What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-07 · 220 added, 128 removed, 255 unchanged (58% of the section changed)

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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.

We also provide rail joint bar products as well as various services to the railroad and utility industries 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.

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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.

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, 2021, including those related to COVID-19.

Events and changes in circumstances arising after June 30, 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

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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.

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.

According to a mid-year forecast update issued by the RTA, demand for crossties in 2021 is now expected to be 18.9 million, or 4.7 percent growth, and 19.5 million in 2022, or 3.2 percent growth.

The year-over-year increases are expected to be driven primarily from growth in the commercial market, while Class I volumes are expected to remain at relatively similar demand levels.

According to the American Association of Railroads (“AAR”), total U.S.

carloads in the second quarter of 2021 were the highest since the fourth quarter of 2019;

carloads excluding coal were the highest since the third quarter of 2019;

and intermodal and chemical volumes were both the highest for any quarter in history.

In addition, carloads of steel-related commodities were also relatively strong in the second quarter, reflecting higher demand as the industrial economy continues to recover.

Year-to-date through June 30, 2021, total U.S.

carload traffic increased 9.4 percent from the prior year, while intermodal units increased by 17.5 percent.

The combined U.S.

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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.

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 other wood-treatment preservatives.

Our internally-produced creosote and chromated copper arsenate (“CCA”) 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 CCA or creosote as potential treatment options.

In July 2021, we began the process of converting our facilities that previously utilized penta to other wood preservatives for the treatment of utility poles.

We anticipate that this will be completed by mid-2022, after which those facilities will be able to offer a variety of preservative treatment options to customers, including copper naphthenate, CCA and creosote.

In undertaking this effort, we believe that Koppers will be in an optimal position to respond quickly to future market needs.

With respect to raw materials, we expect the availability of pole supply to remain relatively 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.

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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.

Currently, there are several key factors impacting the untreated crosstie market and the related availability of crosstie supply.

Due to a strong market for housing construction, there is a higher demand for wood products, mainly softwood construction lumber, but also including hardwood used for crosstie production.

As a result, there are indications that some sawmills that normally produce hardwood lumber have shifted some or much of their capacity to produce higher-margin construction lumber.

Also, the lack of available labor is affecting some sawmills to the extent that they are not able to adequately staff their operations.

Longer term, the RTA expects that demand for pallets and construction lumber to moderate and, therefore, is forecasting a favorable outlook for log availability over the next 6 to 12 months.

Strategic Initiatives and Integration Synergies

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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.

In the third quarter of 2020, we permanently closed our Denver, Colorado wood treatment 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.

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These forward positions are typically marked to market.

Currently, we have forward swap positions for copper extending to the end of 2022.

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.

According to the National Association of Realtors® (“NAR”), total existing-home sales rose 1.4 percent on a seasonally adjusted annual rate from May to June, with no regions showing a sales decline.

The inventory of unsold homes increased 3.3 percent to 1.2 million from May to June.

The median existing-home sales price rose at a year-over-year pace of 23.4 percent, the second highest level recorded since January 1999.

Supply has improved in recent months due to more housing starts and existing homeowners listing their homes, all of which has resulted in increased sales.

Home sales continue to run at a higher pace compared to the pre-pandemic pace.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, the annual growth in home renovation and repair expenditures is projected to reach 8.6 percent by the second quarter of 2022 and reach $380 billion in annual remodeling expenditures to owner-occupied homes.

Home remodeling is anticipated to continue to grow given the ongoing strength of home sales, house price appreciation, and new residential construction activity.

There has been a significant increase in permits for home improvements, which indicates that homeowners are continuing to invest in larger discretionary and replacement projects.

The Conference Board Consumer Confidence Index® improved further in June, following gains in each of the previous four months , with the index at 127.3, up from 120.0 in May 2021.

Consumer confidence increased in June and is currently at its highest level since March 2020.

Consumers’ assessment of current conditions improved again, suggesting economic growth has strengthened further in the second quarter of 2021.

While short-term inflation expectations increased, this did not have any significant impact on consumer confidence or purchasing intentions.

Consumer spending for both goods and services is expected to continue to support economic growth in the short-term.

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.

In addition, strong gains in retail sales of building materials also suggest that the remodeling market will continue to be supported by do-it-yourself activities.

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.

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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.

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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 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 part of our restructuring initiatives beginning in 2015, we have now 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.

In 2021, we are planning to return to normal production levels in North America in the second half of the year, which should result in higher production domestically.

As a result, we are projecting transportation cost savings as imports from Europe are reduced or no longer necessary.

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.

