Koppers Holdings Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report and any documents incorporated herein by reference contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and may include, but are not limited to, statements about sales levels, acquisitions, restructuring, declines in the value of Koppers assets and the effect of any related impairment charges, profitability and anticipated expenses and cash outflows. All forward-looking statements involve risks and uncertainties. All statements contained herein that are not clearly historical in nature are forward-looking, and words such as “believe,” “anticipate,” “expect,” “estimate,” “may,” “will,” “should,” “continue,” “plans,” “potential,” “intends,” “likely,” or other similar words or phrases are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or documents filed with the Securities and Exchange Commission, or in Koppers communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, regarding future dividends, expectations with respect to sales, earnings, cash flows, operating efficiencies, restructurings, product introduction or expansion, the benefits of acquisitions and divestitures, or other matters as well as financings and debt reduction, are subject to known and unknown risks, uncertainties and contingencies. Many of these risks, uncertainties and contingencies are beyond our control, and may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Factors that might affect such forward-looking statements, include, among other things, the impact of changes in commodity prices, such as oil and copper, on product margins; general economic and business conditions; disruption in the U.S. and global financial markets; potential difficulties in protecting our intellectual property; the ratings on our debt and our ability to repay or refinance our outstanding indebtedness as it matures; our ability to operate within the limits of our debt covenants; potential impairment of our goodwill and/or long-lived assets; demand for Koppers goods and services; competitive conditions; interest rate and foreign currency rate fluctuations; availability and costs of key raw materials, such as coal tar, and unfavorable resolution of claims against us, as well as those discussed more fully elsewhere in this report and in documents filed with the Securities and Exchange Commission by Koppers, particularly our latest annual report on Form 10-K and subsequent filings. We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report and the documents incorporated by reference herein may not in fact occur. Any forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and related notes included in Item 1 of this Part I as well as the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021. Overview We are a leading integrated global provider of treated wood products, wood preservation chemicals and carbon compounds. Our products and services are used in a variety of niche applications in a diverse range of end-markets, including the railroad, specialty chemical, utility, residential lumber, agriculture, aluminum, steel, rubber and construction industries. We serve our customers through a comprehensive global manufacturing and distribution network, with manufacturing capabilities in North America, South America, Australasia and Europe. We operate three principal businesses: RUPS, PC and CMC. Through our RUPS business, we believe that we are the largest supplier of wood crossties to the Class I railroads in North America. Our other treated wood products include utility poles for the electric, telephone, and broadband utility industries in the United States and Australia and construction pilings in the U.S. We also provide rail joint bar products as well as various services to the railroad industry in North America. Through our PC business, we believe that we are the global leader in developing, manufacturing and marketing wood preservation chemicals and wood treatment technologies for use in the pressure treating of lumber for residential, industrial and agricultural applications. Our CMC business processes coal tar into a variety of products, including creosote, carbon pitch, carbon black feedstock, naphthalene and phthalic anhydride, which are intermediate materials necessary in the pressure treatment of wood, and the production of aluminum, carbon black, high-strength concrete, plasticizers and specialty chemicals, respectively . 22 Non-GAAP Financial Measures We utilize certain financial measures that are not in accordance with U.S. generally accepted accounting principles (U.S. GAAP) to analyze and manage the performance of our business. 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 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. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP basis financial measures and should be read in conjunction with the relevant GAAP financial measures. Other companies in a similar industry may define or calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, these non-GAAP financial measures should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. 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 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. Adjusted EBITDA is the primary measure of profitability we use to evaluate our businesses. Refer to Note 9 – “Segment Information” for reconciliations from adjusted EBITDA to net income on a consolidated basis. Outlook Trend Overview Our businesses and results of operations are affected by various competitive and other factors including (i) the impact of global economic conditions on demand for our products, including the impact of imported products from competitors in certain regions where we operate; (ii) raw material pricing and availability, in particular the cost and availability of hardwood lumber for railroad crossties, softwood lumber for utility poles, scrap copper prices, and the cost and amount of coal tar available in global markets, which is negatively affected by reductions in blast furnace steel production and currently by the Russian invasion of Ukraine; (iii) volatility in oil prices, which impacts the cost of coal tar and certain other raw