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10-Q
KOPPERS HOLDINGS INC. filed this Form 10-Q on 08/03/2017
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market. Sales of utility products declined by $1.6 million or 11 percent due to reduced demand for structural timber in Australia.

PC net sales increased by $12.1 million or 6 percent compared to the prior year period. The sales increase was due primarily to higher North American sales volumes for some copper-based wood preservatives and additives. Higher sales volumes were driven primarily by favorable market trends in the repair and remodeling markets and existing home sales as well as treated wood dealers stocking and selling treated wood with higher preservative retention levels. These gains were offset in part by higher customer development costs, which are reflected as a reduction of net sales, compared to the prior year period.

CMC net sales increased by $25.0 million or 11 percent compared to the prior year period due mainly to higher sales prices for carbon black feedstock, carbon pitch and other coal tar products with higher sales volumes for carbon black feedstock and phthalic anhydride, partially offset by lower carbon pitch and creosote volumes. Our strategy is to sell as much distillate production to the higher value wood preservative market, however there was a reduction in creosote volume driven by lower demand for treated crossties in the first six months of 2017. The excess distillate was sold as carbon black feedstock. Sales of coal tar chemicals increased over the prior year period due to an increase in sales volumes and pricing of phthalic anhydride. The increase was driven by the effect of higher orthoxylene prices, which impact phthalic anhydride market prices. Higher sales prices for carbon pitch and carbon black feedstock in China were driven primarily by reduced supply in that region.

Cost of sales as a percentage of net sales was 79 percent for the six months ended June 30, 2017 compared to 81 percent in the prior year period due mainly to a sales mix shift for PC as higher gross margins were driven by increased sales volumes and lower costs. In addition, higher gross margins for CMC were driven by lower raw material and shipping costs in North America and higher sales volumes and prices in Europe and Australasia. This more than offset lower sales volumes and gross margins from RUPS due to reduced sales volumes of crossties, utility poles, and railroad services combined with reduced margins in the commercial crosstie market as a result of inventory over-supply in the non-class I market.

Depreciation and amortization for the six months ended June 30, 2017 was $5.3 million lower when compared to the prior year period due mainly to a reduction in assets, excluding assets under construction, related to our shutdown of distillation facilities in the United States and United Kingdom.

Impairment and restructuring expenses for the six months ended June 30, 2017 were $7.5 million lower when compared to the prior year period due mainly to a prior year accrual for exited real estate lease obligations, net of estimated sublease revenue, at our closed coal tar distillation facility in Uithoorn, the Netherlands, as well as severance charges related to our closed coal tar distillation CMC facilities in the United Kingdom and impairment charges for the remaining fixed assets at our coal tar distillation facility in Clairton, Pennsylvania. Current year charges consist of restructuring-related storage tank decommissioning costs and accelerated depreciation for the remaining fixed assets at our coal tar distillation facilities in Clairton, Pennsylvania and Follansbee, West Virginia.

Selling, general and administrative expenses for the six months ended June 30, 2017 were $2.4 million higher when compared to the prior year period due mainly to increases in consulting and stock-based compensation expense offset by decreases in customer development costs.

Other income for the six months ended June 30, 2017 was $0.7 million higher when compared to the prior year period. In the six months ended June 30, 2016, we incurred equity method losses of $0.7 million for CMC related to our TKK facility in China. This facility was sold in the first quarter of 2017.

Interest expense for the six months ended June 30, 2017 was $5.2 million lower than the prior year period as a result of reduced average debt levels and reduced interest rates related to our new 2025 Notes and our new Revolving Credit Facility.

Loss on extinguishment of debt for the six months ended June 30, 2017 was $13.3 million higher when compared to the prior year period. In the current year period, all of our senior notes due 2019 were repurchased at a premium to carrying value and accordingly, we realized a loss on extinguishment of debt totaling $10.0 million consisting of $7.3 million for bond premium and bond tender expenses and $2.7 million for the writeoff of unamortized debt issuance costs. In addition, we repaid our term loan in full and entered into a new revolving credit facility. Accordingly, we realized a loss of $3.3 million for the writeoff of unamortized debt issuance costs.

Income taxes for the six months ended June 30, 2017 were $7.6 million, an increase of $1.3 million when compared to the prior period. The increase in tax expense is due to an increase in pre-tax earnings that are greater than the prior period partially offset by a lower effective income tax rate. The effective income tax rates for the six months ended June 30, 2017 and June 30, 2016 were 22.9 percent and 41.4 percent, respectively. The decrease in the effective income tax rate is partially due to an increase in foreign pre-tax earnings that are taxed at more favorable rates. Additionally, in the

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