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Item 1. Financial Statements

2023-11-03 compared with 2023-08-03 · 264 added, 353 removed, 697 unchanged (47% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in millions, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions, except share and per share amounts)

Cost of sales

11 unchanged sentences

Net income attributable to Koppers

Earnings (loss) per common share attributable to Koppers common shareholders:

Earnings (loss) per common share attributable to Koppers

common shareholders:

Continuing operations

5 unchanged sentences

Comprehensive income (loss)

Comprehensive income (loss) attributable to noncontrolling interests

Comprehensive income (loss) attributable to

noncontrolling interests

Comprehensive income (loss) attributable to Koppers

3 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in millions, except per share amounts)

September 30,

(Dollars in millions, except share and per share amounts)

Cash and cash equivalents

4 unchanged sentences

Total current assets

Property, plant and equipment, net

Property, plant and equipment, net of accumulated depreciation

of $ 461.9 and $ 462.1

Operating lease right-of-use assets

29 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in millions)

14 unchanged sentences

Other working capital

Net cash (used in) provided by operating activities

Net cash provided by operating activities

Cash (used in) provided by investing activities:

16 unchanged sentences

Cash and cash equivalents at end of period

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash outflow from operating leases

Supplemental disclosure of non-cash investing and financing activities:

8 unchanged sentences

In the opinion of management, all adjustments considered necessary for a fair presentation of Koppers Holdings Inc.’s and its subsidiaries’

(“Koppers”, “Koppers Holdings”, the “Company”, “we”

or “us”) financial position and interim results as of and for the periods presented have been included.

(Koppers, Koppers Holdings, the Company, we or us) financial position and interim results as of and for the periods presented have been included.

All such adjustments are of a normal recurring nature unless disclosed otherwise.

5 unchanged sentences

In March 2022, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No.

2022-01 , “Derivatives and Hedging (Topic 815):

Fair Value Hedging—Portfolio Layer Method.”

2022-01 , Derivatives and Hedging (Topic 815):

Fair Value Hedging—Portfolio Layer Method.

This ASU amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in financial statements.

1 unchanged sentence

Fair Value Measurements

The following table presents the carrying amounts and the related estimated fair values of our financial instruments:

June 30, 2023

The following table presents the estimated fair values and the related carrying amounts of our financial instruments:

September 30, 2023

December 31, 2022

6 unchanged sentences

Represents the broker-quoted cash surrender value on universal life insurance policies.

This asset is classified as Level 2 in the valuation hierarchy and is measured from values received from financial institutions.

This asset is classified as Level 2 in the valuation hierarchy.

Debt –

The fair value of our Term Loan B (as defined in Note 12 –

"Debt") is estimated based on the market prices for the same or similar issuances or on the current rates offered to us for debt of the same remaining maturities (Level 2).

The fair value of our long-term debt is estimated based on the market prices for the same or similar issuances or on the current rates offered to us for debt of the same remaining maturities (Level 2).

The fair value of our Credit Facility (as defined in Note 11 –

Debt) approximates carrying value due to the variable rate nature of this instrument.

As of December 31, 2022, the fair value of our fixed-rate long-term debt was estimated based on the market prices for the same or similar issuances or on the current rates offered to us for debt of the same remaining maturities (Level 2).

See Note 12 –

“Derivative Financial Instruments”, for the fair value of our derivative financial instruments.

Derivative Financial Instruments, for the fair value of our derivative financial instruments.

Comprehensive Income (Loss) and Equity

The following table presents total comprehensive income (loss):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions)

1 unchanged sentence

Currency translation adjustment

Unrealized gain (loss) on cash flow hedges, net of tax

(expense) benefit of $ 1.5 , $ 12.6 , $( 0.4 ) and $ 15.0

Unrecognized pension net loss, net of tax expense of

$ 0.0 , $ 0.0 , $ 0.1 and $ 0.1

Unrealized gain (loss) on cash flow hedges, net of

tax (expense) benefit of $( 0.6 ), $ 4.9 , $( 1.0 ) and $ 21.1

Unrecognized pension net loss, net of tax expense

of $ 0.1 , $ 0.1 , $ 0.2 and $ 0.2

Comprehensive income (loss)

Comprehensive income (loss) attributable to noncontrolling interests

Comprehensive income (loss) attributable to

noncontrolling interests

Comprehensive income (loss) attributable to Koppers

Amounts reclassified from accumulated other comprehensive loss to net income consist of amounts shown for changes in or amortization of unrecognized pension net loss.

This component of accumulated other comprehensive loss is included in the computation of net periodic pension cost as disclosed in Note 11 –

“Pensions and Post-Retirement Benefit Plans.”

Other amounts reclassified from accumulated other comprehensive income (loss) related to derivative financial instruments, net of tax, were $ 0.6 million and $ 11.1 million during the three months ended June 30, 2023 and 2022, respectively, and $ 2.3 million and $ 21.2 million during the six months ended June 30, 2023 and 2022, respectively.

Amounts reclassified from accumulated other comprehensive income (loss) to net income consist of amounts shown for changes in or amortization of unrecognized pension net loss.

This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost as disclosed in Note 10 –

Pensions and Post-Retirement Benefit Plans.

Other amounts reclassified from accumulated other comprehensive income (loss) related to derivative financial instruments, net of tax, were $ 0.2 million and $ 5.8 million during the three months ended September 30, 2023 and 2022, respectively, and $ 2.5 million and $ 27.0 million during the nine months ended September 30, 2023 and 2022, respectively.

The following table presents changes in common stock and treasury stock:

Three Months Ended September 30,

Nine Months Ended September 30,

(Shares in thousands)

Common Stock:

Balance at beginning of period

Issued for employee stock plans

Balance at end of period

Treasury Stock:

Balance at beginning of period

Shares repurchased

Balance at end of period

The following tables present the changes in equity:

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Noncontrolling

Balance at March 31, 2023

Balance at June 30, 2023

Net income (loss)

Dividends ($ 0.06 per share)

Dividends ($ 0.06 per

Issuance of common stock

4 unchanged sentences

Currency translation

Unrealized loss on

Unrealized gain on

cash flow hedges

Unrecognized pension

Balance at June 30, 2023

Balance at September 30,

(Dollars in millions)

3 unchanged sentences

Noncontrolling

Balance at March 31, 2022

Dividends ($ 0.05 per share)

Balance at June 30, 2022

Net income (loss)

Dividends ($ 0.05 per

Issuance of common stock

Repurchases of common

Employee stock plans

5 unchanged sentences

Unrecognized pension

Balance at June 30, 2022

Balance at September 30,

(Dollars in millions)

4 unchanged sentences

Balance at December 31,

Dividends ($ 0.12 per share)

Dividends ($ 0.18 per

Issuance of common stock

7 unchanged sentences

Unrecognized pension

Balance at June 30, 2023

Balance at September 30,

(Dollars in millions)

5 unchanged sentences

Net income (loss)

Dividends ($ 0.10 per share)

Dividends ($ 0.15 per

Issuance of common stock

7 unchanged sentences

Unrecognized pension

Balance at June 30, 2022

On August 2, 2023 , we declared a quarterly dividend of $ 0.06 per common share, payable on September 11, 2023 to shareholders of record as of August 25, 2023 .

Balance at September 30,

On November 2, 2023 , we declared a quarterly dividend of $ 0.06 per common share, payable on December 11, 2023 to shareholders of record as of November 24, 2023 .

Earnings per Common Share

The computation of basic earnings per common share for the periods presented is based upon the weighted average number of common shares outstanding during the periods.

The computation of diluted earnings per common share includes the effect of non-vested nonqualified stock options and restricted stock units assuming such options and stock units were outstanding common shares at the beginning of the period.

The effect of antidilutive securities is excluded from the computation of diluted loss per common share, if any.

The following table sets forth the computation of basic and diluted earnings per common share:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in millions, except share amounts, in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions, except share and per share amounts)

Net income attributable to Koppers

1 unchanged sentence

Income from continuing operations attributable to Koppers

Weighted average common shares outstanding:

Weighted average common shares outstanding (in thousands):

Effect of dilutive securities

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Stock-based Compensation

We have outstanding stock-based compensation awards that were granted under the amended and restated 2005 Long-Term Incentive Plan (the “2005 LTIP”), the 2018 Long-Term Incentive Plan (the “2018 LTIP”) and the 2020 Long-Term Incentive Plan, as amended (the “2020 LTIP”) (collectively, the “LTIP”).