For the external markets served by our CMC business, we anticipate a recovery in manufacturing overall as well as increased production in steel, aluminum and carbon black industries.

According to IHS Markit Automotive Group, light vehicle production is projected to grow approximately 14 percent in 2021 globally, with U.S.

production expected to increase 24 percent.

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, 2021 and 2020

Results of Operations – Comparison of Three Months Ended June 30, 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,

Net sales for the three months ended June 30, 2021 and 2020 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 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.

RUPS net sales decreased by $14.4 million or seven percent compared to the prior year period.

The sales decrease was primarily due to volume decreases of untreated crossties for our Class I customers.

Increased demand for lumber driven by strong construction markets resulted in decreased supply and decreased purchasing activity of untreated crossties by our customers during the current period.

Volume decreases in our utility pole business due to transitioning production from the Texas Electric Cooperatives’ Jasper, Texas plant to our Somerville, Texas plant as well as volume decreases in our commercial crosstie business also contributed to the reduction from the prior year period.

These decreases were offset, in part, by volume increases in our crosstie disposal business.

Foreign currency translation also had a favorable impact on sales in the current period of $1.8 million, mainly from our Australian utility pole business.

PC net sales increased by $8.5 million or six percent compared to the prior year period.

The sales increase was primarily due to higher demand for preservatives in our international markets resulting from continued pent-up demand after the lifting of earlier restrictions associated with the pandemic.

PC also benefitted from pricing increases in the current year period for our copper-based preservatives in the Americas.

Foreign currency translation from our international markets also had a favorable impact on sales in the current year period of $3.5 million.

The increases were offset, in part, by volume decreases for preservatives in North America as high lumber prices have tempered customer demand in the current year period coupled with high levels of demand in the prior year period as a result of the pandemic.

CMC net sales increased by $10.3 million or 11 percent compared to the prior year period due mainly to higher sales prices for carbon black feedstock in Europe and phthalic anhydride in North America in the current year period.

Foreign currency translation also had a favorable impact on sales in the current year period of $5.8 million, mainly from our Australian and European markets.

These increases were offset, in part, by lower sales volumes of carbon pitch in North America, due to a temporary plant outage, and Europe and lower pitch prices in Australia in the current year period.

Cost of sales as a percentage of net sales was 78 percent for the quarter ended June 30, 2021 compared to 77 percent in the prior year quarter.

Gross margin at RUPS was negatively affected in the current year period by lower sales volumes of crossties and utility poles in North America.

Gross margin at PC was favorably impacted in the prior year period by an $8.3 million unrealized gain from our copper swap contracts as compared to an unrealized loss of $0.9 million for the three months ended June 30, 2021.

These unfavorable drivers were offset, in part, by gross margin at CMC which was favorably impacted in the current year period by higher sales prices for carbon black feedstock in Europe and phthalic anhydride in North America along with a recovery from insurance proceeds.

Depreciation and amortization charges for the quarter ended June 30, 2021 were $0.6 million higher when compared to the prior year period due mainly to an increase in capitalized assets in our North American RUPS operations.

Impairment and restructuring charges for the quarter ended June 30, 2021 were $3.2 million lower when compared to 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.

The current year period included remaining demolition and other plant closure period costs related to the closure .

Selling, general and administrative expenses for the quarter ended June 30, 2021 were $3.5 million higher when compared to the prior year period due mainly to an increase of $1.5 million for consulting and professional services, $0.8 million for employee benefit related expenses and $0.7 million for travel and facility related costs.

Interest expense for the quarter ended June 30, 2021 was $2.7 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 underlying 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.

Income tax expense for the quarter ended June 30, 2021 was $9.1 million, an increase of $1.1 million when compared to the prior year quarter.

The increase is primarily due to a reduction in the amount of discrete tax items in the current quarter when compared to the prior year quarter.

Discontinued operations for the quarter ended June 30, 2021 resulted in income of $1.0 million primarily due to the recovery of past professional service fees from the noncontrolling interest in KJCC which was sold in 2020.

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,

Segment operating profit for the three months ended June 30, 2021 and 2020 is summarized by segment in the following table:

Three Months Ended June 30,

(Dollars in millions)

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RUPS operating profit decreased by $11.9 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.

Operating profit as a percentage of net sales decreased to 2.2 percent from 7.7 percent in the prior year period.

Operating profit as a percentage of net sales for the quarter ended June 30, 2021 was unfavorably impacted primarily by the effect on profitability from volume decreases of untreated crosstie sales to our Class I customers, including the effects of reduced utilization of plant capacity.

An increase in raw material costs, including the price of hardwoods as the pandemic continues, also contributed to reduced margins.

