Koppers Holdings Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report and any documents incorporated herein by reference contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and may include, but are not limited to, statements about sales levels, acquisitions, restructuring, declines in the value of Koppers assets and the effect of any related impairment charges, profitability and anticipated expenses and cash outflows. All forward-looking statements involve risks and uncertainties. All statements contained herein that are not clearly historical in nature are forward-looking, and words such as “believe,” “anticipate,” “expect,” “estimate,” “may,” “will,” “should,” “continue,” “plans,” “potential,” “intends,” “likely,” or other similar words or phrases are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or documents filed with the Securities and Exchange Commission, or in Koppers communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, regarding expectations with respect to sales, earnings, cash flows, operating efficiencies, restructurings, product introduction or expansion, the benefits of acquisitions and divestitures, or other matters as well as financings and debt reduction, are subject to known and unknown risks, uncertainties and contingencies. Many of these risks, uncertainties and contingencies are beyond our control, and may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Factors that might affect such forward-looking statements, include, among other things, the impact of changes in commodity prices, such as oil and copper, on product margins; general economic and business conditions; existing and future adverse effects 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; the ratings on our debt and our ability to repay or refinance our outstanding indebtedness as it matures; our ability to operate within the limits of our debt covenants; potential impairment of our goodwill and/or long-lived assets; demand for Koppers goods and services; competitive conditions; interest rate and foreign currency rate fluctuations; availability and costs of key raw materials and unfavorable resolution of claims against us, as well as those discussed more fully elsewhere in this report and in documents filed with the Securities and Exchange Commission by Koppers, particularly our latest annual report on Form 10-K and subsequent filings. We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report and the documents incorporated by reference herein may not in fact occur. Any forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and related notes included in Item 1 of this Part I as well as the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020. Overview We are a leading integrated global provider of treated wood products, wood preservation chemicals and carbon compounds. Our products and services are used in a variety of niche applications in a diverse range of end-markets, including the railroad, specialty chemical, utility, residential lumber, agriculture, aluminum, steel, rubber and construction industries. We serve our customers through a comprehensive global manufacturing and distribution network, with manufacturing capabilities in North America, South America, Australasia and Europe. We operate three principal businesses: Railroad and Utility Products and Services (“RUPS”), Performance Chemicals (“PC”) and Carbon Materials and Chemicals (“CMC”). Through our RUPS business, we believe that we are the largest supplier of wood crossties to the Class I railroads in North America. Our other treated wood products include utility poles for the electric, telephone, and broadband utility industries in the United States and Australia and construction pilings in the U.S. We also provide rail joint bar products as well as various services to the railroad industry in North America. Through our PC business, we believe that we are the global leader in developing, manufacturing and marketing wood preservation chemicals and wood treatment technologies for use in the pressure treating of lumber for residential, industrial and agricultural applications. Our CMC business processes coal tar into a variety of products, including creosote, carbon pitch, carbon black feedstock, naphthalene and phthalic anhydride, which are intermediate materials necessary in the pressure treatment of wood, the production of aluminum, the production of carbon black, the production of high-strength concrete, and the production of plasticizers and specialty chemicals, respectively. 