Koppers Holdings Inc. — Form 10-Q Summary
Business context and reporting period
Koppers is an integrated global provider of treated wood products, wood-preservation chemicals, and carbon compounds. Its reportable segments are Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. Prior-period amounts were reclassified for discontinued operations following the September 2020 sale of Koppers Jiangsu Carbon Chemical Company Limited (KJCC).
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $407.5 million | $401.9 million | +1% |
| Operating profit | $43.9 million | $13.6 million | +$30.3 million |
| Income from continuing operations | $26.2 million | $1.9 million | +$24.3 million |
| Net income attributable to Koppers | $25.9 million | $(1.4) million | Improved |
| Diluted EPS | $1.18 | $(0.07) | Improved |
| Adjusted EBITDA | $55.1 million | $37.6 million | +47% |
| Adjusted EBITDA margin | 13.5% | 9.4% | +4.1 percentage points |
| Net cash used in operating activities | $(7.4) million | $(17.2) million | Improved by $9.8 million |
Reported operating margin was 10.8%, compared with 3.4% in the prior-year quarter. Net income attributable to Koppers represented approximately 6.4% of sales, compared with a net loss in Q1 2020.
- RUPS sales were $191.9 million, up 1%; operating profit was $8.7 million versus $9.2 million.
- PC sales were $123.6 million, up 11%; operating profit was $24.8 million versus $4.1 million. Excluding copper-hedge mark-to-market effects, PC operating margin was 18.0% versus 10.8%.
- CMC sales were $92.0 million, down 8%; operating profit was $10.8 million versus $0.7 million. The current period included a $7.5 million gain on asset sales; excluding that gain, CMC operating margin was approximately 3.0%.
At March 31, 2021, cash and cash equivalents including restricted cash were $44.2 million, total assets were $1.65 billion, and total equity was $380.9 million. Debt totaled $818.2 million, consisting primarily of $308.6 million drawn on the revolving credit facility, $500.0 million of 2025 senior notes, and $9.6 million of term-loan obligations. Estimated liquidity was $325.6 million, including $41.9 million of unrestricted cash and $283.7 million of available revolving credit capacity. The company reported compliance with all debt covenants.
Capital expenditures were $24.2 million in the quarter, compared with $10.6 million in Q1 2020. Management expects 2021 capital expenditures, excluding acquisitions, of approximately $105 million to $115 million, funded by operating cash flow.
Material changes versus the prior comparable period
- Profitability increased substantially due to stronger PC volumes and mix, improved cost absorption, lower interest expense, favorable copper-hedge results, and better CMC performance.
- PC benefited from increased North American home repair and remodeling demand and international recovery from pandemic-related restrictions.
- CMC benefited from a $7.5 million gain related to sales of two previously decommissioned plants, including the Follansbee facility and release of Clairton escrow proceeds.
- Interest expense declined $3.8 million, primarily because of lower average debt and lower LIBOR-based borrowing costs.
- Discontinued-operations loss declined to $0.4 million from $4.4 million, primarily because KJCC was sold in Q3 2020.
- Operating cash flow remained negative despite the earnings improvement, reflecting working-capital usage, including reductions in accounts payable and accrued liabilities.
- Long-term debt increased to $801.0 million from $765.8 million at December 31, 2020, primarily reflecting increased revolving-credit borrowings.
Guidance, outlook, risks, and unusual items
Management stated that estimated liquidity should be adequate for the next twelve months and did not provide a specific consolidated revenue or earnings forecast in the filing. The company expects continued strong near-term demand for residential treated wood and wood-preservation chemicals, while railroad demand is expected to be stable to modestly higher and CMC markets may remain pressured by pandemic-related industrial weakness, lower aluminum production, constrained coal-tar supply, and commodity-price volatility.
- COVID-19 continues to create uncertainty regarding demand, supply chains, production, workforce restrictions, and spending patterns, although substantially all operations continued without significant disruption.
- The planned North American phase-out of pentachlorophenol production by its sole producer may require utility customers to transition to alternatives such as chromated copper arsenate or creosote.
- Commodity, raw-material, foreign-exchange, interest-rate, and oil-price volatility may affect margins. Copper-hedging gains contributed $2.6 million in Q1 2021, compared with an $8.0 million loss in Q1 2020.
- Seasonality is significant; historically, first- and fourth-quarter results are weaker than second- and third-quarter results.
- Koppers faces coal-tar pitch litigation involving 63 plaintiffs in 33 cases. No reserve was recorded because the probability and amount of loss could not reasonably be estimated.
- Environmental liabilities included approximately $3.6 million of estimated de minimis settlements for the Portland Harbor and Newark Bay sites, $4.2 million for acquired U.S. sites, and $1.5 million for an Australian site. Total environmental remediation reserves were $10.9 million.
- The company recorded $1.2 million of impairment and restructuring charges in Q1 2021, while restructuring reserves totaled $4.0 million at March 31, 2021.
- The filing states that no material changes occurred in previously disclosed risk factors, market-risk disclosures, or critical accounting policies. Disclosure controls were effective.
Most important facts for investors to verify
- Whether PC demand and unusually strong pandemic-related home-improvement spending remain durable through the remainder of 2021.
- The sustainability of reported margins after excluding the $7.5 million asset-sale gain and volatile copper-hedge mark-to-market effects.
- Progress toward generating positive operating cash flow while funding expected $105 million to $115 million of 2021 capital expenditures.
- Revolving-credit utilization, debt maturities, covenant headroom, and the company’s ability to reduce leverage.
- Potential exposure from coal-tar pitch litigation, environmental remediation, indemnification disputes, and other contingencies.
- The effects of pentachlorophenol availability changes, coal-tar supply constraints, aluminum-market weakness, and COVID-19 on future demand and costs.