These decreases were offset, in part, by higher margins in our Australian utility pole business.

PC operating profit decreased by $3.9 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 19.7 percent from 23.8 percent in the prior year period.

The current year period was unfavorably impacted by a $0.9 million unrealized loss from our copper swap contracts compared to the prior year period which was favorably impacted by an $8.3 million unrealized gain 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 20.3 percent in the current year period compared with 17.8 percent in the prior year period.

The current year period was favorably impacted by pricing increases for our copper-based preservatives in the Americas.

CMC operating profit increased by $11.9 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 13.4 percent from 1.7 percent in the prior year period.

Operating profit for the quarter ended June 30, 2021 was favorably impacted primarily by higher sales prices for carbon black feedstock in Europe and phthalic anhydride in North America, higher sales volumes of carbon pitch in Australia, a recovery of $2.9 million from insurance proceeds in the current year period and a reduction in certain restructuring-related charges of $3.6 million from the prior year period.

Results of Operations – Comparison of Six Months Ended June 30, 2021 and 2020

Consolidated Results

Net sales for the six months ended June 30, 2021 and 2020 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 decreased by $12.5 million or three percent compared to the prior year period.

The sales decrease was primarily due to volume decreases in the commercial crosstie market as well as volume decreases of untreated crossties for our Class I customers.

Increased demand for lumber driven by strong construction markets resulted in decreased supply and decreased purchasing activity of untreated crossties by our customers during the current period.

Volume decreases in our utility pole business due to transitioning production from the Texas Electric Cooperatives’ Jasper, Texas plant to our Somerville, Texas plant also contributed to the reduction from the prior year period.

These decreases were offset, in part, by volume increases in our maintenance-of-way and crosstie disposal businesses.

Foreign currency translation also had a favorable impact on sales in the current year period of $3.5 million, mainly from our Australian utility pole business.

PC net sales increased by $20.7 million or eight percent compared to the prior year period.

The sales increase was primarily due to higher demand for preservatives in our international markets resulting from continued pent-up demand due to earlier restrictions associated with the pandemic along with pricing increases in the current year period for our copper-based preservatives in the Americas.

Foreign currency translation from our international markets also had a favorable impact on sales in the current year period of $5.0 million.

The increases were offset, in part, by volume decreases for non-copper-based preservatives in North America as high lumber prices have tempered customer demand in the current year period coupled with high levels of demand in the prior year period as a result of the pandemic.

CMC net sales increased by $1.8 million or one percent compared to the prior year period due mainly to higher sales prices for carbon black feedstock in Europe and higher sales volumes of carbon pitch in Australia in the current year period .

Foreign currency translation also had a favorable impact on sales in the current year period of $12.1 million, mainly from our Australian and European markets.

These increases were offset, in part, by lower sales volumes of carbon pitch in North America, due to a temporary plant outage, and Europe, lower sales volumes of phthalic anhydride in North America and lower pitch prices in Australia and Europe in the current year period.

Cost of sales as a percentage of net sales was 78 percent for the six months ended June 30, 2021 compared to 81 percent in the prior year period.

Gross margin at PC was favorably impacted by higher sales volumes for preservatives in our international markets along with pricing increases in the current year period for our copper-based preservatives in the Americas.

Gross margin at CMC which was favorably impacted in the current year period by higher sales prices for carbon black feedstock in Europe, higher sales volumes of carbon pitch in Australia and a recovery from insurance proceeds in the current year period along with a reduction in certain restructuring-related charges from the prior year period.

These favorable drivers were offset, in part, by gross margin at RUPS which was negatively affected in the current year period by volume decreases in the commercial crosstie market as well as volume decreases of untreated crossties for our Class I customers principally due to decreased supply and decreased purchasing activity of untreated crossties due to higher lumber prices .

Depreciation and amortization charges for the six months ended June 30, 2021 were $3.2 million higher when compared to the prior year period due mainly to an increase in asset retirement obligations at 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 six months ended June 30, 2021 was $7.8 million and is primarily related to the sales of two previously decommissioned plants as described in Note 3 – “Plant Closures and Divestitures”.

Impairment and restructuring charges for the six months ended June 30, 2021 were $1.8 million lower when compared to 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 six months ended June 30, 2020 related to the announced closure of our Denver, Colorado facility.

The current year period included remaining demolition and other plant closure period costs related to the closure .

Selling, general and administrative expenses for the six months ended June 30, 2021 were $3.3 million higher when compared to the prior year period due mainly to an increase of $3.6 million in employee benefit related expenses, which were partially offset by a decrease in travel and facility related costs.