22 Outlook Trend Overview Our businesses and results of operations are affected by various competitive and other factors including (i) the impact of global economic conditions on demand for our products, including the impact of imported products from competitors in certain regions where we operate; (ii) raw material pricing and availability, in particular the cost and availability of hardwood lumber for railroad crossties and softwood lumber for utility poles, scrap copper prices, and the cost and amount of coal tar available in global markets, which is negatively affected by reductions in blast furnace steel production; (iii) volatility in oil prices, which impacts the cost of coal tar and certain other raw materials, as well as selling prices and margins for certain of our products including carbon black feedstock, phthalic anhydride, and naphthalene; (iv) competitive conditions in global carbon pitch markets; and (v) changes in foreign exchange rates. Effects of COVID-19 on our operations Our 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 continues to have a significant impact on global markets driven by supply chain and production disruptions, workforce restrictions, trends in spending patterns and other factors. During the COVID-19 pandemic, substantially all of our global businesses have continued to operate without significant disruption. In the U.S., Koppers was designated as an essential business, as determined by the Cybersecurity and Infrastructure Security Agency (CISA) within the Department of Homeland Security. As a result, we have been able to meet the demands of our customers in the various markets we serve by continuing to operate to transport critical goods, provide power and connectivity to homes and businesses, and keep our infrastructure running reliably. 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 ultimate 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, 2021. Events and changes in circumstances arising after March 31, 2021, including those resulting from the impacts of COVID-19, will be reflected in our estimates for future periods. Railroad and Utility Products and Services We provide our customers with treated and untreated wood products, rail joint bars and services primarily for the railroad markets in the United States and Canada. We also operate a railroad services business that conducts engineering, design, repair and inspection services primarily for railroad bridges in the U.S. and Canada. In addition, we supply treated utility poles for the utility sector in the United States and Australia. The primary end-markets for RUPS are the North American railroad industry, which has an installed base of approximately 450 million wood crossties, and the utility industry which utilizes wooden distribution and transmission poles. Both crossties and utility poles require periodic replacement. For the past several years, the major companies in the rail industry substantially reduced both operating and capital spending from peak spending levels, which had a negative impact on sales of various products and services that we provide to that industry. We currently supply all seven of the North American Class I railroads and have long-standing relationships with these customers. 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. Historically, North American demand for crossties had been in the range of 22 million to 25 million crossties annually. However, the crosstie replacement market has been significantly lower in recent years. According to the Railway Tie Association (“RTA”), the reported total crosstie installations in 2020 were approximately 18 million, of which 14 million were for Class I railroads. T hroughout 2020, there was a decline in freight-rail traffic, which prompted larger track maintenance windows to be available and, as a result, the railroad industry managed to offset lower volumes with increased productivity as certain railroads used the reduced track time to increase maintenance on their infrastructure. Given the continuing uncertainties related to COVID-19, the RTA is forecasting modest increases of 2.7 percent in 2021 and 3.6 percent in 2022, primarily from the commercial market while Class I volumes are expected to remain at relatively similar demand levels. With a recovering economy as well as additional government stimulus payments to drive consumer spending, the RTA expects retail sales to increase from the prior year. Due to declining inventory levels in recent months, suppliers will need to replenish various goods in order to serve increasing demand. This should have a positive effect on freight activity in the coming months which may result in an increased requirement for track maintenance activities. 23 According to the American Association of Railroads (“AAR”), rail traffic has clearly rebounded from the depths of 2020, when much of the economy was shut down and rail volumes plummeted as well. Overall, railroad volumes are highly correlated with manufacturing output, therefore, the recent signs of strength in manufacturing are also positive indicators for the railroad industry. Year-to-date through March 31, 2021, total U.S. carload traffic decreased 2.6 percent from the prior year, while intermodal units increased by 13.2 percent. The combined U.S. traffic for carloads and intermodal units was higher by 5.6 percent as compared with the prior year. Looking ahead to 2021, the AAR stated that a significant amount of ongoing network investments has made the industry more adaptable and better able to adjust to the demands of a wide range of operational and market conditions. With respect to our utility products business, 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 2021 demand will be relatively stable to slightly higher, as the overall industry is trending toward expanded and upgraded transmission networks. We continue to evaluate opportunities to potentially expand our market presence in the U.S. as well as certain overseas markets. From a long-term perspective, we believe there remains an overall 