What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-05 compared with 2020-05-07 · 163 added, 103 removed, 203 unchanged (57% of the section changed)

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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.

The COVID-19 outbreak began to have a global effect in the first quarter of 2020 and continues to have 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, primarily with respect to our CMC business in the first two quarters 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.

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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.

These operations have returned to service in the second quarter of 2020.

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

Another impact of the pandemic is that more individuals are spending more time in their homes, and as a result, big-box retailers are continuing to report strong demand for home improvement projects.

Consequently, we are benefiting from higher sales volumes of our water-borne treatment solutions used in residential treated wood products.

In the U.S., we expect that lumber treaters will continue working to fill the demand backlog and retailers will continue replenishing their inventory levels for the remainder of 2020.

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

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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.

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 June 30, 2020.

Events and changes in circumstances arising after June 30, 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.

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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.

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.

For 2020, RTA has not provided a forecast given the uncertainties related to COVID-19, but has reported , in general, the railroad industry is managing to offset lower volumes with increased productivity.

In fact, certain railroads are taking advantage of reduced track time to increase maintenance on their infrastructure.

For distribution poles, nearly half of the installed base is over 40 years old and 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.

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.

As a whole, utilities need to maintain their infrastructure to avoid interruptions in service as large sections of the population continue to work remotely due to the COVID-19 pandemic.

As such, we anticipate that 2020 demand will be relatively stable to slightly higher, although certain utilities are having issues securing line hardware and transformers which could push some second-half 2020 projects into 2021 .

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

as well as certain overseas markets.

Regarding the supply chain, we expect that the availability of raw materials will remain consistent even with lumber in high demand.

The supply of untreated crossties can vary at times based upon weather conditions in addition to other factors.

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Approximately 70 percent of our North American sales are under long-term contracts and we believe that we are positioned to maintain or grow our current market position.

According to the Association of American Railroads (“AAR”), railroads are facing multiple challenges that include fundamental long-term structural changes as a result of the continued decline of coal markets, growth in the domestic intermodal and chemical sectors, evolution of consumer purchasing practices, and disruptions stemming from trade uncertainty.

In the recent past, the Class I railroads were highly dependent on the oil and gas and coal mining industries.

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

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.

According to the American Association of Railroads, even though rail traffic in 2020 lags significantly from the prior year, Class I railroad activities began improving in May and that has continued into June.

Freight, coal, automotive and support industry-related loadings all saw either increases or stabilization.

Through June 30, 2020, total U.S.

carload traffic decreased 15.9 percent from the same period last year, while intermodal units dropped by 10.6 percent.

The combined U.S.

traffic for carloads and intermodal units fell by 13.2 percent.

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

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

The RTA reports that the availability of logs is near the ideal rate, as is the outlook for log availability over the next six to 12 months.

We are reducing crosstie purchases to be more in line with prior year levels for the remainder of 2020 in order to stabilize inventory levels.

In addition, we are receiving more dry ties from third parties for certain Class I customers and that should help maintain year-over-year treating levels in the second half of 2020.

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.

however these plans may change in future months due to a 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.

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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.

In June 2020, we announced the closure of our Denver, Colorado facility and we have targeted the third quarter of 2020 for discontinuing activities at this location and, as such, in the second quarter of 2020 we recorded charges of $4.2 million for asset retirement obligations, fixed asset write-offs and severance.

As a result of this closure, we expect additional restructuring and related charges to earnings of approximately $4 to $9 million through 2021.

Performance Chemicals

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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 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.

Overall, the market for existing homes are show ing some improvements .

According to the National Association of Realtors® (“NAR”), total existing-home sales rebounded at a record pace in June showing signs of a market turnaround after three straight months of sales declines caused by the pandemic .

According to the NAR, t otal existing home sales increased 20.7 percent since May , although overall home s ales were down 11.3 percent from a year ago.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, expenditures for improvements and repairs to owner-occupied homes are expected to slow by the middle of next year as the COVID-19 pandemic continues to unfold.

LIRA projects annual declines in renovation and repair spending of 0.4 percent by mid-2021 as the pace of home improvement and repairs tapers off.

The Conference Board Consumer Confidence Index® decreased in July, after increasing in June.

The Index now stands at 92.6, down from 98.3 in June.

Consumers are less optimistic about the short-term outlook for the economy and labor market, likely due to a resurgence of COVID-19 in certain regions.

Although the market data and projections for home improvements continue to vary widely, w e are anticipating continued strong demand for residential treated wood in North America, primarily in the U.S.

