Koppers Holdings Inc. 2021 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. Its 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 six months ended June 30, 2021, compared with the corresponding 2020 periods. Results are seasonal and interim performance may not indicate full-year results. Koppers completed the sale of Koppers Jiangsu Carbon Chemical Company in 2020, and related results are presented as discontinued operations.
Financial Highlights
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Net sales | $441.0 million | $436.6 million | $848.5 million | $838.5 million |
| Operating profit | $44.3 million | $49.7 million | $88.2 million | $63.3 million |
| Operating margin | 10.0% | 11.4% | 10.4% | 7.5% |
| Net income attributable to Koppers | $26.9 million | $29.2 million | $52.8 million | $27.8 million |
| Diluted EPS | $1.22 | $1.39 | $2.40 | $1.32 |
| Adjusted EBITDA | $65.6 million | $59.6 million | $120.7 million | $97.2 million |
| Adjusted EBITDA margin | 14.9% | 13.7% | 14.2% | 11.6% |
Six-month net cash provided by operating activities was $36.1 million, versus $22.2 million in the prior-year period. Capital expenditures were $60.9 million, compared with $26.5 million, producing net cash used in investing activities of $55.8 million. Financing activities provided $29.0 million, primarily from increased credit-facility borrowings.
At June 30, 2021, cash and cash equivalents, including restricted cash, were $46.5 million. Total debt was $813.1 million, consisting primarily of $306.0 million outstanding under the revolving credit facility and $500.0 million of 6.00% senior notes due 2025. Estimated liquidity was $330.5 million, including $44.2 million of available cash and $286.3 million of unused revolving credit capacity. Net leverage was 3.2x for the twelve months ended June 30, 2021, compared with 3.5x at December 31, 2020 and 4.5x at June 30, 2020.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 1%, but operating profit declined 11% because of weaker RUPS results, higher raw-material costs, increased SG&A and unfavorable commodity-hedging results.
- Six-month sales increased 1%, while operating profit increased 39% and adjusted EBITDA increased 24%.
- RUPS second-quarter sales declined 7% and operating profit declined 73%, primarily because of lower untreated crosstie and utility-pole volumes, reduced plant utilization and higher hardwood costs.
- PC second-quarter sales increased 6%, but operating profit declined 12% due partly to a $0.9 million unrealized copper-hedging loss versus an $8.3 million gain in the prior-year quarter. Excluding these mark-to-market effects, PC operating margin improved to 20.3% from 17.8%.
- CMC second-quarter sales increased 11% and operating profit increased to $13.4 million from $1.5 million, helped by higher prices, insurance proceeds of $2.9 million and lower restructuring costs.
- Six-month results benefited from higher PC international volumes and pricing, improved CMC pricing and volumes, lower interest expense, and $7.8 million of gains from sales of previously decommissioned assets.
- Income from discontinued operations was $0.6 million for the six months ended June 30, 2021, compared with a $4.4 million loss in 2020, primarily reflecting recovery of professional-service fees related to the KJCC sale.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2021 capital expenditures, excluding acquisitions, of approximately $110 million to $120 million, funded by operating cash flow. Management expects liquidity to be adequate for the next twelve months.
- Management cited expectations for stable to slightly higher utility-pole demand, continued strong North American residential treated-wood demand, and recovery in steel, aluminum and carbon-black markets.
- RUPS is affected by constrained hardwood and crosstie availability, high lumber prices, labor shortages and lower Class I railroad volumes. Koppers began converting facilities away from pentachlorophenol following the expected North American production exit by the sole producer; conversion is expected to be completed by mid-2022.
- CMC remains exposed to constrained coal-tar supply, reduced aluminum-smelting capacity and commodity-price volatility. Koppers planned to return North American CMC production to normal levels in the second half of 2021.
- COVID-19 continues to create uncertainty involving demand, supply chains, workforce restrictions and future estimates, although substantially all operations continued without significant disruption through June 30, 2021.
- The company recorded a $2.9 million insurance recovery in CMC and $7.8 million of gains on asset sales during the first six months. Results also reflect restructuring charges, non-cash LIFO effects and commodity-hedging mark-to-market gains or losses.
- Koppers faces environmental and legal contingencies. It has accrued $3.4 million for estimated de minimis settlements at the Portland Harbor and Newark Bay CERCLA sites, $4.2 million for certain acquired U.S. sites and $1.4 million for an Australian site. The company has not accrued a reserve for 32 pending coal-tar-pitch cases because the probability and amount of loss cannot currently be reasonably estimated.
- The company was in compliance with its debt covenants at June 30, 2021. Fixed-charge coverage was 2.18x, secured leverage was 1.28x and total leverage was 3.30x.
- On August 5, 2021, the board approved a new $100 million share-repurchase program, replacing the prior program with approximately $24.8 million remaining.
Most Important Facts for Investors to Verify
- Whether RUPS crosstie volumes, raw-material availability and plant utilization improve, and whether the planned facility conversions remain on schedule.
- Whether PC pricing offsets copper costs and whether commodity-hedging results create further earnings volatility.
- Whether CMC’s production normalization, insurance recovery and market-price improvements are recurring or nonrecurring.
- Actual capital expenditures and operating cash flow relative to the $110 million to $120 million spending expectation.
- Debt repayment capacity, revolving-credit availability, covenant headroom and the February 2025 senior-notes maturity.
- Potential exposure from coal-tar-pitch litigation, environmental remediation and indemnification matters, for which ultimate losses remain uncertain.
- The effect of COVID-19, inflation, supply-chain constraints, foreign exchange and commodity prices on margins and liquidity.