The LTIP provides for the grant to eligible persons of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance awards, dividend equivalents and other stock-based awards, which are collectively referred to as the “awards.”

Restricted Stock Units and Performance Stock Units

Under the LTIP, the board of directors grants restricted stock units and performance stock units to certain employee participants (collectively, the “stock units”).

Compensation expense for non-vested stock units is recorded over the vesting period based on the fair value at the date of grant.

The fair value of restricted stock units is the market price of the underlying common stock on the date of grant.

The fair value of performance stock units is determined using the market price of the underlying common stock on the date of grant for units with a performance condition and a Monte Carlo valuation model for units with a market condition.

For grants to most employees prior to 2023, the restricted stock units vest in four equal annual installments.

The board of directors granted restricted stock units and performance stock units (collectively, the stock units) to certain employee participants in January 2023.

No stock options were granted in 2023.

Starting in 2023, most grants of restricted stock units vest in three years .

Restricted stock units that have one-year vesting periods are also issued under the LTIP to members of the board of directors in connection with annual director compensation and, from time to time, are issued to employees with vesting periods of typically two years or less.

Performance stock units have vesting based upon either a performance condition or a market condition.

Performance stock units granted with a performance condition have a cumulative three-year performance objective based on adjusted EBITDA (see Note 7 –

“Segment Information").

For performance stock units granted with a market condition, which applies to all performance stock unit grants made prior to 2023, the applicable objective is based on our total shareholder return relative to the Standard & Poor’s SmallCap 600 Materials Index and has multi-year performance objectives.

Both types of performance stock units have a three-year period for vesting.

Segment Information).

For performance stock units granted with a market condition, the applicable objective is based on our total shareholder return relative to the Standard & Poor’s SmallCap 600 Materials Index and has multi-year performance objectives.

Both types of performance stock units have a three-year period for vesting, if the applicable performance objectives are achieved.

The number of performance stock units granted represents the target award and participants have the ability to earn between zero and 200 percent of the target award based upon actual performance.

If minimum performance criteria are not achieved, no performance stock units will vest.

We have the discretion to settle the award in cash rather than shares, although we currently expect that all awards will be settled by the issuance of shares.

We calculated the fair value of the performance stock unit awards with a market condition on the date of grant using the assumptions listed below:

January 2023 Grant

January 2022 Grant

For the awards granted in January 2023, target shares for units with market conditions were 78,411 and target shares for units with performance conditions were 188,238 .

We calculated the fair value of the restricted stock units and performance stock units with a performance condition using the market price of the underlying common stock on the date of grant.

We calculated the fair value of the performance stock units with a market condition on the date of grant using a Monte Carlo valuation model and the assumptions listed below:

January 2023 Grant

Grant date price per share of performance

Grant date price per share of performance award

Expected volatility

2 unchanged sentences

Grant date fair value per share

Dividends declared, if any, on our common stock during the period prior to vesting of the stock units are credited at equivalent value as additional stock units and become payable as additional common shares upon vesting.

In the event of termination of employment, other than retirement, death or disability, any non-vested stock units are forfeited, including additional stock units credited from dividends.

In the event of termination of employment due to retirement, death or disability, pro-rata vesting of the stock units over the service period will result.

There are special vesting provisions for the stock units related to a change in control.

The following table shows a summary of the performance stock units as of June 30, 2023:

Performance Period

Market Condition Units

2021 –

2022 –

2023 –

Performance Condition Units

2023 –

The following table shows a summary of the status and activity of non-vested stock units:

4 unchanged sentences

Credited from dividends

Non-vested at June 30, 2023

Stock Options

Stock options to executive officers vest and become exercisable in four equal annual installments.

The stock options have a term of ten years .

In the event of termination of employment, other than retirement, death or disability, any non-vested options are forfeited.

In the event of termination of employment due to retirement, death or disability, pro-rata vesting of the options over the service period will result.

There are special vesting provisions for the stock options related to a change in control.

Compensation expense for non-vested stock options is recorded over the vesting period based on the fair value at the date of grant.

No stock options have been issued in 2023.

We calculated the fair value of stock options on the date of grant using the Black-Scholes-Merton model and the assumptions listed below:

January 2022 Grant

January 2021 Grant

March 2020 Grant

Grant date price per share of stock

Expected dividend yield per share

Expected life in years

Expected volatility

Risk-free interest rate

Grant date fair value per share of option

Prior to February 2022, we had not declared a dividend since 2014.

The dividend yield is based on the Company’s current and prospective dividend rate which calculates a continuous dividend yield based upon the market price of the underlying common stock.

The expected life in years is based on historical exercise data of options previously granted by us.

Expected volatility is based on the historical volatility of our common stock and the risk-free interest rate is based on U.S.

Treasury bill rates for the expected life of the option.

Non-vested at September 30, 2023

The following table shows a summary of the status and activity of stock options:

6 unchanged sentences

Outstanding at December 31, 2022

Outstanding at June 30, 2023

Exercisable at June 30, 2023

Outstanding at September 30, 2023

Exercisable at September 30, 2023

Stock Compensation Expense

The following table presents total stock-based compensation expense recognized under our LTIP and employee stock purchase plan:

Three Months Ended June 30,

Six Months Ended June 30,

The following table presents total stock-based compensation expense recognized:

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions)

3 unchanged sentences

Decrease in net income attributable to Koppers

Intrinsic value of exercised stock options

Cash received from the exercise of stock options

As of June 30, 2023, total future compensation expense related to non-vested stock-based compensation arrangements is expected to total $ 25.4 million and the weighted-average period over which this expense is expected to be recognized is approximately 25 months .

Segment Information

We have three reportable segments:

Railroad and Utility Products and Services ("RUPS"), Performance Chemicals (“PC”) and Carbon Materials and Chemicals ("CMC").

Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC) and Carbon Materials and Chemicals (CMC).

Our reportable segments contain multiple aggregated business units since management believes the long-term financial performance of these business units is affected by similar economic conditions.

4 unchanged sentences

The segment also operates a railroad services business that conducts engineering, design, repair and inspection services for railroad bridges, a business related to the recovery of used crossties and utility poles and a business related to the inspection of utility poles.

Our PC segment develops, manufactures, and markets wood preservation chemicals and wood treatment technologies and services a diverse range of end-markets including infrastructure, residential and commercial construction, and agriculture.

Our PC segment develops, manufactures, and markets wood preservation chemicals and wood treatment technologies and services to a diverse range of end-markets including infrastructure, residential and commercial construction, and agriculture.

Our CMC segment is primarily a manufacturer of creosote, carbon pitch, naphthalene, phthalic anhydride and carbon black feedstock.

3 unchanged sentences

Phthalic anhydride is used in the production of plasticizers, polyester resins and alkyd paints.

Our primary measure of segment profitability is adjusted earnings before interest, income taxes, depreciation, amortization and certain non-cash and/or non-recurring items that do not contribute directly to management’s evaluation of our operating results (as defined by us, “adjusted EBITDA").

These items include impairment, restructuring and plant closure costs, mark-to-market commodity hedging, gain or loss on sale of assets and LIFO inventory effects.

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The timing of revenue recognition results in both billed accounts receivable and unbilled receivables, both classified as accounts receivable, net of allowance within the condensed consolidated balance sheet.

Contract assets of $ 6.8 million and $ 8.3 million are recorded within accounts receivable, net of allowance within the condensed consolidated balance sheet as of June 30, 2023 and December 31, 2022, respectively.

The following table sets forth certain sales and operating data, net of all intersegment transactions, for our segments:

Three Months Ended June 30,

Six Months Ended June 30,

Contract assets of $ 7.8 million and $ 8.3 million are recorded within accounts receivable, net of allowance within the condensed consolidated balance sheet as of September 30, 2023 and December 31, 2022, respectively.

