The Securities and Exchange Commission (SEC) recently settled a lawsuit against Koppers Holdings for failing to disclose material information related to two non-GAAP financial measures the company highlighted in connection with its debt reduction efforts. The Commission’s order states that Koppers failed to disclose that it achieved its debt reduction goals by withholding a significant amount of past-due payments from suppliers in fiscal 2019.
The order notes that throughout fiscal 2019, Koppers emphasized the importance of reducing debt and used two non-GAAP measures – net debt and net leverage – to measure its progress.
For 2019, Koppers announced plans to reduce net debt by at least $80 million and net leverage to approximately four times trailing twelve-month adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). Although Koppers missed its annual earnings forecast, the company announced that it met its debt reduction targets.
However, Koppers did not disclose that it had significantly delayed overdue supplier payments to meet those targets. At the end of fiscal 2019, Koppers held back outstanding payments to suppliers of approximately $72 million, representing more than 85% of the reported net debt reduction of $81.6 million.
Koppers then paid these past-due invoices in the week following the end of the reporting period by drawing on its revolving credit facility, reversing most of the net debt reduction reported for 2019. As a result, the decrease in Koppers’ net debt was temporary and changed shortly after each 2019 reporting period. These actions were necessary for Koppers to achieve the 2019 year-end debt reduction target it had emphasized to investors.
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