Koppers Holdings Inc. 2021 Form 10-K Summary
Business Context and Reporting Period
Koppers Holdings Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The company is a global provider of treated wood products, wood-preservation chemicals and carbon compounds, operating through Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). The filing is an annual report rather than a quarterly report; the source does not provide separate fourth-quarter financial statements in this summary.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $1,678.6 million | $1,669.1 million | +1% |
| Operating profit | $156.5 million | $156.7 million | Essentially flat |
| Net income | $84.9 million | $121.0 million | -30% |
| Net income attributable to Koppers | $85.2 million | $122.0 million | -30% |
| Diluted EPS | $3.88 | $5.71 | -32% |
| Adjusted EBITDA | $223.5 million | $211.0 million | +6% |
| Adjusted EBITDA margin | 13.3% | 12.6% | +0.7 percentage points |
| Cash flow from operations | $103.0 million | $127.1 million | -19% |
| Capital expenditures | $125.0 million | $69.8 million | +$55.2 million |
Cost of sales increased to 80% of sales from 78%, driven principally by higher raw-material costs and a $28.2 million LIFO expense, compared with a $13.7 million LIFO benefit in 2020. The effective income tax rate was 28.8% in the consolidated financial statements, while the MD&A discussion reports 29.9% for income before taxes; investors should reconcile this presentation difference.
Segment Performance
| Segment | 2021 Sales | Sales Change | 2021 Adjusted EBITDA | Margin |
|---|---|---|---|---|
| RUPS | $729.9 million | -4% | $45.4 million | 6.2% |
| PC | $503.3 million | -4% | $101.8 million | 20.2% |
| CMC | $445.4 million | +16% | $76.3 million | 17.1% |
RUPS profitability declined because of lower untreated crosstie procurement, utility-pole production transitions, preservative shortages, higher fuel costs and pandemic-related inefficiencies. PC EBITDA was slightly higher as pricing, international demand and copper hedging offset lower North American volumes. CMC benefited from higher prices for carbon pitch, distillates and chemicals, partially offset by higher raw-material costs and lower volumes.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents, including restricted cash, were $45.5 million at December 31, 2021; approximately $2.3 million was restricted in escrow.
- Estimated liquidity was $348.4 million, consisting of $43.2 million of cash and $305.2 million of available credit capacity.
- Total debt was $789.1 million, compared with $784.2 million at year-end 2020. Debt consisted principally of $500.0 million of 6% senior notes due 2025 and $287.1 million drawn under the revolving credit facility.
- Net debt was $738.0 million and net leverage was 3.3 times adjusted EBITDA, above management’s long-term target range of 2.0 to 3.0 times.
- The company was in compliance with its debt covenants. The fixed-charge coverage ratio was 1.50 versus a 1.10 minimum; total secured leverage was 1.23 versus a 2.75 maximum; and total leverage was 3.34 versus a 4.75 maximum.
- Management expected 2022 capital expenditures of approximately $95 million, funded by operating cash flow, and stated that liquidity should be adequate for the next twelve months.
Material Changes and Unusual Items
- Operating cash flow declined by $24.1 million because of higher working-capital usage, including increased inventories and receivables.
- Capital expenditures increased substantially to $125.0 million, including investment in the North Little Rock, Arkansas RUPS facility and other growth and modernization projects.
- Cash used in financing activities decreased to $4.0 million from $128.7 million, reflecting significantly lower debt repayments but including $11.5 million of share repurchases.
- The company recorded a $31.2 million gain on asset sales, primarily from the sale of the former Denver crosstie facility and two decommissioned CMC plants. The Denver sale included potential contingent post-closing payments that could not be estimated.
- The 2020 comparison benefited from a $35.8 million after-tax gain on the sale of the KJCC discontinued operation and a $13.3 million CARES Act-related tax benefit. These items contributed significantly to the year-over-year decline in reported net income and EPS.
- Goodwill of $296.0 million was not impaired, although the RUPS reporting units had relatively low impairment headroom of approximately 10% to 65%.
Guidance, Outlook and Management Commentary
- Management anticipated 2022 North American crosstie demand of approximately 19.2 million units, up modestly from 18.8 million in 2021, with Class I railroad demand expected to remain broadly stable.
- Utility-pole demand was expected to be stable to slightly higher, supported by infrastructure and transmission-network investment, although lumber and transportation costs were expected to remain elevated.
- Management expected ongoing demand for residential treated wood but identified inflation, labor and construction costs, rising interest rates and supply-chain delays as potential headwinds.
- The Infrastructure Investment and Jobs Act was viewed as a potential long-term demand driver across utility, railroad, construction and other infrastructure applications.
- In January 2022, Koppers began curtailing operations at its Sweetwater, Tennessee plant as part of efforts to optimize the RUPS footprint.
- The company declared a quarterly dividend of $0.05 per share on February 23, 2022, its first declared dividend since November 2014. Future dividends remain discretionary and subject to debt-covenant and legal restrictions.
Principal Risks and Contingencies
- Raw-material availability and pricing, particularly hardwood, scrap copper, coal tar, chemicals and energy, could pressure margins and production.
- Supply-chain disruptions in 2021, including late chromic-acid deliveries, caused lost sales and higher service costs; similar disruptions may continue.
- The company has substantial leverage and faces refinancing risk as approximately $287.1 million of revolving debt and $500.0 million of senior notes mature in 2024 and 2025, respectively.
- Environmental reserves totaled $10.7 million at year-end 2021, but actual remediation costs could materially exceed current estimates. Expected 2022 environmental-control capital expenditures were approximately $16 million.
- The company is involved in environmental, toxic-tort and product-liability litigation. It had 59 plaintiffs in 31 coal-tar-pitch cases and had not recorded a reserve because loss probability and amount could not be reasonably estimated.
- Koppers is cooperating with an SEC Division of Enforcement inquiry into prior non-GAAP disclosures concerning its 2019 debt-reduction target, net leverage ratio and accounts-payable management. No Wells Notice had been received as of the filing date, but potential outcomes could include fines, sanctions, compliance changes or other remedies.
- Beazer East and Beazer Limited provide important indemnification for certain pre-1988 environmental and product liabilities. Failure of those parties to perform could materially affect Koppers’ liquidity and cash flows.
- The U.K. pension buy-in is expected to be converted to a buy-out in late 2022 or early 2023, when the company expects to recognize an estimated pre-tax pension settlement loss of approximately $22 million.
Investor Verification Checklist
- Reconcile reported net income, EPS and adjusted EBITDA, including the effects of the 2020 KJCC sale, 2021 asset-sale gains, LIFO expense and commodity-hedging adjustments.
- Verify the company’s ability to refinance or repay the 2024 revolving-credit maturity and 2025 senior notes while funding approximately $95 million of planned 2022 capital expenditures.
- Monitor RUPS utilization, crosstie procurement volumes, utility-pole preservative conversions and the Sweetwater plant curtailment.
- Assess whether CMC pricing and margins remain supported if coal-tar availability, steel and aluminum demand, or oil-linked chemical prices weaken.
- Track the SEC inquiry, coal-tar-pitch litigation, Portland Harbor and other environmental matters, and the continuing performance of Beazer indemnification obligations.
- Evaluate goodwill impairment sensitivity, particularly for the Railroad Products and Services and Utility Products reporting units with lower headroom.
- Confirm the timing and financial impact of the expected pension settlement loss and the sustainability of the newly reinstated dividend.