What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-24 · 237 added, 339 removed, 200 unchanged (74% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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:

Railroad and Utility Products and Services (“RUPS”), Performance Chemicals (“PC”) and Carbon Materials and Chemicals (“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, the production of aluminum, the production of carbon black, the production of high-strength concrete, and the production of plasticizers and specialty chemicals, respectively.

See description of the segments in “Item 1 – Business”.

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 and with other corporations in similar industries.

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.

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 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.

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 and amortization along with other adjustments.

These 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 net income to adjusted EBITDA on a consolidated basis.

Trend Overview

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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, reduced spending and other factors.

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

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

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 transport critical goods, provide power and connectivity to homes and businesses, and keep our infrastructure running reliably.

Our focus during this period has been on the following key priorities:

Protecting the health and safety of employees, customers and supply chain partners through deployment of new safety measures, including frequent communication and guidance to all employees on effective hygiene and disinfection, social distancing, limiting access to facilities, remote work when possible and use of face masks.

Providing critical products and ongoing support to customers by communicating frequently, understanding their changing business needs and ensuring key raw materials are multi-sourced when possible.

Maintaining adequate liquidity and financial flexibility by launching several cost-reduction initiatives and contingency plans to raise and conserve cash in all aspects of our operations and utilizing available federal relief such as the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in the United States.

Our consolidated financial statements and discussion and analysis of financial condition and results of operations reflect estimates and assumptions made by us as of December 31, 2021, including those related to COVID-19.

Events and changes in circumstances arising after December 31, 2021, including those resulting from the impacts of COVID- 19, will be reflected in our estimates for future periods.

Koppers Holdings Inc.

2021 Annual Report

The full extent to which COVID-19 will adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the ultimate severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects.

Since March 2020, some of our facilities have temporarily curtailed operations as a result of government restrictions or as a result of our proactive measures to limit the potential spread of COVID-19 among our employees.

Our business will continue to be impacted by such restrictions and protective measures for the foreseeable future.

Our consolidated financial statements and discussion and analysis of financial condition and results of operations reflect estimates and assumptions made by us as of December 31, 2020.

Events and changes in circumstances arising after December 31, 2020, including those resulting from the impacts of COVID-19, will be reflected in our estimates for future periods.

Refer to the Liquidity section of Management’s Discussion and Analysis for the impact of the global pandemic on our liquidity.

Railroad and Utility Products and Services

We provide our customers with treated and untreated wood products, rail joint bars and services primarily for the railroad markets in the United States and Canada.

We also operate a railroad services business that conducts engineering, design, repair and inspection services primarily for railroad bridges in the U.S.

In addition, we supply treated utility poles for the utility sector in the United States and Australia.

The primary end-markets for RUPS is the North American railroad industry, which has an installed base of approximately 450 million wood crossties, and the utility industry which utilizes wooden distribution and transmission poles.

Both crossties and utility poles require periodic replacement.

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 reported total crosstie installations in 2020 were approximately 18 million, of which 14 million were for Class I railroads.

T hroughout 2020, freight-rail traffic continued to decline, and passenger railroads and transit systems suspended or canceled operations due to lower ridership from stay-at-home restrictions.

The reduced activity prompted larger track maintenance windows to be available and, as a result, the railroad industry is managing to offset lower volumes with increased productivity as certain railroads are taking advantage of reduced track time to increase maintenance on their infrastructure.

Given the continuing uncertainties related to COVID-19, the RTA is forecasting modest increases of 2.7 percent in 2021 and 3.6 percent in 2022, primarily from the commercial market while Class I volumes are expected to remain at relatively similar demand levels.

For distribution poles, nearly half of the installed base is over 40 years old and 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 poles market include growing global energy consumption as well as expansion of the global telecommunication industry.

Now more than ever, 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.

Longer term, we are evaluating opportunities to potentially expand our market presence in the U.S.

as well as certain overseas markets.

For the past several years, the major companies in the rail industry substantially reduced both operating and capital spending from peak spending levels, which had a negative impact on sales of various products and services that we provide to that industry.

We currently supply all seven of the North American Class I railroads and have long-standing relationships with these customers.

Approximately 70 percent of our North American sales are under long-term contracts and we believe that we are positioned to maintain or grow our current market position.

According to the American Association of Railroads (“AAR”), railroads began 2020 with uncertainty due to weakness in the manufacturing sector and lower port activity caused by trade disputes.

In the early months of 2020, railroad traffic reported near-record declines, but ultimately rebounded to close to pre-pandemic levels by the end of the year, sparked by sharply higher grain and intermodal shipments along with the reopening of auto assembly plants.

According to the Railway Tie Association (“RTA”), the estimated total crosstie installations in 2021 were approximately 18.8 million, of which 14.4 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 pallet and flooring lumber increased significantly throughout 2021, overall crosstie production output 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, including those related to COVID-19, the RTA is forecasting a modest increase of 2.2 percent, or 19.2 million crossties, in 2022, primarily from the commercial market while Class I volumes are expected to remain at relatively similar demand levels.

According to the American Association of Railroads (“AAR”), rail traffic in 2021 was substantially higher than in 2020 for most categories.

Coal carloads were considerably higher than the prior year due to sharply higher natural gas prices, while carloads of motor vehicles suffered as microchip shortages forced automakers to cut output.

For intermodal, a record-setting first-half of 2021 gave way to a lower second half as supply chain challenges persisted.

Even so, 2021 ranked as the second-best U.S.

intermodal year, behind only 2018.

In 2021, total U.S.

carload traffic decreased 12.9 percent from the prior year, while intermodal units declined by 1.8 percent.

carload traffic increased 6.6 percent from the prior year, while intermodal units strengthened by 4.9 percent.

The combined U.S.

traffic for carloads and intermodal units was lower by 7.2 percent than 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.

From a long-term perspective, we believe there remains an overall need for sustained investment in infrastructure and capacity expansion.

We believe that with our vertical integration capabilities in wood treatment and strong customer relationships, we will ultimately benefit from increased demand.

In terms of raw material s , we expect the availability of pole supply to remain 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.

We have a nationwide wood procurement team that maintains close working relationships with a network of sawmills.

We procure untreated crossties, either on behalf of our customers, or for our own inventory for future treating.

We also procure switch ties and various other types of lumber used for railroad bridges and crossings.

Untreated crossties go through a six- to nine-month air seasoning process before they are ready to be pressure treated.

After the air seasoning process is complete, the crossties are pressure treated using creosote-only treatment or a combined creosote and borate treatment.

During any given year, there is a seasonal effect in the winter and spring months on our crosstie business depending on weather conditions for harvesting lumber and crosstie installation.

W hile forestry has generally been deemed essential during the COVID-19 outbreak and tie demand has remained consistent, sawmills are being hampered by low demand in other key markets such as wood fibers used in palettes or shipping containers or mats for the oil and gas industry.

So far to date, we have not experienced a noticeable impact as sawmills are continuing to produce poles and crossties to maintain their operations and cash flow.

Consistent with typical seasonality, the RTA reports that the current availability of logs is slightly below the ideal rate, as is the outlook for log availability over the next six to 12 months.

