Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
KOPPERS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(Dollars in millions, except per share amounts)
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
Net sales
$
502.5
$
441.0
$
961.8
$
848.5
Cost of sales
419.4
343.9
789.7
663.2
Depreciation and amortization
13.4
13.9
27.6
30.0
(Gain) on sale of assets
0.0
( 0.3
)
( 2.5
)
( 7.8
)
Impairment and restructuring charges
0.0
0.9
0.0
2.1
Selling, general and administrative expenses
40.6
38.3
79.7
72.8
Operating profit
29.1
44.3
67.3
88.2
Other income, net
0.4
0.8
1.0
1.8
Interest expense
11.1
10.1
20.9
20.3
Income from continuing operations before income taxes
18.4
35.0
47.4
69.7
Income tax provision
6.8
9.1
16.5
17.6
Income from continuing operations
11.6
25.9
30.9
52.1
(Gain) loss on sale of discontinued operations, net of tax
(expense) benefit of $ 0.0 , $ 0.1 , $( 0.2 ) and $ 0.1
0.0
1.0
( 0.5
)
0.6
Net income
11.6
26.9
30.4
52.7
Net loss attributable to noncontrolling interests
( 0.1
)
0.0
( 0.1
)
( 0.1
)
Net income attributable to Koppers
$
11.7
$
26.9
$
30.5
$
52.8
Earnings (loss) per common share attributable to
Koppers common shareholders:
Basic -
Continuing operations
$
0.56
$
1.22
$
1.47
$
2.46
Discontinued operations
0.00
0.04
( 0.02
)
0.03
Earnings per basic common share
$
0.56
$
1.26
$
1.45
$
2.49
Diluted -
Continuing operations
$
0.55
$
1.18
$
1.44
$
2.38
Discontinued operations
0.00
0.04
( 0.02
)
0.02
Earnings per diluted common share
$
0.55
$
1.22
$
1.42
$
2.40
Comprehensive (loss) income
$
( 38.8
)
$
31.4
$
( 18.4
)
$
63.1
Comprehensive loss attributable to noncontrolling interests
( 0.2
)
0.0
( 0.3
)
( 0.1
)
Comprehensive (loss) income attributable to Koppers
$
( 38.6
)
$
31.4
$
( 18.1
)
$
63.2
Weighted average shares outstanding (in thousands):
Basic
21,026
21,289
21,088
21,217
Diluted
21,239
21,967
21,472
21,949
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
KOPPERS HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEET
June 30,
2022
December 31,
2021
(Dollars in millions, except per share amounts)
(Unaudited)
Assets
Cash and cash equivalents, including restricted cash (Note 4)
$
40.4
$
45.5
Accounts receivable, net of allowance of $ 3.3 and $ 3.3
229.5
182.8
Inventories, net
326.6
313.8
Derivative contracts
17.0
61.0
Other current assets
27.9
25.0
Total current assets
641.4
628.1
Property, plant and equipment, net
518.8
489.1
Operating lease right-of-use assets
86.9
91.2
Goodwill
294.0
296.0
Intangible assets, net
123.5
131.5
Deferred tax assets
13.5
15.0
Other assets
9.2
11.0
Total assets
$
1,687.3
$
1,661.9
Liabilities
Accounts payable
$
197.9
$
171.9
Accrued liabilities
84.5
90.5
Current operating lease liabilities
20.9
21.3
Current maturities of long-term debt
0.0
2.0
Total current liabilities
303.3
285.7
Long-term debt
833.7
781.5
Accrued postretirement benefits
37.4
38.6
Deferred tax liabilities
24.1
33.4
Operating lease liabilities
67.0
70.3
Other long-term liabilities
42.6
41.6
Total liabilities
1,308.1
1,251.1
Commitments and contingent liabilities (Note 18)
Equity
Senior Convertible Preferred Stock, $ 0.01 par value per share; 10,000,000
shares authorized; no shares issued
0.0
0.0
Common Stock, $ 0.01 par value per share; 80,000,000 shares authorized;
24,504,713 and 24,026,844 shares issued
0.2
0.2
Additional paid-in capital
257.0
249.5
Retained earnings
329.3
300.9
Accumulated other comprehensive loss
( 88.7
)
( 40.0
)
Treasury stock, at cost, 3,607,639 and 2,930,694 shares
( 122.5
)
( 104.0
)
Total Koppers shareholders’ equity
375.3
406.6
Noncontrolling interests
3.9
4.2
Total equity
379.2
410.8
Total liabilities and equity
$
1,687.3
$
1,661.9
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
KOPPERS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
2022
2021
(Dollars in millions)
(Unaudited)
(Unaudited)
Cash provided by (used in) operating activities:
Net income
$
30.4
$
52.7
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization
27.6
30.0
Stock-based compensation
6.7
6.6
Change in derivative contracts
7.1
( 1.7
)
Non-cash interest expense
1.7
1.3
(Gain) on sale of assets
( 2.6
)
( 7.8
)
Insurance proceeds
( 0.7
)
0.0
Deferred income taxes
0.6
0.4
Change in other liabilities
( 1.0
)
4.0
Other - net
5.8
1.2
Changes in working capital:
Accounts receivable
( 52.3
)
( 31.7
)
Inventories
( 19.6
)
5.7
Accounts payable
28.0
0.5
Accrued liabilities
( 7.9
)
( 21.5
)
Other working capital
( 2.6
)
( 3.6
)
Net cash provided by operating activities
21.2
36.1
Cash (used in) provided by investing activities:
Capital expenditures
( 55.8
)
( 60.9
)
Insurance proceeds received
0.7
0.0
Cash provided by sale of assets
4.0
5.1
Net cash used in investing activities
( 51.1
)
( 55.8
)
Cash provided by (used in) financing activities:
Net increase in credit facility borrowings
55.0
34.2
Repayments of long-term debt
( 2.0
)
( 5.1
)
Issuances of Common Stock
0.7
1.8
Repurchases of Common Stock
( 18.5
)
( 1.9
)
Payment of debt issuance costs
( 4.6
)
0.0
Dividends paid
( 2.1
)
0.0
Net cash provided by financing activities
28.5
29.0
Effect of exchange rate changes on cash
( 3.7
)
( 1.3
)
Net (decrease) increase in cash and cash equivalents
( 5.1
)
8.0
Cash and cash equivalents at beginning of period
45.5
38.5
Cash and cash equivalents at end of period
$
40.4
$
46.5
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases
$
14.6
$
15.5
Supplemental disclosure of non-cash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities
$
6.3
$
8.3
Supplemental disclosure of cash flow information:
Non-cash investing activities
Accrued capital expenditures
$
8.2
$
4.2
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
KOPPERS HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 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. All such adjustments are of a normal recurring nature unless disclosed otherwise. Because our business is seasonal, results for interim periods are not necessarily indicative of those that may be expected for a full year. The Condensed Consolidated Balance Sheet as of December 31, 2021 has been summarized from the audited balance sheet contained in the Annual Report on Form 10-K as of and for the year ended December 31, 2021. Certain prior period amounts in the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been reclassified to conform to the current period’s presentation.
