What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-05-07 compared with 2019-11-07 · 147 added, 207 removed, 159 unchanged (69% of the section changed)

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general economic and business conditions;

the length and extent of economic contraction as a result of the coronavirus (COVID-19) pandemic;

disruption in the U.S.

and global financial markets;

potential difficulties in protecting our intellectual property;

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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 and telephone utility industries in the United States and Australia.

Our other treated wood products include utility poles for the electric and telephone utility industries in the United States and Australia and construction pilings.

We also provide rail joint bar products as well as various services to the railroad industry.

In April 2018, we re-entered the North American utility pole market with the acquisition of Cox Industries, Inc., which has been renamed Koppers Utility and Industrial Products Inc.

UIP manufactures and sells utility poles and certain construction and marine pilings through a network of eight manufacturing facilities and 19 distribution yards located throughout the United States.

In February 2018, Koppers Inc.

acquired M.A.

Energy Resources, LLC, a business related to the recovery of used crossties, which was renamed Koppers Recovery Resources LLC (“KRR”) subsequent to the acquisition.

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.

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and (v) changes in foreign exchange rates.

Effects of COVID-19 on our operations

Our quarterly operating results may fluctuate due to a variety of factors that are outside of our control, including from the effects of the current pandemic.

The COVID-19 outbreak began to have a global effect in the first quarter of 2020 and is having a significant impact on global markets driven by supply chain and production disruptions, workforce restrictions, reduced spending and other factors.

These events negatively impacted our financial performance in the first quarter of 2020 and are expected to negatively impact our financial performance in future periods.

During the COVID-19 pandemic, substantially all of our global businesses have continued to operate within a critical infrastructure sector (as established by the Cybersecurity & Infrastructure Security Agency of the U.S.

Department of Homeland Security, as well as other governments worldwide), and as a result, we have been able to meet the demand of our customers in the various markets we serve.

Our operations were curtailed in two locations, China and New Zealand, after government restrictions required the temporary closure of operations.

As of the date of this filing, these operations have returned to service.

Our remaining 31 facilities, principally in the United States, Canada, the United Kingdom, Australia and Denmark, were permitted to continue to operate.

Our focus during this period has been on the following key priorities:

Protecting the health and safety of employees, customers and supply chain partners through rapid deployment of new safety measures, including frequent communication and guidance to all employees on effective hygiene and disinfection, social distancing, limited and remote access and use of face masks.

Providing critical products and ongoing support to customers by communicating frequently, understanding their changing business needs and ensuring key raw materials are multi-sourced when possible.

Maintaining adequate liquidity and financial flexibility by launching several cost-reduction initiatives and contingency plans to raise and conserve cash in all aspects of our operations and utilizing available federal relief such as the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which we continue to evaluate.

The full extent to which COVID-19 will adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects.

Our condensed consolidated financial statements and discussion and analysis of financial condition and results of operations reflect estimates and assumptions made by us as of March 31, 2020.

Events and changes in circumstances arising after March 31, 2020, including those resulting from the impacts of COVID-19, will be reflected in our estimates for future periods.

Refer to the Liquidity section of Management’s Discussion and Analysis for the impact of the global pandemic on our liquidity.

Railroad and Utility Products and Services

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According to the Railway Tie Association (“RTA”), the estimated total crosstie installations in 2019 were approximately 20 million, of which 15 million were for Class I railroads.

The RTA initially forecasted demand in 2019 to be at 22 million to 23 million crossties;

however, that has recently been revised to 20.7 million crossties for 2019 and 20.8 million crossties for 2020.

The key drivers for the lower projected crosstie demand levels include reduced heavy-haul loads because of the continuing secular shift from coal to natural gas, lower agricultural shipments due to lower crop yields, manufacturing constraints related to a less optimistic economic outlook, and uncertainties from ongoing trade tensions.

For 2020, RTA forecasted a slight increase in demand to 20.5 million crossties , with 15 million for Class I railroads .

The key drivers for the projected relatively flat crosstie demand levels include reduced heavy-haul loads because of the continuing secular shift from coal to natural gas, lower agricultural shipments due to lower crop yields, manufacturing constraints related to a less optimistic economic outlook, and uncertainties from ongoing trade tensions.

The RTA has not yet provided a forecast that incorporates the potential effects of COVID-19.

For distribution poles, nearly half of the installed base is 40-plus years old and the demand has historically been in the range of two to three 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.

Given that backdrop, we anticipate that 2019 will be a relatively stable year from a demand standpoint.

As a whole, utilities need to maintain their infrastructure to avoid interruptions in service as large sections of the population are currently impacted by stay-at-home orders related to the COVID-19 pandemic.

Given that backdrop, we anticipate that 2020 will be a relatively stable to slightly higher from a demand standpoint.

Longer term, we are evaluating opportunities to potentially expand our market presence in the U.S.

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Currently, the railroads are more correlated to commodity prices, interest rates and trade relations.

The AAR reported that rail traffic has been trending down in recent months.

For the nine months ended September 30, 2019, total U.S.

carload traffic decreased 3.8 percent from last year while intermodal units were lower by 4.1 percent from the prior year, and on a combined basis, U.S.

traffic for carloads and intermodal units was 3.9 percent lower than prior year.

Although year-over-year rail traffic had been relatively positive during the past several years, the amount of heavy-haul loads such as coal and fracking sands have declined significantly from historical levels.

As a result, this translates into lighter-weight loads having less wear on tracks and ties.

Additionally, the current demand for rail service has been softening due to lower U.S.

manufacturing output, decelerating market trends in housing and tensions with trading partners overseas.