Strategic Initiatives and Integration Synergies

traffic for carloads and intermodal units was higher by 5.7 percent than the prior 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 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.

Now more than ever, utilities need to maintain their infrastructure to avoid interruptions in service as portions of the population continue to work remotely due to the COVID-19 pandemic.

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, we expect the availability of pole supply 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.

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.

For the overall segment, a positive development involves t he Infrastructure Investment and Jobs Act, which was signed into law on November 15, 2021, and 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 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.

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 16 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 June 2020, we announced the closure of our Denver, Colorado facility and, as such, in the second quarter of 2020 we recorded charges of $5.8 million for asset retirement obligations, fixed asset write-offs and severance.

Concurrent with the decision to close the Denver facility, we announced our plan to modernize and upgrade parts of our treating network, specifically at our facility in North Little Rock, Arkansas, which will be primarily funded through proceeds from the sale of non-core assets, which includes the Denver facility.

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.

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 we 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

The largest geographic market for wood treating chemicals sold by our PC business is in North America, and the largest application for our products is the residential remodeling market.

We also have a market presence in Europe, South America, Australia, New Zealand and Africa.

We believe that PC is the largest global manufacturer and supplier of water-based wood preservatives and wood specialty additives to treaters that supply pressure treated wood products to large retailers and independent lumber dealers.

These retailers and dealers, in turn, serve the residential, agricultural and industrial pressure-treated wood market.

Our primary products are copper-based wood preservatives and fire-retardant chemicals (“FlamePro®”).

Our copper-based wood preservatives include micronized copper azole (“MicroPro®”) and micronized pigments (“MicroShades®”).

Applications for these products include decking, fencing, utility poles, construction lumber and other outdoor structures.

In North America, we are vertically integrated due to our manufacturing capabilities for copper compounds for our copper-based wood preservatives.

We believe our vertical integration is part of our proprietary processes and reflects an important competitive advantage.

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 receive hedge accounting treatment.

From time to time, we enter into forward transactions based upon long-term forecasted needs of copper.

These forward positions are typically marked to market.

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

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

According to the National Association of Realtors® (“NAR”), total existing-home sales grew in December for the fourth consecutive month.

According to the NAR, total existing home sales increased 0.7 percent from November, and up 5.6 percent from a year ago.

The increased buying activity is attributed to record-low interest rates and higher demand for existing homes, which includes buyers of vacation homes given the flexibility to work remotely.

For 2020 as a whole, total home sales performed at their highest levels since 2006 and the momentum is expected to carry into 2021, with more buyers expected to enter the market.

Koppers Holdings Inc.

2020 Annual Report

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, there was 3.5 percent year-over-year growth in 2020 home renovation and repair expenditures.

The LIRA projects annual growth in renovation and repair spending of 3.8 percent by year-end 2021 .

The remodeling market continues to benefit from a strong housing market – including accelerating growth in homebuilding, sales and home equity.

In addition to routine replacement and repair projects, homeowners are likely to pursue more and larger discretionary home improvements this year as the broader economy recovers.

The Conference Board Consumer Confidence Index® improved moderately in January, after decreasing in December.

The Index now stands at 89.3, up from 87.1 in December.

In addition, consumers’ expectations regarding the economy and jobs showed improvement and the percent of consumers who said they intend to purchase a home in the next six months increased, suggesting that the pace of home sales should remain robust in early 2021.

D uring the pandemic, there has been a shift with more individuals spending more time in their homes, and as a result, big-box retailers are continuing to report strong demand for home improvement projects.

Consequently, we are benefiting from higher sales volumes of our water-borne treatment solutions used in residential treated wood products.

In the U.S., we expect that lumber treaters will continue working to fill the demand backlog and retailers will continue replenishing their inventory levels during 2021.

Although the market data and projections for home improvements are continually changing, w e are anticipating continued strong demand for residential treated wood in North America, primarily in the U.S.

In looking at residential renovation markets, businesses are indicating a continued positive outlook, at least through mid-2021.

In addition, the housing industry reported an increase in the number of buyers who are actively pursuing the purchase of a new or existing home, which supports a continued favorable outlook.

As homeowners are focusing on the importance of their homes in a work-life environment and with interest rates at historically low levels, we expect the pace to continue into 2021.

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 reached peak levels in mid-2021, boosted by pent-up demand as growth accelerated when pandemic lockdowns were eased and the market faced tight supplies.

In 2022, projections for 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.

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

According to the National Association of Realtors® (“NAR”), total existing-home sales increased 8.5 percent in 2021 compared with the prior year, which is the highest annual level since 2006 .

The NAR reported, however, total existing home sales in December decreased 4.6 percent from November, and were down 7.1 percent from a year ago.

While December sales were softer, the slowdown was more a sign of supply constraints than an indication of a weakened demand for housing.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, there was 9.4 percent year-over-year growth in home renovation and repair expenditures in the fourth quarter of 2021.

The LIRA projects annual growth in renovation and repair spending of 17.3 percent by the third quarter of 2022 .

While annual improvement and repair spending is projected to reach $430 billion by the second half of 2022, several headwinds, such as rising costs of labor and construction materials, difficulty retaining contractors, and rising interest rates, may temper growth expectations.

The Conference Board Consumer Confidence Index® increased to 115.2 in December, then declined slightly to 113.8 in January 2022.

Consumer confidence moderated somewhat in January, following gains in the final three months of 2021, suggesting the economy finished the year on solid footing;

however, the expectations related to near-term growth prospects reflect some moderation during the first quarter of 2022.

Although the market data and projections for home improvements are continually changing, w e anticipate ongoing demand for residential treated wood and in looking at residential renovation markets, businesses are indicating a continued positive outlook.

While a global pandemic, an inflationary environment and supply chain delays constitute potential risks, consumers are indicating their continued plans to purchase homes, automobiles, and major appliances over the next six months.

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 reduced 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.

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.

On September 30, 2020, we sold KJCC to Fangda Carbon New Material Co., Ltd and C-Chem Co., Ltd., a subsidiary of Nippon Steel Chemical & Material Co., Ltd.

KJCC was located in Pizhou, Jiangsu Province, China and was a 75 percent-owned coal tar distillation company which was part of our CMC segment.

The sales price was $107.0 million, subject to adjustments for cash, debt and working capital as defined in the sale and purchase agreement.

The pre-tax gain on the sale of KJCC was $44.1 million and the after-tax gain on the sale was $35.8 million.

The estimated final net cash proceeds to Koppers will total $65.2 million, after payment for Chinese capital gain taxes, transaction costs and estimated working capital adjustments.

In the third quarter of 2019, we ceased remaining production activities at our Follansbee, West Virginia facility and, i n February 2021, we completed the sale of the facility.

As a result of this action and other previously disclosed initiatives to reduce capacity in our CMC business, we expect additional restructuring and related charges to earnings of approximately $2 million to $5 million through 2021.

The overall remaining future cash requirements for CMC plant closures still in progress are estimated to be approximately $10 million through 2021.

While the sale of carbon pitch remains a significant portion of our sales volume, the reduction of aluminum smelting capacity in the United States, Australia and Western Europe has led to sharply lower demand for carbon pitch over the past several years.

