Koppers Holdings(KOP) - 2021 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements The company's financial statements for Q3 2021 show decreased net sales and net income, while nine-month sales were flat with lower net income Condensed Consolidated Statement of Operations Q3 2021 net sales and operating profit declined significantly, with net income dropping to $10.2 million, while nine-month net income also decreased Statement of Operations Highlights (Q3 & Nine Months) | Metric (in millions) | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $424.8 | $437.5 | $1,273.3 | $1,276.0 | | Operating Profit | $24.6 | $58.6 | $112.8 | $121.9 | | Net Income Attributable to Koppers | $10.2 | $75.6 | $63.0 | $103.4 | | Diluted EPS | $0.47 | $3.53 | $2.87 | $4.88 | Condensed Consolidated Balance Sheet As of September 30, 2021, total assets and Koppers shareholders' equity increased, while total liabilities remained relatively flat Balance Sheet Summary | Metric (in millions) | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $614.2 | $564.5 | | Total Assets | $1,652.2 | $1,598.6 | | Total Current Liabilities | $266.8 | $292.1 | | Long-Term Debt | $802.6 | $765.8 | | Total Liabilities | $1,251.7 | $1,252.6 | | Total Koppers Shareholders' Equity | $396.4 | $341.7 | Condensed Consolidated Statement of Cash Flows Nine-month operating cash flow decreased, investing activities shifted to a significant net cash outflow, and financing activities provided cash Cash Flow Summary (Nine Months Ended Sep 30) | Activity (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $59.6 | $65.5 | | Net Cash (Used in) from Investing Activities | $(78.7) | $35.0 | | Net Cash from (Used in) Financing Activities | $28.3 | $(93.7) | | Net Increase in Cash | $6.4 | $7.2 | Notes to Condensed Consolidated Financial Statements Notes detail financial statement basis, plant divestitures, segment performance, debt structure, derivative instruments, and significant legal and environmental contingencies - The company sold its Denver, Colorado crosstie treating plant in October 2021 and expects to recognize a gain of approximately $23 million in Q4 2021[14] - The sale of Koppers (Jiangsu) Carbon Chemical Company Limited (KJCC) in 2020 was classified as a discontinued operation, representing a strategic shift for the company[15][16] - The company utilizes copper swap contracts to hedge commodity price risk, with a net fair value asset of $62.1 million as of September 30, 2021, and also uses foreign currency forward contracts[71][73] - Koppers is involved in 32 lawsuits related to coal tar pitch exposure and is a potentially responsible party (PRP) at the Portland Harbor and Newark Bay CERCLA sites, with an accrued liability of $3.4 million for these sites[78][93] Management's Discussion and Analysis (MD&A) Management discusses segment performance, Q3 sales decline driven by RUPS and PC, profitability impacts from LIFO and copper hedges, segment-specific outlooks, and strong liquidity with debt covenant compliance Business Outlook Segment outlooks vary, with RUPS facing supply constraints, PC benefiting from strong housing, and CMC impacted by coal tar raw material availability - RUPS: Crosstie demand is expected to grow 4.7% in 2021, but supply is constrained by sawmills prioritizing construction lumber and facing labor/freight issues; the company is transitioning utility pole treatment from penta to alternatives like creosote and CCA[109][115] - PC: The outlook is positive, supported by strong housing market trends and projected 9.0% annual growth in home renovation spending into 2022; the company hedges the majority of its copper needs for up to 36 months[121][123] - CMC: The business has realigned capacity to meet North American creosote demand, but the availability of its primary raw material, coal tar, is linked to metallurgical coke production, which remains constrained[127][128] Results of Operations – Q3 2021 vs. Q3 2020 Q3 2021 consolidated net sales decreased 3%, driven by lower RUPS and PC sales, while operating profit plummeted 58% due to LIFO expense and copper hedge losses Net Sales by Segment (Q3) | Segment (in millions) | Q3 2021 | Q3 2020 | Net Change | | :--- | :--- | :--- | :--- | | RUPS | $186.9 | $191.0 | -2% | | Performance Chemicals | $115.2 | $147.9 | -22% | | Carbon Materials & Chemicals | $122.7 | $98.6 | 24% | | Total | $424.8 | $437.5 | -3% | Operating Profit (Loss) by Segment (Q3) | Segment (in millions) | Q3 2021 | Q3 