The following table sets forth revenues for significant product lines, net of all intersegment transactions, for our segments:

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions)

Revenues from external customers:

Railroad and Utility Products and Services:

Railroad treated products

Utility poles

Railroad infrastructure services

Total Railroad and Utility Products and Services

Performance Chemicals:

Wood preservative products

Other products

Total Performance Chemicals

Carbon Materials and Chemicals:

Pitch and related products

Phthalic anhydride and other chemicals

Carbon black feedstock and distillates

Other products

Total Carbon Materials and Chemicals

Intersegment revenues:

1 unchanged sentence

Carbon Materials and Chemicals

The following table sets forth certain operating data, net of all intersegment transactions, for our segments:

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions)

Depreciation and amortization expense:

7 unchanged sentences

Items excluded from the determination of segment profit:

Impairment, restructuring and plant closure (costs) benefits

Gain on sale of assets

LIFO expense (1)

Impairment, restructuring and plant closure costs

Gain on sale of assets

Mark-to-market commodity hedging losses

4 unchanged sentences

(1) The LIFO expense adjustment removes the entire impact of LIFO and effectively reflects the results as if we were on a FIFO inventory basis .

The following table sets forth revenues for significant product lines, net of all intersegment transactions, for our segments:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in millions)

Railroad and Utility Products and Services:

Railroad treated products

Utility poles

Railroad infrastructure services

Other products

Performance Chemicals:

Wood preservative products

Other products

Carbon Materials and Chemicals:

Pitch and related products

Phthalic anhydride and other chemicals

Carbon black feedstock and distillates

Other products

The following table sets forth assets and goodwill allocated to each of our segments:

September 30,

(Dollars in millions)

12 unchanged sentences

federal statutory tax rate due to:

September 30,

Federal income tax rate

2 unchanged sentences

State income taxes, net of federal tax benefit

GILTI inclusion, net of foreign tax credits

Change in tax contingency reserves

GILTI inclusion, net of foreign tax credits

Interest expense deduction limitation

Estimated annual effective income tax rate

Income taxes as a percentage of pretax income were 28.9 and 28.1 percent for the three and six months ended June 30, 2023 , and 37.0 and 34.8 percent for the three and six months ended June 30, 2022, respectively.

The effective income tax rates for the periods mentioned were slightly higher than their respective estimated annual effective income tax rates due to various discrete items, which were not material in the aggregate or individually.

Income taxes as a percentage of pretax income were 24.1 and 41.0 percent for the three months ended September 30, 2023 and 2022, respectively, and 26.8 and 37.3 percent for the nine months ended September 30, 2023 and 2022, respectively.

These percentages for the three and nine months ended September 30, 2023 were lower than the estimated annual effective income tax rate due to adjustments to our 2022 US income tax provision primarily resulting from a July 2023 IRS notice that clarified existing tax regulations.

For the three months ended September 30, 2022, the actual percentage was higher than the estimated annual effective income tax rate due to additional tax expense recognized in the quarter as a result of increases in the estimated annual effective income tax rate from the prior period.

For the nine months ended September 30, 2022, the actual percentage was higher than the estimated annual effective income tax rate due to forecasted pre-tax losses of certain foreign subsidiaries not expected to generate a future tax benefit.

During the year, management regularly updates estimates of pre-tax income and income tax expense based on changes in pre-tax income projections by taxable jurisdiction, repatriation of foreign earnings, unrecognized tax benefits and other tax matters.

To the extent that actual results vary from these estimates, the actual annual effective income tax rate at the end of the year could be materially different from the estimated annual effective income tax rate for the six months ended June 30, 2023.

Unrecognized Tax Benefits

7 unchanged sentences

income tax examinations by tax authorities for years prior to 2017.

Unrecognized tax benefits totaled $ 1.5 million and $ 1.4 million as of June 30, 2023 and December 31, 2022 , respectively.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, was approximately $ 1.5 million and $ 1.4 million as of June 30, 2023 and December 31, 2022, respectively.

We recognize interest expense and any related penalties from unrecognized tax benefits in income tax expense.

For the six months ended June 30, 2023 we recognized $ 0.1 million in interest and penalties.

For the year ended December 31, 2022 , we recognized income of $ 0.1 million in interest and penalties.

As of September 30, 2023 and December 31, 2022, unrecognized tax benefits of $ 1.5 million and $ 1.4 million, respectively, would affect the effective tax rate if recognized.

We do not anticipate material changes to the amount of unrecognized tax benefits within the next twelve months.

Inventories, net

The following table presents net inventories:

September 30,

(Dollars in millions)

3 unchanged sentences

Less revaluation to LIFO

Property, Plant and Equipment

The following table presents property, plant and equipment:

(Dollars in millions)

Machinery and equipment

Less accumulated depreciation

Pensions and Post-Retirement Benefit Plans

We maintain a number of defined benefit and defined contribution plans to provide retirement benefits for employees in the United States, as well as employees outside the United States.

These plans are maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974 (“ERISA”) or local law, as applicable.

The defined benefit pension plans generally provide benefits based upon years of service and compensation.

Pension plans are funded except for three domestic non-qualified defined benefit pension plans for certain key executives.

In the United States, all qualified and two of the non-qualified defined benefit pension plans for salaried and hourly employees have been closed to new participants and have been frozen.

3 unchanged sentences

The buy-in policy will be treated as a plan asset going forward until such time as the buy-in policy is converted to a buy-out policy, which is when individual insurance policies will be assigned to each member of the plan and the plan will no longer have legal responsibility to pay the benefits to the members.

The data cleansing effort was substantially completed in late 2022 and by late 2023, the pension obligation is expected to be irrevocably settled.

Upon that event, we will recognize a pre-tax pension settlement loss of approximately $ 20 million.

The defined contribution plans generally provide retirement assets to employee participants based upon employer and employee contributions to the participant’s individual investment account.

We also provide retiree medical insurance coverage to certain U.S.

employees and a life insurance benefit to most U.S.

For salaried employees, the retiree medical and retiree life insurance plans have been closed to new participants.

The data cleansing effort has been substantially completed and we expect to recognize a pre-tax pension settlement loss of approximately $ 20 million upon the pension obligation becoming irrevocably settled sometime in 2024.

The following table provides the components of net periodic benefit cost for the pension plans:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions)

6 unchanged sentences

Interest Rate

September 30,

(Dollars in millions)

5 unchanged sentences

Credit Facility

We have an $ 800.0 million revolving credit agreement (the “Credit Facility”) with a consortium of banks.

We have an $ 800.0 million revolving credit agreement (the Credit Facility) with a consortium of banks.

The Credit Facility also provides for a $ 50.0 million swingline facility and provides for the ability to incur one or more uncommitted incremental revolving or term loan facilities in an aggregate amount of at least $ 730.0 million, subject to applicable financial covenants.

The interest rate on the Credit Facility is variable and may be based on the Secured Overnight Financing Rate (“SOFR”), which is the applicable benchmark for current borrowings, or an alternative benchmark depending on the borrowing type.

The interest rate on the Credit Facility is variable and may be based on the Secured Overnight Financing Rate (SOFR), which is the applicable benchmark for current borrowings, or an alternative benchmark depending on the borrowing type.

Borrowings under the Credit Facility are secured by a first priority lien on substantially all of the assets (excluding real property and other customary assets) of Koppers Inc., Koppers Holdings Inc.

4 unchanged sentences

and its restricted subsidiaries to meet certain financial ratios.

As of June 30, 2023, we had approximately $ 301 million of unused revolving credit availability after restrictions from certain letter of credit commitments and other covenants.

As of June 30, 2023, $ 7.8 million of commitments were utilized by outstanding letters of credit.

As of September 30, 2023, we had approximately $ 350 million of unused revolving credit availability after restrictions from certain letter of credit commitments and other covenants.

As of September 30, 2023, $ 7.8 million of commitments were utilized by outstanding letters of credit.

On April 10, 2023, we entered into Amendment No.

1 to the Credit Facility ("Amendment No.

1") which added a new class of senior secured term loans under the Credit Facility in an aggregate principal amount of $ 400.0 million (the "Term Loan B"), among other modifications.

1 to the Credit Facility which added a new class of senior secured term loans under the Credit Facility in an aggregate principal amount of $ 400.0 million (the Term Loan B), among other modifications.

The Term Loan B was issued at 97 percent of face value, resulting in $ 388.0 million of net proceeds, before debt financing costs.

1 unchanged sentence

The principal balance of the Term Loan B will be repayable in quarterly installments of $ 1.0 million each quarter beginning with the third quarter of 2023, with the balance due at maturity on April 10, 2030 .

During the six months ended June 30, 2023 , we entered into interest rate swap agreements with an aggregate notional value of $ 150.0 million related to the Term Loan B.

The interest rate swaps effectively convert the variable rate to a weighted average fixed rate of 7.45 percent for that portion of the loan.

