What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-03 · 91 added, 47 removed, 150 unchanged (48% of the section changed)

62 unchanged sentences

• For our RUPS segment, we need to (i) recoup cost increases, including the value of our creosote preservative in the market, (ii) ensure our facilities run uninterrupted to serve customer demand, (iii) maximize opportunities for increased volumes, including expanding our customer base into the Texas utility pole market, (iv) lower costs and (v) successfully integrate the Brown Wood asset acquisition with our domestic utility pole business.

• For our PC segment, we need to (i) increase market share for certain newer product lines and (ii) improve gross margin by maintaining volumes and reducing operating costs.

• For our PC segment, we need to (i) increase market share for certain newer product lines, (ii) maintain volumes and margin and (iii) reduce operating costs.

• For our CMC segment, we need to (i) optimize production from our yield enhancement project in Nyborg, Denmark, (ii) push acceptance of petroleum-blended products, which mitigates reductions in coal tar volumes and (iii) execute on domestic plant optimization projects.

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• The Railway Tie Association’s estimate of total crosstie installations in 2024 is approximately 18.9 million ties, with approximately 14.6 million for Class I railroads.

This is consistent with 2023 crosstie installations of approximately 18.5 million crossties with the small increase expected to be from the commercial market.

This is slightly higher than 2023 crosstie installations of approximately 18.5 million crossties with the small increase expected to be from the commercial market.

We expect the crosstie market to remain stable.

• According to BMO Capital Markets, market demand for utility poles is expected to remain high throughout 2024 as a result of aging pole infrastructure, efforts to strengthen poles against larger and more frequent storms, and a need to add larger poles to support continued electrification and expansion of broadband access.

In the first quarter of 2024, we experienced a decrease in volumes as a result of temporary customer overstock and budget realignment.

We expect demand to return to normal levels in 2024.

• Product demand for our PC business has historically been closely associated with consumer spending on home repair and remodeling projects in North America.

The Leading Indicator of Remodeling Activity (LIRA) reported by the Joint Center for Housing Studies of Harvard University projects that annual homeowner renovation and maintenance expenditures will decline by over seven percent in the third quarter of 2024 before easing to just a 2.6 percent decline through the first quarter of 2025.

Spending on home improvements and repairs are expected to drop from $463 billion to $451 billion over the next four quarters.

While the LIRA projects a decrease in 2024, the outlook for our PC business remains relatively positive driven by improvements in the industrial markets and expected flat volumes for our residential business.

• 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.

• Product demand for our PC business has historically been associated with consumer spending on home repair and remodeling projects in North America.

The Leading Indicator of Remodeling Activity (LIRA) reported by the Joint Center for Housing Studies of Harvard University projects that declines in annual homeowner renovation and maintenance expenditures will ease to just -0.5 percent through the second quarter of 2025.

Annual spending on home improvements and repairs is expected to reach $466 billion through the second quarter of 2025, on par with spending over the past four quarters.

While the LIRA projects a decrease in 2024, the outlook for our PC business remains relatively positive driven by improvements in the industrial markets we serve and expected flat volumes for our residential business.

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

The availability of coal tar, the primary raw material for our CMC business, is linked to levels of metallurgical coke production.

As the global steel industry, excluding Asia, has reduced the production of steel using metallurgical coke, the volumes of coal tar have been reduced.

We are actively working to mitigate the impacts of long-term decline of coal tar supply by gaining market acceptance for petroleum-blended products.

We are actively working to mitigate the impacts of the long-term decline of coal tar supply by gaining market acceptance for petroleum-blended products.

We are also investing in projects to increase distillation yields and balance raw material supply and cost with customer demand and pricing.

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Historically, our operating results have been significantly lower in the first and fourth calendar quarters as compared to the second and third calendar quarters.

Results of Operations – Comparison of Three Months Ended March 31, 2024 and 2023

Results of Operations – Comparison of Three Months Ended June 30, 2024 and 2023

Consolidated Results

Net sales are summarized by segment in the following table:

Three Months Ended March 31,

Three Months Ended June 30,

(Dollars in millions)

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Carbon Materials and Chemicals

RUPS net sales increased largely due to $9.6 million of volume increases for crossties and a net $8.1 million of pricing increases across multiple markets, particularly for crossties and domestic utility poles.

These increases were partly offset by lower activity in our maintenance of way businesses and a 4.2 percent volume decrease in our domestic utility pole business due to temporary customer overstock and budget realignment.