Accordingly, we have experienced significantly lower sales volumes due to the reduction in aluminum production in parts of the world where the majority of our production facilities are located.

However, beginning in 2018, aluminum production in the United States increased to some extent as tariffs were imposed on certain imported steel and aluminum products, which has stimulated restarts of previously idled capacity.

This development has resulted in additional demand for carbon pitch in the United States that can likely only be sustained through a continuation of current trade policy.

The availability of coal tar, the primary raw material for our CMC business, is linked to levels of metallurgical coke production.

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.

For the past decade, the coal tar distillation industry has operated in an excess capacity mode, which further increased the competition for a limited amount of coal tar in North America.

Over the past five years we have consolidated our operating footprint and significantly lowered production levels at the same time that we added distribution assets to move finished products from Europe to the United States more efficiently.

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

For the external markets served by our CMC business, we expect that North America and Europe will continue to be negatively impacted in 2021 by the COVID-19 pandemic.

We have seen declines in industrial production markets which resulted in lower demand for our products.

Carbon pitch and phthalic anhydride markets have softened due to declines in demand as manufacturing activity in North America and Europe significantly slowed.

In addition , end market pricing for some products has been under pressure in certain regions due to the significant fall in worldwide oil prices .

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

In North America, the pullback in steel production has led to lower domestic coal tar availability and an increase in raw material imports to North America at higher prices, while markets in Europe and Australia remain relatively steady.

Overall, the cost of coal tar is decreasing in line with end markets but lagging by approximately three months.

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.

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 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), global light vehicle production in 2021 is projected to be at 75.5 million units, a 1.2 percent improvement from the prior year period.

The industry demand levels will likely continue to be constrained as the semiconductor supply chain remains challenged.

For 2022, IHS forecasts a rebound in light vehicle production of 9.0 percent, to 82.3 million units.

Koppers Holdings Inc.

2021 Annual Report

Results of Operations – Comparison of Years Ended December 31, 2021 and December 31, 2020

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Carbon Materials and Chemicals

RUPS net sales for the year ended December 31, 2020 increased by $25.6 million, or three percent, compared to the prior year.

The sales increase was primarily due to volume increases in the Class I crosstie market as well as the domestic and Australian utility pole markets, along with price increases in the domestic utility pole market in the current year.

Sales of crossties increased by $16.8 million in the current year.

These increases were offset, in part, by volume decreases in the commercial crosstie market and our maintenance-of-way businesses in the current year.

PC net sales for the year ended December 31, 2020 increased by $78.0 million, or 17 percent, compared to the prior year.

The sales increase was due primarily to higher demand for copper-based preservatives in North America due to new customer additions and higher organic volumes driven by increased home repair and remodeling activities during the pandemic, along with an increase in sales volumes in our international markets resulting from pent-up demand due to several months of restrictions associated with the pandemic.

These increases were partially offset by an unfavorable impact from foreign currency translation in the current year period of $5.1 million.

CMC net sales for the year ended December 31, 2020 decreased by $71.5 million, or 16 percent, compared to the prior year due mainly to lower sales prices for carbon pitch, carbon black feedstock, phthalic anhydride and naphthalene as a result of depressed oil prices in the current year period.

Other contributing factors include lower sales volumes of carbon pitch in North America and naphthalene in Europe and Australia as a result of the economic conditions.

These decreases were offset, in part, by volume increases of carbon pitch and carbon black feedstock in Australia.

RUPS net sales for the year ended December 31, 2021 decreased by $29.2 million, or four percent, compared to the prior year.

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

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

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

Foreign currency changes compared to the prior year period 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 for the year ended December 31, 2021 decreased by $23.0 million, or four percent, compared to the prior year.

The sales decrease was primarily due to volume decreases for preservatives in North America as high lumber prices and a return to normal consumer spending habits have tempered customer demand compared to extremely high levels of pandemic-fueled demand in 2020.

The decreases 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 benefited 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 $7.2 million.

CMC net sales for the year ended December 31, 2021 increased by $61.7 million, or 16 percent, compared to the prior year due mainly to higher sales prices for carbon pitch, distillates and chemicals in the current year.

Foreign currency translation also had a favorable impact on sales in the current year of $11.3 million, mainly from our Australian and European markets.

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

Cost of sales as a percentage of net sales was 80 percent for the year ended December 31, 2021, compared to 78 percent in the prior year .

Gross margin at PC was favorably impacted by higher sales volumes, a favorable sales mix and better absorption on higher production volumes.

Improved margins at RUPS were due to a favorable sales mix in our Class I crosstie market and higher margins in our domestic utility pole and maintenance-of-way markets.

Lower gross margins for CMC in the current year period were a result of lower sales prices for carbon pitch, carbon black feedstock, phthalic anhydride and naphthalene.

Depreciation and amortization charges for the year ended December 31, 2020 were consistent with the prior year .

Impairment and restructuring charges were $0.5 million higher when compared to the prior year period.

The current year period primarily consists of charges for asset retirement obligations, fixed asset write-offs, severance, accelerated depreciation, demolition and other plant closure period costs related to the closure of our Denver, Colorado facility.

The prior year period primarily consisted of asset retirement obligation charges, accelerated depreciation and inventory and fixed asset write-offs related to the closure of our Follansbee, West Virginia facility.

Koppers Holdings Inc.

2020 Annual Report

Selling, general and administrative expenses for the year ended December 31, 2020 were $ 5.2 million lower when compared to the prior year period due mainly to a decrease in consulting and professional service expenses, travel and facility related costs and employee related benefits.

Interest expense for the year ended December 31, 2020 was $12.8 million lower when compared to the prior year period primarily due to our lower average debt level and lower interest rates due to the significant decrease in LIBOR rates.

Gross margin was unfavorably impacted in the current year period primarily by an increase in raw material costs along with total LIFO expense of $28.2 million compared to the prior year period which was favorably impacted by a LIFO benefit of $13.7 million.

Depreciation and amortization charges for the year ended December 31, 2021 were $3.6 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 year ended December 31, 2021 of $31.2 million and is primarily related to the sale of our former RUPS crosstie treating plant located in Denver, Colorado as well as two previously decommissioned CMC plants as described in Note 4 – “Plant Closures and Divestitures”.

Impairment and restructuring charges for the year ended December 31, 2021 were $4.3 million lower when compared to the prior year period .

We recorded charges for asset retirement obligations, fixed asset write-offs and severance in the prior year period related to the announced closure of our Denver, Colorado facility.

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

Selling, general and administrative expenses for the year ended December 31, 2021 were $5.8 million higher when compared to the prior year period due mainly to an increase of $2.6 million in employee benefit related expenses, $1.9 million for consulting and professional services and $0.7 million in travel and facility related charges.

Interest expense for the year ended December 31, 2021 was $8.4 million lower when compared to the prior year primarily as a result of 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 taxes for the year ended December 31, 2020 were $21.0 million higher when compared to the prior year period.

Both periods included various tax costs or benefits that significantly influenced income taxes.