In looking at residential renovation markets, businesses are indicating a more positive outlook for 2020 than at the beginning of pandemic.

In addition, the housing industry reported an increase in the number of buyers who are actively pursuing the purchase of a new or existing home, which supports a continued favorable outlook.

As homeowners are focusing on the importance of their homes in a work-life environment and with interest rates at historically low levels, we expect the pace to continue at least through 2020.

Regarding our supply chain, we continue to evaluate copper hedges for the 2021-2022 timeframe, which on average are at lower average costs compared with 2020.

For 2020, we do not expect to see any additional benefits related to lower copper prices, since we are already fully hedged.

However, we are expecting slightly higher costs in the second half of 2020, as we need to source higher cost intermediate raw material to fill the demand backlog.

Carbon Materials and Chemicals

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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.

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

The CMC business currently supplies our North American RUPS business with 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.

On April 29, 2020, the pending divestiture reached a key milestone by receiving antitrust approval from China’s State Administration for Market Regulation of China (SAMR).

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.

The sales price is $107.0 million, subject to adjustment for cash, debt and working capital at closing, which is expected to occur in the third quarter of 2020 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 .

The results of KJCC are reflected as a discontinued operation in the consolidated financial statements 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.

As a result of this action and other previously disclosed initiatives to reduce capacity in our CMC business, we expect additional restructuring and related charges to earnings of approximately $2 million to $5 million through 2021.

The overall remaining future cash requirements for CMC plant closures still in progress are estimated to be approximately $13 million through 2021.

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.

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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 United States more efficiently.

Over the past five 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 United States more efficiently.

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.

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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.

We are seeing significant declines in auto manufacturing capacity and other industrial production markets, and consequently, that is resulting in lower demand for our products.

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.

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

In North America, the pullback in steel production had led to lower domestic coal tar availability and an increase in raw material imports to North America at higher prices, while markets in Europe and Australia remain relatively steady.

Although automakers had shut down in recent months, the demand for new cars has been improving and therefore, production is resuming for certain models in the second half of 2020.

Overall, the cost of coal tar is decreasing in line with end markets, but lagging by approximately three months.

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 March 31, 2020 and 2019

Results of Operations – Comparison of Three Months Ended June 30, 2020 and 2019

Consolidated Results

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,

Net sales for the three months ended June 30, 2020 and 2019 are summarized by segment in the following table:

Three Months Ended June 30,

(Dollars in millions)

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Carbon Materials and Chemicals

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

RUPS net sales increased by $10.8 million or five percent compared to the prior year period.

The sales increase was primarily due to volume increases in the Class I crosstie market 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 $9.7 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 $0.5 million from our Australian pole business.

PC net sales in creased by $ 16.3 million or 13 percent compared to the prior year period.

The sales increase was due primarily to higher demand for copper-based preservatives in North America due to new customer additions and higher organic volumes driven by increased home repair and remodeling activities during the pandemic .

These increases were partially offset by a decrease in sales volumes in all of our international markets and an unfavorable impact from foreign currency translation in the current year period of $ 1.9 million.

CMC net sales decreased by $34.3 million or 28 percent compared to the prior year period due mainly to lower sales prices for carbon pitch and carbon black feedstock globally and lower sales prices for phthalic anhydride in North America as a result of depressed oil prices in the current year period.

Other contributing factors include lower sales volumes of carbon pitch globally, lower sales volumes of phthalic anhydride in North America and lower sales volumes of carbon black feedstock in Europe as a result of the pandemic.

Foreign currency translation also had an unfavorable impact on sales in the current year period of $1.3 million.

Cost of sales as a percentage of net sales was 77 percent for the quarter ended June 30, 2020 compared to 79 percent in the prior year quarter.

Gross margin at PC was favorably impacted by a net amount of $10.1 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 globally.

Depreciation and amortization charges for the quarter ended June 30, 2020 were consistent with the prior year period .

Impairment and restructuring charges for the quarter ended June 30, 2020 were consistent with the prior year period .

We recorded charges of $2.9 million for asset retirement obligations and $1.3 million for fixed asset write-offs and severance in the three months ended June 30, 2020 related to the announced closure of our Denver, Colorado facility.

Prior year charges consisted of asset retirement obligation charges and inventory and fixed asset write-offs related to the closure of our Follansbee, West Virginia facility.

