Koppers Holdings Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Koppers Holdings Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Management’s Report on Internal Control Over Financial Reporting 45 Report of Independent Registered Public Accounting Firm 46 Report of Independent Registered Public Accounting Firm 47 Consolidated Statement of Operations for the years ended December 31, 2021, 2020 and 2019 49 Consolidated Statement of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019 49 Consolidated Balance Sheet as of December 31, 2021 and 2020 50 Consolidated Statement of Cash Flows for the years ended December 31, 2021, 2020 and 2019 51 Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2021, 2020 and 2019 52 Notes to Consolidated Financial Statements 53 44 Koppers Holdings Inc. 2021 Annual Report MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Koppers Holdings Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of Koppers Holdings Inc.’s internal control over financial reporting as of December 31, 2021. In making this assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 Framework). Management concluded that based on its assessment, Koppers Holdings Inc.’s internal control over financial reporting was effective as of December 31, 2021. The effectiveness of Koppers Holdings Inc.’s internal control over financial reporting as of December 31, 2021, has been audited by KPMG LLP, the independent registered public accounting firm that also audited the consolidated financial statements included in this annual report, as stated in their attestation report which appears on page 46. February 23, 2022 / S / L EROY M. B ALL Leroy M. Ball President and Chief Executive Officer / S / J IMMI S UE S MITH Jimmi Sue Smith Chief Financial Officer and Treasurer 45 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Koppers Holdings Inc.: Opinion on Internal Control Over Financial Reporting We have audited Koppers Holdings Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and December 31, 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated February 23, 2022 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Pittsburgh, Pennsylvania February 23, 2022 46 Koppers Holdings Inc. 2021 Annual Report Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Koppers Holdings Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Koppers Holdings Inc. and subsidiaries (the Company) as of December 31, 2021 and December 31, 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and December 31, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 47 Assessment of the carrying value of Goodwill in the Utility Products Reporting Unit As described in Notes 2 and 13 to the consolidated financial statements, the Company’s goodwill balance as of December 31, 2021 was $296.0 million, of which $79.8 million related to the Utility Products reporting unit. The Company performs goodwill impairment testing at the reporting unit level annually or more frequently if a change in circumstances or the occurrence of events indicates that a potential impairment exists. The Company uses a combination of an income approach, using a discounted cash flow methodology, and a market approach in its annual goodwill impairment assessment. We identified the assessment of the carrying value of goodwill for the Utility Products reporting unit as a critical audit matter. Significant auditor judgment was required to evaluate the Company’s estimate of fair value of the Utility Products reporting unit, which was developed, in part, using a discounted cash flow model. Specifically, the key assumptions used in the reporting unit’s discounted cash flow model are forecasted cash flows, including forecasted revenue growth rates, and the discount rate, as changes to those assumptions could have a significant effect on the Company’s assessment of the impairment of the goodwill. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s goodwill impairment assessment process. This included controls over the development of the forecasted cash flows, including forecasted revenue growth rates, and discount rate assumptions. We evaluated the Company’s forecasted cash flows and revenue growth rates by comparing them to external market and industry data. We compared the Company’s historical revenue and cash flows forecasts to actual results to assess the Company’s ability to accurately forecast. We involved valuation professionals with specialized skills and knowledge, who assisted in: • Evaluating the Company’s discount rate, by comparing it against a discount rate that was independently developed using publicly available third-party market data for comparable entities. • Developing an independent estimate of the Utility Products reporting unit’s fair value using the reporting unit’s cash flow forecast and an independently developed discount rate, and comparing the result of our estimate of fair value to the Company’s fair value estimate. /s/ KPMG LLP We have served as the Company’s auditor since 2016. Pittsburgh, Pennsylvania February 23, 2022 48 Koppers Holdings Inc. 2021 Annual Report KOPPERS HOLDINGS INC. CONSOLIDATED STATEMENT OF OPERATIONS Year Ended December 31, 2021 2020 2019 (Dollars in millions, except per share amounts) Net sales $ 1,678.6 $ 1,669.1 $ 1,637.0 Cost of sales 1,344.5 1,308.7 1,306.3 Depreciation and amortization 57.7 54.1 51.4 Selling, general and administrative expenses 148.9 143.1 148.3 Impairment and restructuring charges 2.2 6.5 6.0 (Gain) on sale of assets ( 31.2 ) 0.0 0.0 Operating profit 156.5 156.7 125.0 Other income, net 3.6 2.3 0.4 Interest expense 40.5 48.9 61.7 Income from continuing operations before income taxes 119.6 110.1 63.7 Income tax provision 34.5 21.0 0.0 Income from continuing operations 85.1 89.1 63.7 Income (loss) from discontinued operations, net of tax benefit (expense) of $ 0.0 , $ 0.9 and $( 1.4 ) 0.1 ( 3.9 ) 3.7 (Loss) gain on sale of discontinued operations, net of tax benefit (expense) of $ 0.1 , $( 8.3 ) and $ 0.0 ( 0.3 ) 35.8 0.0 Net income 84.9 121.0 67.4 Net (loss) income attributable to noncontrolling interests ( 0.3 ) ( 1.0 ) 0.8 Net income attributable to Koppers $ 85.2 $ 122.0 $ 66.6 Earnings (loss) per common share attributable to Koppers common shareholders: Basic - Continuing operations $ 4.02 $ 4.25 $ 3.09 Discontinued operations ( 0.02 ) 1.56 0.13 Earnings per basic common share $ 4.00 $ 5.81 $ 3.22 Diluted - Continuing operations $ 3.90 $ 4.17 $ 3.03 Discontinued operations ( 0.02 ) 1.54 0.13 Earnings per diluted common share $ 3.88 $ 5.71 $ 3.16 Weighted average shares outstanding (in thousands): Basic 21,238 20,992 20,665 Diluted 21,925 21,374 21,068 KOPPERS HOLDINGS INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year Ended December 31, 2021 2020 2019 (Dollars in millions) Net income $ 84.9 $ 121.0 $ 67.4 Changes in other comprehensive income: Currency translation adjustment ( 16.4 ) 22.8 ( 1.3 ) Unrealized (loss) gain on cash flow hedges, net of tax benefit (expense) of $ 0.5 , $( 12.6 ) and $( 4.1 ) ( 3.8 ) 41.2 8.7 Unrecognized pension prior service cost (benefit), net of tax benefit of $ 0.0 , $ 0.0 and $ 0.0 0.1 0.0 ( 0.1 ) Unrecognized pension net (loss) gain, net of tax benefit (expense) of $ 1.3 , $ 0.4 and $( 0.8 ) ( 3.8 ) ( 1.1 ) 2.1 Total comprehensive income 61.0 183.9 76.8 Comprehensive (loss) income attributable to noncontrolling interests ( 0.2 ) 0.1 0.6 Comprehensive income attributable to Koppers $ 61.2 $ 183.8 $ 76.2 The accompanying notes are an integral part of these consolidated financial statements. 49 KOPPERS HOLDINGS INC. CONSOLIDATED BALANCE SHEET December 31, 2021 2020 (Dollars in millions, except per share amounts) Assets Cash and cash equivalents, including restricted cash (Note 5) $ 45.5 $ 38.5 Accounts receivable, net of allowance of $ 3.3 and $ 2.6 182.8 175.1 Inventories, net 313.8 295.8 Derivative contracts 61.0 38.5 Other current assets 25.0 16.6 Total current assets 628.1 564.5 Property, plant and equipment, net 489.1 409.1 Operating lease right-of-use assets 91.2 102.5 Goodwill 296.0 297.8 Intangible assets, net 131.5 149.8 Deferred tax assets 15.0 18.4 Non-current derivative contracts 0.0 31.9 Other assets 11.0 24.6 Total assets $ 1,661.9 $ 1,598.6 Liabilities Accounts payable $ 171.9 $ 154.1 Accrued liabilities 90.5 106.7 Current operating lease liabilities 21.3 21.2 Current maturities of long-term debt 2.0 10.1 Total current liabilities 285.7 292.1 Long-term debt 781.5 765.8 Accrued postretirement benefits 38.6 46.2 Deferred tax liabilities 33.4 21.3 Operating lease liabilities 70.3 81.3 Other long-term liabilities 41.6 45.9 Total liabilities 1,251.1 1,252.6 Commitments and contingent liabilities (Note 19) Equity Senior Convertible Preferred Stock, $ 0.01 par value per share; 10,000,000 shares authorized; no shares issued 0.0 0.0 Common Stock, $ 0.01 par value per share; 80,000,000 shares authorized; 24,026,844 and 23,688,347 shares issued 0.2 0.2 Additional paid-in capital 249.5 234.1 Retained earnings 300.9 215.8 Accumulated other comprehensive loss ( 40.0 ) ( 15.9 ) Treasury stock, at cost, 2,930,694 and 2,589,803 shares ( 104.0 ) ( 92.5 ) Total Koppers shareholders’ equity 406.6 341.7 Noncontrolling interests 4.2 4.3 Total equity 410.8 346.0 Total liabilities and equity $ 1,661.9 $ 1,598.6 The accompanying notes are an integral part of these consolidated financial statements. 