The financial information included herein should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.
2. New Accounting Pronouncements
In March 2022, the Financial Accounting Standards Board (“FASB”) issued ASU No. 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. ASU No. 2022-01 is effective for periods beginning after December 15, 2022, and earlier adoption is permitted. We are currently in the process of reviewing the effect of this ASU on our financial statements.
3. Plant Closures and Divestitures
We have restructured our Carbon Materials and Chemicals (“CMC”) segment in order to concentrate our facilities in regions where we believe we hold key competitive advantages to better serve our global customers. The recent restructuring activities which had an impact on our reported results include:
•
In February 2021, we sold our closed Follansbee, West Virginia coal tar distillation facility and we recorded a gain on sale of $ 5.7 million, consisting of $ 2.6 million from cash proceeds in addition to the assumption of certain liabilities by the buyer.
•
In September 2020, we sold Koppers (Jiangsu) Carbon Chemical Company Limited (“KJCC”) . Refer to Note 4 – “Discontinued Operations” for more details.
•
In October 2018, we sold our closed Clairton, Pennsylvania coal tar distillation facility. In the first quarter of 2021, certain post-sale conditions were achieved and the buyer of the property released cash held in escrow to us resulting in a gain on sale of $ 1.8 million.
Other closure and divestiture activity relates to our Railroad and Utility Products and Services (“RUPS”) segment, including:
•
In January 2022, we began curtailing operations at our utility pole treating facility in Sweetwater, Tennessee. We sold the facility in March 2022 and recorded a gain on sale of $ 2.5 million.
•
In October 2021, we sold our closed Denver, Colorado crosstie treating facility and recorded a gain on sale of $ 23.4 million. As part of the sales agreement, we may receive additional contingent post-closing payments secured by a guaranty from the buyer after applicable redevelopment milestones are reached. At this time, we are unable to estimate how much, if any, of these additional funds will ultimately be paid to us .
5
4. Discontinued Operations
On September 30, 2020, we sold KJCC to Fangda Carbon New Material Co., Ltd and C-Chem Co., Ltd., a subsidiary of Nippon Steel Chemical & Material Co., Ltd. (the “Buyers”). KJCC was located in Pizhou, Jiangsu Province, China and was a 75 percent-owned coal tar distillation company which was part of our CMC segment. Restricted cash of $ 2.3 million is being held in an escrow account and is recorded within cash and cash equivalents as of June 30, 2022 to cover potential customary indemnity claims by the Buyers. On December 23, 2021 and March 31, 2022, the Buyers issued various claims, which after negotiation were settled in April 2022 for $ 0.9 million, of which our share is $ 0.7 million. After reduction for the settlement, we expect the escrow amount will be fully released by the end of the third quarter.
The sale of KJCC represented a strategic shift that had a major effect on our operations and accordingly is classified as discontinued operations in our condensed consolidated financial statements and notes.
5. Fair Value Measurements
Carrying amounts and the related estimated fair values of our financial instruments as of June 30, 2022 and December 31, 2021 are as follows:
June 30, 2022
December 31, 2021
Fair Value
Carrying
Value
Fair Value
Carrying
Value
(Dollars in millions)
Financial assets:
Investments and other assets
$
1.3
$
1.3
$
1.3
$
1.3
Financial liabilities:
Long-term debt (including current portion)
$
831.5
$
842.2
$
804.1
$
789.1
Investments and other assets – 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.
Debt – 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 approximates carrying value due to the variable rate nature of this instrument.
6. Comprehensive (Loss) Income and Equity
Total comprehensive (loss) income for the three and six months ended June 30 , 2022 and 2021 is summarized in the table below:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(Dollars in millions)
Net income
$
11.6
$
26.9
$
30.4
$
52.7
Changes in other comprehensive (loss) income:
Currency translation adjustment
( 26.5
)
3.8
( 20.7
)
( 3.4
)
Unrealized (loss) gain on cash flow hedges,
net of tax benefit (expense) of
$ 12.6 , $( 0.1 ), $ 15.0 and $( 4.6 )
( 24.4
)
0.4
( 28.7
)
13.3
Unrecognized pension net loss, net of tax
expense of $ 0.0 , $ 0.1 , $ 0.1 and $ 0.2
0.5
0.3
0.6
0.5
Total comprehensive (loss) income
( 38.8
)
31.4
( 18.4
)
63.1
Comprehensive loss attributable to
noncontrolling interests
( 0.2
)
0.0
( 0.3
)
( 0.1
)
Comprehensive (loss) income attributable to Koppers
$
( 38.6
)
$
31.4
$
( 18.1
)
$
63.2
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 13 – “Pensions and Post-Retirement Benefit Plans.” Other amounts reclassified from accumulated other comprehensive loss related to derivative financial instruments of $ 11.1 million and $ 21.2 million for the three and six months ended June 30, 2022, respectively, and $ 12.7 million and $ 19.9 million for the three and six months ended June 30, 2021, respectively. The amounts in the preceding sentence are net of tax.