Over an economic cycle, the long-term prognosis for the railroad industry and the products and services that we provide to it are generally favorable.

However, in the near-term, railroad customers have scaled back and are focusing on reducing their operating costs and working capital.

In general, demand has shown improvements year-to-date 2019 and we anticipate that to continue, contingent on the availability of lumber for untreated crosstie production.

In terms of raw material, in 2018, there was less available inventory of untreated crossties from the sawmills and lumber prices increased dramatically due to unfavorable weather conditions affecting production.

During 2019, lumber prices have come down and remained relatively stable;

however, the weather challenges in the first half of the year have negatively affected the availability of logs for production at sawmill operators.

The RTA indicates that the industry continues to experience a shortage of lumber availability and consequently, the sawmills are reducing their tie production, which has resulted in a tightness in the supply of untreated crossties which constrains our ability to procure needed inventory.

In addition, the potential effects from the impending tariffs on trade between China and the U.S.

may negatively impact the hardwood industry and the availability of lumber.

The conditions for log availability improved somewhat late in the second quarter and throughout the third quarter.

To the extent that we can build our untreated tie inventory, we anticipate having higher levels of dry crosstie inventory ready for future treatment.

In addition, over the last several years, certain Class I railroads have shifted from a treatment-service only model to having suppliers hold untreated inventory until the crossties have been treated.

Going forward, we estimate that the remaining potential impact of this transition could be a further increase of working capital of approximately $50 million primarily due to higher inventory, and approximately $50 million in associated revenues could be deferred for approximately six to nine months.

The actual timing of this impact will be dependent on the date, if at all, when the remaining customers make the transition.

From a long-term perspective, there remains a need for sustained investment in infrastructure and capacity expansion.

The AAR reported that rail traffic trended down in recent months.

For the three months ended March 31, 2020 , total U.S.

carload traffic decreased 6.3 percent from the prior year while intermodal units were lower by 8.6 percent from the prior year, and on a combined basis, U.S.

traffic for carloads and intermodal units was 7.5 percent lower than the prior year.

According to the AAR, rail traffic has been negatively impacted by continuing weakness in coal markets, trade disputes and related uncertainties, and the COVID-19 pandemic.

With respect to the effects of COVID-19, U.S.

carloads of autos and auto parts were down as auto production has largely been suspended and lower consumer spending has begun to shrink demand.

In addition, the recent collapse in worldwide oil prices has also severely affected rail shipments of petroleum products, fracking sand and steel products.

In terms of raw material, while forestry has generally been deemed essential during the COVID-19 outbreak, new construction is not considered essential in many areas.

While this has impacted some of the sawmills, we have not experienced a noticeable impact to date as there are sawmills continuing to produce poles and crossties to maintain their operations and cash flow.

According to the RTA, the outlook is favorable for the adequate availability of logs over the current six to twelve-month period.

To the extent that demand remains as forecasted, we can build our untreated tie inventory and have higher levels of dry crosstie inventory ready for future treatment.

To date, all but one of our Class I customers have indicated that they expect to maintain their tie replacement programs for 2020;

however these plans may change due to highly uncertain and unpredictable economic environment.

From a long-term perspective, we believe there remains a need for sustained investment in infrastructure and capacity expansion.

We believe that with our vertical integration capabilities in wood treatment and strong customer relationships, we will ultimately benefit from increased demand.

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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 17 treating facilities related to our RUPS and UIP businesses in North America operating at less than full utilization, our goal is to either capture more volume through the existing facilities or consolidate our operating footprint.

We are pursuing actions to achieve both goals, which has begun realizing benefits in 2019.

Overall, through a combination of strategic initiatives and integration synergies, we expect to generate approximately $20 million of benefits in 2019, driven by savings from the new naphthalene unit at our Stickney, Illinois, facility as well as actions related to network optimization, commercial development, raw materials, and other cost savings.

Beyond 2019, we are forecasting an additional $15 million to $30 million of annualized benefits to be achieved ratably through 2023.

On August 5, 2019, we sold our utility pole treatment plant located in Blackstone, Virginia.

In exchange for the property and associated assets, the buyer extended its agreement to purchase wood-treatment chemicals from us for a one-year period and agreed to assume any potential historical environmental obligations at the plant.

Production capacity at Blackstone is being consolidated with other existing facilities.

With 17 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.

Performance Chemicals

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We also have a market presence in Europe, South America, Australia, New Zealand and Africa.

We believe that PC is the largest global manufacturer and supplier of water-based wood preservatives and wood specialty additives to treaters who supply pressure treated wood products to large retailers and independent lumber dealers.

We believe that PC is the largest global manufacturer and supplier of water-based wood preservatives and wood specialty additives to treaters that supply pressure treated wood products to large retailers and independent lumber dealers.

These retailers and dealers, in turn, serve the residential, agricultural and industrial pressure-treated wood market.

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Product demand for our PC business has historically been closely associated with consumer spending on home repair and remodeling projects, and therefore, trends in existing home sales serve as a leading indicator.

Overall, the market for existing homes continues to show mixed signals.

According to the National Association of Realtors® (“NAR”), total existing-home sales in September were down 2.2 percent from August, following two consecutive months of increases.

Despite the decline, overall existing-home sales are up 3.9 percent from a year ago.

Even with historically low mortgage rates, sales have not commensurately increased, in part due to a low level of new housing options.

Given the housing shortage, home prices are rising too rapidly, and this lack of inventory is preventing a potentially higher growth rate in existing-home sales.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, the annual growth in the national market for home improvement and repair has been revised lower and expected to slow considerably over the next twelve months.

The LIRA projects that annual home improvement and maintenance expenditures will post a modest decline of 0.3 percent through the third quarter of 2020.

