Koppers Holdings Inc. quarterly report, Q3 FY2021

Koppers Holdings Inc. — 2021 Third-Quarter 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 filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Results are seasonal and interim performance may not indicate full-year results.

Key Financial Metrics

Metric	Q3 2021	Q3 2020	Nine Months 2021	Nine Months 2020
Net sales	$424.8 million	$437.5 million	$1,273.3 million	$1,276.0 million
Operating profit	$24.6 million	$58.6 million	$112.8 million	$121.9 million
Operating margin	5.8%	13.4%	8.9%	9.6%
Income from continuing operations	$10.5 million	$39.1 million	$62.6 million	$70.4 million
Net income attributable to Koppers	$10.2 million	$75.6 million	$63.0 million	$103.4 million
Diluted EPS	$0.47	$3.53	$2.87	$4.88
Adjusted EBITDA	$53.9 million	$66.7 million	$174.7 million	$163.9 million
Adjusted EBITDA margin	12.7%	15.2%	13.7%	12.8%

Q3 2021 net income included a $0.5 million loss related to discontinued operations. Q3 2020 included a $35.8 million after-tax gain on the sale of discontinued operations, materially affecting the year-over-year net income and EPS comparison.

Revenue and Segment Performance

RUPS: Q3 revenue decreased 2% to $186.9 million and operating profit declined to a $0.7 million loss from $15.0 million. Results were pressured by lower untreated crosstie volumes, reduced utility-pole volumes during the Jasper-to-Somerville production transition, supply constraints and a $7.5 million LIFO expense. Nine-month operating profit fell 70% to $12.3 million.
PC: Q3 revenue decreased 22% to $115.2 million and operating profit declined 62% to $11.6 million. North American preservative volumes were lower following unusually strong pandemic-driven demand in 2020, while high lumber prices and changes in consumer spending reduced demand. A $4.4 million unrealized copper-hedging loss also reduced Q3 results. Nine-month operating profit was $65.1 million, broadly consistent in margin at 16.9%.
CMC: Q3 revenue increased 24% to $122.7 million and operating profit rose 9% to $14.9 million, primarily from higher selling prices for carbon pitch, carbon black feedstock and phthalic anhydride, partly offset by lower carbon-pitch volumes and higher raw-material costs. Nine-month operating profit increased 146% to $39.1 million.

Cash Flow, Balance Sheet, Debt and Liquidity

Cash provided by operating activities was $59.6 million for the first nine months of 2021, compared with $65.5 million in 2020. Working-capital usage, particularly lower accrued liabilities, reduced operating cash flow.
Capital expenditures were $87.6 million, compared with $43.8 million in the prior-year period. Management expected full-year 2021 capital expenditures of approximately $115 million to $120 million.
Investing activities used $78.7 million, versus $35.0 million of cash provided in 2020, when the company received $78.1 million from the sale of KJCC.
Financing activities provided $28.3 million, primarily reflecting $37.1 million of increased credit-facility borrowings, partly offset by $7.6 million of debt repayments and $3.3 million of share repurchases.
Cash and cash equivalents, including restricted cash, were $44.9 million at September 30, 2021, compared with $38.5 million at December 31, 2020. Estimated liquidity was $326.0 million, consisting of $42.6 million of cash and $283.4 million of available revolving-credit capacity.
Total debt was $813.5 million, including $308.9 million outstanding under the revolving credit facility, a $4.6 million term loan balance and $500.0 million of 6.00% senior notes due 2025. Fair value of long-term debt was $828.5 million.
The company reported compliance with all credit-facility covenants. The fixed-charge coverage ratio was 1.77 versus a 1.10 minimum; total secured leverage was 1.36 versus a 2.75 maximum; and total leverage was 3.51 versus a 5.00 maximum. Net leverage was 3.4 times at September 30, 2021.

Material Changes Versus the Prior Comparable Period

Q3 operating profit fell $34.0 million, reflecting RUPS and PC weakness, higher LIFO expense, copper-hedging losses and higher SG&A costs.
Q3 cost of sales increased to 82% of sales from 75%, reducing consolidated operating margin to 5.8% from 13.4%.
Nine-month sales were essentially flat, but the mix shifted toward CMC, whose revenue increased 9%, while RUPS and PC revenue declined 3% each.
Nine-month adjusted EBITDA increased $10.8 million to $174.7 million, primarily because of stronger CMC profitability, insurance proceeds and lower restructuring-related charges.
Interest expense declined by $1.6 million in Q3 and $8.1 million for the nine months, due to lower average debt and lower variable interest rates.
Accumulated other comprehensive loss increased to $33.0 million from $15.9 million at year-end 2020, mainly due to currency translation and unrealized cash-flow-hedge losses.

Guidance, Outlook, Risks and Unusual Items

Management stated that estimated liquidity should be adequate to fund working capital, capital spending and other cash requirements for the next twelve months; no formal earnings guidance was provided in the filing.
Management expected relatively stable to slightly higher 2021 utility-pole demand and cited longer-term infrastructure, transmission and telecommunications needs. However, hardwood availability, labor shortages, freight costs and construction-related lumber demand constrained crosstie supply.
The company began converting facilities away from pentachlorophenol following the sole North American producer's planned exit from the market. Conversion was expected to be completed by mid-2022.
In October 2021, Koppers sold its Denver, Colorado facility and expected to recognize an approximately $23 million gain in the fourth quarter of 2021.
COVID-19 continued to create uncertainty through supply-chain disruptions, labor constraints, production interruptions and changing consumer demand, although substantially all operations continued without significant disruption.
Key ongoing risks include commodity prices, copper and coal-tar availability, raw-material inflation, foreign exchange and interest rates, demand volatility, debt refinancing and covenant compliance, environmental liabilities, litigation, goodwill impairment and adverse COVID-19 effects.
The company was defending 32 coal-tar-pitch cases involving 61 plaintiffs and had recorded no reserve because the probability and amount of potential loss could not reasonably be estimated. An unfavorable resolution could materially affect results.
Environmental remediation liabilities totaled $10.6 million. The company had accrued $3.4 million for estimated de minimis settlements at the Portland Harbor and Newark Bay CERCLA sites, but disclosed that actual costs could be materially higher.

Most Important Facts for Investors to Verify

Whether RUPS and PC volumes and margins recover after supply constraints, lower North American demand and pandemic-related comparisons.
Whether CMC pricing strength and improved profitability persist as raw-material availability and aluminum, steel and automotive demand evolve.
The effect of LIFO accounting, copper-hedging mark-to-market adjustments and other non-GAAP items on reported and adjusted earnings.
Progress against the $115 million to $120 million 2021 capital-expenditure plan and the effect on free cash flow and borrowings.
Debt maturities, refinancing plans for the 2025 senior notes, variable-rate exposure and continued covenant headroom.
The timing and final accounting effect of the approximately $23 million Denver facility gain and any remaining restructuring or divestiture obligations.
Developments in coal-tar-pitch litigation, CERCLA matters, environmental remediation and indemnification arrangements.