What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-06 · 133 added, 101 removed, 171 unchanged (58% of the section changed)

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general economic and business conditions;

existing and future adverse effects as a result of the coronavirus (COVID-19) pandemic;

disruption in the U.S.

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We believe that adjusted EBITDA provides information useful to investors in understanding the underlying operational performance of the company, our business and performance trends, and facilitates comparisons between periods.

The exclusion of certain items permits evaluation and a comparison of results for business operations, and it is on this basis that our management internally assesses our performance.

The exclusion of certain items permits evaluation and a comparison between periods of results for 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.

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Adjusted EBITDA is a non-GAAP financial measure defined as net income from continuing operations before interest, income taxes, depreciation, amortization and other adjustments.

These adjustments are items that we believe are not representative of underlying business performance.

These other adjustments 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, LIFO and mark-to-market commodity hedging and other unusual items.

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Our products are used in multiple infrastructure applications, including utility poles, railroad ties, highway and construction concrete, steel, aluminum, and wood for construction projects.

Effects of COVID-19 on our operations

Our operating results may fluctuate due to a variety of factors that are outside of our control, including from the effects of the current pandemic.

The COVID-19 outbreak began to have a global effect in the first quarter of 2020 and continues to have a significant impact on global markets driven by supply chain and production disruptions, workforce restrictions, trends in spending patterns and other factors.

During the COVID-19 pandemic, substantially all of our global businesses have continued to operate without significant disruption.

In the United States, Koppers was designated as an essential business, as determined by the Cybersecurity and Infrastructure Security Agency (CISA) within the Department of Homeland Security.

As a result, we have been able to meet the demands of our customers in the various markets we serve by continuing to operate to help our customers 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 March 31, 2022, including those related to COVID-19.

Events and changes in circumstances arising after March 31, 2022, 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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Crosstie prices increased significantly as a result of limited supply and railroad customers are deferring their purchases.

Given continuing economic uncertainties, including those related to COVID-19, the RTA is forecasting a slight increase in 2022 of 1.9 percent, or 18.7 million crossties, primarily from the commercial market while Class I volumes are expected to remain at relatively similar demand levels.

In 2023, the outlook continues to be modest with a projected increase of 2.0 percent, or 19.0 million crossties, primarily from the Class I railroads.

According to the Association of American Railroads (“AAR”), rail traffic for the first three months of 2022 was mixed compared with the prior year period.

For the first quarter of 2022, total U.S.

carload traffic increased 2.6 percent from the prior year, while intermodal units declined by 6.9 percent.

Given continuing economic uncertainties such as a tight labor market, the RTA is forecasting a slight decrease in 2022 of 0.8 percent, or 18.6 million crossties, primarily from lower Class I volumes while the commercial market is expected to have slightly higher demand levels.

In 2023, the outlook reflects a modest overall increase of 1.1 percent, or 18.8 million crossties, with increases from Class I as well as commercial railroads.

According to the Association of American Railroads (“AAR”), rail traffic for the first six months of 2022 was unfavorable compared with the prior year period.

Compared to the prior year, total U.S.

carload traffic decreased 0.1 percent and intermodal units declined by 6.2 percent for the year-to-date period through June 30, 2022.

The combined U.S.

traffic for carloads and intermodal units was lower than the prior year by 3.5 percent.

In March, the trends were conflicting as carloads for certain categories such as chemicals, crushed stone and sand, food products, lumber, and motor vehicles were higher than prior months;

however, carloads for grain, petroleum products, and paper products were down.

The trends were conflicting as carloads for certain categories such as automotive, provided generally positive indicators while others, such as chemicals, were much more subdued than earlier in the year.

With respect to our utility products business, the installed base for wood distribution poles in the U.S.

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In addition, there is a developing trend in the industry for utilities to maintain some additional inventory to prepare for potential damaging storms.

With respect to raw materials, we expect the cost of poles to be affected as lumber for other uses continue to be in high demand and, consequently, lead to increased costs for pole material.

Also, transportation costs, which include fuel costs, are expected to experience some upward pressure and affect the price of pole material delivered to the pole peelers from the forest.

With respect to raw materials, wood supply remains relatively stable, however we have experienced pricing pressures based on higher freight and transportation costs.

This negatively affects the price of pole material delivered to our pole peeling locations from the forest.

