What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-08 compared with 2024-08-08 · 79 added, 70 removed, 171 unchanged (47% of the section changed)

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All statements contained herein that are not clearly historical in nature are forward-looking, and words such as “believe,” “anticipate,” “expect,” “estimate,” “may,” “will,” “should,” “continue,” “plans,” “potential,” “intends,” “likely,” or other similar words or phrases are generally intended to identify forward-looking statements.

Any forward-looking statement contained herein, in press releases, written statements or documents filed with the Securities and Exchange Commission, or in Koppers communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, regarding future dividends, expectations with respect to sales, earnings, cash flows, operating efficiencies, restructurings, product introduction or expansion, the benefits of acquisitions and divestitures, or other matters as well as financings and debt reduction, are subject to known and unknown risks, uncertainties and contingencies.

Any forward-looking statement contained herein, in press releases, written statements or documents filed with the Securities and Exchange Commission, or in Koppers communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, regarding future dividends, expectations with respect to sales, earnings, cash flows, operating efficiencies, restructurings, cost reduction efforts, product introduction or expansion, the benefits of acquisitions and divestitures, or other matters as well as financings and debt reduction, are subject to known and unknown risks, uncertainties and contingencies.

Many of these risks, uncertainties and contingencies are beyond our control, and may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements.

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unexpected business disruptions;

potential delays in timing or changes to expected benefits from cost reduction efforts;

potential impairment of our goodwill and/or long-lived assets;

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These items include, but are not limited to, restructuring and impairment charges, acquisition-related costs, mark-to-market commodity hedging, and LIFO adjustments that are difficult to forecast for a GAAP estimate and may be significant.

We remain committed to expanding and optimizing our business and making continued progress towards our long-term financial goals.

After considering global economic conditions, as well as ongoing uncertainty associated with geopolitical and supply chain challenges, the following summarizes our 2024 financial goals:

After considering the current intensely competitive environment, global economic conditions, as well as ongoing uncertainty associated with geopolitical and supply chain challenges, we anticipate taking measures to streamline our organization to support an increasingly cost-conscious customer base.

These actions will ensure that we extend our decade-long growth in profitability and support a higher margin profile by leveraging a smaller global team highly focused on serving customer preferences.

The following summarizes our 2024 financial goals, which are supported by these actions:

• sales of approximately $2.1 billion,

• adjusted EBITDA of approximately $270 million to $275 million, and

• capital expenditures, including capitalized interest but excluding acquisitions, of approximately $80 million to $85 million with approximately $22 million to $27 million of the total allocated to discretionary projects.

Our keys to success for 2024 are the following:

• capital expenditures, including capitalized interest but excluding acquisitions, of approximately $80 million with approximately $20 million of the total allocated to discretionary projects.

Our keys to success for 2024 include streamlining the organization in addition to our original 2024 objectives, which are:

• 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.

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• The Railway Tie Association’s estimate of total crosstie installations in 2024 is approximately 19.6 million ties, with approximately 13.4 million for Class I railroads.

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.

This is slightly higher than 2023 crosstie installations of approximately 19.2 million crossties with the small increase expected to be from Class I railroads.

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 2024, we have experienced a decrease in our legacy utility pole business due to temporary customer overstock and budget realignment.

• 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.

The Leading Indicator of Remodeling Activity (LIRA) reported by the Joint Center for Housing Studies of Harvard University reported a mild pullback in 2024 compared to the prior year;

however, annual homeowner renovation and maintenance expenditures are expected to grow by 1.2 percent through the third quarter of 2025.

Volumes may also be impacted by customer market share shifts as contracts are negotiated for 2025.

While the LIRA projects a decrease in 2024, the outlook for our PC business for the remainder of the year remains relatively positive driven by improvements in the industrial markets we serve and expected flat volumes for our residential business, inclusive of any market share changes in 2024.

• 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.

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(iii) volatility in oil prices, which impacts the cost of coal tar and certain other raw materials, as well as selling prices and margins for certain of our products including carbon black feedstock, phthalic anhydride, and naphthalene;

(iv) competitive conditions in global carbon pitch markets;

(iv) competitive conditions in our performance chemicals business and global carbon pitch markets;

and (v) changes in foreign exchange rates.

Any or all of these factors could impact our actual results for 2024.

Any or all of these or other factors could impact our actual results for 2024.

Seasonality and Effects of Weather on Operations

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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 June 30, 2024 and 2023

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

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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Carbon Materials and Chemicals

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.

RUPS net sales increased largely due to $10.0 million of price increases, mainly for domestic crossties and utility poles in Australia, an 11 percent increase in the volume of domestic utility poles sold driven by our acquisition of Brown Wood and an increase in activity in our railroad bridge services business.

These increases were partly offset by lower activity in our crosstie recovery business.

PC net sales decreased primarily as a result of sales to the recently acquired Brown Wood no longer being included in our reported sales beginning April 1, 2024.

Slightly higher volumes, excluding Brown Wood, were offset by lower sales prices.

CMC net sales decreased mainly due to $16.6 million of lower sales prices across most products, especially carbon pitch where prices were down approximately 20 percent globally, along with lower volumes of carbon black feedstock.

The decreases in carbon pitch prices were driven by market dynamics in the current year period, particularly in Europe.

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

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 $1.8 million.

Cost of sales as a percentage of net sales was 78 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 prices.

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 $3.6 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.

Loss on sale of assets for the three months ended September 30, 2024 was related to the liquidation of our former coal tar distillation facility located in China.

See Note 2 – Acquisition and Loss on Sale of Assets.

Interest expense was $1.2 million higher when compared to the prior year period due to higher borrowings.

Income tax expense increased by $2.3 million when compared to the prior year period due primarily to higher income before income taxes.

