What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-06 · 166 added, 162 removed, 313 unchanged (51% of the section changed)

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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.

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.

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 September 30, 2021, including those related to COVID-19.

Events and changes in circumstances arising after September 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.

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.

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

However, the RTA reports that significant forces are weighing upon the markets for wood and crossties.

A number of sawmills are continuing to utilize their capacity to process softwood logs instead of hardwoods for crossties due to higher profitability in cutting construction lumber.

Additionally, the sawmills are facing supply chain issues resulting from a combination of a lack of available labor, insufficient number of truck drivers, and a rise in freight costs.

According to the American Association of Railroads (“AAR”), for the year-to-date period through September 30, 2021, total U.S.

carload traffic increased 7.9 percent from the prior year, while intermodal units increased by 9.9 percent.

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traffic for carloads and intermodal units was higher by 9.0 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.

In recent months, the limited availability of downstream truck and warehouse capacity has negatively affected rail intermodal volumes due to the lack of freight outflows in order to make room for new freight inflows.

The AAR reports that in an attempt to help mitigate these issues, the railroads are bringing intermodal yard capacity back online to increase storage availability as well as working with their customers and truckers to accelerate container pickup and other efforts as applicable.

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.

As long as there are not any extended supply chain disruptions, we anticipate that 2021 demand will be relatively stable to slightly higher, given that 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.

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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.

With respect to raw materials, we expect that there will be an unfavorable effect on the availability of pole supply due to construction lumber continuing to be in high demand.

T he supply for untreated crossties 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.

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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.

Due to a strong market for housing construction, the sawmills are producing fewer crossties as well as dealing with a labor shortage, consequently leading to higher input prices.

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 third 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 will include 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.

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 .

Separately, in the third quarter of 2020, we permanently closed our Denver, Colorado wood treatment facility.

In October 2021, we sold the Denver, Colorado facility and will recognize a gain on the transaction of approximately $23 million during the three months ended December 31, 2021.

Performance Chemicals

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Overall, the market for existing homes are showing strong demand.

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 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.

According to the National Association of Realtors® (“NAR”), total existing-home sales rose 7.0 percent on a seasonally adjusted annual rate from August to September, with all regions showing an increase.

The inventory of unsold homes decreased 0.8 percent from August to September.

The median existing-home sales price was higher year-over-year by 13.3 percent, as prices rose in each region and marked 115 consecutive months of year-over-year increases.

Supply has improved in prior months which helped to drive up sales in September.

Housing demand remains strong as buyers are likely looking to secure a home before interest rates potentially increase further in the next year.

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 now projected to reach 9.0 percent in the fourth quarter and maintain that pace into 2022 and reach $400 billion in annual remodeling expenditures to owner-occupied homes by the third quarter of 2022.

Residential remodeling is anticipated to continue to benefit from a strong housing market.

With significant price appreciation in many markets, the expansion of homeowners’ equity is likely to fuel demand for more home improvement projects.

Nevertheless, there may be some headwinds that could still taper the expected growth in remodeling activity including the rising cost of labor and building materials.

The Conference Board Consumer Confidence Index® increased in October, following declines in the prior three months.

The Index now stands at 113.8, up from 109.8 in September.

The Conference Board reports that consumer confidence improved, reversing a three-month downward trend as concerns eased about the spread of the Delta variant and consumers continued to spend money on travel and in-person services.

While short-term inflation concerns showed an increase, the impact on confidence was muted.

Also, the proportion of consumers planning to purchase homes, automobiles, and major appliances all increased in October—a sign that economic growth will likely continue through the end of 2021.

The market data and projections for home improvements are continually changing and w e are closely monitoring customer demand for residential treated wood in North America, primarily in the U.S.

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

Carbon Materials and Chemicals

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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.

As the global steel industry, excluding Asia, has reduced the production of steel using metallurgical coke, the volumes of coal tar have been reduced.

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

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.

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

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

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.

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.

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.

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

According to IHS Markit Automotive Group (IHS), light vehicle production has been revised from 1.6 percent growth in 2021 globally to 0.3 percent.

The adjustment to the outlook reflects heightened risk as challenges to the supply chain are expected to remain entrenched for the next six to twelve months.

IHS now anticipates double- digit production growth in 2022, projected to be at 10.6 percent year-over-year growth, compared with 9.1 percent previously.

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 June 30, 2021 and 2020

Results of Operations – Comparison of Three Months Ended September 30, 2021 and 2020

Consolidated Results

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,

Net sales for the three months ended September 30, 2021 and 2020 are summarized by segment in the following table:

Three Months Ended September 30,

(Dollars in millions)

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Carbon Materials and Chemicals

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

RUPS net sales decreased by $4.1 million or two 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.

