Koppers Holdings Inc. — Second-Quarter 2017 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). The filing covers the three and six months ended June 30, 2017; interim results are unaudited and affected by seasonality.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Net sales | $378.0 million | $385.1 million | $724.6 million | $731.9 million |
| Operating profit | $37.6 million | $32.0 million | $65.2 million | $39.8 million |
| Operating margin | 9.9% | 8.3% | 9.0% | 5.4% |
| Net income attributable to Koppers | $19.7 million | $12.1 million | $24.1 million | $10.8 million |
| Diluted EPS | $0.90 | $0.57 | $1.09 | $0.52 |
| Cash flow from operations | Not separately provided | Not separately provided | $31.3 million | $34.3 million |
Second-quarter income from continuing operations attributable to Koppers was $20.8 million, or $0.95 diluted EPS, compared with $12.1 million, or $0.57, in the prior-year quarter. Discontinued operations reduced second-quarter net income by $1.1 million and six-month net income by $1.2 million.
At June 30, 2017, cash and cash equivalents were $40.0 million, total current assets were $501.0 million, and total equity was $73.5 million. Debt consisted primarily of $500.0 million of 6.00% senior notes due 2025, $168.1 million outstanding under the revolving credit facility, and $37.5 million of construction and other loans. Long-term debt was $680.4 million, or $692.9 million including current maturities and before unamortized issuance costs.
Estimated liquidity was $227.3 million, consisting of $40.0 million of cash and $187.3 million of available revolving-credit capacity. The revolver had a $400.0 million commitment, with $44.6 million of letters of credit utilizing commitments. The company reported compliance with all debt covenants; its fixed-charge coverage ratio was 1.90 versus a 1.10 minimum, and its secured leverage ratio was 1.07 versus a 2.75 maximum.
Material changes versus the prior comparable periods
- Second-quarter sales declined 2%, while six-month sales declined 1%, primarily because RUPS sales fell 17% and 14%, respectively.
- RUPS operating profit decreased 41% in the quarter and 38% year to date, reflecting lower railroad spending, reduced crosstie volumes and pricing pressure from excess commercial-market inventory.
- PC sales increased 3% in the quarter and 6% year to date. Six-month operating profit rose 9%, although second-quarter operating profit declined 13% because higher copper costs more than offset volume gains.
- CMC sales increased 16% in the quarter and 11% year to date. CMC returned to operating profitability, reporting $7.8 million in second-quarter operating profit versus an $8.3 million loss and $8.2 million for the six months versus a $25.9 million loss.
- Consolidated operating profit improved despite lower sales because of better CMC results, lower raw-material and logistics costs, and lower restructuring and depreciation charges.
- Interest expense declined by $3.5 million in the quarter and $5.2 million year to date, reflecting refinancing and lower average debt levels.
- The company incurred a $13.3 million loss on extinguishment of debt in the first six months, including premiums and fees for repurchasing 2019 notes and write-offs of prior debt issuance costs.
- Net cash from operations decreased $3.0 million year to date, mainly because accounts receivable used more cash. Capital expenditures increased to $34.2 million from $21.3 million.
Guidance, outlook, risks and unusual items
- Management expects 2017 capital expenditures of approximately $70 million to $75 million, excluding acquisitions, funded by operating cash flow.
- Management expects RUPS revenue and profitability to decline year over year because of reduced capital spending by North American Class I railroads, lower freight activity and commercial crosstie oversupply. The long-term infrastructure outlook remains favorable.
- PC demand is supported by repair and remodeling activity and existing-home sales, but the shift toward higher-retention treated wood products has moderated, and copper prices remain a margin risk.
- CMC restructuring reduced the global coal-tar distillation footprint from 11 facilities to four. The company expects additional restructuring and related charges of $8 million to $16 million through 2020 and approximately $40 million of related cash requirements through 2020. Further curtailments or closures remain possible.
- On July 31, 2017, after quarter-end, the company annuitized approximately $31 million of U.S. retiree pension obligations and expects to record an approximately $8 million pension settlement charge in the third quarter of 2017.
- Restructuring reserves were $16.3 million at June 30, 2017. Environmental reserves were $14.1 million, including $2.1 million accrued for Portland Harbor and Newark Bay CERCLA matters.
- The company faces 99 plaintiffs in 55 coal-tar-pitch cases and ongoing Gainesville environmental litigation. No reserve was recorded for these matters because potential losses were not reasonably estimable; an unfavorable outcome could be material.
- The company is exposed to commodity prices, especially copper, coal tar and oil; foreign-exchange movements; railroad and aluminum demand; raw-material availability; environmental liabilities; litigation; debt refinancing and covenant compliance.
- The company suspended its dividend in February 2015 and does not expect to declare dividends for the foreseeable future. Debt agreements restrict dividends and other payments.
- The company adopted share-based-payment accounting guidance effective January 1, 2017. It plans to adopt the new revenue-recognition standard using the modified retrospective method and expected to complete its impact evaluation during the third quarter of 2017.
Most important facts for investors to verify
- Whether railroad spending and crosstie demand recover, and whether RUPS pricing pressure persists.
- Whether CMC’s improved profitability is sustainable or primarily reflects favorable pricing, logistics and restructuring effects.
- Progress and total cash cost of the CMC closures, including the Stickney naphthalene project and Follansbee transition.
- Execution of the $70 million to $75 million capital-expenditure plan and its effect on operating cash flow and liquidity.
- Debt-service requirements, variable-rate exposure, covenant headroom and the company’s ability to refinance or reduce leverage.
- The third-quarter pension settlement charge and any additional restructuring, environmental or litigation costs.
- Potential exposure from unreserved coal-tar-pitch, Gainesville, CERCLA and other environmental matters.
- The final effect of revenue-recognition and lease accounting changes on reported results and disclosures.