Koppers Holdings Inc. — 2015 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2015. The filing is unaudited and notes that seasonal patterns make first-quarter results not necessarily indicative of full-year performance. Koppers operates through Carbon Materials and Chemicals, Railroad and Utility Products and Services, and Performance Chemicals.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|
| Net sales | $397.8 million | $331.4 million | +20% |
| Operating profit | $8.0 million | $0.5 million | +$7.5 million |
| Operating margin | 2.0% | 0.2% | +1.8 percentage points |
| Net loss attributable to Koppers | $3.4 million | Net income of $2.2 million | Unfavorable change of $5.6 million |
| Diluted loss/earnings per share | $(0.16) | $0.11 | Unfavorable change |
| Net cash from operating activities | $19.7 million | $(13.7) million | +$33.4 million |
| Capital expenditures | $7.0 million | $14.8 million | Down $7.8 million |
| Cash used in investing activities | $10.0 million | $44.4 million | Improved by $34.4 million |
- Cost of sales was 86% of sales in both periods, implying an approximately 14% gross margin before depreciation, amortization, gains, and other operating costs.
- Interest expense increased to $13.0 million from $6.8 million because of debt incurred to finance the Osmose acquisition.
- Income taxes were a $0.6 million benefit in Q1 2015 versus a $6.0 million benefit in Q1 2014. The prior-year benefit included a $5.5 million discrete tax benefit; the current-year discrete benefit was $0.3 million.
- Cash and cash equivalents declined to $25.8 million from $51.1 million at December 31, 2014. Total estimated liquidity was $89.5 million, consisting of cash, $62.9 million of available revolving capacity, and $0.8 million under other credit facilities.
- Total debt was $815.6 million at March 31, 2015, including $44.7 million of current maturities and $770.9 million of long-term debt, compared with total debt of $850.5 million at year-end 2014.
- The company had $61.6 million of outstanding letters of credit and only $62.9 million of revolving availability after covenant and letter-of-credit restrictions.
Segment Results and Material Changes
| Segment | Q1 2015 Sales | Prior-Year Sales | Q1 2015 Operating Profit/(Loss) | Prior-Year Operating Profit/(Loss) |
|---|
| Carbon Materials and Chemicals | $158.2 million | $202.6 million | $(10.9) million | $(8.8) million |
| Railroad and Utility Products and Services | $158.1 million | $128.8 million | $15.4 million | $11.1 million |
| Performance Chemicals | $81.5 million | $0 | $6.4 million | $0 |
- Carbon Materials and Chemicals sales fell 22%, primarily from lower prices for carbon black feedstock, phthalic anhydride, and naphthalene associated with lower oil prices, plus a 7% adverse foreign-exchange translation impact. An unscheduled plant outage reduced pretax earnings by approximately $1.9 million.
- Railroad and Utility Products and Services sales rose 23% and operating profit rose 39%, driven by stronger crosstie volumes, railroad customer restocking, and incremental Osmose-related sales.
- Performance Chemicals contributed $81.5 million of sales and $6.4 million of operating profit following the August 2014 acquisition of the Osmose entities. Management stated that first-quarter results were consistent with expectations and that the acquired businesses were expected to add more than $400 million of 2015 sales at EBITDA margins above the company’s 12% target.
- On January 16, 2015, the company acquired KMG Chemicals’ creosote sales and distribution business for $15.1 million and sold its North American utility pole business for $12.3 million in cash plus a $1.3 million promissory note. The sale generated a $3.2 million gain.
- In March 2015, Koppers announced the closure of its Green Spring, West Virginia plant, expected to be completed by July 2015. It recorded $2.7 million of severance and impairment charges; $1.6 million of fixed assets remained subject to accelerated depreciation.
- Cash flow improved primarily because of working-capital reductions, including a $24.2 million increase in accounts payable. Financing cash use included $35.0 million of net long-term debt repayments and $6.8 million of dividends paid.
Guidance, Outlook, Risks, and Unusual Items
- 2015 capital expenditures, excluding acquisitions, were expected to be approximately $45 million.
- Koppers suspended its dividend in February 2015 and did not expect to declare dividends for the foreseeable future. No dividend was declared in the first quarter.
- The company withdrew a planned $400 million senior-notes offering and related tender offer for its 2019 notes because of credit-market volatility. Management may revisit the offering if conditions improve.
- Koppers was in compliance with its debt covenants at March 31, 2015. The fixed-charge coverage ratio was 1.5 versus a 1.10 minimum, and the leverage ratio was 4.86 versus a 5.25 maximum. Future compliance remains sensitive to operating performance and other factors.
- Key operating risks include commodity prices and availability, especially coal tar, hardwood lumber, copper, and oil; foreign-exchange movements; weak European and certain carbon-products markets; acquisition integration; weather and seasonality; interest rates; and customer demand.
- Outstanding copper swaps covered 22.2 million pounds and had a net fair value liability of approximately $6.8 million. The company estimated that $3.1 million of related unrealized losses, net of tax, would be reclassified into earnings over the following twelve months.
- Material contingencies include coal-tar-pitch toxic-tort cases, the Gainesville environmental class action, a Virgin Islands wood-preservative lawsuit, CERCLA matters at Portland Harbor and Newark Bay, and other environmental obligations. The company generally recorded no reserve where loss probability and amount could not reasonably be estimated.
- Environmental reserves were $7.2 million at March 31, 2015. Asset-retirement obligations were $33.2 million, and restructuring reserves related primarily to closures were $6.4 million.
- Management stated that a previously identified material weakness involving interim income-tax controls had been remediated through additional quarterly-close procedures. Disclosure controls were considered effective.
Most Important Facts to Verify
- Whether Performance Chemicals and the other Osmose businesses achieve the expected 2015 sales contribution and targeted EBITDA margins.
- Progress and final costs of the Green Spring closure and continuing European and Australian site closures.
- Liquidity headroom, covenant compliance, debt maturities, interest expense, and the ability to refinance or reduce the substantial debt burden.
- Whether weak oil-linked pricing, coal-tar availability, foreign exchange, and European demand continue to pressure Carbon Materials and Chemicals.
- Potential cash exposure from environmental, toxic-tort, product-liability, and CERCLA proceedings for which no reserve was recorded.
- Whether the suspended dividend remains in effect and whether the company can distribute cash from operating subsidiaries under debt and indenture restrictions.
- Final purchase-accounting adjustments for the Osmose acquisition, which remained preliminary and could materially affect future depreciation, amortization, deferred taxes, and reported earnings.
