Koppers Holdings Inc. 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the same 2013 periods. Koppers operates through Carbon Materials and Chemicals (CMC), Railroad and Utility Products and Services (RUPS), and the newly established Performance Chemicals (PC) segment.
The August 15, 2014 acquisition of the Osmose wood-preservation and railroad-services businesses added the PC segment and expanded RUPS. The acquisition had a cash purchase price of $494.1 million and contributed $53.4 million of revenue in the third quarter. Purchase accounting remained preliminary.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $440.1 million | $395.2 million | $1,128.3 million | $1,136.5 million |
| Operating profit | $17.3 million | $39.1 million | $31.1 million | $92.5 million |
| Operating margin | 3.9% | 9.9% | 2.8% | 8.1% |
| Income from continuing operations attributable to Koppers | $(2.8) million | $19.2 million | $1.1 million | $44.6 million |
| Net income attributable to Koppers | $(2.7) million | $19.1 million | $1.1 million | $44.5 million |
| Diluted EPS from continuing operations | $(0.14) | $0.92 | $0.05 | $2.13 |
| Operating cash flow | Not separately provided | Not separately provided | $10.8 million | $65.6 million |
Q3 cost of sales was 86% of sales versus 84% in the prior-year quarter. The nine-month ratio was 86% versus 85%. Interest expense increased to $11.9 million from $6.7 million in Q3 and to $25.3 million from $20.2 million for the nine-month period.
At September 30, 2014, cash and cash equivalents were $75.1 million, total debt was $867.5 million, including $30.0 million of current maturities, and shareholders’ equity was $148.6 million. The company reported $233.0 million of unused revolving-credit availability and total estimated liquidity of $308.9 million, including cash.
Cash used in investing activities was $555.4 million for the nine months, principally reflecting $496.5 million of acquisitions and $59.0 million of capital expenditures. Financing activities provided $537.6 million, including acquisition-related borrowings. Cash decreased by $7.1 million from year-end 2013.
Material changes versus the prior comparable periods
- Q3 sales increased 11%, but operating profit declined 56% and diluted EPS fell from $0.92 to $(0.14).
- Nine-month sales declined 1%, while operating profit fell 66% and diluted EPS declined from $2.13 to $0.05.
- CMC Q3 sales declined 6% and operating profit declined 76%, driven by lower carbon-pitch and phthalic-anhydride pricing and volumes, as well as closure and impairment costs.
- RUPS Q3 sales increased 9%, primarily from Ashcroft and Osmose, but operating profit decreased 2% because of lower crosstie and utility-pole volumes.
- PC contributed $46.1 million of Q3 revenue and $1.3 million of operating profit, but results included $2.7 million of amortization related to acquired inventory write-ups.
- Corporate operating costs increased substantially, primarily from Osmose transaction and integration costs.
- Impairment and restructuring charges totaled $2.6 million in Q3 and $18.1 million for nine months. The nine-month amount included Uithoorn closure costs and impairment related to the Tangshan, China facility.
- Comprehensive loss attributable to Koppers was $18.6 million in Q3 and $9.2 million for nine months, reflecting foreign-currency translation losses and derivative losses in addition to net losses.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects at least $12 million of annual Osmose synergies, with the annual run rate expected by the end of 2015. The filing does not provide formal earnings or revenue guidance.
- Management expects 2014 capital expenditures, excluding acquisitions and the China coal-tar facility, of approximately $41 million. Remaining spending for the China facility was estimated at approximately $5 million.
- Management expects cost savings of approximately $9 million in 2015 from facility curtailments and closures. Uithoorn closure is expected to be completed by the end of 2015; Kurnell, Australia closure activities are also expected to be completed during 2015.
- The Tangshan coke-battery closures threaten the supply, utilities, and shared services supporting Koppers’ 60%-owned KCCC facility. The company is evaluating relocation and strategic-partnership alternatives and warns that closure could materially adversely affect results.
- The company was in compliance with its debt covenants. The fixed-charge coverage ratio was 2.7 versus a minimum of 1.10, and the secured leverage ratio was 4.4 versus a maximum of 5.0.
- Liquidity is exposed to debt service, working-capital needs, capital spending, acquisition integration, raw-material availability, foreign exchange, and interest-rate fluctuations. Approximately $67 million of cash was held by foreign subsidiaries and could incur an estimated $11 million tax cost if repatriated.
- Pending or potential material contingencies include coal-tar-pitch toxic-tort litigation, environmental matters, Portland Harbor and Newark Bay CERCLA proceedings, the Virgin Islands product-liability class action, and a Netherlands arbitration claim of at least $3.1 million. Reserves were generally not recorded because losses could not be reasonably estimated.
- The company disclosed a material weakness in internal control over financial reporting involving the timely accounting for interim income taxes. Management planned remediation by the close of the quarter ended March 31, 2015, but stated that successful remediation was not assured.
- The company declared a quarterly dividend of $0.25 per share on November 5, 2014, payable January 5, 2015.
Most important facts for an investor to verify
- Whether Osmose integration delivers the targeted annual synergies and whether preliminary purchase accounting produces material future adjustments.
- Progress and ultimate costs of the Uithoorn, Kurnell, Tangshan, and other facility closures.
- Whether KCCC can maintain production, customer service, and export margins after the Tangshan coke-battery closures.
- Debt reduction, covenant headroom, interest-rate exposure, and available liquidity following the Osmose financing.
- Whether the interim income-tax control weakness is remediated on schedule without further reporting effects.
- Potential exposure from environmental, toxic-tort, product-liability, and arbitration matters for which no or limited reserves were recorded.
- Performance of CMC pricing and margins, RUPS crosstie availability, and PC demand tied to residential construction and copper costs.