Koppers Holdings Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report and any documents incorporated herein by reference contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and may include, but are not limited to, statements about sales levels, acquisitions, restructuring, declines in the value of Koppers assets and the effect of any related impairment charges, profitability and anticipated synergies, expenses and cash outflows. All forward-looking statements involve risks and uncertainties. All statements contained herein that are not clearly historical in nature are forward-looking, and words such as “outlook,” "guidance,” “forecast,” “believe,” “anticipate,” “expect,” “estimate,” “may,” “will,” “should,” “continue,” “plan,” “potential,” “intend,” “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, 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. Factors that might affect such forward-looking statements, include, among other things, availability of and fluctuations in the prices of key raw materials, including coal tar, lumber and scrap copper; the impact of changes in commodity prices, such as oil, copper and chemicals, on product margins; the extent of the dependence of certain of our businesses on certain market sectors and customers; economic, political and environmental conditions in international markets, including governmental changes, tariffs, restrictions on trade and restrictions on the ability to transfer capital across countries; current and potential future tariffs; the ratings on our debt and our ability to repay or refinance our outstanding indebtedness as it matures; our ability to operate within the limitations of our debt covenants; capital market and banking market conditions, including interest rates, borrowing costs, foreign currency rate fluctuations, and general volatility; general economic and business conditions, including labor shortages, increased employee turnover and demand for our goods and services; disruptions and inefficiencies in the supply chain; unexpected business disruptions (including, but not limited to, labor disputes, natural disasters, weather conditions, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, certain regional and world events or economic conditions and public health crises) and technology-related disruptions or failures (including, but not limited to, cyber attacks or other events) related to our technology infrastructure, or at key vendors which could impact our supply chain, or at key customers which could impact their operations and cause them to curtail or pause orders; potential difficulties in protecting our intellectual property; potential delays in timing or changes to expected benefits from cost reduction efforts; potential impairment of our goodwill and/or long-lived assets; demand for our goods and services; the effects of competition in the industries in which we operate, including locations of competitors and operating and market competition; changes in laws, their interpretation, and their enforcement, including tax regulations or accounting standards, third-party relations and approvals, and decisions of courts, regulators and governmental bodies; the impact of environmental laws and regulations; parties who are obligated to indemnify us for liabilities, including legal and environmental liabilities, fail to perform under their legal obligations; and unfavorable resolution of litigation or other legal proceedings against us, as well as those discussed more fully elsewhere in this report and in documents filed with the Securities and Exchange Commission by Koppers, particularly our latest annual report on Form 10-K and subsequent filings. We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report and the documents incorporated by reference herein may not in fact occur. Any forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and related notes included in Item 1 of this Part I as well as the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2024. Overview We are a leading integrated global provider of treated wood products, wood preservation chemicals and carbon compounds. Our products and services are used in a variety of niche applications in a diverse range of end-markets, including the railroad, specialty chemical, utility, residential lumber, agriculture, aluminum, steel, rubber and construction industries. We serve our customers through a comprehensive global manufacturing and distribution network, with manufacturing capabilities in North America, South America, Australasia and Europe. We operate three principal businesses: RUPS, PC and CMC. 20 Through our RUPS business, we believe that we are the largest supplier of railroad crossties to the Class I railroads in North America and the second largest producer of utility poles in the United States. Our other treated wood products include utility poles for the electric, telephone, and broadband utility industries in the United States and Australia and construction pilings in the United States. In addition, we provide untreated wood products and rail joint bars to the railroad markets and inspection services to the utility markets. We also operate a railroad services business that conducts engineering, design, repair and inspection services for railroad bridges and a business related to the recovery of used crossties, serving the same customer base as our North American railroad business. Through our PC business, we believe that we are the global leader in developing, manufacturing