Koppers Holdings Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2018. Koppers operates through Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). Results are seasonal and interim performance may not indicate full-year results.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $436.0 million, up 15% | $842.1 million, up 16% |
| Operating profit | $22.3 million, versus $38.1 million | $65.6 million, versus $66.2 million |
| Operating margin | 5.1%, versus 10.1% | 7.8%, versus 9.1% |
| Net income attributable to Koppers | $0.6 million, versus $19.7 million | $18.4 million, versus $24.1 million |
| Diluted EPS | $0.03, versus $0.90 | $0.83, versus $1.09 |
| Operating cash flow | Not separately provided | $3.1 million, versus $31.3 million |
- Six-month sales growth was led by CMC, up 41% to $344.0 million, while RUPS increased 5% to $285.6 million and PC increased 2% to $212.5 million.
- Second-quarter RUPS operating loss was $1.0 million, PC operating profit was $11.6 million, and CMC operating profit was $12.5 million. Six-month operating profit was $0.1 million for RUPS, $17.2 million for PC, and $49.7 million for CMC.
- Cash and cash equivalents were $62.5 million at June 30, 2018, compared with $60.3 million at December 31, 2017. Estimated liquidity was $238.7 million, consisting of cash and $176.2 million of available revolving credit capacity.
- Total debt was $1,013.5 million, including $500.0 million of 6% senior notes due 2025, $390.1 million drawn on the revolving facility, and a $97.5 million term loan. Long-term debt, net of current maturities and issuance costs, was $984.8 million.
- The company was in compliance with debt covenants. The fixed-charge coverage ratio was 2.98 against a minimum of 1.10, and the secured leverage ratio was 2.31 against a maximum of 3.25.
- Capital expenditures were $53.6 million in the first six months, and management expected full-year 2018 capital expenditures of approximately $70 million to $78 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from higher CMC pricing and the acquisitions of UIP and MAER. The April 2018 UIP acquisition added treated utility poles and pilings; the February 2018 MAER acquisition added recovered-crosstie and biomass-fuel operations. Cash consideration totaled $201.4 million for UIP and $62.8 million for MAER.
- Reported profitability declined despite higher sales. Second-quarter operating profit fell 41%, and six-month operating profit was approximately flat, reflecting weaker RUPS and PC performance.
- RUPS was pressured by lower Class I railroad spending, reduced crosstie volumes, weather-related delays in railroad bridge services, higher untreated-tie costs, and a $5.5 million UIP inventory fair-value purchase-price adjustment.
- PC margins declined because of higher copper and other raw-material costs, higher selling and administrative expenses, unfavorable sales mix, and copper-hedge mark-to-market effects. PC operating margin fell to 8.1% for the six months from 18.3%.
- CMC benefited from higher carbon-pitch, carbon-black-feedstock, and naphthalene prices and a streamlined cost structure. Its six-month operating margin increased to 14.4% from 3.5%.
- Interest expense increased by $3.6 million for the six months due to higher debt used to fund acquisitions. The prior-year period included a $13.3 million loss on extinguishment of debt; no comparable charge occurred in 2018.
- Operating cash flow fell by $28.2 million, principally because working capital used $33.6 million more cash. Inventory increased as certain railroad customers shifted toward arrangements requiring Koppers to hold untreated crosstie inventory.
- Comprehensive income attributable to Koppers was a loss of $20.4 million in the quarter and a loss of $10.3 million for the six months, primarily reflecting foreign-currency translation losses and unrealized hedge losses.
Guidance, Outlook, Risks, and Unusual Items
- Management expected an additional $9.5 million to $11.5 million of CMC restructuring and related charges through 2020, with approximately $30 million of future cash requirements through 2020. A new naphthalene unit at Stickney, Illinois was expected to be completed in the third quarter of 2018.
- Management expected to use an additional $30 million to $40 million of working capital during 2018, primarily because of higher inventory and receivables associated with revised railroad crosstie supply arrangements.
- The company suspended its dividend in February 2015 and did not expect to declare dividends for the foreseeable future.
- A $4.8 million tax expense was recorded in the second quarter following new IRS guidance related to the Tax Cuts and Jobs Act. The six-month effective tax rate was 39.4%, versus 22.9% in the prior-year period. Tax estimates remain subject to further guidance, including matters involving GILTI and the transition tax.
- Koppers adopted ASC 606 using the modified retrospective method. The opening retained-earnings increase was $0.3 million, and management reported no material effect on revenue measurement. The company also adopted updated hedge, retirement-benefit, goodwill, and cash-flow classification guidance.
- The company was responding to an EPA letter concerning potential Clean Water Act, spill-prevention, facility-response-plan, and storage-tank compliance issues at facilities in West Virginia and Pennsylvania. Potential penalties or expenditures could not be estimated.
- There were 85 plaintiffs in 47 coal-tar-pitch cases. No reserve was recorded because the probability and amount of any loss could not reasonably be estimated.
- Environmental liabilities included $13.6 million of accrued environmental reserves, $2.1 million for estimated Portland Harbor and Newark Bay CERCLA participation, and additional site-specific remediation liabilities. Unfavorable litigation or environmental outcomes could materially affect results.
- Principal operating risks include railroad capital-spending reductions, copper, lumber, coal-tar and other commodity costs, foreign-exchange volatility, interest rates, debt refinancing and covenant compliance, acquisition integration, seasonal weather effects, environmental obligations, litigation, and potential impairment of goodwill or long-lived assets.
Important Facts for Investors to Verify
- Whether UIP and MAER achieve expected synergies and whether their preliminary purchase-price allocations produce further depreciation, amortization, deferred-tax, or impairment effects.
- The sustainability of CMC’s higher pricing and margins as coal-tar, carbon-pitch, aluminum, steel, and environmental-market conditions evolve.
- RUPS working-capital requirements, Class I railroad demand, untreated-tie availability, and the effect of customer supply-contract changes on cash flow.
- PC margin recovery in the face of copper-price volatility, hedge accounting effects, and higher raw-material costs.
- Debt reduction capacity, variable-rate exposure, remaining revolver availability, and continued compliance with leverage and fixed-charge covenants.
- Final tax impacts from the Tax Cuts and Jobs Act, GILTI, and additional IRS guidance.
- Potential costs and timing of EPA actions, coal-tar-pitch litigation, CERCLA matters, environmental remediation, and CMC restructuring.
- Management’s exclusion of UIP and MAER from the annual internal-control effectiveness evaluation during the integration period.