As a result of these inflationary factors, we are implementing price increases to pass on higher costs to end customers .

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These hedges typically match expected customer purchases and from time to time, we enter into forward transactions based upon long-term forecasted needs of copper.

Copper prices began to reach peak levels in mid-2021 boosted by pent-up demand as home repair and remodeling growth accelerated when pandemic lockdowns were eased, and the market faced tight supplies.

In 2022, thus far copper prices have remained high but projections for future copper prices are mixed and are contingent on supply and demand dynamics as well as the impact of higher interest rates on economic growth.

Product demand for our PC business has historically been closely associated with consumer spending on home repair and remodeling projects in North America, and therefore, trends in existing home sales serve as a leading indicator.

In recent months, the market for existing homes seems to be slowing.

According to the National Association of Realtors® (“NAR”), total existing-home sales decreased in March by 2.7 percent compared with February and 4.5 percent compared with the prior year, marking two consecutive months of declines .

The housing market is expected to be impacted by rising interest rates and inflation, which in turn, are having unfavorable effects on purchasing power.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, home renovation and repair expenditures increased by 11.5 percent year-over-year in the first quarter of 2022.

The LIRA projects that expenditures for improvements and repairs to the owner-occupied housing stock are expected to grow throughout 2022 and into early next year .

The year-over-year increases in residential renovation and maintenance spending are estimated to reach 19.7 percent in the third quarter of 2022 before decreasing to 15.1 percent in the first quarter of 2023.

While annual improvement and repair spending is projected to reach $450 billion by the first quarter of 2023, headwinds such as the rising costs of project financing, construction materials, and labor, as well as growing concerns about a broader economic slowdown or recession may further slow remodeling growth.

The Conference Board Consumer Confidence Index® was 107.2 in March, increasing slightly from 105.7 in February.

While economic growth continued late into the first quarter of 2022, consumers are indicating a weakened outlook and purchasing intentions for big-ticket items such as automobiles are softening somewhat over the past few months as expectations for interest rates have risen.

Although the market data and projections for home improvements are continually changing, we anticipate ongoing demand for residential treated wood and residential renovation markets is remaining favorable.

According to the National Association of Realtors® (“NAR”), total existing-home sales decreased in June by 5.4 percent compared with May and 14.2 percent compared with the prior year, marking five consecutive months of declines .

In addition, the housing market is expected to be impacted by rising interest rates and inflation, which in turn, are having unfavorable effects on purchasing power.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, home renovation and repair expenditures increased by 15.9 percent year-over-year in the second quarter of 2022.

The LIRA projects year-over-year gains in remodeling expenditures to owner-occupied homes will decelerate from 17.4 percent in 2022 to 10.1 percent by the second quarter of 2023.

The slowdown in sales of existing homes, rising mortgage interest rates, and moderating house price appreciation are expected to reduce investments in residential remodeling in the coming 12 to 18 months.

While beginning to soften, growth in spending for home improvements and repairs is projected to expand to nearly $450 billion in the first half of 2023, which is well above the market’s historical average of 5 percent.

The Conference Board Consumer Confidence Index® was 98.7 in June, down by 4.5 points from 103.2 in May.

The Index now stands at its lowest level since February 2021.

The negative outlook from consumers was driven by increasing concerns about inflation, in particular rising gas and food prices.

Looking ahead over the next six months, consumer spending and economic growth are likely to continue facing strong headwinds from further inflation and interest rate hikes.

Carbon Materials and Chemicals

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C oal tar raw material supply remains constrained globally due to reductions in blast furnace steel capacity in addition to near term supply restrictions resulting from the Russian invasion of Ukraine in March 2022.

Our European CMC business typically receives approximately 20 percent of its annual coal tar requirements from Russia and Ukraine.

We have ceased purchasing coal tar from Russian suppliers and we are currently unable to purchase coal tar from Ukrainian suppliers due to the conflict.

Currently, the financial impact of volume reductions in our coal tar supply have been offset by higher prices in our end markets for that region and are not expected to materially impact operating results.

Our European CMC business historically received approximately 20 percent of its annual coal tar requirements from Russia and Ukraine.

We have ceased purchasing coal tar from Russian suppliers and we are currently unable to purchase normal volumes of coal tar from Ukrainian suppliers due to the conflict.