During the nine months ended September 30, 2023, we entered into interest rate swap agreements with an aggregate notional value of $ 250.0 million.

The interest rate swaps effectively convert the variable rate component of our borrowings to a weighted average fixed rate of 3.63 percent for a portion of our variable rate debt.

This weighted average fixed rate amount excludes the interest rate margin of 4 .00 percent as of September 30, 2023.

All swap agreements expire in April 2027 .

Senior Notes due 2025

Koppers Inc.’s $ 500 million Senior Notes due 2025 (the “2025 Notes”) were unsecured senior obligations of Koppers Inc.

Koppers Inc.’s $ 500 million Senior Notes due 2025 (the 2025 Notes) were unsecured senior obligations of Koppers Inc.

and were guaranteed by Koppers Holdings Inc.

2 unchanged sentences

Subsequent Events

During the third quarter of 2023, we entered into an additional interest rate swap with an aggregate notional value of $ 100.0 million related to the Term Loan B.

As of July 31, 2023, the interest rate swaps collectively convert the variable rate to a weighted average fixed rate of 7.73 percent for the notional value of $ 250.0 million.

All swap agreements expire in April 2027 .

Asset Retirement Obligations

We recognize asset retirement obligations for the removal and disposal of residues;

dismantling of certain tanks required by governmental authorities;

cleaning and dismantling costs for owned railcars;

cleaning costs for leased railcars and barges;

and site demolition, when required by governmental authorities or by contract.

The following table reflects changes in the carrying values of asset retirement obligations:

(Dollars in millions)

Balance at beginning of year

Accretion expense

Revision in estimated cash flows

Cash expenditures

Balance at end of year

We recognize lease obligations and associated right-of-use assets for existing non-cancelable leases.

We have non-cancelable operating leases primarily associated with railcars, office and manufacturing facilities, storage tanks, ships, production equipment and vehicles.

Many of our leases include both lease (e.g., fixed rent) and non-lease components (e.g., maintenance and services).

For certain asset classes such as railcars, storage tanks and ships, we have separated the lease and non-lease components based on the estimated stand-alone price for each component.

For the remaining asset classes, we have elected to account for these components as a single lease component.

In addition, we exclude leases expiring within twelve months from balance sheet recognition.

Many of our leases include one or more options to renew.

We evaluate renewal options at the lease commencement date and regularly thereafter to determine if we are reasonably certain to exercise the option, in which case we include the renewal period in our lease term.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available to determine the present value of the lease payments.

Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Variable lease expense is recognized in the period in which the obligation for those payments is incurred.

The following table presents operating and variable lease costs:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in millions)

Operating lease costs

Variable lease costs

The following table presents information about the amount and timing of cash flows arising from our operating leases as of June 30, 2023:

(Dollars in millions)

Total lease payments

Present value of lease liabilities

Supplemental condensed consolidated balance sheet information related to leases is as follows:

(Dollars in millions)

Operating leases:

Operating lease right-of-use assets

Current operating lease liabilities

Operating lease liabilities

Total operating lease liabilities

Weighted average remaining lease term, in years

Weighted average discount rate

On October 11, 2023, we entered into Amendment No.

2 to the Credit Facility which reduced the interest rate margins applicable to the Term Loan B by 0.50 percent to 3.50 percent with a floor of 0.50 percent, in the case of adjusted Term SOFR Rate or adjusted Daily Simple SOFR loans, among other modifications.

The principal balance of the Term Loan B will be repayable in quarterly installments in an amount equal to 0.25 percent of the principal amount, commencing on January 1, 2024 and on the last business day of each March, June, September and December thereafter, with the balance due at maturity on April 10, 2030 .

Derivative Financial Instruments

We utilize derivative instruments to manage exposures to risks that have been identified, measured and are capable of being mitigated.

The primary risks that we manage by using derivative instruments are commodity price risk associated with copper, foreign currency exchange risk associated with a number of currencies, principally the U.S.

The primary risks that we manage by using derivative instruments are commodity price risk associated with copper, foreign currency exchange risk, principally the U.S.

dollar and Australian dollar, and interest rate risk associated with variable rate borrowings.

Swap contracts on copper are used to manage the price risk associated with forecasted purchases of materials used in our manufacturing processes.

Generally, we will not hedge cash flow exposures for durations longer than 36 months and we have hedged certain volumes of copper through the end of 2024.

We enter into foreign currency forward contracts to manage foreign currency risk associated with our receivable and payable balances in addition to foreign-denominated sales.

We also enter into interest rate swaps to effectively convert portions of our variable interest debt into fixed rate debt.

Our objective in using interest rate swaps is to add stability to interest expense and to manage our exposure to interest rate movements .

Generally, we enter into master netting arrangements with the counterparties and offset net derivative positions with the same counterparties.

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A derivative instrument's fair value is determined using significant other observable inputs, a Level 2 fair value measurement.

We designate certain of our commodity swaps as cash flow hedges of forecasted purchases of commodities.

We also designate our interest rate swaps as cash flow hedges on interest payments.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

Gains and losses on the derivative instruments representing hedge ineffectiveness are recognized in current earnings.

For those commodity swaps where hedge accounting is not elected, the fair value of the commodity swap is recognized as an asset or liability on the condensed consolidated balance sheet and the related gain or loss on the derivative is reported in current earnings.

Swap contracts on copper are used to manage the price risk associated with forecasted purchases of materials used in our manufacturing processes.

Generally, we will not hedge cash flow exposures for durations longer than 36 months and we have hedged certain volumes of copper through the end of 2024.

We designate certain of our commodity swaps as cash flow hedges of forecasted purchases of commodities.

For those commodity swaps where hedge accounting is not elected, the fair value of the commodity swap is recognized as an asset or liability on the condensed consolidated balance sheet and the related unrealized gain or loss on the derivative is reported in current earnings.

These amounts are classified in cost of sales in the condensed consolidated statement of operations.

We enter into foreign currency forward contracts to manage foreign currency risk associated with our receivable and payable balances in addition to foreign-denominated sales.

The fair value associated with forward contracts related to foreign currency that are not designated as hedges are immediately charged to earnings.

These amounts are classified in cost of sales in the condensed consolidated statement of operations and comprehensive income (loss).

See Note 4 –

“Comprehensive Income (Loss) and Equity”, for amounts recorded in other comprehensive income (loss) and for amounts reclassified from accumulated other comprehensive income (loss) into net income.

As of June 30, 2023 and December 31, 2022 , w e had outstanding copper swap contracts of the following amounts:

Units Outstanding (in Pounds)

Net Fair Value - Asset (Liability)

(Amounts in millions)

Cash flow hedges

Contracts where hedge accounting was not

The unrealized loss from contracts where hedge accounting was not elected is as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in millions)

Loss from contracts where hedge accounting was not elected

The net currency units outstanding for contracts were:

(In millions)

Australian Dollars

United States Dollars

These amounts are classified in cost of sales in the condensed consolidated statement of operations.

We enter into interest rate swaps to effectively convert portions of our variable interest debt into fixed rate debt to add stability to interest expense and to manage our exposure to interest rate movements .

We designate our interest rate swaps as cash flow hedges on interest payments.

See Note 4 –

"Debt" for discussion of the interest rate swap agreements, which effectively convert the variable rate to a fixed rate for portions of the Term Loan B.

The interest rate swaps have been designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for us making fixed rate payments over the life of the agreements without exchange of the underlying notional amount.

Comprehensive Income (Loss) and Equity, for amounts recorded in other comprehensive income (loss) and for amounts reclassified from accumulated other comprehensive income (loss) into net income.

The fair value of the outstanding derivative contracts recorded in the balance sheet are as follows:

September 30,

Foreign Currency

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Net asset (liability) on balance sheet

Accumulated other comprehensive (loss) gain,

Accumulated other comprehensive gain (loss),

Foreign Currency

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Accumulated other comprehensive gain, net of tax

We estimate that unrealized gains, net of tax, for commodity price hedging and interest rate swaps of $ 2.1 million will be reclassified from other comprehensive income into earnings over the next twelve months .

Over the next twelve months , we estimate unrealized losses of $ 0.6 million for commodity price hedging as well as unrealized gains of $ 3.2 million for interest rate swaps will be reclassified from accumulated other comprehensive income into earnings.