The continued weakness in home sales—existing and new--is anticipated to lead to sluggish remodeling activity next year.

Also, the slowdowns in other key indicators of improvement spending—project permitting, sales of building materials, and home prices—may suggest the remodeling market may be reaching a turning point.

The improvement and repair spending in the coming year is expected to be at $325 billion, essentially remaining flat compared to the past twelve months.

However, the current environment of low interest rates may help to counter some of these headwinds, which could boost home improvement expenditures over the coming year.

The Conference Board Consumer Confidence Index® decreased in October to 125.9, down from 126.3 in September, and 134.2 in August.

Consumers were less positive in their assessment of current conditions and their expectations regarding the short-term outlook also weakened.

The escalation in trade and tariff tensions appears to have diminished confidence in the expansion.

However, this pattern of uncertainty and volatility has persisted throughout 2019 and may continue hovering at current levels for months to come.

From a margin perspective, our profitability has been unfavorably impacted by rising raw material costs, primarily due to copper prices which began to trend higher in 2017, continued into 2018 and then pulled back from highs reached in the first half of 2018.

Overall, copper prices in 2018 were higher, and given that we make purchasing commitments approximately 12 to 18 months in advance of the following 12-month period, we expect higher year-over-year raw material costs throughout 2019.

Our strategy is to hedge a majority of our requirements over a one-to-three year time frame in order to provide short-term certainty and visibility of our cost structure by lessening the impact that may arise in commodity markets.

In a rising copper price environment, as has been the case for much of the past twenty-four months, our average hedged prices have increased from prior year.

That trend has continued in 2019.

We are hedging for our input needs in 2020 and beyond, and as long as copper prices remain at current levels, we anticipate a year-over-year benefit for that time period.

We have and will continue to implement pricing actions, where possible, to partially offset the impact of higher input costs.

Overall, the market for existing homes are beginning to show more negative signals.

According to the National Association of Realtors® (“NAR”), total existing-home sales in March dropped 8.5 percent from February;

however, overall sales increased year-over-year for the ninth straight month, up 0.8 percent from a year ago.

Due to the COVID-19 outbreak, existing home sales slowed in March and more temporary interruptions to home sales are expected in the near term.

While sales have declined, the NAR reports that home prices remain strong for the time being.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, national spending for home renovations and repairs are expected to decline at least through the first quarter of 2021 due to impacts from the COVID-19 pandemic .

Prior to the pandemic, t he LIRA pointed to a healthy rebound in home remodeling spending with annual growth of 3.9 percent by the first quarter of 2021, but the latest data incorporating both actual and forecasted impacts of the economic shutdown point to spending declines this year with further worsening into 2021.

With the unprecedented changes to the U.S.

economy since mid-March, LIRA projects that home remodeling expenditures will decrease as much as 1.2 percent in 2020 compared with annual gains of five percent to seven percent in recent years.

The current environment of low interest rates may help mitigate declines to home improvement expenditures over the next six to twelve months.

The Conference Board Consumer Confidence Index® d eteriorated further in April, following a sharp decline in March.

The Index now stands at 86.9, down from 118.8 in March.

Consumer confidence weakened significantly in April, driven by a sharp contraction in economic activity and a surge in unemployment claims brought about by the COVID-19 outbreak.

In general, consumers were less optimistic about their financial prospects.

The uncertainty of the economic effects of COVID-19 will likely cause expectations to fluctuate in the months ahead.

Carbon Materials and Chemicals

The primary products produced by CMC are creosote, which is a registered pesticide in the U.S.

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.

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 reduced 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.

Most recently, in June 2019, we announced the cessation of remaining production activities at our Follansbee, West Virginia facility in the third quarter of 2019 and, as such, we recorded charges of $3.3 million in the second quarter of 2019 related to asset retirement obligations and inventory and fixed asset write-offs.

As a result of these initiatives, we expect additional restructuring and related charges to earnings of approximately $3 to $5 million through 2021.

The CMC business currently supplies our North American RUPS business with the majority of its creosote requirements.

On February 18, 2020, we entered into a definitive agreement to sell Koppers (Jiangsu) Carbon Chemical Company Limited (“KJCC”) to Fangda Carbon New Material Co., Ltd and C-Chem Co., Ltd., a subsidiary of Nippon Steel Chemical & Material Co., Ltd.

KJCC is a 75 percent-owned coal tar distillation company which is part of our CMC segment.

On April 16, 2020, the pending divestiture reached a key milestone by filing for antitrust approval with China’s State Administration for Market Regulation of China (SAMR) and a decision is anticipated to be issued by June 2020.

In 2019, KJCC’s sales totaled $127.4 million and its operating profit totaled $5.9 million.

The sales price is $107.0 million, subject to adjustment for cash, debt and working capital at closing, which is expected to occur in four to six months from signing due to required regulatory approvals in China and achievement of other closing conditions.

At closing, we estimate the gain on the sale of KJCC will be approximately $45 million and net cash proceeds to Koppers will be approximately $65 million, after noncontrolling interest, taxes and expenses.

The results of KJCC are reflected as a discontinued operation in the consolidated financial statement s and the supporting footnotes .

In the third quarter of 2019, we ceased remaining production activities at our Follansbee, West Virginia.

As a result of recent initiatives to reduce capacity, we expect additional restructuring and related charges to earnings of approximately $2 million to $5 million through 2021.

The overall expected future cash requirements for the CMC plant closures are estimated to be approximately $14 million through 2021.

We currently supply our North American RUPS business with 100 percent of its creosote requirements.