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 commercial crosstie business and pricing increases in various markets within the segment.

PC net sales decreased by $32.7 million or 22 percent compared to the prior year period.

The sales decrease was primarily due to volume decreases for preservatives in North America as high lumber prices and a temporary change in consumer spending habits 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.

The decreases were offset, in part, by pricing increases in the current year period for our copper-based preservatives.

Foreign currency changes compared to the prior year period from our international markets had a favorable impact on sales in the current year period of $1.5 million.

CMC net sales increased by $24.1 million or 24 percent compared to the prior year period due mainly to higher sales prices for carbon pitch, carbon black feedstock and phthalic anhydride in the current year period.

These increases were offset, in part, by lower sales volumes of carbon pitch in the current year period.

Cost of sales as a percentage of net sales was 82 percent for the quarter ended September 30, 2021 compared to 75 percent in the prior year quarter.

Gross margin at RUPS was unfavorably impacted in the current year period by LIFO expense of $7.5 million compared to the prior year period which was favorably impacted by a LIFO benefit of $2.9 million.

Gross margin at PC was unfavorably impacted in the current year period by sales volume decreases and a $4.4 million unrealized loss from our copper swap contracts compared to the prior year period which was favorably impacted by an $3.9 million unrealized gain from our copper swap contracts.

Gross margin at CMC was negatively affected in the current year period by higher raw material costs.

Depreciation and amortization charges for the quarter ended September 30, 2021 were $0.5 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 September 30, 2021 were $1.5 million lower when compared to the prior year period .

The prior year period included accelerated depreciation, demolition and other plant closure period costs related to the closure of our Denver, Colorado facility.

Selling, general and administrative expenses for the quarter ended September 30, 2021 were $3.2 million higher when compared to the prior year period due mainly to an increase of $2.2 million for consulting and professional services and $1.2 million for employee benefit related expenses.

Interest expense for the quarter ended September 30, 2021 was $1.6 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 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.

Income tax expense for the quarter ended September 30, 2021 was $4.8 million, a decrease of $3.8 million when compared to the prior year quarter.

The decrease is primarily due to a significant reduction in pre-tax income of $32.4 million in the current period when compared to the prior year period.

Additionally, this decrease was mitigated by the favorable discrete benefit of $3.1 million recorded in the third quarter of 2020 related to coronavirus tax relief measures and an amended tax return.

Discontinued operations for the quarter ended September 30, 2021 resulted in a loss of $0.5 million primarily due to a working capital adjustment to the sales price of our noncontrolling interest in KJCC, which was sold in 2020.

Segment Results.

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,

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

Three Months Ended September 30,

(Dollars in millions)

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Carbon Materials and Chemicals

Operating profit as a percentage of net sales:

Operating profit (loss) as a percentage of net sales:

Railroad and Utility Products and Services

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Carbon Materials and Chemicals

RUPS operating profit decreased by $11.9 million compared to the prior year period.

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.

RUPS operating loss was $0.7 million for the three months ended September 30, 2021.

RUPS operating profit was $15.0 million for the three months ended September 30, 2020.

Operating loss as a percentage of net sales was 0.4 percent, compared to operating profit as a percentage of net sales of 7.9 percent in the prior year period.

Operating loss as a percentage of net sales for the quarter ended September 30, 2021 was unfavorably impacted primarily by LIFO expense of $7.5 million compared to the prior year period which was favorably impacted by a LIFO benefit of $2.9 million.

Excluding the effect of LIFO, our operating profit as a percentage of net sales was 3.6 percent in the current year period compared with 6.4 percent in the prior year period.

The current year period was also unfavorably impacted 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.

PC operating profit decreased by $18.8 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 10.1 percent from 20.6 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.

The current year period was unfavorably impacted by sales volume decreases for our copper-based preservatives in North America compared to high levels of demand in the prior year period as a result of the pandemic.

The current year period was also unfavorably impacted by a $4.4 million unrealized loss from our copper swap contracts compared to the prior year period which was favorably impacted by a $3.9 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 13.9 percent in the current year period compared with 17.9 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 $1.2 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

Operating profit as a percentage of net sales decreased to 12.1 percent from 13.9 percent in the prior year period.

Operating profit margin for the quarter ended September 30, 2021 was unfavorably impacted primarily by higher raw material costs in the current year period.

These increased costs were offset, in part, by higher sales prices for carbon pitch, carbon black feedstock and phthalic anhydride in the current year period.

Results of Operations – Comparison of Nine Months Ended September 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,

Net sales for the nine months ended September 30, 2021 and 2020 are summarized by segment in the following table:

Nine Months Ended September 30,

(Dollars in millions)

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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 .

These decreases were offset, in part, by volume increases in our maintenance-of-way and crosstie disposal businesses and pricing increases in various markets within the segment.

Foreign currency changes compared to the prior year period had a favorable impact on sales in the current year period of $3.8 million, mainly from our Australian utility pole business.

PC net sales decreased by $12.0 million or three percent compared to the prior year period.

The increases were offset, in part, by 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.

Foreign currency changes compared to the prior year period from our international markets had a favorable impact on sales in the current year period of $6.8 million.

CMC net sales increased by $25.9 million or nine percent compared to the prior year period due mainly to higher sales prices for carbon black feedstock, carbon pitch and phthalic anhydride in the current year period .

Foreign currency translation also had a favorable impact on sales in the current year period of $13.0 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.

These increases were offset, in part, by lower sales volumes of carbon pitch and phthalic anhydride in the current year period.

Cost of sales as a percentage of net sales was 79 percent for the nine months ended September 30, 2021, consistent with prior year.

Gross margin at CMC was favorably impacted by higher sales prices for carbon black feedstock, carbon pitch and phthalic anhydride in the current year period, 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.

These favorable drivers were offset, in part, by gross margin at RUPS which was negatively affected in the current year period by LIFO expense of $10.3 million compared to the prior year period which was favorably impacted by a LIFO benefit of $5.2 million as well as volume decreases in our domestic utility pole business, our commercial crosstie market and 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 .

Gross margin at PC was relatively consistent with the prior year period.

Depreciation and amortization charges for the nine months ended September 30, 2021 were $3.7 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 nine months ended September 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 nine months ended September 30, 2021 were $3.3 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 nine months ended September 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.

Selling, general and administrative expenses for the nine months ended September 30, 2021 were $6.5 million higher when compared to the prior year period due mainly to an increase of $4.9 million in employee benefit related expenses and $1.8 million for consulting and professional services.

Interest expense for the nine months ended September 30, 2021 was $8.1 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.

Income tax expense for the nine months ended September 30, 2021 was $22.4 million, an increase of $7.6 million when compared to the prior year period.

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

The discrete items in the prior year period were primarily related to coronavirus tax relief measures.

Discontinued operations for the nine months ended September 30, 2021 resulted in income of $0.4 million compared to a loss of $3.8 million in the prior year period.

In the prior year period, the loss was driven by a reduction in net sales and lower end market demand attributable to the economic effects of COVID-19 on our KJCC operations, which was sold in the third quarter of 2020 and resulted in a gain on sale of discontinued operations of $35.8 million.

See Note 4 – “Discontinued Operations” for further detail.

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,

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

Nine Months Ended September 30,

(Dollars in millions)

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Operating profit as a percentage of net sales decreased to 2.1 percent from 6.8 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.

Operating profit as a percentage of net sales for the nine months ended September 30, 2021 was unfavorably impacted primarily by LIFO expense of $10.3 million compared to the prior year period which was favorably impacted by a LIFO benefit of $5.2 million.

Excluding the effect of LIFO, our operating profit as a percentage of net sales was 3.9 percent in the current year period compared with 6.0 percent in the prior year period.

The effect on profitability from volume decreases in the commercial crosstie market as well as volume decreases of untreated crossties for our Class I customers and volume decreases in our utility pole business, including the effects of reduced utilization of plant capacity 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 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.

PC operating profit decreased by $2.0 million compared to the prior year period.

Operating profit as a percentage of net sales of 16.9 percent is consistent with the prior year period.

The current year period was favorably impacted by pricing increases for our copper-based preservatives, higher demand for preservatives in our international markets and lower realized net raw material costs associated with our copper hedging program.

These favorable drivers were offset primarily by sales volume decreases for preservatives in North America.

CMC operating profit increased by $23.2 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 12.4 percent from 5.5 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 $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.

Operating profit for the nine months ended September 30, 2021 was favorably impacted by higher sales prices for carbon black feedstock, carbon pitch and phthalic anhydride in the current year period, 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 nine months ended September 30, 2021 was $59.6 million compared to net cash provided by operating activities of $65.5 million in the prior year period.

The net decrease of $5.9 million in cash provided by operations was due primarily to higher working capital usage of $12.5 million compared to the prior year period, mainly due to a decrease in accrued liabilities in the current year period.

These drivers were partly offset by an increase in certain other operating activities of $6.6 million from the prior year period, which had a favorable result on cash provided by operations in the current year period.

Net cash used in investing activities for the nine months ended September 30, 2021 was $78.7 million compared to net cash provided by investing activities of $35.0 million in the prior year period.

The net change of $113.7 million in cash used in investing activities was primarily due to an increase in capital expenditures of $43.8 million in the current year period and net cash of $78.1 million provided by the sale of KJCC in the prior year period, partially offset by cash received related to sales of two previously decommissioned CMC plants and insurance proceeds in the current year period.

