Koppers Holdings Inc. 2013 Form 10-K Summary
Business context and reporting period
Koppers Holdings Inc. is a global producer of carbon compounds and treated wood products, operating through Carbon Materials and Chemicals (CMC) and Railroad and Utility Products and Services (RUPS). The filing covers the fiscal year ended December 31, 2013; fourth-quarter information is included where disclosed. The company operates in the United States, Australia, China, the United Kingdom, Denmark, Canada and the Netherlands.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $1,478.3 million | $1,555.0 million | -5% |
| Operating profit | $100.3 million | $126.6 million | -21% |
| Operating margin | 6.8% | 8.1% | -1.3 points |
| Income from continuing operations | $40.2 million | $67.3 million | -40% |
| Net income attributable to Koppers | $40.4 million | $65.6 million | -38% |
| Diluted EPS from continuing operations | $1.94 | $3.14 | -38% |
| Cash flow from operations | $117.6 million | $77.8 million | +$39.8 million |
| Capital expenditures | $72.9 million | $28.9 million | +$44.0 million |
| Cash and equivalents | $82.2 million | $66.7 million | +$15.5 million |
| Total debt | $303.1 million | $296.1 million | +$7.0 million |
- CMC: Sales declined 9% to $906.1 million and operating profit fell 47% to $43.9 million, producing a 4.8% margin versus 8.3% in 2012.
- RUPS: Sales increased 3% to $572.2 million and operating profit increased 29% to $58.3 million, producing a 10.2% margin versus 8.1% in 2012.
- Fourth-quarter sales were $341.8 million, operating profit was $7.8 million and net loss attributable to Koppers was $4.1 million, or a diluted loss of $0.20 per share.
- 2013 cash flow benefited from a $29.4 million working-capital source, including a $21.6 million inventory reduction. Investing cash outflow was $72.3 million, principally reflecting approximately $37 million spent on the Jiangsu, China tar-distillation facility.
- Dividends declared increased to $1.00 per share from $0.96 per share. The company repurchased $17.5 million of common stock during 2013; no shares were repurchased in the fourth quarter.
Material changes versus the prior comparable period
- Revenue and profitability weakened primarily because of lower carbon-pitch volumes and prices, depressed European markets, excess supply and pricing pressure in China and the Middle East, European and Australian smelter closures, and lower U.S. phthalic-anhydride demand.
- CMC recorded approximately $16.5 million of restructuring and tank-cleaning charges. Fourth-quarter curtailment charges were approximately $9.6 million, with management expecting approximately $9 million of 2014 cost savings.
- 2013 impairment charges were approximately $11.9 million, primarily relating to facilities in the Netherlands, China and the United States, compared with $0.6 million in 2012.
- RUPS benefited from favorable railroad-crosstie mix and improved Australian utility-pole profitability following the 2012 Western Pole acquisition. However, untreated-crosstie purchases declined in the second half of 2013 because of competition from housing and crane-mat lumber markets.
- The effective tax rate increased to 47.8% from 33.1%, primarily because $11.0 million of European and Chinese impairment expenses were not tax deductible and 2012 included favorable tax benefits.
Outlook, commentary, risks and unusual items
- Management expects difficult European market conditions to continue for at least the next six months and is curtailing or restructuring selected CMC facilities. Additional curtailments or closures remain possible.
- The Uithoorn, Netherlands facility is expected to discontinue coal-tar distillation by mid-2014. The company recorded a $7.0 million impairment charge in the fourth quarter of 2013 and expects approximately $25 million of additional 2014 charges for severance, accelerated depreciation, disentanglement, demolition and remediation.
- The Tangshan, China facility faced potential disruption because the local government ordered closure of the coke batteries operated by the company’s raw-material and utilities partner. The company recorded a $4.0 million impairment charge and stated that relocation or closure could materially affect results. Tangshan contributed approximately $3.3 million of 2013 operating profit after noncontrolling interests.
- The Jiangsu, China tar-distillation facility was expected to begin production in mid-2014. Remaining construction spending was estimated at approximately $35 million, with financing from cash and incremental third-party and shareholder financing.
- In January 2014, the company acquired a Canadian crosstie treating facility for approximately $29.6 million after a working-capital adjustment. Management estimated approximately $30 million of annual revenue from the facility.
- 2014 capital expenditures, excluding acquisitions and the Jiangsu facility, were expected to be approximately $49 million. Expected 2014 defined-benefit plan contributions were approximately $23 million.
- Liquidity totaled approximately $451.4 million at year-end, comprising $82.2 million of cash, $331.0 million of available revolving-credit capacity, $37.4 million of available construction-loan capacity and $0.8 million under other facilities. Approximately $52 million of cash was held by foreign subsidiaries and would incur an estimated $20 million tax cost if repatriated.
- The company had $300.0 million principal amount of 7 7/8% Senior Notes due 2019 and $6.6 million of construction loans. It was in compliance with debt covenants; the fixed-charge coverage ratio was 1.5 versus a 1.10 minimum, and the leverage ratio was 1.72 versus a 4.50 maximum.
- Environmental reserves were $11.9 million at December 31, 2013. The company also faces environmental, toxic-tort, product-liability and CERCLA matters for which potential losses cannot presently be reasonably estimated. Approximately 111 plaintiffs in 61 coal-tar-pitch cases were pending at year-end, with no reserve recorded.
- Pension obligations exceeded plan assets by approximately $32.1 million, and other post-retirement obligations were approximately $10.4 million. Approximately 60% of employees were represented by labor unions.
- Top ten customers represented approximately 40% of 2013 net sales, and the two largest customers represented approximately 14%. Foreign subsidiaries generated approximately 40% of total net sales.
Most important facts for investors to verify
- Whether CMC demand, pricing and capacity utilization recover, particularly in Europe, China and the aluminum-related carbon-pitch market.
- The timing, cost and operational impact of the Uithoorn closure and any additional CMC curtailments.
- The resolution of Tangshan’s potential closure or relocation and the related impact on raw-material supply, margins and asset values.
- Execution, financing and expected returns from the Jiangsu facility and the Canadian crosstie acquisition.
- Debt maturity and refinancing risk, including the $300 million Senior Notes due in 2019 and compliance with revolving-credit covenants.
- Future environmental, litigation and indemnification exposure, including the reliability of Beazer East indemnity recoveries.
- Cash requirements for capital expenditures, restructuring, remediation, pension funding, dividends and restricted cash held overseas.