Koppers Holdings Inc. — 2014 Q1 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2014, filed May 7, 2014. Koppers operates through Carbon Materials and Chemicals (CMC) and Railroad and Utility Products and Services (RUPS), serving aluminum, steel, chemical, railroad, utility and related markets. Results are seasonal, with historically weaker first and fourth quarters.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $331.4 million | $370.4 million |
| Operating profit | $0.5 million | $24.9 million |
| Operating margin | 0.2% | 6.7% |
| Loss from continuing operations | $0.1 million | $11.4 million income |
| Net income attributable to Koppers | $2.2 million | $11.0 million |
| Diluted EPS | $0.11 | $0.53 |
| Net cash from operating activities | $(13.7) million | $5.7 million |
| Capital expenditures | $14.8 million | $6.4 million |
| Cash used for acquisitions | $29.6 million | — |
- CMC sales fell 12% to $202.6 million; operating profit declined to an $8.8 million loss from $13.1 million of profit. CMC was affected by lower volumes and pricing and $17.2 million of Tangshan impairment and Uithoorn closure charges.
- RUPS sales declined 8% to $128.8 million, while operating profit fell 10% to $11.1 million. The segment margin was 8.6%, compared with 8.8% in the prior-year quarter.
- Cost of sales was 86% of sales versus 87% in the prior-year quarter. Depreciation and amortization increased to $8.9 million from $7.3 million. Selling, general and administrative expense rose to $21.4 million from $17.7 million.
- Cash and cash equivalents were $54.7 million at March 31, 2014, down from $82.2 million at December 31, 2013. Total assets were $801.2 million and total equity was $186.4 million.
- Total debt was $340.0 million at March 31, 2014, up from $303.1 million at year-end 2013. Debt comprised $296.7 million of senior notes, $28.3 million of construction loans and $15.0 million drawn under the revolving facility.
- Estimated liquidity was $369.7 million, comprising cash of $54.7 million, $299.8 million of available revolver capacity and $15.2 million under other credit facilities. Approximately $54 million of cash was held by foreign subsidiaries and would incur an estimated $20 million cash tax cost if repatriated.
- The company declared a quarterly dividend of $0.25 per common share on May 2, 2014. The filing states that the company remained in compliance with its debt covenants; the fixed-charge coverage ratio was 1.4 and the leverage ratio was 2.19 at March 31, 2014.
Material changes versus the prior comparable period
- Sales decreased 11%, primarily from lower CMC product volumes and prices and lower untreated crosstie volumes in RUPS.
- Operating profit decreased 98%, driven mainly by $10.8 million of Uithoorn closure costs and $4.7 million of Tangshan impairment charges, as well as weaker operating conditions.
- The effective tax rate before discrete items increased to 72.9% from 38.5%. A $5.5 million discrete tax benefit primarily reflected the decision to treat certain European subsidiary earnings as permanently reinvested.
- Operating cash flow shifted from a $5.7 million inflow to a $13.7 million outflow, reflecting lower earnings, a $7.2 million noncash tax benefit and working-capital effects, including higher inventories and lower accounts payable.
- Investing cash outflows increased to $44.4 million, primarily because of the $29.6 million Ashcroft acquisition and higher capital spending. Financing cash flow was a $30.2 million inflow, principally from net debt borrowings of $37.2 million.
- On January 20, 2014, Koppers acquired the Ashcroft, British Columbia crosstie treating business for approximately $29.6 million. Management estimated annual revenue of approximately $30 million from the facility.
Guidance, outlook, commentary and unusual items
- The filing does not provide a clear full-year earnings or revenue guidance range. Management expected approximately $49 million of 2014 capital expenditures excluding acquisitions and the new Chinese coal tar facility.
- Management expected approximately $9 million of 2014 cost savings from prior facility curtailments and closures, including Follansbee, Uithoorn and Portland.
- Uithoorn, Netherlands coal tar distillation activities were being ramped down and were expected to cease by mid-2014, with site closure expected by the end of 2015. The company recorded $10.8 million of closure costs in the quarter; the restructuring reserve was $20.1 million at March 31, 2014.
- The forced closure of neighboring TISCO coke batteries in Tangshan, China was expected by the end of June 2014. Koppers determined that its adjacent KCCC facility could not continue coal tar distillation after the TISCO shutdown. The company was evaluating relocation or strategic partnership alternatives. Management stated that closure or relocation could materially adversely affect the business, financial condition, cash flow and results of operations.
- The Pizhou, China coal tar distillation facility was expected to begin production in mid-2014. Remaining expected spending was approximately $29 million, financed through cash and incremental financing.
- On April 13, 2014, Koppers signed an agreement to acquire Osmose’s wood preservation and railroad services businesses for a base price of $460 million. The businesses generated approximately $390 million of 2013 revenue. Closing was expected in the third quarter of 2014, subject to approvals and other conditions, and was expected to be financed with a new approximately $300 million term loan and increased revolving capacity.
- Key risks include weak European demand, carbon pitch pricing, coal tar availability and cost, hardwood lumber availability, weather-related operating disruptions, foreign exchange and interest-rate changes, acquisition integration and financing risks, and potential adverse outcomes in environmental and toxic-tort matters.
- Approximately 111 plaintiffs in 61 coal tar pitch cases were pending at March 31, 2014. No reserve was recorded because loss probability and amount could not reasonably be estimated. Other contingencies included Gainesville environmental litigation, Netherlands arbitration with a claim of at least $3.1 million, and CERCLA matters including Portland Harbor and Newark Bay.
Important facts for investors to verify
- Whether the Tangshan facility was successfully relocated, replaced or closed, and the resulting effect on CMC earnings and cash flow.
- Actual timing, financing terms, regulatory approvals and integration results for the $460 million Osmose acquisition.
- Progress, remaining cost and commercial ramp-up of the Pizhou, China facility.
- Whether weaker crosstie volumes, European demand and carbon-material pricing pressures persisted beyond the seasonally weak first quarter.
- Compliance with debt covenants and available liquidity after financing the Osmose acquisition and other capital requirements.
- Developments in environmental, toxic-tort and other unreserved contingencies that could become material.