Koppers Holdings Inc. — 2023 First-Quarter 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, operating through Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the same period in 2022. Results are seasonal and first-quarter performance may not be indicative of full-year results.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $513.4 million | $459.3 million | +12% |
| Operating profit | $50.3 million | $38.2 million | +32% |
| Operating margin | 9.8% | 8.3% | +150 basis points |
| Income from continuing operations | $26.2 million | $19.3 million | +36% |
| Net income attributable to Koppers | $25.5 million | $18.8 million | +36% |
| Diluted EPS | $1.19 | $0.87 | +$0.32 |
| Adjusted EBITDA | $61.5 million | $52.6 million | +17% |
| Adjusted EBITDA margin | 12.0% | 11.5% | +50 basis points |
| Net cash used in operating activities | $(15.3) million | $(8.0) million | Higher use of cash |
| Capital expenditures | $30.4 million | $26.2 million | +$4.2 million |
RUPS sales increased 16% to $213.1 million, PC sales increased 8% to $146.9 million, and CMC sales increased 10% to $153.4 million. Adjusted EBITDA rose 36% for RUPS to $15.8 million and 26% for PC to $26.3 million, while CMC declined 3% to $19.4 million.
Cost of sales declined to 80% of sales from 81% in the prior-year quarter. The reported income tax rate was 27.4%, compared with 33.4% in the prior-year period. Interest expense increased to $14.0 million from $9.8 million, primarily because of higher interest rates.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $46.4 million at March 31, 2023, compared with $33.3 million at December 31, 2022.
- Operating cash flow was negative $15.3 million, driven principally by increases in accounts receivable, inventories and other working capital.
- Investing cash flow was negative $28.5 million, including $30.4 million of capital expenditures.
- Financing cash flow was positive $56.8 million, primarily reflecting $63.5 million of net credit-facility borrowings, partly offset by $5.8 million of share repurchases, $1.3 million of dividends and $0.8 million of debt issuance costs.
- Debt before issuance costs was $888.8 million at March 31, 2023, consisting of $388.8 million drawn on the revolving facility and $500.0 million of 6.00% senior notes due 2025. Reported long-term debt, net of issuance costs, was $881.0 million.
- Approximately $400 million of revolving-credit availability remained at quarter-end, with approximately $18 million of commitments used by letters of credit.
- The total net leverage ratio was 3.4 against a maximum of 5.0, and the cash interest coverage ratio was 5.2 against a minimum of 2.0. The company reported compliance with its debt covenants.
- Total assets were $1.801 billion and total equity was $434.9 million at March 31, 2023.
Material Changes Versus the Prior Comparable Period
- Revenue growth was primarily pricing-driven. RUPS benefited from pricing and higher untreated crosstie volume; PC pricing more than offset lower preservative volumes; and CMC benefited from higher carbon-pitch pricing amid constrained raw-material supply.
- RUPS and PC margins improved, while CMC margin declined to 12.6% from 14.4% because of substantially higher raw-material costs, particularly in North America and Europe.
- Working-capital usage increased, including inventory growth associated with higher raw-material costs, resulting in a larger operating cash outflow.
- Shares outstanding declined, with weighted-average basic shares decreasing to 20.842 million from 21.151 million. The company repurchased 112,705 shares during March for $3.7 million at an average price of $32.39 per share; total first-quarter repurchases reflected in cash flow were $5.8 million.
- Comprehensive income increased to $33.9 million from $20.5 million, benefiting from currency translation and cash-flow-hedge gains.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2023 capital expenditures, excluding acquisitions, of approximately $110 million to $120 million, funded by operating cash flow, and expects liquidity to be adequate for at least the next twelve months.
- RUPS expects 2023 crosstie demand to decline modestly, while utility-pole demand is expected to benefit from replacement programs and infrastructure investment. Supply, lumber costs, transportation costs and rail volumes remain important variables.
- PC faces weaker housing, remodeling and consumer-spending indicators. Copper prices and availability, although substantially hedged, remain key margin factors.
- CMC expects relative stability in its end markets but faces declining coal-tar availability tied to lower metallurgical-coke production, as well as commodity, steel, aluminum, automotive and foreign-exchange risks.
- On April 10, 2023, after quarter-end, the company issued a $400 million Term Loan B at 97% of face value, generating $388 million of gross proceeds before financing costs. On April 11, it used the proceeds, cash and approximately $100 million of additional revolving borrowings to redeem all $500 million of 2025 senior notes.
- The Term Loan B matures in 2030 and bears variable interest based on SOFR plus 4.00%, subject to a 0.50% floor. A $100 million interest-rate swap fixes that portion at 7.478% through April 2027. Following the refinancing, substantially all debt is variable-rate debt.
- Management estimates that a one-percentage-point increase in interest rates would reduce annual earnings and cash flow by approximately $8.0 million, holding other factors constant.
- A United Kingdom pension buy-in is expected to be irrevocably settled by late 2023, at which time the company expects to recognize an estimated pre-tax pension settlement loss of approximately $20 million.
- The company faces coal-tar-pitch litigation involving 51 plaintiffs in 27 cases and has not recorded a reserve because the probability and amount of loss cannot currently be reasonably estimated.
- Environmental reserves totaled $10.8 million, including $4.0 million accrued for Portland Harbor and Newark Bay CERCLA matters. Unfavorable outcomes in litigation, environmental proceedings or indemnification matters could be material.
- The filing adds risks related to bank failures, counterparty non-performance and potential loss of access to uninsured or underinsured deposits and credit commitments.
Investor Verification Checklist
- Verify the post-quarter-end refinancing, including the Term Loan B’s effective interest cost, mandatory amortization, covenants and remaining revolver availability.
- Assess whether working-capital investment, especially inventories and receivables, converts into operating cash flow during the remainder of 2023.
- Monitor CMC raw-material costs and coal-tar availability, and PC volume trends in housing and remodeling markets.
- Review the expected approximately $20 million pension settlement loss and its cash, tax and leverage effects.
- Track coal-tar-pitch litigation, CERCLA matters, environmental liabilities and the extent of indemnification recoveries.
- Evaluate the sustainability of improved pricing and margins after accounting for higher raw-material, labor, transportation and interest costs.