As discussed in the RUPS outlook, there has been a decrease starting in 2017 with respect to spending for railroad infrastructure.

This results in a shift in excess distillate production to the commodity carbon black feedstock market until demand stabilizes for creosote.

While the sale of carbon pitch remains a significant portion of our sales volume, the reduction of aluminum smelting capacity in the United States, Australia and Western Europe has led to sharply lower demand for carbon pitch over the past several years.

Accordingly, we have experienced significantly lower sales volumes due to the reduction in aluminum production in parts of the world where the majority of our production facilities are located.

However, beginning in 2018, aluminum production in the U.S.

increased to some extent as tariffs are being imposed on certain imported steel and aluminum products that has stimulated restarts of previously idled capacity.

However, beginning in 2018, aluminum production in the United States increased to some extent as tariffs have been imposed on certain imported steel and aluminum products that has stimulated restarts of previously idled capacity.

This development has resulted in additional demand for carbon pitch in the United States that can likely only be sustained through a continuation of current trade policy.

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For the past decade, the coal tar distillation industry has operated in an excess capacity mode, which further increased the competition for a limited amount of coal tar in North America.

Over the past three years we have consolidated our operating footprint and significantly lowered production levels at the same time that we added distribution assets to move finished products from Europe to the U.S.

more efficiently.

In addition, we entered into several new long-term supply agreements in 2017 to further lower our exposure to coal tar availability risk and volatile end markets.

In addition, we entered into several new long-term supply agreements starting in 2017 to further lower our exposure to coal tar availability risk and volatile end markets.

As a result, our raw material needs in North America have been significantly less than historically required.

For the external markets served by our CMC business, we expect that North America and Europe will benefit from relatively favorable demand levels for carbon pitch.

However, phthalic anhydride markets have begun to soften and end market pricing for some products has been under pressure in certain regions as competitors are trying to increase market share.

For the external markets served by our CMC business, we expect that North America and Europe will be significantly impacted by the COVID-19 pandemic.

Carbon pitch and phthalic anhydride markets have begun to soften due to declines in demand as manufacturing activity in North America and Europe significantly slowed.

In addition , end market pricing for some products has been under pressure in certain regions due to the significant fall in worldwide oil prices.

Globally, coal tar raw material supply remains constrained due to reductions in blast furnace steel capacity.

That said, our continued focus on streamlining CMC’s cost structure has been key to maximizing its profitability.

With respect to our largest customer in China, we believe that the pricing we have received has been understated for a number of quarterly periods prior to the fourth quarter of 2018.

We have not recognized any incremental revenue associated with the higher pricing that we believe is accurate.

Seasonality and Effects of Weather on Operations

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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, 2019 and 2018

Results of Operations – Comparison of Three Months Ended March 31, 2020 and 2019

Consolidated Results

Net sales for the three months ended September 30, 2019 and 2018 are summarized by segment in the following table:

Three Months Ended September 30,

Net sales for the three months ended March 31, 2020 and 2019 are summarized by segment in the following table:

Three Months Ended March 31,

(Dollars in millions)

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Carbon Materials and Chemicals

RUPS net sales increased by $13.8 million or seven percent compared to the prior year period.

The sales increase was primarily due to volume increases in the Class I crosstie market and the domestic utility pole market and price increases across the segment in the current year period.

In total, sales of Class I crossties increased by $18.0 million in the current year period.

These increases were offset, in part, by volume decreases in the commercial crosstie market, the rail joints market and our domestic pilings business.

RUPS net sales in creased by $ 23.9 million or 14 percent compared to the prior year period.

The sales increase was primarily due to volume increases in the Class I and commercial crosstie markets as well as the domestic and Australian utility pole markets , along with price increases in the commercial crosstie market in the current year period.

Sales of crossties increased by $ 23.5 million in the current year period.

These increases were offset, in part, by volume decreases in our maintenance of way businesses and an unfavorable impact from foreign currency translation in the current year period of $ 1 .0 million from our Australian pole business.

PC net sales increased by $12.4 million or 13 percent compared to the prior year period.

The sales increase was due primarily to higher volumes of copper based preservatives in North America, new customer volumes and new product sales.

In addition, sales of non-copper based preservatives in Europe realized a more favorable pricing mix in the current year period.

CMC net sales increased by $2.7 million or two percent compared to the prior year period due mainly to higher sales volumes for carbon pitch and naphthalene in China.

These were partially offset by lower sales volumes of carbon pitch in Europe and Australia and phthalic anhydride in North America, lower sales prices for carbon pitch and naphthalene in China and Europe and an unfavorable impact from foreign currency translation .

Cost of sales as a percentage of net sales was 81 percent for the quarters ended September 30, 2019 and 2018.

In the current year period, higher gross margins for RUPS were due primarily to increased sales volumes of crossties while CMC margins are being favorably impacted by permanent cost savings from its restructuring initiatives .

These margin increases were partially offset by slightly lower PC margins due to higher raw material costs in the current year period.

Depreciation and amortization charges for the quarter ended September 30, 2019 were $1.3 million higher compared to the prior year period due mainly to assets placed in service over the past year related to our new naphthalene unit at our CMC plant in Stickney, Illinois.

Impairment and restructuring expenses for the quarter ended September 30, 2019 were largely unchanged compared to the prior year period and consist of remaining domestic restructuring charges within our CMC segment.

Selling, general and administrative expenses for the quarter ended September 30, 2019 were $0.3 million lower when compared to the prior year period due primarily to a decrease of $1.7 million for travel, consulting and other professional service expenses mostly related to our prior year acquisitions offset mainly by an increase in employee related costs.