2020 | % Change | | :--- | :--- | :--- | :--- | | RUPS | $(0.7) | $15.0 | -105% | | Performance Chemicals | $11.6 | $30.4 | -62% | | Carbon Materials & Chemicals | $14.9 | $13.7 | 9% | | Total | $24.6 | $58.6 | -58% | - RUPS operating profit was negatively impacted by a $7.5 million LIFO expense in Q3 2021, compared to a $2.9 million LIFO benefit in Q3 2020[136][144] - PC operating profit was hurt by a $4.4 million unrealized loss from copper swap contracts, versus a $3.9 million unrealized gain in the prior-year quarter[136][145] Results of Operations – YTD 2021 vs. YTD 2020 Nine-month consolidated net sales were flat, with RUPS and PC sales down, while CMC sales and profitability increased significantly, offsetting RUPS's LIFO-impacted decline Net Sales by Segment (Nine Months) | Segment (in millions) | YTD 2021 | YTD 2020 | Net Change | | :--- | :--- | :--- | :--- | | RUPS | $574.3 | $590.9 | -3% | | Performance Chemicals | $384.4 | $396.4 | -3% | | Carbon Materials & Chemicals | $314.6 | $288.7 | 9% | | Total | $1,273.3 | $1,276.0 | 0% | Operating Profit by Segment (Nine Months) | Segment (in millions) | YTD 2021 | YTD 2020 | % Change | | :--- | :--- | :--- | :--- | | RUPS | $12.3 | $40.4 | -70% | | Performance Chemicals | $65.1 | $67.1 | -3% | | Carbon Materials & Chemicals | $39.1 | $15.9 | 146% | | Total | $112.8 | $121.9 | -7% | - RUPS operating profit for the nine-month period was unfavorably impacted by a $10.3 million LIFO expense, compared to a $5.2 million LIFO benefit in the prior year[151][159] - CMC operating profit was favorably impacted by higher sales prices, a $2.9 million insurance recovery, and reduced restructuring charges[161] Liquidity and Capital Resources The company maintains strong liquidity of $326.0 million as of September 30, 2021, projects $115-120 million in 2021 capital expenditures, and remains in compliance with all debt covenants Estimated Liquidity as of Sep 30, 2021 | Component (in millions) | Amount | | :--- | :--- | | Cash and cash equivalents | $42.6 | | Amount available under Credit Facility | $283.4 | | Total estimated liquidity | $326.0 | - Projected capital expenditures for 2021 are expected to be approximately $115 to $120 million, funded by cash from operations[170] - The company is in compliance with all debt covenants, with a total leverage ratio of 3.51, below the maximum permitted of 5.00[172][177] Non-GAAP Financial Measures The company uses non-GAAP measures like adjusted EBITDA, which decreased in Q3 but increased for the nine-month period, leading to an improved net leverage ratio Adjusted EBITDA (Consolidated) | Period (in millions) | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $53.9 | $66.7 | $174.7 | $163.9 | Net Leverage Ratio | Date | Ratio | | :--- | :--- | | Sep 30, 2021 | 3.4x | | Dec 31, 2020 | 3.5x | | Sep 30, 2020 | 3.8x | - The decrease in Q3 adjusted EBITDA was primarily due to lower profitability in the RUPS and PC segments[178] - The increase in nine-month adjusted EBITDA was driven by strong performance in the CMC segment, offsetting declines in RUPS[180] Quantitative and Qualitative Disclosures About Market Risk No material changes to the company's market risk disclosures were reported since the prior annual report - There have been no material changes to the company's market risk profile since the last annual report[190] Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[191] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[191] PART II—OTHER INFORMATION Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 18 of the Condensed Consolidated Financial Statements - Details on legal proceedings are located in Note 18 of the financial statements[193] Risk Factors No material changes to the previously disclosed Risk Factors were reported since the last annual filing - No material changes to risk factors were reported since the last annual filing[194] Share Repurchases During Q3 2021, the company repurchased 45,000 shares for $1.4 million, and a new $100 million share repurchase program was approved with $98.6 million remaining Share Repurchases (Q3 2021) | Period | Total Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | July 2021 | 0 | $0.00 | | August 2021 | 39,000 | $31.45 | | September 2021 | 6,000 | $33.50 | | Total | 45,000 | $31.72 | - A new $100 million share repurchase program was approved on August 6, 2021, replacing the prior program; as of September 30, 2021, $98.6 million was available under this new program[195]