Currently, the financial impact of volume reductions in our coal tar supply have been offset by higher prices in our end markets for that region and are not expected to negatively impact operating results during 2022.

For the external markets served by our CMC business, we anticipate some slowdown in manufacturing.

According to IHS Markit Automotive Group (IHS), the global auto production forecast was updated in March to reflect the impact of Russia's invasion of Ukraine and in April, the forecast was further downgraded.

This was due to some additional challenges that have arisen, including a sluggish recovery in semiconductor supplies, the impact of further COVID lockdowns in China, and the longer-term influence of high raw material prices that will put added pressure on new vehicle affordability.

Currently, the forecast reflects noteworthy reductions for several markets, with the most significant reductions focused on Europe and China.

According to IHS Markit Automotive Group (IHS), there are mixed signals with some automakers reporting an improved supply of semiconductor chips while others still struggle with consistent supply of critical components.

The June 2022 forecast reflects a near-term increase in auto production for Greater China due to COVID-19 lockdowns expiring and demand stimulus taking effect.

Conversely, lingering supply chain impacts from the lockdowns in China are expected to result in downward revisions for Japan/Korea and South Asia.

Supply chain pressures are also continuing to impact the near-term outlook for Europe and North America.

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, 2022 and 2021

Results of Operations – Comparison of Three Months Ended June 30, 2022 and 2021

Consolidated Results

Net sales for the three months ended March 31, 2022 and 2021 are summarized by segment in the following table:

Three Months Ended March 31,

Net sales for the three months ended June 30, 2022 and 2021 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 decreased by $8.5 million, or four percent, compared to the prior year period.

The sales decrease was largely related to volume decreases in our utility pole business as a result of transitioning production from the Texas Electric Cooperatives’ Jasper, Texas plant to our Somerville, Texas plant along with volume decreases of untreated crossties for certain Class I customers and volume decreases in the commercial crosstie market.

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

RUPS net sales increased by $8.7 million, or four percent, compared to the prior year period.

The sales increase was largely related to pricing increases across multiple markets, particularly crossties and utility poles, and volume increases in our railroad bridge services business.

These increases were offset, in part, by volume decreases in our utility pole business mostly due to capacity and transportation issues driven by the current labor shortage as well as the transfer of some production from a third party to our facility in Somerville, Texas, in the prior year quarter.

Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $1.1 million, mainly from our Australian utility pole business.

PC net sales increased by $12.8 million, or ten percent, compared to the prior year period.

The sales increase was primarily due to global price increases in the current year period for our copper-based preservatives and higher demand for preservatives in some of our international markets.

The increases were offset, in part, by volume decreases for preservatives in Canada as high lumber prices, excess treated inventory from prior year and a return to normal consumer spending habits have tempered customer demand compared to extremely high levels of pandemic-fueled demand in the first half of 2021.

Foreign currency changes compared to the prior year period had a de minimis impact on sales in the current year period.

CMC net sales increased by $47.5 million, or 52 percent, compared to the prior year period due mainly to higher sales prices and volumes for carbon pitch, phthalic anhydride and carbon black feedstock along with higher sales prices for naphthalene in the current year period.

PC net sales increased by $4.0 million, or three percent, compared to the prior year period.

The sales increase was primarily due to global price increases in the current year period for our copper-based preservatives.

The increases were offset, in part, by volume decreases for preservatives, primarily within our European markets.

Volumes in the Americas decreased slightly from prior year record levels.

Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $2.7 million.

CMC net sales increased by $48.8 million, or 49 percent, compared to the prior year period due mainly to higher sales prices for carbon pitch, phthalic anhydride, carbon black feedstock and naphthalene in the current year period.

Foreign currency changes compared to the prior year period from our international markets had an unfavorable impact on sales in the current year period of $10.7 million.

Cost of sales as a percentage of net sales was 81 percent for the quarter ended March 31, 2022 compared to 78 percent in the prior year quarter.

Gross margin was unfavorably impacted in the current year period primarily by an increase in raw material costs, fuel costs and shipping costs along with a decrease in absorption due to lower utilization at some of our plants in the current year period as sales volumes and throughput at RUPS has declined compared to the prior year period.

Depreciation and amortization charges for the quarter ended March 31, 2022 were $1.9 million lower when compared to the prior year period mainly due to an increase in an asset retirement obligation in our European CMC operations in the first quarter of 2021 .

Gain on sale of assets for the quarter ended March 31, 2022 was $2.5 million and was related to the sale of our utility pole treating facility in Sweetwater, Tennessee while the gain on sale of assets for the quarter ended March 31, 2021 was $7.5 million and was 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, 2022 were $1.2 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 March 31, 2022 were $4.6 million higher when compared to the prior year period due mainly to an increase of $1.6 million for consulting and professional services, $1.4 million for employee benefit related expenses and $1.0 million for travel and entertainment expenses.

Interest expense for the quarter ended March 31, 2022 was consistent with the prior year period.

Income tax expense for the quarter ended March 31, 2022 was $9.7 million, an increase of $1.2 million when compared to the prior year quarter.

The increase in the current year period is due to an increase in the estimated annual effective income tax rate when compared to the prior year period.

The increase is attributable to the geographical mix of earnings as well as an increase in the interest expense deduction limitation due to a tax law change that went into effect January 1, 2022.

Cost of sales as a percentage of net sales was 83 percent for the quarter ended June 30, 2022 compared to 78 percent in the prior year quarter.

Gross margin was unfavorably impacted in the current year period primarily by an increase in raw material costs, fuel costs, shipping costs and other operating expenses across our businesses as a result of rising inflation in the current year period .

Depreciation and amortization charges for the quarter ended June 30, 2022 were consistent with the prior year period.

Impairment and restructuring charges for the prior year period were $0.9 million and included 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 June 30, 2022 were $2.3 million higher when compared to the prior year period due mainly to an increase of $1.2 million for travel and entertainment expenses and $0.9 million for consulting and professional services.

Interest expense for the quarter ended June 30, 2022 was $1.0 million higher when compared to the prior year period due to our higher average debt level and higher interest rates.

Income tax expense for the quarter ended June 30, 2022 decreased due to lower pre-tax earnings, partially offset by a higher estimated annual effective income tax rate of 34.3 percent when compared to the prior year period rate of 25.8 percent.

This increase in the estimated annual effective income tax rate is attributable to the geographical mix of earnings as well as an increase in the interest expense deduction limitation due to a tax law change that went into effect January 1, 2022.

Segment Results.

Segment adjusted EBITDA and adjusted EBITDA margin for the three months ended March 31, 2022 and 2021 is summarized by segment in the following table:

Three Months Ended March 31,

Segment adjusted EBITDA and adjusted EBITDA margin for the three months ended June 30, 2022 and 2021 is summarized by segment in the following table:

Three Months Ended June 30,

(Dollars in millions)

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Total Adjusted EBITDA margin

RUPS adjusted EBITDA increased by $1.2 million compared to the prior year period.

Adjusted EBITDA as a percentage of net sales increased to 6.5 percent from 6.1 percent in the prior year period and was positively impacted by improvements in our maintenance of way businesses as well as price increases, which offset higher costs for raw materials, freight and fuel, and favorable absorption as procurement volumes improved.

PC adjusted EBITDA decreased by $14.1 million compared to the prior year period.

Adjusted EBITDA as a percentage of net sales decreased to 13.6 percent from 23.7 percent in the prior year period.

The current year period was unfavorably impacted primarily by higher raw material costs, which were exacerbated by working through higher cost inventory in a current falling copper price environment, and decreased volumes, partly offset by global price increases for copper-based preservatives.

CMC adjusted EBITDA increased by $2.4 million compared to prior year period as a result of higher prices;

however, a djusted EBITDA as a percentage of net sales decreased to 14.1 percent from 18.6 percent as there was an insurance recovery in the prior year period .

Results of Operations – Comparison of Six Months Ended June 30, 2022 and 2021

Consolidated Results

Net sales for the six months ended June 30, 2022 and 2021 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 were flat compared to the prior year period.

Sales increased as a result of pricing increases across multiple markets, particularly crossties and utility poles, and volume increases in our railroad bridge services business.

These increases were offset by volume decreases in our utility pole business due to transitioning production from the Texas Electric Cooperatives’ Jasper, Texas plant to our Somerville, Texas plant.

In addition, 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.

Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $1.5 million, mainly from our Australian utility pole business.

PC net sales increased by $16.8 million or six percent compared to the prior year period.

The sales increase was primarily due to global price increases in the current year period for most preservatives in our portfolio of products.

The increases were offset, in part, by v olume decreases for preservatives, primarily within our European markets.

Volumes in the Americas decreased slightly from prior year record levels.

Foreign currency changes compared to the prior year period had an unfavorable impact on sales in the current year period of $3.6 million.

CMC net sales increased by $96.3 million or 50 percent compared to the prior year period due mainly to higher sales prices for carbon pitch, carbon black feedstock and naphthalene along with higher sales prices and volumes for phthalic anhydride in the current year period.

Foreign currency changes from our international markets had an unfavorable impact on sales in the current year period of $16.0 million.

Cost of sales as a percentage of net sales was 82 percent for the six months ended June 30, 2022 compared to 78 percent in the prior year period.

Depreciation and amortization charges for the six months ended June 30, 2022 were $2.4 million lower when compared to the prior year period due mainly to an increase in asset retirement obligations at our European CMC operations in the prior year period.

Gain on sale of assets for the six months ended June 30, 2022 was $2.5 million and was related to the sale of our utility pole treating facility in Sweetwater, Tennessee while the gain on sale of assets for the quarter ended June 30, 2021 was $7.8 million and was 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 $2.1 million and included demolition and other plant closure period costs related to the closure of our Denver, Colorado facility.

Selling, general and administrative expenses for the six months ended June 30, 2022 were $6.9 million higher when compared to the prior year period due mainly to an increase of $2.6 million for consulting and professional services, $2.3 million in travel and entertainment expenses and $1.2 million in employee benefit related expenses.

Interest expense for the six months ended June 30, 2022 was $0.6 million higher when compared to the prior year period due to our higher average debt level and higher interest rates.

Income tax expense for the six months ended June 30, 2022 decreased due to lower pre-tax earnings, partially offset by a higher estimated annual effective income tax rate of 34.3 percent when compared to the prior year period rate of 25.8 percent.

Segment Results.

Segment adjusted EBITDA and adjusted EBITDA margin for the six months ended June 30, 2022 and 2021 is summarized by segment in the following table:

Six Months Ended June 30,

(Dollars in millions)

Adjusted EBITDA:

Railroad and Utility Products and Services

Performance Chemicals

Carbon Materials and Chemicals

Corporate unallocated

Total Adjusted EBITDA

Adjusted EBITDA margin as a percentage of GAAP sales:

Railroad and Utility Products and Services

Performance Chemicals

Carbon Materials and Chemicals

Total Adjusted EBITDA margin

RUPS adjusted EBITDA decreased by $3.6 million compared to the prior year period.

Adjusted EBITDA as a percentage of net sales decreased to 6.3 percent from 8.5 percent in the prior year period and was unfavorably impacted in our domestic utility pole business by higher raw material, freight and fuel costs, as well as driver shortages and labor inefficiencies driven by the current labor shortage.

In addition, unfavorability in our railroad crosstie business was driven by higher raw material costs and lower absorption of fixed costs due to lower tie throughput as a result of decreased purchasing activity of untreated crossties by our Class I customers driven by the impact that higher lumber prices had on the hardwood market.

Adjusted EBITDA as a percentage of net sales decreased to 6.4 percent from 7.3 percent in the prior year period and was unfavorably impacted in our railroad and utility pole businesses by higher raw material, freight and fuel costs as a result of rising inflation in the current year period .

In addition, our domestic utility pole business has experienced higher operating costs as a result of driver shortages and labor inefficiencies driven by the current labor shortage.

Finally, travel expenses have also increased over the prior year period as we emerge from in-person restrictions related to the pandemic.

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Adjusted EBITDA as a percentage of net sales decreased to 14.4 percent from 23.1 percent in the prior year period.

The current year period was unfavorably impacted primarily by an increase in raw material costs, including scrap copper, net of gains realized from our copper-hedging program.

This was offset, in part, by global price increases in the current year period for our copper-based preservatives and higher demand for preservatives in some of our other international markets.

CMC adjusted EBITDA increased by $9.7 million compared to the prior year period.

Adjusted EBITDA as a percentage of net sales increased to 14.4 percent from 11.3 percent in the prior year period.

The current year period was favorably impacted by higher sales prices and volumes for carbon pitch, phthalic anhydride and carbon black feedstock along with higher sales prices for naphthalene .

These increases were offset, in part, by an increase in raw material costs and selling, general and administrative costs in the current year period.

CMC adjusted EBITDA increased by $12.2 million compared to the prior year period, however a djusted EBITDA as a percentage of net sales decreased to 14.3 percent from 15.1 percent in the prior year period.

The current year period was favorably impacted by higher sales prices for carbon pitch, carbon black feedstock and naphthalene along with higher sales prices and volumes for phthalic anhydride in the current year period.

Conversely, the prior year period margin was favorably impacted by an insurance recovery.

The following table reconciles net income to adjusted EBITDA on a consolidated basis as calculated by us for the periods indicated below:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in millions)

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Adjustments to arrive at adjusted EBITDA:

Impairment, restructuring and plant closure costs ( 1)

Impairment, restructuring and plant closure (benefits)

(Gain) on sale of assets

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(1) Includes costs associated with restructuring, sales and closures of certain RUPS and CMC facilities as described in Note 3 – “Plant Closures and Divestitures”.

Net cash used in operating activities for the three months ended March 31, 2022 was $8.0 million compared to net cash used in operating activities of $7.4 million in the prior year period as higher working capital usage of $0.5 million in the current year period was a result of an increase in accounts receivable consistent with our increase in sales and an increase in inventory due to increased levels and raw material costs offset, in part, by a corresponding increase in accounts payable.

Operating profit, excluding gain on sale of assets, was consistent with the prior year period.

Net cash used in investing activities for the three months ended March 31, 2022 was $22.0 million compared to net cash used in investing activities of $19.5 million in the prior year period.

Net cash provided by operating activities for the six months ended June 30, 2022 was $21.2 million compared to net cash provided by operating activities of $36.1 million in the prior year.

The decrease is consistent with the decrease in operating profit excluding non-cash items and higher working capital usage of $3.8 million in the current year period as a result of higher sales and raw material costs.

Net cash used in investing activities for the six months ended June 30, 2022 was $51.1 million compared to net cash used in investing activities of $55.8 million in the prior year period driven primarily by capital expenditures.

Capital expenditures for both periods include increased investment in growth projects, primarily in our crosstie business, such as the expansion of our RUPS facility in North Little Rock, Arkansas.

In addition, the current year period included $3.8 million of cash provided by the sale of our utility pole treating facility in Sweetwater, Tennessee while the prior year period included $4.7 million of cash provided by the sales of two previously decommissioned CMC plants.

Net cash provided by financing activities was $33.4 million for the three months ended March 31, 2022 and March 31, 2021.

The cash provided by financing activities in the three months ended March 31, 2022 reflected net borrowings of $45.4 million partially offset by repurchases of common stock and dividends paid of $12.2 million .

The cash provided by financing activities in the prior year period primarily reflected net borrowings of debt of $34.1 million.

Net cash provided by financing activities was $28.5 million for the six months ended June 30, 2022 compared to $29.0 million of net cash provided by financing activities in the prior year.

The cash provided by financing activities in the six months ended June 30, 2022 reflected net borrowings of $53.0 million partially offset by repurchases of common stock and dividends paid of $20.6 million as well as payments of debt issuance costs of $4.6 million .

The cash provided by financing activities in the prior year period primarily reflected net borrowings of $29.1 million.

Liquidity and Capital Resources

The Credit Facility includes a $600.0 million senior secured revolving credit facility and a $100.0 million secured term loan facility as described in Note 14 “Debt.” As of March 31, 2022, the secured term loan has been fully repaid.

Our Credit Facility is described in Note 14 “Debt.”

Restrictions on Dividends to Koppers Holdings

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and its subsidiaries to generate the funds necessary to meet its financial obligations, including the payment of any declared dividend of Koppers Holdings.

The Credit Facility prohibits Koppers Inc.

from making dividend payments to Koppers Holdings unless (1) such dividend payments are permitted by the indenture governing the “2025 Notes”, (2) no event of default or potential default has occurred or is continuing under our Credit Facility, and (3) we are in pro forma compliance with our fixed charge coverage ratio covenant after giving effect to such dividend.

The Credit Facility permits Koppers Inc.

to make dividend payments to Koppers Holdings to meet such financial obligations if certain conditions are met, including, among other permitted dividend payments, the ability to fund the payment of regularly scheduled dividends on and repurchases of, Koppers Holdings common stock, in an aggregate amount per year not to exceed the greater of $50 .0 million in any fiscal year, with unused amounts in any fiscal year being carried over to the succeeding fiscal year, and 6.0% of market capitalization.

The indenture governing the 2025 Notes restricts Koppers Inc.’s ability to finance our payment of dividends if a default has occurred or would result from such financing, Koppers Inc., or a restricted subsidiary of Koppers Inc.

which is not a guarantor under the indenture, is not able to incur additional indebtedness (as defined in the indenture), and the sum of all restricted payments (as defined in the indenture) have exceeded the permitted amount (which we refer to as the “basket”) at such point in time.

At March 31, 2022, the basket totaled $281.2 million.

At June 30, 2022, the basket totaled $287.3 million.

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

In addition, certain required coverage ratios in the Credit Facility may restrict the ability of Koppers Inc.

to pay dividends.

The following table summarizes our estimated liquidity as of March 31, 2022 (dollars in millions) :

Cash and cash equivalents ( 1)

Amount available under Credit Facility

Total estimated liquidity

Cash includes approximately $46.2 million held by foreign subsidiaries and excludes approximately $2.3 million of restricted cash.

Our liquidity was $348.4 million as of December 31, 2021.

As of June 30, 2022, the maximum amount available under the Credit Facility was $317.2 million, considering restrictions from debt covenants.

The maximum amount available under the Credit Facility is increased by the amount of cash held by certain subsidiaries as defined by the Credit Facility.

At December 31, 2021, the maximum amount available under the previous credit agreement which contained different covenants was $305.2 million.

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, dividends and share repurchases.

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

In addition, we continually monitor debt and capital markets.

We may, from time to time, pursue one or more transactions to refinance all or a portion of the 2025 Notes, which may include, among other things, the purchase of 2025 Notes in the open market.

We would expect to cancel any 2025 Notes purchased.

Capital expenditures in 2022, excluding acquisitions, if any, are expected to total approximately $95 million and are expected to be funded by cash from operations.

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Debt will fluctuate throughout any operating period based upon the timing of receipts from customers and payments to vendors.

As of March 31, 2022 and December 31, 2021, approximately 80 percent and 75 percent of accounts payable was current, approximately 15 percent and 20 percent was 1-30 days past due and approximately five percent was past due greater than 30 days, respectively.

As of June 30, 2022 and June 30, 2021, approximately 80 percent of accounts payable was current at both dates, approximately 15 percent and ten percent was 1-30 days past due and approximately five and ten percent was greater than 30 days past due, respectively.

Debt Covenants

The covenants under the Credit Facility may affect availability of the facility or restrict the ability of Koppers Inc.

to pay dividends, including the following financial ratios:

The fixed charge coverage ratio, calculated as of the end of each fiscal quarter for the four fiscal quarters then ended, is not permitted to be less than 1.10.

The fixed charge coverage ratio as of March 31, 2022 was 1.31.

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 March 31, 2022 was 1.43.

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 4.75.

The total leverage ratio as of March 31, 2022 was 3.57.

The covenants under the Credit Facility, including the following financial covenants, may affect availability of the facility:

The total net leverage ratio, calculated as of the last day of each fiscal quarter (commencing with the fiscal quarter ending September 30, 2022), is not permitted to exceed 5.0.

The total net leverage ratio as of June 30, 2022 was 3.61.

The cash interest coverage ratio, calculated as of the last day of each fiscal quarter (commencing with the fiscal quarter ending September 30, 2022), is not permitted to be less than 2.0.

The cash interest coverage ratio as of June 30, 2022 was 5.56.

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

Our continued ability to meet these financial ratios can be affected by events beyond our control;

however, excluding possible acquisitions, we currently expect that our net cash flows from operating activities and funds available from our Credit Facility will be sufficient to provide for our working capital needs and capital spending requirements over the next twelve months.

Our continued ability to meet these financial covenants can be affected by events beyond our control;

however, we currently expect that our net cash flows from operating activities and funds available from our Credit Facility will be sufficient to provide for our working capital needs and capital spending requirements over the next twelve months.

Legal Matters

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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