Selling, general and administrative expenses for the quarter ended June 30, 2020 were $3.5 million lower when compared to the prior year period due mainly to a decrease of $1.1 million for employee benefit related expenses and $2.6 million for travel and facility related costs.

These decreases were partially offset by an increase in employee incentive expense in the current year period.

Interest expense for the quarter ended June 30, 2020 was $2.9 million lower when compared to the prior year period primarily due to our lower average debt level and lower interest rates due to the recent drop in LIBOR rates.

Income tax expense for the quarters ended June 30, 2020 and 2019 was $8.0 million.

Income before income taxes was $15.1 million higher in the quarter ended June 30, 2020 when compared to the prior year period.

However, the related increase to income tax expense was offset by a lower estimated annual effective income tax rate in the quarter ended June 30, 2020 when compared to the prior year period.

Also, the quarter ended June 30, 2020 included tax benefits of $2.4 million principally related to provisions of the CARES Act.

Income tax expense as a percentage of pre-tax profit for the quarters ended June 30, 2020 and 2019 were 21.4 percent and 35.9 percent, respectively.

See Note 10 – “Income Taxes” for further detail.

Segment Results.

Segment operating profit for the three months ended June 30, 2020 and 2019 is summarized by segment in the following table:

Three Months Ended June 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 in creased by $ 4.4 million compared to the prior year period.

Operating profit as a percentage of net sales in creased to 7.7 percent from an operating profit of 5.

9 percent in the prior year period .

Operating profit as a percentage of net sales for the three months ended June 3 0 , 2020 was favorably impacted by higher margins in our domestic utility pole and maintenance-of-way markets, a favorable sales mix in our commercial crosstie market and lower selling, general and administrative costs in the current year period.

PC operating profit increased by $18.6 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 23.8 percent from 11.6 percent in the prior year period.

The current year period was favorably impacted by higher sales volumes, a favorable sales mix and better absorption on higher production volumes during the pandemic along with lower year-over-year raw material prices.

These factors were compounded by a net benefit of $10.1 million due to changes in unrealized gains and losses from our copper swap contracts over the prior year period.

Excluding the effect of unrealized gains from our copper swap contracts, our operating profit as a percentage of net sales would have been 17.8 percent in the current year period.

CMC operating profit decreased by $11.5 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 1.7 percent from an operating profit of 10.5 percent in the prior year period.

Operating profit for the quarter ended June 30, 2020 was negatively affected primarily by lower sales prices for carbon pitch and carbon black feedstock globally and lower sales prices for phthalic anhydride in North America as a result of depressed oil prices.

Results of Operations – Comparison of Six Months Ended June 30, 2020 and 2019

Consolidated Results

Net sales for the six months ended June 30, 2020 and 2019 are summarized by segment in the following table:

Six Months Ended June 30,

(Dollars in millions)

Railroad and Utility Products and Services

Performance Chemicals

Carbon Materials and Chemicals

RUPS net sales increased by $34.7 million or 10 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.

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PC net sales increased by $28.7 million or 13 percent compared to the prior year period.

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.

CMC net sales decreased by $45.6 million or 19 percent compared to the prior year period due mainly to lower sales prices for carbon pitch and carbon black feedstock globally and lower sales prices for phthalic anhydride in North America as a result of depressed oil prices in the current year period.

Other contributing factors include lower sales volumes of carbon pitch and carbon black feedstock in Europe and North America as a result of the pandemic.

Foreign currency translation also had an unfavorable impact on sales in the current year period of $4.6 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.

Cost of sales as a percentage of net sales and depreciation and amortization charges for the six months ended June 30, 2020 were consistent with the prior year period .

Impairment and restructuring charges for the six months ended June 30, 2020 were consistent with the prior year period .

Prior year charges consisted of asset retirement obligation charges and inventory and fixed asset write-offs related to the closure of our Follansbee, West Virginia facility.

Selling, general and administrative expenses for the six months ended June 30, 2020 were $5.7 million lower when compared to the prior year period due mainly to a decrease of $2.4 million for employee benefit related expenses and $3.8 million for travel and facility related costs.

Interest expense for the six months ended June 30, 2020 was $ 5.

2 million lower when compared to the prior year period primarily due to our low er average debt level and lower interest rates due to the significant drop in LIBOR rates .

Income tax expense for the six months ended June 30, 2020 was $6.2 million as compared to income tax expense of $6.8 million in the prior year period.

Income before income taxes was $6.7 million higher in the six months ended June 30, 2020 when compared to the prior year period.

