Business Context and Reporting Period
Koppers Holdings Inc. filed its Form 10-K for the fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter filing; separate Q4 results are not clearly provided in the filing text.
Koppers is a global supplier of treated wood products, wood-preservation chemicals and carbon compounds. Its three reportable segments are Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC).
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $1,980.5 million | $1,678.6 million | 18% |
| Operating profit | $137.7 million | $156.5 million | Down $18.8 million |
| Income from continuing operations | $63.8 million | $85.1 million | Down $21.3 million |
| Net income attributable to Koppers | $63.4 million | $85.2 million | Down $21.8 million |
| Diluted EPS | $2.98 | $3.88 | Down $0.90 |
| Adjusted EBITDA | $228.1 million | $223.5 million | 2% |
| Adjusted EBITDA margin | 11.5% | 13.3% | Down 1.8 percentage points |
| Cash flow from operations | $102.3 million | $103.0 million | Down $0.7 million |
| Capital expenditures | $105.3 million | $125.0 million | Down $19.7 million |
Cost of sales increased to 83% of sales from 80%, reflecting inflation in raw materials, fuel, shipping and other operating costs. Operating profit margin was approximately 7.0%, compared with approximately 9.3% in 2021. The effective income tax rate increased to 33.1% from 28.8%, primarily because of a greater proportion of foreign earnings.
Segment Performance
| Segment | 2022 Sales | Sales Change | 2022 Adjusted EBITDA | Margin |
|---|---|---|---|---|
| RUPS | $788.3 million | 8% | $53.6 million | 6.8% |
| PC | $579.9 million | 15% | $75.5 million | 13.0% |
| CMC | $612.3 million | 37% | $99.0 million | 16.2% |
RUPS benefited from pricing, commercial crosstie volumes and railroad bridge services, partly offset by lower utility-pole volumes and lower untreated-crosstie purchasing. PC sales increased on pricing and higher Americas volumes, but profitability declined because higher copper and other raw-material costs more than offset pricing and volume gains. CMC benefited from higher pricing and strong demand amid constrained supply, although foreign exchange, lower volumes and higher costs pressured margins.
Debt and Liquidity
- Total debt was $825.3 million at December 31, 2022, including $500.0 million of 6.00% senior notes due February 2025 and $325.3 million of variable-rate revolving credit borrowings due 2027.
- The company had approximately $412.0 million of unused revolving-credit availability, after covenant and letter-of-credit restrictions.
- Cash and cash equivalents were $33.3 million, down from $45.5 million.
- The total net leverage ratio was 3.3 versus a maximum of 5.0; the cash interest coverage ratio was 5.5 versus a minimum of 2.0. Management stated that the company was in compliance with its debt covenants.
- The revolving facility has a springing maturity if the 2025 Notes are not repurchased, redeemed or refinanced before November 15, 2024.
Material Changes Versus the Prior Comparable Period
- Sales increased 18%, but net income attributable to Koppers decreased 26% because cost inflation, higher interest expense and a higher tax rate outweighed revenue growth.
- Adjusted EBITDA increased only 2%, and the margin contracted by 1.8 percentage points.
- Interest expense increased $4.3 million to $44.8 million as interest rates rose.
- 2022 included a $25.6 million LIFO expense and $6.5 million of mark-to-market commodity-hedging losses. The 2021 period included a $31.2 million gain on asset sales, making year-over-year operating-profit comparisons less favorable.
- The company acquired substantially all assets of Gross & Janes Co. for $15.5 million in cash on October 31, 2022, strengthening untreated-crosstie procurement within RUPS.
- The company sold its Sweetwater, Tennessee utility-pole facility and recorded a $2.5 million gain. No impairment charges were recorded in 2022.
- Share repurchases totaled $23.6 million in cash flow terms, including 172,721 shares repurchased during November 2022. Dividends paid totaled $4.2 million.
Cash Flow, Guidance and Outlook
Operating cash flow of $102.3 million was approximately equal to 2021, but capital expenditures of $105.3 million exceeded operating cash flow. Investing cash usage was $114.8 million, including capital expenditures and the Gross & Janes acquisition. Financing activities provided $4.8 million, primarily because of increased borrowings.
- Management expects 2023 capital expenditures of approximately $105 million, excluding acquisitions, funded by operating cash flow.
- Management expects liquidity to remain adequate for the next twelve months and continues to evaluate refinancing, redemption or open-market purchases of the 2025 Notes.
- RUPS expects modestly higher 2023 crosstie demand, higher utility-pole replacement demand and potential benefits from U.S. infrastructure spending, but faces lumber availability, labor and transportation-cost pressure.
- PC expects ongoing residential treated-wood demand, although remodeling growth is forecast to decelerate through 2023 and copper prices remain a significant margin variable.
- CMC expects generally stable manufacturing, steel, aluminum and carbon-black markets, while coal-tar supply remains constrained by reduced blast-furnace steel capacity.
Risks, Contingencies and Unusual Items
- Major risks include raw-material availability and pricing, inflation, supply-chain disruption, cyclical demand, labor shortages, foreign exchange, variable interest rates and substantial leverage.
- Environmental reserves totaled $10.9 million at year-end. Planned 2023 environmental-control capital expenditures are approximately $16 million.
- The company is involved in environmental, toxic-tort, product-liability and other litigation. It had 27 pending coal-tar-pitch cases involving 51 plaintiffs and had not recorded a reserve because the probability and amount of loss could not be reasonably estimated.
- Environmental indemnification from Beazer East and related parties is material to the company’s exposure; failure of the indemnitors to perform could adversely affect liquidity and results.
- Defined-benefit pension obligations exceeded plan assets by $29.6 million, and 2023 pension contributions are estimated at $7.0 million. The company expects an approximately $20 million pretax pension settlement loss by late 2023 when a U.K. pension obligation is expected to be irrevocably settled.
- Goodwill totaled $294.0 million. No impairment was recorded, but headroom for the Railroad Products and Services and Utility Products reporting units was at the low end of the disclosed 6% to 84% range.
- A 1 percentage-point increase in interest rates would have reduced estimated annual earnings and cash flow by approximately $3.2 million on variable-rate debt. A 10% decline in relevant foreign exchange rates would have reduced estimated earnings by approximately $7.5 million.
Important Facts for Investors to Verify
- Confirm the company’s plan and financing capacity to address the $500 million 2025 Notes, including the revolving facility’s springing-maturity provision.
- Assess whether pricing can continue to offset inflation in lumber, copper, coal tar, fuel, freight and other production inputs.
- Monitor PC margin recovery after the 2022 decline and the effect of copper-hedging settlements and inventory costs.
- Evaluate the sustainability of CMC’s strong 2022 results if carbon-pitch pricing, demand or coal-tar availability normalizes.
- Track operating cash flow relative to planned capital expenditures, pension contributions, dividends, repurchases and debt service.
- Review developments in environmental and coal-tar-pitch litigation and the continued financial capacity of Beazer East to honor indemnification obligations.
- Verify the timing and amount of the expected U.K. pension settlement loss and any resulting cash requirements.