Koppers Holdings Inc. — 2015 Form 10-K Summary
Business Context and Reporting Period
Koppers Holdings Inc. is a global producer of treated wood products, wood-preservation chemicals and carbon compounds. Its three reportable segments are Railroad and Utility Products and Services (RUPS), Carbon Materials and Chemicals (CMC), and Performance Chemicals (PC). The filing covers the fiscal year ended December 31, 2015; fourth-quarter information is presented in the filing’s unaudited quarterly data.
The company operates internationally and has substantial exposure to railroad, aluminum, steel, chemicals, construction, residential remodeling and utility markets. The PC business was consolidated for a full year in 2015 following the August 2014 acquisition of the Osmose entities.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $1,626.9 million | $1,555.0 million | Up 5% |
| Operating profit (loss) | $(29.6) million | $33.2 million | Declined $62.8 million |
| Net loss attributable to Koppers | $(72.0) million | $(32.4) million | Loss increased $39.6 million |
| Diluted loss per share | $(3.51) | $(1.58) | Worsened |
| Operating margin | (1.8)% | 2.1% | Down 3.9 percentage points |
| Cash flow from operations | $127.7 million | $35.5 million | Up $92.2 million |
| Capital expenditures | $40.7 million | $83.8 million | Down $43.1 million |
| Cash and equivalents | $21.8 million | $51.1 million | Down $29.3 million |
| Total debt | $734.8 million | $850.5 million | Down $115.7 million |
Cost of sales declined to 84% of sales from 86% in 2014, primarily because of the full-year contribution from the higher-margin PC business and improved RUPS performance. These benefits were more than offset by CMC losses, restructuring charges, goodwill impairment and higher interest expense.
Segment Performance and Material Changes
| Segment | 2015 Sales | 2015 Operating Profit (Loss) | 2014 Operating Profit (Loss) |
|---|---|---|---|
| RUPS | $657.0 million | $62.2 million | $53.6 million |
| CMC | $613.4 million | $(125.0) million | $(5.3) million |
| PC | $356.5 million | $39.0 million | $1.6 million |
- RUPS sales increased 10%, driven by higher crosstie volumes, railroad customer inventory restocking and a full year of railroad-services revenue from Osmose.
- CMC sales decreased 26%, primarily because of lower carbon-pitch volumes, lower oil-linked prices for carbon black feedstock, phthalic anhydride and naphthalene, and unfavorable foreign exchange translation.
- PC sales increased substantially because the business was included for 12 months in 2015 versus approximately 4.5 months in 2014. PC operating margin improved to 10.9% from 1.3%.
- CMC recorded a $67.2 million goodwill impairment charge, reducing CMC goodwill to zero. CMC also recorded $34.7 million of asset impairment and restructuring charges.
- Total impairment and restructuring charges were $42.2 million, compared with $17.9 million in 2014.
- Interest expense increased to $50.7 million from $39.1 million, primarily because of acquisition-related debt.
- The company sold its North American utility pole business in January 2015 for cash proceeds and a promissory note, recognizing a $3.2 million gain.
- The quarterly loss was concentrated in the fourth quarter: operating loss was $90.6 million and net loss attributable to Koppers was $87.7 million, primarily reflecting CMC impairment and closure-related charges.
Cash Flow, Debt and Liquidity
- Operating cash flow was $127.7 million, supported by lower working-capital usage and a $30 million customer advance payment related to a Chinese supply agreement.
- Investing cash outflow was $41.1 million, versus $580.0 million in 2014, when the Osmose acquisition was completed.
- Financing cash outflow was $123.4 million, including $113.4 million of net debt repayments.
- Total debt was $734.8 million, consisting of $437.3 million of variable-rate debt and $297.5 million of fixed-rate debt. Most debt matures in 2019.
- Estimated liquidity at December 31, 2015 was $76.5 million, including $21.8 million of cash, $53.9 million of available revolving credit and $0.8 million under other facilities. Revolving availability was reduced by covenants and letters of credit.
- The company was in compliance with debt covenants. The fixed-charge coverage ratio was 1.44 versus a minimum of 1.10, and the leverage ratio was 4.67 versus a maximum of 5.00.
- Koppers suspended its quarterly dividend in February 2015 to preserve financial flexibility and repay debt. No dividends were declared to Koppers Holdings shareholders during 2015.
- Contractual cash obligations totaled $1.79 billion, including $737.3 million of debt principal, $151.6 million of debt interest, $198.1 million of operating leases and $704.4 million of purchase commitments.
Outlook, Management Commentary, Risks and Unusual Items
- Management expects to continue restructuring CMC because of aluminum-industry capacity shifts, weak demand in North America and Europe, excess industry capacity and lower utilization. The company expects additional CMC closure-related charges of $15 million to $30 million through 2020 and cash requirements of approximately $45 million to $55 million.
- After year-end, the company announced plans to substantially discontinue production at Clairton, Pennsylvania; cease operations at its two U.K. facilities; and close the Tangshan, China plant. These actions are intended to reduce the CMC footprint and improve capacity utilization.
- Capital expenditures excluding acquisitions were expected to be approximately $45 million in 2016. Environmental-control capital expenditures were expected to be approximately $10.5 million.
- Key operating risks include commodity-price volatility, particularly oil, coal tar, hardwood and copper; declining aluminum production in higher-cost regions; foreign exchange movements; cyclical demand; customer concentration; weather-related disruptions; and raw-material availability.
- Environmental reserves totaled $19.8 million at year-end. The company expects substantial continuing environmental compliance and remediation expenditures.
- The company reported a $45.1 million underfunded pension position and $9.4 million of unfunded other post-retirement benefit obligations. Expected 2016 contributions were approximately $5.7 million.
- Significant litigation includes coal-tar-pitch personal-injury cases, the Gainesville environmental class action, and a Virgin Islands putative class action involving wood-preservative products. The company recorded no reserves for these matters because potential losses were not probable and reasonably estimable.
- The company relies on indemnification from Beazer East for certain pre-1988 environmental and product liabilities. Failure of the indemnitor to perform could materially affect results and liquidity.
- Koppers holds a $9.5 million loan to its 30%-owned TKK investment in China. TKK defaulted on scheduled installments, and Koppers was negotiating repayment and a potential sale of its investment; management concluded the loan remained collectible and recorded no provision.
- Management concluded that internal control over financial reporting was effective, and Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important Facts for Investors to Verify
- Whether CMC restructuring actions achieve the expected cost reductions and whether additional closures or impairment charges occur.
- The company’s ability to refinance or repay the large debt maturities concentrated in 2019 while maintaining covenant compliance and adequate liquidity.
- Whether oil, coal tar, aluminum, copper and hardwood-market conditions improve or further pressure margins.
- The timing and cash cost of environmental remediation, asset-retirement obligations and litigation outcomes, including reliance on Beazer indemnification.
- Whether the $9.5 million TKK loan is collected and whether the 30% TKK investment is sold on acceptable terms.
- Whether the dividend remains suspended and how cash savings are allocated between debt reduction, restructuring and capital expenditures.
- The sustainability of RUPS and PC profitability after the favorable effects of customer inventory restocking and the first full year of PC consolidation.