Interest expense for the quarter ended September 30, 2019 was $0.4 million higher when compared to the prior year period primarily due to the higher average debt level to fund our stock buybacks and capital expenditures in the second half of 2018.

Income taxes for the quarter ended September 30, 2019 were $ 3.6 million , a decrease of $5.0 million when compared to the prior year period.

The decrease in income tax expense is primarily due to discrete items that were recorded in each period in addition to a lower estimated annual effective income tax rate.

The decrease is partially offset by additional tax expense due to an increase in pre-tax profit of $8.

6 million when compared to the prior period.

In the quarter ended September 30, 2019, we recorded a favorable tax benefit of $2.6 million for provision-to-return adjustments as a result of filing the Company’s 2018 U.S.

These favorable adjustments were predominately due to various tax return positions which enabled us to increase our U.S.

taxable income and therefore decrease the limitation on our interest expense deduction as originally estimated.

In the quarter ended September 30, 2018, we recorded a tax cost of $1.0 million related to the completion of the analysis of the final impact of the Tax Cuts and Jobs Act of 2017.

Income tax expense as a percentage of pre-tax profit for the quarter ended September 30, 2019 and 2018 was 14.9 percent and 55.5 percent, respectively.

The decrease in this percentage is largely due to the factors that were previously described.

Additionally, the estimated annual effective income tax rate is lower when compared to the prior period due to the change in the geographical mix of earnings and due to a decrease in unfavorable U.S.

tax adjustments for the limitation on our interest expense deduction and the GILTI inclusion.

The sales increase was due primarily to higher demand for copper-based preservatives in North America due to new customer wins and higher organic volumes as well as favorable weather and optimistic demand leading into the first quarter.

The business experienced these positive drivers despite the COVID-19 pandemic.

These increases were partially offset by a decrease in sales volumes of non-copper based preservatives in Europe as well as an unfavorable impact from foreign currency translation in the current year period of $1.9 million.

CMC net sales decreased by $11.3 million or 10 percent compared to the prior year period due mainly to lower sales prices for carbon pitch in Australia, Europe and North America along with reduced sales volumes of carbon pitch in North America.

These unfavorable drivers were primarily due to reduced demand as a result of an oversupply in the aluminum market.

Foreign currency translation also had an unfavorable impact on sales in the current year period of $3.4 million.

Favorable offsetting factors in the current year period included increased volumes for phthalic anhydride in North America and carbon pitch and carbon black feedstock in Australia.

Cost of sales as a percentage of net sales was 85 percent for the quarter ended March 31, 2020 compared to 80 percent in the prior year quarter.

Gross margin at PC was unfavorably impacted by a net amount of $11.1 million due to changes in unrealized gains and losses from our copper swap contracts.

Lower gross margins for CMC in the current year period were a result of lower sales volumes and prices for carbon pitch in North America and Europe.

Depreciation and amortization charges for the quarter ended March 31, 2020 were consistent with the prior year period .

Impairment and restructuring charges for the quarter ended March 31, 2020 were consistent with the prior year period .

Selling, general and administrative expenses for the quarter ended March 31, 2020 were $2.2 million lower when compared to the prior year period due mainly to a decrease of $1.3 million for performance based employee incentive expense and $1.2 million for travel and facility related costs.

These decreases were partially offset by a slight increase of for certain consulting, legal and professional service costs in the current year period.

Interest expense for the quarter ended March 31, 2020 was $2.2 million lower when compared to the prior year period primarily due to our lower average debt level each quarter since our elevated cash needs for stock buybacks and major capital projects in the second half of 2018.

Income tax benefit for the quarter ended March 31, 2020 was $1.8 million as compared to an income tax benefit of $1.2 million in the prior year period.

Both years included benefits related to discrete tax items which significantly influenced the tax provision.

In 2020, we recognized net tax benefits of $1.8 million principally related to provisions of the CARES Act and, in 2019, we recognized net tax benefits of $3.8 million principally related to the reversal of unrecognized tax benefits due to audit closures.

Discontinued operations for the three months ended March 31, 2020 resulted in a loss of $4.4 million compared to income of $2.7 million in the prior year period due primarily to a year-over-year reduction in sales of $48.1 million attributable to the economic effects of COVD-19 on our KJCC operations in the current year period.

Segment Results .

Segment operating profit for the three months ended September 30, 2019 and 2018 is summarized by segment in the following table:

Three Months Ended September 30,

Segment operating profit for the three months ended March 31, 2020 and 2019 is summarized by segment in the following table:

Three Months Ended March 31,

(Dollars in millions)

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RUPS operating profit increased by $0.5 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 5.7 percent from an operating profit of 3.1 percent in the prior year period.

Operating profit as a percentage of net sales for the three months ended September 30, 2019 was positively impacted by increased sales volumes of crossties to Class I customers coupled with commercial crosstie market price increases and higher overall demand along with synergy benefits in the current year period from our 2018 acquisition of UIP.

PC operating profit increased by $0.7 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 4.8 percent from an operating profit of 5.2 percent in the prior year period.

Operating profit as a percentage of net sales for the three months ended March 31, 2020 was negatively impacted by higher overhead costs and an unfavorable sales mix on gross margin in the current year period.

PC operating profit decreased by $8.7 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 3.7 percent from 12.9 percent in the prior year period.

The decrease in operating profit margin in the current year period was due primarily to higher year-over-year raw material costs as well as incremental customer warranty costs, partially offset by an increase in sales volumes and prices for our copper-based wood preservatives.

CMC operating profit increased by $2.2 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 11.2 percent from 10.0 percent in the prior year period.

The increase in operating profit margin in the current year period was due primarily to increased sales volumes for carbon pitch and naphthalene in China, and a more streamlined and efficient cost structure across the entire segment.