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. For distribution poles, nearly half of the installed base is over 40 years old and demand has historically been in the range of two million 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, the key factors that drive growth in the utility poles market include growing global energy consumption as well as expansion of the global telecommunication industry. In the U.S., a significant amount of utility poles are treated with pentachlorophenol (“penta”), a wood preservative. The s ole producer of penta in North America announced plans to exit penta production at the end of 2021. Given that penta availability will begin to be phased out over the next 12 months, we will transition from using penta for treating utility poles to another wood-treatment preservative. Our internally-produced creosote and chromated copper arsenate products are viable alternatives to penta and are currently used in the treatment of utility poles. As a result, we are currently working with our utility customers who use penta-treated poles to evaluate the use of chromated copper arsenate or creosote as potential treatment options. In terms of raw materials, we expect the availability of pole supply to remain consistent even with lumber in high demand. For untreated crossties, the supply can vary at times based upon weather conditions in addition to other factors. We have a nationwide wood procurement team that maintains close working relationships with a network of sawmills. We procure untreated crossties, either on behalf of our customers, or for our own inventory for future treating. We also procure switch ties and various other types of lumber used for railroad bridges and crossings. Untreated crossties go through a six to nine-month air seasoning process before they are ready to be pressure treated. After the air seasoning process is complete, the crossties are pressure treated using creosote-only treatment or a combined creosote and borate treatment. During any given year, there is a seasonal effect in the winter and spring months on our crosstie business depending on weather conditions for harvesting lumber and crosstie installation. W hile forestry has generally been deemed essential during the COVID-19 outbreak and tie demand has remained consistent, sawmills are being hampered by low demand in other key markets such as wood fibers used in palettes or shipping containers or mats for the oil and gas industry. So far to date, we have not experienced a noticeable impact as sawmills are continuing to produce poles and crossties to maintain their operations and cash flow. Consistent with typical seasonality, the RTA reports that the current availability of logs remains below the ideal rate, as is the outlook for log availability over the next six to 12 months. Strategic Initiatives and Integration Synergies As part of optimizing our business, we continue to evaluate a number of opportunities to improve efficiencies in our operational processes, people and facilities. With our 15 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 the second quarter of 2020, we permanently closed our Denver, Colorado wood treatment facility. Concurrent with the decision to close the Denver facility, we announced our plan to modernize and upgrade parts of our treating network, specifically at our facility in North Little Rock, Arkansas, which will be primarily funded through proceeds from the sale of non-core assets, which includes the Denver facility. Separately, in the second quarter of 2021, we exited our Jasper, Texas facility lease and relocated the production of utility products to our Somerville, Texas plant. 24 Performance Chemicals The largest geographic market for wood treating chemicals sold by our PC business is in North America, and the largest application for our products is the residential remodeling market. 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 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. Our primary products are copper-based wood preservatives and fire-retardant chemicals (“FlamePro®”). Our copper-based wood preservatives include micronized copper azole (“MicroPro®”) and micronized pigments (“MicroShades®”). Applications for these products include decking, fencing, utility poles, construction lumber and other outdoor structures. In North America, we are vertically integrated due to our manufacturing capabilities for copper compounds for our copper-based wood preservatives. We believe our vertical integration is part of our proprietary processes and reflects an important competitive advantage. As most of the products sold by PC are copper-based products, changes in the price and availability of copper can have a significant impact on product pricing and margins. We attempt to moderate the variability in copper pricing over time by entering into hedging transactions for the majority of our copper needs, which primarily range from six months up to 36 months. These hedges typically match expected customer purchases and receive hedge accounting treatment, with any ineffectiveness reflected in current earnings. From time to time, we enter into forward transactions based upon long-term forecasted needs of copper. These forward positions are typically marked to market. 