Koppers Holdings Inc. 2019 Form 10-K Summary
Business context and reporting period
Koppers is a global provider of treated wood products, wood-preservation chemicals and carbon compounds serving railroad, utility, residential lumber, construction, agriculture, aluminum, steel and specialty-chemical markets. The company operates through Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC).
The filing covers the fiscal year ended December 31, 2019, with comparable results for 2018 and 2017. The filing was signed on February 27, 2020. Results are seasonally weaker in the first and fourth quarters, particularly because of winter weather and raw-material availability.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $1,772.8 million | $1,710.2 million | +4% |
| Operating profit | $130.8 million | $110.4 million | +18% |
| Operating margin | 7.4% | 6.5% | +0.9 percentage points |
| Income from continuing operations | $67.5 million | $28.8 million | +134% |
| Net income attributable to Koppers | $66.6 million | $23.4 million | +184% |
| Diluted EPS from continuing operations | $3.16 | $1.08 | +193% |
| Net cash provided by operating activities | $115.3 million | $78.3 million | +$37.0 million |
| Capital expenditures | $37.2 million | $109.7 million | -$72.5 million |
| Cash and cash equivalents | $33.0 million | $40.6 million | -$7.6 million |
| Total debt | $911.9 million | $1,002.6 million | -$90.7 million |
Cost of sales was 81% of sales versus 80% in 2018, implying a gross margin of approximately 19%. Interest expense increased to $62.5 million from $56.3 million. The 2019 income-tax provision was $1.4 million, or approximately 2.0% of pretax income, compared with 47.4% in 2018.
- RUPS: Sales increased 16% to $733.5 million; operating profit rose to $35.8 million from $5.9 million, with margin improving to 4.9% from 0.9%. Growth reflected higher crosstie volumes, pricing and a full year of UIP results.
- PC: Sales increased 7% to $448.3 million; operating profit rose 44% to $52.1 million, with margin improving to 11.6% from 8.6%. Results benefited from new customers, products, volume and pricing, as well as a net $11.0 million benefit from copper swaps and insurance proceeds.
- CMC: Sales declined 10% to $591.0 million; operating profit fell 36% to $45.0 million, with margin declining to 7.6% from 10.8%. Lower carbon-pitch and naphthalene pricing, weaker volumes and unfavorable currency translation outweighed cost-structure improvements.
Material changes versus the prior comparable period
- Operating performance improved substantially in RUPS and PC, while CMC experienced a significant decline.
- Operating cash flow improved primarily because of lower working-capital usage and favorable accounts-receivable collection timing.
- Investing cash outflows fell sharply because 2018 included $264.0 million of acquisition spending for UIP and KRR, while 2019 included no acquisitions and substantially lower capital expenditures.
- Financing activities used $88.7 million in 2019, including $90.8 million of net debt repayments, compared with $282.8 million of financing inflows in 2018.
- 2019 tax expense benefited from a $14.9 million one-time deferred tax benefit related to an intra-entity transfer of intangible assets, a $4.3 million benefit from the reversal of unrecognized tax benefits, and a $2.6 million provision-to-return benefit.
- The company adopted the lease accounting standard on January 1, 2019. The adoption added approximately $119 million of right-of-use assets and lease liabilities at adoption and had no material ongoing income-statement impact.
- CMC ceased remaining production activities at its Follansbee, West Virginia facility in 2019 and recorded approximately $3 million of related charges. Additional restructuring and related charges of approximately $3 million to $5 million are expected through 2021, with estimated closure cash requirements of approximately $14 million through 2021.
Liquidity, debt and capital allocation
The company had $33.0 million of cash and $221.6 million of available revolving-credit capacity at December 31, 2019, for estimated liquidity of $254.6 million. The credit facility includes a $600 million revolving facility and a $100 million term-loan facility, with stated maturity in 2024. Debt also includes $500 million of 6.0% senior notes due 2025.
At year-end, the fixed-charge coverage ratio was 2.27 versus a minimum of 1.10, the total secured leverage ratio was 1.97 versus a maximum of 3.00, and the total leverage ratio was 4.31 versus a maximum of 5.25. The company stated that it was in compliance with all debt covenants.
Koppers has not declared a dividend since November 2014 and does not expect to declare dividends for the foreseeable future. No shares were repurchased in the fourth quarter of 2019; approximately $24.8 million remained available under the $75 million repurchase authorization.
Guidance, outlook, risks and unusual items
- Management characterized 2020 RUPS demand as relatively stable, with expected longer-term support from infrastructure investment and utility-pole replacement. Near-term risks include lower rail traffic, reduced coal shipments, trade uncertainty and constrained untreated-crosstie supply.
- PC expects lower year-over-year copper costs in 2020 because copper prices declined in 2019, although hedging delays the effect of market-price changes. Residential remodeling growth is expected to be modest.
- CMC expects relatively favorable carbon-pitch demand in North America and Europe but faces constrained coal-tar supply, reduced aluminum-smelting capacity and softer phthalic-anhydride markets.
- On February 18, 2020, the company agreed to sell its 75%-owned Koppers Jiangsu Carbon Chemical Company for $107.0 million, subject to adjustments and regulatory approval. Management estimated net cash proceeds of approximately $65 million and a gain of approximately $45 million. Closing was expected within four to six months.
- Environmental reserves totaled $9.5 million. The company expects approximately $12.1 million of environmental-control capital expenditures in 2020, funded from operations.
- The company accrued its estimated liability for a proposed $2.8 million EPA penalty relating to alleged Clean Water Act and storage-tank compliance issues. It also accrued estimated liabilities for an Australian environmental proceeding, where the maximum fine was approximately $0.7 million plus legal costs.
- There were 34 pending coal-tar-pitch cases involving 64 plaintiffs at year-end. No reserve was recorded because the probability and amount of loss could not reasonably be estimated.
- The pension obligation exceeded plan assets by $28.3 million, and other post-retirement obligations were $9.2 million. Expected 2020 contributions totaled approximately $4.8 million.
- Key market exposures include lumber, coal tar, copper, oil-linked chemicals, interest rates, foreign currency and LIBOR transition risk. The company had $401.2 million of variable-rate debt at year-end.
- Goodwill totaled $296.1 million and was not impaired in 2019, although the valuation of the Utility Products reporting unit was identified as a critical audit matter because it depends on forecast growth, margins and discount-rate assumptions.
Most important facts an investor should verify
- Whether the KJCC sale closes on the expected timetable and produces the estimated gain and net cash proceeds.
- Progress on CMC restructuring, Follansbee closure costs and the expected $14 million of closure cash requirements through 2021.
- RUPS crosstie demand, untreated-lumber availability and rail-industry spending trends.
- Whether PC pricing and copper hedging adequately offset raw-material volatility.
- CMC carbon-pitch pricing, aluminum-industry demand, coal-tar availability and foreign-exchange effects.
- Debt repayment capacity, covenant headroom and refinancing requirements for the 2024 credit facilities and 2025 notes.
- Environmental, toxic-tort and coal-tar-pitch litigation exposure, including the reliance on Beazer East indemnification for certain legacy liabilities.
- The sustainability of 2019 earnings, given the $14.9 million one-time tax benefit and the $11.0 million PC benefit from copper swaps and insurance proceeds.