Koppers Holdings Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2020. Koppers operates three principal segments: Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). The filing reflects the September 30, 2020 sale of the 75%-owned Koppers (Jiangsu) Carbon Chemical Company Limited (KJCC), which is reported as discontinued operations.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $437.5 million, versus $434.2 million | $1,276.0 million, versus $1,254.9 million |
| Operating profit | $58.6 million, versus $36.6 million | $121.9 million, versus $98.9 million |
| Income from continuing operations | $39.1 million, versus $18.3 million | $70.4 million, versus $42.2 million |
| Net income attributable to Koppers | $75.6 million, versus $19.9 million | $103.4 million, versus $46.0 million |
| Diluted EPS from continuing operations | $1.83, versus $0.86 | $3.33, versus $2.02 |
| Diluted EPS including discontinued operations | $3.53, versus $0.94 | $4.88, versus $2.20 |
| Operating margin | 13.4%, versus 8.4% | 9.6%, versus 7.9% |
| Operating cash flow | Not separately provided for the quarter | $65.5 million, versus $57.0 million |
Quarterly revenue increased 1%, while nine-month revenue increased 2%. Quarterly operating profit rose 60%, and nine-month operating profit rose 23%. Cost of sales was 75% of sales in the quarter and 79% for the nine-month period, compared with 80% in both prior-year periods.
Segment results for the quarter were RUPS revenue of $191.0 million and operating profit of $15.0 million; PC revenue of $147.9 million and operating profit of $30.4 million; and CMC revenue of $98.6 million and operating profit of $13.7 million. For the nine months, segment operating profit was $40.4 million for RUPS, $67.1 million for PC, and $15.9 million for CMC.
At September 30, 2020, cash and cash equivalents including restricted cash were $39.5 million. Total debt was $818.7 million, consisting primarily of a $75.0 million term loan, $243.7 million of revolving credit facility borrowings and other debt, and $500.0 million of 2025 senior notes. Long-term debt was $796.1 million. The company reported approximately $305.7 million of available revolver capacity in the liquidity discussion, while the debt note reports $307.3 million of unused availability before certain presentation differences.
Total estimated liquidity was $342.9 million, comprising $37.2 million of cash and $305.7 million of available credit facility capacity. The company was in compliance with its debt covenants. The fixed charge coverage ratio was 2.37 versus a 1.10 minimum; the total secured leverage ratio was 1.51 versus a 3.00 maximum; and the total leverage ratio was 3.83 versus a 5.25 maximum.
Investing cash flow was $35.0 million, including $78.1 million from the KJCC sale, partly offset by $43.8 million of capital expenditures. Financing cash flow was negative $93.7 million, including $85.6 million of net credit facility repayments and $7.5 million of long-term debt repayments. Capital expenditures for 2020 were expected to be approximately $55 million to $60 million.
Material changes versus the prior comparable period
- PC was the principal earnings driver. Quarterly revenue increased 19% and operating profit increased 160%, benefiting from higher residential repair and remodeling demand, new customers, favorable mix, and improved production absorption.
- RUPS quarterly revenue declined 4%, primarily because of lower commercial crosstie and domestic utility pole volumes, but operating profit increased 33% due to improved mix, utility pole and maintenance-of-way margins, and lower selling, general and administrative costs. For the nine months, RUPS revenue increased 5% and operating profit increased 27%.
- CMC quarterly revenue decreased 12% and nine-month revenue decreased 17%. Lower pricing for carbon pitch, carbon black feedstock and phthalic anhydride, along with pandemic-related volume declines, pressured results. Nine-month CMC operating profit declined 48%.
- The company sold KJCC for a $44.1 million pretax gain and a $35.8 million after-tax gain. Net cash proceeds to Koppers were $65.2 million, including $2.3 million of restricted escrow cash. KJCC contributed discontinued-operation sales of $8.8 million in the quarter and $31.6 million year to date, compared with $40.7 million and $124.7 million, respectively, in 2019.
- The Denver, Colorado crosstie treating plant was closed during the third quarter after $5.8 million of charges were recorded in the second quarter. Additional restructuring and related charges of approximately $4 million to $9 million are expected through 2021.
- Total shareholders’ equity increased to $281.4 million from $147.3 million at December 31, 2019, primarily reflecting earnings and other comprehensive income, partly offset by treasury stock activity and the reduction in noncontrolling interests.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that all manufacturing facilities were fully operational at September 30, 2020, although New Zealand operations had been temporarily curtailed earlier in the year. Demand for residential treated wood remained strong, while railroad activity and CMC end markets remained exposed to pandemic-related weakness. Management expected liquidity to remain adequate for the next twelve months after anticipated term-loan repayments of approximately $10 million to $20 million in the fourth quarter and the scheduled tightening of leverage covenants at December 31, 2020.
Management estimated that the covenant step-down could reduce liquidity by approximately $50 million. The company expected additional CMC restructuring and related charges of approximately $2 million to $5 million through 2021 and approximately $13 million of remaining future cash requirements for CMC plant closures through 2021.
COVID-19 impacts remain uncertain and could affect demand, supply chains, employee availability, customer collectability, operating cash flow, asset valuations and debt covenant compliance. The company stated that no goodwill impairment triggering event occurred during the quarter. Commodity prices, copper and coal tar availability, oil prices, foreign exchange rates, rail spending, aluminum production, environmental obligations and litigation are additional material risks.
The company is defending 34 coal tar pitch cases involving 64 plaintiffs and has not recorded a reserve because the probability and amount of loss cannot reasonably be estimated. It has accrued $2.1 million for estimated participation and settlement costs at the Portland Harbor and Newark Bay CERCLA sites and $4.3 million for certain acquired-site environmental remediation liabilities. A $1.0 million EPA penalty under a consent decree was accrued as of September 30, 2020. An additional one-time cash incentive payment of $3.0 million was approved on November 2, 2020, payable by the end of January 2021.
The company does not expect to declare dividends for the foreseeable future. It adopted expected-credit-loss guidance in 2020 without a material impact. Management concluded that disclosure controls and procedures were effective and that no material changes affected internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported liquidity, including the $305.7 million and $307.3 million unused-credit figures and the treatment of restricted cash.
- Assess the sustainability of PC’s pandemic-related demand and the extent to which CMC pricing and volume weakness persists.
- Verify the timing and cash impact of the expected $10 million to $20 million term-loan repayment and the December 2020 covenant step-down.
- Monitor COVID-19 effects on operations, working capital, covenant compliance and customer demand.
- Review the $35.8 million after-tax KJCC sale gain, escrow restrictions, purchase-price adjustments and discontinued-operation treatment.
- Evaluate future Denver and CMC closure charges, environmental remediation costs, coal tar pitch litigation and other contingencies.
- Confirm the $3.0 million one-time incentive payment and its effect on future compensation expense and cash flow.