Koppers Holdings Inc. 2022 First-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 three reportable segments are Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). This unaudited report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Results are seasonal, with historically lower activity in the first and fourth quarters.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $459.3 million | $407.5 million | +13% |
| Operating profit | $38.2 million | $43.9 million | -$5.7 million |
| Net income attributable to Koppers | $18.8 million | $25.9 million | -$7.1 million |
| Diluted EPS | $0.87 | $1.18 | -$0.31 |
| Adjusted EBITDA | $52.6 million | $55.1 million | -$2.5 million |
| Adjusted EBITDA margin | 11.5% | 13.5% | -2.0 percentage points |
| Cash used in operating activities | $8.0 million | $7.4 million | Use increased $0.6 million |
| Capital expenditures | $26.2 million | $24.2 million | +$2.0 million |
Revenue growth was led by CMC, which increased 52% to $139.5 million, primarily from higher prices and volumes for carbon pitch, phthalic anhydride, and carbon black feedstock. PC revenue increased 10% to $136.4 million, mainly from pricing actions and international demand. RUPS revenue declined 4% to $183.4 million because of lower utility-pole and crosstie volumes.
Gross margin weakened as cost of sales increased to 81% of sales from 78%, reflecting higher raw-material, fuel, and shipping costs and lower plant utilization. SG&A increased $4.6 million to $39.1 million, primarily from higher consulting, employee benefit, travel, and entertainment costs. Income tax expense increased to $9.7 million from $8.5 million; the estimated annual effective tax rate rose to 32.9% from 25.8%, partly because of the revised interest-expense deduction limitation effective January 1, 2022.
Liquidity, debt, and balance sheet
- Cash and cash equivalents, including restricted cash, were $49.2 million at March 31, 2022, compared with $45.5 million at December 31, 2021. Liquidity excluding restricted cash was estimated at $304.7 million, consisting of $46.9 million of cash and $257.8 million of available revolver capacity.
- Total debt was $834.4 million, compared with $789.1 million at year-end 2021. Debt consisted primarily of $334.4 million drawn on the revolving credit facility and $500.0 million of senior notes due 2025. The $100 million term loan was fully repaid.
- The company had $257.8 million of unused revolving availability after restrictions and $7.8 million of outstanding undrawn letters of credit.
- Fixed-charge coverage was 1.31 versus a 1.10 minimum; total secured leverage was 1.43 versus a 2.75 maximum; and total leverage was 3.57 versus a 4.75 maximum. The company stated that it was in compliance with all debt covenants.
- Total assets increased to $1.732 billion from $1.662 billion, primarily reflecting higher accounts receivable, inventories, and property, plant, and equipment. Inventories increased to $329.7 million from $313.8 million.
Material changes versus the prior comparable period
- Revenue increased $51.8 million, but operating profit declined $5.7 million and adjusted EBITDA declined 5% because of cost inflation, lower utilization, and weaker RUPS and PC profitability.
- RUPS adjusted EBITDA declined 29% to $11.6 million, and PC adjusted EBITDA declined 25% to $20.9 million. CMC adjusted EBITDA increased 93% to $20.1 million.
- Operating cash flow remained negative as higher sales increased accounts receivable and inventories. Financing activities provided $33.4 million, including $47.4 million of net credit-facility borrowings, partly offset by $11.1 million of share repurchases and $1.1 million of dividends.
- The company began curtailing its Sweetwater, Tennessee utility-pole facility in January 2022, sold it in March, and recognized a $2.5 million gain. The prior-year quarter included $7.5 million of gains on sales of previously decommissioned facilities and $1.2 million of impairment and restructuring charges.
- The company declared a quarterly dividend of $0.05 per share and repurchased 225,683 shares for $6.4 million in March under its $100 million authorization, leaving $84.2 million available.
Guidance, outlook, risks, and unusual items
- Management expects 2022 capital expenditures of approximately $95 million, excluding acquisitions, and expects liquidity to be adequate for the next twelve months.
- Management identified infrastructure spending under the Infrastructure Investment and Jobs Act as a potential long-term demand benefit. It expects utility-pole replacement demand to be stable to slightly higher in 2022 and crosstie demand to increase modestly, although Class I railroad demand may remain similar.
- Key operating pressures include inflation in lumber, copper, fuel, freight, labor, and other raw materials; lower railroad and housing-related demand; higher interest rates; supply-chain disruption; foreign-exchange volatility; and seasonal weather effects.
- CMC faces constrained coal-tar availability because of reduced blast-furnace steel production and the Russia-Ukraine conflict. The European business historically sourced approximately 20% of its annual coal-tar requirements from Russia and Ukraine; the company ceased Russian purchases and cannot currently purchase from Ukrainian suppliers. Management stated that higher end-market prices were currently offsetting the volume impact.
- COVID-19 continues to create economic and operational uncertainty, although substantially all global operations continued without significant disruption during the quarter.
- A U.K. pension buy-in is expected to result in an estimated pre-tax pension settlement loss of approximately $22 million when the obligation is settled, expected after data cleansing in late 2022 or early 2023.
- The company is cooperating with an SEC Division of Enforcement inquiry regarding historical non-GAAP disclosures concerning its 2019 debt-reduction target, net leverage ratio, and management of accounts payable. The outcome, timing, and potential penalties or other effects cannot be predicted and could be material.
- Pending legal matters include coal-tar pitch toxic-tort litigation involving 57 plaintiffs in 30 cases, environmental liabilities, and Portland Harbor and Newark Bay CERCLA matters. Accrued environmental liabilities totaled $10.4 million, including $3.4 million for estimated CERCLA site costs. The company has not reserved for the coal-tar pitch lawsuits because the probability and amount of loss cannot presently be reasonably estimated.
- The company may receive contingent post-closing payments related to the 2021 Denver facility sale, but the amount, if any, cannot currently be estimated.
Important facts for investors to verify
- Whether CMC pricing and volume strength can offset coal-tar supply constraints and weaker automotive and industrial demand.
- Whether RUPS and PC margins recover as pricing actions offset lumber, copper, fuel, freight, and labor inflation.
- Progress toward the approximately $95 million 2022 capital-expenditure plan and the effect of continued negative operating cash flow on debt levels.
- Compliance with debt covenants as borrowings, interest rates, working capital, and seasonal cash needs fluctuate.
- The outcome and potential financial or regulatory consequences of the SEC inquiry.
- Developments in coal-tar pitch litigation, CERCLA matters, environmental indemnifications, and the expected pension settlement loss.
- Whether the stated liquidity outlook remains adequate after dividends, repurchases, capital spending, pension funding, and other contractual obligations.