Koppers Holdings Inc. 2020 Q2 Form 10-Q Summary
Business context and reporting period
Koppers is a global provider of treated wood products, wood-preservation chemicals, and carbon compounds, operating through Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). This unaudited report covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Results are seasonal and were materially affected by COVID-19.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $436.6 million | $443.8 million | $838.5 million | $820.7 million |
| Operating profit | $49.7 million | $38.1 million | $63.3 million | $62.4 million |
| Net income attributable to Koppers | $29.2 million | $14.7 million | $27.8 million | $26.2 million |
| Diluted EPS | $1.39 | $0.70 | $1.32 | $1.25 |
| Cash flow from operations | Not separately provided | Not separately provided | $22.2 million | $1.4 million |
- Q2 operating margin was 11.4%, compared with 8.6% in Q2 2019. Six-month operating margin was 7.5%, compared with 7.6%.
- Q2 income from continuing operations was $29.4 million, or $1.40 diluted EPS. Six-month income from continuing operations was $31.3 million, or $1.49 diluted EPS.
- Six-month net cash used in investing activities was $26.4 million, including $26.5 million of capital expenditures. Capital expenditures were $18.5 million in the prior-year period.
- Six-month financing activities provided $3.9 million, including $9.9 million of increased credit-facility borrowings, partially offset by $5.1 million of debt repayments and $1.2 million of share repurchases.
- At June 30, 2020, cash was $33.0 million, total debt was $916.6 million, and long-term debt was $896.9 million. Total operating lease liabilities were $104.1 million.
- Estimated liquidity was $190.5 million, consisting of cash of $33.0 million and $157.5 million of available revolving-credit capacity. Liquidity was $254.6 million at December 31, 2019.
- Debt consisted primarily of a $500.0 million 6.00% senior-notes balance due 2025, $338.8 million drawn on the revolving credit facility, and a $77.5 million term loan. The filing states that all debt covenants were satisfied.
Material changes versus the prior comparable periods
- Q2 sales declined 2%, while six-month sales increased 2%. RUPS sales increased 5% in Q2 and 10% year to date; PC sales increased 13% in both periods; CMC sales declined 28% in Q2 and 19% year to date.
- Q2 RUPS operating profit rose 37% to $16.2 million, supported by higher crosstie and utility-pole volumes, favorable mix, and lower selling, general and administrative expenses.
- Q2 PC operating profit rose 133% to $32.6 million. Results included a $10.1 million favorable change in unrealized copper-swap gains; excluding that effect, PC operating margin was 17.8% versus the reported 23.8%.
- Q2 CMC operating profit fell 88% to $1.5 million as lower carbon-pitch, carbon-black-feedstock, and phthalic-anhydride prices and lower volumes offset gains elsewhere.
- Interest expense declined $2.9 million in Q2 and $5.2 million for the six months, primarily due to lower average debt and lower LIBOR-based rates.
- Six-month operating cash flow improved by $20.8 million, primarily from lower working-capital usage and improved inventory turnover, but capital spending increased by $8.0 million year over year.
- Six-month discontinued-operations loss was $4.4 million versus income of $2.8 million in 2019, primarily because COVID-19 reduced KJCC sales and end-market demand.
Guidance, outlook, risks, and unusual items
- Koppers signed an agreement to sell its 75%-owned KJCC business in China for $107.0 million, subject to closing adjustments and regulatory approvals. Closing was expected in the third quarter of 2020; management estimated a gain of approximately $45 million and net cash proceeds of approximately $65 million after noncontrolling interests, taxes, expenses, and working-capital adjustments.
- Management expected 2020 capital expenditures of approximately $50 million to $60 million, excluding acquisitions, funded by operating cash flow.
- The Denver, Colorado crosstie plant was targeted for closure in the third quarter of 2020. Q2 charges were $4.2 million, and additional restructuring charges of approximately $4 million to $9 million were expected through 2021.
- Additional CMC restructuring charges of approximately $2 million to $5 million and remaining cash requirements of approximately $13 million through 2021 were expected for plant closures in progress.
- Management expected continued strong North American residential treated-wood demand through at least 2020, while noting that CMC demand was being pressured by lower industrial activity, reduced aluminum and steel production, depressed oil prices, and COVID-19 effects.
- COVID-19 temporarily curtailed operations in China and New Zealand, although those operations resumed in Q2. Most other facilities continued operating as critical infrastructure. The ultimate financial impact remained unquantifiable.
- The company had no goodwill impairment triggering event through June 30, 2020, but future COVID-19 developments could affect goodwill, long-lived assets, inventories, receivables, taxes, and cash flows.
- Pending legal and environmental matters include 34 coal-tar-pitch cases involving 64 plaintiffs, for which no reserve was recorded because the probability and amount of loss could not reasonably be estimated. The company also had environmental reserves of $9.3 million and accrued an estimated $2.8 million EPA penalty related to alleged Clean Water Act violations.
- Management identified commodity prices, raw-material availability, foreign exchange, customer demand, debt refinancing and covenant compliance, environmental liabilities, litigation, and further pandemic-related disruptions as significant risks.
Most important facts for investors to verify
- Whether the KJCC sale closed on the expected terms, including the realized gain and net cash proceeds.
- Whether COVID-19 caused further deterioration in CMC demand, PC residential demand, supply chains, or customer credit quality.
- Progress and final costs of the Denver and other plant closures, including the estimated $4 million to $9 million of additional Denver-related charges.
- Compliance with the 1.10 minimum fixed-charge coverage ratio, 3.00 maximum secured-leverage ratio, and 5.25 maximum total-leverage ratio; reported June 30 ratios were 2.24, 2.06, and 4.49, respectively.
- Achievement of the $50 million to $60 million 2020 capital-expenditure plan and sufficiency of operating cash flow to fund it.
- Potential cash exposure from coal-tar-pitch litigation, Portland Harbor and other environmental matters, and the performance of indemnitors such as Beazer East.
- The sustainability of Q2 PC margins, given the $10.1 million favorable copper-derivative effect and other pandemic-related demand benefits.