Koppers Holdings(KOP) - 2023 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Presents Koppers Holdings Inc.'s unaudited condensed consolidated financial statements and related notes ITEM 1. FINANCIAL STATEMENTS This section presents Koppers Holdings Inc.'s unaudited condensed consolidated financial statements, including the statements of operations, balance sheets, and cash flows for the periods ended June 30, 2023, and December 31, 2022 Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) Details Koppers Holdings Inc.'s financial performance, including net sales, operating profit, and net income Three Months Ended June 30, 2023 vs. 2022 (in millions) | Metric | 2023 | 2022 | Change | % Change | | :----------------------------------- | :----- | :----- | :----- | :------- | | Net sales | $577.2 | $502.5 | $74.7 | 14.9% | | Operating profit | $54.4 | $29.1 | $25.3 | 86.9% | | Income from continuing operations | $24.4 | $11.6 | $12.8 | 110.3% | | Net income attributable to Koppers | $24.5 | $11.7 | $12.8 | 109.4% | | Diluted EPS (Continuing operations) | $1.15 | $0.55 | $0.60 | 109.1% | | Comprehensive income (loss) attributable to Koppers | $19.0 | $(38.6) | $57.6 | 149.2% | Six Months Ended June 30, 2023 vs. 2022 (in millions) | Metric | 2023 | 2022 | Change | % Change | | :----------------------------------- | :----- | :----- | :----- | :------- | | Net sales | $1,090.6 | $961.8 | $128.8 | 13.4% | | Operating profit | $104.7 | $67.3 | $37.4 | 55.6% | | Income from continuing operations | $50.6 | $30.9 | $19.7 | 63.8% | | Net income attributable to Koppers | $50.0 | $30.5 | $19.5 | 63.9% | | Diluted EPS (Continuing operations) | $2.34 | $1.44 | $0.90 | 62.5% | | Comprehensive income (loss) attributable to Koppers | $52.2 | $(18.1) | $70.3 | 388.4% | Condensed Consolidated Balance Sheet Provides a snapshot of Koppers Holdings Inc.'s financial position, including assets, liabilities, and equity As of June 30, 2023 vs. December 31, 2022 (in millions) | Metric | June 30, 2023 | Dec 31, 2022 | Change | % Change | | :-------------------------------- | :------------ | :----------- | :----- | :------- | | Total current assets | $713.5 | $636.8 | $76.7 | 12.1% | | Total assets | $1,815.7 | $1,711.4 | $104.3 | 6.1% | | Total current liabilities | $294.1 | $324.0 | $(29.9) | -9.2% | | Long-term debt | $902.2 | $817.7 | $84.5 | 10.3% | | Total liabilities | $1,359.1 | $1,308.4 | $50.7 | 3.9% | | Total Koppers shareholders' equity | $452.6 | $399.4 | $53.2 | 13.3% | | Total equity | $456.6 | $403.0 | $53.6 | 13.3% | Condensed Consolidated Statement of Cash Flows Outlines Koppers Holdings Inc.'s cash inflows and outflows from operating, investing, and financing activities Six Months Ended June 30, 2023 vs. 2022 (in millions) | Metric | 2023 | 2022 | Change | | :-------------------------------------- | :----- | :----- | :----- | | Net cash (used in) provided by operating activities | $(2.1) | $21.2 | $(23.3) | | Net cash used in investing activities | $(60.6) | $(51.1) | $(9.5) | | Net cash provided by financing activities | $78.6 | $28.5 | $50.1 | | Net increase (decrease) in cash and cash equivalents | $14.9 | $(5.1) | $20.0 | | Cash and cash equivalents at end of period | $48.2 | $40.4 | $7.8 | Notes to Condensed Consolidated Financial Statements (Unaudited) Provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Basis of Presentation Explains the accounting principles and assumptions used in preparing the interim financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, omitting some footnotes required for complete annual statements[10] - Management believes all necessary adjustments for fair presentation are included and are of a normal recurring nature[10] - Interim results are not necessarily indicative of full-year results due to seasonality[10] 2. New Accounting Pronouncements Discusses the adoption and impact of recent accounting standards on the financial statements - The company adopted ASU No. 