50 Koppers Holdings Inc. 2021 Annual Report KOPPERS HOLDINGS INC. CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31, 2021 2020 2019 (Dollars in millions) Cash provided by (used in) operating activities: Net income $ 84.9 $ 121.0 $ 67.4 Adjustments to reconcile net cash provided by (used in) operating activities: Depreciation and amortization 57.7 54.1 55.1 Stock-based compensation 13.0 11.3 12.1 Change in derivative contracts 3.8 ( 9.2 ) ( 4.1 ) Non-cash interest expense 2.7 2.6 2.6 Loss (gain) on sale of discontinued operations 0.3 ( 35.8 ) 0.0 (Gain) loss on sale of assets and investment ( 31.5 ) 0.0 0.8 Insurance proceeds ( 6.1 ) ( 0.7 ) ( 3.0 ) Deferred income taxes 16.9 9.4 ( 10.9 ) Change in other liabilities 2.1 ( 8.6 ) ( 18.4 ) Other - net 4.0 ( 0.4 ) ( 0.3 ) Changes in working capital: Accounts receivable ( 12.7 ) ( 11.5 ) 25.4 Inventories ( 24.3 ) 8.7 ( 14.8 ) Accounts payable 20.9 ( 25.3 ) ( 3.1 ) Accrued liabilities ( 21.0 ) 8.5 3.9 Other working capital ( 7.7 ) 3.0 2.6 Net cash provided by operating activities 103.0 127.1 115.3 Cash (used in) provided by investing activities: Capital expenditures ( 125.0 ) ( 69.8 ) ( 37.2 ) Insurance proceeds 6.1 0.7 3.0 Net cash provided by sale of discontinued operations and asset sales 29.4 74.7 0.4 Net cash (used in) provided by investing activities ( 89.5 ) 5.6 ( 33.8 ) Cash (used in) provided by financing activities: Net increase (decrease) in credit facility borrowings 15.2 ( 57.3 ) ( 61.1 ) Repayments of long-term debt ( 10.1 ) ( 70.7 ) ( 29.7 ) Issuances of Common Stock 2.4 1.1 4.0 Repurchases of Common Stock ( 11.5 ) ( 1.6 ) ( 0.9 ) Payment of debt issuance costs 0.0 ( 0.2 ) ( 1.0 ) Net cash used in financing activities ( 4.0 ) ( 128.7 ) ( 88.7 ) Effect of exchange rate changes on cash ( 2.5 ) 1.5 ( 0.4 ) Change in cash and cash equivalents of discontinued operations held for sale 0.0 0.7 2.5 Net increase (decrease) in cash and cash equivalents 7.0 6.2 ( 5.1 ) Cash and cash equivalents at beginning of period 38.5 32.3 37.4 Cash and cash equivalents at end of period $ 45.5 $ 38.5 $ 32.3 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflow from operating leases $ 30.5 $ 31.5 $ 31.1 Supplemental disclosure of non-cash investing and financing activities: Right-of-use assets obtained in exchange for new operating lease liabilities $ 12.6 $ 8.6 $ 29.9 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 38.1 $ 50.1 $ 60.9 Income taxes 23.4 13.4 16.8 Noncash investing activities: Accrued capital expenditures 7.3 8.9 0.4 The accompanying notes are an integral part of these consolidated financial statements. 51 KOPPERS HOLDINGS INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY Year Ended December 31, 2021 2020 2019 (Dollars in millions) Senior Convertible Preferred Stock Balance at beginning and end of year $ 0.0 $ 0.0 $ 0.0 Common Stock Balance at beginning and end of year 0.2 0.2 0.2 Additional paid-in capital Balance at beginning of year 234.1 221.9 206.0 Employee stock plans 13.0 11.3 12.1 Issuance of common stock 2.4 0.9 3.8 Balance at end of year 249.5 234.1 221.9 Retained earnings Balance at beginning of year 215.8 93.8 27.2 Net income attributable to Koppers 85.2 122.0 66.6 Balance at end of year 301.0 215.8 93.8 Accumulated other comprehensive loss Currency translation adjustment: Balance at beginning of year ( 18.1 ) ( 39.8 ) ( 38.5 ) Loss on sale of subsidiary ( 4.4 ) 0.0 0.0 Change in currency translation adjustment ( 12.2 ) 21.7 ( 1.3 ) Balance at end of year ( 34.7 ) ( 18.1 ) ( 39.8 ) Unrecognized gains (losses) on cash flow hedges: Balance at beginning of year 44.4 3.2 ( 5.5 ) Reclassification of unrealized (gains) losses on cash flow hedges to expense, net of tax benefit (expense) of $ 7.2 , $ 0.1 and $( 1.5 ) ( 22.8 ) ( 0.2 ) 4.6 Change in cash flow hedges, net of tax (expense) benefit of $( 6.7 ), $( 12.7 ) and $( 2.6 ) 19.0 41.4 4.1 Balance at end of year 40.6 44.4 3.2 Unrecognized pension prior service cost (benefit): Balance at beginning of year ( 0.6 ) ( 0.6 ) ( 0.6 ) Revaluation of unrecognized prior service benefit, net of tax benefit of $ 0.0 , $ 0.0 and $ 