Interest expense for the six months ended June 30, 2021 was $6.5 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 underlying 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 six months ended June 30, 2021 was $17.6 million, an increase of $11.4 million when compared to the prior year period.

The increase is primarily due to income before income taxes being $32.2 million higher in the current period when compared to the prior year period.

The increase is also due to a reduction in the amount of discrete items in the current period when compared to the prior year period.

Discontinued operations for the six months ended June 30, 2021 resulted in income of $0.6 million compared to a loss of $4.4 million in the prior year period.

The discontinued operation relates to KJCC which was sold in the third quarter of 2020.

The income in 2021 resulted from the recovery of past professional service fees from the noncontrolling interest in KJCC which was sold in 2020, net of ongoing post-sale expenses.

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.

Segment Results.

Segment operating profit for the six months ended June 30, 2021 and 2020 is summarized by segment in the following table:

Six 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 decreased by $12.4 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 3.4 percent from 6.4 percent in the prior year period.

Operating profit as a percentage of net sales for the six months ended June 30, 2021 was unfavorably impacted primarily by the effect on profitability from volume decreases of untreated crossties for our Class I customers, including the effects of reduced utilization of plant capacity.

An increase in raw material costs, including the price of hardwoods as the pandemic continues, also contributed to reduced margins.

These decreases were offset, in part, by higher margins in our Australian utility pole business.

PC operating profit increased by $16.8 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 19.9 percent from 14.8 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.

The current year period was favorably impacted by higher sales volumes for preservatives in our international markets resulting from continued pent-up demand due to the lifting of earlier restrictions associated with the pandemic along with pricing increases in the current year period for our copper-based preservatives in the Americas.

CMC operating profit increased by $22.0 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.

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.

Operating profit as a percentage of net sales increased to 12.6 percent from 1.2 percent in the prior year period.

Operating profit for the six months ended June 30, 2021 was favorably impacted by higher sales prices for carbon black feedstock in Europe, higher sales volumes of carbon pitch in Australia, a recovery of $2.9 million from insurance proceeds in the current year period and a reduction in certain restructuring-related charges from the prior year period.

Net cash provided by operating activities for the six months ended June 30, 2021 was $36.1 million compared to net cash provided by operating activities of $22.2 million in the prior year period.

The net increase of $13.9 million in cash provided by operations was due primarily to an increase in net income and certain other operating activities of $28.9 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 $15.0 million compared to the prior year period, mainly due to a decrease in accrued liabilities in the current year period.

Net cash used in investing activities for the six months ended June 30, 2021 was $55.8 million compared to net cash used in investing activities of $26.4 million in the prior year period.

The net increase of $29.4 million in cash used in investing activities was primarily due to an increase in capital expenditures of $34.4 million in the current year period, partially offset by $5.1 million of cash received related primarily to sales of two previously decommissioned CMC plants.

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.

Net cash provided by financing activities was $29.0 million for the six months ended June 30, 2021 compared to $3.9 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, 2021 reflected net borrowings of debt of $29.1 million partially offset by repurchases of common stock of $1.9 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 $4.8 million partially offset by repurchases of common stock of $1.2 million.

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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, 2021, the basket totaled $240.2 million.

At June 30, 2021, the basket totaled $253.1 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.

1 unchanged sentence

to pay dividends.

The following table summarizes our estimated liquidity as of March 31, 2021 (dollars in millions) :

The following table summarizes our estimated liquidity as of June 30, 2021 (dollars in millions) :

Cash and cash equivalents ( 1)

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Cash includes approximately $40.1 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 liquidity was $344 million as of 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.

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We anticipate that our estimated liquidity will continue to be adequate to fund our cash requirements for the next twelve months.

On August 5, 2021, the board of directors approved a $100 million share repurchase program.

The repurchase program has no expiration date and replaces our previous share repurchase program of $75 million, which was approved in November 2011 and had approximately $24.8 million remaining.

Debt Covenants

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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, 2021 was 2.53.

The fixed charge coverage ratio as of June 30, 2021 was 2.18.

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 secured leverage ratio as of June 30, 2021 was 1.28.

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.

The total leverage ratio as of June 30, 2021 was 3.30.

