Koppers Holdings Inc. — Form 10-Q Summary
Business context and reporting period
Koppers is a global producer of chemicals, carbon compounds, treated wood products and railroad services. Its two reportable segments are Carbon Materials and Chemicals (CMC) and Railroad and Utility Products and Services (RUPS). This unaudited filing covers the three and six months ended June 30, 2014, compared with the respective 2013 periods. Results are seasonal and interim performance may not indicate full-year results.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $356.8 million, versus $370.9 million | $688.2 million, versus $741.3 million |
| Operating profit | $13.3 million, versus $28.5 million | $13.8 million, versus $53.4 million |
| Operating margin | 3.7%, versus 7.7% | 2.0%, versus 7.2% |
| Net income attributable to Koppers | $1.6 million, versus $14.4 million | $3.8 million, versus $25.4 million |
| Diluted earnings per share | $0.08, versus $0.69 | $0.19, versus $1.21 |
| Net cash from operating activities | Not separately provided | $(8.7) million, versus $20.0 million |
CMC second-quarter sales declined 5% to $208.6 million and operating profit declined 70% to $3.8 million. RUPS sales declined 2% to $148.2 million and operating profit declined 22% to $12.8 million. For the first six months, CMC generated an operating loss of $5.0 million versus $25.6 million of profit, while RUPS operating profit fell to $23.9 million from $28.8 million.
At June 30, 2014, cash and cash equivalents were $54.4 million versus $82.2 million at December 31, 2013. Total debt was $358.4 million versus $303.1 million, consisting primarily of $296.8 million of senior notes, $37.3 million of construction loans and $24.3 million drawn on the revolving facility. Estimated liquidity was $344.8 million, including cash, $284.4 million of available revolver capacity and $6.0 million under other facilities. The company reported compliance with its debt covenants; the fixed-charge coverage ratio was 1.4 and the leverage ratio was 2.37.
Six-month investing cash use was $65.2 million, including $29.6 million for the Ashcroft acquisition and substantial construction spending in China. Financing activities provided $45.4 million, primarily from net debt borrowings. Capital expenditures excluding acquisitions and the new China coal-tar facility were expected to be approximately $46 million for 2014.
Material changes versus the prior comparable period
- Six-month sales decreased 7%, operating profit decreased 74%, and diluted EPS decreased from $1.21 to $0.19.
- Results were pressured by lower carbon pitch demand and pricing, lower prices for phthalic anhydride and carbon black feedstock, reduced crosstie volumes, hardwood-lumber competition, and a plant outage.
- Cost of sales increased to 87% of sales from 86%. Depreciation and amortization increased by $4.0 million for the six-month period, and SG&A increased by $9.4 million, primarily due to acquisition, operational-improvement and plant-startup costs.
- Operating results included $15.5 million of first-half impairment and restructuring charges, including $10.8 million for the Uithoorn, Netherlands closure and $4.7 million related to the Tangshan, China facility.
- Cash from operations changed from a $20.0 million source to an $8.7 million use, largely because of lower earnings and working-capital usage.
Outlook, commentary, risks and unusual items
- Koppers expects to close its planned acquisition of Osmose’s wood-preservation and railroad-services businesses in the third quarter of 2014, subject to closing conditions. The base purchase price is $460 million; the businesses generated approximately $390 million of 2013 revenue.
- The Osmose acquisition is expected to be financed with a new $500 million revolving facility and approximately $300 million of amortizing term debt, while the existing $300 million principal amount of senior notes remains outstanding.
- The Uithoorn facility is being closed because of deteriorating European market conditions and required capital spending; closure is expected to be completed by the end of 2015. The related restructuring reserve was $19.6 million at June 30, 2014.
- The adjacent TISCO coke-battery closures threaten the operation of Koppers’ 60%-owned Tangshan coal-tar facility. Management is evaluating relocation and strategic-partnership alternatives and states that closure could materially adversely affect business, cash flow and results. The facility contributed approximately $3.3 million of 2013 operating profit after noncontrolling interests.
- The company identifies risks from global demand, coal-tar and hardwood availability, raw-material and oil-price volatility, foreign exchange, European weakness, competitive pricing, weather, acquisition financing and integration.
- Coal-tar pitch litigation, environmental matters, toxic-tort claims and the Gainesville class action remain unresolved and are not reserved because loss probability and amounts cannot reasonably be estimated. The Portland Harbor and Newark Bay matters have estimated participation costs of $0.8 million but broader remediation liabilities remain uncertain.
- The company declared a quarterly dividend of $0.25 per share on August 6, 2014. Approximately $54 million of cash was held by foreign subsidiaries and estimated repatriation tax cost was approximately $16 million.
- The company adopted no material changes to critical accounting policies. It was evaluating the future impact of the new revenue-recognition standard, effective for annual periods beginning after December 15, 2016.
Most important facts for investors to verify
- Whether the Osmose transaction closed on the expected terms and the resulting debt, leverage and integration costs.
- Progress, costs and cash requirements associated with the Uithoorn closure and the Tangshan facility response.
- Whether CMC pricing, coal-tar availability and aluminum-related demand improve, and whether RUPS crosstie supply constraints persist.
- Actual operating cash flow, working-capital trends and liquidity after the acquisition and China construction spending.
- Potential exposure from coal-tar pitch litigation, environmental remediation, indemnification arrangements and other contingencies.
- The company’s ability to maintain dividends given debt covenants, restricted subsidiary assets and the planned acquisition financing.