Copper Swap Contracts

As of the periods presented, we had outstanding copper swap contracts of the following amounts:

Units Outstanding (in Pounds)

Net Fair Value - (Liability) Asset

September 30,

(Amounts in millions)

Cash flow hedges

Contracts where hedge accounting was not

The unrealized loss from copper swaps contracts where hedge accounting was not elected is as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions)

(Loss) from contracts where hedge accounting was not

Foreign Currency Forward Contracts

The net currency units outstanding for contracts were:

September 30,

(In millions)

Australian Dollars

United States Dollars

Interest Rate Swap Contracts

See Note 11 –

Debt for discussion of the interest rate swap agreements, which effectively convert the variable rate to a fixed rate for a portion of our variable rate debt.

Commitments and Contingent Liabilities

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is one of several defendants in lawsuits filed in two states in which the plaintiffs claim they suffered a variety of illnesses (including cancer) as a result of exposure to coal tar pitch sold by the defendants.

There were 51 plaintiffs in 27 cases pending as of June 30, 2023 and December 31, 2022.

As of June 30, 2023 , there were 26 cases pending in the Court of Common Pleas of Allegheny County, Pennsylvania, and one case pending in the Circuit Court of Knox County, Tennessee.

There were 51 plaintiffs in 27 cases pending as of September 30, 2023 and December 31, 2022.

As of September 30, 2023 , there were 26 cases pending in the Court of Common Pleas of Allegheny County, Pennsylvania, and one case pending in the Circuit Court of Knox County, Tennessee.

The plaintiffs in all 27 pending cases seek to recover compensatory damages.

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The other defendants in these lawsuits vary from case to case and include companies such as Beazer East, Inc.

(“Beazer East”), Honeywell International Inc., Graftech International Holdings, UCAR Carbon Company, Inc., and SGL Carbon Corporation.

(Beazer East), Honeywell International Inc., Graftech International Holdings, UCAR Carbon Company, Inc., and SGL Carbon Corporation.

Discovery is proceeding in these cases.

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We have agreements with former owners of certain of our operating locations under which the former owners retained, assumed and/or agreed to indemnify us against certain environmental and other liabilities.

The most significant of these agreements was entered into at Koppers Inc.’s formation on December 29, 1988 (the “Acquisition”).

The most significant of these agreements was entered into at Koppers Inc.’s formation on December 29, 1988 (the Acquisition).

Under the related asset purchase agreement between Koppers Inc.

and Beazer East, subject to certain limitations, Beazer East retained the responsibility for and agreed to indemnify Koppers Inc.

against certain liabilities, damages, losses and costs, including, with certain limited exceptions, liabilities under and costs to comply with environmental laws to the extent attributable to acts or omissions occurring prior to the Acquisition and liabilities related to products sold by Beazer East prior to the Acquisition (the “Indemnity”).

Beazer Limited, the parent company of Beazer East, unconditionally guaranteed Beazer East’s performance of the Indemnity pursuant to a guarantee.

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Qualified expenditures under the Indemnity are not subject to a monetary limit.

Qualified expenditures under the Indemnity include (i) environmental cleanup liabilities required by third parties, such as investigation, remediation and closure costs, relating to pre-December 29, 1988 (“Pre-Closing”) acts or omissions of Beazer East or its predecessors;

Qualified expenditures under the Indemnity include (i) environmental cleanup liabilities required by third parties, such as investigation, remediation and closure costs, relating to pre-December 29, 1988 (Pre-Closing) acts or omissions of Beazer East or its predecessors;

(ii) environmental claims by third parties for personal injuries, property damages and natural resources damages relating to Pre-Closing acts or omissions of Beazer East or its predecessors;

(iii) punitive damages for the acts or omissions of Beazer East and its predecessors without regard to the date of the alleged conduct and (iv) product liability claims for products sold by Beazer East or its predecessors without regard to the date of the alleged conduct.

The indemnification period ended July 14, 2019 (the “Claim Deadline”) and Beazer East may now tender certain third-party claims described in sections (i) and (ii) above to Koppers Inc.

The indemnification period ended July 14, 2019 (the Claim Deadline) and Beazer East may now tender certain third-party claims described in sections (i) and (ii) above to Koppers Inc.

However, to the extent the third-party claims described in sections (i) and (ii) above were tendered to Beazer East by the Claim Deadline, Beazer East will continue to be required to pay the costs arising from such claims under the Indemnity.

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One site currently owned and operated by Koppers Inc.

in the United States is listed on the National Priorities List promulgated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”).

Currently, at the properties acquired from Beazer East (which includes the National Priorities List site and all but one of the sites permitted under the Resource Conservation and Recovery Act (“RCRA”)), a significant portion of all investigative, cleanup and closure activities are being conducted and paid for by Beazer East pursuant to the terms of the Indemnity.

in the United States is listed on the National Priorities List promulgated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA).

Currently, at the properties acquired from Beazer East (which includes the National Priorities List site and all but one of the sites permitted under the Resource Conservation and Recovery Act (RCRA)), a significant portion of all investigative, cleanup and closure activities are being conducted and paid for by Beazer East pursuant to the terms of the Indemnity.

In addition, other of Koppers Inc.’s sites are or have been operated under RCRA and various other environmental permits, and remedial and closure activities are being conducted at some of these sites.

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Domestic Environmental Matters.

has been named as one of the potentially responsible parties (“PRPs”) at the Portland Harbor CERCLA site located on the Willamette River in Oregon.

has been named as one of the potentially responsible parties (PRPs) at the Portland Harbor CERCLA site located on the Willamette River in Oregon.

operated a coal tar pitch terminal near the site.

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believes it is a de minimis contributor at the site.

The EPA issued its Record of Decision (“ROD”) in January 2017 for the Portland Harbor CERCLA site.

The EPA issued its Record of Decision (ROD) in January 2017 for the Portland Harbor CERCLA site.

The selected remedy includes a combination of sediment removal, capping, enhanced and monitored natural recovery and riverbank improvements.

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is a de minimis party at this site.

We have accrued the estimated costs of participating in the PRP group at the Portland Harbor and Newark Bay CERCLA sites and estimated de minimis contributor settlement amounts at the sites totaling $ 4.0 million as of June 30, 2023.

The actual cost could be materially higher as there has not been a determination of how those costs will be allocated among the PRPs at the sites.

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There are two plant sites related to the Performance Chemicals business and one plant site related to the Utility and Industrial Products business in the United States where we have recorded environmental remediation liabilities for soil and groundwater contamination which occurred prior to our acquisition of the businesses.

As of June 30, 2023, our estimated environmental remediation liability for these acquired sites totals $ 3.9 million.

As of September 30, 2023, our estimated environmental remediation liability for these acquired sites totals $ 3.8 million.

Foreign Environmental Matters .

There is one plant site related to the Performance Chemicals business located in Australia where we have recorded an environmental remediation liability for soil and groundwater contamination which occurred prior to the acquisition of the business.

As of June 30, 2023, our estimated environmental remediation liability for the acquired site totals $ 1.2 million.

As of September 30, 2023 , our estimated environmental remediation liability for the acquired site totals $ 1.2 million.

Environmental Reserves Rollforward.

The following table reflects changes in the accrual for environmental remediation.

As of June 30, 2023 and December 31, 2022, $ 2.5 million is classified as current liabilities .

A total of $ 2.4 million and $ 2.5 million are classified as current liabilities as of September 30, 2023 and December 31, 2022 , respectively.

September 30,

(Dollars in millions)

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The exclusion of certain items permits evaluation and a comparison between periods of results for business operations, and it is on this basis that our management internally assesses our performance.

In addition, our board of directors and executive management team use adjusted EBITDA as a performance measure under the company’s annual incentive plans for certain performance share units granted to management.

Adjusted EBITDA is the primary measure of profitability we use to evaluate our businesses.

In addition, adjusted EBITDA is the primary measure used to determine the level of achievement of management's short-term incentive goals and related payout, as well as one of the measures used to determine performance and related payouts for certain performance share units granted to management.

Although we believe that these non-GAAP financial measures enhance investors’

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These other adjustments are items that we believe are not representative of underlying business performance.

Adjusted items typically include certain expenses associated with impairment, restructuring and plant closure costs, significant gains and losses on asset disposals or business combinations, LIFO and mark-to-market commodity hedging and other unusual items.

We adjust for LIFO to reflect operating results on a FIFO basis.

Adjusted EBITDA is the primary measure of profitability we use to evaluate our businesses.