These benefits were partially offset by lower sales volumes of carbon pitch in Europe and Australia and phthalic anhydride in North America and lower sales prices for carbon pitch and naphthalene in China and Europe.

Results of Operations – Comparison of Nine Months Ended September 30, 2019 and 2018

Consolidated Results

Net sales for the nine months ended September 30, 2019 and 2018 are summarized by segment in the following table:

Nine Months Ended September 30,

(Dollars in millions)

Railroad and Utility Products and Services

Performance Chemicals

Carbon Materials and Chemicals

RUPS net sales increased by $93.4 million or 20 percent compared to the prior year period.

The sales increase was primarily due to a full nine months of results from UIP, which was acquired in the second quarter of the prior year as well as volume increases in the Class I crosstie market and our rail services business and price increases across the segment in the current year period.

Sales of crossties increased by $48.4 million in the current year period.

These increases were offset, in part, by volume decreases in the rail joints market and an unfavorable impact from foreign currency translation out of our Australian pole business.

PC net sales increased by $23.0 million or seven percent compared to the prior year period.

The sales increase was due primarily to higher volumes and price increases for copper based preservatives in North America, new customer volumes and new product sales.

Sales of copper based preservatives in North America and non-copper based preservatives in Europe realized a more favorable pricing mix in the current year period as well.

CMC net sales decreased by $21.6 million or four percent compared to the prior year period due mainly to lower sales prices for carbon pitch in China and Europe and naphthalene in Europe along with lower sales volumes of carbon black feedstock and phthalic anhydride and an unfavorable impact from foreign currency translation , partially offset by increased volumes for carbon pitch in China, Europe and North America and naphthalene in China.

In Australia, higher sales prices for carbon pitch were driven primarily by higher raw material cost and increases in global oil pricing.

Cost of sales as a percentage of net sales was 81 percent for the nine months ended September 30, 2019 compared to 80 percent in the prior year period.

Lower gross margins for CMC in the current year period were a result of favorable margins in the first quarter of 2018 in China along with lower gross margins for PC due to higher year-over-year raw material costs .

These were offset by higher gross margins for RUPS due to increased sales volumes of crossties coupled with commercial crosstie market price increases .

Depreciation and amortization charges for the nine months ended September 30, 2019 was $3.8 million higher when compared to the prior year period due mainly to assets placed in service over the past year related to our new naphthalene unit at our CMC plant in Stickney, Illinois along with depreciation and amortization from our acquisition of UIP in the second quarter of 2018.

Impairment and restructuring expenses for the nine months ended September 30, 2019 were $1.4 million higher when compared to the prior year period.

In the third quarter of 2019, we discontinued remaining production activities at our Follansbee, West Virginia facility and, as such, we recorded associated charges of approximately $3 million for asset retirement obligations and inventory and fixed asset write-offs in the current year.

Prior year charges consisted of storage tank decommissioning costs and accelerated depreciation for the remaining fixed assets at our coal tar distillation facilities in Clairton, Pennsylvania and Follansbee, West Virginia.

Selling, general and administrative expenses for the nine months ended September 30, 2019 were $7.9 million lower when compared to the prior year period due primarily to a decrease of $9.2 million for travel, consulting and professional service expenses mostly related to our prior year acquisitions offset mainly by an increase in employee related costs.

Interest expense for the nine months ended September 30, 2019 was $8.1 million higher when compared to the prior year period primarily due to the higher average debt level to fund our acquisitions of UIP and KRR in 2018 as well as to fund our stock buybacks and capital expenditures in the second half of 2018.

Income tax es for the nine months ended September 30, 2019 w ere $ 1 1.5 million , a decrease of $12.9 million when compared to the prior year period even though pre-tax profit was similar to the prior period.

The decrease in income tax expense is primarily due to discrete items that were recorded in each period in addition to a lower estimated annual effective income tax rate.

In the nine months ended September 30, 2019, we recorded a favorable tax benefit of $4.3 million for the reversal of various unrecognized tax benefits due to the closure of a U.S.

tax audit and a favorable tax benefit of $2.6 million for provision-to-return adjustments as a result of filing the Company’s 2018 U.S.

These favorable adjustments were predominately due to various tax return positions which enabled us to increase our U.S.

taxable income and therefore decrease the limitation on our interest expense deduction as originally estimated.

In the nine months ended September 30, 2018, we recorded a tax cost of approximately $3.8 million, which was primarily related to the completion of the analysis of the final impact of the Tax Cuts and Jobs Act of 2017.

Income tax expense as a percentage of pre-tax profit for the nine months ended September 30, 2019 and 2018 was 19.6 percent and 43.9 percent, respectively.

The decrease in this percentage is largely due to the factors that were previously described.

Additionally, the estimated annual effective income tax rate is lower when compared to the prior period due to the change in the geographical mix of earnings and due to a decrease in unfavorable U.S.

tax adjustments for the limitation on our interest expense deduction and the GILTI inclusion.

Segment Results

Segment operating profit for the nine months ended September 30, 2019 and 2018 is summarized by segment in the following table:

Nine Months Ended September 30,

(Dollars in millions)

Operating profit (loss):

Railroad and Utility Products and Services

Performance Chemicals

Carbon Materials and Chemicals

Operating profit as a percentage of net sales:

Railroad and Utility Products and Services

Performance Chemicals

Carbon Materials and Chemicals

RUPS operating profit increased by $25.9 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 5.6 percent in the current year period.