and marketing wood preservation chemicals and wood treatment technologies for use in the pressure treating of lumber for residential, industrial and agricultural applications. Our CMC business processes coal tar into a variety of products, including creosote, carbon pitch, carbon black feedstock, naphthalene and phthalic anhydride, which are intermediate materials necessary in the pressure treatment of wood, and the production of aluminum, steel, carbon black, high-strength concrete, plasticizers and specialty chemicals. Our CMC segment ceased primary production of phthalic anhydride in April 2025. See Note 2 – Acquisitions and Restructuring . Non-GAAP Financial Measures We utilize certain financial measures that are not in accordance with U.S. generally accepted accounting principles (U.S. GAAP) to analyze and manage the performance of our business. We believe that adjusted EBITDA provides information useful to investors in understanding the underlying operational performance of the company, our business and performance trends, and facilitates comparisons between periods. 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. Adjusted EBITDA is the 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 this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP financial measures and should be read in conjunction with the relevant GAAP financial measures. Other companies in a similar industry may define or calculate this measure differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, this non-GAAP financial measure should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. Adjusted EBITDA is a non-GAAP financial measure defined as income before interest expense, income taxes, depreciation, amortization and other adjustments. These other adjustments are items that we believe are not representative of underlying business performance. Adjusted items typically include LIFO inventory effects, impairment, restructuring and plant closure costs, significant gains and losses on asset disposals, mark-to-market commodity hedging, acquisition-related charges, cloud-computing amortization expenses 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. An adjusted EBITDA reconciliation is presented in the Segment Results section and reconciles net income to adjusted EBITDA on a consolidated basis. Forward-looking statements, including the significant market indicators described below, are based upon current expectations and are subject to factors that could cause actual results to differ materially from those set forth below. Please see the “forward-looking statements” disclaimer above for more information. Outlook 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, some of which are one-time savings and some of which are expected to be permanent savings, are intended to ensure that we continue our growth in profitability and support a higher margin profile by leveraging a smaller global team highly focused on serving customer preferences. Trade Tariff Uncertainties Our 2025 outlook reflects plans to substantially offset costs related to import and export tariffs, where possible, but due to the continued uncertainty regarding the implementation dates and scope of potential additional tariffs, as well as potential retaliatory trade policy, our outlook may vary as a result. See also Item 1A. Risk Factors. 21 Our keys to success for 2025 include: • For our RUPS segment, our focus is to (i) recoup cost increases, including the value of our creosote preservative in the market, (ii) maximize opportunities for increased volumes, including expanding our customer base into the Texas, western and midwestern utility pole markets and (iii) lower operating and selling, general and administrative expenses. • For our PC segment, our focus is to (i) acquire new customers in our residential preservatives markets to offset certain customer market share losses, (ii) expand market share in our industrial preservatives markets and (iii) improve our cost structure. • For our CMC segment, our focus is to (i) execute on domestic plant restructuring projects, (ii) optimize and develop markets for enhanced carbon products and (iii) implement global tar and pitch strategies. Significant market indicators for our businesses include: • The Railway Tie Association’s estimate of total crosstie purchases in 2025 is approximately 19.9 million ties, with approximately 13.6 million for Class I railroads. This is slightly lower than the estimated 2024 crosstie purchases of approximately 20.0 million crossties with the small decrease expected to be from the commercial market. We expect the crosstie market to remain stable. • Market demand for utilities poles is expected to grow in 2025 with most of the growth concentrated in the second half of the year, while demand in the first half is expected to remain relatively flat. Key drivers include aging pole infrastructure, the expansion of renewable energy, vehicle electrification, grid-hardening measures and extreme weather protection. Recently, the realization of potential productivity gains from artificial intelligence (AI) has significantly increased the demand for electricity. Technology companies are now securing power supplies for data centers to fuel AI, resulting in higher volume demand for both distribution and transmission wood poles. We continue to focus on expanding our presence in the western and midwestern United States and Canada along with improving our efficiency and capturing new customers to increase our market