Koppers Holdings Inc. — Form 10-Q Summary
Business Context and Reporting Period
Koppers is an integrated global provider of treated wood products, wood-treatment chemicals, and carbon compounds. Its reportable segments are Railroad and Utility Products and Services (RUPS), Carbon Materials and Chemicals (CMC), and Performance Chemicals (PC). This filing covers the three months ended March 31, 2016. Results are seasonal, with the first and fourth quarters historically weaker than the second and third quarters.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $346.8 million | $397.8 million | Down 13% |
| Operating profit | $7.8 million | $8.0 million | Down 3% |
| Operating margin | 2.2% | 2.0% | Up 0.2 percentage points |
| Loss from continuing operations | $2.4 million | $4.2 million | Improved |
| Net loss attributable to Koppers | $1.3 million | $3.4 million | Improved |
| Loss per diluted share | $0.06 | $0.16 | Improved |
| Cash provided by operating activities | $2.5 million | $19.7 million | Down $17.2 million |
- Cost of sales declined to 83% of sales from 86% in the prior-year quarter, reflecting stronger PC margins that more than offset weaker CMC margins.
- Segment sales were RUPS $151.4 million, CMC $107.4 million, and PC $88.0 million.
- Segment operating profit was RUPS $13.5 million, CMC loss $17.6 million, PC $12.6 million, and Corporate loss $0.7 million.
- PC operating margin increased to 14.3% from 7.9%; RUPS margin decreased to 8.9% from 9.7%; CMC margin declined to negative 16.4% from negative 6.9%.
- Cash and cash equivalents were $15.6 million at March 31, 2016, compared with $21.8 million at December 31, 2015.
- Total debt was $737.8 million gross, including $42.4 million of current maturities; long-term debt, net of current maturities and issuance costs, was $683.7 million.
- Estimated liquidity was $137.7 million, consisting of cash of $15.6 million, $119.1 million of available revolving credit, and $3.0 million under other credit facilities.
- Capital expenditures were $8.6 million in the quarter. Management expected approximately $45 million of 2016 capital expenditures, excluding acquisitions.
Material Changes Versus the Prior Comparable Period
- CMC sales decreased $50.8 million, primarily because of lower carbon pitch and carbon black feedstock volumes and lower prices for carbon pitch, carbon black feedstock, and naphthalene, partly reflecting lower oil prices.
- RUPS sales decreased $6.7 million because of weaker utility pole demand, reduced U.S. toll-treating, foreign-exchange effects, and lower rail-industry spending.
- PC sales increased $6.5 million due to higher domestic volumes of copper-based and non-copper-based preservatives, favorable residential remodeling trends, and changes to wood-treatment specifications.
- Operating cash flow declined substantially because accounts receivable and inventory increased, while the prior year benefited from favorable working-capital changes.
- Interest expense declined $0.7 million to $12.3 million, primarily because of lower debt levels since the 2014 Osmose acquisition financing.
- There were no dividends paid or declared in Q1 2016. The dividend remained suspended, and the company did not expect to declare dividends for the foreseeable future.
- Comprehensive income attributable to Koppers was $7.7 million, compared with a $13.5 million comprehensive loss in Q1 2015, primarily due to favorable currency translation and hedge-related changes.
Outlook, Commentary, Risks, and Unusual Items
- Management expects continued pressure in CMC from weak global end-market demand, reduced coal-tar availability, lower utilization, competitive imports, and commodity-price volatility.
- The CMC restructuring plan is expected to reduce the global number of coal-tar distillation and related facilities from 11 at the end of 2013 to four. Management estimated additional restructuring charges of $15 million to $30 million through 2020, including approximately $2 million to $9 million of non-cash charges, and future cash requirements of $45 million to $55 million through 2020.
- Q1 2016 restructuring and impairment-related charges totaled $5.1 million. These included charges associated with the Tangshan, China facility, U.K. operations, the Clairton, Pennsylvania closure, and the Green Spring, West Virginia facility.
- The company discontinued production at its Tangshan, China plant and planned to cease coal-tar distillation at its U.K. facilities and Clairton facility. A definitive agreement to sell substantially all U.K. tar-distillation properties and assets was executed in April 2016, with closing expected in Q2 2016 subject to conditions.
- The Clairton cessation was expected to be completed by July 2016. Restructuring reserves were $31.6 million at March 31, 2016, including $23.2 million for site demolition and $4.5 million for environmental remediation.
- On April 8, 2016, after quarter-end, the revolving credit facility was reduced from $500 million to $300 million and the leverage-ratio ceiling was increased to 5.25 through September 30, 2016. Management stated the company complied with all covenants at March 31, 2016 regardless of the amendment.
- At March 31, 2016, the fixed-charge coverage ratio was 1.54 versus a minimum of 1.10, and the leverage ratio was 4.53 versus a maximum of 5.25. The company reported compliance with its credit agreement and senior-notes covenants.
- Potentially material risks include commodity and foreign-exchange volatility, raw-material availability, demand weakness, debt repayment or refinancing, covenant compliance, asset impairments, environmental liabilities, and litigation.
- Coal-tar pitch litigation involved 110 plaintiffs in 59 pending cases. No reserve was recorded because the probability and amount of loss could not reasonably be estimated.
- Environmental reserves were $19.1 million at March 31, 2016. The company also identified significant potential exposure related to CERCLA sites, acquired properties, remediation obligations, and indemnities from former owners.
- A related-party loan of $9.5 million to TKK, a 30%-owned Chinese affiliate, remained unpaid after the borrower defaulted on installments beginning in June 2015. Management concluded the full principal remained collectible and recorded no provision.
- The AWPA approved revised wood-treatment standards expected to become official in Q2 2016. Management expected higher preservative consumption but stated that the effect on sales, operating profit, and cash flow remained uncertain.
Important Facts for Investors to Verify
- Whether the U.K. asset sale closed as expected and the final proceeds, liabilities, and accounting impact.
- Progress, cash costs, and additional charges associated with the CMC closures and restructuring program.
- CMC volume, pricing, coal-tar availability, and margin trends, particularly in China, Europe, and North America.
- Working-capital requirements and whether operating cash flow improves from the Q1 decline.
- Revolving-credit availability, covenant headroom, leverage, and refinancing needs through the 2019 debt maturities.
- Developments in coal-tar pitch, Gainesville, Virgin Islands, CERCLA, and other environmental or product-liability matters.
- Collectibility of the $9.5 million TKK related-party loan and any outcome from negotiations regarding the affiliate investment.
- Implementation and financial effect of the revised AWPA wood-treatment standards.
- Future dividend policy, given the continuing suspension and restrictions on upstreaming cash from Koppers Inc. to Koppers Holdings.