Operating profit as a percentage of net sales for the nine months ended September 30, 2019 was impacted by increased sales volumes of crossties to Class I customers coupled with commercial crosstie market price increases and higher overall demand along with synergy benefits in the current year period from our 2018 acquisition of UIP.

The prior year period also included acquisition-related costs not present in the current year period.

PC operating profit increased by $10.3 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 11.2 percent from 8.8 percent in the prior year period.

The current year period was favorably impacted by a net amount of $5.6 million due to changes in unrealized gains and losses from our copper swap contracts as well as insurance proceeds compared to the prior year period.

Higher year-over-year raw material prices partially offset our slight increase in sales for the nine months ended September 30, 2019.

The current year period was unfavorably impacted by a net amount of $11.1 million due to changes in unrealized gains and losses from our copper swap contracts.

Excluding the effect of unrealized losses from our copper swap contracts, our operating profit as a percentage of net sales would have been 10.9 percent in the current year period.

Lower year-over-year raw material prices and higher absorption on higher production volumes partially offset our unrealized coppers swap contract losses for the quarter ended March 31, 2020.

CMC operating profit decreased by $2.6 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 8 percent from 13.1 percent in the prior year period.

Operating profit for the nine months ended September 30, 2019 was negatively affected primarily by lower sales prices for carbon pitch in China year over year.

In addition, we recognized restructuring and related charges to earnings of approximately $3 million for the nine months ended September 30, 2019 resulting from our cessation of remaining production activities at our Follansbee, West Virginia facility in the third quarter of 2019.

Finally, lower sales prices for carbon pitch and naphthalene in Europe along with lower sales volumes of carbon black feedstock and phthalic anhydride were partially offset by increased volumes for carbon pitch in China, Europe and North America and naphthalene in China coupled with a more streamlined and efficient cost structure across the entire segment in the current year period .

Net cash provided by operating activities for the nine months ended September 30, 2019 was $57.0 million compared to net cash provided by operating activities of $8.0 million in the prior year period.

The net increase of $49.0 million in cash provided by operations was due primarily to lower working capital usage of $50.4 million compared to the prior year period, mainly due to favorable timing of accounts receivable collections in the current year period and prior period payment of amounts owed to a Chinese customer under the operation of a long-term sales contract.

These positive impacts were partially offset by a net unfavorable impact on cash from a reduction in outstanding payables in the current year period relative to the prior year end and the change in income and certain operating activities of $1.4 million.

Net cash used in investing activities amounted to $23.5 million for the nine months ended September 30, 2019 compared to net cash used in investing activities of $341.6 million in the prior year period.

The decrease in cash used for investing activities of $318.1 million is primarily due to $264.0 million of net cash used for acquisitions in the prior year period as well as prior year capital expenditures to expand production capacity at PC in the United States and continued spending on the new naphthalene unit construction at our CMC plant in Stickney, Illinois.

Both of these projects were substantially completed by the end of 2018.

Net cash used in financing activities was $33.0 million for the nine months ended September 30, 2019 compared to $337.8 million of net cash provided by financing activities in the prior year period.

The cash used in financing activities in the nine months ended September 30, 2019, reflected net repayments of $32.2 million and repurchases of common stock of $0.9 million.

The cash provided by financing activities in the prior year period reflected net borrowings of $369.9 million to primarily fund acquisitions and capital expenditures and repurchases of common stock of $31.7 million.

Operating profit as a percentage of net sales decreased to 0.7 percent from an operating profit of 3.0 percent in the prior year period.

Operating profit for the quarter ended March 31, 2020 was negatively affected primarily by lower sales prices for carbon pitch in Australia, Europe and North America along with reduced sales volumes of carbon pitch in North America.

These unfavorable drivers were primarily due to reduced demand as a result of an oversupply in the aluminum market.

The global drop in crude oil prices also had an unfavorable impact on pricing and inventory write-downs within the segment during the current year period.

Favorable offsetting factors in the current year period included increased volumes for phthalic anhydride in North America and carbon pitch and carbon black feedstock in Australia.

Net cash used in operating activities for the three months ended March 31, 2020 was $17.2 million compared to net cash used in operating activities of $14.3 million in the prior year period.

The net increase of $2.9 million in cash used in operations was due primarily to higher working capital usage of $1.2 million compared to the prior year period, mainly due to unfavorable timing of payments in the current year period.

In addition, the change in income and certain operating activities of $1.7 million from the prior year period had an unfavorable result on cash provided by operations in the current year period.

These negative impacts were partially offset by a net favorable impact on cash from a reduction in inventory in the current year period relative to the prior year end.

Net cash used in investing activities for the three months ended March 31, 2020 was $10.6 million compared to net cash used in investing activities of $9.3 million in the prior year period.

Capital expenditures were consistent with the prior year period.

The net increase in cash used for investing activities of $1.3 million is primarily due to the cash provided by insurance proceeds for capital expenditures of $1.4 million in the prior year period.

Net cash provided by financing activities was $50.3 million for the three months ended March 31, 2020 compared to $20.8 million of net cash provided by financing activities in the prior year period.

The cash provided by financing activities in the three months ended March 31, 2020 reflected net borrowings of debt of $51.5 million partially offset by repurchases of common stock of $1.2 million.

The cash provided by financing activities in the prior year period reflected net borrowings of $21.4 million partially offset by repurchases of common stock of $0.9 million.

Liquidity and Capital Resources

We have a $600.0 million senior secured revolving credit facility and a $100.0 million secured term loan facility (the “Credit Facility”) with a maturity date of May 2024.

We have a $600.0 million senior secured revolving credit facility and a $100.0 million secured term loan facility (collectively, the “Credit Facility”) with a maturity date of May 2024.

