Koppers Holdings Inc. 2019 Q3 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 three reportable segments are Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Results are seasonal and interim results may not indicate full-year performance.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $474.9 million | $442.7 million | $1,379.6 million | $1,284.8 million |
| Operating profit | $39.6 million | $31.2 million | $106.5 million | $96.8 million |
| Income from continuing operations | $20.5 million | $6.9 million | $47.3 million | $31.2 million |
| Net income attributable to Koppers | $19.8 million | $7.6 million | $46.0 million | $26.0 million |
| Diluted EPS from continuing operations | $0.94 | $0.35 | $2.20 | $1.17 |
| Operating margin | 8.3% | 7.0% | 7.7% | 7.5% |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $57.0 million | $8.0 million |
Q3 sales increased 7%, operating profit increased 27%, and diluted continuing-operations EPS increased 169%. Nine-month sales increased 7%, operating profit increased 10%, and diluted continuing-operations EPS increased 88%. Income tax expense declined to $3.6 million in Q3 and $11.5 million for the nine months, with 2019 benefiting from discrete tax items. The estimated annual effective tax rate was 31.1% versus 37.1% in 2018.
| Segment | Q3 2019 Sales | Q3 Operating Profit | 9M 2019 Sales | 9M Operating Profit |
|---|---|---|---|---|
| RUPS | $198.8 million | $11.3 million | $564.0 million | $31.8 million |
| PC | $123.9 million | $11.7 million | $343.7 million | $38.5 million |
| CMC | $152.2 million | $17.1 million | $471.9 million | $37.8 million |
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $40.7 million at September 30, 2019, versus $40.6 million at December 31, 2018.
- Total debt was $970.5 million, including $500.0 million of 2025 Senior Notes, $385.0 million drawn on the revolving facility, and an $85.0 million term loan. Reported long-term debt, net of current maturities and issuance costs, was $948.8 million.
- Estimated liquidity was $248.3 million, consisting of $40.7 million of cash and $207.6 million of available revolving credit capacity. Foreign subsidiaries held approximately $33.7 million of cash.
- The credit facility was amended in May 2019 to extend its maturity to May 2024 and revise certain covenant definitions. The company was in compliance with all covenants at September 30, 2019: fixed-charge coverage ratio of 2.11 versus a minimum of 1.10, secured leverage ratio of 2.18 versus a maximum of 3.25, and total leverage ratio of 4.46 versus a maximum of 5.50.
- Nine-month operating cash flow was $57.0 million, compared with $8.0 million in 2018, principally reflecting improved working-capital timing. Investing cash use was $23.5 million versus $341.6 million, primarily because 2018 included acquisition spending. Financing cash use was $33.0 million versus $337.8 million of inflow in 2018, reflecting debt repayments and substantially lower share repurchases.
- 2019 capital expenditures, excluding acquisitions, were expected to total approximately $30 million and be funded from operating cash flow. The company has suspended its dividend and does not expect to declare dividends for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- RUPS benefited from a full nine months of UIP results, higher Class I crosstie volumes, price increases, and acquisition-related synergies. Nine-month RUPS sales rose 20% and operating profit rose to $31.8 million from $5.9 million.
- PC sales increased 7% for the nine months, while operating profit increased 37%. Results benefited from higher volumes, pricing, favorable copper-hedge effects, and insurance proceeds, partly offset by higher raw-material costs.
- CMC sales declined 4% for the nine months and operating profit declined 41%, primarily because of lower carbon-pitch prices, lower volumes for certain products, foreign-exchange effects, and approximately $3 million of restructuring charges related to the Follansbee closure.
- SG&A declined $7.9 million for the nine months, mainly because 2018 acquisition-related professional expenses did not recur. Interest expense increased $8.1 million because of higher average debt.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $119 million of right-of-use assets and lease liabilities at adoption. At September 30, operating lease liabilities totaled $116.9 million.
- In August 2019, Koppers ceased remaining production at Follansbee and sold its Blackstone, Virginia utility-pole treatment plant. Production capacity is being consolidated into other facilities.
Guidance, Outlook, Risks, and Unusual Items
- Management expected approximately $20 million of strategic-initiative and integration benefits in 2019, with an additional $15 million to $30 million of annualized benefits to be achieved ratably through 2023.
- Management described 2019 RUPS demand as relatively stable, but cited revised 2019 and 2020 North American crosstie demand estimates of approximately 20.7 million and 20.8 million ties, respectively. Lumber availability and weather remain constraints.
- Remaining customer shifts toward supplier-held untreated inventory could require approximately $50 million of additional working capital and defer approximately $50 million of revenue for six to nine months, depending on timing.
- CMC expected additional restructuring and related charges of approximately $3 million to $5 million through 2021, with estimated plant-closure cash requirements of approximately $17 million through 2021.
- Key operating risks include commodity prices and availability, particularly copper, coal tar, lumber, and oil; weaker railroad, housing, aluminum, steel, and construction demand; foreign-exchange and interest-rate movements; trade tensions and tariffs; customer concentration; debt refinancing and covenant compliance; and potential goodwill or long-lived-asset impairments.
- The company faces coal-tar-pitch personal-injury litigation and pavement-sealer lawsuits. No reserve was recorded because the probability and amount of loss could not reasonably be determined. An unfavorable outcome could materially affect results, cash flow, or financial condition.
- Environmental matters include CERCLA sites, remediation liabilities, an EPA inquiry regarding potential Clean Water Act violations, and a New South Wales EPA proceeding involving an Australian facility. The maximum stated fine in the Australian proceeding was approximately $0.7 million, plus potential legal costs; the company accrued its estimated liability.
- Environmental reserves totaled $9.6 million at September 30, 2019, including $2.2 million for estimated participation and de minimis settlement costs at the Portland Harbor and Newark Bay CERCLA sites and $4.4 million for certain acquired U.S. sites.
- Comprehensive income attributable to Koppers was $5.3 million in Q3 and $35.1 million for the nine months, despite currency-translation and cash-flow-hedge losses recorded in other comprehensive income.
Important Facts for Investors to Verify
- Whether improved RUPS volumes and UIP synergies offset lower railroad traffic, constrained untreated-tie supply, and potential working-capital requirements.
- The sustainability of the 2019 tax-rate benefit, including the $6.7 million nine-month discrete tax benefit.
- CMC pricing, coal-tar availability, plant-closure costs, and the expected $15 million to $30 million of future annualized savings.
- Debt reduction capacity, covenant headroom, refinancing requirements, and access to the $207.6 million of stated revolver availability.
- Potential exposure from coal-tar-pitch, pavement-sealer, CERCLA, environmental, and regulatory matters for which loss estimates remain uncertain.
- Execution of the Follansbee closure, Blackstone divestiture, facility consolidation, and integration of UIP and KRR.