The income excludes the loss on the sale of KCCC's assets, which does not have a corresponding tax benefit.

See Note 8 – Income Taxes.

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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 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

RUPS adjusted EBITDA was essentially flat as net sales increases and $3.4 million from improved plant utilization were offset by $14.1 million of higher raw material, operating and selling, general and administrative expenses.

PC adjusted EBITDA increased despite the net decrease in sales, on lower raw material and logistics costs, which were favorably impacted by timing.

CMC adjusted EBITDA increased due to $9.2 million of lower raw material costs, particularly in Europe, lower selling, general and administrative costs and higher volumes of carbon pitch and phthalic anhydride.

These favorable drivers were partly offset by price decreases and higher operating expenses.

Results of Operations – Comparison of Nine Months Ended September 30, 2024 and 2023

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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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 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.

RUPS net sales increased largely due to $28.8 million of pricing increases primarily for crossties and utility poles, along with higher volumes for crossties and utilities poles and an increase in activity in our railroad bridge services business, partly offset by lower activity in our crosstie recovery business.

Volumes in our domestic utility pole business increased 3.2 percent as an increase from our acquisition of Brown Wood was partly offset by a decrease in our legacy utility pole business due to temporary customer overstock and budget realignment.

PC net sales decreased due primarily to sales to the recently acquired Brown Wood of approximately $6 million no longer being included in our reported sales beginning April 1, 2024 and lower pricing of $4.8 million in the Americas, partly offset by a 1.5 percent volume increase in the Americas for our copper-based preservatives.

CMC net sales decreased largely due to $72.7 million of lower sales prices across most products, especially carbon pitch where prices were down approximately 24 percent globally, along with $12.9 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.

These decreases were partly offset by volume increases for phthalic anhydride.

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 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 $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.

Depreciation and amortization expenses were $9.5 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 RUPS facility in North Little Rock, Arkansas and the yield enhancement project at our CMC facility in Nyborg, Denmark, as well as the acquisition of Brown Wood.

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 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.

Selling, general and administrative expenses were $6.2 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 and insurance expenses.

Loss on sale of assets for the nine months ended September 30, 2024 was related to the liquidation of our former coal tar distillation facility located in China while the gain on sale of assets for the nine months ended September 30, 2023 was related to a sale of assets at that same facility.

See Note 2 – Acquisition and Loss on Sale of Assets.

Interest expense was $4.6 million higher when compared to the prior year period due to higher borrowings and interest rates, partly offset by the write-off of debt issuance costs in 2023.

Income tax expense decreased by $2.9 million when compared to the prior year period due primarily to lower income before income taxes.

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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 $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.

RUPS adjusted EBITDA increased due primarily to net sales increases and $11.2 million from improved plant utilization, which combined to more than offset $39.8 million of higher raw material, operating and selling, general and administrative expenses.

PC adjusted EBITDA increased despite lower sales, 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.

CMC adjusted EBITDA decreased as a result of lower sales prices, which were partly offset by a $42.6 million reduction in raw material costs, particularly in Europe, as well as higher operating expenses and lower plant utilization, partly offset by lower selling, general and administrative costs and higher volumes of phthalic anhydride.

Adjusted EBITDA Reconciliation.

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

Nine Months Ended

September 30,

(Dollars in millions)

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Depreciation and amortization

Income tax provision

Income tax expense

Adjustments to arrive at adjusted EBITDA:

LIFO expense (1)

LIFO (benefit) expense (1)

Impairment, restructuring and plant closure costs

(Gain) on sale of assets

Mark-to-market commodity hedging (gains) losses

Loss (gain) on sale of assets

Mark-to-market commodity hedging gains

Acquisition inventory step-up amortization

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(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 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 six months ended June 30, 2024 was $141.6 million compared to $60.6 million in the prior year.

Net cash provided by operating activities for the nine months ended September 30, 2024 was $44.7 million compared to $79.5 million in the prior year.

For both periods, the primary source of cash was net income, excluding non-cash items, less working capital usage.

Higher working capital usage in the current year was primarily driven by a reduction in accounts payable as a result of the timing of inventory purchases and vendor payments.

Net cash used in investing activities for the nine months ended September 30, 2024 was $154.4 million compared to $88.3 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 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.

Net cash provided by financing activities for the nine months ended September 30, 2024 was $88.4 million compared to $31.6 million in the prior year.

The primary source of financing cash flows for the nine months ended September 30, 2024 was net borrowings of $138.9 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 $46.9 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

As of September 30, 2024, liquidity was approximately $332 million.

Our Credit Facility is described in Note 11 – Debt.

Restrictions on Dividends to Koppers Holdings

Koppers Holdings depends on the dividends from the earnings of Koppers Inc.

and its subsidiaries to generate the funds necessary to meet its financial obligations, including the payment of any declared dividend of Koppers Holdings.

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 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.

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, share repurchases and voluntary pension plan contributions, including pension plan settlements.

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, share repurchases, voluntary pension plan contributions, including pension plan terminations, and to fund cost savings initiatives.

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.

Capital expenditures in 2024, excluding acquisitions, are expected to total approximately $80 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.

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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 September 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.

Restrictions on Dividends to Koppers Holdings

Koppers Holdings depends on the dividends from the earnings of Koppers Inc.

and its subsidiaries to generate the funds necessary to meet its financial obligations, including the payment of any declared dividend of Koppers Holdings.

The Credit Facility permits Koppers Inc.

Bank Debt Covenants

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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 June 30, 2024 was 3.5.

The total net leverage ratio as of September 30, 2024 was 3.3.

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 June 30, 2024 was 3.9.

The cash interest coverage ratio as of September 30, 2024 was 4.0.

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

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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 2. Management’s Discussion and Analysis