The interest rate on the Credit Facility is variable and is based on LIBOR.

On May 1, 2019, we entered into the Third Amendment and amended the Credit Facility to, among other things:

(1) reset the Credit Facility termination date to May 1, 2024;

and (2) revise certain financial statement covenants and related definitions and other covenants, including revising the definition of Consolidated EBITDA to increase the permitted add back of non-recurring, non-cash charges incurred in connection with the discontinuation or sale of business operations and excluding dividends and distributions made during the fiscal quarter ended September 30, 2018 from the definition of fixed charge coverage ratio.

All other material terms, conditions and covenants with respect to the Credit Facility remain unchanged.

On February 26, 2020, we entered into the Fourth Amendment and amended the Credit Facility to, among other things:

(1) revise the LIBOR replacement language in the Credit Facility, (2) revise certain provisions regarding mandatory prepayments of the term loan facility with proceeds of equity issuances and associated definitions, (3) remove the step downs in the maximum total secured leverage ratio and maximum total leverage ratio which would otherwise occur at the time of a first equity issuance, and (4) revise certain provisions regarding disposition of assets by certain subsidiaries of Koppers Inc.

Restrictions on Dividends to Koppers Holdings

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The basket is governed by a formula based on the sum of a beginning amount, plus or minus a percentage of Koppers Inc.’s consolidated net income (as defined in the indenture), plus the net proceeds of Koppers Inc.’s qualified stock issuance or conversions of debt to qualified stock, plus the net proceeds from the sale of or a reduction in an investment (as defined in the indenture) or the value of the assets of an unrestricted subsidiary which is designated a restricted subsidiary.

At September 30, 2019, the basket totaled $150.6 million.

At March 31, 2020, the basket totaled $164.8 million.

Notwithstanding such restrictions, the indenture governing the 2025 Notes permits 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 is any basket availability, provided that at the time of such payment, no default in the indenture has occurred or would result from financing the dividends.

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and its restricted subsidiaries to meet certain financial ratios.

As of September 30, 2019, we had $207.6 million of unused revolving credit availability for working capital purposes after restrictions by various debt covenants and certain letter of credit commitments.

As of September 30, 2019, $7.5 million of commitments were utilized by outstanding letters of credit.

The following table summarizes our estimated liquidity as of September 30, 2019 (dollars in millions) :

As of March 31, 2020, we had $129.9 million of unused revolving credit availability for working capital purposes after restrictions by various debt covenants and certain letter of credit commitments.

As of March 31, 2020, $7.5 million of commitments were utilized by outstanding letters of credit.

The following table summarizes our estimated liquidity as of March 31, 2020 (dollars in millions) :

Cash and cash equivalents (1)

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We may also use cash to pursue other potential strategic acquisitions or voluntary pension plan contributions .

Capital expenditures in 2019, excluding acquisitions, if any, are expected to total approximately $30 million and are expected to be funded by cash from operations.

Capital expenditures in 2020 , excluding acquisitions, if any, are expected to total approximately $55 to $ 65 million and are expected to be funded by cash from operations .

Debt Covenants

The covenants under the Third Amendment 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 covenants under the Credit Facility may restrict the availability to borrow or may restrict the ability of Koppers Inc.

to pay dividends.

The Credit Facility’s covenants include the following financial ratios:

The fixed charge coverage ratio, calculated as of the end of each fiscal quarter for the four fiscal quarters then ended, is not permitted to be less than 1.10.

The fixed charge coverage ratio at September 30, 2019 was 2.11.

The fixed charge coverage ratio at March 31, 2020 was 2.31.

The total secured leverage ratio, calculated as of the end of each fiscal quarter for the four fiscal quarters then ended, is not permitted to exceed 3.00.

The total secured leverage ratio at September 30, 2019 was 2.18.

The total secured leverage ratio at March 31, 2020 was 2.25.

The total leverage ratio, calculated as of the end of each fiscal quarter for the four fiscal quarters then ended, is not permitted to exceed 5.25.

The total leverage ratio at September 30, 2019 was 4.46.

The total leverage ratio at March 31, 2020 was 4.63.

We are currently in compliance with all covenants governing the Credit Facility.

Our continued ability to meet those financial ratios can be affected by events beyond our control, however, excluding possible acquisitions, 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 the next twelve months.

Effects of COVID-19 on our Liquidity

As of March 31, 2020, we are in compliance with our debt covenant metrics and had $184.1 million of liquidity to fund our operations.

Our estimates and assumptions as of the date of this report indicate that we should remain in compliance with our debt covenants and we have identified actions we can implement to help maintain compliance if the impact of COVID-19 has a more pronounced impact on the economy, our business and our ability to generate cash flow and profits than estimated.

These impacts are highly uncertain and unpredictable, and include the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects.

Accordingly, the financial effects of the pandemic on our business may have an adverse effect on the determination of, and compliance with, our debt covenants over the next twelve months.

In the event we do not maintain compliance with our debt covenants, we may be required to pursue additional sources of financing to meet our financial obligations.

Obtaining such financing is not guaranteed and is largely dependent upon market conditions and other factors.

Further actions may be required to improve our cash position, including but not limited to, monetizing assets, implementing cost reductions including employee furloughs, and foregoing capital expenditures and other discretionary expenses.

Legal Matters

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Critical Accounting Policies

We adopted ASU 2016-02, Leases (Topic 842) effective January 1, 2019 using the modified retrospective approach with no restatement of comparative periods presented.

The adoption is accounted for as a change in accounting principle in conformity with FASB Accounting Standards Codification ("ASC") 250, “Accounting Changes and Error Corrections”.

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, 2019.

Environmental and Other Matters

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis