Koppers Holdings Inc. quarterly report, Q2 FY2022

Koppers Holdings Inc. — Q2 2022 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 serving railroad, utility, construction, agricultural, aluminum, steel, rubber, and chemical markets. The filing covers the three and six months ended June 30, 2022, compared with the prior-year periods. Reportable segments are Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). Results are seasonal and interim performance may not indicate full-year results.

Financial performance and liquidity

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Net sales	$502.5 million	$441.0 million	$961.8 million	$848.5 million
Operating profit	$29.1 million	$44.3 million	$67.3 million	$88.2 million
Net income attributable to Koppers	$11.7 million	$26.9 million	$30.5 million	$52.8 million
Diluted EPS	$0.55	$1.22	$1.42	$2.40
Adjusted EBITDA	$54.6 million	$65.6 million	$107.2 million	$120.7 million
Adjusted EBITDA margin	10.9%	14.9%	11.1%	14.2%
Operating cash flow	Not separately provided	Not separately provided	$21.2 million	$36.1 million

Q2 revenue increased 14%, while six-month revenue increased 13%. Operating margins were approximately 5.8% in Q2 and 7.0% year to date, compared with approximately 10.0% and 10.4%, respectively, in the prior-year periods. Net margins were approximately 2.3% in Q2 and 3.2% year to date, versus approximately 6.1% and 6.2%.

Q2 segment revenue was $204.2 million for RUPS, $149.6 million for PC, and $148.7 million for CMC. CMC revenue rose 49%, primarily from higher selling prices.
Q2 adjusted EBITDA increased 10% for RUPS to $13.2 million and 13% for CMC to $21.0 million, but fell 41% for PC to $20.4 million. PC margins declined to 13.6% from 23.7%.
Six-month adjusted EBITDA decreased 11% to $107.2 million. RUPS declined 13%, PC declined 34%, and CMC increased 42%.
Cost of sales increased to 83% of sales in Q2 and 82% for the first six months, from 78% in both prior-year periods, reflecting higher raw material, fuel, freight, shipping, and operating costs.
Interest expense increased to $11.1 million in Q2 and $20.9 million year to date, reflecting higher average debt and interest rates. The estimated annual effective tax rate rose to 34.3% from 25.8%, partly due to the limitation on deductible interest expense beginning in 2022.

At June 30, 2022, cash and cash equivalents, including restricted cash, were $40.4 million, compared with $45.5 million at December 31, 2021. Total debt was $842.2 million, including $342.2 million drawn under the new revolving facility and $500.0 million of 6.00% senior notes due 2025. Long-term debt reported on the balance sheet was $833.7 million after issuance costs. Gross debt less cash was approximately $801.8 million.

The new $800.0 million revolving credit facility matures in June 2027, subject to a springing maturity if the 2025 Notes are not refinanced or otherwise addressed before November 15, 2024. Available borrowing capacity was $317.2 million after covenant and letter-of-credit restrictions; $7.8 million of commitments were used by undrawn letters of credit. The company reported a net leverage ratio of 3.61 and cash interest coverage ratio of 5.56 and was in compliance with its covenants.

Year-to-date operating cash flow of $21.2 million was more than offset by $51.1 million of investing cash outflows, including $55.8 million of capital expenditures. Financing activities provided $28.5 million, including net borrowings, partly offset by $18.5 million of share repurchases, $2.1 million of dividends, and $4.6 million of debt issuance costs. Management expects approximately $95 million of 2022 capital expenditures and believes liquidity is adequate for the next twelve months.

Material changes versus the prior comparable period

Revenue growth was driven primarily by price increases and substantially higher CMC selling prices, while profitability declined because inflation and raw-material costs outpaced pricing benefits.
PC experienced lower volumes and margin compression from higher-cost copper inventory in a falling copper-price environment.
RUPS revenue was broadly flat for the six-month period, with pricing and railroad services gains offset by lower utility-pole and untreated-crosstie volumes, labor shortages, transportation constraints, and limited lumber supply.
CMC benefited from higher prices for carbon pitch, carbon black feedstock, naphthalene, and phthalic anhydride. Prior-year results included an insurance recovery that affected comparisons.
The company replaced its prior credit facilities with the new $800 million facility and increased borrowings. It also repurchased $18.5 million of common stock year to date; $76.9 million remained available under the $100 million repurchase authorization at June 30.
The company sold its Sweetwater, Tennessee utility-pole treating facility and recognized a $2.5 million gain. It also settled claims relating to discontinued KJCC operations for $0.9 million, of which Koppers’ share was $0.7 million, and expected release of the remaining escrow by the end of the third quarter.

Outlook, commentary, risks, and unusual items

Management expects infrastructure spending, utility-pole replacement, and railroad investment to support demand, but railroad crosstie purchases, residential remodeling, and broader industrial activity face economic and interest-rate headwinds.
Coal-tar supply remains constrained by reduced blast-furnace steel production and the Russia-Ukraine conflict. Koppers stopped purchasing from Russian suppliers and cannot obtain normal volumes from Ukrainian suppliers; management stated that higher end-market prices were expected to offset the 2022 volume impact.
Inflation, labor and driver shortages, freight costs, commodity prices, foreign exchange, raw-material availability, housing-market weakness, supply-chain disruptions, and customer demand remain significant risks.
The company expects to recognize an estimated pretax pension settlement loss of approximately $22 million when its U.K. pension data-cleansing process is completed, expected in early 2023.
Koppers is cooperating with an SEC Division of Enforcement inquiry concerning prior non-GAAP disclosures about its 2019 debt-reduction target and net leverage ratio and related accounts-payable management. The company cannot predict the outcome; potential penalties, remedies, sanctions, or business impacts could be material.
There were 57 plaintiffs in 30 coal-tar-pitch cases at June 30, 2022. No reserve was recorded because the probability and amount of loss could not reasonably be determined.
Environmental liabilities included $3.3 million for Portland Harbor and Newark Bay matters, $4.0 million for certain acquired U.S. sites, and $1.3 million for an Australian site. Failure of indemnifying parties to perform could create material additional exposure.
The company declared a quarterly dividend of $0.05 per share on August 4, 2022, payable September 12, 2022.

Important facts for investors to verify

Whether PC margins recover as higher-cost copper inventory is sold and whether price increases offset raw-material and logistics inflation.
The sustainability of CMC pricing, coal-tar availability, and the extent to which the Russia-Ukraine conflict affects European operations.
Progress toward refinancing, repurchasing, or otherwise addressing the $500 million of 2025 Notes and compliance with leverage and interest-coverage covenants.
Actual 2022 capital expenditures, operating cash conversion, working-capital requirements, and available revolver capacity.
The outcome and potential financial or governance consequences of the SEC inquiry.
Developments in coal-tar-pitch litigation, environmental proceedings, indemnification coverage, and the estimated $22 million U.K. pension settlement loss.
Reconciliation and comparability of management’s adjusted EBITDA and other non-GAAP measures with GAAP results.