Net cash provided by financing activities was $28.3 million for the nine months ended September 30, 2021 compared to $93.7 million of net cash used in financing activities in the prior year period.

The cash provided by financing activities in the nine months ended September 30, 2021 reflected net borrowings of debt of $29.5 million partially offset by repurchases of common stock of $3.3 million related to long-term incentive compensation plans.

The cash used in financing activities in the prior year period primarily reflected net repayments of debt of $93.1 million.

Liquidity and Capital Resources

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

At September 30, 2021, the basket totaled $258.8 million.

Notwithstanding such restrictions, the indenture governing the 2025 Notes permits an additional aggregate amount of $0.30 per share each fiscal quarter to finance dividends on the capital stock of Koppers Holdings, whether or not there is any basket availability, provided that at the time of such payment, no default in the indenture has occurred or would result from financing the dividends.

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to pay dividends.

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

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

Cash and cash equivalents ( 1)

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Cash includes approximately $41.9 million held by foreign subsidiaries and excludes approximately $2.3 million of restricted cash.

(2) Liquidity will fluctuate before, after and throughout periods based upon timing of receipts and payments.

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.

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, the funding of plant consolidation and rationalizations and share repurchases.

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

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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 as of June 30, 2021 was 2.18.

The fixed charge coverage ratio as of September 30, 2021 was 1.77.

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 as of June 30, 2021 was 1.28.

The total secured leverage ratio as of September 30, 2021 was 1.36.

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 as of June 30, 2021 was 3.30.

The total leverage ratio as of September 30, 2021 was 3.51.

The maximum permitted total leverage ratio will step down to 4.75 on December 31, 2021.

This change is not expected to have a material impact on liquidity.

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

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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.

generally accepted accounting principles (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 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.

In addition, our board of directors and executive management team use adjusted EBITDA as a performance measure under our 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.

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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.

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 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 three and six month periods indicated below:

Three Months Ended June 30,

Six Months Ended June 30,

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

Three Months Ended September 30,

Nine Months Ended September 30,

(amounts in millions)

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Adjustments to arrive at adjusted EBITDA:

Impairment, restructuring and plant closure costs (benefits)

Impairment, restructuring and plant closure (benefits) costs

Non-cash LIFO expense (benefit)

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Adjusted EBITDA

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,

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

Three Months Ended September 30,

Nine Months Ended September 30,

(amounts in millions)

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Total Adjusted EBITDA margin

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 .

The decrease in adjusted EBITDA of $12.8 million for the three months ended September 30, 2021 from the prior year period is primarily due to decreased profitability at RUPS, which 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.

PC’s adjusted EBITDA was unfavorably impacted by volume decreases for our copper-based preservatives in North America in the current year period .

These drivers were offset, in part, by increased profitability at CMC, which was favorably impacted by higher sales prices for carbon pitch and carbon black feedstock in Europe and Australia and phthalic anhydride in North America in the current year period.

The increase in adjusted EBITDA of $10.8 million for the nine months ended September 30, 2021 over the prior year period is primarily due to profitability at CMC, which was favorably impacted by higher sales prices for carbon black feedstock and carbon pitch in Europe and Australia as well as phthalic anhydride in North America in the current year period, a recovery of insurance proceeds in the current year period and a reduction in certain restructuring-related charges from the prior year period.

EBITDA 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 .

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

Three Months Ended September 30, 2021

Operating profit (loss)

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Depreciation and amortization

Depreciation in impairment and restructuring charges

EBITDA with noncontrolling interest

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EBITDA (excluding corporate unallocated)

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Operating profit (loss)

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EBITDA (excluding corporate unallocated)

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Operating profit (loss)

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Depreciation and amortization

Depreciation in impairment and restructuring charges

EBITDA with noncontrolling interest

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Non-cash LIFO expense

Mark-to-market commodity hedging gains

Mark-to-market commodity hedging losses

Adjusted EBITDA

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EBITDA (excluding corporate unallocated)

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Operating profit (loss)

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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.

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 and restricted 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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(amounts in millions)

September 30,

Adjusted EBITDA

Net Leverage Ratio

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.

Our net leverage ratio decreased over the past 12 months primarily due to an increase in adjusted EBITDA of $18.1 million during that period, along with an $8.6 million decrease in net debt, principally due to cash generated from operating activities.

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

September 30,

Interest expense

Depreciation and amortization

Income tax provision (benefit)

Income tax provision

Discontinued operations, net of tax

Adjustments to arrive at adjusted EBITDA:

Impairment, restructuring and plant closure (benefits)

Non-cash LIFO benefit

Impairment, restructuring and plant closure costs

Non-cash LIFO expense (benefit)

Mark-to-market commodity hedging gains

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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