Koppers Holdings Inc. 2017 Q3 Form 10-Q Summary
Business context and reporting period
Koppers Holdings 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 unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The company cautions that its operations are seasonal and interim results may not represent full-year performance.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $384.8 million | $371.1 million | $1,109.4 million | $1,103.0 million |
| Operating profit | $34.7 million | $27.7 million | $99.9 million | $67.5 million |
| Operating margin | 9.0% | 7.5% | 9.0% | 6.1% |
| Income from continuing operations | $20.0 million | $12.0 million | $45.6 million | $20.9 million |
| Net income attributable to Koppers | $19.8 million | $12.1 million | $43.9 million | $22.9 million |
| Diluted EPS from continuing operations | $0.91 | $0.58 | $2.06 | $1.07 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $48.5 million | $82.5 million |
Q3 net sales increased 4%, while nine-month sales increased 1%. Cost of sales declined to 76% of sales in Q3 from 79% in the prior-year quarter and to 78% for the nine-month period from 80%. The lower cost ratio primarily reflected stronger CMC margins and favorable PC mix, partially offset by weaker RUPS volumes and margins.
- RUPS: Q3 sales declined 10% to $131.7 million and nine-month sales declined 13% to $403.1 million. Q3 operating profit fell 38% to $9.3 million, with margin declining to 7.1% from 10.2%. Lower railroad capital spending, reduced crosstie and bridge-service volumes, and commercial crosstie oversupply were the primary pressures.
- PC: Q3 sales increased 2% to $109.7 million and nine-month sales increased 5% to $318.2 million. Operating profit rose 5% in Q3 to $18.4 million and 8% for nine months to $56.6 million. Higher North American volumes and favorable repair-and-remodeling demand were partly offset by higher copper costs.
- CMC: Q3 sales increased 22% to $143.4 million and nine-month sales increased 15% to $388.1 million. Operating profit improved to $16.2 million in Q3 from a $3.9 million loss and to $24.4 million for nine months from a $29.8 million loss. Benefits included higher carbon pitch and carbon black feedstock pricing, lower North American raw-material and logistics costs, and stronger European and Australasian results.
Cash flow, liquidity, debt, and balance sheet
- Operating cash flow for the first nine months was $48.5 million, down $34.0 million year over year. The decline reflected higher working-capital usage, including a $19.7 million larger increase in accounts receivable and a $15.3 million decrease in accounts payable, plus a $7.0 million voluntary pension contribution.
- Capital expenditures were $48.6 million, compared with $32.2 million in the prior-year period. Spending included PC production-capacity expansion and construction of the new Stickney, Illinois naphthalene unit.
- Cash and cash equivalents totaled $50.2 million at September 30, 2017, compared with $20.8 million at December 31, 2016. Estimated liquidity was $230.3 million, consisting of cash of $50.2 million and $180.1 million of available revolver capacity.
- Total debt was $712.9 million at September 30, 2017, compared with $671.1 million at year-end 2016; long-term debt reported on the balance sheet was $688.0 million. Debt included $500.0 million of 6% senior notes due 2025, $174.8 million outstanding under the revolving facility, and $38.1 million of construction and other loans.
- In January 2017, the company issued the 2025 Notes and used the proceeds to repay its term loan and repurchase or redeem its 2019 Notes. In February 2017, it entered into a $400.0 million senior secured revolving credit facility maturing in 2022.
- The company was in compliance with its debt covenants at September 30, 2017. The fixed-charge coverage ratio was 2.16 versus a minimum of 1.10, and the secured leverage ratio was 1.06 versus a maximum of 2.75.
- Capital expenditures for 2017 were expected to total approximately $70 million to $75 million, excluding acquisitions. The company suspended its dividend in February 2015 and did not expect to declare dividends for the foreseeable future.
Material changes, unusual items, outlook, and risks
- The company recorded an $8.8 million pension settlement loss in Q3 after annuitizing approximately $33 million of retiree pension obligations, representing about 20% of the plan’s discounted obligation. It estimated an additional $1.1 million pension settlement loss in Q4 related to participant buyouts.
- The company recorded a $13.3 million loss on extinguishment of debt during the first nine months, consisting of tender premiums, fees, and write-offs of unamortized debt issuance costs.
- CMC restructuring is ongoing. Management expects additional restructuring and related charges of $7 million to $10 million through 2020 and approximately $30 million of future cash requirements for plant closures through 2020.
- Management expects railroad spending to improve modestly in 2018, but near-term RUPS demand remains pressured by lower Class I railroad capital budgets, reduced coal transportation, and commercial crosstie oversupply.
- CMC benefited from temporarily tight coal-tar and carbon-pitch supply, particularly in China. Management expects pricing conditions to moderate sometime in 2018, although they could remain above recent-year averages.
- Key operating risks include commodity prices and availability, especially copper, coal tar, lumber, and oil-linked inputs; demand and pricing volatility; foreign-exchange and interest-rate movements; seasonality and weather; customer concentration and railroad spending; debt covenant compliance and refinancing risk; potential impairment of goodwill or long-lived assets; and environmental and litigation liabilities.
- The company was defending 50 coal-tar pitch cases involving 88 plaintiffs and a Gainesville, Florida environmental case scheduled for trial in May 2018. No reserves were recorded for these matters because losses could not be reasonably estimated. The company had accrued $2.2 million for Portland Harbor and Newark Bay CERCLA matters and reported additional environmental remediation liabilities for other sites.
- The company elected modified-retrospective adoption for the upcoming revenue-recognition standard and did not expect a significant impact based on its analysis to date. It was evaluating the forthcoming lease, cash-flow classification, derivatives, and other accounting standards.
Important facts for investors to verify
- Whether the improvement in CMC profitability is sustainable after expected moderation in coal-tar and carbon-pitch pricing.
- The pace of recovery in North American railroad capital spending and the effect of crosstie oversupply on RUPS volumes and margins.
- Actual 2017 capital expenditures, restructuring cash costs, and the completion and economics of the Stickney naphthalene project.
- Operating cash-flow conversion and working-capital requirements, particularly accounts receivable and accounts payable movements.
- Compliance with revolving-credit and senior-note covenants as debt service and capital spending continue.
- Future pension settlement losses, required pension contributions, and the effect of the annuitization transaction on ongoing pension risk.
- Potential exposure from coal-tar pitch litigation, environmental remediation, CERCLA allocations, and indemnification arrangements.
- Management’s updated assessment of the revenue-recognition and lease accounting adoptions.