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method," in Q1 2023[12] - This ASU aims to simplify guidance for more accurate presentation of risk management activities[12] - Its adoption did not materially impact the financial statements, as the company primarily uses cash flow hedges[12] 3. Fair Value Measurements Details the fair value of financial instruments and the methodologies used for their measurement Fair Value of Financial Instruments (in millions) | Instrument | June 30, 2023 (Fair Value) | June 30, 2023 (Carrying Value) | Dec 31, 2022 (Fair Value) | Dec 31, 2022 (Carrying Value) | | :----------------------- | :------------------------- | :--------------------------- | :------------------------ | :---------------------------- | | Investments and other assets | $1.3 | $1.3 | $1.3 | $1.3 | | Long-term debt | $927.4 | $915.7 | $801.1 | $825.3 | - The fair value of the Term Loan B is estimated based on market prices or current rates for similar maturities (Level 2)[14] - The Credit Facility's fair value approximates its carrying value due to its variable rate nature[14] - Investments and other assets represent broker-quoted cash surrender value on universal life insurance policies, classified as Level 2[14] 4. Comprehensive Income (Loss) and Equity Presents components of comprehensive income and changes in Koppers shareholders' equity Comprehensive Income (Loss) Attributable to Koppers (in millions) | Period | 2023 | 2022 | Change | | :-------------------------- | :----- | :----- | :----- | | Three Months Ended June 30 | $19.0 | $(38.6) | $57.6 | | Six Months Ended June 30 | $52.2 | $(18.1) | $70.3 | - Changes in other comprehensive income (loss) include currency translation adjustments, unrealized gains/losses on cash flow hedges, and unrecognized pension net loss[17] - For the three months ended June 30, 2023, currency translation adjustment was $(2.2) million (vs. $(26.5) million in 2022) and unrealized loss on cash flow hedges was $(3.8) million (vs. $(24.4) million in 2022)[17] - Total Koppers shareholders' equity increased from $399.4 million at December 31, 2022, to $452.6 million at June 30, 2023, driven by net income and employee stock plans, partially offset by dividends and stock repurchases[7][19] 5. Earnings per Common Share Explains the calculation of basic and diluted earnings per common share for continuing operations Earnings per Common Share – Continuing Operations | Period | Basic EPS (2023) | Basic EPS (2022) | Diluted EPS (2023) | Diluted EPS (2022) | | :-------------------------- | :--------------- | :--------------- | :----------------- | :----------------- | | Three Months Ended June 30 | $1.17 | $0.56 | $1.15 | $0.55 | | Six Months Ended June 30 | $2.40 | $1.47 | $2.34 | $1.44 | - The computation of basic EPS is based on weighted average common shares outstanding, while diluted EPS includes the effect of non-vested nonqualified stock options and restricted stock units[21][22] - Antidilutive securities are excluded[21][22] 6. Stock-based Compensation Describes the company's stock-based incentive plans and the associated compensation expense - Stock-based compensation awards are granted under the 2005, 2018, and 2020 Long-Term Incentive Plans (LTIP), including stock options, restricted stock units (RSUs), and performance stock units (PSUs)[23][24][25][26][27] - RSUs generally vest in three or four equal annual installments, while PSUs have three-year vesting periods based on performance or market conditions[23][24][25][26][27] Stock-based Compensation Expense Recognized (in millions) | Period | 2023 | 2022 | Change | | :----------------------------------- | :----- | :----- | :----- | | Three Months Ended June 30 | $3.8 | $3.2 | $0.6 | | Six Months Ended June 30 | $7.8 | $6.7 | $1.1 | - As of June 30, 2023, total future compensation expense for non-vested stock-based arrangements is $25.4 million, expected to be recognized over approximately 25 months[34] 7. Segment Information Provides financial data and performance metrics for Koppers' three reportable business segments - Koppers operates three reportable segments: Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC)[35] - Each segment manufactures and distributes distinct products with different production processes[35] Revenues from External Customers (in millions) | Segment | Q2 2023 | Q2 2022 | Q2 Change | YTD 2023 | YTD 2022 | YTD Change | | :----------------------------------- | :------ | :------ | :-------- | :------- | :------- | :--------- | | RUPS | $234.4 | $204.2 | $30.2 | $447.5 | $387.6 | $59.9 | | PC | $180.9 | $149.6 | $31.3 | $327.8 | $286.0 | $41.8 | | CMC | $161.9 | $148.7 | $13.2 | $315.3 | $288.2 | $27.1 | | Total | $577.2 | $502.5 | $74.7 | $1,090.6 | $961.8 | $128.8 | Adjusted EBITDA (in millions) | Segment | Q2 2023 | Q2 2022 | Q2 Change | YTD 2023 | YTD 2022 | YTD Change | | :----------------------------------- | :------ | :------ | :-------- | :------- | :------- | :--------- | | RUPS | $22.3 | $13.2 | $9.1 | $38.1 | $24.8 | $13.3 | | PC | $32.3 | $20.4 | $11.9 | $58.6 | $41.2 | $17.4 | | CMC | $15.7 | $21.0 | $(5.3) | $35.1 | $41.2 | $(6.1) | | Total Adjusted EBITDA | $70.3 | $54.6 | $15.7 | $131.8 | $107.2 | $24.6 | 8. Income Taxes Details the company's effective income tax rates, unrecognized tax benefits, and related tax matters Estimated Annual Effective Income Tax Rate | Period | 2023 | 2022 | | :------------------- | :----- | :----- | | June 30 | 28.1% | 34.3% | - The effective income tax rates for Q2 2023 and YTD 2023 were 28.9% and 28.1%, respectively, slightly higher than the estimated annual effective rate due to various discrete items[46] - The prior year's higher effective tax rate was influenced by higher estimated non-deductible expenses, particularly interest expense[46] - Unrecognized tax benefits totaled $1.5 million as of June 30, 2023, and $1.4 million as of December 31, 2022[49][50] - The company does not anticipate material changes to these amounts within the next twelve months[49][50] 9. Inventories, net Presents the breakdown and valuation of Koppers' inventories, including raw materials and finished goods Net Inventories (in millions) | Category | June 30, 2023 | Dec 31, 2022 | | :--------------- | :------------ | :----------- | | Raw materials | $341.4 | $318.5 | | Work in process | $10.1 | $10.2 | | Finished goods | $125.5 | $130.4 | | Total | $477.0 | $459.1 | | Less revaluation to LIFO | $103.9 | $103.4 | | Net | $373.1 | $355.7 | 10. Property, Plant and Equipment Details the company's property, plant, and equipment, net of accumulated depreciation Property, Plant and Equipment (in millions) | Category | June 30, 2023 | Dec 31, 2022 | | :---------------------- | :------------ | :----------- | | Land | $18.2 | $15.0 | | Buildings | $80.0 | $80.3 | | Machinery and equipment | $954.5 | $924.1 | | Total | $1,052.7 | $1,019.4 | | Less accumulated depreciation | $457.8 | $462.1 | | Net | $594.9 | $557.3 | 11. Pensions and Post-Retirement Benefit Plans Describes the company's defined benefit and contribution plans and associated costs - Koppers maintains defined benefit and defined contribution plans for employees in the U.S. and internationally[53] - Most U.S. qualified and non-qualified defined benefit plans are closed to new participants and frozen[53] - In 2021, the company entered a buy-in bulk annuity insurance policy for its UK defined benefit plan, with the pension obligation expected to be irrevocably settled by late 2023, leading to an estimated pre-tax pension settlement loss of approximately $20 million[54][55] Net Periodic Benefit Cost for Pension Plans (in millions) | Component | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :------------------------ | :------ | :------ | :------- | :------- | | Service cost | $0.4 | $0.3 | $0.8 | $0.6 | | Interest cost | $2.0 | $1.5 | $4.1 | $2.9 | | Expected return on plan assets | $(1.8) | $(1.9) | $(3.5) | $(3.9) | | Amortization of net loss | $0.6 | $0.4 | $1.1 | $0.9 | | Net periodic benefit cost | $1.2 | $0.3 | $2.5 | $0.5 | | Defined contribution plan expense | $2.4 | $2.3 | $4.9 | $4.8 | 12. Debt Summarizes Koppers' debt structure, including credit facilities, term loans, and interest rate management Debt Summary (in millions) | Debt Type | Weighted Average Interest Rate | Maturity | June 30, 2023 | Dec 31, 2022 | | :---------------------- | :----------------------------- | :------- | :------------ | :----------- | | Credit Facility | 7.36% | 2027 | $528.4 | $325.3 | | Term Loan B | 8.56% | 2030 | $387.3 | $0.0 | | Senior Notes due 2025 | - | - | $0.0 | $500.0 | | Total Debt | | | $915.7 | $825.3 | | Long-term debt (net) | | | $902.2 | $817.7 | - On April 10, 2023, Koppers entered Amendment No. 1 to its Credit Facility, adding a new $400.0 million Term Loan B[62][65] - Proceeds from the Term Loan B, along with cash on hand and existing Credit Facility capacity, were used on April 11, 2023, to redeem all outstanding $500 million Senior Notes due 2025[62][65] - During the six months ended June 30, 2023, the company entered interest rate swap agreements with a notional value of $150.0 million related to the Term Loan B, effectively