6
The following tables present the change in equity for the three months ended June 30, 2022 and 2021, respectively:
(Dollars in millions)
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Noncontrolling
Interests
Total Equity
Balance at March 31, 2022
$
0.2
$
253.4
$
318.7
$
( 38.3
)
$
( 115.1
)
$
4.1
$
423.0
Net income
0.0
0.0
11.6
0.0
0.0
0.0
11.6
Dividends
0.0
0.0
( 1.0
)
0.0
0.0
0.0
( 1.0
)
Issuance of common stock
0.0
0.3
0.0
0.0
0.0
0.0
0.3
Repurchases of common
stock
0.0
0.0
0.0
0.0
( 7.4
)
0.0
( 7.4
)
Employee stock plans
0.0
3.3
0.0
0.0
0.0
0.0
3.3
Other comprehensive
(loss) income
Currency translation
adjustment
0.0
0.0
0.0
( 26.5
)
0.0
( 0.2
)
( 26.7
)
Unrealized loss on cash
flow hedges
0.0
0.0
0.0
( 24.4
)
0.0
0.0
( 24.4
)
Unrecognized pension
net loss
0.0
0.0
0.0
0.5
0.0
0.0
0.5
Balance at June 30, 2022
$
0.2
$
257.0
$
329.3
$
( 88.7
)
$
( 122.5
)
$
3.9
$
379.2
(Dollars in millions)
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Noncontrolling
Interests
Total Equity
Balance at March 31,
2021
$
0.2
$
238.9
$
241.9
$
( 10.0
)
$
( 94.3
)
$
4.2
$
380.9
Net income
0.0
0.0
26.9
0.0
0.0
0.0
26.9
Issuance of common stock
0.0
0.7
0.0
0.0
0.0
0.0
0.7
Repurchases of common
stock
0.0
0.0
0.0
0.0
( 0.1
)
0.0
( 0.1
)
Employee stock plans
0.0
3.1
0.0
0.0
0.0
0.0
3.1
Other comprehensive
(loss) income
Currency translation
adjustment
0.0
0.0
0.0
8.2
0.0
0.1
8.3
Cumulative translation
adjustment loss on
sale of subsidiary
0.0
0.0
0.0
( 4.4
)
0.0
0.0
( 4.4
)
Unrealized gain on
cash flow hedges
0.0
0.0
0.0
0.4
0.0
0.0
0.4
Unrecognized pension
net loss
0.0
0.0
0.0
0.3
0.0
0.0
0.3
Balance at June 30,
2021
$
0.2
$
242.7
$
268.8
$
( 5.5
)
$
( 94.4
)
$
4.3
$
416.1
7
The following tables present the change in equity for the six months ended June 30, 2022 and 2021, respectively:
(Dollars in millions)
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Noncontrolling
Interests
Total Equity
Balance at December 31,
2021
$
0.2
$
249.5
$
300.9
$
( 40.0
)
$
( 104.0
)
$
4.2
$
410.8
Net income (loss)
0.0
0.0
30.5
0.0
0.0
( 0.1
)
30.4
Dividends
0.0
0.0
( 2.1
)
0.0
0.0
0.0
( 2.1
)
Issuance of common stock
0.0
0.7
0.0
0.0
0.0
0.0
0.7
Repurchases of common
stock
0.0
0.0
0.0
0.0
( 18.5
)
0.0
( 18.5
)
Employee stock plans
0.0
6.8
0.0
0.0
0.0
0.0
6.8
Other comprehensive
(loss) income
Currency translation
adjustment
0.0
0.0
0.0
( 20.7
)
0.0
( 0.2
)
( 20.9
)
Unrealized loss on
cash flow hedges
0.0
0.0
0.0
( 28.7
)
0.0
0.0
( 28.7
)
Unrecognized pension
net loss
0.0
0.0
0.0
0.6
0.0
0.0
0.6
Balance at June 30, 2022
$
0.2
$
257.0
$
329.3
$
( 88.7
)
$
( 122.5
)
$
3.9
$
379.2
(Dollars in millions)
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Noncontrolling
Interests
Total Equity
Balance at December 31,
2020
$
0.2
$
234.1
$
215.8
$
( 15.9
)
$
( 92.5
)
$
4.3
$
346.0
Net income
0.0
0.0
52.7
0.0
0.0
0.0
52.7
Issuance of common stock
0.0
1.8
0.0
0.0
0.0
0.0
1.8
Employee stock plans
0.0
6.7
0.0
0.0
0.0
0.0
6.7
Other comprehensive
(loss) income
Currency translation
adjustment
0.0
0.0
0.3
1.0
0.0
0.0
1.3
Cumulative translation
adjustment loss on
sale of subsidiary
0.0
0.0
0.0
( 4.4
)
0.0
0.0
( 4.4
)
Unrealized gain on
cash flow hedges
0.0
0.0
0.0
13.3
0.0
0.0
13.3
Unrecognized pension
net loss
0.0
0.0
0.0
0.5
0.0
0.0
0.5
Repurchases of common
stock
0.0
0.0
0.0
0.0
( 1.9
)
0.0
( 1.9
)
Balance at June 30,
2021
$
0.2
$
242.7
$
268.8
$
( 5.5
)
$
( 94.4
)
$
4.3
$
416.1
On August 4, 2022 , we declared a quarterly dividend of $ 0.05 per common share, payable on September 12, 2022 to shareholders of record as of August 26, 2022 .
