructure spending to support demand over time, but cited slowing housing and remodeling activity, higher interest rates, inflation, labor constraints, supply-chain disruption, and recession risk.
Coal-tar availability remains constrained by lower blast-furnace steel production and the Russia-Ukraine conflict. The company ceased purchases from Russian suppliers and could not purchase normal volumes from Ukrainian suppliers; management stated that higher end-market prices were expected to offset the 2022 impact.
Key commodity and market risks include copper, coal tar, oil, lumber, freight, foreign exchange, interest rates, and carbon-pitch market conditions.
The company expects to recognize an estimated pre-tax pension settlement loss of approximately $22 million when its U.K. pension buy-in is converted to a buy-out, expected after data cleansing is completed in mid-2023.
Coal-tar pitch litigation involved 53 plaintiffs in 28 pending cases at September 30, 2022. No reserve was recorded because the probability and amount of any loss could not reasonably be determined.
Environmental liabilities included $3.3 million accrued for Portland Harbor and Newark Bay matters, $3.9 million for certain acquired U.S. sites, and $1.2 million for an acquired Australian site. The company also relies on indemnification from former owners for certain environmental and product liabilities.
In November 2022, the SEC accepted the company’s settlement concerning prior non-GAAP disclosures and accounts-payable management. The settlement required a $1.3 million civil penalty, with no current or former officers or employees subject to enforcement action. The company did not expect a material impact on its financial statements or operations.
In October 2022, after the reporting period, the company acquired substantially all assets of Gross & Janes Co. for approximately $15 million.

Important facts for investors to verify

Whether pricing can continue to offset inflation, raw-material constraints, freight costs, and weaker demand in housing, rail, automotive, and industrial markets.
The sustainability of CMC’s favorable pricing and margins and the effect of coal-tar supply restrictions and foreign exchange.
PC margin recovery as copper prices and inventory costs normalize.
Liquidity available for the $500 million 2025 notes, ongoing capital expenditures, acquisitions, dividends, and share repurchases.
Compliance with leverage and interest-coverage covenants under the new credit facility, particularly if earnings or cash flow weaken.
Potential cash and earnings effects from coal-tar pitch litigation, environmental matters, indemnification disputes, and the expected pension settlement loss.
The impact of the Gross & Janes acquisition and any further restructuring or facility-consolidation actions.