0.0 0.1 0.0 0.0 Balance at end of year ( 0.5 ) ( 0.6 ) ( 0.6 ) Unrecognized pension net loss: Balance at beginning of year ( 41.6 ) ( 40.5 ) ( 42.6 ) Reclassification of unrecognized pension net loss to expense, net of tax expense of $ 0.3 , $ 0.3 and $ 0.3 1.1 1.1 1.1 Revaluation of unrecognized pension net loss, net of tax (benefit) expense of $( 1.6 ), $( 0.7 ) and $ 0.4 ( 4.9 ) ( 2.2 ) 1.0 Balance at end of year ( 45.4 ) ( 41.6 ) ( 40.5 ) Total balance at end of year ( 40.0 ) ( 15.9 ) ( 77.7 ) Treasury stock Balance at beginning of year ( 92.5 ) ( 90.9 ) ( 90.0 ) Purchases ( 11.6 ) ( 1.6 ) ( 0.9 ) Balance at end of year ( 104.1 ) ( 92.5 ) ( 90.9 ) Total Koppers shareholders’ equity – end of year 406.6 341.7 147.3 Noncontrolling interests Balance at beginning of year 4.3 11.4 10.8 Net (loss) income attributable to noncontrolling interests ( 0.3 ) ( 1.0 ) 0.8 Sale of discontinued operations 0.0 ( 7.2 ) 0.0 Currency translation adjustment 0.2 1.1 ( 0.2 ) Balance at end of year 4.2 4.3 11.4 Total equity – end of year $ 410.8 $ 346.0 $ 158.7 The accompanying notes are an integral part of these consolidated financial statements. 52 Koppers Holdings Inc. 2021 Annual Report KOPPERS HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business Parent company of Koppers Inc. – In these financial statements, unless otherwise indicated or the context requires otherwise, when the terms “Koppers,” the “Company,” “we,” “our” or “us,” are used, they mean Koppers Holdings Inc. (“Koppers Holdings”) and its subsidiaries on a consolidated basis. The use of these terms is not intended to imply that Koppers Holdings and Koppers Inc. are not separate and distinct legal entities from each other and from their respective subsidiaries. Koppers Holdings has no direct operations and no significant assets other than the stock of Koppers Inc. It depends on the dividends from the earnings of Koppers Inc. and its subsidiaries to generate the funds necessary to meet its financial obligations. The terms of Koppers Inc.’s Credit Facility prohibit Koppers Inc. from paying dividends and otherwise transferring assets except for certain limited dividends. Further, the terms of the indenture governing Koppers Inc.’s Senior Notes due 2025 significantly restrict Koppers Inc. from paying dividends and otherwise transferring assets to Koppers Holdings. Business description – We are a global integrated provider of treated wood products, wood treatment chemicals and carbon compounds for use in a variety of markets including the railroad, specialty chemical, utility, residential lumber, agriculture, aluminum, steel, rubber and construction industries. Our business is operated through three business segments, Railroad and Utility Products and Services (“RUPS”), Performance Chemicals (“PC”) and Carbon Materials and Chemicals (“CMC”). Our RUPS segment sells treated and untreated wood products, rail joint bars and services primarily to the railroad industry and treated wood products to the utility industry. Railroad products include procuring and treating items such as crossties, switch ties and various types of lumber used for railroad bridges and crossings and the manufacture of rail joint bars. Utility products include transmission and distribution poles and pilings. The segment also operates a railroad services business that conducts engineering, design, repair and inspection services for railroad bridges, a business related to the recovery of used crossties and utility poles and a business related to the inspection of utility poles. Our PC segment develops, manufactures, and markets wood preservation chemicals and wood treatment technologies and services a diverse range of end-markets including infrastructure, residential and commercial construction and agriculture. Our CMC segment is primarily a manufacturer of creosote, carbon pitch, naphthalene, phthalic anhydride and carbon black feedstock. Creosote is used in the treatment of wood and carbon black feedstock which is used in the production of carbon black. Carbon pitch is a critical raw material used in the production of aluminum and for the production of steel in electric arc furnaces. Naphthalene is used for the production of phthalic anhydride and as a surfactant in the production of concrete. Phthalic anhydride is used in the production of plasticizers, polyester resins and alkyd paints. 