For the year ended December 31, 2020, our income tax provision benefitted by a total of $13.3 million from our ability to utilize prior year carryforwards related to the limitation on our U.S.

interest expense deduction in addition to increased prior year deductions for interest expense as a result of the CARES Act.

For the year ended December 31, 2019, our tax provision was favorably impacted due to a legal entity restructuring and tax audit closures.

We completed a Dutch legal entity restructuring project, which resulted in an intra-entity transfer of certain intangible assets and intellectual property.

This transaction resulted in the recognition of a deferred tax asset of $14.9 million.

We also recorded a favorable tax benefit of $4.3 million for the year ended December 31, 2019 for the reversal of various unrecognized tax benefits due to the closure of a U.S.

Income tax expense as a percentage of income before income taxes for the years ended December 31, 2020 and 2019 was 19.1 percent and zero percent, respectively.

The increase is partially due to income before income taxes being $46.4 million higher when compared to the prior year period and the benefits from a Dutch legal entity restructuring recorded for the year ended December 31, 2019.

Discontinued operations for the year ended December 31, 2020 resulted in a loss of $3.9 million compared to income of $3.7 million in the prior year period due primarily to a year-over-year reduction in net sales of $104.2 million attributable to lower end market demand on our KJCC operations and only nine months of operations in 2020 due to the sale of the company.

Income tax expense as a percentage of income before income taxes for the years ended December 31, 2021 and 2020 was 29.9 percent and 19.1 percent, respectively.

In 2020, we recorded a benefit of $13.3 million due to legislative changes to the interest expense limitation that were a result of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

Discontinued operations for the year ended December 31, 2021 resulted in income of $0.1 million compared to a loss of $3.9 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.

Gain on sale of discontinued operations for the year ended December 31, 2020 is related to the sale of our KJCC business in China in September 2020.

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

See Note 5 – “Discontinued Operations” for further detail.

Segment Results

Segment operating profit for the years ended December 31, 2020 and 2019 is summarized in the following table:

Segment adjusted EBITDA and adjusted EBITDA margin for the years ended December 31, 2021 and 2020 are summarized in the following table:

Year Ended December 31,

(Dollars in millions)

Operating profit (loss):

(amounts in millions)

Adjusted EBITDA:

Railroad and Utility Products and Services

1 unchanged sentence

Carbon Materials and Chemicals

Operating profit as a percentage of net sales:

Total Adjusted EBITDA

Adjusted EBITDA margin as a percentage of GAAP sales:

Railroad and Utility Products and Services

1 unchanged sentence

Carbon Materials and Chemicals

RUPS operating profit increased by $10.9 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 6.2 percent from 4.9 percent in the prior year period.

Operating profit as a percentage of net sales for the year ended December 31, 2020 was favorably impacted by higher margins in our domestic utility pole and maintenance-of-way markets, a favorable sales mix in our Class I crosstie market, a favorable adjustment to our LIFO inventory reserve and lower selling, general and administrative costs in the current year period.

PC operating profit increased by $36.5 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 16.8 percent from 11.6 percent in the prior year period.

The current year period was favorably impacted by higher sales volumes in North America driven by increased home repair and remodeling activities during the pandemic, a favorable sales mix, better absorption on higher production volumes during the pandemic and lower selling, general and administrative costs.

CMC operating profit decreased by $15.8 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 6.1 percent from 8.6 percent in the prior year period.

Operating profit for the year ended December 31, 2020 was negatively affected primarily by lower sales prices for carbon pitch, carbon black feedstock, phthalic anhydride and naphthalene as a result of depressed oil prices in the current year period.

Other contributing factors include lower sales volumes of carbon pitch in North America as a result of economic conditions.

These decreases were offset, in part, by volume increases of carbon pitch and carbon black feedstock in Australia.

Total Adjusted EBITDA margin

RUPS adjusted EBITDA decreased by $19.9 million compared to the prior year period.

Adjusted EBITDA as a percentage of net sales decreased to 6.2 percent from 8.6 percent in the prior year period and was unfavorably impacted in our domestic utility pole business by the c osts, loss of throughput and inefficiencies associated with pole treatment preservative conversions at our Vidalia, Georgia and Vance, Alabama plants, a shortage of pole treatment preservative in the fourth quarter of the current year period and higher fuel costs and labor inefficiencies driven by the pandemic.

In addition, unfavorability in our railroad crosstie business was driven by lower absorption of fixed costs due to approximately two million less crossties procured than the prior year period as a result of decreased purchasing activity of untreated crossties by our Class I customers driven by the impact higher lumber prices had on the hardwood market.

Finally, pandemic-driven costs and inefficiencies in our maintenance-of-way businesses contributed to a reduction in adjusted EBITDA over the prior year period.

PC adjusted EBITDA increased by $1.1 million compared to the prior year.

Adjusted EBITDA as a percentage of net sales increased to 20.2 percent from 19.1 percent in the prior year.

The current year was favorably impacted by lower realized raw material costs associated with the company’s copper hedging program along with higher demand for preservatives in our international markets.

PC benefited from pricing increases in the current year period for our copper-based preservatives in addition to the contribution from our copper-hedging program which mitigated increases in our raw material costs.

These favorable drivers were offset, in part, by volume decreases for preservatives in North America.

CMC adjusted EBITDA increased by $31.3 million compared to the prior year.

Adjusted EBITDA as a percentage of net sales increased to 17.1 percent from 11.7 percent in the prior year.

The current year was favorably impacted by higher sales prices for carbon pitch, distillates and chemicals , a recovery of insurance proceeds.

These increases were offset, in part, by an increase in raw material costs and lower sales volumes of carbon pitch and phthalic anhydride in the current year.

Koppers Holdings Inc.

2021 Annual Report

Results of Operations – Comparison of Years Ended December 31, 2020 and December 31, 2019

6 unchanged sentences

Carbon Materials and Chemicals

RUPS net sales for the year ended December 31, 2019 increased by $98.7 million, or 16 percent, compared to the prior year.

The sales increase was primarily due to volume increases in the Class I and commercial crosstie markets, as well as a full year of results from UIP which was acquired in the second quarter of the prior year, along with price increases across the segment in 2019.

RUPS net sales for the year ended December 31, 2020 increased by $25.6 million, or three percent, compared to the prior year.

Sales of crossties increased by $16.8 million in 2020.

These increases were offset, in part, by volume decreases in the rail joints market and an unfavorable impact from foreign currency translation in 2019 of $2.5 million from our Australian pole business.

PC net sales for the year ended December 31, 2019 increased by $28.3 million, or seven percent, compared to the prior year.

The sales increase was due primarily to new customer wins, new product sales, higher organic volumes and price increases for copper-based preservatives in North America.

Sales of non-copper based preservatives in Europe realized a more favorable pricing mix in 2019 as well.

These increases were offset, in part, by volume decreases in the commercial crosstie market and our maintenance-of-way businesses in 2020.

PC net sales for the year ended December 31, 2020 increased by $78.0 million, or 17 percent, compared to the prior year.

These increases were partially offset by an unfavorable impact from foreign currency translation in 2020 of $5.1 million.