RUPS net sales increased largely due to $12.7 million of pricing increases across multiple markets, particularly for crossties, and $9.4 million of volume increases for crossties and utility poles.

Sales in our domestic utility pole business increased 2.3 percent as increases from our acquisition of Brown Wood were partly offset by lower sales volumes in our legacy utility pole business due to temporary customer overstock and budget realignment.

In addition, lower activity in our maintenance of way businesses negatively impacted sales.

PC net sales decreased primarily as a result of equal parts lower volumes and pricing decreases globally.

A $3.5 million decrease in volumes in the Americas was driven primarily by sales to the recently acquired Brown Wood no longer being included in our reported sales beginning April 1, 2024.

This decrease was partly offset by higher volumes in Australasia.

CMC net sales decreased due to reduced market demand, especially in Europe where sales decreased by $22.0 million due to equal parts pricing and volumes, primarily driven by carbon pitch markets.

Globally, prices were down $25.3 million.

These decreases were partly offset by volume increases for phthalic anhydride and carbon black feedstock.

Cost of sales as a percentage of net sales was 78 percent, compared to 81 percent in the prior year period as lower raw material costs were partly offset by the market driven reduction in sales.

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

Depreciation and amortization expenses were $3.8 million higher when compared to the prior year period as a result of recent capital expenditures including growth projects such as the expansion of our facility in North Little Rock, Arkansas, as well as the acquisition of Brown Wood, both within our RUPS segment.

We also recognized accelerated depreciation of $1.5 million for certain decommissioned assets at our North Little Rock, Arkansas facility.

Selling, general and administrative expenses were $2.2 million higher when compared to the prior year period due mainly to an increase in compensation-related costs, insurance and other administrative expenses.

Interest expense was $0.3 million higher when compared to the prior year period due to higher interest rates and borrowings, offset by the write-off of debt issuance costs in 2023.

Income tax expense increased by $0.3 million when compared to the prior year period due primarily to higher income before income taxes.

See Note 8 – Income Taxes.

Segment Results

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

Three Months Ended June 30,

(Dollars in millions)

Adjusted EBITDA:

Railroad and Utility Products and Services

Performance Chemicals

Carbon Materials and Chemicals

Total Adjusted EBITDA

Adjusted EBITDA margin as a percentage of GAAP sales:

Railroad and Utility Products and Services

Performance Chemicals

Carbon Materials and Chemicals

RUPS adjusted EBITDA was essentially flat as net sales price increases, $3.9 million from improved plant utilization and higher volumes for crossties and utility poles, were offset by $13.8 million of higher raw material, operating and selling, general and administrative expenses and lower activity in our crosstie recovery business.

PC adjusted EBITDA increased as a result of lower raw material costs offsetting lower sales prices and volumes.

Lower raw material costs were favorably impacted by timing, including an increase in gains realized from our copper-hedging program, net of an increase in the cost of scrap copper recognized to date.

CMC adjusted EBITDA decreased due to price decreases globally and volume decreases in Europe, partly offset by a $16.3 million reduction in raw material costs, particularly in Europe, and higher volumes of phthalic anhydride.

Results of Operations – Comparison of Six Months Ended June 30, 2024 and 2023

Consolidated Results

Net sales are summarized by segment in the following table:

Six Months Ended June 30,

(Dollars in millions)

Railroad and Utility Products and Services

Performance Chemicals

Carbon Materials and Chemicals

RUPS net sales increased largely due to $23.6 million of pricing increases across multiple markets, particularly for crossties and utility poles and $15.0 million of volume increases for crossties, partly offset by lower activity in our maintenance of way businesses.

Sales volumes in our domestic utility pole business were flat with the prior year as increases from our acquisition of Brown Wood were offset by a decrease in our legacy utility pole business due to temporary customer overstock and budget realignment.

Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $0.8 million, mainly from our Australian utility pole business.

PC net sales increased as a result of volume increases of $6.8 million in the current year period, including a 6.1 percent volume increase in the Americas, primarily for our copper-based preservatives.

These increases were partly offset by $3.3 million of lower prices in the Americas and Australasia.

Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $0.2 million.

CMC net sales decreased mainly due to $28.6 million of lower sales prices across most products, including carbon pitch where prices were down 24.6 percent globally, along with $11.5 million of lower volumes of carbon pitch and carbon black feedstock.