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 showing strong demand. According to the National Association of Realtors® (“NAR”), total existing-home sales grew in December for the fourth consecutive month. According to the NAR, the median existing-home sales price in March 2021 rose to historic high levels, with all regions posting double-digit price gains. As a result of the record demand, housing inventory continues to represent near-historic lows. Driven by the lack of available inventory, total existing home sales decreased 3.7 percent in March 2021, although higher by 12.3 percent from a year ago. The increased interest is attributed to continued low interest rates and higher demand for existing homes, which includes buyers of vacation homes given the flexibility to work remotely. According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, the growth in home repair and improvement expenditures is expected to remain solid throughout the year and into 2022. The LIRA projects that annual spending will grow by 4.8 percent by the first quarter of 2022 and reach $370 billion in annual homeowner remodeling expenditures. Due to a combination of federal stimulus payments and strong house price appreciation, there has been a trend toward homeowners undertaking larger discretionary renovations of their properties . The Conference Board Consumer Confidence Index® rose sharply again in April 2021, following a substantial gain in March 2021, with the index at 121.7, up from 109.0 in March 2021. Consumer confidence has rebounded sharply and is now at its highest level since February 2020. In addition, consumers’ assessment of current conditions improved significantly, suggesting the economic recovery strengthened further, potentially due to an improving job market and the recent round of stimulus checks. D uring the pandemic, consumers are shifting much of their discretionary spending from areas such as travel, to the enhancement of their homes as they seek to personalize their overall living environments. This includes homeowners investing in big-ticket items such as new decks to expand and fully utilize their outdoor living space. 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 during 2021. Although the market data and projections for home improvements are continually changing, 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 continued positive outlook, at least through mid-2021. As COVID-19 is brought under control by the introduction of vaccines and other measures, this may have an unfavorable impact on pandemic-driven discretionary spending patterns in the second half of 2021. In the near term, 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 remote or virtual work environment and with interest rates at historically low levels, we expect the pace to continue for much of 2021. 25 Carbon Materials and Chemicals The primary products produced by CMC are creosote, which is a registered pesticide in the United States and used primarily in the pressure treatment of railroad crossties, and carbon pitch, which is sold primarily to the aluminum industry for the production of carbon anodes used in the smelting of aluminum. We have realigned capacity in our CMC plants in North America and Europe over the past several years to levels required to meet creosote demand in North America for the treatment of railroad crossties. The CMC business currently supplies our North American RUPS business with its creosote requirements. 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 United States increased to some extent as tariffs were imposed on certain imported steel and aluminum products, which 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. The availability of coal tar, the primary raw material for our CMC business, is linked to levels of metallurgical coke production. As the global steel industry, excluding Asia, has reduced the production of steel using metallurgical coke, the volumes of coal tar have also been reduced. 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 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. 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 continue to be negatively impacted in 2021 by the COVID-19 pandemic until the global economy fully reopens and manufacturing activity improves. Over the past twelve months, we have experienced declines followed by slow recovery in industrial production markets which impacted demand for our products. Carbon pitch and phthalic anhydride markets have softened compared to the prior year period 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 impacted in some regions due to the volatility of worldwide oil prices. Globally, coal tar raw material supply remains constrained due to reductions in blast furnace steel capacity. In North America, the pullback in steel production has 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. Seasonality and Effects of Weather on Operations Our quarterly operating results fluctuate due to a variety of factors that are outside of our control, including inclement weather conditions, which in the past have affected operating results. Operations at some of our facilities have at times been reduced during the winter months. Moreover, demand for some of our products declines during periods of inclement weather. As a result of the