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

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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,

The following table summarizes EBITDA and adjusted EBITDA on a consolidated basis as calculated by us for the three and six month periods indicated below:

Three Months Ended June 30,

Six Months Ended June 30,

(amounts in millions)

Net income (loss)

Interest expense

Depreciation and amortization

Income tax provision (benefit)

Depreciation in impairment and restructuring charges

Income tax provision

Discontinued operations

1 unchanged sentence

Adjustments to arrive at adjusted EBITDA:

Impairment, restructuring and plant closure (benefits) costs

Impairment, restructuring and plant closure costs (benefits)

Non-cash LIFO expense (benefit)

Mark-to-market commodity hedging (gains) losses

Mark-to-market commodity hedging losses (gains)

Total adjustments

Adjusted EBITDA

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,

The following table summarizes EBITDA and adjusted EBITDA on a consolidated and segment basis as calculated by us for the three and six month periods indicated below:

Three Months Ended June 30,

Six Months Ended June 30,

(amounts in millions)

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Corporate unallocated

Total EBITDA with noncontrolling interests

Adjusted EBITDA:

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Total Adjusted EBITDA margin

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

The increase in adjusted EBITDA of $6.0 million for the three months ended June 30, 2021 from the prior year period is primarily due to increased profitability at CMC, which was favorably impacted in the current year period by higher sales prices for carbon black feedstock in Europe and phthalic anhydride in North America and a recovery of insurance proceeds.

PC’s adjusted EBITDA was favorably impacted by pricing increases for our copper-based preservatives in the Americas in the current year period.

These drivers were offset, in part, by less profitability at RUPS, which was negatively affected in the current year period by volume decreases in the commercial crosstie market as well as volume decreases of untreated crossties for our Class I customers principally due to decreased supply and decreased purchasing activity of untreated crossties due to higher lumber prices .

The increase in adjusted EBITDA of $23.5 million for the six months ended June 30, 2021 over the prior year period is primarily due to higher sales volumes at PC for preservatives in our international markets along with pricing increases in the current year period for our copper-based preservatives in the Americas.

EBITDA at CMC was favorably impacted in the current year period by higher sales prices for carbon black feedstock in Europe, higher sales volumes of carbon pitch in Australia and a recovery of insurance proceeds in the current year period .

These favorable drivers were offset, in part, by lower EBITDA at RUPS which was negatively affected in the current year period by volume decreases in the commercial crosstie market as well as volume decreases of untreated crossties for our Class I customers principally due to decreased supply and decreased purchasing activity of untreated crossties due to higher lumber prices .

A reconciliation of operating profit (loss) to adjusted EBITDA on a segment basis is presented below:

Three Months Ended June 30, 2021

Operating profit (loss)

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Impairment, restructuring and plant closure

Non-cash LIFO expense

Mark-to-market commodity hedging losses

Adjusted EBITDA

EBITDA % of Consolidated Adj.

EBITDA (excluding corporate unallocated)

Three Months Ended June 30, 2020

Operating profit (loss)

Other income (loss)

Depreciation and amortization

Depreciation in impairment and restructuring charges

EBITDA with noncontrolling interest

Adjustments to arrive at adjusted EBITDA:

Impairment, restructuring and plant closure costs

Non-cash LIFO benefit

Mark-to-market commodity hedging gains

Adjusted EBITDA

EBITDA % of Consolidated Adj.

EBITDA (excluding corporate unallocated)

Six Months Ended June 30, 2021

Operating profit (loss)

Other income (loss)

Depreciation and amortization

EBITDA with noncontrolling interest

Adjustments to arrive at adjusted EBITDA:

Impairment, restructuring and plant closure

(benefits) costs

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EBITDA (excluding corporate unallocated)

Three Months Ended March 31, 2020

Six Months Ended June 30, 2020

Operating profit (loss)

1 unchanged sentence

Depreciation and amortization

Depreciation in impairment and restructuring charges

EBITDA with noncontrolling interest

2 unchanged sentences

Non-cash LIFO benefit

Mark-to-market commodity hedging losses

Mark-to-market commodity hedging gains

Adjusted EBITDA

EBITDA % of Consolidated Adj.

(excluding corporate unallocated)

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.

EBITDA (excluding corporate unallocated)

Net leverage ratio is a non-GAAP financial measure defined as net debt (total debt, calculated as total debt less unamortized debt issuance costs, 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:

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Net Leverage Ratio

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.

Our net leverage ratio decreased over the past 12 months primarily due to the $114.4 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, along with an increase in adjusted EBITDA during that period.

The following table summarizes EBITDA and adjusted EBITDA on a consolidated basis as calculated by us for the twelve month periods indicated below:

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Adjustments to arrive at adjusted EBITDA:

Impairment, restructuring and plant closure costs

Non-cash LIFO (benefit) expense

Mark-to-market commodity hedging (gains) losses

Impairment, restructuring and plant closure (benefits)

Non-cash LIFO benefit

Mark-to-market commodity hedging gains

Pension settlement

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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