Koppers Holdings Inc. — 2024 First-Quarter Form 10-Q
Business context and reporting period
Koppers is a global provider of treated wood products, wood-preservation chemicals and carbon compounds, operating through Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). This unaudited report covers the three months ended March 31, 2024; interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $497.6 million | $513.4 million | Down 3% |
| Operating profit | $34.6 million | $50.3 million | Down $15.7 million |
| Net income attributable to Koppers | $13.0 million | $25.5 million | Down 49% |
| Diluted EPS | $0.59 | $1.19 | Down $0.60 |
| Adjusted EBITDA | $51.5 million | $61.5 million | Down 16% |
| Adjusted EBITDA margin | 10.3% | 12.0% | Down 1.6 percentage points |
| Net cash used in operating activities | $12.3 million | $15.3 million | Improved by $3.0 million |
| Capital expenditures | $26.3 million | $30.4 million | Down $4.1 million |
Reported operating margin was 7.0%, compared with 9.8% in the prior-year quarter. Net income margin was 2.6%, compared with 5.1%. Cost of sales increased to 81% of sales from 80%, while interest expense increased to $17.1 million from $14.0 million, primarily due to higher interest rates. Income tax expense was $4.4 million, with taxes equal to 25.3% of pretax income.
Segment sales and adjusted EBITDA were: RUPS sales of $225.1 million and adjusted EBITDA of $17.7 million; PC sales of $150.1 million and adjusted EBITDA of $29.8 million; and CMC sales of $122.4 million and adjusted EBITDA of $4.0 million.
At March 31, 2024, cash and cash equivalents were $49.0 million, compared with $66.5 million at December 31, 2023. Total debt was $877.6 million, including $491.3 million under the Credit Facility and $386.3 million of Term Loan B. Liquidity was approximately $340 million, including approximately $301 million of unused revolving credit availability after restrictions and $7.8 million of outstanding letters of credit.
The total net leverage ratio was 3.2 versus a covenant limit of 4.75, and the cash interest coverage ratio was 3.9 versus a minimum of 2.0. The company was in compliance with its debt covenants at quarter-end.
Material changes versus the prior comparable period
- Sales declined $15.8 million, primarily because CMC sales fell $31.0 million, partially offset by increases of $12.0 million in RUPS and $3.2 million in PC.
- CMC sales were pressured by lower carbon pitch prices and volumes; global carbon pitch prices declined 24.6%. CMC adjusted EBITDA fell $15.4 million, despite an $18.6 million reduction in raw-material costs, because of lower prices and volumes and a North American plant outage in January.
- RUPS adjusted EBITDA increased $1.9 million, supported by pricing and improved plant utilization, while PC adjusted EBITDA increased $3.5 million, primarily from higher volumes.
- Depreciation and amortization increased $2.1 million due to recent growth investments and higher asset-retirement obligations. Selling, general and administrative expense increased $3.9 million, mainly from compensation and professional-service costs.
- Operating cash use improved, but working capital remained a cash use: accounts receivable increased $18.2 million and inventories increased $8.2 million during the quarter.
- Financing activities provided $23.0 million, including $29.9 million of net Credit Facility borrowings, compared with $56.8 million provided in the prior-year period.
Guidance, outlook, risks and unusual items
- Management’s 2024 goals are sales of approximately $2.25 billion, adjusted EBITDA of approximately $265 million to $280 million, and capital expenditures of approximately $80 million to $90 million, excluding acquisitions.
- Utility-pole demand is expected to remain strong, although first-quarter volumes were temporarily affected by customer overstock and budget realignment. Management expects demand to normalize during 2024.
- PC outlook is relatively positive, supported by industrial markets and expected stable residential volumes, although remodeling expenditures are projected to decline.
- CMC faces weaker near-term demand in steel, aluminum and carbon black markets and reduced coal-tar availability. Management is pursuing petroleum-blended products, production-yield improvements and plant-optimization projects.
- On April 1, 2024, the company acquired substantially all assets of Brown Wood Preserving Company for approximately $100 million in cash, financed with cash and Credit Facility borrowings. Following the acquisition, the leverage covenant temporarily increases to 5.00 from the second quarter of 2024 through the first quarter of 2025.
- On April 12, 2024, the company amended its Credit Facility to add $100 million of Term Loan B borrowings for general corporate purposes and reduce the applicable Term Loan B interest-rate margin by 0.50 percentage points.
- The company is evaluating termination of its U.S. qualified pension plan, potentially in the first quarter of 2025. Management estimates additional cash funding of approximately $25 million and a pretax settlement loss of approximately $40 million, subject to changes in assumptions.
- The planned U.K. pension buy-out could result in an estimated pretax settlement loss of approximately $20 million; timing may be affected by pending legal developments.
- There were 51 plaintiffs in 27 coal-tar-pitch cases as of March 31, 2024. No reserve was recorded because loss probability and amount could not reasonably be estimated. Environmental reserves totaled $10.5 million, including $3.9 million accrued for Portland Harbor and Newark Bay matters.
- Key risks include commodity prices and availability, coal-tar supply, demand and economic conditions, interest rates, foreign exchange, supply-chain disruptions, debt covenant compliance, environmental liabilities, litigation, pension funding and potential impairment of goodwill or long-lived assets.
Investor verification points
- Verify the sustainability of the 2024 adjusted EBITDA target given the 16% first-quarter decline and significant CMC weakness.
- Monitor CMC coal-tar availability, carbon-pitch pricing, plant utilization and the effectiveness of petroleum-blended products.
- Assess post-acquisition leverage and covenant headroom after the $100 million Brown Wood acquisition and additional Term Loan B borrowing.
- Reconcile reported operating cash use with working-capital trends and expected full-year capital expenditures.
- Evaluate potential pension funding and settlement losses, including the estimated $25 million U.S. funding requirement and possible $40 million pretax loss.
- Track coal-tar-pitch litigation, environmental matters and the adequacy of the related reserves and indemnifications.
- Distinguish management’s non-GAAP adjusted EBITDA and adjusted EBITDA margin from GAAP operating profit and margins.