8
7. 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,
2022
2021
2022
2021
(Dollars in millions, except share amounts, in thousands)
Net income attributable to Koppers
$
11.7
$
26.9
$
30.5
$
52.8
Less: (Gain) loss on sale of discontinued operations,
net of tax of $ 0.0
0.0
1.0
( 0.5
)
0.6
Income from continuing operations attributable to Koppers
$
11.7
$
25.9
$
31.0
$
52.2
Weighted average common shares outstanding:
Basic
21,026
21,289
21,088
21,217
Effect of dilutive securities
213
678
384
732
Diluted
21,239
21,967
21,472
21,949
Earnings per common share – continuing operations:
Basic earnings per common share
$
0.56
$
1.22
$
1.47
$
2.46
Diluted earnings per common share
0.55
1.18
1.44
2.38
Other data:
Antidilutive securities excluded from computation of
diluted earnings per common share
1,077
434
1,058
439
8. 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”). The 2005 LTIP, the 2018 LTIP and the 2020 LTIP are collectively referred to as 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 and the fair value of performance stock units is determined using a Monte Carlo valuation model. For grants to most employees, the restricted stock units vest in four equal annual installments. 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 in connection with employee compensation with vesting periods of typically two years or less.
Performance stock units have vesting based upon a market condition. These performance stock units have multi-year performance objectives and a three-year period for vesting (if the applicable performance objectives are achieved). The applicable performance objective is based on our total shareholder return relative to the Standard & Poor’s SmallCap 600 Materials Index. 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.
9
We calculated the fair value of the performance stock unit awards on the date of grant using the assumptions listed below:
January 2022 Grant
January 2021 Grant
March 2020 Grant
Grant date price per share of performance
award
$
32.19
$
29.84
$
19.63
Expected dividend yield per share
0.00
%
0.00
%
0.00
%
Expected volatility
66.90
%
68.70
%
45.60
%
Risk-free interest rate
1.10
%
0.16
%
0.72
%
Look-back period in years
3.00
3.00
2.83
Grant date fair value per share
$
45.19
$
41.50
$
11.56
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, 2022:
Performance Period
Minimum
Shares
Target
Shares
Maximum
Shares
2020 – 2022
0
74,259
148,563
2021 – 2023
40,751
137,936
235,138
2022 – 2024
0
149,892
299,784
The following table shows a summary of the status and activity of non-vested stock units for the six months ended June 30, 2022:
Restricted
Stock Units
Performance
Stock Units
Total
Stock Units
Weighted Average
Grant Date Fair
Value per Unit
Non-vested at December 31, 2021
505,905
474,166
980,071
$
30.79
Granted
241,260
151,236
392,496
$
36.12
Performance share adjustment
0
2,491
2,491
$
14.20
Vested
( 191,962
)
( 256,956
)
( 448,918
)
$
34.50
Forfeited
( 25,344
)
( 8,848
)
( 34,192
)
$
28.19
Non-vested at June 30, 2022
529,859
362,089
891,948
$
31.32
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. 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
March 2019 Grant
Grant date price per share of stock
option award
$
32.19
$
29.84
$
19.63
$
26.63
Expected dividend yield per share
0.00
%
0.00
%
0.00
%
0.00
%
Expected life in years
6.76
6.64
6.40
6.14
Expected volatility
54.50
%
54.80
%
42.85
%
39.44
%
Risk-free interest rate
1.52
%
0.59
%
0.87
%
2.53
%
Grant date fair value per share of option
awards
$
17.58
$
15.79
$
8.42
$
11.29
10
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 historical volatility of certain other similar public companies. The risk-free interest rate is based on U.S. Treasury bill rates for the expected life of the option.
The following table shows a summary of the status and activity of stock options for the six months ended June 30, 2022:
Options
Weighted Average
Exercise Price
per Option
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
Outstanding at December 31, 2021
1,054,166
$
26.89
Granted
98,108
$
32.19
Expired
( 30,138
)
$
38.21
Outstanding at June 30, 2022
1,122,136
$
27.05
5.12
$
2.3
Exercisable at June 30, 2022
843,475
$
26.99
4.02
$
2.0
Stock Compensation Expense
Total stock-based compensation expense recognized under our LTIP and employee stock purchase plan for the three and six months ended June 30, 2022 and 2021 is as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(Dollars in millions)
Stock-based compensation expense recognized:
Selling, general and administrative expenses
$
3.2
$
3.1
$
6.7
$
6.6
Less related income tax benefit
1.1
0.8
2.3
1.7
Decrease in net income attributable to Koppers
$
2.1
$
2.3
$
4.4
$
4.9
Intrinsic value of exercised stock options
$
0.0
$
1.3
$
0.0
$
2.2
Cash received from the exercise of stock options
$
0.0
$
1.3
$
0.0
$
2.3
As of June 30, 2022 , total future compensation expense related to non-vested stock-based compensation arrangements is expected to total $ 24.6 million and the weighted-average period over which this expense is expected to be recognized is approximately 29 months .
9. Segment Information
We have three reportable segments: RUPS, Performance Chemicals (“PC”) and 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. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes.
Our RUPS segment sells treated and untreated wood products, manufactured products and services primarily to the railroad and public utility markets. Railroad products and services include procuring and treating items such as crossties, switch ties and various types of lumber used for railroad bridges and crossings and the manufacture of rail joint bars. Utility products include transmission and distribution poles and pilings. 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 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 CMC segment is primarily a manufacturer of creosote, carbon pitch, naphthalene, phthalic anhydride and carbon black feedstock. Creosote is used in the treatment of wood and carbon black feedstock is used in the production of carbon black. Carbon pitch is used in the production of aluminum and steel in electric arc furnaces. Naphthalene is used for the production of phthalic anhydride and as a surfactant in the production of concrete. Phthalic anhydride is used in the production of plasticizers, polyester resins and alkyd paints.
11
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 on sale of assets and LIFO inventory effects. This presentation is consistent with how our chief operating decision maker evaluates the results of operations and makes strategic decisions about the business. 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. For these reasons, we believe that adjusted EBITDA represents the most relevant measure of segment profit and loss.
Consolidated adjusted EBITDA is reconciled to net income, the most directly comparable financial measure determined and reported in accordance with U.S. GAAP. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment transactions are eliminated in consolidation.
Contract Balances
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 $ 6.1 million and $ 7.9 million are recorded within accounts receivable, net of allowance within the condensed consolidated balance sheet as of June 30, 2022 and December 31, 2021, respectively.