Refer to Note 7 –

“Segment Information”

for reconciliations from adjusted EBITDA to net income on a consolidated basis.

Adjusted items typically include certain expenses associated with impairment, restructuring and plant closure costs, significant gains and losses on asset disposals or business combinations, LIFO, mark-to-market commodity hedging and other unusual items.

The LIFO expense adjustment removes the entire impact of LIFO and effectively reflects the results as if we were on a FIFO inventory basis.

See Adjusted EBITDA Reconciliation in the below section for reconciliations from adjusted EBITDA to net income on a consolidated basis.

Trend Overview

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Historically, North American demand for crossties had been in the range of 18 million to 22 million crossties annually.

According to the Railway Tie Association (“RTA”), total crosstie installations in 2022 were down 1.9 percent from the prior year, to approximately 18.4 million, of which 14.8 million were for Class I railroads.

According to the Railway Tie Association (RTA), total crosstie installations in 2022 were down 1.9 percent from the prior year, to approximately 18.4 million, of which 14.8 million were for Class I railroads.

In the aggregate, spending by railroads is projected to be somewhat higher in 2023 in nominal terms;

however, it will be marginally lower in real terms due to higher input costs for labor, crossties and other materials.

In terms of the supply of crossties, the demand for pallet lumber has eased, which has improved crosstie availability, and the price has moderated on slowing consumer spending.

As a result of the weakening demand for board roads and mats, availability for crosstie production by sawmills is improving which is encouraging for the railroads as their inventory-to-sales ratio has been depressed for many months, mainly because of low crosstie inventories.

The demand for pallet lumber has eased, the price has moderated on slowing consumer spending and the demand for board roads and mats has weakened, which have all contributed to improved crosstie availability.

Nevertheless, the RTA demand forecast predicts slightly lower crosstie demand of 1.3 percent in 2023, or total industry demand of 18.2 million crossties.

For 2024, the economy is estimated to grow and crosstie demand is expected to recover, with an increase of 2.4 percent, or total industry demand of 18.6 million crossties.

According to the Association of American Railroads (“AAR”), compared to the prior year, U.S.

carload traffic for the year-to-date period through June 30, 2023 was up 0.6 percent and intermodal units were down 10.3 percent.

According to the Association of American Railroads (AAR), compared to the prior year, U.S.

carload traffic for the year-to-date period through September 30, 2023 was up 0.3 percent and intermodal units were down 8.2 percent.

For 2023 to-date, total combined U.S.

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Rail intermodal is largely consumer goods, and recent spending on goods has cooled considerably.

On the other hand, rail carloads of industrial products are performing much better, reflecting relative strength in automotive, mineral extraction, and other sectors.

Conversely, rail carloads of industrial products are performing much better, reflecting relative strength in mineral extraction and other sectors.

With respect to our utility products business, the installed base for wood distribution poles in the United States is approximately 150 million and nearly half are 40 years old.

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Concurrent with the decision to close the Denver facility, we announced our plan to modernize and upgrade parts of our treating network, specifically at our facility in North Little Rock, Arkansas, which has been partly funded through proceeds from the sale of non-core assets, including the Denver facility.

This modernization was substantially complete by the end of the third quarter of 2023.

Performance Chemicals

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Product demand for our PC business has historically been closely associated with consumer spending on home repair and remodeling projects in North America, and therefore, trends in existing home sales serve as a leading indicator.

According to the National Association of Realtors® (“NAR”), total existing-home sales in June declined 3.3 percent from May and on a year-over-year basis, sales were lower by 18.9 percent.

While existing-home sales declined, pending home sales in June registered a modest increase of 0.3 percent from the prior month.

Home prices have held firm in most parts of the country as housing inventory remains low, and the limited supply is leading to multiple-offer situations, with one-third of homes being sold above the list price in June.

According to the National Association of Realtors (NAR), total existing-home sales in September declined 2.0 percent from August and on a year-over-year basis, sales were lower by 15.4 percent.

Existing-home sales declined and pending home sales in August registered a decrease of 7.1 percent from the prior month.

The NAR projects that the market can easily absorb a doubling of housing inventory and if mortgage rates and inventory move favorably, pent-up demand could be realized in the near term.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, after more than a decade of continuous growth, annual expenditures for improvements and repairs to owner-occupied homes are expected to decline at an accelerating rate through the first half of 2024.

The LIRA projects that year-over-year spending on homeowner improvements and maintenance will decline by 2.7 percent through the first quarter of 2024 and by 5.9 percent through mid-2024.

Home remodeling activity continues to face strong headwinds from high interest rates, softening house price appreciation, and sluggish home sales.

Annual spending on home improvements and repairs is expected to decrease from $486 billion through the second quarter of this year to $457 billion over the coming twelve months.

Reductions in household moves will likely result in a decline in the remodeling and repair activity;

however, the magnitude of the impact may be offset if homeowners with ultra-low mortgage rates continue to “upgrade-in-place”

and renovate their current homes.

According to the Leading Indicator of Remodeling Activity (LIRA) reported by the Joint Center for Housing Studies of Harvard University, a moderate decline in annual spending on improvements and repairs for owner-occupied homes is expected over the next year.

The LIRA predicts a 7.7 percent decrease in annual homeowner expenditures for home renovations and maintenance through the third quarter of 2024.

The housing market’s continued weakness, attributed to high interest rates and a limited supply of existing homes, is projected to impact remodeling activity in the coming year.

The annual spending on home improvements and repairs is expected to drop from $489 billion to $452 billion over the next four quarters.

Reductions in household moves will likely result in a decline in remodeling and repair activity in 2024, offset by homeowners deciding to renovate their current homes.

In addition, since pressure-treated lumber prices are approximately 50-60 percent lower year-over-year at big-box retailers, outdoor residential projects are significantly more affordable than this time a year ago.

The Conference Board Consumer Confidence Index® increased in June to 110.1 and again in July to 117.0, which is the second straight month of gains and reflects the highest confidence level since July 2021.

Despite rising interest rates, consumers are more upbeat, likely reflecting softening inflation as well as a favorable outlook on a labor market that continues to outperform expectations.

As a result, consumer expectations for the next six months improved materially, indicating greater confidence about future business conditions and job availability.

In September 2023, the Conference Board’s Consumer Confidence Index saw a decrease for the second month, landing at 103.0 from a revised 108.7 in August.

This decline in consumer confidence was widespread among consumers with increasing focus on rising prices, political instability, and sustained higher interest rates.

Conversely, expectations among economists have recently indicated a lesser likelihood of a recession in the short-term.

Carbon Materials and Chemicals

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For the external markets served by our CMC business, we anticipate a slowdown in the near-term in manufacturing overall as well as in the steel, aluminum and carbon black industries.

The June 2023 S&P Global Mobility (formerly IHS Markit Automotive Group) forecast sees global light-vehicle sales increasing by 5.6 percent from the prior year and reaching 83.6 million units globally in 2023, recovering from sales declines in 2021 and 2022 that were driven by production constraints rather than by a lack of consumer demand or willingness to buy.

The October 2023 S&P Global Mobility report noted approximately 150,000 units of production have been lost due to plant strikes particularly in the United States.

The near-term outlook remains unclear with continued strikes and auto consumers facing vehicle affordability issues (rising interest rates, credit tightening and high vehicle prices).

Inventory levels, which will continue to be closely monitored as long as the United Auto Workers strike persists, will be pressured through November and December.

The S&P Global Mobility forecast saw global light-vehicle sales increasing by 5.6 percent from the prior year and reaching 83.6 million units globally in 2023, recovering from sales declines in 2021 and 2022 that were driven by production constraints rather than by a lack of consumer demand or willingness to buy.

As for global light-vehicle production, the output is forecast to reach 85.6 million units in 2023 as supply chain issues are approaching a more normalized situation.

However, the near-term outlook remains unclear as the new vehicle sales environment will be defined in the second half of the year by auto consumers pressured by potential vehicle affordability issues (rising interest rates, credit tightening, high vehicle prices) and production advances that could build back inventory more quickly than anticipated.

Seasonality and Effects of Weather on Operations

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Results of Operations –

Comparison of Three Months Ended June 30, 2023 and 2022

Comparison of Three Months Ended September 30, 2023 and 2022

Consolidated Results

Net sales are summarized by segment in the following table:

Three Months Ended June 30,

Three Months Ended September 30,

(Dollars in millions)

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RUPS net sales increased largely due to a net $20.3 million of pricing increases across multiple markets, particularly for crossties and domestic utility poles.

