Koppers Holdings Inc. annual report, FY2023

Koppers Holdings Inc. 2023 Form 10-K Summary

Business context and reporting period

Koppers Holdings Inc. is a global provider of treated wood products, wood-preservation chemicals and carbon compounds. Its three reportable segments are Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC). The filing covers the fiscal year ended December 31, 2023. The source provides annual results and does not provide a separate fourth-quarter income statement.

Financial performance and key metrics

Metric	2023	2022	Change
Net sales	$2,154.2 million	$1,980.5 million	+9%
Operating profit	$195.2 million	$137.7 million	+42%
Net income	$89.8 million	$63.2 million	+42%
Net income attributable to Koppers	$89.2 million	$63.4 million	+41%
Diluted EPS	$4.14	$2.98	+39%
Adjusted EBITDA	$256.4 million	$228.1 million	+12%
Cash flow from operations	$146.1 million	$102.3 million	+$43.8 million
Capital expenditures	$120.5 million	$105.3 million	+$15.2 million

Calculated margins improved: gross margin was approximately 19.7% versus 17.4% in 2022, operating margin was approximately 9.1% versus 7.0%, net margin was approximately 4.2% versus 3.2%, and adjusted EBITDA margin was approximately 11.9% versus 11.5%.

RUPS: Sales were $897.9 million, up 14%; adjusted EBITDA was $84.0 million, up 57%. Pricing increases, improved plant utilization, higher Class I crosstie volumes and stronger crosstie recovery activity were partly offset by lower maintenance-of-way activity and a 2.5% decline in utility-pole volumes.
PC: Sales were $671.6 million, up 16%; adjusted EBITDA was $123.1 million, up 63%. Price increases and higher Americas volumes helped recover prior cost inflation.
CMC: Sales were $584.7 million, down 5%; adjusted EBITDA was $49.3 million, down 50%. Lower phthalic anhydride and carbon-pitch volumes, higher raw-material and SG&A costs, and a $2.8 million bad-debt reserve reduced results.

Cash and cash equivalents were $66.5 million at year-end, compared with $33.3 million in 2022. Inventories increased to $395.7 million from $355.7 million, principally reflecting crosstie restocking. Total assets were $1.84 billion and total equity was $503.0 million.

Debt, liquidity and capital allocation

Total debt was $849.4 million at December 31, 2023, compared with $825.3 million at December 31, 2022; debt fair value was $860.4 million.
The company issued a $400.0 million Term Loan B, receiving $388.0 million of net proceeds, and used the proceeds, cash and revolver capacity to redeem its $500.0 million 2025 senior notes.
Debt consisted primarily of $461.4 million outstanding under the Credit Facility and $388.0 million under the Term Loan B. The weighted-average rates were 7.39% and 7.56%, respectively.
Unused revolving capacity was approximately $330.0 million after specified restrictions; maximum availability considering debt-covenant limitations was approximately $386 million.
The December 31, 2023 total net leverage ratio was 2.9 versus a maximum of 5.0, and the cash-interest-coverage ratio was 3.9 versus a minimum of 2.0. The company reported compliance with all covenants.
The company paid $5.0 million of dividends and repurchased $20.1 million of common stock during 2023. A $100 million repurchase authorization remained, with approximately $54.1 million available at December 31, 2023.

Material changes versus the prior comparable period

Revenue and profitability increased substantially, led by pricing and improved performance in RUPS and PC.
Interest expense increased to $71.0 million from $44.8 million because of higher interest rates, higher debt levels and debt-issuance-cost write-offs associated with the 2025 Notes redemption.
Operating cash flow improved despite increased inventories and capital spending.
CMC performance deteriorated materially because of volume declines, cost inflation and bad-debt activity.
The company recorded a $1.8 million gain on the sale of assets from its closed Chinese coal-tar distillation facility; no impairment charges were recorded in 2023.
Goodwill increased slightly to $294.4 million. No goodwill impairment was recorded, but the Railroad Products and Services reporting unit had the least valuation headroom and could be exposed to future impairment if forecasts or market conditions weaken.

Guidance, outlook, commentary and risks

Management’s 2024 financial goals are sales of approximately $2.25 billion, adjusted EBITDA of approximately $275 million, and capital expenditures of approximately $100 million, including capitalized interest. Approximately $29 million of planned capital spending is discretionary.

RUPS priorities include recovering cost increases, maintaining uninterrupted operations, expanding volumes and entering the Texas utility-pole market.
PC priorities include increasing market share for newer products and improving gross margin through cost reductions.
CMC priorities include optimizing the Nyborg, Denmark yield-enhancement project, increasing acceptance of petroleum-blended products and executing domestic plant-optimization projects.
Management expects approximately 18.5 million crosstie installations in 2024, high utility-pole demand, a 6.5% decline in homeowner renovation and maintenance spending, and near-term weakness in broader manufacturing, steel, aluminum and carbon-black markets.
Raw-material exposure includes hardwood, softwood, scrap copper, coal tar, oil-linked chemicals and transportation services. The company uses commodity, foreign-exchange and interest-rate derivatives to manage portions of these risks.
A 1 percentage-point increase in interest rates would reduce estimated annual earnings and cash flow by approximately $4.6 million, after considering interest-rate swaps. A 10% decline in relevant foreign exchange rates would reduce estimated earnings by approximately $5.4 million.
Environmental reserves totaled $10.6 million. The company expects approximately $9.5 million of environmental-control capital expenditures in 2024.
Pension and other post-retirement obligations were underfunded by $26.2 million and $6.2 million, respectively. Normal 2024 funding is expected to be approximately $7.6 million for pension plans and $0.6 million for other benefit plans. A potential U.S. pension-plan termination could require approximately $25 million of additional funding and produce an estimated $40 million pretax settlement loss.
The company is involved in coal-tar-pitch, environmental, toxic-tort and other litigation. It had not reserved for 27 pending coal-tar-pitch cases involving 51 plaintiffs because loss probability and amount could not reasonably be estimated.
The company relies on indemnification from Beazer East and Beazer Limited for certain pre-1988 environmental and product liabilities. Failure of the indemnitors to perform could materially affect liquidity and results.
Management reported no material cybersecurity incident as of the filing date and stated that internal control over financial reporting was effective. KPMG issued unqualified audit opinions.

On February 27, 2024, Koppers agreed to acquire substantially all assets of Brown Wood Preserving Company for approximately $100 million in cash. The transaction was expected to close in the second quarter of 2024, subject to customary conditions, and is expected to be financed with cash and Credit Facility borrowings.

Important facts for investors to verify

Whether 2024 sales and adjusted EBITDA goals of $2.25 billion and $275 million remain achievable amid CMC market weakness and lower remodeling demand.
The sustainability of RUPS and PC pricing benefits and the ability to offset lumber, copper, coal-tar, labor and transportation costs.
Interest-rate exposure, debt maturities, covenant headroom and the effect of the Brown Wood acquisition on leverage and liquidity.
The timing, funding requirement and potential settlement losses associated with the U.S. and U.K. pension actions.
Potential exposure from environmental remediation, Portland Harbor and Newark Bay matters, coal-tar-pitch litigation, and the continued performance of Beazer indemnitors.
The valuation headroom of the Railroad Products and Services goodwill reporting unit and the risk of future impairment.
Whether cash generation supports planned capital expenditures, dividends, share repurchases and strategic acquisitions simultaneously.