The following table sets forth certain sales and operating data, net of all intersegment transactions, for our segments for the periods indicated:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(Dollars in millions)
Revenues from external customers:
Railroad and Utility Products and Services
$
204.2
$
195.5
$
387.6
$
387.4
Performance Chemicals
149.6
145.6
286.0
269.2
Carbon Materials and Chemicals
148.7
99.9
288.2
191.9
Total
$
502.5
$
441.0
$
961.8
$
848.5
Intersegment revenues:
Performance Chemicals
$
5.9
$
3.8
$
9.9
$
7.3
Carbon Materials and Chemicals
18.9
18.5
37.5
36.3
Total
$
24.8
$
22.3
$
47.4
$
43.6
Depreciation and amortization expense:
Railroad and Utility Products and Services
$
5.5
$
5.3
$
10.9
$
11.6
Performance Chemicals
3.8
4.7
7.7
9.5
Carbon Materials and Chemicals
4.1
3.9
9.0
8.9
Total
$
13.4
$
13.9
$
27.6
$
30.0
Adjusted EBITDA:
Railroad and Utility Products and Services
$
13.2
$
12.0
$
24.8
$
28.4
Performance Chemicals
20.4
34.5
41.2
62.3
Carbon Materials and Chemicals
21.0
18.6
41.2
29.0
Items excluded from the determination of segment
profit:
Impairment, restructuring and plant closure
benefits (costs)
0.2
( 1.6
)
0.0
( 5.0
)
Gain on sale of assets
0.0
0.3
2.5
7.8
LIFO expense
( 5.1
)
( 4.3
)
( 6.8
)
( 5.3
)
Mark-to-market commodity hedging (losses)
gains
( 6.8
)
( 1.0
)
( 7.1
)
1.8
Corporate unallocated
0.0
0.5
0.0
1.0
Interest expense
( 11.1
)
( 10.1
)
( 20.8
)
( 20.3
)
Depreciation and amortization
( 13.4
)
( 13.9
)
( 27.6
)
( 30.0
)
Income tax provision
( 6.8
)
( 9.1
)
( 16.5
)
( 17.6
)
Discontinued operations
0.0
1.0
( 0.5
)
0.6
Net income
$
11.6
$
26.9
$
30.4
$
52.7
12
The following table sets forth revenues for significant product lines, net of all intersegment transactions, for our segments for the periods indicated:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(Dollars in millions)
Railroad and Utility Products and Services:
Railroad treated products
$
122.3
$
111.8
$
227.6
$
220.8
Utility poles
59.5
63.7
115.7
126.4
Railroad infrastructure services
9.7
7.6
19.0
16.5
Rail joints
7.0
6.7
13.8
12.2
Other products
5.7
5.7
11.5
11.5
Total
204.2
195.5
387.6
387.4
Performance Chemicals:
Wood preservative products
141.7
137.5
270.8
254.8
Other products
7.9
8.1
15.2
14.4
Total
149.6
145.6
286.0
269.2
Carbon Materials and Chemicals:
Pitch and related products
82.5
56.1
160.3
107.3
Phthalic anhydride and other chemicals
28.2
15.9
53.5
32.4
Creosote and distillates
20.7
16.6
39.7
29.6
Naphthalene
8.4
4.8
16.9
9.4
Other products
8.9
6.5
17.8
13.2
Total
148.7
99.9
288.2
191.9
Total
$
502.5
$
441.0
$
961.8
$
848.5
The following table sets forth assets and goodwill allocated to each of our segments as of the dates indicated:
June 30,
2022
December 31,
2021
(Dollars in millions)
Segment assets:
Railroad and Utility Products and Services
$
610.3
$
594.1
Performance Chemicals
555.3
586.9
Carbon Materials and Chemicals
490.3
447.1
All other
31.4
33.8
Total
$
1,687.3
$
1,661.9
Goodwill:
Railroad and Utility Products and Services
$
120.7
$
120.9
Performance Chemicals
173.3
175.1
Total
$
294.0
$
296.0
10. Income Taxes
Effective Tax Rate
The income tax provision for interim periods is comprised of an estimated annual effective income tax rate applied to current year ordinary income and tax associated with discrete items. These discrete items generally relate to excess stock compensation deductions, changes in tax laws, adjustments to unrecognized tax benefits and changes of estimated tax liability to the actual liability determined upon filing income tax returns. To determine the annual effective tax rate, management is required to make estimates of annual pretax income in each domestic and foreign jurisdiction in which we conduct business. Entities that have historical pre-tax losses and current year estimated pre-tax losses that are not projected to generate a future benefit are excluded from the estimated annual effective income tax rate.
13
The estimated annual effective income tax rate, excluding discrete items, was 34.3 percent and 25.8 percent for the six months ended June 30, 2022 and 2021, respectively. The estimated annual effective income tax rate differs from the U.S. federal statutory tax rate due to:
June 30,
2022
2021
Federal income tax rate
21.0
%
21.0
%
Foreign earnings taxed at different rates
6.4
3.2
Interest expense deduction limitation
5.0
0.0
Nondeductible expenses
1.5
1.1
State income taxes, net of federal tax benefit
0.6
0.6
Change in tax contingency reserves
0.1
0.1
GILTI inclusion, net of foreign tax credits
( 0.3
)
( 0.2
)
Estimated annual effective income tax rate
34.3
%
25.8
%
The interest expense deduction limitation is limited to 30 percent of adjusted taxable income as defined under the tax regulations. Starting January 1, 2022, the calculation of adjusted taxable income excludes an addback for depreciation and amortization whereas previous years’ determination of adjusted taxable income included an addback for depreciation and amortization. This change in the determination of adjusted taxable income has decreased the amount of interest expense we can deduct and has had a significant unfavorable impact on our estimated annual effective income tax rate for the current year.
Income taxes as a percentage of pretax income were 37.0 percent for the three months ended June 30, 2022. This is higher than the estimated annual effective income tax rate of 34.3 percent due to additional tax expense recognized in the current quarter as a result of increasing the estimated annual effective income tax rate utilized in the previous quarter.