foregoing, we anticipate that we may experience material fluctuations in quarterly operating results. Historically, our operating results have been significantly lower in the first and fourth calendar quarters as compared to the second and third calendar quarters. Results of Operations – Comparison of Three Months Ended March 31, 2021 and 2020 Consolidated Results Net sales for the three months ended March 31, 2021 and 2020 are summarized by segment in the following table: Three Months Ended March 31, 2021 2020 Net Change (Dollars in millions) Railroad and Utility Products and Services $ 191.9 $ 190.0 1 % Performance Chemicals 123.6 111.4 11 % Carbon Materials and Chemicals 92.0 100.5 -8 % $ 407.5 $ 401.9 1 % 26 RUPS net sales increased by $1.9 million or one percent compared to the prior year period. The sales increase was primarily due to volume increases for our Class I crosstie business, our railroad bridge services business and our crosstie disposal business. Foreign currency translation also had a favorable impact on sales in the current year period of $1.9 million, mainly from our Australian utility pole market. These increases were offset, in part, by volume decreases in the commercial crosstie market principally due to timing and higher backlog levels in the prior year period. PC net sales increased by $12.2 million or 11 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 higher organic volumes driven by increased home repair and remodeling activities as the pandemic drove increased discretionary spending into these markets. We also experienced an increase in sales volumes in our international markets resulting from continued pent-up demand due to several months of restrictions associated with the pandemic. CMC net sales decreased by $8.5 million or eight percent compared to the prior year period due mainly to lower sales volumes and prices for phthalic anhydride in North America, lower sales prices for carbon pitch globally and lower sales volumes for carbon black feedstock in Australia in the current year period. These decreases were offset, in part, by foreign currency translation, which had a favorable impact on sales in the current year period of $6.2 million. Cost of sales as a percentage of net sales was 78 percent for the quarter ended March 31, 2021 compared to 85 percent in the prior year quarter. Gross margin at PC was favorably impacted by a $2.6 million unrealized gain from our copper swap contracts in the current year period. Gross margin at PC was unfavorably impacted by a $8.0 million unrealized loss from our copper swap contracts in the prior year period. Excluding these impacts, cost of sales as a percentage of net sales would have been 79 percent and 83 percent for the current year period and the prior year period, respectively. In addition, PC was positively impacted by higher sales volumes in North America, a favorable sales mix and better absorption on higher production volumes during the pandemic. Improved margins at RUPS were attributed to our railroad bridge services business and a favorable sales mix in our Class I crosstie market. Depreciation and amortization charges for the quarter ended March 31, 2021 were $2.6 million higher when compared to the prior year period due mainly to an increase in an asset retirement obligation in our European CMC operations as well as an increase in capitalized assets in our North American RUPS operations. Gain on sale of assets for the quarter ended March 31, 2021 was $7.5 million and is related to the sales of two previously decommissioned plants as described in Note 3 – “Plant Closures and Divestitures” . Impairment and restructuring charges for the quarter ended March 31, 2021 were $1.4 million higher when compared to the prior year period . The current year period included demolition and other plant closure period costs related to the closure of our Denver, Colorado facility. The prior year period included a reversal of certain charges related to the closure of our Follansbee, West Virginia facility. Selling, general and administrative expenses for the quarter ended March 31, 2021 were consistent with the prior year period . Interest expense for the quarter ended March 31, 2021 was $3.8 million lower when compared to the prior year period primarily due to our lower average debt level and lower interest rates due to the significant decrease in LIBOR rates. In the third quarter of 2020, we used the net proceeds of the KJCC sale to reduce our borrowings under the Credit Facility. Income tax expense for the quarter ended March 31, 2021 was $8.5 million, an increase of $10.3 million when compared to the prior year quarter. The increase is primarily due to i ncome before income taxes being $34.8 million higher in the quarter ended March 31, 2021 when compared to the prior year quarter. See Note 10 – “Income Taxes” for support for our estimated annual effective income tax rate and specific discrete items. Discontinued operations for the quarter ended March 31, 2021 resulted in a loss of $0.4 million compared to a loss of $4.4 million in the prior year period. The loss in the prior year period was due primarily to a reduction in sales attributable to the economic effects of the pandemic on KJCC, which was sold in the third quarter of 2020. 