share. • 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 year-over-year spending for annual homeowner renovation and maintenance expenditures is expected to grow by 2.5 percent to reach a record $526 billion by the first quarter of 2026. While the LIRA projects an increase in 2025, our PC business expects flat or lower volumes as a result of customer market share shifts. • 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 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. Our businesses and results of operations are affected by various competitive and other factors including (i) the impact of global economic conditions on demand for our products, including the impact of imported products from competitors in certain regions where we operate as well as tariffs and international trade policy; (ii) raw material pricing and availability, in particular the cost and availability of hardwood lumber for railroad crossties, softwood lumber for utility poles, scrap copper prices, and the cost and amount of coal tar available in global markets, which is negatively affected by reductions in blast furnace steel production; (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 our performance chemicals business and global carbon pitch markets; (v) the effectiveness of our commodity hedging programs; (vi) changes in foreign exchange rates; and (vii) the other factors set forth in the "forward-looking statements" disclaimer. Any or all of these or other factors, including those set forth in our Annual Report on Form 10-K, could impact our actual results for 2025. Seasonality and Effects of Weather on Operations Our quarterly operating results fluctuate due to a variety of factors that are outside of our control, including inclement weather conditions, which in the past have affected operating results. Operations at some of our facilities have at times been reduced during the winter months. Moreover, demand for some of our products declines during periods of inclement weather. As a result of the foregoing, we anticipate that we may experience material fluctuations in quarterly operating 22 results. 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, 2025 and 2024 Consolidated Results Net sales are summarized by segment in the following table: Three Months Ended March 31, 2025 2024 Change % Change (Dollars in millions) Railroad and Utility Products and Services $ 235.0 $ 225.1 $ 9.9 4.4 % Performance Chemicals 120.9 150.1 (29.2 ) -19.5 % Carbon Materials and Chemicals 100.6 122.4 (21.8 ) -17.8 % Total $ 456.5 $ 497.6 $ (41.1 ) -8.3 % RUPS net sales increased largely due to higher volumes in our Class I crosstie business, $4.6 million of price increases across most products, a nine 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 volumes in our commercial crosstie business. PC net sales decreased primarily due to 21.5 percent lower volumes of residential and industrial preservatives in the Americas due mostly to a shift in United States market share along with reduced volumes due to weather. 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 $2.4 million. CMC net sales decreased mainly due to $10.8 million of volume decreases for phthalic anhydride and lower sales prices for carbon pitch where prices were down approximately eight percent globally. The decreases in carbon pitch prices were driven by market dynamics in the current year period, particularly in Australasia. 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 77 percent, compared to 81 percent in the prior year period as lower freight costs, operating expenses and raw material costs were partly offset by lower sales volumes. 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 $1.9 million higher when compared to the prior year period primarily as a result of our acquisition of Brown Wood. Selling, general and administrative expenses were $4.4 million lower when compared to the prior year period due mainly to a decrease in compensation-related costs, professional service fees and other administrative expenses. See Note 6 - Stock-based Compensation for changes related to our long-term incentive plan. Impairment and restructuring charges in the current year period represent costs associated with discontinuing phthalic anhydride production at our facility in Stickney, Illinois and our workforce reduction program across selected U.S. locations to streamline operations and reduce costs. See Note 2 - Acquisitions and Restructuring. Other income in the current year period primarily relates to the sale of our office space in Griffin, Georgia. Interest expense was $0.5 million lower when compared to the prior year period due to lower interest rates. Loss on pension settlement in the current year period represents the settlement loss recorded as a result of the termination of our United States qualified pension plan as discussed in Note 10 - Pensions and Post-Retirement Benefit Plans. Income tax provision decreased by $7.7 million when compared to the prior year period due primarily to the loss on pension settlement and lower income before income taxes. See Note 8 - Income Taxes. 