Income taxes as a percentage of pretax income were 34.8 percent for the six months ended June 30, 2022. This was higher than the estimated annual effective income tax rate of 34.3 percent due to minor discrete items.
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 as of June 30, 2022.
Unrecognized Tax Benefits
We file income tax returns in the U.S. federal jurisdiction, individual U.S. state jurisdictions and non-U.S. jurisdictions. With few exceptions, we are no longer subject to U.S. federal, U.S. state, or non-U.S. income tax examinations by tax authorities for years prior to 2016.
Unrecognized tax benefits totaled $ 1.5 million as of June 30, 2022 and December 31, 2021. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, was approximately $ 1.5 million as of June 30, 2022 and December 31, 2021. We recognize interest expense and any related penalties from unrecognized tax benefits in income tax expense. As of June 30, 2022 and December 31, 2021, we had accrued approximately $ 0.4 million for interest and penalties.
We do not anticipate material changes to the amount of unrecognized tax benefits within the next twelve months.
11. Inventories
Net inventories as of June 30, 2022 and December 31, 2021 are summarized in the table below:
June 30,
2022
December 31,
2021
(Dollars in millions)
Raw materials
$
279.5
$
266.8
Work in process
11.1
12.6
Finished goods
120.5
112.1
$
411.1
$
391.5
Less revaluation to LIFO
84.5
77.7
Net
$
326.6
$
313.8
14
12. Property, Plant and Equipment
Property, plant and equipment as of June 30, 2022 and December 31, 2021 are summarized in the table below:
June 30,
2022
December 31,
2021
(Dollars in millions)
Land
$
14.0
$
15.2
Buildings
74.4
75.8
Machinery and equipment
875.9
836.8
$
964.3
$
927.8
Less accumulated depreciation
445.5
438.7
Net
$
518.8
$
489.1
13. 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”), local statutory law or as determined by the board of directors. 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 frozen and are closed to new participants. Accordingly, these pension plans no longer accrue additional years of service or recognize future increases in compensation for benefit purposes.
With respect to our defined benefit pension plan in the United Kingdom, in 2021 we entered into a buy-in bulk annuity insurance policy in exchange for a premium payment of $ 67.8 million, which is subject to adjustment as a result of subsequent data cleansing activities. Under the terms of this buy-in insurance policy, the insurer is liable to pay the benefits of our defined benefit pension plan in the United Kingdom, but the plan still retains full legal responsibility to pay the benefits to the members of the plan using the insurance payments. 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 is expected to be completed in early 2023 at which time the pension obligation will be irrevocably settled. Upon that event, we will recognize a pre-tax pension settlement loss of approximately $ 22 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. employees. For salaried employees, the retiree medical and retiree life insurance plans have been closed to new participants.
The following table provides the components of net periodic benefit cost for the pension plans for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(Dollars in millions)
Service cost
$
0.3
$
0.3
$
0.6
$
0.7
Interest cost
1.5
1.5
2.9
2.7
Expected return on plan assets
( 1.9
)
( 1.9
)
( 3.9
)
( 3.7
)
Amortization of net loss
0.4
0.3
0.9
0.7
Net periodic benefit cost
$
0.3
$
0.2
$
0.5
$
0.4
Defined contribution plan expense
$
2.3
$
2.6
$
4.8
$
4.3
15
14. Debt
Debt as of June 30, 2022 and December 31, 2021 was as follows:
Weighted
Average
Interest Rate
Maturity
June 30,
2022
December 31,
2021
(Dollars in millions)
Term Loan
2.38
%
─
$
0.0
$
2.0
Revolving Credit Facility
2.38
%
2024
0.0
287.1
Revolving Credit Facility
3.60
%
2027
342.2
0.0
Senior Notes due 2025
6.00
%
2025
500.0
500.0
Debt
842.2
789.1
Less short-term debt and current maturities of long-term debt
0.0
2.0
Less unamortized debt issuance costs
8.5
5.6
Long-term debt
$
833.7
$
781.5
Revolving Credit Facility
In June 2022, we entered into an $ 800.0 million revolving credit agreement (the “Credit Facility”) with a consortium of banks which replaced our previous $ 600.0 million senior secured revolving credit facility and $ 100.0 million senior secured term loan facility (the latter having been fully repaid as of March 31, 2022). 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 maturity date of the Credit Facility is in June 2027 subject to a springing maturity in the event the 2025 Notes (as defined below) are not repurchased, redeemed or refinanced prior to November 15, 2024. 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. and their material domestic subsidiaries. The Credit Facility contains certain covenants that limit Koppers Inc. and its restricted subsidiaries, including, without limitation, limitations on additional indebtedness, liens, dividends, investments, acquisitions, subsidiary and certain other distributions, asset sales, transactions with affiliates and modifications to material documents, including organizational documents. In addition, such covenants give rise to events of default upon the failure by Koppers Inc. and its restricted subsidiaries to meet certain financial ratios.
As of June 30, 2022, we had $ 317.2 million of unused revolving credit availability after restrictions from certain letter of credit commitments and other covenants. As of June 30, 2022, $ 7.8 million of commitments were utilized by outstanding undrawn letters of credit.
Senior Notes due 2025
Koppers Inc.’s $ 500 million Senior Notes due 2025 (the “2025 Notes”) are senior obligations of Koppers Inc., are unsecured and are guaranteed by Koppers Holdings Inc. and certain of Koppers Inc.’s domestic subsidiaries. The 2025 Notes pay interest semi-annually in arrears on February 15 and August 15 and will mature on February 15, 2025 unless earlier redeemed or repurchased. We are entitled to redeem all or a portion of the 2025 Senior Notes at a redemption price of 101.5 percent of principal value as of February 15, 2022 until April 15, 2023 when the 2025 Notes are redeemable at principal value.
The indenture governing the 2025 Senior Notes includes customary covenants that restrict, among other things, the ability of Koppers Inc. and its restricted subsidiaries to incur additional debt, pay dividends or make certain other restricted payments, incur liens, merge or sell all or substantially all of the assets of Koppers Inc. or its subsidiaries or enter into various transactions with affiliates.