PC net sales were essentially flat with the prior year as lower pricing of $5.4 million in the current year period was mostly offset by a 2.0 percent volume increase in the Americas for our copper-based preservatives.

Sales to the recently acquired Brown Wood are no longer included in our reported sales beginning April 1, 2024, which negatively impacted volumes compared to the prior year.

CMC net sales decreased mainly due to $53.6 million of lower sales prices across most products, especially carbon pitch where prices were down approximately 24 percent globally, along with $21.5 million of lower volumes of carbon pitch and carbon black feedstock.

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

1 unchanged sentence

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 $2.0 million.

Cost of sales as a percentage of net sales was 81 percent, compared to 80 percent in the prior year period as the market driven reduction in CMC pricing, primarily carbon pitch, more than offset lower CMC raw material costs, particularly in North America and Australia.

Cost of sales as a percentage of net sales was 79 percent, compared to 80 percent in the prior year period as lower raw material costs were partly offset by the market driven reduction in sales.

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

Depreciation and amortization expenses were $2.1 million higher when compared to the prior year period as recent capital expenditures 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.

Additionally, asset retirement obligations in our European CMC operations increased during the first quarter of 2024 when compared to the prior year period.

Depreciation and amortization expenses were $5.9 million higher when compared to the prior year period as a result of recent capital expenditures including growth projects such as the expansion of our facility in North Little Rock, Arkansas, as well as the acquisition of Brown Wood, both within our RUPS segment.

We also recognized accelerated depreciation of $1.5 million for certain decommissioned assets at our North Little Rock, Arkansas facility.

Additionally, asset retirement obligations in our European CMC operations and the related depreciation expense increased during the first quarter of 2024 when compared to the prior year period.

Selling, general and administrative expenses were $6.1 million higher when compared to the prior year period due mainly to an increase in compensation-related costs along with an increase in professional service expenses.

Gain on sale of assets for the quarter ended March 31, 2023 was related to a sale of assets of our former coal tar distillation facility located in China.

Interest expense was $3.1 million higher when compared to the prior year period due primarily to higher interest rates.

Income tax expense decreased by $5.5 million when compared to the prior year period primarily due to lower income before income taxes.

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.

Interest expense was $3.4 million higher when compared to the prior year period due to higher interest rates and borrowings, partly offset by the write-off of debt issuance costs in 2023.

Income tax expense decreased by $5.2 million when compared to the prior year period due primarily to lower income before income taxes.

See Note 8 – Income Taxes.

1 unchanged sentence

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

Three Months Ended March 31,

Six Months Ended June 30,

(Dollars in millions)

8 unchanged sentences

Carbon Materials and Chemicals

RUPS adjusted EBITDA increased due primarily to net sales price increases and $3.7 million from improved plant utilization, which combined to more than offset $10.6 million of higher operating, raw material and selling, general and administrative expenses.

PC adjusted EBITDA increased primarily as a result of higher volumes.

Lower sales prices were offset by raw material price decreases.

CMC adjusted EBITDA decreased due to price and volume decreases along with lower North American plant utilization primarily due to a plant outage in January, partly offset by an $18.6 million reduction in raw material costs, particularly in Europe and North America.

Segment Results

RUPS adjusted EBITDA increased due primarily to net sales price increases and $7.9 million from improved plant utilization, which combined to more than offset $25.3 million of higher raw material, operating and selling, general and administrative expenses and lower activity in our crosstie recovery business.

PC adjusted EBITDA increased primarily as a result of lower raw material costs offsetting lower sales prices and higher selling, general and administrative costs.

Lower raw material costs were favorably impacted by timing, including an increase in gains realized from our copper-hedging program, net of an increase in the cost of scrap copper recognized to date.

CMC adjusted EBITDA decreased due to price and volume decreases along with higher operating expenses and lower North American plant utilization due primarily to a plant outage in January, partly offset by a $31.6 million reduction in raw material costs, particularly in Europe.

Adjusted EBITDA Reconciliation.

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in millions)

4 unchanged sentences

LIFO expense (1)

Impairment, restructuring and plant closure costs

(Gain) on sale of assets

Mark-to-market commodity hedging gains

Mark-to-market commodity hedging (gains) losses

Acquisition inventory step-up amortization

Total adjustments

1 unchanged sentence

(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 three months ended March 31, 2024 was $12.3 million compared to $15.3 million in the prior year.

