Koppers Holdings Inc. — 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 three reportable segments are Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). This filing covers the three and nine months ended September 30, 2023; results are unaudited and seasonal.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $550.4 million | $536.1 million | $1,641.0 million | $1,497.9 million |
| Operating profit | $53.3 million | $42.8 million | $158.0 million | $110.1 million |
| Net income attributable to Koppers | $26.3 million | $19.1 million | $76.3 million | $49.6 million |
| Diluted EPS | $1.22 | $0.91 | $3.54 | $2.32 |
| Adjusted EBITDA | $70.7 million | $68.8 million | $202.5 million | $176.0 million |
| Operating margin | 9.7% | 8.0% | 9.6% | 7.4% |
- Q3 sales increased 3%, while nine-month sales increased 10%. Q3 net income attributable to Koppers rose 38%; nine-month income rose 54%.
- Q3 adjusted EBITDA margin was approximately 12.8%, compared with 12.8% in the prior-year quarter. Nine-month adjusted EBITDA margin was approximately 12.3%, compared with 11.7%.
- Operating cash flow for the first nine months was $79.5 million, up from $67.4 million. Capital expenditures were $91.3 million, producing negative free cash flow before financing of approximately $11.8 million.
- Cash and cash equivalents were $53.5 million at September 30, 2023, compared with $33.3 million at December 31, 2022.
- Debt totaled $872.9 million, including $485.2 million under the Credit Facility and $387.7 million under Term Loan B. Long-term debt, net of current maturities and issuance costs, was $859.8 million.
- Approximately $350 million of revolving credit availability remained after covenant and letter-of-credit restrictions. The company reported a total net leverage ratio of 3.1 versus a 5.0 maximum and cash interest coverage of 4.2 versus a 2.0 minimum.
Material changes versus the prior comparable period
- RUPS Q3 sales rose 13% to $234.0 million and adjusted EBITDA increased 62% to $25.1 million, supported by pricing, crosstie volumes, utility poles and improved plant utilization.
- PC Q3 sales rose 17% to $179.4 million and adjusted EBITDA increased 111% to $35.2 million, reflecting pricing actions and stronger Americas volumes.
- CMC Q3 sales declined 22% to $137.0 million and adjusted EBITDA declined 72% to $10.4 million because of lower carbon-pitch pricing and volumes.
- For the first nine months, RUPS and PC adjusted EBITDA increased 57% and 62%, respectively, while CMC adjusted EBITDA declined 42%.
- Interest expense increased $7.6 million in Q3 and $21.0 million year to date, primarily because of higher interest rates. The nine-month amount also included a $1.6 million increase in debt issuance-cost write-offs related to redeeming the 2025 Notes.
- On April 11, 2023, the company redeemed all $500 million of Senior Notes due 2025 using Term Loan B proceeds, cash and Credit Facility borrowings. On October 11, 2023, the Term Loan B interest-rate margin was reduced by 0.50 percentage point to 3.50% for applicable SOFR borrowings.
- The company repurchased 99,888 shares during Q3 at an average price of $38.91, leaving approximately $64.4 million available under its $100 million repurchase authorization.
Guidance, outlook, commentary and risks
- Management expects 2023 capital expenditures of approximately $110 million to $120 million and believes liquidity will be adequate for at least the next twelve months. The North Little Rock, Arkansas RUPS modernization was substantially complete by the end of Q3.
- Management expects railroad crosstie demand to decline modestly in 2023 but recover in 2024. Utility infrastructure investment and grid hardening are viewed as longer-term demand drivers.
- PC demand is exposed to weaker housing, remodeling and consumer-spending trends, although pricing and contract renegotiations have helped recover higher input costs.
- CMC faces weaker near-term steel, aluminum, carbon-black and manufacturing demand, as well as long-term coal-tar supply constraints. The company is pursuing petroleum-blended products and yield-enhancement projects to mitigate these pressures.
- A one-percentage-point increase in interest rates would reduce earnings and cash flow by approximately $6 million over twelve months, assuming other factors remain constant.
- The company expects to recognize an estimated pre-tax pension settlement loss of approximately $20 million when its U.K. pension obligation becomes irrevocably settled, expected sometime in 2024.
- Pending matters include coal-tar-pitch toxic-tort litigation, environmental remediation and CERCLA matters. No reserve was recorded for the coal-tar-pitch lawsuits because the probability and amount of loss could not reasonably be estimated. Environmental reserves totaled $10.5 million at September 30, 2023, including $4.0 million for Portland Harbor and Newark Bay matters.
- Other risks include commodity prices and availability, coal-tar supply, foreign exchange, higher interest rates, debt refinancing and covenant compliance, seasonal and weather-related volatility, environmental liabilities, litigation, goodwill impairment, counterparty exposure and possible disruption at financial institutions. The company added a risk factor concerning uninsured bank deposits and financial-institution or derivative-counterparty failures.
Important facts for investors to verify
- Whether RUPS and PC pricing and volume strength can offset CMC weakness and sustain adjusted EBITDA margins.
- The effect of higher variable-rate debt costs, the October 2023 margin reduction, and the company’s interest-rate swaps on future cash flow.
- Actual 2023 capital expenditures and resulting free cash flow relative to the $110 million to $120 million estimate.
- Progress and final cost of the expected approximately $20 million pension settlement loss in 2024.
- Developments in coal-tar-pitch litigation, CERCLA allocation processes, environmental indemnities and remediation obligations.
- Compliance with the revised total net leverage covenant of 4.75 effective in the first quarter of 2024.
- Demand trends in railroads, utility infrastructure, housing and remodeling, aluminum, steel and carbon black markets.