16
15. 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 rail-cars 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:
June 30,
2022
December 31,
2021
(Dollars in millions)
Asset retirement obligation at beginning of year
$
13.2
$
19.8
Accretion expense
0.5
1.0
Revision in estimated cash flows
0.0
( 0.3
)
Cash expenditures
( 0.5
)
( 7.3
)
Currency translation
( 0.1
)
0.0
Balance at end of period
$
13.1
$
13.2
16. Leases
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. Operating lease costs were $ 7.2 million and $ 14.7 million during the three and six months ended June 30, 2022, respectively, and $ 7.6 million and $ 15.3 million during the three and six months ended June 30, 2021, respectively. Variable lease costs were $ 0.6 million and $ 1.4 million during the three and six months ended June 30, 2022, respectively, and $ 0.8 million and $ 1.6 million during the three and six months ended June 30, 2021, respectively.
The following table presents information about the amount and timing of cash flows arising from our operating leases as of June 30, 2022:
(Dollars in millions)
2022
$
14.3
2023
23.2
2024
19.4
2025
15.6
2026
11.4
Thereafter
26.9
Total lease payments
$
110.8
Less: Interest
( 22.9
)
Present value of lease liabilities
$
87.9
17
Supplemental condensed consolidated balance sheet information related to leases is as follows:
June 30,
December 31,
2022
2021
(Dollars in millions)
Operating leases:
Operating lease right-of-use assets
$
86.9
$
91.2
Current operating lease liabilities
$
20.9
$
21.3
Operating lease liabilities
67.0
70.3
Total operating lease liabilities
$
87.9
$
91.6
Weighted average remaining lease term, in years
5.7
5.8
Weighted average discount rate
7.3
%
7.4
%
17. 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 and foreign currency exchange risk associated with a number of currencies, principally the U.S. dollar, the Euro and British pounds. 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 2023. 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. Generally, we enter into master netting arrangements with the counterparties and offset net derivative positions with the same counterparties. Currently, our agreements do not require cash collateral.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the balance sheet. Derivative instruments’ fair value is determined using significant other observable inputs, or Level 2 in the fair value hierarchy. We designate certain of our commodity swaps as cash flow hedges of forecasted purchases of commodities. 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 (loss) 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 in the consolidated balance sheet and the related 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.
As of June 30, 2022 and December 31, 2021, we had outstanding copper swap contracts of the following amounts:
Units Outstanding (in Pounds)
Net Fair Value - Asset (in Dollars)
June 30,
2022
December 31,
2021
June 30,
2022
December 31,
2021
(Amounts in millions)
Cash flow hedges
15.5
29.0
$
16.5
$
53.8
Contracts where hedge accounting was not
elected
5.5
6.1
$
0.0
7.1
Total
21.0
35.1
$
16.5
$
60.9
As of June 30, 2022 and December 31, 2021, the fair value of the outstanding copper swap contracts is recorded in the balance sheet as follows:
June 30,
2022
December 31,
2021
(Dollars in millions)
Derivative contracts
$
17.0
$
60.9
Other long-term liabilities
( 0.5
)
0.0
Net asset on balance sheet
$
16.5
$
60.9
Accumulated other comprehensive gain, net of tax
$
12.6
$
40.6
We estimate that $ 12.9 million of unrealized gains, net of tax, related to commodity price hedging will be reclassified from other comprehensive (loss) income into earnings over the next twelve months .
18
See Note 6 – “ Comprehensive (Loss) Income and Equity ” , for amounts recorded in other comprehensive loss and for amounts reclassified from accumulated other comprehensive loss in to net income for the periods specified below.
For the three and six months ended June 30, 2022 and 2021, the unrealized (loss) gain from contracts where hedge accounting was not elected is as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(Dollars in millions)
(Loss) gain from contracts where hedge accounting was
not elected
( 6.8
)
( 0.9
)
( 7.1
)
1.7
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 (loss) income.
As of June 30, 2022 and December 31, 2021, the fair value of outstanding foreign currency forward contracts is recorded in the balance sheet as follows:
June 30,
2022
December 31,
2021
(Dollars in millions)
Derivative contracts
$
0.0
$
0.1
Accrued liabilities
( 0.9
)
( 0.4
)
Net liability on balance sheet
$
( 0.9
)
$
( 0.3
)
As of June 30, 2022 and December 31, 2021, the net currency units outstanding for these contracts were:
June 30,
2022
December 31,
2021
(In millions)
United States Dollars
USD 12.9
USD 21.4
18. Commitments and Contingent Liabilities
We are involved in litigation and various proceedings relating to environmental laws and regulations, product liability and other matters. Certain of these matters are discussed below. The ultimate resolution of these contingencies is subject to significant uncertainty and should we fail to prevail in any of these legal matters or should several of these legal matters be resolved against us in the same reporting period, these legal matters could, individually or in the aggregate, be material to the condensed consolidated financial statements.
Legal Proceedings
Coal Tar Pitch Cases . Koppers Inc. 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 57 plaintiffs in 30 cases pending as of June 30, 2022, compared to 59 plaintiffs in 31 cases pending as of December 31, 2021. As of June 30, 2022 , there were 29 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 30 pending cases seek to recover compensatory damages. Plaintiffs in 25 of those cases also seek to recover punitive damages. The plaintiffs in the 29 cases filed in Pennsylvania seek unspecified damages in excess of the court’s minimum jurisdictional limit. The plaintiff in the Tennessee state court case seeks damages of $ 15.0 million. 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, Dow Chemical Company, UCAR Carbon Company, Inc., and SGL Carbon Corporation. Discovery is proceeding in these cases. No trial dates have been set in any of these cases.
We have no t provided a reserve for the coal tar pitch lawsuits because, at this time, we cannot reasonably determine the probability of a loss, and the amount of loss, if any, cannot be reasonably estimated. The timing of resolution of these cases cannot be reasonably determined. Although Koppers Inc. is vigorously defending these cases, an unfavorable resolution of these matters may have a material adverse effect on our business, financial condition, cash flows and results of operations.