Net cash provided by operating activities for the six months ended June 30, 2024 was $14.9 million compared to net cash used in operating activities of $2.1 million in the prior year.

The improvement was primarily the result of lower working capital usage in the current year which more than offset the cash impact of lower net income in the current year period the reasons for which are discussed under results of operations.

Net cash used in investing activities for the three months ended March 31, 2024 was $25.8 million compared to $28.5 million in the prior year driven primarily by capital expenditures.

Net cash used in investing activities for the six months ended June 30, 2024 was $141.6 million compared to $60.6 million in the prior year.

The increase was due to cash paid for the Brown Wood acquisition, partly offset by lower capital expenditures.

Capital expenditures were higher in the prior year period due to investment in growth projects, such as the expansion of our RUPS facility in North Little Rock, Arkansas which was completed in the fourth quarter of 2023 and a yield enhancement project at our CMC facility in Nyborg, Denmark which was completed in the first quarter of 2024.

Net cash provided by financing activities for the three months ended March 31, 2024 was $23.0 million compared to $56.8 million in the prior year.

The primary source of financing cash flows was net borrowings of $27.9 million and the primary uses of financing cash flows were payments related to taxes withheld under stock-based compensation plans and dividends paid.

In the prior year, the primary source of financing cash flows was net borrowings of $63.5 million and the primary uses of financing cash flows were repurchases of common stock and dividends paid.

Net cash provided by financing activities for the six months ended June 30, 2024 was $111.6 million compared to $78.6 million in the prior year.

The primary source of financing cash flows was net borrowings of $150.6 million and the primary uses of financing cash flows were repurchases of common stock including payments related to taxes withheld under stock-based compensation plans and dividends paid.

In the prior year, the primary source of financing cash flows was net borrowings of $90.1 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

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The Credit Facility permits Koppers Inc.

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 (a) $50.0 million in any fiscal year, with unused amounts in any fiscal year being carried over to the succeeding fiscal year, and (b) 6.0 percent of market capitalization.

As of March 31, 2024, liquidity was approximately $340 million.

Our need for cash in the next twelve months relates primarily to capital spending, purchase commitments, operating leases, working capital, debt service, pension plan funding, dividends and share repurchases.

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

Capital expenditures in 2024, excluding acquisitions, if any, are expected to total approximately $80 million to $90 million and are expected to be funded by cash from operations.

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 Koppers Holdings common stock and repurchases of Koppers Holdings common stock, in an aggregate amount per year not to exceed the greater of (a) $50.0 million in any fiscal year, with unused amounts in any fiscal year being carried over to the succeeding fiscal year, and (b) 6.0 percent of market capitalization.

As of June 30, 2024, liquidity was approximately $325 million.

We may also use cash to pursue other potential strategic acquisitions.

Capital expenditures in 2024, excluding acquisitions, are expected to total approximately $80 million to $85 million and are expected to be funded by cash from operations.

We anticipate that our liquidity will continue to be adequate to fund our cash requirements for at least the next twelve months, and based on our current expectations, for the foreseeable future.

We manage our working capital to increase our flexibility to pay down debt.

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

As of March 31, 2024, approximately 90 percent of accounts payable was current and ten percent was 1-30 days past due.

The amount of our outstanding debt and our overall cash flows will fluctuate throughout any operating period based upon, among other things, the timing of receipts from customers and payments to vendors.

As of June 30, 2024, approximately 90 percent of accounts payable was current and ten percent was 1-30 days past due.

As of December 31, 2023, approximately 85 percent of accounts payable was current and 15 percent was 1-30 days past due.

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• The total net leverage ratio is calculated as of the last day of each fiscal quarter in accordance with the Credit Facility definitions of consolidated total net debt divided by consolidated EBITDA and is not permitted to exceed 5.0.

The total net leverage ratio as of March 31, 2024 was 3.2.

In connection with the completion of the Brown Wood acquisition as described in Note 14 – Subsequent Events, the total net leverage ratio will not be permitted to exceed 5.00 from the second quarter of 2024 through the first quarter of 2025.

The total net leverage ratio as of June 30, 2024 was 3.5.

Effective during the second quarter of 2025, the total net leverage ratio will not be permitted to exceed 4.75.

• 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 March 31, 2024 was 3.9.

The cash interest coverage ratio as of June 30, 2024 was 3.9.

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

14 unchanged sentences

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 2. Management’s Discussion and Analysis