converting the variable rate to a weighted average fixed rate of 7.45% for that portion[63][66] - An additional $100.0 million swap was entered in Q3 2023, bringing the total notional value to $250.0 million at a weighted average fixed rate of 7.73%[63][66] 13. Asset Retirement Obligations Details the company's liabilities for future asset retirement and environmental remediation costs - Asset retirement obligations include costs for residue removal, tank dismantling, railcar cleaning, and site demolition[67] - The balance of asset retirement obligations was $15.3 million at June 30, 2023, a slight decrease from $15.5 million at December 31, 2022[67] 14. Leases Outlines the company's operating lease arrangements, right-of-use assets, and lease liabilities - Koppers recognizes lease obligations and right-of-use assets for non-cancelable operating leases, primarily for railcars, facilities, storage tanks, ships, production equipment, and vehicles[68] - Leases expiring within twelve months are excluded from balance sheet recognition[68] Operating and Variable Lease Costs (in millions) | Cost Type | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :------------------ | :------ | :------ | :------- | :------- | | Operating lease costs | $7.1 | $7.2 | $13.8 | $14.7 | | Variable lease costs | $1.2 | $0.6 | $2.1 | $1.4 | Operating Lease Liabilities (in millions) | Metric | June 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :------------ | :----------- | | Operating lease right-of-use assets | $84.1 | $86.3 | | Current operating lease liabilities | $21.7 | $20.5 | | Operating lease liabilities | $62.5 | $66.3 | | Total operating lease liabilities | $84.2 | $86.8 | | Weighted average remaining lease term | 5.2 years | 5.6 years | | Weighted average discount rate | 6.7% | 7.2% | 15. Derivative Financial Instruments Explains the use of derivatives to manage commodity, foreign currency, and interest rate risks - Koppers uses derivative instruments to manage commodity price risk (copper), foreign currency exchange risk (U.S. dollar, Australian dollar), and interest rate risk[72][73][74] - Commodity swaps are used for forecasted purchases, typically hedging for up to 36 months[72][73][74] - Foreign currency forward contracts manage receivable/payable balances and foreign-denominated sales[72][73][74] - Interest rate swaps convert variable-rate debt to fixed-rate debt[72][73][74] Net Fair Value of Outstanding Copper Swap Contracts (in millions) | Contract Type | June 30, 2023 | Dec 31, 2022 | | :-------------------------------------- | :------------ | :----------- | | Cash flow hedges | $(0.3) | $2.5 | | Contracts where hedge accounting not elected | $0.6 | $0.6 | | Total Net Fair Value - Asset (Liability) | $0.3 | $3.1 | - Unrealized gains, net of tax, for commodity price hedging and interest rate swaps of $2.1 million are estimated to be reclassified from other comprehensive income into earnings over the next twelve months[79] 16. Commitments and Contingent Liabilities Discloses the company's legal, environmental, and other potential financial obligations - Koppers is involved in litigation related to environmental laws, product liability, and other matters[80][81][82][83] - This includes 27 pending coal tar pitch lawsuits (26 in Pennsylvania, 1 in Tennessee) claiming various illnesses, with plaintiffs seeking compensatory and, in most cases, punitive damages[80][81][82][83] - No reserve has been provided due to inability to reasonably determine probability or amount of loss[80][81][82][83] - The company is subject to environmental laws and regulations, incurring costs for compliance and potential claims for contamination[84][85][86][87] - Agreements with former owners, particularly Beazer East, indemnify Koppers Inc. against certain pre-Acquisition environmental and product liabilities, with qualified expenditures not subject to monetary limits[84][85][86][87] - Koppers Inc. is a Potentially Responsible Party (PRP) at the Portland Harbor and Newark Bay CERCLA sites[92][93][94][95][96][97][98] - An accrual of $4.0 million has been recorded for estimated costs and de minimis settlement amounts at these sites, though actual costs could be materially higher[92][93][94][95][96][97][98] - Environmental remediation liabilities for acquired sites total $3.9 million in the U.S. and $1.2 million in