19
Environmental and Other Litigation Matters
We are subject to federal, state, local and foreign laws and regulations and potential liabilities relating to the protection of the environment and human health and safety including, among other things, the cleanup of contaminated sites, the treatment, storage and disposal of wastes, the discharge of effluent into waterways, the emission of substances into the air and various health and safety matters. We expect to incur substantial costs for ongoing compliance with such laws and regulations. We may also face governmental or third-party claims, or otherwise incur costs, relating to cleanup of, or for injuries resulting from, contamination at sites associated with past and present operations. We accrue for environmental liabilities when a determination can be made that a liability is probable and reasonably estimable .
Environmental and Other Liabilities Retained or Assumed by Others. 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”). 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 (the “Guarantee”).
The Indemnity provides different mechanisms, subject to certain limitations, by which Beazer East is obligated to indemnify Koppers Inc. with regard to certain environmental, product and other liabilities and imposes certain conditions on Koppers Inc. before receiving such indemnification, including, in some cases, certain limitations regarding the time period as to which claims for indemnification can be brought. In July 2004, Koppers Inc. and Beazer East agreed to amend the environmental indemnification provisions of the December 29, 1988 asset purchase agreement to extend the indemnification period for pre-closing environmental liabilities, subject to the following paragraph, and agreed to share toxic tort litigation defense arising from any sites acquired from Beazer East.
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; (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. 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. Furthermore, the Claim Deadline did not change the provisions of the Indemnity with respect to indemnification for non-environmental claims, such as product liability claims, which claims may continue to be tendered by Koppers Inc. to Beazer East.
The Indemnity provides for the resolution of issues between Koppers Inc. and Beazer East by an arbitrator on an expedited basis upon the request of either party. The arbitrator could be asked, among other things, to make a determination regarding the allocation of environmental responsibilities between Koppers Inc. and Beazer East. Arbitration decisions under the Indemnity are final and binding on the parties.
Contamination has been identified at most manufacturing and other sites of our subsidiaries. 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 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.
To date, the parties that retained, assumed and/or agreed to indemnify us against the liabilities referred to above, including Beazer East, have performed their obligations in all material respects. We believe that, for the last three years ended December 31, 2021, amounts paid by Beazer East as a result of its environmental remediation obligations under the Indemnity have averaged, in total, approximately $ 6.4 million per year. Periodically, issues have arisen between Koppers Inc. and Beazer East and/or other indemnitors that have been resolved without arbitration. Koppers Inc. and Beazer East engage in discussions from time to time that involve, among other things, the allocation of environmental costs related to certain operating and closed facilities.
20
If for any reason (including disputed coverage or financial incapability) one or more of such parties fail to perform their obligations and we are held liable for or otherwise required to pay all or part of such liabilities without reimbursement, the imposition of such liabilities on us could have a material adverse effect on our business, financial condition, cash flows and results of operations. Furthermore, we could be required to record a contingent liability on our balance sheet with respect to such matters, which could result in a negative impact to our business, financial condition, cash flows and results of operations.
Domestic Environmental Matters. Koppers Inc. has been named as one of the potentially responsible parties (“PRPs”) at the Portland Harbor CERCLA site located on the Willamette River in Oregon. Koppers Inc. operated a coal tar pitch terminal near the site. Koppers Inc. has responded to an EPA information request and has executed a PRP agreement which outlines a private process to develop an allocation of past and future costs among more than 80 parties to the site. Koppers Inc. 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 selected remedy includes a combination of sediment removal, capping, enhanced and monitored natural recovery and riverbank improvements. The ROD does not determine who is responsible for remediation costs. At that time, the net present value and undiscounted costs of the selected remedy as estimated in the ROD were approximately $ 1.1 billion and $ 1.7 billion, respectively. These costs may increase given the remedy will not be implemented for several years. Responsibility for implementing and funding that work will be decided in the separate private allocation process which is ongoing.
Additionally, Koppers Inc. is involved in two separate matters involving natural resource damages at the Portland Harbor site. One matter involves claims by the trustees to recover damages based upon an assessment of damages to natural resources caused by the releases of hazardous substances to the Willamette River. The assessment serves as the foundation to estimate liabilities for settlements of natural resource damages claims or litigation to recover from those who do not settle with the trustee groups. Koppers Inc. has been engaged in a process to resolve its natural resource damage liabilities for the assessment area. A second matter involves a lawsuit filed in January 2017 by the Yakama Nation in Oregon federal court. Yakama Nation seeks recovery for response costs and the costs of assessing injury to natural resources to waterways beyond the current assessment area. Following the most recent court rulings, the Yakama Nation case has been stayed pending completion of the private allocation process for the Portland Harbor CERCLA site .
In September 2009, Koppers Inc. received a general notice letter stating that it may be a PRP at the Newark Bay CERCLA site. In January 2010, Koppers Inc. submitted a response to the general notice letter asserting that Koppers Inc. 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 $ 3.3 million as of June 30, 2022. 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. Accordingly, an unfavorable resolution of these matters may have a material adverse effect on our business, financial condition, cash flows and results of operations.
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, 2022, our estimated environmental remediation liability for these acquired sites totals $ 4.0 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, 2022 , our estimated environmental remediation liability for the acquired site totals $ 1.3 million.
Environmental Reserves Rollforward. The following table reflects changes in the accrual for environmental remediation. A total of $ 2.4 million and $ 2.8 million are classified as current liabilities as of June 30, 2022 and December 31, 2021:
Period ended
June 30,
2022
December 31,
2021
(Dollars in millions)
Balance at beginning of year
$
10.7
$
11.0
Expense
0.3
0.3
Reversal of reserves
0.0
( 0.1
)
Cash expenditures
( 0.7
)
( 0.4
)
Currency translation
( 0.2
)
( 0.1
)
Balance at end of period
$
10.1
$
10.7
21
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.