Koppers Holdings Inc. quarterly report, Q2 FY2023

Koppers Holdings Inc. — Form 10-Q Summary

Business context and reporting period

Koppers is a global provider of treated wood products, wood-preservation chemicals, and carbon compounds. Its reportable segments are Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). This unaudited filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Results are seasonal and interim results may not represent full-year performance.

Key financial metrics

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Net sales	$577.2 million	$502.5 million	$1,090.6 million	$961.8 million
Operating profit	$54.4 million	$29.1 million	$104.7 million	$67.3 million
Net income	$24.4 million	$11.6 million	$50.6 million	$30.4 million
Net income attributable to Koppers	$24.5 million	$11.7 million	$50.0 million	$30.5 million
Diluted EPS	$1.15	$0.55	$2.34	$1.42
Adjusted EBITDA	$70.3 million	$54.6 million	$131.8 million	$107.2 million
Cash provided by operating activities	Not separately provided	Not separately provided	$(2.1) million	$21.2 million

Q2 2023 operating margin was approximately 9.4%, versus 5.8% in Q2 2022; six-month operating margin was approximately 9.6%, versus 7.0%. Q2 net margin was approximately 4.2%, versus 2.3%; six-month net margin was approximately 4.6%, versus 3.2%.

Q2 sales increased 15%, with RUPS up 15% to $234.4 million, PC up 21% to $180.9 million, and CMC up 9% to $161.9 million.
Q2 adjusted EBITDA increased 29% to $70.3 million. RUPS adjusted EBITDA rose 69% to $22.3 million and PC rose 58% to $32.3 million, while CMC declined 25% to $15.7 million.
Six-month sales increased 13% and adjusted EBITDA increased 23%.
Six-month capital expenditures were $62.6 million, compared with $55.8 million in 2022.
Cash and cash equivalents were $48.2 million at June 30, 2023, compared with $33.3 million at December 31, 2022.
Total debt was $915.7 million at June 30, 2023, compared with $825.3 million at year-end 2022. Long-term debt was $902.2 million, and current maturities were $4.0 million.
Total assets were $1.816 billion and total equity was $456.6 million at June 30, 2023.

Material changes versus the prior comparable period

Pricing actions were the primary sales driver. Q2 pricing increased sales by approximately $20.3 million in RUPS, $21.0 million in PC, and $7.2 million in CMC.
RUPS benefited from higher crosstie and utility-pole volumes and improved plant utilization. PC benefited from renegotiated customer contracts and higher preservative volumes.
CMC profitability weakened because raw-material costs increased by $17.2 million in Q2 and $60.5 million for the six-month period, partially offset by higher pricing and volumes.
Cost of sales declined to 81% of sales in Q2 from 83% and to 80% for the six-month period from 82%, as price increases outpaced higher raw-material and operating costs.
Interest expense increased by $9.2 million in Q2 and $13.4 million for the six-month period because of higher interest rates and debt issuance-cost write-offs related to the 2025 Notes redemption.
Operating cash flow declined to an outflow of $2.1 million for the six-month period, primarily because working-capital usage increased by $36.6 million.
On April 11, 2023, the company redeemed its $500 million Senior Notes due 2025 using Term Loan B proceeds, cash on hand, and Credit Facility borrowings. The new $400 million Term Loan B generated $388.0 million of net proceeds before financing costs and matures in 2030.

Liquidity, debt, and cash flow

The company has an $800 million revolving Credit Facility. Approximately $301 million of borrowing capacity was available at June 30, 2023 after covenant and letter-of-credit restrictions; $7.8 million was utilized by letters of credit.
The Credit Facility carried a weighted-average interest rate of 7.36%, and the Term Loan B carried a weighted-average rate of 8.56% at June 30, 2023.
The company entered into interest-rate swaps with a $150 million aggregate notional amount during the first half of 2023. Including an additional $100 million swap entered into during the third quarter, swaps collectively fixed the rate on $250 million of Term Loan B at a weighted average of 7.73% as of July 31, 2023.
The total net leverage ratio was 3.3 versus a maximum of 5.0, and the cash interest coverage ratio was 4.7 versus a minimum of 2.0. The company stated that it was in compliance with all debt covenants.
Management expects liquidity to be adequate for at least the next twelve months. Estimated 2023 capital expenditures, excluding acquisitions, are approximately $110 million to $120 million and are expected to be funded with operating cash flow.

Guidance, outlook, commentary, and risks

Management expects 2023 capital expenditures of approximately $110 million to $120 million but does not provide clear consolidated revenue or earnings guidance in the filing.
RUPS demand is supported by utility-grid hardening, infrastructure spending, pole replacement, and railroad investment, although 2023 crosstie demand is expected to be slightly lower than 2022. The filing describes an expected recovery in crosstie demand in 2024.
PC faces housing, remodeling, interest-rate, and consumer-spending headwinds. Copper prices and availability remain significant drivers of pricing and margins.
CMC expects near-term weakness in manufacturing, steel, aluminum, and carbon-black markets. Long-term coal-tar supply may decline as steel production using metallurgical coke decreases; the company is pursuing petroleum-blended products and yield-enhancement projects to mitigate this risk.
The company expects to recognize an approximately $20 million pretax pension settlement loss when its U.K. pension obligation is irrevocably settled, expected by late 2023.
Coal-tar pitch litigation involved 51 plaintiffs in 27 pending cases as of June 30, 2023. No reserve was recorded because the probability and amount of loss could not reasonably be determined.
Environmental remediation liabilities totaled $10.7 million, including $4.0 million accrued for Portland Harbor and Newark Bay CERCLA matters and $5.1 million for acquired-site remediation. Actual costs could be materially higher.
Material risks include commodity prices and availability, coal-tar supply, interest rates, foreign exchange, debt refinancing and covenant compliance, demand volatility, environmental and product-liability claims, goodwill or asset impairment, counterparty and bank failure, and seasonal or weather-related fluctuations.
Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.

Investor verification checklist

Verify the sustainability of pricing gains and whether they continue to offset raw-material, labor, transportation, and interest costs.
Monitor CMC raw-material costs, coal-tar availability, end-market demand, and the effect on segment margins.
Reconcile adjusted EBITDA to GAAP results and assess the recurring nature of LIFO, hedging, asset-sale, and other adjustments.
Track operating cash conversion, working-capital requirements, capital expenditures, and progress toward management’s $110 million to $120 million 2023 capital-spending estimate.
Review leverage, interest-rate exposure, available revolver capacity, and compliance with the Credit Facility’s financial covenants.
Assess the timing and approximately $20 million pretax impact of the expected U.K. pension settlement loss.
Follow coal-tar pitch litigation, CERCLA matters, environmental remediation, indemnification recoveries, and other contingent liabilities.
Confirm subsequent dividend actions, including the August 2, 2023 declaration of a $0.06-per-share dividend payable September 11, 2023.