Koppers Holdings Inc. — Fiscal 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; fourth-quarter data is included for the three months ended December 31, 2012. Koppers is a global producer of carbon compounds and treated and untreated wood products, operating through Carbon Materials & Chemicals (CM&C) and Railroad & Utility Products (R&UP).
Financial performance and position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $1,555.0 million | $1,466.2 million | +6% |
| Operating profit | $126.6 million | $122.7 million | +3% |
| Operating margin | 8.1% | 8.4% | Down 0.3 percentage points |
| Income from continuing operations | $67.3 million | $57.5 million | +17% |
| Net income attributable to Koppers | $65.6 million | $36.9 million | +78% |
| Diluted EPS from continuing operations | $3.14 | $2.72 | +15% |
| Net cash from operating activities | $77.8 million | $76.9 million | +1% |
| Capital expenditures | $28.9 million | $32.5 million | Down $3.6 million |
| Cash and equivalents | $66.7 million | $54.1 million | +$12.6 million |
| Total debt | $296.1 million | $302.1 million | Down $6.0 million |
Fourth-quarter 2012 net sales were $374.9 million, operating profit was $25.9 million, income from continuing operations was $14.2 million, net income attributable to Koppers was $13.6 million, and diluted EPS was $0.65. Fourth-quarter 2011 included a $41.0 million carbon black facility closure charge, which contributed to a net loss attributable to Koppers of $14.2 million.
CM&C sales increased 6% to $999.7 million, but segment operating profit declined 7% to $83.1 million and margin decreased to 8.3% from 9.4%. R&UP sales increased 6% to $555.3 million, while operating profit increased 30% to $45.1 million and margin improved to 8.1% from 6.7%.
Cash flow, liquidity and capital structure
- Operating cash flow was $77.8 million. Inventory increased by $26.5 million and was the principal working-capital use.
- Investing cash use was $39.9 million, including $28.9 million of capital expenditures and $14.0 million of acquisition spending.
- Financing cash use was $27.3 million, including $19.5 million of dividends, $8.1 million of share repurchases and $6.4 million of net revolving-credit repayments.
- The company had estimated liquidity of $365.7 million, consisting of $66.7 million of cash, $290.0 million of available revolving-credit capacity and $9.0 million under other facilities. Approximately $62 million of cash was held by foreign subsidiaries and would incur an estimated $20 million tax cost if repatriated.
- Debt consisted primarily of $300.0 million principal amount of 7 7/8% Senior Notes due 2019, reported at $296.1 million after accretion. The revolver had no outstanding balance at year-end, with $10.0 million of commitments used by letters of credit.
- The company was in compliance with its debt covenants. The fixed-charge coverage ratio was 2.6 versus a minimum of 1.10, and the leverage ratio was 1.73 versus a maximum of 4.50.
Material changes and unusual items
- CM&C profitability was pressured by lower pitch volumes, lower naphthalene prices and higher raw-material costs. Additional costs included a $3.1 million European customer allowance, $2.5 million related to an Australian pitch-tank leak and $1.9 million related to a Netherlands plant outage, partially offset by a $3.6 million supplier-audit refund.
- R&UP benefited from higher railroad crosstie pricing and value-added product volumes, as well as improved utility-pole profitability.
- The effective tax rate declined to 33.1% from 40.2%, helped by lower tax reserves and recognition of foreign-tax-credit, domestic-manufacturing and state tax benefits.
- The Australian carbon black facility closure was substantially completed in the first quarter of 2012. Its 2011 closure costs totaled $41.0 million; 2012 discontinued-operation loss was $0.1 million and remaining closure costs were estimated at approximately $0.8 million.
- In November 2012, Koppers acquired Western Poles for $13.8 million in cash plus expected future payments of $4.9 million. The business serves utility customers in Western Australia.
- Koppers entered into an agreement to develop a majority-owned, 300,000-metric-ton coal-tar distillation facility in Pizhou City, China. Construction was expected to be completed in mid-2014, with an estimated company capital commitment of approximately $50 million.
Outlook, risks and contingencies
Management expected difficult European economic conditions and reduced demand in certain European end markets to continue through 2013. Aluminum-smelter closures and production curtailments reduced carbon-pitch volumes in Europe and Australia, while increased Asian exposure could dilute margins. Coal-tar availability and pricing remain linked to global steel and metallurgical-coke production, and raw-material cost increases may not always be recoverable through customer pricing.
- 2013 capital expenditures, excluding acquisitions, were expected to be approximately $38 million, with additional China-project funding of approximately $50 million over the following 18 months.
- Expected 2013 defined-benefit plan contributions were approximately $22.7 million for pension plans and $0.8 million for other benefit plans; management separately indicated total defined-benefit contributions of approximately $24 million.
- Pension obligations exceeded plan assets by approximately $79.6 million, and other post-retirement obligations were approximately $11.2 million at year-end.
- Environmental reserves were $14.1 million at December 31, 2012. The company expected approximately $9.9 million of 2013 environmental-control capital expenditures.
- Material legal and environmental exposures include coal-tar-pitch toxic-tort cases, the Gainesville class action, Portland Harbor and Newark Bay CERCLA matters, and Australian remediation. The filing states that certain losses cannot currently be reasonably estimated and no reserves have been recorded for some matters.
- The company relies on Beazer East indemnification for certain pre-1988 environmental and product liabilities. Failure of the indemnitors to perform could materially affect earnings, cash flow and financial condition.
- Key operating risks include cyclical aluminum, chemical and railroad markets; coal tar and timber price and availability; weather; foreign exchange; customer concentration; labor relations; environmental regulation; litigation; pension funding; and debt covenant or refinancing risk.
Investor verification checklist
- Verify the sustainability of CM&C margins after the 2012 raw-material, European customer and operational disruptions.
- Track R&UP crosstie volumes, pricing, utility-pole profitability and customer inventory patterns.
- Confirm the timing, financing and returns of the Pizhou, China project and the Western Poles integration.
- Review 2013 pension, environmental and closure cash requirements against operating cash flow and available liquidity.
- Assess the $300 million Senior Notes maturity in 2019, refinancing capacity and compliance with revolving-credit and note covenants.
- Monitor environmental and toxic-tort claims, indemnification recoveries and the potential for unreserved liabilities.
- Confirm dividend capacity at Koppers Holdings, given that the parent has substantially no independent operations and depends on subsidiary distributions.