Volume increases for crossties and utility poles also contributed to the increase.

Volume increases for crossties and higher activity in our crosstie recovery business also contributed to the increase.

These increases were partly offset by lower activity in our other maintenance of way businesses and volume decreases in our Australian utility pole business.

Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $0.4 million, mainly from our Australian utility pole business.

PC net sales increased as a result of global price increases of $21.0 million, or 14 percent in the current period, particularly in the Americas for our copper-based preservatives, along with volume increases of eight percent globally driven by the Americas and offset by Europe and Australasia.

PC net sales increased as a result of global price increases of $15.7 million, or 10.3 percent in the current year period, particularly in the Americas for our copper-based preservatives.

Volumes increased by 7.1 percent globally, including a 10.2 percent increase in the Americas, partly offset by volume decreases in Australasia.

Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $0.3 million.

CMC net sales increased mainly due to $7.2 million of higher sales prices, primarily for carbon pitch driven by strong end markets and constrained raw material supply, along with volume increases of refined tar in North America.

These increases were partly offset by price decreases for certain other products and volume decreases of phthalic anhydride in North America.

Foreign currency changes compared to the prior year period from our international markets had an unfavorable impact on sales in the current year period of $1.3 million.

Cost of sales as a percentage of net sales was 81 percent for the quarter ended June 30, 2023, compared to 83 percent in the prior year period as global price increases have outpaced increased raw material and operating costs on a consolidated basis and across most of our businesses.

CMC net sales decreased mainly due to $24.3 million of lower sales prices across most products, including carbon pitch where prices were down ten percent globally, along with $25.9 million of lower volumes of carbon pitch and phthalic anhydride.

The decreases in carbon pitch prices and volumes were driven by reduced market demand in the current year period.

These decreases were partly offset by volume increases for refined tar and carbon black feedstock.

Foreign currency changes compared to the prior year period from our international markets had a favorable impact on sales in the current year period of $1.5 million.

Cost of sales as a percentage of net sales was 80 percent, compared to 82 percent in the prior year period as global price increases have outpaced increased raw material and operating costs on a consolidated basis and across most of our businesses.

Significant items impacting cost of sales in individual operating segments are discussed as part of "Segment adjusted EBITDA and adjusted EBITDA margin" herein.

Selling, general and administrative expenses for the quarter ended June 30, 2023 were $3.1 million higher when compared to the prior year period due mainly to an increase in compensation related costs along with an increase in travel, entertainment and advertising.

These increases were partly offset by a reduction in professional services and insurance costs.

Interest expense for the quarter ended June 30, 2023 was $9.2 million higher when compared to the prior year period due to higher interest rates and a $1.6 million increase in write-off of debt issuance costs related to the repayment of the 2025 Notes as described in Note 12 –

Income tax expense for the quarter ended June 30, 2023 increased due to higher income from continuing operations before income taxes when compared to the prior year period.

This increase was partially offset by a lower estimated annual effective income tax rate when compared to the prior year period.

The higher effective tax rate in the prior year period was driven by higher estimated non-deductible expenses, notably interest expense, as discussed in Note 8 –

"Income Taxes."

Depreciation and amortization charges were $2.6 million lower when compared to the prior year period as the prior year included an increase in asset retirement obligation within our European CMC business.

Selling, general and administrative expenses were $7.1 million higher when compared to the prior year period due mainly to an increase in compensation related costs along with an increase in insurance, consulting and travel expenses.

Interest expense was $7.6 million higher when compared to the prior year period due primarily to higher interest rates.

Income tax expense decreased by $4.9 million when compared to the prior year period due to a lower estimated annual effective income tax rate, which is mainly due to the geographical mix of earnings and interest expense deduction limitations in the prior year, in addition to favorable return to provision adjustments in 2023.

Segment Results

Segment adjusted EBITDA and adjusted EBITDA margin is summarized in the following table:

Three Months Ended June 30,

Three Months Ended September 30,

(Dollars in millions)

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Carbon Materials and Chemicals

RUPS adjusted EBITDA increased due primarily to net sales price increases and $6.5 million from improved plant utilization, partly offset by higher raw material and operating costs of $23.2 million in our crosstie, utility pole and maintenance of way businesses in the current year period.

PC adjusted EBITDA increased as renegotiated customer contracts allowed us to increase prices to recapture prior year raw material and other operating cost increases, along with a global volume increase for wood treatment preservatives.

These price increases more than offset $12.5 million of raw material cost increases from the prior year period.

CMC adjusted EBITDA decreased due to an increase of $17.2 million in raw material costs, particularly in Europe and North America, partly offset by higher pricing and higher volumes, which also improved plant utilization in North America compared to the prior year period.

RUPS adjusted EBITDA increased due primarily to net sales price increases and $3.8 million from improved plant utilization, which combined to more than offset higher raw material, operating and selling, general and administrative expenses of $14.3 million.

The domestic utility pole businesses' increased sales, operating profit and adjusted EBITDA contributed to the strong results.

PC adjusted EBITDA increased as renegotiated customer contracts allowed us to increase prices to recapture the higher raw material and other operating costs we began experiencing last year, along with a volume increase for wood treatment preservatives in the Americas.

These price increases more than offset higher raw material costs of $3.9 million and increased selling, general and administrative expenses.

CMC adjusted EBITDA decreased due to price and volume decreases, partly offset by a $4.2 million reduction in raw material costs and operating expense, particularly in North America, along with $2.3 million of insurance proceeds recognized in the current year period.

Results of Operations –

Comparison of Six Months Ended June 30, 2023 and 2022

Comparison of Nine Months Ended September 30, 2023 and 2022

Consolidated Results

Net sales are summarized by segment in the following table:

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in millions)

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Volume increases for crossties and higher activity in our crosstie recovery business also contributed to the increase.

These increases were partly offset by lower activity in our other maintenance of way businesses and volume decreases in our Australian utility pole business.

Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $2.0 million, mainly from our Australian utility pole business.

PC net sales increased as a result of global price increases of $46.0 million, or 16 percent in the current year period, particularly in the Americas for our copper-based preservatives, along with $16.2 million of volume increases in the Americas.

These increases were offset, in part, by $15.8 million of volume decreases for wood treatment preservatives across most international markets, primarily Europe and Australasia.

PC net sales increased as a result of global price increases of $61.4 million, or 14 percent in the current year period, particularly in the Americas for our copper-based preservatives.

Volumes increased by 2.6 percent globally, including an 8.1 percent increase in the Americas, partly offset by volume decreases in Australasia and Europe.

Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $4.7 million.

CMC net sales increased due mainly to $50.9 million of higher sales prices, primarily for carbon pitch driven by strong end markets and constrained raw material supply, partly offset by volume decreases of phthalic anhydride and carbon pitch.

CMC net sales decreased due mainly to $32.3 million of volume decreases, primarily carbon pitch and phthalic anhydride, partly offset by volume increases for refined tar and carbon black feedstock.

Higher sales prices added $23.5 million, primarily for carbon pitch driven by strong end markets and constrained raw material supply in the first half of the year, partly offset by lower pricing across other product lines.

Foreign currency changes compared to the prior year period from our international markets had an unfavorable impact on sales in the current year period of $2.3 million.

Cost of sales as a percentage of net sales was 80 percent for the six months ended June 30, 2023, compared to 82 percent in the prior year period as global price increases have outpaced increased raw material and operating costs on a consolidated basis and across most of our businesses.

Significant items impacting cost of sales in individual operating segments are discussed as part of "Segment adjusted EBITDA and adjusted EBITDA margin" herein.

Gain on sale of assets for the six months ended June 30, 2023 was related to a sale of assets of our former coal tar distillation facility located in China while the gain on sale of assets in the prior year was related to the sale of our utility pole treating facility in Sweetwater, Tennessee.

Selling, general and administrative expenses for the six months ended June 30, 2023 were $5.6 million higher when compared to the prior year period due mainly to an increase in compensation related costs along with an increase in travel, entertainment and advertising.

Gain on sale of assets for 2023 was related to the sale of our former coal tar distillation facility located in China while the prior year gain was related to the sale of our utility pole treating facility in Sweetwater, Tennessee.

Selling, general and administrative expenses were $12.7 million higher when compared to the prior year period due mainly to an increase in compensation related costs along with an increase in travel and company meeting expenses.