27 Segment Results. Segment operating profit for the three months ended March 31, 2021 and 2020 is summarized by segment in the following table: Three Months Ended March 31, 2021 2020 % Change (Dollars in millions) Operating profit (loss): Railroad and Utility Products and Services $ 8.7 $ 9.2 -5% Performance Chemicals 24.8 4.1 1,090% Carbon Materials and Chemicals 10.8 0.7 1,429% Corporate (0.4 ) (0.4 ) 0% $ 43.9 $ 13.6 399% Operating profit as a percentage of net sales: Railroad and Utility Products and Services 4.5 % 4.8 % -0.3% Performance Chemicals 20.1 % 3.7 % 35.8% Carbon Materials and Chemicals 11.7 % 0.7 % 10.9% 10.8 % 3.4 % 13.2% RUPS operating profit decreased by $0.5 million compared to the prior year period. Operating profit as a percentage of net sales decreased to 4.5 percent from an operating profit of 4.8 percent in the prior year period. Operating profit as a percentage of net sales for the quarter ended March 31, 2021 was unfavorably impacted primarily by the impact on profitability from volume decreases in the commercial crosstie market principally due to timing and higher backlog levels in the prior year period. These decreases were offset, in part, by higher margins in our railroad bridge services business and a favorable sales mix in our Class I crosstie market. PC operating profit increased by $20.7 million compared to the prior year period. Operating profit as a percentage of net sales increased to 20.1 percent from 3.7 percent in the prior year period. The current year period was favorably impacted by a $2.6 million unrealized gain from our copper swap contracts compared to the prior year period which was unfavorably impacted by an $8.0 million unrealized loss from our copper swap contracts. Excluding the effect of unrealized gains and losses from our copper swap contracts, our operating profit as a percentage of net sales was 18.0 percent in the current year period compared with 10.8 percent in the prior year period. The current year period was also favorably impacted by higher sales volumes in North America driven by increased home repair and remodeling activities during the pandemic, a favorable sales mix and better absorption on higher production volumes during the pandemic. CMC operating profit increased by $10.0 million compared to the prior year period. Operating profit as a percentage of net sales increased to 11.6 percent from an operating profit of 0.7 percent in the prior year period. Operating profit for the quarter ended March 31, 2021 was favorably impacted by a $7.5 million gain on sale of assets related to the sales of two previously decommissioned plants. Excluding this impact, operating profit margin would have been 3.0 percent for the current 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 prior year period. Cash Flow Net cash used in operating activities for the three months ended March 31, 2021 was $7.4 million compared to net cash used in operating activities of $17.2 million in the prior year period. The net decrease of $9.8 million in cash used in operations was due primarily to an increase in net income and certain other operating activities of $17.5 million from the prior year period, which had a favorable result on cash provided by operations in the current year period. These drivers were partly offset by higher working capital usage of $7.7 million compared to the prior year period, mainly due to a decrease in accounts payable in the current year period. Net cash used in investing activities for the three months ended March 31, 2021 was $19.5 million compared to net cash used in investing activities of $10.6 million in the prior year period. The net increase of $8.9 million in cash used in investing activities was primarily due to an increase in capital expenditures of $13.6 million in the current year period, partially offset by $4.7 million of cash received related primarily to sales of two previously decommissioned CMC plants . 28 Net cash provided by financing activities was $33.4 million for the three months ended March 31, 2021 compared to $50.3 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, 2021 reflected net borrowings of debt of $34.1 million partially offset by repurchases of common stock of $1.8 million related to long-term incentive compensation plans. The cash provided by financing activities in the prior year period reflected net borrowings of debt of $51.5 million partially offset by repurchases of common stock of $1.2 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 (collectively, the “Credit Facility”) as described in Note 14 “Debt.” Restrictions on Dividends to Koppers Holdings Koppers Holdings depends on the dividends from the earnings of Koppers Inc. and its subsidiaries to generate the funds necessary to meet its financial obligations, including the payment of any declared dividend of Koppers Holdings. The Credit Facility prohibits Koppers Inc. from making dividend payments to Koppers Holdings unless (1) such dividend payments are permitted by the indenture governing Koppers Inc.’s $500 million Senior Notes due 2025 (the “2025 Notes”), (2) no event of default or potential default has occurred or is continuing under our Credit Facility, and (3) we are in pro forma compliance with our fixed charge coverage ratio covenant after giving effect to such dividend. The indenture governing the 2025 Notes restricts Koppers Inc.’s ability to finance our payment of dividends if (1) a default has occurred or would result from such financing, (2) Koppers Inc., or a restricted subsidiary of Koppers Inc. which is not a guarantor under the indenture, is not able to incur additional indebtedness (as defined in the indenture), and (3) the sum of all restricted payments (as defined in the indenture) have exceeded the permitted amount (which we refer to as the “basket”) at such point in time. 