Australia[92][93][94][95][96][97][98] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on Koppers Holdings Inc.'s financial condition and results of operations for the three and six months ended June 30, 2023, compared to the prior year Overview Provides a general description of Koppers' businesses, products, and global operational footprint - Koppers is a leading integrated global provider of treated wood products, wood preservation chemicals, and carbon compounds, serving diverse end-markets like railroad, specialty chemical, utility, and construction[103] - The company operates through a global manufacturing and distribution network across North America, South America, Australasia, and Europe[103] - The three principal businesses are Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC)[104][105][106] - RUPS is a major supplier of wood crossties and utility poles in North America and Australia[104][105][106] - PC is a global leader in wood preservation chemicals[104][105][106] - CMC processes coal tar into products like creosote and carbon pitch for various industrial applications[104][105][106] Non-GAAP Financial Measures Explains the definition and purpose of non-GAAP financial measures used by management - Koppers uses non-GAAP financial measures, primarily Adjusted EBITDA, to analyze and manage business performance[107][109] - Adjusted EBITDA is defined as net income from continuing operations before interest, income taxes, depreciation, amortization, and other adjustments (e.g., impairment, restructuring, LIFO, mark-to-market commodity hedging)[107][109] - It is used internally by management and for incentive plans[107][109] - While Adjusted EBITDA enhances understanding of operational performance, it should not be considered an alternative to GAAP measures and should be read in conjunction with relevant GAAP financial measures[108] Outlook Presents management's expectations and factors influencing future business performance across segments Trend Overview Discusses key external factors and market trends impacting the company's business results - Business results are influenced by global economic conditions, raw material pricing and availability (e.g., hardwood lumber, scrap copper, coal tar), oil price volatility, competitive conditions in carbon pitch markets, and foreign exchange rates[110] Railroad and Utility Products and Services Provides an outlook on demand, raw material costs, and strategic initiatives for the RUPS segment - North American crosstie demand is projected to be slightly lower in 2023 (18.2 million, down 1.3%) but expected to recover in 2024 (18.6 million, up 2.4%)[111] - Crosstie availability is improving due to easing pallet lumber demand and moderating prices[111] - Utility pole demand is expected to grow in 2023 due to replacement programs, grid hardening, and investments in EV charging and telecommunications[113][114][116] - Raw material costs for poles and transportation costs may increase[113][114][116] - The Infrastructure Investment and Jobs Act is expected to benefit the segment[113][114][116] - The company is optimizing its RUPS business by evaluating opportunities to improve efficiencies, capture more volume through existing facilities, or consolidate its operating footprint, including modernizing its North Little Rock, Arkansas facility[117] Performance Chemicals Discusses market conditions, consumer spending, and housing trends affecting the PC segment - PC product demand is linked to consumer spending on home repair and remodeling[119] - Existing-home sales declined 18.9% year-over-year in June, but pending home sales saw a modest increase[119] - Housing inventory remains low, leading to firm home prices[119] - Annual expenditures for home improvements are projected to decline by 2.7% through Q1 2024 and 5.9% through mid-2024 due to high interest rates and softening house price appreciation[120] - However, lower pressure-treated lumber prices make outdoor residential projects more affordable[120] - Consumer confidence increased in June and July 2023, reaching its highest level since July 2021, driven by softening inflation and a favorable labor market outlook[121] Carbon Materials and Chemicals Presents the outlook for raw material availability and demand in the CMC segment's end-markets - The CMC business primarily produces creosote for railroad crossties and carbon pitch for the aluminum industry[122][123] - Coal tar availability, the primary raw material, is linked to metallurgical coke production, which has been reduced due to weakening global steel demand (excluding Asia)[122][123] - Koppers is mitigating coal tar supply decline by seeking market acceptance for petroleum blended products and investing in projects to increase distillation yields[123][124] - A slowdown is anticipated in the near-term for manufacturing, steel, aluminum, and carbon black industries[123][124] - Global light-vehicle sales are forecast to increase by 5.6% in 2023 to 83.6 million units, with production reaching 85.6 million units, as supply chain issues normalize[124] - However, the near-term outlook is uncertain due to potential vehicle affordability issues and rapid inventory build-up[124] Seasonality and Effects of Weather on Operations Explains how seasonal patterns and weather conditions impact quarterly operating results - Quarterly operating results fluctuate due to factors like inclement weather, which can reduce operations and demand during winter months[125] - Historically, operating results are significantly lower in the first and fourth calendar quarters compared to the second and third quarters[125] Results of Operations – Comparison of Three Months Ended June 30, 2023 and 2022 Analyzes consolidated and segment-specific financial performance for the second quarter Consolidated Results Provides a high-level analysis of Koppers' overall financial performance for the quarter Net Sales by Segment (Q2 2023 vs. Q2 2022, in millions) | Segment | 2023 | 2022 | Change | % Change | | :----------------------------------- | :----- | :----- | :----- | :------- | | RUPS | $234.4 | $204.2 | $30.2 | 15% | | PC | $180.9 | $149.6 | $31.3 | 21% | | CMC | $161.9 | $148.7 | $13.2 | 9% | | Total | $577.2 | $502.5 | $74.7 | 15% | - RUPS net sales increased by $30.2 million (15%) due to $20.3 million in pricing increases (crossties, domestic utility poles) and volume increases[126][127][128] - PC net sales rose by $31.3 million (21%) from $21.0 million in global price increases (copper-based preservatives) and 8% global volume growth[126][127][128] - CMC net sales grew by $13.2 million (9%) due to $7.2 million in higher carbon pitch prices and increased refined tar volumes[126][127][128] - Cost of sales as a percentage of net sales decreased to 81% in Q2 2023 from 83% in Q2 2022, as global price increases outpaced raw material and operating cost increases[129] - Interest expense increased by $9.2 million due to higher interest rates and a $1.6 million write-off of debt issuance costs[131] Segment Results Details the financial performance and key drivers for each of Koppers' operating segments for the quarter Adjusted EBITDA by Segment (Q2 2023 vs. Q2 2022, in millions) | Segment | 2023 | 2022 | Change | % Change | | :----------------------------------- | :----- | :----- | :----- | :------- | | RUPS | $22.3 | $13.2 | $9.1 | 69% | | PC | $32.3 | $20.4 | $11.9 | 58% | | CMC | $15.7 | $21.0 | $(5.3) | -25% | | Total Adjusted EBITDA | $70.3 | $54.6 | $15.7 | 29% | - RUPS Adjusted EBITDA increased by $9.1 million (69%) due to net sales price increases and $6.5 million from improved plant utilization, partially offset by $23.2 million higher raw material and operating costs[133][134] - PC Adjusted EBITDA rose by $11.9 million (58%) as price increases from renegotiated contracts more than offset $12.5 million in raw material cost increases[133][134] - CMC Adjusted EBITDA decreased by $5.3 million (-25%) due to a $17.2 million increase in raw material costs, mainly in Europe and North America, partially offset by higher pricing and volumes in North America[135] Results of Operations – Comparison of Six Months Ended June 30, 2023 and 2022 Analyzes consolidated and segment-specific financial performance for the first half of the year Consolidated Results Provides a high-level analysis of Koppers' overall financial performance for the six-month period Net Sales by Segment (YTD 2023 vs. YTD 2022, in millions) | Segment | 2023 | 2022 | Change | % Change | | :----------------------------------- | :----- | :----- | :----- | :------- | | RUPS | $447.5 | $387.6 | $59.9 | 15% | | PC | $327.8 | $286.0 | $41.8 | 15% | | CMC | $315.3 | $288.2 | $27.1 | 9% | | Total | $1,090.6 | $961.8 | $128.8 | 13% | - RUPS net sales increased by $59.9 