Koppers Holdings Inc. 2014 Form 10-K Summary
Business context and reporting period
Koppers is a global producer of carbon compounds, chemicals, treated wood products and railroad-related services. Operations are organized into Carbon Materials and Chemicals (CMC), Railroad and Utility Products and Services (RUPS), and Performance Chemicals (PC). The filing covers the fiscal year ended December 31, 2014; fourth-quarter results are also presented.
Major 2014 transactions included the January acquisition of the Ashcroft, British Columbia crosstie facility for $29.8 million and the August acquisition of the Osmose wood-preservation and railroad-services businesses for $494.1 million. Osmose contributed $144.4 million of sales from August 15 through year-end.
Financial performance and key metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Net sales | $1,555.0 million | $1,478.3 million | +5% |
| Operating profit | $33.2 million | $100.3 million | -67% |
| Operating margin | 2.1% | 6.8% | -4.7 points |
| Income from continuing operations | $(40.0) million | $40.2 million | Decline |
| Net loss attributable to Koppers | $(32.4) million | $40.4 million | Decline |
| Continuing-operations diluted EPS | $(1.61) | $1.94 | Decline |
| Cash flow from operations | $35.5 million | $117.6 million | Decline |
| Capital expenditures | $83.8 million | $72.9 million | Increase |
| Cash and equivalents | $51.1 million | $82.2 million | Decline |
| Total debt | $850.5 million | $303.1 million | Increase |
FY 2014 cost of sales was 86% of sales, unchanged from 2013. Depreciation and amortization increased to $44.0 million from $29.7 million, while selling, general and administrative expense increased to $116.2 million from $71.7 million, primarily due to Osmose-related costs and integration expenses. Interest expense increased to $39.1 million from $26.8 million.
| Segment | FY 2014 sales | FY 2013 sales | FY 2014 operating profit | FY 2013 operating profit |
|---|---|---|---|---|
| CMC | $833.7 million | $906.1 million | $(5.3) million | $43.9 million |
| RUPS | $597.8 million | $572.2 million | $53.6 million | $58.3 million |
| PC | $123.5 million | — | $1.6 million | — |
Fourth-quarter 2014 net sales were $426.7 million, operating profit was $2.1 million, and the net loss attributable to Koppers was $33.5 million, or $1.63 diluted loss per share. Fourth-quarter results included a $24.3 million income-tax charge related to a legal-entity restructuring project.
Material changes versus the prior comparable period
- Sales increased primarily because of the Osmose and Ashcroft acquisitions, partially offset by weaker CMC pricing and volumes.
- CMC sales declined 8% and operating profit fell to a loss, reflecting lower aluminum-related pitch demand, competitive pricing, lower oil-linked prices for carbon black feedstock, phthalic anhydride and naphthalene, and foreign-exchange effects.
- RUPS sales increased 4%, but operating profit declined 8% because of lower crosstie volumes and raw-material availability. Wet weather also reduced Australian utility-pole sales.
- PC was added as a new segment following the Osmose acquisition. Purchase-accounting amortization and inventory step-up charges reduced its reported operating profit.
- Operating cash flow fell sharply because of the net loss and a $14.0 million increase in inventories as the company rebuilt crosstie inventories.
- Debt increased substantially to finance Osmose. The company ended the year with $553.5 million of variable-rate debt and $297.0 million of fixed-rate debt.
- The company recorded $17.9 million of impairment and restructuring charges, including $13.2 million related to the Uithoorn, Netherlands facility closure and $4.7 million of fixed-asset impairments, principally in Tangshan, China.
Liquidity, debt and outlook
Estimated liquidity at December 31, 2014 was $165.4 million, consisting of $51.1 million of cash, $113.5 million of available revolving credit capacity and $0.8 million under other credit facilities. Approximately $50 million of cash was held by foreign subsidiaries and would incur an estimated $13 million cash tax cost if repatriated.
The company was in compliance with its debt covenants. The fixed-charge coverage ratio was 1.9 versus a 1.10 minimum, and the leverage ratio was 4.63 versus a 5.25 maximum. Debt maturities were concentrated in 2019, including approximately $677.0 million of scheduled maturities.
Management expected 2015 capital expenditures, excluding acquisitions, of approximately $45 million. It expected continued improvement in hardwood availability and crosstie production during 2015. Management also anticipated that the newly acquired Osmose businesses could generate more than $400 million of annual sales at EBITDA margins above the company’s 12% target, although integration and purchase-accounting effects remained significant.
In January 2015, Koppers withdrew a proposed $400 million senior-notes offering and a related tender offer for $300 million of notes due 2019 because of credit-market volatility. In February 2015, the board suspended the quarterly dividend to preserve financial flexibility, repay debt and support stabilization of CMC. The company did not expect to pay dividends for the foreseeable future.
Risks, contingencies and unusual items
- Commodity and raw-material exposure includes coal tar, hardwood, copper, oil-linked chemicals and transportation availability. The company stated that falling oil prices negatively affected CMC during the fourth quarter and into 2015.
- CMC restructuring includes the Uithoorn closure and potential changes to the Chinese Tangshan operation after the adjacent coke batteries are shut down. Remaining operating options include closure, relocation or strategic partnerships.
- Environmental reserves were $7.8 million at year-end, but actual remediation, compliance and litigation costs could materially exceed recorded amounts.
- The company faces toxic-tort, product-liability, environmental and class-action litigation. Several matters had no recorded reserve because loss probability and amount could not reasonably be estimated.
- The company relies on Beazer East indemnification for certain pre-1988 environmental and product liabilities. Failure of the indemnitors to perform could materially affect cash flow and financial condition.
- Defined-benefit pension obligations exceeded plan assets by $46.2 million, and other post-retirement obligations were unfunded at $9.8 million. The company contributed $15.1 million to benefit plans in 2014.
- Foreign-currency translation reduced comprehensive income by $30.6 million in 2014. A one-percentage-point increase in interest rates was estimated to reduce annual earnings and cash flow by approximately $5.5 million on variable-rate debt.
- Copper swaps covered 19.6 million pounds and had a fair-value loss of $6.5 million at year-end; $3.8 million net of tax was recorded in other comprehensive loss.
- Goodwill impairment testing found no impairment, but goodwill increased to $247.2 million and finite-lived intangible assets to $167.7 million following Osmose.
- Management and the auditors concluded that internal control over financial reporting was effective; the acquired Osmose entities were excluded from management’s control assessment because they were acquired during 2014.
Most important facts for investors to verify
- Whether CMC pricing, utilization and margins recover after the 2014 oil-price decline and European restructuring.
- Whether Osmose achieves the projected sales, EBITDA margins and integration synergies without additional restructuring or impairment charges.
- Debt-repayment capacity, 2019 refinancing needs, variable-rate exposure and compliance with leverage and fixed-charge coverage covenants.
- Cash conversion and working-capital trends, particularly the level and turnover of crosstie inventories.
- The timing and financial impact of the Tangshan coke-battery shutdown and any resulting KCCC closure or relocation.
- The sustainability of the dividend suspension and the company’s ability to restore shareholder distributions.
- Potential environmental, toxic-tort and product-liability exposures, including the continued availability of Beazer East indemnification.
- Final purchase-price accounting for Osmose and the resulting amortization, tax and goodwill balances.