# Koppers Holdings Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Koppers Holdings Inc.](/companies/kop.md) (CIK 1315257)
- Form: 10-Q
- Filed: 2023-05-05
- Accepted by EDGAR: May 5, 2023, 11:55 ET
- Period: 2023-03-31
- Accession: 0000950170-23-018172
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1315257/000095017023018172/kop-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1315257/000095017023018172/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $513.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-01-01 to 2023-03-31 | $409.3m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-03-31 | $41.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | $50.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $14.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $9.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $25.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $1.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $1.22 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 21,385,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | −$15.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $30.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $1.3m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $5.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Current assets | at 2023-03-31 | $710.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $1.80bn | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $316.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $1.37bn | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $881.0m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2023-03-31 | $430.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 35,540 characters.

*This report and any documents incorporated herein by reference contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and may include, but are not limited to, statements about sales levels, acquisitions, restructuring, declines in the value of Koppers assets and the effect of any related impairment charges, profitability and anticipated expenses and cash outflows. All forward-looking statements involve risks and uncertainties. All statements contained herein that are not clearly historical in nature are forward-looking, and words such as “believe,” “anticipate,” “expect,” “estimate,” “may,” “will,” “should,” “continue,” “plans,” “potential,” “intends,” “likely,” or other similar words or phrases are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or documents filed with the Securities and Exchange Commission, or in Koppers communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, regarding future dividends, expectations with respect to sales, earnings, cash flows, operating efficiencies, restructurings, product introduction or expansion, the benefits of acquisitions and divestitures, or other matters as well as financings and debt reduction, are subject to known and unknown risks, uncertainties and contingencies. Many of these risks, uncertainties and contingencies are beyond our control, and may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Factors that might affect such forward-looking statements, include, among other things, the impact of changes in commodity prices, such as oil and copper, on product margins; general economic and business conditions; inflation; disruption in the U.S. and global financial markets; potential difficulties in protecting our intellectual property; the ratings on our debt and our ability to repay or refinance our outstanding indebtedness as it matures; our ability to operate within the limits of our debt covenants; potential impairment of our goodwill and/or long-lived assets; demand for Koppers goods and services; competitive conditions; interest rate and foreign currency rate fluctuations; availability and costs of key raw materials, such as coal tar, and unfavorable resolution of claims against us, as well as those discussed more fully elsewhere in this report and in documents filed with the Securities and Exchange Commission by Koppers, particularly our latest annual report on Form 10-K and subsequent filings. We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report and the documents incorporated by reference herein may not in fact occur. Any forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.*

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and related notes included in Item 1 of this Part I as well as the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.*

Overview

We are a leading integrated global provider of treated wood products, wood preservation chemicals and carbon compounds. Our products and services are used in a variety of niche applications in a diverse range of end-markets, including the railroad, specialty chemical, utility, residential lumber, agriculture, aluminum, steel, rubber and construction industries. We serve our customers through a comprehensive global manufacturing and distribution network, with manufacturing capabilities in North America, South America, Australasia and Europe.

We operate three principal businesses: RUPS, PC and CMC. Through our RUPS business, we believe that we are the largest supplier of wood crossties to the Class I railroads in North America. Our other treated wood products include utility poles for the electric, telephone, and broadband utility industries in the United States and Australia and construction pilings in the U.S. We also provide rail joint bar products as well as various services to the railroad industry in North America.

Through our PC business, we believe that we are the global leader in developing, manufacturing and marketing wood preservation chemicals and wood treatment technologies for use in the pressure treating of lumber for residential, industrial and agricultural applications.

Our CMC business processes coal tar into a variety of products, including creosote, carbon pitch, carbon black feedstock, naphthalene and phthalic anhydride, which are intermediate materials necessary in the pressure treatment of wood, and the production of aluminum, steel, carbon black, high-strength concrete, plasticizers and specialty chemicals, respectively.

Non-GAAP Financial Measures

We utilize certain financial measures that are not in accordance with U.S. generally accepted accounting principles (U.S. GAAP) to analyze and manage the performance of our business. We believe that adjusted EBITDA provides information useful to investors in understanding the underlying operational performance of the company, our business and performance trends, and facilitates comparisons between periods. The exclusion of certain items permits evaluation and a comparison between periods of results for business operations, and it is on this basis that our management internally assesses our performance. In addition, our board of directors and executive management team use adjusted EBITDA as a performance measure under the company’s annual incentive plans.

Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP financial measures and should be read in conjunction with the relevant GAAP financial measures. Other companies in a similar industry may define or calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, these non-GAAP financial measures should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP.

Adjusted EBITDA is a non-GAAP financial measure defined as net income from continuing operations before interest, income taxes, depreciation, amortization and other adjustments. These other adjustments are items that we believe are not representative of underlying business performance. Adjusted items typically include certain expenses associated with impairment, restructuring and plant closure costs, significant gains and losses on asset disposals or business combinations, LIFO and mark-to-market commodity hedging and other unusual items. We adjust for LIFO to reflect operating results on a FIFO basis. Adjusted EBITDA is the primary measure of profitability we use to evaluate our businesses. Refer to Note 7 – “Segment Information” for reconciliations from adjusted EBITDA to net income on a consolidated basis.

Outlook

#### Trend Overview

Our businesses and results of operations are affected by various competitive and other factors including (i) the impact of global economic conditions on demand for our products, including the impact of imported products from competitors in certain regions where we operate; (ii) raw material pricing and availability, in particular the cost and availability of hardwood lumber for railroad crossties and softwood lumber for utility poles, scrap copper prices, and the cost and amount of coal tar available in global markets, which is negatively affected by reductions in blast furnace steel production; (iii) volatility in oil prices, which impacts the cost of coal tar and certain other raw materials, as well as selling prices and margins for certain of our products including carbon black feedstock, phthalic anhydride, and naphthalene; (iv) competitive conditions in global carbon pitch markets; and (v) changes in foreign exchange rates.

#### Railroad and Utility Products and Services

Historically, North American demand for crossties had been in the range of 18 million to 22 million crossties annually. According to the Railway Tie Association (“RTA”), the estimated total crosstie installations in 2022 were approximately 18.7 million, of which 14.6 million were for Class I railroads. In the aggregate, spending by railroads is projected to be somewhat higher in 2023 in nominal terms; however, will be marginally lower in real terms due to higher input costs for labor, crossties and other materials. In terms of the supply of crossties, the demand for pallet lumber has eased, which has improved crosstie availability, and the price has moderated on slowing consumer spending. As a result of the weakening demand for board roads and mats, availability for crosstie production by sawmills is improving which is encouraging for the railroads as their inventory-to-sales ratio has been depressed for many months, mainly because of low crosstie inventories. Nevertheless, the RTA demand forecast predicts slightly lower crosstie demand of 1.3 percent in 2023, or total demand of 18.4 million crossties. For 2024, the economy is estimated to grow by 1.4 percent and crosstie demand is expected to recover modestly, with an increase of 0.9 percent, or total demand of 18.6 million crossties.

According to the Association of American Railroads (“AAR”), rail traffic in 2022 was lower than in 2021 for most categories. Compared to the prior year, total U.S. carload traffic for the year-to-date period through March 31, 2023 declined 0.3 percent, and intermodal units were lower by 10.3 percent. For 2023 to-date, total combined U.S. traffic decreased by 5.6 percent compared to last year. According to the AAR, rail volumes are being negatively influenced by broader economic trends, including slowdowns in industrial output, high inventory levels at many retailers, lower port activity and less robust consumer spending.

With respect to our utility products business, the installed base for wood distribution poles in the United States is approximately 150 million and nearly half are 40 years old. Industry demand has historically been in the range of approximately two to four million poles annually. On an overall basis, we believe that the rate at which utilities purchase utility poles will grow as they continue replacement programs within their service territories. As a whole, the key factors that drive growth in the utility pole market include growing global energy consumption as well as expansion of the global telecommunication industry. Now more than ever, utilities need to maintain their infrastructure to avoid interruptions in service as portions of the population work remotely. As long as there are not any extended supply chain disruptions, we anticipate that 2023 demand for pole replacements will be higher, as the overall industry is trending toward expanded and upgraded transmission networks. In addition, we believe there is a developing trend in the industry for utilities to maintain some additional inventory to prepare for potentially damaging storms.

With respect to raw materials, we expect the availability of poles to be affected as lumber demand continues to be relatively strong and, consequently, results in increased costs for pole material. Also, transportation costs, which include fuel costs, could experience some upward pressure and may affect the price of pole material delivered to the pole peelers from the forest. At the same time, utilities are working through various supply constraints by adjusting their ordering patterns and moving away from single-source supply, which may represent additional growth opportunities to gain market share.

Longer term, we are evaluating opportunities to potentially expand our market presence in the United States as well as certain overseas markets. We believe there remains an overall need for sustained investment in infrastructure and capacity expansion and with our vertical integration capabilities in wood treatment and strong customer relationships, we will ultimately benefit from increased demand.

For the overall segment, we believe a positive development involves the Infrastructure Investment and Jobs Act, which was signed into law on November 15, 2021, and will usher in more than a trillion dollars in new spending across eight years to improve the nation's roads, bridges, rail, Internet, water systems and more. As a global leader in water- and oil-borne preservatives serving many end markets with our wood-treatment technologies, we believe we are well-positioned to benefit from the new legislation. Our products are used in multiple infrastructure applications, including utility poles, railroad ties, highway and construction concrete, steel, aluminum, and wood for construction projects.

As part of optimizing our business, we continue to evaluate a number of opportunities to improve efficiencies in our operational processes, people and facilities. With our 14 North American RUPS treating facilities operating at less than full utilization, our goal is to either capture more volume through the existing facilities or consolidate our operating footprint. Actions we have taken over the past three years include the purchase of a 105-acre property in Leesville, Louisiana, which will host a facility providing additional peeling and drying capacity for utility poles and is expected to become operational in mid-2023, the sale of our Sweetwater, Tennessee plant, exiting the Texas Electric Cooperatives’ Jasper, Texas facility and relocating the production of utility products to our existing Somerville, Texas plant and the permanent closure of our Denver, Colorado wood treatment facility. Concurrent with the decision to close the Denver facility, we announced our plan to modernize and upgrade parts of our treating network, specifically at our facility in North Little Rock, Arkansas, which has been partly funded through proceeds from the sale of non-core assets, including the Denver facility.

#### Performance Chemicals

As most of the products sold by PC are copper-based products, changes in the price and availability of copper can have a significant impact on product pricing and margins. We attempt to moderate the variability in copper pricing over time by entering into hedging transactions for the majority of our copper needs, which primarily range from six months up to 36 months. These hedges typically match expected customer purchases and from time to time, we enter into forward transactions based upon long-term forecasted needs of copper.

Product demand for our PC business has historically been closely associated with consumer spending on home repair and remodeling projects in North America, and therefore, trends in existing home sales serve as a leading indicator. According to the National Association of Realtors® (“NAR”), total existing-home sales in March were 2.4 percent lower than February. Month-over-month sales decreased in three out of four major U.S. regions, while sales in the Northeast remained steady. On a year-over-year basis, all regions declined and March existing home sales were lower by 22 percent. The NAR reported that the market is unique in that while home sales are trying to recover and are highly sensitive to changes in mortgage rates, multiple offers on starter homes are quite common, implying more supply will be needed to fully satisfy demand.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, after more than a decade of continuous growth, annual spending on improvements and repairs to owner-occupied homes is expected to decline by early 2024. The LIRA projects that year-over-year expenditures for homeowner improvements and maintenance will post a modest decline of 2.8 percent through the first quarter of 2024. The forecast for sluggish remodeling activity next year is driven by higher interest rates and sharp downturns in homebuilding and existing home sales. Overall, homeowner improvement and maintenance spending is expected to reach $458 billion in the coming year, compared with market spending of $471 billion during the past twelve months.

The Conference Board Consumer Confidence Index® decreased to 101.3 in April, down from 104.0 in March. In April, consumers indicated a more favorable assessment of the current business environment; however, their forward expectations declined, which may signal a recession in the short-term. At the same time, consumer inflation expectations regarding the next twelve months remain essentially unchanged from March but are still elevated.

#### Carbon Materials and Chemicals

The primary products produced by CMC are creosote, which is a registered pesticide in the United States and used primarily in the pressure treatment of railroad crossties, and carbon pitch, which is sold primarily to the aluminum industry for the production of carbon anodes used in the smelting of aluminum. We have realigned capacity in our CMC plants in North America and Europe over the past several years to levels required to meet creosote demand in North America for the treatment of railroad crossties. The CMC business currently supplies our North American RUPS business with its creosote requirements.

The availability of coal tar, the primary raw material for our CMC business, is linked to levels of metallurgical coke production. As the global steel industry, excluding Asia, has reduced the production of steel using metallurgical coke, the volumes of coal tar have been reduced. We are actively working to mitigate the impacts of declining coal tar supply by gaining market acceptance for blended alternative products. We are also investing in projects to increase distillation yields and balance raw material supply and cost with customer demand and pricing.

For the external markets served by our CMC business, we anticipate relative stability in manufacturing overall as well as in the steel, aluminum and carbon black industries. According to S&P Global Mobility (formerly IHS Markit Automotive Group), U.S. light vehicle production levels are forecasted to increase even as economic conditions are expected to deteriorate. The advancing production levels, along with reports of sustained retail order books, recovering stock of vehicles, and a fleet sector that remains low on product should provide some benefits to automotive demand levels. For 2023, S&P projects U.S. production volumes of 14.8 million units, a seven percent increase from the estimated 2022 production level.

Globally, the auto industry continues to navigate supply chain challenges while impacted by several markets facing deteriorating economic conditions and fading demand. As the ongoing issue of semiconductor availability continues to be addressed, the global light vehicle market is expected to slowly recover and vehicle sales are anticipated to reach nearly 83.6 million units in 2023, a 5.6 percent increase year-over-year. Recently, auto production is beginning to show some sustained signs of improvement. In March 2023, North American production results were estimated to total 1.5 million units, translating into 15.8 million units produced on a seasonally adjusted annual rate basis, which is the highest level in 30 months. However, the auto sales environment is dealing with mixed signals of mildly advancing production, improving inventory and attractive incentives on one hand, and rising affordability concerns and uncertain consumer confidence levels on the other. Therefore, subject to the uncertainty in the overall economy, we believe it is likely that month-to-month volatility lies ahead.

#### Seasonality and Effects of Weather on Operations

Our quarterly operating results fluctuate due to a variety of factors that are outside of our control, including inclement weather conditions, which in the past have affected operating results. Operations at some of our facilities have at times been reduced during the winter months. Moreover, demand for some of our products declines during periods of inclement weather. As a result of the foregoing, we anticipate that we may experience material fluctuations in quarterly operating results. Historically, our operating results have been significantly lower in the first and fourth calendar quarters as compared to the second and third calendar quarters.

### Results of Operations – Comparison of Three Months Ended March 31, 2023 and 2022

#### Consolidated Results

**Net sales** for the three months ended March 31, 2023 and 2022 are summarized by segment in the following table:

*(Dollars in millions)*

|  | Three Months Ended March 31, 2023 | 2022 | Net Change |
| --- | ---: | ---: | ---: |
| Railroad and Utility Products and Services | $213.1 | $183.4 | 16% |
| Performance Chemicals | 146.9 | 136.4 | 8% |
| Carbon Materials and Chemicals | 153.4 | 139.5 | 10% |
|  | $513.4 | $459.3 | 12% |

**RUPS net sales** increased by $29.7 million, or 16 percent, compared to the prior year period. The sales increase was largely related to a net $21.2 million of pricing increases across multiple markets, particularly for crossties and domestic utility poles. Volume increases for untreated crossties also contributed to the increase. Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $0.8 million, mainly from our Australian utility pole business.

**PC net sales** increased by $10.5 million, or eight percent, compared to the prior year period. Sales increased as a result of global price increases of $24.7 million, or 18 percent in the current year period, particularly in the Americas for our copper-based preservatives. The pricing increases were offset, in part, by $11.7 million of volume decreases for wood treatment preservatives across most markets, primarily Europe and Australasia. Volumes in the Americas were down four percent compared to the prior year period. Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $2.5 million.

**CMC net sales** increased by $13.9 million, or 10 percent, compared to the prior year period due mainly to $37.1 million of higher sales prices, primarily for carbon pitch driven by strong end markets and constrained raw material supply, partly offset by volume decreases of phthalic anhydride, carbon pitch and carbon black feedstock. Foreign currency changes compared to the prior year period from our international markets had an unfavorable impact on sales in the current year period of $4.6 million.

**Cost of sales** as a percentage of net sales was 80 percent for the quarter ended March 31, 2023, compared to 81 percent in the prior year period as global price increases have outpaced increased raw material and operating costs on a consolidated basis and across most of our businesses. Significant items impacting cost of sales in individual operating segments are discussed as part of "Segment adjusted EBITDA and adjusted EBITDA margin" herein.

**Depreciation and amortization charges** for the quarter ended March 31, 2023 were consistent with the prior year period.

**Gain on sale of assets** for the quarter ended March 31, 2023 was related to a sale of assets of our former coal tar distillation facility located in China while the gain on sale of assets in the prior year was related to the sale of our utility pole treating facility in Sweetwater, Tennessee.

**Selling, general and administrative expenses** for the quarter ended March 31, 2023 were $2.5 million higher when compared to the prior year period due mainly to an increase in travel, entertainment and corporate events along with an increase in compensation related costs.

**Interest expense** for the quarter ended March 31, 2023 was $4.2 million higher when compared to the prior year period due to higher interest rates.

**Income tax expense** for the quarter ended March 31, 2023 increased due to higher income from continuing operations before income taxes when compared to the prior year period. This increase was partially offset by a lower estimated annual effective income tax rate when compared to the prior year period. The higher effective tax rate in the prior year period was driven by higher estimated non-deductible expenses, notably interest expense.

### Segment Results.

**Segment adjusted EBITDA and adjusted EBITDA margin** for the three months ended March 31, 2023 and 2022 is summarized in the following table:

*(Dollars in millions)*

| Adjusted EBITDA: | Three Months Ended March 31, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Railroad and Utility Products and Services | $15.8 | $11.6 | 36% |
| Performance Chemicals | 26.3 | 20.9 | 26% |
| Carbon Materials and Chemicals | 19.4 | 20.1 | -3% |
| Total Adjusted EBITDA | $61.5 | $52.6 | 17% |
| Adjusted EBITDA margin as a percentage of GAAP sales: |  |  |  |
| Railroad and Utility Products and Services | 7.4% | 6.3% | 17% |
| Performance Chemicals | 17.9% | 15.3% | 17% |
| Carbon Materials and Chemicals | 12.6% | 14.4% | -12% |

**RUPS adjusted EBITDA** increased by $4.2 million compared to the prior year period. Adjusted EBITDA as a percentage of net sales increased to 7.4 percent from 6.3 percent in the prior year period due primarily to price increases, partly offset by cost increases, including $19.2 million of higher raw material and operating costs in our crosstie and maintenance of way businesses in the current year period.

**PC adjusted EBITDA** increased by $5.4 million compared to the prior year period. Adjusted EBITDA as a percentage of net sales increased to 17.9 percent from 15.3 percent as renegotiated customer contracts allowed us to increase prices to recapture prior year cost increases. These price increases more than offset $10.9 million of raw material cost increases and an 8.6 percent global volume decrease on wood treatment preservatives from the prior year period.

**CMC adjusted EBITDA** decreased by $0.7 million compared to the prior year period. Adjusted EBITDA as a percentage of net sales decreased to 12.6 percent from 14.4 percent in the prior year period due to an increase of $39.8 million in raw material costs, particularly in North America and Europe, partly offset by higher pricing compared to the prior year period. Foreign currency changes from our international markets had an unfavorable impact on profitability in the current year period of $0.7 million.

The following table reconciles net income to adjusted EBITDA on a consolidated basis as calculated by us for the periods indicated below:

*(Dollars in millions)*

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net income | $26.2 | $18.8 |
| Interest expense | 14.0 | 9.8 |
| Depreciation and amortization | 14.0 | 14.2 |
| Income tax provision | 9.9 | 9.7 |
| Discontinued operations | 0.0 | 0.5 |
| Sub-total | 64.1 | 53.0 |
| Adjustments to arrive at adjusted EBITDA: |  |  |
| Impairment, restructuring and plant closure costs(1) | 0.0 | 0.1 |
| (Gain) on sale of assets | (1.8) | (2.5) |
| LIFO expense(2) | 0.3 | 1.7 |
| Mark-to-market commodity hedging (gains) losses | (1.1) | 0.3 |
| Total adjustments | (2.6) | (0.4) |
| Adjusted EBITDA | $61.5 | $52.6 |

*(1) Includes costs associated with restructuring, sales and closures of certain RUPS and CMC facilities.*

*(2) The LIFO expense adjustment removes the entire impact of LIFO and effectively reflects the results as if we were on a FIFO inventory basis.*

#### Cash Flow

**Net cash used in operating activities** for the three months ended March 31, 2023 was $15.3 million compared to net cash used in operating activities of $8.0 million in the prior year. The increase is primarily the result of higher working capital usage of $11.6 million in the current year period driven in part by an increase in inventories from higher raw material costs.

**Net cash used in investing activities** for the three months ended March 31, 2023 was $28.5 million compared to net cash used in investing activities of $22.0 million in the prior year period driven primarily by capital expenditures. Capital expenditures for both periods include increased investment in growth projects, such as the expansion of our RUPS facility in North Little Rock, Arkansas and a capacity enhancement project at our CMC facility in Nyborg, Denmark.

**Net cash provided by financing activities** was $56.8 million for the three months ended March 31, 2023 compared to $33.4 million of net cash provided by financing activities in the prior year. Cash provided by financing activities in the three months ended March 31, 2023 reflected net borrowings of $63.5 million partly offset by repurchases of common stock, dividends paid and payments of debt issuance costs. The cash provided by financing activities in the prior year period primarily reflected net borrowings of debt of $45.4 million partly offset by repurchases of common stock and dividends paid.

#### Liquidity and Capital Resources

Our Credit Facility is described in Note 12 – “Debt.”

#### Restrictions on Dividends to Koppers Holdings

Koppers Holdings depends on the dividends from the earnings of Koppers Inc. and its subsidiaries to generate the funds necessary to meet its financial obligations, including the payment of any declared dividend of Koppers Holdings. The Credit Facility permits Koppers Inc. to make dividend payments to Koppers Holdings if certain conditions are met, including, among other permitted dividend payments, the ability to fund the payment of regularly scheduled dividends on and repurchases of Koppers Holdings common stock, in an aggregate amount per year not to exceed the greater of $50.0 million in any fiscal year, with unused amounts in any fiscal year being carried over to the succeeding fiscal year, and 6.0 percent of market capitalization. The indenture governing the 2025 Notes restricted Koppers Inc.’s ability to finance our payment of dividends if a default had occurred or would have resulted from such financing, Koppers Inc. would not have been able to incur additional indebtedness (as defined in the indenture), or the sum of all restricted payments (as defined in the indenture) would have exceeded the permitted amount (which we refer to as the “basket”) at such point in time.

At March 31, 2023, the basket totaled $314.6 million. Notwithstanding such restrictions, the indenture governing the 2025 Notes permitted an additional aggregate amount of $0.30 per share each fiscal quarter to finance dividends on the capital stock of Koppers Holdings, whether or not there was any basket availability, provided that at the time of such payment, no default in the indenture had occurred or would have resulted from financing the dividends. The indenture governing the 2025 Notes was discharged in accordance with its terms upon our redemption of the 2025 Notes on April 11, 2023, as described in "Subsequent Events" in Note 12 – “Debt.”

#### Liquidity

As of March 31, 2023, the maximum amount available under the Credit Facility considering restrictions from debt covenants was approximately $400 million. As of December 31, 2022, the maximum amount available under the Credit Facility was approximately $412 million. On April 11, 2023, we redeemed our 2025 Notes using the proceeds of a $400.0 million face value Term Loan B, cash on hand and additional borrowings of approximately $100.0 million under our existing $800.0 million revolving Credit Facility. Such additional borrowings reduced the maximum amount available under the Credit Facility by a commensurate amount. The maximum amount available under the Credit Facility is increased by the amount of cash held by certain subsidiaries as defined by the Credit Facility.

Our need for cash in the next twelve months relates primarily to contractual obligations which includes debt service, pension plan funding, purchase commitments and operating leases, as well as working capital, capital maintenance programs, the funding of plant consolidation and rationalizations, dividends and share repurchases. We may also use cash to pursue other potential strategic acquisitions or voluntary pension plan contributions. Capital expenditures in 2023, excluding acquisitions, if any, are expected to total approximately $110 to $120 million and are expected to be funded by cash from operations. We anticipate that our liquidity will continue to be adequate to fund our cash requirements for at least the next twelve months.

We manage our working capital to increase our flexibility to pay down debt. Debt will fluctuate throughout any operating period based upon the timing of receipts from customers and payments to vendors. As of March 31, 2023, approximately 85 percent of accounts payable was current and 15 percent was 1-30 days past due. As of December 31, 2022, approximately 80 percent of accounts payable was current and 20 percent was 1-30 days past due.

#### Debt Covenants

The covenants that affect availability of the Credit Facility and which may restrict the ability of Koppers Inc. to pay dividends include the following financial ratios:

- The total net leverage ratio, calculated as of the last day of each fiscal quarter, is not permitted to exceed 5.0. The total net leverage ratio as of March 31, 2023 was 3.4.
- The cash interest coverage ratio, calculated as of the last day of each fiscal quarter, is not permitted to be less than 2.0. The cash interest coverage ratio as of March 31, 2023 was 5.2.

We are currently in compliance with all covenants governing the Credit Facility. Our continued ability to meet these financial covenants can be affected by events beyond our control; however, we currently expect that our net cash flows from operating activities and funds available from our Credit Facility will be sufficient to provide for our working capital needs and capital spending requirements over at least the next twelve months.

Legal Matters

The information set forth in Note 16 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference.

Recently Issued Accounting Guidance

The information set forth in Note 2 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference.

Critical Accounting Policies

There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Environmental and Other Matters

The information set forth in Note 16 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference.

## Market risk

As filed, 1,431 characters.

Except for the following update of interest rate sensitivity subsequent to March 31, 2023, there are no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2022. As discussed in Note 12 – “Debt” - "Subsequent Events", on April 10, 2023 we completed a Term Loan B financing in an aggregate principal amount of $400.0 million and used the proceeds from the Term Loan B, cash on hand and additional borrowings under our Credit Facility to redeem our 2025 Notes. As a result of these transactions, all of our debt subsequent to April 11, 2023 consists of variable rate debt. For variable rate debt, interest rate changes impact earnings and cash flows, assuming other factors are held constant. Assuming all of our debt consisted of variable rate debt as of March 31, 2023, a one percentage point increase in interest rates would have decreased earnings and cash flows by approximately $8.0 million over a twelve-month period, holding other variables constant inclusive of interest rate swap effects. During the first quarter of 2023, we entered into an interest rate swap agreement with an aggregate notional value of $100.0 million in anticipation of the issuance of the Term Loan B in April 2023. The interest rate swap effectively converts the variable rate to a fixed rate of 7.478 percent for that portion of the loan. The swap agreement expires in April 2027.

## Controls and procedures

As filed, 962 characters.

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer and utilizing the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control – Integrated Framework (2013), have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were effective as of the end of the period covered by this report. There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 2,152 characters.

There have been no material changes to the Risk Factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, except for the addition of the following risk factor.

**The failure of financial institutions or transactional counterparties could adversely affect our current and projected business operations and our liquidity, financial condition and results of operations.**

We regularly maintain domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks which exceed the FDIC insurance limits. We also maintain cash deposits in foreign banks where we operate, some of which are not insured or are only partially insured by the FDIC or other similar agencies. The failure of a bank, or events involving limited liquidity, defaults, non-performance or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, or concerns or rumors about such events, may lead to disruptions in access to our bank deposits or otherwise adversely impact our liquidity and financial condition. There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S. or applicable foreign government, or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis.

In addition, instability, liquidity constraints or other distress in the financial markets, including the effects of bank failures, defaults, non-performance or other adverse developments that affect financial institutions could impair the ability of one or more of the banks participating in our current or any future credit agreement from honoring their commitments under the credit agreement or situations where the banks serve as a counterparty on our derivative swap agreements. This could have a material adverse effect on our business if we were not able to replace those commitments or locate other sources of liquidity on acceptable terms.

Filed May 5, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-018172. Last ingested by Listed: Oct 30, 2026, 12:04 ET. No prices; not investment advice.