million (15%) due to $44.0 million in pricing increases and higher crosstie volumes[137][138][139] - PC net sales rose by $41.8 million (15%) from $46.0 million in global price increases and $16.2 million in Americas volume increases, partially offset by $15.8 million in international volume decreases[137][138][139] - CMC net sales grew by $27.1 million (9%) primarily due to $50.9 million in higher carbon pitch prices, partially offset by volume decreases[137][138][139] - Cost of sales as a percentage of net sales decreased to 80% in YTD 2023 from 82% in YTD 2022[139] - Interest expense increased by $13.4 million due to higher interest rates and a $1.6 million write-off of debt issuance costs[142] Segment Results Details the financial performance and key drivers for each of Koppers' operating segments for the six-month period Adjusted EBITDA by Segment (YTD 2023 vs. YTD 2022, in millions) | Segment | 2023 | 2022 | Change | % Change | | :----------------------------------- | :----- | :----- | :----- | :------- | | RUPS | $38.1 | $24.8 | $13.3 | 54% | | PC | $58.6 | $41.2 | $17.4 | 42% | | CMC | $35.1 | $41.2 | $(6.1) | -15% | | Total Adjusted EBITDA | $131.8 | $107.2 | $24.6 | 23% | - RUPS Adjusted EBITDA increased by $13.3 million (54%) due to net sales price increases and $10.4 million from improved plant utilization, partially offset by $44.4 million higher raw material and operating costs[144] - PC Adjusted EBITDA rose by $17.4 million (42%) as price increases more than offset $25.4 million in raw material and SG&A cost increases[144] - CMC Adjusted EBITDA decreased by $6.1 million (-15%) due to a $60.5 million increase in raw material costs, mainly in North America and Europe, partially offset by higher global pricing and lower North American operating costs[145] Cash Flow Analyzes the company's cash generation and usage from operating, investing, and financing activities - Net cash used in operating activities for the six months ended June 30, 2023, was $2.1 million, a decrease from $21.2 million provided in the prior year, primarily due to higher working capital usage of $36.6 million[147] - Net cash used in investing activities increased to $60.6 million from $51.1 million in the prior year, driven by capital expenditures, including investments in growth projects like the RUPS facility expansion in North Little Rock, Arkansas, and a yield enhancement project at the CMC facility in Nyborg, Denmark[148] - Net cash provided by financing activities increased to $78.6 million from $28.5 million in the prior year, reflecting net borrowings of $90.1 million, partially offset by debt issuance costs, common stock repurchases, and dividends[149] Liquidity and Capital Resources Discusses the company's financial flexibility, available capital, and debt management strategies Restrictions on Dividends to Koppers Holdings Explains the limitations on dividend payments from Koppers Inc. to Koppers Holdings - Koppers Holdings relies on dividends from Koppers Inc. and its subsidiaries[150] - The Credit Facility permits Koppers Inc. to pay dividends to Koppers Holdings for regularly scheduled dividends and common stock repurchases, up to the greater of $50.0 million annually (with carryover) or 6.0% of market capitalization[150] Liquidity Assesses the company's ability to meet its short-term and long-term financial obligations - As of June 30, 2023, Koppers had approximately $301 million of unused revolving credit availability under its Credit Facility, down from $412 million at December 31, 2022[151] - Cash needs for the next twelve months include debt service, pension funding, purchase commitments, operating leases, working capital, capital maintenance, plant consolidation, dividends, and share repurchases[152] - Capital expenditures for 2023 are projected at $110-$120 million, to be funded by cash from operations[152] - Liquidity is anticipated to be adequate for the next twelve months[152] Debt Covenants Details the financial covenants under the Credit Facility and the company's compliance status - Koppers is in compliance with all Credit Facility covenants[154][155] - Key financial ratios include a total net leverage ratio not exceeding 5.0 (actual 3.3 at June 30, 2023) and a cash interest coverage ratio not less than 2.0 (actual 4.7 at June 30, 2023)[154][155] Legal Matters Refers to the detailed disclosures on legal proceedings in the financial statement notes - Legal proceedings information is incorporated by reference from Note 16 to the Condensed Consolidated Financial Statements[156] Recently Issued Accounting Guidance Refers to the detailed disclosures on new accounting pronouncements in the financial statement notes - Information on recently issued accounting guidance is incorporated by reference from Note 2 to the Condensed Consolidated Financial Statements[157] Critical Accounting Policies States that there are no material changes to previously disclosed critical accounting policies - There have been no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[158] Environmental and Other Matters Refers to the detailed disclosures on environmental matters in the financial statement notes - Information on environmental and other matters is incorporated by reference from Note 16 to the Condensed Consolidated Financial Statements[159] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Provides insights into the company's exposure to market risks, particularly interest rate fluctuations Interest Rate Sensitivity This section updates the disclosure on market risk, specifically regarding interest rate sensitivity - A one percentage point increase in interest rates would decrease earnings and cash flows by approximately $7.0 million over a twelve-month period, considering interest rate swap effects[161] ITEM 4. CONTROLS AND PROCEDURES Describes the evaluation of the effectiveness of the company's disclosure controls and internal control over financial reporting Effectiveness of Disclosure Controls and Procedures Management, with the CEO and CFO's participation, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2023, concluding they were effective - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[162] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting during the quarter ended June 30, 2023[162] PART II—OTHER INFORMATION Contains additional information not covered in the financial statements, including legal, risk, and exhibit details ITEM 1. LEGAL PROCEEDINGS This section incorporates by reference the legal proceedings information detailed in Note 16 to the Condensed Consolidated Financial Statements - Legal proceedings information is incorporated by reference from Note 16 to the Condensed Consolidated Financial Statements[163] ITEM 1A. RISK FACTORS This section updates the risk factors previously disclosed in the Annual Report on Form 10-K, adding a new risk related to the failure of financial institutions or transactional counterparties - A new risk factor has been added concerning the potential adverse effects of financial institution failures or transactional counterparty distress on business operations, liquidity, financial condition, and results of operations[164][165][166] - The company maintains domestic cash deposits exceeding FDIC insurance limits and foreign bank deposits that may be uninsured or partially insured, posing a risk of disruption to access to funds or impact on liquidity if banks fail[165] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This item is not applicable for the reporting period ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is not applicable for the reporting period ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable for the reporting period ITEM 5. OTHER INFORMATION This section states that no directors or executive officers adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2023 - No directors or executive officers adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2023[170] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including amendments to benefit plans, restricted stock unit agreements, certifications from the CEO and CFO, and Inline XBRL documents - Exhibits include Amendment to the Koppers Holdings Inc. Benefit Restoration Plan, Form of Restricted Stock Unit Issuance Agreement, Certifications of CEO and CFO (Sarbanes-Oxley Act Sections 302 and 906), and Inline XBRL documents[171] SIGNATURES Confirms the official submission of the report by an authorized corporate officer Signature of Authorized Officer The report is duly signed on behalf of Koppers Holdings Inc. by Jimmi Sue Smith, Chief Financial Officer, on August 3, 2023 - The report was signed by Jimmi Sue Smith, Chief Financial Officer of Koppers Holdings Inc., on August 3, 2023[172]