Koppers Holdings Inc. 10-Q Summary: First Quarter 2017
Business context and reporting period
Koppers Holdings Inc. filed its unaudited Form 10-Q for the three months ended March 31, 2017. The company operates three principal segments: Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). Results are seasonal and first-quarter performance is generally weaker than second- and third-quarter results.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $346.6 million | $346.8 million |
| Operating profit | $27.6 million | $7.8 million |
| Operating margin | 8.0% | 2.2% |
| Income from continuing operations | $4.7 million | $(2.4) million |
| Net income attributable to Koppers | $4.4 million | $(1.3) million |
| Diluted EPS | $0.20 | $(0.06) |
| Net cash from operating activities | $(24.1) million | $2.5 million |
| Capital expenditures | $14.9 million | $8.6 million |
| Cash and cash equivalents | $23.4 million | $15.6 million |
- Cost of sales excluding depreciation and amortization was $275.3 million, or approximately 79% of sales, versus 83% in the prior-year quarter.
- Impairment and restructuring charges declined to $1.5 million from $5.1 million. Depreciation and amortization declined to $11.2 million from $15.1 million.
- Total debt was $721.2 million at March 31, 2017, compared with $671.1 million at December 31, 2016; long-term debt, net of current maturities and issuance costs, was $696.1 million.
- Estimated liquidity was $202.0 million, consisting of $23.4 million of cash and $178.6 million of available revolving credit capacity. Outstanding letters of credit used $44.1 million of commitments.
- The fixed charge coverage ratio was 1.72 versus a minimum of 1.10, and the secured leverage ratio was 1.15 versus a maximum of 2.75. The company reported compliance with all revolving-credit covenants.
Material changes versus the prior comparable period
- Sales were essentially flat overall, but mix shifted materially: RUPS sales declined 11% to $135.5 million, PC sales increased 10% to $96.7 million, and CMC sales increased 7% to $114.4 million.
- RUPS operating profit fell 33% to $9.0 million because of lower crosstie, utility-product, and railroad-services volumes and weaker commercial crosstie pricing.
- PC operating profit rose 48% to $18.6 million, supported by higher North American volumes, repair and remodeling demand, existing-home sales, and increased demand for higher-retention treated wood.
- CMC improved from a $17.6 million operating loss to $0.4 million of operating profit, primarily because of lower North American raw-material costs and higher selling prices in Europe and Australasia.
- Interest expense decreased to $10.6 million from $12.3 million, but the company recorded a $13.3 million loss on extinguishment of debt related to refinancing and retirement of prior debt.
- Operating cash flow declined by $26.6 million, mainly because of increased accounts receivable and inventory and reductions in accounts payable and accrued liabilities.
- Comprehensive income attributable to Koppers increased to $12.1 million from $7.7 million, aided by currency translation and derivative-related gains.
Guidance, outlook, commentary, risks and unusual items
- Management expects 2017 RUPS revenue and profitability to decline year over year because of lower North American Class I railroad capital spending, reduced coal-related freight, and commercial-market crosstie oversupply.
- Management expects continued favorable PC demand from repair and remodeling activity and higher-retention treated wood, although the product-mix transition was expected to moderate after the second quarter.
- CMC continues to restructure its footprint. Management expects additional restructuring and related charges of $9 million to $17 million through 2020 and approximately $40 million of cash requirements through 2020.
- Capital expenditures for 2017, excluding acquisitions, were expected to be approximately $70 million to $75 million, funded by operating cash flow.
- In January 2017, the company issued $500.0 million of 6.00% senior notes due 2025. In February, it repaid the term loan, retired the 2019 notes, and entered into a $400.0 million senior secured revolving facility due 2022.
- The company suspended its dividend in February 2015 and did not expect to declare dividends for the foreseeable future. Debt agreements restrict dividends and other restricted payments.
- Key risks include commodity prices and availability, copper and coal-tar costs, railroad and aluminum demand, foreign exchange and interest rates, debt covenant compliance, refinancing risk, environmental liabilities, product liability, toxic-tort litigation, and potential goodwill or long-lived-asset impairments.
- The company had 99 plaintiffs in 55 coal-tar-pitch cases and had not recorded a reserve because loss probability and amount could not reasonably be estimated. Environmental reserves totaled $12.1 million; Portland Harbor and Newark Bay liabilities could be materially higher depending on allocation among potentially responsible parties.
- The Gainesville class-certification motion was denied in March 2017, but plaintiffs filed an appeal in April 2017.
- The company adopted ASU 2016-09 effective January 1, 2017, reducing retained earnings by $0.2 million. Revenue recognition, lease, and cash-flow classification standards were still under evaluation.
- Management stated that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether RUPS railroad demand and commercial crosstie pricing continue to weaken and whether PC strength offsets that decline.
- Whether CMC restructuring delivers the projected cost savings without exceeding the estimated $9 million to $17 million of additional charges and $40 million of cash requirements.
- Operating cash-flow conversion, working-capital requirements, and the company’s ability to fund the projected $70 million to $75 million of 2017 capital spending.
- Debt covenant ratios, available revolver capacity, interest costs, and refinancing requirements under the 2025 notes and 2022 revolving facility.
- The ultimate cost and timing of environmental remediation, coal-tar-pitch litigation, Gainesville litigation, and Portland Harbor and Newark Bay allocations.
- The sustainability of reported earnings after excluding the $13.3 million debt-extinguishment loss, restructuring charges, derivative gains, and other unusual items.