Koppers Holdings Inc. 2020 Form 10-K Summary
Business context and reporting period
Koppers Holdings Inc. filed its annual report for the fiscal year ended December 31, 2020. The company is a global provider of treated wood products, wood-preservation chemicals and carbon compounds, operating through Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC).
The filing is an annual report, not a standalone fourth-quarter report. Results include the effects of the COVID-19 pandemic and the September 2020 sale of Koppers (Jiangsu) Carbon Chemical Company Limited (KJCC), which was classified as discontinued operations.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $1,669.1 million | $1,637.0 million | +2% |
| Operating profit | $156.7 million | $125.0 million | +25% |
| Operating margin | 9.4% | 7.6% | +1.8 percentage points |
| Income from continuing operations | $89.1 million | $63.7 million | +40% |
| Net income attributable to Koppers | $122.0 million | $66.6 million | +83% |
| Diluted EPS | $5.71 | $3.16 | +81% |
| Adjusted EBITDA | $211.0 million | $201.1 million | +5% |
| Adjusted EBITDA margin | 12.6% | 12.3% | +0.3 percentage points |
| Cash from operating activities | $127.1 million | $115.3 million | +$11.8 million |
| Capital expenditures | $69.8 million | $37.2 million | +$32.6 million |
| Total debt | $784.2 million | $911.9 million | -$127.7 million |
| Cash and cash equivalents | $38.5 million | $32.3 million | +$6.2 million |
Operating cash flow exceeded capital expenditures by $57.3 million. Net cash used in financing activities was $128.7 million, primarily reflecting $128.0 million of net debt repayments. Net leverage declined to 3.5x from 4.3x.
Estimated liquidity at December 31, 2020 was $344.0 million, consisting of $36.2 million of cash and $307.8 million of available credit capacity. The company reported compliance with its debt covenants, including a fixed-charge coverage ratio of 2.29x, secured leverage ratio of 1.32x and total leverage ratio of 3.59x.
Segment performance and material changes
- RUPS: Sales increased 3% to $759.1 million and operating profit increased 30% to $46.7 million. Results benefited from higher Class I crosstie volumes, utility-pole pricing and improved product mix.
- PC: Sales increased 17% to $526.3 million and operating profit increased 70% to $88.6 million. Strong North American demand for copper-based preservatives, new customers, home repair and remodeling activity, favorable mix and improved production absorption drove the improvement.
- CMC: Sales decreased 16% to $383.7 million and operating profit decreased 40% to $23.4 million. Lower prices for carbon pitch, carbon black feedstock, phthalic anhydride and naphthalene, along with weaker carbon-pitch volumes, pressured results.
- KJCC divestiture: Koppers sold its 75%-owned Chinese coal-tar distillation business for a stated sales price of $107.0 million. The transaction generated a $44.1 million pretax gain and a $35.8 million after-tax gain; estimated final net cash proceeds were $65.2 million, including amounts held in escrow and transaction adjustments.
- Restructuring: The Denver, Colorado crosstie facility was closed, generating approximately $5.8 million of charges in 2020. CMC closure activities are expected to generate an additional $2 million to $5 million of restructuring-related charges through 2021.
Outlook, commentary, risks and unusual items
- Management expected 2021 RUPS demand to be stable to slightly higher, with modest industry growth in commercial crossties and continued utility infrastructure investment.
- Management anticipated continued strong North American residential treated-wood demand, supported by housing activity, remodeling, low interest rates and pandemic-related spending shifts toward home improvement.
- Management expected CMC external markets in North America and Europe to remain pressured in 2021 by pandemic-related industrial weakness, softer carbon-pitch and phthalic-anhydride demand, and constrained coal-tar availability.
- 2021 capital expenditures, excluding acquisitions, were expected to be approximately $105 million to $115 million and funded from operating cash flow.
- The company has $500.0 million of 6% senior notes due 2025 and a credit facility and term loan maturing in 2024. Variable-rate debt exposes the company to interest-rate risk and uses LIBOR-based pricing, which is expected to transition to an alternative reference rate.
- The company had not declared a dividend since November 2014 and stated that it did not expect to declare dividends for the foreseeable future. Debt agreements restrict dividends and other distributions.
- COVID-19 caused temporary curtailments at some facilities, but most operations continued as essential businesses. Future effects remain uncertain, particularly for demand, supply chains, workforce availability and covenant compliance.
- Environmental reserves totaled $11.0 million at year-end. The company expects approximately $30 million of 2021 environmental-control capital expenditures, funded by operations.
- The company disclosed 64 plaintiffs in 34 coal-tar-pitch cases and has not recorded a reserve because the probability and amount of any loss cannot reasonably be estimated. Environmental and toxic-tort matters, including Portland Harbor, could have a material adverse effect if resolved unfavorably.
- Goodwill totaled $297.8 million. Fourth-quarter testing identified no goodwill impairment, but future adverse industry or economic conditions could result in impairment charges.
Most important facts for investors to verify
- Whether PC’s pandemic-related demand strength persists and offsets continued CMC weakness.
- The timing and funding of the $105 million to $115 million 2021 capital-expenditure program.
- Progress toward refinancing or repaying the $272.0 million revolving facility maturity in 2024 and the $500.0 million senior notes due in 2025.
- Compliance with leverage and fixed-charge covenants under weaker operating conditions or renewed COVID-19 disruption.
- Actual cash proceeds and final adjustments associated with the KJCC divestiture, including the $2.3 million escrow.
- Potential costs from environmental remediation, coal-tar-pitch litigation, indemnification disputes and facility closures.
- Exposure to lumber, coal tar, copper, oil, foreign-exchange and interest-rate volatility.
- Whether the expected transition away from pentachlorophenol affects utility-pole customers, product mix or market share.