These increases were partly offset by a reduction in professional services and insurance costs.

Interest expense for the six months ended June 30, 2023 was $13.4 million higher when compared to the prior year period due to higher interest rates and a $1.6 million increase in write-off of debt issuance costs related to the repayment of the 2025 Notes as described in Note 12 –

Income tax expense for the six months ended June 30, 2023 increased due to higher income from continuing operations before income taxes when compared to the prior year period.

This increase was partially offset by a lower estimated annual effective income tax rate when compared to the prior year period.

The higher effective tax rate in the prior year period was driven by higher estimated non-deductible expenses, notably interest expense, as discussed in Note 8 –

"Income Taxes."

Interest expense was $21.0 million higher when compared to the prior year period due primarily to higher interest rates and a $1.6 million increase in write-off of debt issuance costs related to the repayment of the 2025 Notes as described in Note 11 –

Income tax expense decreased by $1.6 million when compared to the prior year period due to a lower estimated annual effective income tax rate, which is mainly due to the geographical mix of earnings and interest expense deduction limitations in the prior year, in addition to favorable return to provision adjustments in 2023.

This is offset by a higher amount of income from continuing operations before income taxes when compared to the prior year period.

Segment Results

Segment adjusted EBITDA and adjusted EBITDA margin is summarized in the following table:

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in millions)

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Carbon Materials and Chemicals

RUPS adjusted EBITDA increased due primarily to net sales price increases and $10.4 million from improved plant utilization, partly offset by higher raw material and operating costs of $44.4 million in our crosstie, utility pole and maintenance of way businesses in the current year period.

PC adjusted EBITDA increased as renegotiated customer contracts allowed us to increase prices to recapture prior year raw material and other operating cost increases, along with a 7.1 percent volume increase in the Americas for wood treatment preservatives.

These price increases more than offset $25.4 million of raw material and selling, general and administrative cost increases from the prior year period.

CMC adjusted EBITDA decreased due to an increase of $60.5 million in raw material costs, particularly in North America and Europe, partly offset by higher pricing globally and lower operating costs in North America compared to the prior year period.

RUPS adjusted EBITDA increased due primarily to net sales price increases and $14.9 million from improved plant utilization, which combined to more than offset higher raw material, operating and selling, general and administrative expenses of $61.9 million.

The domestic utility pole businesses' increased sales, operating profit and adjusted EBITDA contributed to the strong results.

PC adjusted EBITDA increased as renegotiated customer contracts allowed us to increase prices to recapture the higher raw material and other operating costs we began experiencing last year, along with an 8.1 percent volume increase in the Americas for wood treatment preservatives.

These price increases more than offset higher raw material costs of $26.8 million and increased selling, general and administrative expenses.

CMC adjusted EBITDA decreased due to an increase of $52.4 million in raw material costs, particularly in North America and Europe, along with volume decreases, partly offset by higher pricing globally and lower operating costs in North America compared to the prior year period as well as $2.3 million of insurance proceeds recognized in the current year period.

Foreign currency changes from our international markets had an unfavorable impact on profitability in the current year period of $1.4 million.

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The following table reconciles net income to adjusted EBITDA on a consolidated basis:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions)

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Adjustments to arrive at adjusted EBITDA:

Impairment, restructuring and plant closure costs (benefits) (1)

(Gain) on sale of assets

LIFO expense (1)

Impairment, restructuring and plant closure costs (2)

(Gain) on sale of assets

Mark-to-market commodity hedging losses

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Adjusted EBITDA

(1) Includes costs associated with restructuring, sales and closures of certain RUPS and CMC facilities.

(1) The LIFO expense adjustment removes the entire impact of LIFO and effectively reflects the results as if we were on a FIFO inventory basis.

Net cash used in operating activities for the six months ended June 30, 2023 was $2.1 million compared to net cash provided by operating activities of $21.2 million in the prior year.

The decrease is primarily the result of higher working capital usage of $36.6 million, which more than offset the cash impact of the increase in net income in the current year period.

The increase in working capital during the current year period is consistent with higher costs combined with a reduction in accounts payable as a result of the timing of purchases and related vendor payments.

Net cash used in investing activities for the six months ended June 30, 2023 was $60.6 million compared to net cash used in investing activities of $51.1 million in the prior year period driven primarily by capital expenditures.

(2) Includes costs associated with restructuring, sales and closures of certain RUPS and CMC facilities.

Net cash provided by operating activities for the nine months ended September 30, 2023 was $79.5 million compared to $67.4 million in the prior year.

The increase was primarily the result of higher net sales, partly offset by higher costs and unfavorable changes in working capital consistent with higher costs.

Net cash used in investing activities for the nine months ended September 30, 2023 was $88.3 million compared to $75.1 million in the prior year driven primarily by capital expenditures.

Capital expenditures for both periods include increased investment in growth projects, such as the expansion of our RUPS facility in North Little Rock, Arkansas and a yield enhancement project at our CMC facility in Nyborg, Denmark.

Net cash provided by financing activities for the six months ended June 30, 2023 was $78.6 million compared to $28.5 million of net cash provided by financing activities in the prior year.

Cash provided by financing activities in the six months ended June 30, 2023 reflected net borrowings of $90.1 million partly offset by payments of debt issuance costs, repurchases of common stock and dividends paid.

The cash provided by financing activities in the prior year period primarily reflected net borrowings of debt of $53.0 million partly offset by repurchases of common stock, payments of debt issuance costs and dividends paid.

Net cash provided by financing activities for the nine months ended September 30, 2023 was $31.6 million compared to $12.3 million in the prior year.

The primary source of financing cash flows was net borrowings of $46.9 million and the primary uses of financing cash flows were repurchases of common stock, payments of debt issuance costs and dividends paid.

In the prior year, the primary source of financing cash flows was net borrowings of $37.9 million and the primary uses of financing cash flows were repurchases of common stock, payments of debt issuance costs and dividends paid.

Liquidity and Capital Resources

Our Credit Facility is described in Note 11 –

“Debt.”

Restrictions on Dividends to Koppers Holdings

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to make dividend payments to Koppers Holdings if certain conditions are met, including, among other permitted dividend payments, the ability to fund the payment of regularly scheduled dividends on and repurchases of Koppers Holdings common stock, in an aggregate amount per year not to exceed the greater of $50.0 million in any fiscal year, with unused amounts in any fiscal year being carried over to the succeeding fiscal year, and 6.0 percent of market capitalization.

As of June 30, 2023, the maximum amount available under the Credit Facility considering restrictions from debt covenants was approximately $301 million.

As of December 31, 2022, the maximum amount available under the Credit Facility was approximately $412 million.

As of September 30, 2023, the maximum amount available under the Credit Facility considering restrictions from debt covenants was approximately $350 million.

The maximum amount available under the Credit Facility is increased by the amount of cash held by certain subsidiaries as defined by the Credit Facility.

Our need for cash in the next twelve months relates primarily to contractual obligations which includes debt service, pension plan funding, purchase commitments and operating leases, as well as working capital, capital maintenance programs, the funding of plant consolidation and rationalizations, dividends and share repurchases.

We may also use cash to pursue other potential strategic acquisitions or voluntary pension plan contributions.

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Debt will fluctuate throughout any operating period based upon the timing of receipts from customers and payments to vendors.

As of June 30, 2023, approximately 90 percent of accounts payable was current and 10 percent was 1-30 days past due.

As of September 30, 2023, approximately 90 percent of accounts payable was current and 10 percent was 1-30 days past due.

As of December 31, 2022, approximately 80 percent of accounts payable was current and 20 percent was 1-30 days past due.

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The total net leverage ratio, calculated as of the last day of each fiscal quarter, is not permitted to exceed 5.0.

The total net leverage ratio as of June 30, 2023 was 3.3.

The total net leverage ratio as of September 30, 2023 was 3.1.

The cash interest coverage ratio, calculated as of the last day of each fiscal quarter, is not permitted to be less than 2.0.

The cash interest coverage ratio as of June 30, 2023 was 4.7.

The cash interest coverage ratio as of September 30, 2023 was 4.2.

We are currently in compliance with all covenants governing the Credit Facility.

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however, we currently expect that our net cash flows from operating activities and funds available from our Credit Facility will be sufficient to provide for our needs over at least the next twelve months.

Effective during the first quarter of 2024, the total net leverage ratio is not permitted to exceed 4.75.

Legal Matters

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements