Koppers Holdings Inc.: Form 10-Q for the period ended Sep 30, 2023

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. Adjusted EBITDA is the primary measure of profitability we use to evaluate our businesses. In addition, adjusted EBITDA is the primary measure used to determine the level of achievement of management's short-term incentive goals and related payout, as well as one of the measures used to determine performance and related payouts for certain performance share units granted to management.

Although we believe that 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, mark-to-market commodity hedging and other unusual items. The LIFO expense adjustment removes the entire impact of LIFO and effectively reflects the results as if we were on a FIFO inventory basis. See Adjusted EBITDA Reconciliation in the below section 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), total crosstie installations in 2022 were down 1.9 percent from the prior year, to approximately 18.4 million, of which 14.8 million were for Class I railroads. In the aggregate, spending by railroads is projected to be somewhat higher in 2023 in nominal terms; however, it will be marginally lower in real terms due to higher input costs for labor, crossties and other materials. The demand for pallet lumber has eased, the price has moderated on slowing consumer spending and the demand for board roads and mats has weakened, which have all contributed to improved crosstie availability. Nevertheless, the RTA demand forecast predicts slightly lower crosstie demand of 1.3 percent in 2023, or total industry demand of 18.2 million crossties. For 2024, the economy is estimated to grow and crosstie demand is expected to recover, with an increase of 2.4 percent, or total industry demand of 18.6 million crossties.

According to the Association of American Railroads (AAR), compared to the prior year, U.S. carload traffic for the year-to-date period through September 30, 2023 was up 0.3 percent and intermodal units were down 8.2 percent. For 2023 to-date, total combined U.S. traffic decreased 4.3 percent compared to last year. The recent rail traffic patterns demonstrate the contrasts in the broader economy. Rail intermodal is largely consumer goods, and recent spending on goods has cooled considerably. Conversely, rail carloads of industrial products are performing much better, reflecting relative strength in mineral extraction and other sectors.

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 higher global energy consumption, expansion of the electric vehicle charging network, and investments in the global telecommunications industry. Now more than ever, utilities need to maintain and strengthen their infrastructure, referred to as hardening the electrical grid, 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 that occur throughout the year.

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 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 taken in the past include the purchase of a 105-acre property in Leesville, Louisiana, to host a facility providing additional peeling and drying capacity for utility poles, 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. This modernization was substantially complete by the end of the third quarter of 2023.

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 September declined 2.0 percent from August and on a year-over-year basis, sales were lower by 15.4 percent. Existing-home sales declined and pending home sales in August registered a decrease of 7.1 percent from the prior month. Home prices have held firm in most parts of the country as housing inventory remains low, and the limited supply is leading to multiple-offer situations, with one-third of homes being sold above the list price in September. The NAR projects that the market can easily absorb a doubling of housing inventory and if mortgage rates and inventory move favorably, pent-up demand could be realized in the near term.

According to the Leading Indicator of Remodeling Activity (LIRA) reported by the Joint Center for Housing Studies of Harvard University, a moderate decline in annual spending on improvements and repairs for owner-occupied homes is expected over the next year. The LIRA predicts a 7.7 percent decrease in annual homeowner expenditures for home renovations and maintenance through the third quarter of 2024. The housing market’s continued weakness, attributed to high interest rates and a limited supply of existing homes, is projected to impact remodeling activity in the coming year. The annual spending on home improvements and repairs is expected to drop from $489 billion to $452 billion over the next four quarters. Reductions in household moves will likely result in a decline in remodeling and repair activity in 2024, offset by homeowners deciding to renovate their current homes. In addition, since pressure-treated lumber prices are approximately 50-60 percent lower year-over-year at big-box retailers, outdoor residential projects are significantly more affordable than this time a year ago.

In September 2023, the Conference Board’s Consumer Confidence Index saw a decrease for the second month, landing at 103.0 from a revised 108.7 in August. This decline in consumer confidence was widespread among consumers with increasing focus on rising prices, political instability, and sustained higher interest rates. Conversely, expectations among economists have recently indicated a lesser likelihood of a recession in the short-term.

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. Currently, we are seeing weakening end market demand, which is allowing more availability of coal tar in the near term. However, 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 long-term decline of coal tar supply by gaining market acceptance for petroleum blended products. We are also investing in projects to increase distillation yields and balance raw material supply and cost with customer demand and pricing.

For the external markets served by our CMC business, we anticipate a slowdown in the near-term in manufacturing overall as well as in the steel, aluminum and carbon black industries. The October 2023 S&P Global Mobility report noted approximately 150,000 units of production have been lost due to plant strikes particularly in the United States. The near-term outlook remains unclear with continued strikes and auto consumers facing vehicle affordability issues (rising interest rates, credit tightening and high vehicle prices). Inventory levels, which will continue to be closely monitored as long as the United Auto Workers strike persists, will be pressured through November and December. The S&P Global Mobility forecast saw global light-vehicle sales increasing by 5.6 percent from the prior year and reaching 83.6 million units globally in 2023, recovering from sales declines in 2021 and 2022 that were driven by production constraints rather than by a lack of consumer demand or willingness to buy. As for global light-vehicle production, the output is forecast to reach 85.6 million units in 2023 as supply chain issues are approaching a more normalized situation.

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 September 30, 2023 and 2022

Consolidated Results

Net sales are summarized by segment in the following table:

(Dollars in millions)

RUPS net sales increased largely due to a net $20.3 million of pricing increases across multiple markets, particularly for crossties and domestic utility poles. Volume increases for crossties and higher activity in our crosstie recovery business also contributed to the increase. These increases were partly offset by lower activity in our other maintenance of way businesses and volume decreases in our Australian utility pole business. Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $0.4 million, mainly from our Australian utility pole business.

PC net sales increased as a result of global price increases of $15.7 million, or 10.3 percent in the current year period, particularly in the Americas for our copper-based preservatives. Volumes increased by 7.1 percent globally, including a 10.2 percent increase in the Americas, partly offset by volume decreases in Australasia. Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $0.3 million.

CMC net sales decreased mainly due to $24.3 million of lower sales prices across most products, including carbon pitch where prices were down ten percent globally, along with $25.9 million of lower volumes of carbon pitch and phthalic anhydride. The decreases in carbon pitch prices and volumes were driven by reduced market demand in the current year period. These decreases were partly offset by volume increases for refined tar and carbon black feedstock. Foreign currency changes compared to the prior year period from our international markets had a favorable impact on sales in the current year period of $1.5 million.

Cost of sales as a percentage of net sales was 80 percent, compared to 82 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 were $2.6 million lower when compared to the prior year period as the prior year included an increase in asset retirement obligation within our European CMC business.

Selling, general and administrative expenses were $7.1 million higher when compared to the prior year period due mainly to an increase in compensation related costs along with an increase in insurance, consulting and travel expenses.

Interest expense was $7.6 million higher when compared to the prior year period due primarily to higher interest rates.

Income tax expense decreased by $4.9 million when compared to the prior year period due to a lower estimated annual effective income tax rate, which is mainly due to the geographical mix of earnings and interest expense deduction limitations in the prior year, in addition to favorable return to provision adjustments in 2023.

Segment Results

Segment adjusted EBITDA and adjusted EBITDA margin is summarized in the following table:

(Dollars in millions)

24

RUPS adjusted EBITDA increased due primarily to net sales price increases and $3.8 million from improved plant utilization, which combined to more than offset higher raw material, operating and selling, general and administrative expenses of $14.3 million. The domestic utility pole businesses' increased sales, operating profit and adjusted EBITDA contributed to the strong results.

PC adjusted EBITDA increased as renegotiated customer contracts allowed us to increase prices to recapture the higher raw material and other operating costs we began experiencing last year, along with a volume increase for wood treatment preservatives in the Americas. These price increases more than offset higher raw material costs of $3.9 million and increased selling, general and administrative expenses.

CMC adjusted EBITDA decreased due to price and volume decreases, partly offset by a $4.2 million reduction in raw material costs and operating expense, particularly in North America, along with $2.3 million of insurance proceeds recognized in the current year period.

Results of Operations – Comparison of Nine Months Ended September 30, 2023 and 2022

Consolidated Results

Net sales are summarized by segment in the following table:

(Dollars in millions)

RUPS net sales increased largely due to a net $65.0 million of pricing increases across multiple markets, particularly for crossties and domestic utility poles. Volume increases for crossties and higher activity in our crosstie recovery business also contributed to the increase. These increases were partly offset by lower activity in our other maintenance of way businesses and volume decreases in our Australian utility pole business. Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $2.0 million, mainly from our Australian utility pole business.

PC net sales increased as a result of global price increases of $61.4 million, or 14 percent in the current year period, particularly in the Americas for our copper-based preservatives. Volumes increased by 2.6 percent globally, including an 8.1 percent increase in the Americas, partly offset by volume decreases in Australasia and Europe. Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $4.7 million.

CMC net sales decreased due mainly to $32.3 million of volume decreases, primarily carbon pitch and phthalic anhydride, partly offset by volume increases for refined tar and carbon black feedstock. Higher sales prices added $23.5 million, primarily for carbon pitch driven by strong end markets and constrained raw material supply in the first half of the year, partly offset by lower pricing across other product lines. Foreign currency changes compared to the prior year period from our international markets had an unfavorable impact on sales in the current year period of $2.3 million.

Cost of sales as a percentage of net sales was 80 percent, compared to 82 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.

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

Selling, general and administrative expenses were $12.7 million higher when compared to the prior year period due mainly to an increase in compensation related costs along with an increase in travel and company meeting expenses. These increases were partly offset by a reduction in professional services and insurance costs.

Interest expense was $21.0 million higher when compared to the prior year period due primarily to higher interest rates and a $1.6 million increase in write-off of debt issuance costs related to the repayment of the 2025 Notes as described in Note 11 – Debt.

Income tax expense decreased by $1.6 million when compared to the prior year period due to a lower estimated annual effective income tax rate, which is mainly due to the geographical mix of earnings and interest expense deduction limitations in the prior year, in addition to favorable return to provision adjustments in 2023. This is offset by a higher amount of income from continuing operations before income taxes when compared to the prior year period.

Segment Results

Segment adjusted EBITDA and adjusted EBITDA margin is summarized in the following table:

(Dollars in millions)

RUPS adjusted EBITDA increased due primarily to net sales price increases and $14.9 million from improved plant utilization, which combined to more than offset higher raw material, operating and selling, general and administrative expenses of $61.9 million. The domestic utility pole businesses' increased sales, operating profit and adjusted EBITDA contributed to the strong results.

PC adjusted EBITDA increased as renegotiated customer contracts allowed us to increase prices to recapture the higher raw material and other operating costs we began experiencing last year, along with an 8.1 percent volume increase in the Americas for wood treatment preservatives. These price increases more than offset higher raw material costs of $26.8 million and increased selling, general and administrative expenses.

CMC adjusted EBITDA decreased due to an increase of $52.4 million in raw material costs, particularly in North America and Europe, along with volume decreases, partly offset by higher pricing globally and lower operating costs in North America compared to the prior year period as well as $2.3 million of insurance proceeds recognized in the current year period. Foreign currency changes from our international markets had an unfavorable impact on profitability in the current year period of $1.4 million.

Adjusted EBITDA Reconciliation. The following table reconciles net income to adjusted EBITDA on a consolidated basis:

(Dollars in millions)

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

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

Cash Flow

Net cash provided by operating activities for the nine months ended September 30, 2023 was $79.5 million compared to $67.4 million in the prior year. The increase was primarily the result of higher net sales, partly offset by higher costs and unfavorable changes in working capital consistent with higher costs.

Net cash used in investing activities for the nine months ended September 30, 2023 was $88.3 million compared to $75.1 million in the prior year 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 yield enhancement project at our CMC facility in Nyborg, Denmark.

Net cash provided by financing activities for the nine months ended September 30, 2023 was $31.6 million compared to $12.3 million in the prior year. The primary source of financing cash flows was net borrowings of $46.9 million and the primary uses of financing cash flows were repurchases of common stock, payments of debt issuance costs and dividends paid. In the prior year, the primary source of financing cash flows was net borrowings of $37.9 million and the primary uses of financing cash flows were repurchases of common stock, payments of debt issuance costs and dividends paid.

Liquidity and Capital Resources

Our Credit Facility is described in Note 11 – Debt.

Restrictions on Dividends to Koppers Holdings

Koppers Holdings depends on the dividends from the earnings of Koppers Inc. and its subsidiaries to generate the funds necessary to meet its financial obligations, including the payment of any declared dividend of Koppers Holdings. The Credit Facility permits Koppers Inc. to make dividend payments to Koppers Holdings if certain conditions are met, including, among other permitted dividend payments, the ability to fund the payment of regularly scheduled dividends on 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.

Liquidity

As of September 30, 2023, the maximum amount available under the Credit Facility considering restrictions from debt covenants was approximately $350 million. 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 spending, 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 September 30, 2023, approximately 90 percent of accounts payable was current and 10 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 September 30, 2023 was 3.1.
• 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 September 30, 2023 was 4.2.

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 needs over at least the next twelve months. Effective during the first quarter of 2024, the total net leverage ratio is not permitted to exceed 4.75.

Legal Matters

The information set forth in Note 13 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 13 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference.

Except for the following update regarding interest rate sensitivity, 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.

See Note 11 – Debt for discussion of the changes in debt and interest rate swap agreements. For variable rate debt, interest rate changes impact earnings and cash flows, assuming other factors are held constant. A one percentage point increase in interest rates would have decreased earnings and cash flows by approximately $6 million over a twelve-month period, holding other variables constant inclusive of interest rate swap effects.

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 September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.