However, the related increase to income tax expense was offset by a lower estimated annual effective income tax rate in the six months ended June 30, 2020 when compared to the prior year period.

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

In 2020, we recognized net tax benefits of $4.2 million principally related to provisions of the CARES Act and, in 2019, we recognized net tax benefits of $3.7 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.

Income tax expense as a percentage of pre-tax profit for the six months ended June 30, 2020 and 2019 were 16.5 percent and 22.1 percent, respectively.

See Note 10 – “Income Taxes” for further detail.

Discontinued operations for the six months ended June 30, 2020 resulted in a loss of $4.4 million compared to income of $2.8 million in the prior year period due primarily to a year-over-year reduction in sales of $61.2 million attributable to the economic effects of COVID-19 on our KJCC operations and lower end market demand.

Segment Results.

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,

Segment operating profit for the six months ended June 30, 2020 and 2019 is summarized by segment in the following table:

Six Months Ended June 30,

(Dollars in millions)

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RUPS operating profit increased by $4.9 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 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.

Operating profit as a percentage of net sales increased to 6.4 percent from an operating profit of 5.6 percent in the prior year period.

Operating profit as a percentage of net sales for the six months ended June 30, 2020 was favorably impacted by higher margins in our domestic utility pole and maintenance-of-way markets, a favorable sales mix in our commercial crosstie market and lower selling, general and administrative costs in the current year period.

PC operating profit increased by $9.9 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 14.8 percent from 12.2 percent in the prior year period.

These favorable factors were partially offset by a net amount of $1.0 million due to changes in unrealized gains and losses from our copper swap contracts and $3.0 million of insurance proceeds recognized in the prior year period.

CMC operating profit decreased by $14.0 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 1.2 percent from an operating profit of 6.9 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.

Operating profit for the six months ended June 30, 2020 was negatively affected primarily by lower sales prices for carbon pitch and carbon black feedstock globally and lower sales prices for phthalic anhydride in North America as a result of depressed oil prices.

Other contributing factors include lower sales volumes of carbon pitch and carbon black feedstock in Europe and North America as a result of the pandemic.

Net cash provided by operating activities for the six months ended June 30, 2020 was $22.2 million compared to net cash provided by operating activities of $1.4 million in the prior year period.

The net increase of $20.8 million in cash provided by operations was due primarily to lower working capital usage of $15.9 million compared to the prior year period, mainly due to improved inventory turnover in the current year period.

In addition, the change in income and certain operating activities of $4.9 million from the prior year period had a favorable result on cash provided by operations in the current year period.

Net cash used in investing activities for the six months ended June 31, 2020 was $26.4 million compared to net cash used in investing activities of $15.0 million in the prior year period.

The net increase in cash used for investing activities of $11.4 million is primarily due to an increase in capital expenditures of $8.0 million in the current year period.

In addition, cash provided by insurance proceeds for capital expenditures of $3.0 million was received in the prior year period.

Net cash provided by financing activities was $3.9 million for the six months ended June 30, 2020 compared to $15.1 million of net cash provided by financing activities in the prior year period.

The cash provided by financing activities in the six months ended June 30, 2020 reflected net borrowings of debt of $4.8 million partially offset by repurchases of common stock of $1.2 million related to long-term incentive compensation plans.

The cash provided by financing activities in the prior year period reflected net borrowings of $16.3 million partially offset by repurchases of common stock of $0.9 million related to long-term incentive compensation plans.

Liquidity and Capital Resources

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

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.

On February 26, 2020, we entered into the Fourth Amendment as described in Note 14 – “Debt”.

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

At June 30, 2020, the basket totaled $179.4 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 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) :

As of June 30, 2020, we had $157.5 million of unused revolving credit availability for working capital purposes after restrictions by various debt covenants and certain letter of credit commitments.

As of June 30, 2020, $7.1 million of commitments were utilized by outstanding letters of credit.

The following table summarizes our estimated liquidity as of June 30, 2020 (dollars in millions) :

Cash and cash equivalents (1)

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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 March 31, 2020 was 2.31.

The fixed charge coverage ratio at June 30, 2020 was 2.24.

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 March 31, 2020 was 2.25.

The total secured leverage ratio at June 30, 2020 was 2.06.

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 March 31, 2020 was 4.63.

The total leverage ratio at June 30, 2020 was 4.49.

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

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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.

As of June 30, 2020, we are in compliance with our debt covenant metrics and had $190.5 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.

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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