CMC net sales for the year ended December 31, 2019 decreased by $52.7 million, or ten percent, compared to the prior year due mainly to lower sales prices for carbon pitch and naphthalene in Europe, along with lower sales volumes of carbon pitch in Australia and carbon black feedstock globally.

F oreign currency translation also had an unfavorable impact on sales in 2019 over the prior year period.

These decreases were partially offset by increased volumes for carbon pitch in North America.

In Australia, higher sales prices for carbon pitch were driven primarily by higher raw material cost and increases in global oil pricing.

Other contributing factors included lower sales volumes of carbon pitch and naphthalene as a result of the economic conditions.

These decreases were offset, in part, by volume increases of carbon black feedstock.

Cost of sales as a percentage of net sales was 78 percent for the year ended December 31, 2020, compared to 80 percent in the prior year .

Lower gross margins for PC in 2019 were primarily due to higher year-over-year raw material costs .

These were offset by higher gross margins for RUPS due to increased sales volumes of crossties coupled with commercial crosstie market price increases .

Depreciation and amortization charges for the year ended December 31, 2019 were $4.5 million higher when compared to the prior year period due mainly to assets placed in service during 2019 related to our new naphthalene unit at our CMC plant in Stickney, Illinois along with a full year of depreciation and amortization from our acquisition of UIP which occurred in the second quarter of 2018.

Loss on sale of assets of $8.3 million for the year ended December 31, 2018 reflects sales of our coal tar distillation facility in Clairton, Pennsylvania and our specialty chemicals business in the United Kingdom within our CMC segment and the sale of assets in the United Kingdom within our PC segment.

Gross margin at PC was favorably impacted by higher sales volumes, a favorable sales mix and better absorption on higher production volumes.

Improved margins at RUPS were due to a favorable sales mix in our Class I crosstie market and higher margins in our domestic utility pole and maintenance-of-way markets.

Lower gross margins for CMC in 2020 were a result of lower sales prices for carbon pitch, carbon black feedstock, phthalic anhydride and naphthalene.

Depreciation and amortization charges for the year ended December 31, 2020 were consistent with the prior year .

Impairment and restructuring charges were $0.5 million higher when compared to the prior year period.

In the third quarter of 2019, we discontinued remaining production activities at our Follansbee, West Virginia facility and, as such, we recorded associated charges of approximately $3 million for asset retirement obligations and inventory and fixed asset write-offs in 2019.

Prior year charges consisted of 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 year ended December 31, 2019 were $9.9 million lower when compared to the prior year period due primarily to a decrease of $9.4 million for travel, consulting and professional service expenses mostly related to our prior year acquisitions.

This decrease was partially offset by an increase in legal costs.

Interest expense for the year ended December 31, 2019 was $7.6 million higher when compared to the prior year period primarily due to the higher average debt level related to our acquisitions of UIP and KRR in 2018 as well as cash used to fund our stock buybacks and capital expenditures in the second half of 2018.

Koppers Holdings Inc.

2020 Annual Report

Income taxes for the year ended December 31, 2019 were $25.7 million lower when compared to the prior year period.

Both periods included various tax costs or benefits that significantly influenced income taxes.

For the year ended December 31, 2019, we completed a Dutch legal entity restructuring project, which resulted in an intra-entity transfer of certain intangible assets and intellectual property.

Charges in 2020 consisted of asset retirement obligations, fixed asset write-offs, severance, 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 year ended December 31, 2020 were $5.2 million lower when compared to the prior year period due mainly to a decrease in consulting and professional service expenses, travel and facility related costs and employee related benefits.

In the third quarter of 2020, we used the net proceeds of the KJCC sale to reduce our borrowings under the Credit Facility.

Income taxes for the year ended December 31, 2020 were $21.0 million higher when compared to the prior year period.

Both periods included benefits that significantly influenced income taxes.

For the year ended December 31, 2020, our income tax provision benefited by a total of $13.3 million due to legislative changes to the interest expense limitation that were a result of the CARES Act.

For the year ended December 31, 2019, our tax provision was favorably impacted due to a legal entity restructuring and tax audit closures.

We completed a Dutch legal entity restructuring project, which resulted in an intra-entity transfer of certain intangible assets and intellectual property.

This transaction resulted in the recognition of a deferred tax asset of $14.9 million.

We also recorded a favorable tax benefit of $4.3 million in the year ended December 31, 2019 for the reversal of various unrecognized tax benefits due to the closure of a U.S.

For the year ended December 31, 2018 , income taxes included a tax cost of $4.8 million related to the completion of the analysis of the final impact of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) and a tax cost of $6.6 million related to the impact of the global intangible low taxed income (“GILTI”) provision in our 2018 U.S.

tax provision.

Income tax expense as a percentage of income before income taxes for the years ended December 31, 2019 and 2018 was zero percent and 82.4 percent, respectively.

The decrease in this percentage is largely due to the factors that are described in the above paragraph.

Additionally, the annual effective income tax rate is lower when compared to the prior period due to a decrease in unfavorable U.S.

tax adjustments for the limitation on our U.S.

interest expense deduction and the GILTI inclusion.

Discontinued operations for the year ended December 31, 2019 resulted in income of $3.7 million compared to income of $23.7 million in the prior year period due primarily to higher sales prices in China in 2018 based on higher market prices, particularly in the first quarter .

We also recorded a favorable tax benefit of $4.3 million for the year ended December 31, 2019 for the reversal of various unrecognized tax benefits due to the closure of a U.S.

Income tax expense as a percentage of income before income taxes for the years ended December 31, 2020 and 2019 was 19.1 percent and zero percent, respectively.

The increase was partially due to income before income taxes being $46.4 million higher when compared to the prior year period and the benefits from a Dutch legal entity restructuring recorded for the year ended December 31, 2019.

Segment Results

Segment operating profit for the years ended December 31, 2019 and 2018 is summarized by segment in the following table:

Segment adjusted EBITDA and adjusted EBITDA margin for the years ended December 31, 2020 and 2019 are summarized in the following table:

Year Ended December 31,

(Dollars in millions)

Operating profit (loss):

(amounts in millions)

Adjusted EBITDA:

Railroad and Utility Products and Services

1 unchanged sentence

Carbon Materials and Chemicals

Operating profit as a percentage of net sales:

Corporate unallocated

Total Adjusted EBITDA

Adjusted EBITDA margin as a percentage of GAAP sales:

Railroad and Utility Products and Services

1 unchanged sentence

Carbon Materials and Chemicals

RUPS operating profit increased by $29.9 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 4.9 percent in 2019.

Operating profit as a percentage of net sales for the year ended December 31, 2019 was impacted by increased sales volumes of crossties to Class I customers coupled with commercial crosstie market price increases and higher overall demand along with benefits in 2019 from our 2018 acquisition of UIP.

The prior year period also included acquisition-related costs not present in 2019.

PC operating profit increased by $15.9 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 11.6 percent from 8.6 percent in the prior year period.

The year ended December 31, 2019 was favorably impacted by sales increases due primarily to new customer wins, new product sales, higher organic volumes and price increases for copper-based preservatives in North America.

Sales of non-copper based preservatives in Europe realized a more favorable pricing mix in 2019 as well.

Higher year-over-year raw material prices partially offset our increase in sales for the year ended December 31, 2019.

CMC operating profit for the year ended December 31, 2019 decreased by $5.5 million, or 12 percent, compared to the prior year.

Operating profit as a percentage of net sales decreased to 7.6 percent from 10.8 percent in the prior year period.

Operating profit for the year ended December 31, 2019 was negatively affected primarily by lower sales prices for carbon pitch and naphthalene in Europe, along with lower sales volumes of carbon pitch in Australia and carbon black feedstock globally and an unfavorable impact from foreign currency translation.

Additionally, we recognized restructuring and related charges to earnings of approximately $3 million in the current year resulting from our cessation of remaining production activities at our Follansbee, West Virginia facility in the third quarter of 2019.

These unfavorable drivers were partially offset by increased volumes for carbon pitch in North America coupled with a more streamlined and efficient cost structure across the entire segment.

Total Adjusted EBITDA margin

RUPS adjusted EBITDA increased by $5.1 million compared to the prior year period.

Adjusted EBITDA as a percentage of net sales increased to 8.6 percent from 8.2 percent in the prior year period.

Adjusted EBITDA as a percentage of net sales for the year ended December 31, 2020 was favorably impacted by higher margins in our domestic utility pole and maintenance-of-way markets, a favorable sales mix in our Class I crosstie market and lower selling, general and administrative costs in 2020.

PC adjusted EBITDA increased by $32.1 million compared to the prior year period.

Adjusted EBITDA as a percentage of net sales increased to 19.1 percent in 2020 compared to 15.3 percent in the prior year period.

Adjusted EBITDA as a percentage of net sales for the year ended December 31, 2020 was favorably impacted by higher sales volumes in North America driven by increased home repair and remodeling activities during the pandemic, a favorable sales mix, better absorption on higher production volumes during the pandemic and lower selling, general and administrative costs.

CMC adjusted EBITDA for the year ended December 31, 2020 decreased by $28.5 million, or 39 percent, compared to 2019.

Adjusted EBITDA as a percentage of net sales for 2020 decreased to 11.7 percent from 16.1 percent in 2019.

Adjusted EBITDA for the year ended December 31, 2020 was negatively affected primarily by lower sales prices for carbon black feedstock, phthalic anhydride and naphthalene as a result of depressed oil prices in 2020.

Other contributing factors included lower sales prices and volumes of carbon pitch as a result of economic conditions.

These decreases were offset, in part, by volume increases of carbon black feedstock.

Koppers Holdings Inc.

2021 Annual Report

Adjusted EBITDA is reconciled to net income, the most directly comparable financial measure determined and reported in accordance with U.S.

Year Ended December 31,

(amounts in millions)

Interest expense

Depreciation and amortization

Depreciation in impairment and restructuring charges

Discontinued operations

Adjustments to arrive at adjusted EBITDA:

Impairment, restructuring and plant closure costs (1)

(Gain) on sale of assets

LIFO expense (benefit)

Mark-to-market commodity hedging losses (gains)

Pension settlement

Discretionary incentive (2)

Total adjustments

Adjusted EBITDA

Includes costs associated with restructuring, sales and closures of certain RUPS and CMC facilities as described in Note 4 – “Plant Closures and Divestitures”.

Represents a one-time employee incentive associated with the sale of KJCC as described in Note 5 – “Discontinued Operations”.

Net cash provided by operating activities was $103.0 million for the year ended December 31, 2021 as compared to net cash provided by operating activities of $127.1 million for the year ended December 31, 2020.

The net increase of $11.8 million in cash provided by operations was due primarily to an increase in net income and certain other operating activities of $42.4 million from the prior year period, which includes the gain on the sale of KJCC of $35.6 million in the current year period.

These drivers were partly offset by higher working capital usage of $30.6 million compared to the prior year period, mainly due to an increase in accounts receivable and a reduction in accounts payable in the current year period.

The net decrease of $24.1 million was due primarily to higher working capital usage of $28.2 million primarily as a result of higher inventory values from increased raw material prices and inventory levels as well as increased receivables due to higher fourth quarter 2021 sales as compared to the prior year.

Operating profit, excluding gain on sale of assets and changes in derivative contracts, was slightly down year-over-year but was offset by a change in other liabilities as a result of lower asset retirement costs.

Net cash provided by operating activities was $127.1 million for the year ended December 31, 2020 as compared to net cash provided by operating activities of $115.3 million for the year ended December 31, 2019.

The net increase of $37.0 million in cash provided by operations was due primarily to lower working capital usage of $30.7 million compared to the prior year period, mainly due to favorable timing of accounts receivable collections in 2019.

In addition, the change in income and certain operating activities of $6.3 million from the prior year period had a favorable result on cash provided by operations in 2019.

These positive impacts were partially offset by a net unfavorable impact on cash from a reduction in outstanding payables in 2019 relative to the prior year end.

The net increase of $11.8 million was due primarily to an increase in operating profit partly offset by higher working capital usage of $30.6 million compared to the prior year as a result of timing of payments between periods and an increase in asset retirement costs.

Net cash used in investing activities was $89.5 million for the year ended December 31, 2021 as compared to net cash provided by investing activities of $5.6 million for the year ended December 31, 2020.

The net change in cash used in investing activities of $95.1 million is primarily due to an increase in capital expenditures of $55.2 million in the current year period for increased investment in growth projects, primarily the expansion of the RUPS facility in North Little Rock, Arkansas, and net cash of $74.7 million provided by the sale of KJCC in the prior year, partially offset by cash received related to sales of the Denver, Colorado plant and two previously decommissioned CMC plants as well as insurance proceeds in the current year.

Net cash provided by investing activities was $5.6 million for the year ended December 31, 2020 as compared to net cash used in investing activities of $33.8 million for the year ended December 31, 2019.

The net increase in cash provided by investing activities of $39.4 million is primarily due to net cash of $74.7 million provided by the sale of KJCC partly offset by an increase in capital expenditures of $32.6 million used mainly for production expansion and modernization at our RUPS plant in North Little Rock, Arkansas.

Net cash used in investing activities was $33.8 million for the year ended December 31, 2019 as compared to net cash used in investing activities of $376.4 million for the year ended December 31, 2018.

The decrease in cash used for investing activities of $342.6 million is primarily due to $264.0 million of net cash used for acquisitions in the prior year period as well as prior year capital expenditures used mainly to expand production capacity at PC in the United States and continued spending on the new naphthalene unit at our CMC plant in Stickney, Illinois.

Both of these projects were substantially completed by the end of 2018.

The net decrease in cash used for capital expenditures in 2019 from the prior year period was $72.5 million.

The net change in cash provided by investing activities of $39.4 million is primarily due to net cash of $74.7 million provided by the sale of KJCC partly offset by an increase in capital expenditures of $32.6 million used mainly for production expansion and modernization across our businesses.

Net cash used in financing activities was $4.0 million for the year ended December 31, 2021 as compared to net cash used in financing activities of $128.7 million for the year ended December 31, 2020.

