Koppers Holdings Inc. — Q2 2019 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 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, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $469.8 million | $436.0 million | $904.7 million | $842.1 million |
| Operating profit | $38.5 million | $22.3 million | $66.9 million | $65.6 million |
| Operating margin | 8.2% | 5.1% | 7.4% | 7.8% |
| Net income attributable to Koppers | $14.7 million | $0.6 million | $26.2 million | $18.4 million |
| Diluted EPS from continuing operations | $0.70 | $0.01 | $1.25 | $0.81 |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $1.4 million | $3.1 million |
- Q2 sales increased 8%, while six-month sales increased 7%.
- Q2 cost of sales was 80% of sales versus 81% in the prior-year quarter; six-month cost of sales was 81% versus 79% in 2018.
- Q2 interest expense was $16.0 million, up from $14.5 million; six-month interest expense was $32.7 million, up from $25.0 million.
- Cash and cash equivalents were $42.1 million at June 30, 2019, compared with $40.6 million at December 31, 2018.
- Total debt was $1,019.2 million, including $14.0 million of current maturities, versus $1,002.6 million at year-end 2018. Long-term debt, net of current maturities and issuance costs, was $993.2 million.
- Estimated liquidity was $202.7 million, consisting of cash of $42.1 million and $160.6 million of available revolving-credit capacity.
- Total assets were $1.598 billion and total equity was $103.0 million at June 30, 2019.
Segment performance and material changes
- RUPS: Q2 sales rose 12% to $199.1 million and operating profit increased to $11.8 million from a $1.0 million loss. Six-month sales increased 28% to $365.2 million and operating profit increased to $20.5 million from $0.1 million. Growth reflected higher crosstie volumes, improved railroad demand, utility-pole activity, UIP acquisition contributions, and integration synergies.
- PC: Q2 sales rose 5% to $120.8 million and operating profit increased 21% to $14.0 million. Six-month sales rose 3% to $219.8 million and operating profit increased 56% to $26.8 million. Results benefited from higher copper-preservative volumes, favorable pricing mix, insurance proceeds, and copper-swap effects, partly offset by higher raw-material costs.
- CMC: Q2 sales rose 4% to $149.9 million and operating profit increased 6% to $13.3 million. Six-month sales declined 7% to $319.7 million and operating profit fell 58% to $20.7 million. Six-month results were pressured by lower carbon-pitch prices, lower carbon-black volumes, foreign-exchange effects, and restructuring charges.
- SG&A declined by $7.3 million in Q2 and $7.6 million in the first half, primarily because of lower acquisition-related and consulting expenses.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $119 million of right-of-use assets and lease liabilities without a material initial income-statement or cash-flow impact.
Cash flow, debt, liquidity, and capital allocation
- First-half operating cash flow was only $1.4 million, with working-capital outflows including accounts receivable and accounts payable changes.
- First-half investing cash use was $15.0 million, including $18.5 million of capital expenditures. The prior-year period included $264.1 million of acquisition spending.
- First-half financing cash inflow was $15.1 million, including $35.0 million of net credit-facility borrowings and $18.7 million of long-term-debt repayments.
- 2019 capital expenditures, excluding acquisitions, were expected to be approximately $30 million and funded by operating cash flow.
- The $600 million revolving credit facility and $100 million term loan mature in 2024 following a May 2019 amendment. The company had $160.6 million of unused revolver availability, after covenant and letter-of-credit restrictions.
- At June 30, 2019, the fixed-charge coverage ratio was 1.81 versus a 1.10 minimum; total secured leverage was 2.43 versus a 3.25 maximum; and total leverage was 4.73 versus a 5.50 maximum. The company reported compliance with all credit-facility covenants.
- The company suspended its dividend in 2015 and did not expect to declare dividends for the foreseeable future.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2019 railroad and utility demand to be relatively stable, with improvement in crosstie demand contingent on untreated-lumber availability. U.S. rail traffic was down year over year during the first half.
- Management expected $25 million to $40 million of annualized benefits from strategic initiatives and integration synergies over five years, including approximately $10 million in 2019.
- Transition by certain railroad customers toward supplier-held untreated inventory could require approximately $50 million of additional working capital and extend the revenue cycle by approximately six to nine months.
- The Follansbee, West Virginia CMC facility was scheduled to cease remaining production in the third quarter of 2019. Q2 included $3.3 million of related charges, and additional restructuring charges of approximately $3 million to $5 million were expected through 2021, with approximately $18 million of total future cash requirements for CMC plant closures through 2021.
- On August 5, 2019, the company sold its Blackstone, Virginia utility-pole treatment plant and expected no material third-quarter earnings charge.
- Management identified exposure to copper, oil, coal-tar and lumber prices; raw-material availability; foreign-exchange and interest-rate movements; railroad, housing, aluminum, steel and construction demand; tariffs; customer pricing disputes; debt refinancing and covenant compliance; and environmental and product-liability matters.
- The company had 34 coal-tar-pitch cases involving 64 plaintiffs and 11 pavement-sealer lawsuits. No reserve was recorded because loss probability and amount could not reasonably be determined; an unfavorable outcome could materially affect results.
- Environmental reserves totaled $9.9 million at June 30, 2019. The company had accrued $2.1 million for Portland Harbor and Newark Bay CERCLA matters and reported additional site-specific environmental liabilities.
- The company had not recognized potential incremental revenue related to a pricing disagreement with a major customer in China.
Important facts for investors to verify
- Whether RUPS crosstie demand and untreated-lumber availability support the expected 2019 improvement.
- Progress toward the stated $10 million of 2019 synergy benefits and the broader $25 million to $40 million annualized target.
- CMC pricing, volumes, Follansbee closure costs, and the timing of the expected $18 million of future closure cash requirements.
- Operating cash-flow conversion, working-capital needs, and the potential $50 million inventory investment from customer business-model changes.
- Debt reduction, available revolver capacity, interest expense, and continued compliance with leverage and fixed-charge covenants.
- Potential exposure from coal-tar-pitch, pavement-sealer, environmental, EPA, and Australian regulatory matters, for which the filing states that ultimate losses may be material but are not currently estimable.