23 Segment Results Segment adjusted EBITDA and adjusted EBITDA margin is summarized in the following table: Three Months Ended March 31, 2025 2024 Change % Change (Dollars in millions) Adjusted EBITDA: Railroad and Utility Products and Services $ 25.5 $ 17.7 $ 7.8 44.1 % Performance Chemicals 20.1 29.8 (9.7 ) -32.6 % Carbon Materials and Chemicals 9.9 4.0 5.9 147.5 % Total Adjusted EBITDA $ 55.5 $ 51.5 $ 4.0 7.8 % Adjusted EBITDA margin as a percentage of GAAP sales: Railroad and Utility Products and Services 10.9 % 7.9 % 3.0 % 38.0 % Performance Chemicals 16.6 % 19.9 % -3.3 % -16.6 % Carbon Materials and Chemicals 9.8 % 3.3 % 6.5 % 197.0 % RUPS adjusted EBITDA increased due to net sales volume and price increases and $2.2 million from lower operating expenses in our crossties business, partly offset by $2.5 million of higher raw material and allocated selling, general and administrative expenses. PC adjusted EBITDA decreased due to a net decrease in sales and higher raw material costs, partly offset by $3.7 million of lower logistics and selling, general and administrative expenses, particularly in North America. CMC adjusted EBITDA increased due to $7.0 million of lower raw material and allocated selling, general and administrative expenses, particularly in North America, along with a favorable sales mix and improved plant performance as a result of an outage in North America in the prior year period, partly offset by price decreases. Adjusted EBITDA Reconciliation. The following table reconciles net income to adjusted EBITDA on a consolidated basis: Three Months Ended March 31, 2025 2024 (Dollars in millions) Net (loss) income $ (13.9 ) $ 13.0 Interest expense 16.6 17.1 Depreciation and amortization 18.0 16.1 Income tax provision (3.3 ) 4.4 Sub-total 17.4 50.6 Adjustments to arrive at adjusted EBITDA: LIFO (benefit) expense (1) (1.8 ) 2.6 Impairment, restructuring and plant closure costs (2) 20.0 0.0 (Gain) on sale of assets (0.3 ) 0.0 Mark-to-market commodity hedging gains (9.1 ) (1.7 ) Amortization of cloud-based software implementation costs 0.3 0.0 Loss on pension settlement 29.0 0.0 Total adjustments 38.1 0.9 Adjusted EBITDA $ 55.5 $ 51.5 (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. (2) See Note 2 - Acquisitions and Restructuring. Cash Flow Net cash used in operating activities for the three months ended March 31, 2025 was $22.7 million compared to $12.3 million in the prior year. For both periods, the primary source of cash was net income, excluding non-cash items, principally depreciation and in 2025, the pension settlement loss. This was offset by working capital usage which was higher in the current year primarily as a result of the timing of purchases and payments of raw material inventory and pension funding of approximately $14 million in connection with the settlement. Net cash used in investing activities for the three months ended March 31, 2025 was $17.6 million compared to $25.8 million in the prior year due primarily to lower capital expenditures. Capital expenditures were higher in the prior year period due to investment in growth projects, such as the yield enhancement project at our CMC facility in Nyborg, Denmark which was completed in the first quarter of 2024. Additionally, during the three months ended March 31, 2025, 24 we paid approximately $7.6 million for a land transfer associated with our agreement to liquidate Koppers (China) Carbon & Chemical Company Limited (KCCC) with Koppers and Tangshan Iron & Steel Group Co. Ltd. (TISCO). Net cash provided by financing activities for the three months ended March 31, 2025 was $28.7 million compared to $23.0 million in the prior year. The primary source of financing cash flows for the three months ended March 31, 2025 was net borrowings of $49.1 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 $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. Liquidity and Capital Resources As of March 31, 2025, liquidity from our Credit Facility and cash on hand was approximately $320 million. Our Credit Facility is described in Note 11 – Debt. 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 spending, dividends and share repurchases. We may also use cash to pursue other potential strategic acquisitions. Capital expenditures in 2025, excluding acquisitions, if any, are expected to total approximately $65 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. We manage our working capital to increase our flexibility to pay down debt. 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 March 31, 2025 and December 31, 2024, 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. 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 fiscal year not to exceed the greater of $50.0 million, with unused amounts in any fiscal year being carried over to the succeeding fiscal year, and 6.0 percent of market capitalization. Bank Debt Covenants The bank debt covenants that affect availability of the Credit Facility and which may restrict the ability of Koppers Inc. to pay dividends include the following financial ratios: • 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, 2025 was 3.34. 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, 2025 was 4.0. We are currently in compliance with all covenants governing the Credit Facility. Our continued ability to meet these financial covenants may be affected by events beyond our control. Legal Matters The information set forth in Note 12 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference. Recently Issued Accounting Guidance The information set forth in Note 1 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference. Critical Accounting Policies There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024. 25 Environmental and Other Matters The information set forth in Note 12 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There are no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2024.