The cash used in financing activities in the year ended December 31, 2020 reflected net repayments of debt of $128.0 million and repurchases of common stock of $1.6 million related to long-term incentive compensation plans.

The cash used in financing activities in the prior year period, reflected net repayments of debt of $90.8 million and repurchases of common stock of $0.9 million.

Net cash used in financing activities was $88.7 million for the year ended December 31, 2019 as compared to net cash provided by financing activities of $282.8 million for the year ended December 31, 2018.

The cash used in financing activities in 2019 reflected net repayments of debt of $90.8 million partially offset by issuances of common stock of $4.0 million.

The cash provided by financing activities in the prior year period reflected net borrowings of $314.6 million to primarily fund acquisitions and capital expenditures and repurchases of common stock of $31.8 million.

Koppers Holdings Inc.

2020 Annual Report

The cash used in financing activities in the year ended December 31, 2021 reflected repurchases of common stock of $11.5 million partially offset by net borrowings of debt of $5.1 million.

The cash used in financing activities in the prior year period primarily reflected net repayments of debt of $128.0 million.

Net cash used in financing activities was $128.7 million for the year ended December 31, 2020 as compared to net cash used in financing activities of $88.7 million for the year ended December 31, 2019.

The cash used in financing activities in both periods primarily related to repayment of debt.

Liquidity and Capital Resources

12 unchanged sentences

to pay dividends.

In the third quarter of 2020, we used the net proceeds of the KJCC sale to reduce our borrowings under the Credit Facility.

Under the terms of the Credit Facility, net proceeds must be used to reduce term loan borrowings within a specified period.

Accordingly, we repaid approximately $63 million of the term loan in the fourth quarter of 2020, inclusive of the normal quarterly principal payment of $2.5 million.

In addition, effective as of December 31, 2020, our total secured leverage ratio is not permitted to exceed 2.75 times and our total leverage ratio is not permitted to exceed 5.0 times due to the scheduled reduction of these ratios under our credit agreement.

However, the step down of these covenant ratios did not have a substantial effect on our liquidity as of December 31, 2020.

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

4 unchanged sentences

Our liquidity was $344.0 million at 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 capital expenditures, working capital, and potential return of capital to shareholders.

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

Capital expenditures in 2021, excluding acquisitions, if any, are expected to total approximately $105 to $115 million and are expected to be funded by cash from operations.

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

From time to time, 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 December 31, 2021 and December 31, 2020, approximately 75 percent and 70 percent of accounts payable was current, approximately 20 percent was 1-30 days past due and approximately five percent and ten percent was past due greater than 30 days, respectively.

Koppers Holdings Inc.

2021 Annual Report

Schedule of Certain Contractual Obligations

15 unchanged sentences

As a result, we generally expect to be able to hedge the purchases with sales at those future prices.

Pension and other employee benefit plan funding obligations (for defined benefit plans) are not included in the table above.

Not included in contractual obligations are commercial commitments associated with standby letters of credit totaling $7.8 million, which expire in 2022.

Pension and other employee benefit plan funding obligations (for defined benefit plans) are not included in the contractual obligation table.

We expect defined benefit plan contributions to total approximately $2.0 million in 2022.

4 unchanged sentences

See Note 10 in our consolidated financial statements for further information.

Schedule of Certain Other Commercial Commitments

The following table details our projected payments for other significant commercial commitments as of December 31, 2020.

The table is based upon available information and certain assumptions we believe to be reasonable.

Amount of Commitment Expiration Per Period

(in millions)

Lines of credit (unused)

Standby letters of credit

Total other commercial commitments

Debt Covenants at December 31, 2021

4 unchanged sentences

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 leverage ratio at December 31, 2020 was 1.32.

The total secured leverage ratio at December 31, 2021 was 1.23.

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 leverage ratio at December 31, 2020 was 3.59.

The total leverage ratio at December 31, 2021 was 3.34.

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

Our continued ability to meet those 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.

Koppers Holdings Inc.

2020 Annual Report

Effects of COVID-19 on our Liquidity

As of December 31, 2020, we are in compliance with our debt covenants under the Credit Facility and had $344.0 million of liquidity to fund our operations.

Our estimates and assumptions as of the date of this report indicate that we should remain in compliance with our debt covenants and we have identified actions we can implement to help maintain compliance if the impact of COVID-19 has a more pronounced impact on the economy, our business and our ability to generate cash flow and profits than estimated.

These impacts are highly uncertain and unpredictable, and include the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects.

Accordingly, the financial effects of the pandemic on our business may have an adverse effect on the determination of, and compliance with, our debt covenants over the next twelve months.

In the event we do not maintain compliance with our debt covenants, we may be required to pursue additional sources of financing to meet our financial obligations.

Obtaining such financing is not guaranteed and is largely dependent upon market conditions and other factors.

Further actions may be required to improve our cash position, including but not limited to, monetizing assets, implementing cost reductions including employee furloughs, and foregoing capital expenditures and other discretionary expenses.

Non-GAAP Financial Measures

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.

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.

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.

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

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 one-time or unusual items or recurring non-cash income or expense items such as LIFO and mark-to-market commodity hedging.

The following tables summarize EBITDA and adjusted EBITDA on a consolidated and segment basis as calculated by us for the years indicated below:

Year Ended December 31,

(amounts in millions)

Interest expense

Depreciation and amortization

Depreciation in impairment and restructuring charges

Discontinued operations

EBITDA with noncontrolling interests

Adjustments to arrive at adjusted EBITDA:

Impairment, restructuring and plant closure costs

Non-cash LIFO (benefit) expense

Mark-to-market commodity hedging

Pension settlement

Discretionary incentive

Total adjustments

Adjusted EBITDA

Year Ended December 31,

(amounts in millions)

EBITDA with noncontrolling interests:

Railroad and Utility Products and Services

Performance Chemicals

Carbon Materials and Chemicals

Corporate unallocated

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

The increase in adjusted EBITDA of $9.9 million from 2019 is primarily due to higher sales volume, favorable product mix and improved cost absorption from our PC segment which was driven by the demand for copper-based preservatives in the U.S.

from strong housing, repair and remodeling markets.

As an effect of the pandemic on the consumer markets, this strong market was driven by the diversion of discretionary spending from leisure and entertainment categories to home repair and beautification projects.

Our RUPS segment also experienced improved adjusted EBITDA from higher margins in our domestic utility pole and maintenance-of-way markets and a favorable sales mix in our Class I crosstie market.

This increase was partially offset by lower adjusted EBITDA from our CMC segment as a result of a weakness and lower pricing in key markets, particularly in the first half of the year, due to the economic effects of the pandemic.

Net leverage ratio is a non-GAAP financial measure defined as net debt (total debt less cash) divided by adjusted EBITDA for the latest twelve months and is a financial measure used by us to assess our borrowing capacity and ability to service our debt.

Net debt will fluctuate before, after and throughout the related period based upon the timing of receipts from customers and payments to vendors.

Refer to “Segment Results” of “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” for reconciliation to net income from adjusted EBITDA.

