Koppers Holdings Inc. 2016 Form 10-K Summary
Business context and reporting period
Koppers Holdings Inc. filed its Form 10-K for the fiscal year ended December 31, 2016. The company provides treated wood products, wood-preservation chemicals and carbon compounds through three segments: Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). The filing includes fourth-quarter data but is primarily an annual report.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $1,416.2 million | $1,626.9 million | (13%) |
| Operating profit (loss) | $86.4 million | $(29.6) million | Improved |
| Net income (loss) attributable to Koppers | $29.3 million | $(72.0) million | Improved |
| Diluted EPS | $1.39 | $(3.51) | Improved |
| Operating margin | 6.1% | (1.8%) | +7.9 percentage points |
| Cash flow from operations | $119.5 million | $127.7 million | $(8.2) million |
| Capital expenditures | $49.9 million | $40.7 million | +$9.2 million |
| Cash and cash equivalents | $20.8 million | $21.8 million | $(1.0) million |
| Total debt | $662.4 million | $734.8 million | $(72.4) million |
Cost of sales declined to 80% of sales from 84% in 2015. Income from continuing operations was $27.1 million, compared with a $75.9 million loss in 2015. The effective tax rate was 29.6%, compared with 5.3% in 2015. Total shareholders’ equity improved to $34.6 million from a deficit of $12.4 million.
Fourth-quarter 2016 net sales were $313.2 million, operating profit was $18.9 million, net income attributable to Koppers was $6.4 million and diluted EPS was $0.30. Fourth-quarter 2015 included significant impairment and restructuring charges and a $67.2 million CMC goodwill impairment.
Segment results
| Segment | 2016 sales | 2015 sales | 2016 operating profit (loss) | 2015 operating profit (loss) |
|---|---|---|---|---|
| RUPS | $586.5 million | $657.0 million | $51.1 million | $62.2 million |
| CMC | $436.3 million | $613.4 million | $(25.1) million | $(125.0) million |
| PC | $393.4 million | $356.5 million | $62.0 million | $39.0 million |
- RUPS sales fell 11%, primarily because of lower railroad freight activity, reduced railroad capital spending, lower crosstie volumes and pricing pressure. RUPS margin declined to 8.7% from 9.5%.
- CMC sales fell 29% because of lower carbon pitch and carbon black feedstock volumes and lower pricing. The operating loss narrowed substantially as 2015 included $67.2 million of goodwill impairment and $34.7 million of other impairment and restructuring charges.
- PC sales rose 10%, driven by higher North American volumes for copper-based preservatives, favorable remodeling trends and increased demand for higher-retention treated wood. PC margin improved to 15.8% from 10.9%.
Material changes versus the prior comparable period
- Results returned to profitability despite a 13% decline in sales, largely because 2015 contained substantial CMC impairment and restructuring charges and because PC profitability improved.
- CMC continued a multi-year restructuring that reduced coal-tar distillation facilities from 11 at the beginning of 2014 to four at December 31, 2016. Additional CMC restructuring charges of $9 million to $17 million and cash requirements of approximately $40 million were expected through 2020.
- The company recorded $20.1 million of impairment and restructuring charges in 2016, including costs associated with CMC closures and exits from three non-core RUPS businesses. No goodwill impairment was recorded in 2016.
- Operating cash flow decreased modestly because of higher working-capital usage, including increased inventory.
- The quarterly dividend remained suspended. No dividends were declared in 2015 or 2016, compared with $1.00 per share in 2014.
Liquidity, debt and capital resources
At December 31, 2016, estimated liquidity was $181.5 million, consisting of $20.8 million of cash, $159.6 million of available revolving-credit capacity and $1.1 million under other credit facilities. Outstanding letters of credit used $43.5 million of commitments. The company was in compliance with its debt covenants; the fixed-charge coverage ratio was 1.68 and the prior leverage ratio was 3.82.
After year-end, Koppers issued $500.0 million of 6.00% Senior Notes due 2025, used the proceeds to repay the $232.5 million term loan and repurchase or redeem the $298.1 million 2019 Notes, and entered into a new $400.0 million senior secured revolving facility maturing in 2022. The company estimated approximately $16.0 million of first-quarter 2017 refinancing costs.
Management expected 2017 capital expenditures, excluding acquisitions, of approximately $70 million to $75 million, funded by operating cash flow. The filing states that 2017 RUPS revenue and profitability were expected to decline year over year because of lower North American Class I railroad capital budgets. Management expected PC trends to remain favorable but moderate, while CMC profitability was expected to benefit from footprint rationalization and long-term coal-tar supply agreements.
Guidance, outlook, risks and unusual items
- Key operating risks include cyclical railroad, residential construction, aluminum and specialty-chemical demand; commodity-price volatility; raw-material availability; foreign exchange; interest rates; and adverse weather.
- CMC remains exposed to weak aluminum production in North America, Europe and Australia, lower oil-linked pricing and constrained coal-tar availability. Management did not expect meaningful near-term improvement in these market conditions.
- Environmental reserves totaled $12.9 million at year-end, and 2017 environmental-control capital expenditures were expected to be approximately $6.1 million.
- The company reported 99 plaintiffs in 55 coal-tar-pitch cases and disclosed other environmental and toxic-tort matters for which no reserve was recorded because loss probability and amount could not reasonably be estimated.
- Koppers is a party potentially responsible at the Portland Harbor CERCLA site. The selected remedy was estimated at approximately $1.1 billion net present value and $1.7 billion undiscounted, but allocation among responsible parties had not been determined. Koppers had accrued $2.0 million for Portland Harbor and Newark Bay participation and estimated settlements.
- Beazer East and Beazer Limited provide significant indemnification for certain pre-1988 environmental and product liabilities. Failure of the indemnitors to perform could materially affect the company.
- The pension deficit was $42.7 million, other post-retirement obligations were $10.0 million, and expected 2017 contributions were approximately $5.1 million.
- Other unusual items included a $4.4 million pension settlement charge, a $2.1 million gain on the sale of U.K. CMC assets, and approximately $3.7 million of favorable non-recurring PC items, including an environmental-liability reversal.
Most important facts for investors to verify
- Whether CMC restructuring produces the expected cost savings and whether additional closures generate the projected $9 million to $17 million of charges and approximately $40 million of cash requirements through 2020.
- Whether the post-year-end refinancing improves maturity risk and remains compliant with the new secured leverage covenant of 2.75.
- The sustainability of PC’s higher-retention product mix, remodeling-related demand and 15.8% operating margin.
- The magnitude and timing of railroad demand reductions, crosstie pricing pressure and RUPS margin recovery.
- Potential exposure from environmental, toxic-tort and product-liability matters, including the Portland Harbor allocation process and the Beazer indemnity.
- Future pension contributions, environmental spending, working-capital needs and the company’s ability to fund planned capital expenditures from operations.
- The effect of commodity prices, especially copper, coal tar, oil and hardwood, on margins and cash flow.