materials, as well as selling prices and margins for certain of our products including carbon black feedstock, phthalic anhydride, and naphthalene; (iv) competitive conditions in global carbon pitch markets; and (v) changes in foreign exchange rates. T he Infrastructure Investment and Jobs Act, which was signed into law on November 15, 2021, will usher in more than a trillion dollars in new spending across eight years to improve the nation's roads, bridges, rail, internet, water systems and more. As a global leader in water- and oil-borne preservatives serving many end markets with our wood-treatment technologies, we believe we are well-positioned to benefit from the new legislation. Our products are used in multiple infrastructure applications, including utility poles, railroad ties, highway and construction concrete, steel, aluminum, and wood for construction projects. Railroad and Utility Products and Services Historically, North American demand for crossties had been in the range of 22 million to 25 million crossties annually. However, the crosstie replacement market has been significantly lower in recent years. According to the Railway Tie Association (“RTA”), the estimated total crosstie installations in 2021 were approximately 18.3 million, of which 14.2 million were for Class I railroads. Throughout the pandemic, some sawmills were operating at 50 percent or less of their production capacity. Sawmills provide raw materials to several industries beyond the wood crosstie market and as demand and pricing for construction lumber increased significantly throughout 2021 and continuing into 2022, overall crosstie production output thus far has been lower than forecasted. Crosstie prices increased significantly as a result of limited supply and railroad customers are deferring their purchases. 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. 23 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. 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. is approximately 150 million and nearly half of this total are 40 years old. Industry demand has historically been in the range of two million to three million poles annually. On an overall basis, we believe that the rate at which utilities purchase utility poles will grow as they continue replacement programs within their service territories. As a whole, the key factors that drive growth in the utility pole market include growing global energy consumption as well as expansion of the global telecommunication industry. Generally, utilities need to maintain their infrastructure to avoid interruptions in service due to extreme weather events that are occurring more frequently. At the same time, the need for digital connectivity remains strong given that portions of the population are continuing to work remotely. As long as there are not any extended supply chain disruptions , we anticipate that 2022 demand for pole replacements will be relatively stable to slightly higher, as the overall industry is trending toward expanded and upgraded transmission networks. 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, 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 . Longer term, we are evaluating opportunities to potentially expand our market presence in the United States as well as certain overseas markets. We believe there remains an overall need for sustained investment in infrastructure and capacity expansion and with our vertical integration capabilities in wood treatment and strong customer relationships, we will ultimately benefit from increased demand. As part of optimizing our business, we continue to evaluate a number of opportunities to improve efficiencies in our operational processes, people and facilities. With our 14 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 January 2022, we began curtailing operations at our Sweetwater, Tennessee plant. We sold the plant in March 2022 and recorded a gain of $2.5 million on the sale. During 2021, we exited the Texas Electric Cooperatives’ Jasper, Texas facility 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. 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 would be primarily funded through proceeds from the sale of non-core assets, including the Denver facility. In October 2021, we sold our closed Denver, Colorado crosstie treating facility and recorded a gain on sale of $23.4 million. In addition, as part of the sales agreement, we may receive additional contingent post-closing payments secured by a guaranty from the buyer after applicable redevelopment milestones are reached. At this time, we are unable to estimate how much, if any, of these additional funds will ultimately be paid to us. Performance Chemicals As most of the products sold by PC are copper-based products, changes in the price and availability of copper can have a significant impact on product pricing and margins. We attempt to moderate the variability in copper pricing over time by entering into hedging transactions for the majority of our copper needs, which primarily range from six months up to 36 months. These hedges typically match expected customer purchases and from time to time, we enter into forward transactions based upon long-term forecasted needs of copper. 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 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. 24 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 The primary products produced by CMC are creosote, which is a registered pesticide in the United States and used primarily in the pressure treatment of railroad crossties, and carbon pitch, which is sold primarily to the aluminum industry for the production of carbon anodes used in the smelting of aluminum. We have realigned capacity in our CMC plants in North America and Europe over the past several years to levels required to meet creosote demand in North America for the treatment of railroad crossties. The CMC business currently supplies our North American RUPS business with its creosote requirements. 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 been reduced. 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 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), 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 Our quarterly operating results fluctuate due to a variety of factors that are outside of our control, including inclement weather conditions, which in the past have affected operating results. Operations at some of our facilities have at times been reduced during the winter months. Moreover, demand for some of our products declines during periods of inclement weather. As a result of the foregoing, we anticipate that we may experience material fluctuations in quarterly operating results. Historically, our operating results have been significantly lower in the first and fourth calendar quarters as compared to the second and third calendar quarters. 25 Results of Operations – Comparison of Three Months Ended June 30, 2022 and 2021 Consolidated Results 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, 2022 2021 Net Change (Dollars in millions) Railroad and Utility Products and Services $ 204.2 $ 195.5 4 % Performance Chemicals 149.6 145.6 3 % Carbon Materials and Chemicals 148.7 99.9 49 % $ 502.5 $ 441.0 14 % 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 $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 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. 26 Segment Results. 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) 2022 2021 % Change Adjusted EBITDA: Railroad and Utility Products and Services $ 13.2 $ 12.0 10 % Performance Chemicals 20.4 34.5 -41 % Carbon Materials and Chemicals 21.0 18.6 13 % Corporate unallocated 0.0 0.5 -100 % Total Adjusted EBITDA $ 54.6 $ 65.6 -17 % Adjusted EBITDA margin as a percentage of GAAP sales: Railroad and Utility Products and Services 6.5 % 6.1 % 5 % Performance Chemicals 13.6 % 23.7 % -42 % Carbon Materials and Chemicals 14.1 % 18.6 % -24 % Total Adjusted EBITDA margin 10.9 % 14.9 % -27 % 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 . 27 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, 2022 2021 Net Change (Dollars in millions) Railroad and Utility Products and Services $ 387.6 $ 387.4 0 % Performance Chemicals 286.0 269.2 6 % Carbon Materials and Chemicals 288.2 191.9 50 % $ 961.8 $ 848.5 13 % 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. 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 inflationary pressures in the current 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. 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. 28 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) 2022 2021 % Change Adjusted EBITDA: Railroad and Utility Products and Services $ 24.8 $ 28.4 -13 % Performance Chemicals 41.2 62.3 -34 % Carbon Materials and Chemicals 41.2 29.0 42 % Corporate unallocated 0.0 1.0 -100 % Total Adjusted EBITDA $ 107.2 $ 120.7 -11 % Adjusted EBITDA margin as a percentage of GAAP sales: Railroad and Utility Products and Services 6.4 % 7.3 % -13 % Performance Chemicals 14.4 % 23.1 % -38 % Carbon Materials and Chemicals 14.3 % 15.1 % -5 % Total Adjusted EBITDA margin 11.1 % 14.2 % -22 % RUPS adjusted EBITDA decreased by $3.6 million compared to the prior year period. Adjusted EBITDA as a percentage of net sales decreased to 6.4 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. These unfavorable factors were partially offset by price increases implemented across our businesses. PC adjusted EBITDA decreased by $21.1 million compared to the prior year period. 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 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 $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. 29 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 June 30, Six Months Ended June 30, (Dollars in millions) 2022 2021 2022 2021 Net income $ 11.6 $ 26.9 $ 30.4 $ 52.7 Interest expense 11.1 10.1 20.8 20.3 Depreciation and amortization 13.4 13.9 27.6 30.0 Income tax provision 6.8 9.1 16.5 17.6 Discontinued operations 0.0 (1.0 ) 0.5 (0.6 ) Sub-total 42.9 59.0 95.8 120.0 Adjustments to arrive at adjusted EBITDA: Impairment, restructuring and plant closure (benefits) costs ( 1) (0.2 ) 1.6 0.0 5.0 (Gain) on sale of assets 0.0 (0.3 ) (2.5 ) (7.8 ) LIFO expense 5.1 4.3 6.8 5.3 Mark-to-market commodity hedging losses (gains) 6.8 1.0 7.1 (1.8 ) Total adjustments 11.7 6.6 11.4 0.7 Adjusted EBITDA $ 54.6 $ 65.6 $ 107.2 $ 120.7 (1) Includes costs associated with restructuring, sales and closures of certain RUPS and CMC facilities as described in Note 3 – “Plant Closures and Divestitures”. Cash Flow 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. 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 Our Credit Facility is described in Note 14 “Debt.” Restrictions on Dividends to Koppers Holdings Koppers Holdings depends on the dividends from the earnings of Koppers Inc. and its subsidiaries to generate the funds necessary to meet its financial obligations, including the payment of any declared dividend of Koppers Holdings. The Credit Facility 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 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. 30 Liquidity 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. We anticipate that our liquidity will continue to be adequate to fund our cash requirements for the next twelve months. We manage our working capital to increase our flexibility to pay down debt. Debt will fluctuate throughout any operating period based upon the timing of receipts from customers and payments to vendors. 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, 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 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 The information set forth in Note 18 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference. Recently Issued Accounting Guidance The information set forth in Note 2 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference. Critical Accounting Policies There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. Environmental and Other Matters The information set forth in Note 18 to the Condensed Consolidated Financial Statements of Koppers Holdings Inc. included in Item 1 of this Part I is incorporated herein by reference. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There are no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2021. 31