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, 2021, the basket totaled $240.2 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. In addition, certain required coverage ratios in Koppers Inc.’s Credit Facility may restrict the ability of Koppers Inc. to pay dividends. Liquidity The following table summarizes our estimated liquidity as of March 31, 2021 (dollars in millions) : Cash and cash equivalents ( 1) $ 41.9 Amount available under Credit Facility 283.7 Total estimated liquidity $ 325.6 (1) Cash includes approximately $39.8 million held by foreign subsidiaries and excludes approximately $2.3 million of restricted cash. Our liquidity was $344.0 million at December 31, 2020. Our need for cash in the next twelve months relates primarily to contractual obligations which include debt service, pension plan funding, purchase commitments and operating leases, as well as working capital, capital maintenance programs and the funding of plant consolidation and rationalizations. We may also use cash to pursue other potential strategic acquisitions or voluntary pension plan contributions. Capital expenditures in 2021, excluding acquisitions, if any, are expected to total approximately $105 to $115 million and are expected to be funded by cash from operations. We anticipate that our estimated liquidity will continue to be adequate to fund our cash requirements for the next twelve months. 29 Debt Covenants The covenants that affect availability of the Credit Facility and which may restrict the ability of Koppers Inc. to pay dividends include the following financial ratios: ◾ The 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, 2021 was 2.53. ◾ 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 2.75. The total secured leverage ratio at March 31, 2021 was 1.34. ◾ 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 5.00. The total leverage ratio at March 31, 2021 was 3.44. 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. Non-GAAP Financial Measures We utilize certain financial measures that are not in accordance with U.S. generally accepted accounting principles (US GAAP) to analyze and manage the performance of the business. We believe that EBITDA (as defined below), adjusted EBITDA, adjusted EBITDA margin, and net leverage ratio provide information useful to investors in understanding the underlying operational performance of the company, our business and performance trends, and facilitate comparisons between periods and with other corporations in similar industries. The exclusion of certain items permits evaluation and a comparison of results for ongoing business operations, and it is on this basis that our management internally assesses our performance. In addition, our board of directors and executive management team use adjusted EBITDA as a performance measure under the company’s annual incentive plans. Although we believe that these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP basis financial measures and should be read in conjunction with the relevant GAAP financial measures. Other companies in a similar industry may define or calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, these non-GAAP financial measures should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. EBITDA is a non-GAAP financial measure defined as net income from continuing operations before income taxes and interest, depreciation and amortization. The adjustments to arrive at adjusted EBITDA are items that we believe are not representative of underlying business performance. Adjusted items typically include certain expenses associated with impairment, restructuring and plant closure costs, significant gains and losses on asset disposals or business combinations, other non-recurring items or recurring non-cash income or expense items such as LIFO and mark-to-market commodity hedging. A reconciliation of segment net income to adjusted segment EBITDA is not available without unreasonable efforts as we do not measure net income at the segment level or use it as a measure of operating performance. The following table summarizes EBITDA and adjusted EBITDA on a consolidated basis as calculated by us for the quarters indicated below: Three Months Ended March 31, (amounts in millions) 2021 2020 Net income (loss) $ 25.8 $ (2.5 ) Interest expense 10.1 14.0 Depreciation and amortization 16.1 13.5 Income tax provision (benefit) 8.5 (1.8 ) Discontinued operations 0.4 4.4 EBITDA with noncontrolling interests 60.9 27.6 Adjustments to arrive at adjusted EBITDA: Impairment, restructuring and plant closure (benefits) costs (4.2 ) 2.7 Non-cash LIFO expense (benefit) 1.0 (0.6 ) Mark-to-market commodity hedging (gains) losses (2.6 ) 7.9 Total adjustments (5.8 ) 10.0 Adjusted EBITDA $ 55.1 $ 37.6 30 The following table summarizes EBITDA and adjusted EBITDA on a consolidated and segment basis as calculated by us for the quarters indicated below: Three Months Ended March 31, (amounts in millions) 2021 2020 EBITDA with noncontrolling interests: Railroad and Utility Products and Services $ 14.7 $ 13.8 Performance Chemicals 30.4 9.1 Carbon Materials and Chemicals 15.3 4.5 Corporate unallocated 0.5 0.2 Total EBITDA $ 60.9 $ 27.6 Adjusted EBITDA: Railroad and Utility Products and Services $ 16.4 $ 13.4 Performance Chemicals 27.8 17.0 Carbon Materials and Chemicals 10.4 7.0 Corporate unallocated 0.5 0.2 Total Adjusted EBITDA $ 55.1 $ 37.6 Adjusted EBITDA margin as a percentage of GAAP sales: Railroad and Utility Products and Services 8.5 % 7.1 % Performance Chemicals 22.5 % 15.3 % Carbon Materials and Chemicals 11.3 % 7.0 % Total Adjusted EBITDA margin 13.5 % 9.4 % The increase in adjusted EBITDA of $17.5 million over the prior year period is primarily due to higher sales volumes, favorable product mix and improved cost absorption from our PC segment which was driven by the demand for copper-based preservatives in the U.S. from strong housing, repair and remodeling markets. As an effect of the pandemic on the consumer markets, this strong market was driven by the diversion of discretionary spending from leisure and entertainment categories to home repair and beautification projects. Our RUPS segment also experienced improved adjusted EBITDA from higher sales volumes and margins in our railroad bridge services business and a favorable sales mix in our Class I crosstie market . Adjusted EBITDA margins increased at our CMC segment driven primarily by improved results in our Australian and European markets. Three Months Ended March 31, 2021 Corporate RUPS PC CMC Unallocated Consolidated Operating profit (loss) $ 8.7 $ 24.8 $ 10.8 $ (0.4 ) $ 43.9 Other income (loss) (0.3 ) 0.8 (0.5 ) 0.9 0.9 Depreciation and amortization 6.3 4.8 5.0 0.0 16.1 EBITDA with noncontrolling interest $ 14.7 $ 30.4 $ 15.3 $ 0.5 $ 60.9 Adjustments to arrive at adjusted EBITDA: Impairment, restructuring and plant closure (benefits) costs 1.3 0.0 (5.5 ) 0.0 (4.2 ) Non-cash LIFO expense 0.4 0.0 0.6 0.0 1.0 Mark-to-market commodity hedging gains 0.0 (2.6 ) 0.0 0.0 (2.6 ) Adjusted EBITDA $ 16.4 $ 27.8 $ 10.4 $ 0.5 $ 55.1 Adj. EBITDA % of Consolidated Adj. EBITDA (excluding corporate unallocated) 30.0 % 50.9 % 19.1 % 31 Three Months Ended March 31, 2020 Corporate RUPS PC CMC Unallocated Consolidated Operating profit (loss) $ 9.2 $ 4.1 $ 0.7 $ (0.4 ) $ 13.6 Other income (loss) (0.3 ) 0.5 (0.3 ) 0.6 0.5 Depreciation and amortization 4.9 4.5 4.1 0.0 13.5 EBITDA with noncontrolling interest $ 13.8 $ 9.1 $ 4.5 $ 0.2 $ 27.6 Adjustments to arrive at adjusted EBITDA: Impairment, restructuring and plant closure costs 0.0 0.0 2.7 0.0 2.7 Non-cash LIFO benefit (0.4 ) 0.0 (0.2 ) 0.0 (0.6 ) Mark-to-market commodity hedging losses 0.0 7.9 0.0 0.0 7.9 Adjusted EBITDA $ 13.4 $ 17.0 $ 7.0 $ 0.2 $ 37.6 Adj. EBITDA % of Consolidated Adj. EBITDA (excluding corporate unallocated) 35.8 % 45.5 % 18.7 % Net leverage ratio is a non-GAAP financial measure defined as net debt (total debt less cash) divided by adjusted EBITDA for the latest twelve months and is a financial measure used by us to assess our borrowing capacity and ability to service our debt. The following table summarizes net leverage ratio as calculated by us for the twelve month periods indicated below: Twelve Months Ended (amounts in millions) March 31, 2021 December 31, 2020 March 31, 2020 Total Debt $ 810.6 $ 775.9 $ 953.2 Less: Cash 44.2 38.5 54.2 Net Debt $ 766.4 $ 737.4 $ 899.0 Adjusted EBITDA $ 228.5 $ 211.0 $ 197.9 Net Leverage Ratio 3.4 3.5 4.5 Our net leverage ratio decreased over the past 12 months primarily due to the $132.6 million decrease in net debt, principally due to cash generated from operating activities in excess of capital expenditures and the net proceeds from the divestiture of KJCC totaling $74.7 million. The following table summarizes EBITDA and adjusted EBITDA on a consolidated basis as calculated by us for the twelve month periods indicated below: Twelve Months Ended March 31, 2021 December 31, 2020 March 31, 2020 Net income $ 149.3 $ 121.0 $ 52.4 Interest expense 45.0 48.9 59.8 Depreciation and amortization 57.7 56.1 54.3 Income tax provision (benefit) 32.1 21.0 (0.6 ) Discontinued operations, net of tax (31.5 ) (31.9 ) 3.4 EBITDA 252.6 215.1 169.3 Adjustments to arrive at adjusted EBITDA: Impairment, restructuring and plant closure costs 4.7 15.7 18.8 Non-cash LIFO (benefit) expense (12.2 ) (13.7 ) 2.8 Mark-to-market commodity hedging (gains) losses (19.7 ) (9.2 ) 7.0 Pension settlement 0.1 0.1 0.0 Discretionary incentive 3.0 3.0 0.0 Adjusted EBITDA with noncontrolling interests $ 228.5 $ 211.0 $ 197.9 32 Legal Matters The information set forth in Note 18 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference. Recently Issued Accounting Guidance The information set forth in Note 2 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference. Critical Accounting Policies There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. Environmental and Other Matters The information set forth in Note 18 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There are no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2020.