The following table summarizes net leverage ratio as calculated by us for the years indicated below:

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Net leverage ratio

Our net leverage ratio decreased in 2020 primarily due to the $131.5 million decrease in net debt, principally due to cash generated from operating activities in excess of capital expenditures totaling $57.3 million and the net proceeds from the divestiture of KJCC totaling $74.7 million.

Our long-term net leverage ratio target continues to be 2.0 to 3.0 times.

Other Matters

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We are subject to foreign currency translation fluctuations due to our foreign operations.

For the years ended December 31, 2020, 2019 and 2018, exchange rate fluctuations resulted in an increase to comprehensive income of $22.8 million, a decrease of $1.3 million and a decrease of $25.6 million, respectively.

For the years ended December 31, 2021, 2020 and 2019, exchange rate fluctuations resulted in a decrease to comprehensive income of $16.4 million, an increase of $22.8 million and a decrease of $1.3 million, respectively.

Foreign currency transaction gains and losses result from transactions denominated in a currency which is different from the currency used by the entity to prepare its financial statements.

Foreign currency transaction gains were $2.5 million, $1.0 million and $0.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Foreign currency transaction (losses) gains were $(0.7) million, $2.5 million and $1.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Recently Issued Accounting Guidance

Information regarding recently issued accounting guidance is contained in Note 3 “New Accounting Pronouncements” of the Notes to Consolidated Financial Statements.

Koppers Holdings Inc.

2020 Annual Report

Critical Accounting Policies

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Our management’s estimates are based on the relevant information available at the end of each period.

With the exception of the revenue recognition policy, each of the following policies contain critical accounting estimates.

Revenue Recognition.

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however in certain circumstances as shipping terms dictate, we transfer control and revenue is recognized at the point of destination.

To determine the transaction price at the time when revenue is recognized, we evaluate whether the price is subject to adjustments, such as for warranties, discounts or volume rebates, to determine the net consideration to which we expect to be entitled.

Shipping and handling costs are included as a component of cost of sales.

We also recognize revenue related to the procurement of certain untreated railroad crossties upon delivery to our plant and acceptance by the customer.

For certain contracts, we also recognize revenue related to the procurement of certain untreated railroad crossties upon delivery to our plant and acceptance by the customer.

Service revenue, consisting primarily of wood treating services, is recognized at the time the service is provided and the performance obligation is satisfied.

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Examples of qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific events, events affecting reporting units, and sustained changes in our stock price.

Koppers Holdings Inc.

2021 Annual Report

If results of the qualitative assessment indicate a more likely than not determination or if a qualitative assessment is not performed, a quantitative test is performed utilizing a combination of an income approach, using a discounted cash flow methodology, and a market approach, by comparing the estimated fair value of each reporting unit with its book value.

The discounted cash flow calculations are dependent on several subjective factors including the timing of future forecasted cash flows, including forecasted future growth rates such as revenue and the discount rate.

Because management’s judgment is involved in performing goodwill impairment analyses, there is risk that the carrying value of goodwill is overstated.

If our assumptions or estimates in our fair value calculations change or if future cash flows or future growth rates vary from what was planned, this may impact our impairment analysis.

We perform an assessment of goodwill at the reporting unit level, utilizing a combination of an income approach, using a discounted cash flow methodology, and a market approach, by comparing the estimated fair value calculations of each reporting unit with its net book value.

The discounted cash flow calculations are dependent on several subjective factors including the timing of future forecasted cash flows including future forecasted revenue growth rates, and the discount rate.

We have three reporting units for purposes of goodwill evaluation.

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During the fourth quarter of 2021, we performed an impairment test for goodwill for each of our reporting units using the quantitative approach.

Based on our evaluation performed, we determined that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying amount, and therefore, we determined that goodwill was not impaired at any of our reporting units as of December 31, 2020.

Based on our evaluation performed, we determined the fair value of each of the reporting units exceeded its respective carrying amount, and therefore, we determined that goodwill was not impaired at any of our reporting units as of December 31, 2021.

We define " headroom " as the percentage difference between the fair value of a reporting unit and its carrying value.

For the 2021 impairment test, the headroom for the reporting units ranged between ten percent to 65 percent.

Our Railroad Products and Services reporting unit and our Utility Products reporting unit have headroom at the low-end of that range and could experience impairment in the future if we do not achieve our profitability projections, there is a change in key assumptions underlying the valuation or if we experience a substantial decrease in our stock price.

Identifiable intangible assets are valued at fair value upon the acquisition of a business.

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Deferred Tax Assets .

At December 31, 2020, our balance sheet included $18.4 million of deferred tax assets, which is net of a $44.6 million valuation allowance.

As of December 31, 2021, our balance sheet included $44.2 million of deferred tax assets, which is net of a $44.5 million valuation allowance.

We also had $62.6 million of deferred tax liabilities resulting in net deferred tax liabilities of $18.4 million, which are predominantly related to our domestic entities.

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At the date a reasonable estimate of the ultimate settlement can be made, we will record an asset retirement obligation and such amounts may be material to the consolidated financial statements in the period in which they are recorded.

In 2020, we recorded additional asset retirement obligations of $4.6 million principally related to storage tank and drip pad cleaning costs within our RUPS segment in the United States.

Financial Statements and Supplementary Data – Note 2 includes information on expense recognized during the past two years.

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We have selected different discount rates for our pension plans and our other post-retirement benefit plans due to the different projected benefit payment patterns.

In determining the assumed discount rates at December 31, 2020, we use our third-party actuary’s discount rate model.

In determining the assumed discount rates at December 31, 2021, we used our third-party actuary’s discount rate model.

This model calculates an equivalent single discount rate for the projected benefit plan cash flows using a hypothetical bond portfolio to match expected cash flows under our benefit plans.

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Financial Statements and Supplementary Data – Note 14 includes detailed information about the assumptions used to calculate the components of our annual defined benefit pension and other postretirement plan expense, as well as the obligations and accumulated other comprehensive loss reported on the year-end balance sheets.

Koppers Holdings Inc.

2020 Annual Report

Environmental Liabilities .

We are subject to federal, state, local and foreign laws and regulations and potential liabilities relating to the protection of the environment and human health and safety, including, among other things, the cleanup of contaminated sites, the treatment, storage and disposal of wastes, the discharge of effluent into waterways, the emission of substances into the air and various health and safety matters.

As discussed under Environmental Matters in “Item 1 – Business”, we are subject to federal, state, local and foreign laws and regulations and potential liabilities relating to the protection of the environment and human health and safety.

We expect to incur substantial costs for ongoing compliance with such laws and regulations.

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We accrue for environmental liabilities when a determination can be made that they are probable and reasonably estimable.

The amount accrued is determined through the evaluation of various information, which could include claims, settlement offers, demands by government agencies, estimates performed by independent third parties, identification of other responsible parties and an assessment of their ability to contribute, and our prior experience.

Inherent uncertainties exist in such evaluations primarily due to unknown conditions and other circumstances, changing governmental regulations and legal standards regarding liability, and evolving technologies.

Financial Statements and Supplementary Data – Note 19 includes information about environmental liabilities.

Koppers Holdings Inc.

2021 Annual Report

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-K

Item 7. Management’s Discussion and Analysis