2. Summary of Significant Accounting Policies Basis of presentation – The consolidated financial statements include our accounts and all majority-owned subsidiaries for which we are deemed to exercise control over its operations. All significant intercompany transactions have been eliminated in consolidation. Certain prior period amounts in the Notes to Consolidated Financial Statements have been reclassified to conform to the current period’s presentation. Use of estimates – Accounting principles generally accepted in the United States require management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies on the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ materially from these estimates. Revenue recognition – Revenue is recognized upon the completion of performance obligations under our contracts with customers and when control of a good or service is transferred to the customer. Substantially all of our contracts with customers are ship and invoice arrangements where revenue is recognized when we complete our performance obligations and transfer control to the customer . Revenue recognition generally occurs at the point of shipment; however in certain circumstances as shipping terms dictate, we transfer control and revenue is recognized at the point of destination. Payment terms on ship and invoice arrangements are typically within 45 days. Shipping and handling costs are included as a component of cost of sales. We 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. Payment on sales of untreated railroad crossties and wood treating services are generally due within 30 days of the invoice date. 53 Contract Balances – The timing of revenue recognition in accordance with ASC 606 results in both billed accounts receivable and unbilled receivables, both classified as accounts receivable, net of allowance within the consolidated balance sheet. Contract assets of $ 7.9 million and $ 5.8 million are recorded within accounts receivable, net of allowance within the consolidated balance sheet as of December 31, 2021 and December 31, 2020, respectively. Cash, cash equivalents and restricted cash – Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid investments with an original maturity of 90 days or less. Restricted cash of $ 2.3 million as of December 31, 2021 is being held in an escrow account for a remaining period of three months to cover potential customary indemnity claims by the buyers of one of our businesses sold as described in Note 4 – “Plant Closures and Divestitures.” Accounts receivable – We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations to Koppers, a specific reserve for bad debts is recorded against amounts due. If the financial condition of our customers were to deteriorate, resulting in an inability to make payments, additional allowances may be required. Inventories – In the United States, CMC and RUPS inventories are valued at the lower of cost, utilizing the last-in, first-out (“LIFO”) basis, or net realizable value. Utilities and industrial products inventories are valued at the lower of cost, utilizing the moving average cost basis, or net realizable value. PC inventories and all other inventories outside of the United States are valued at the lower of cost, utilizing the first-in, first-out (“FIFO”) basis, and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. LIFO inventories constituted approximately 45 percent and 53 percent of the FIFO inventory value at December 31, 2021 and 2020, respectively. In 2021, 2020 and 2019, we recorded inventory write-downs of $ 0.6 million, $ 0.6 million and $ 1.0 million, respectively, related to lower of cost and net realizable value for our subsidiaries that value inventory on the FIFO basis. Property, plant and equipment – Property, plant and equipment are recorded at purchased cost and include improvements which significantly increase capacities or extend useful lives of existing plant and equipment. Depreciation expense is calculated by applying the straight-line method over estimated useful lives. Estimated useful lives for buildings generally range from ten to 20 years and depreciable lives for machinery and equipment generally range from three to 15 years . Net gains and losses related to asset disposals are recognized in earnings in the period in which the disposal occurs. Routine repairs, replacements and maintenance are expensed as incurred. We periodically evaluate whether current facts and circumstances indicate that the carrying value of depreciable long-lived assets may not be recoverable. If an asset, or logical grouping of assets, is determined to be impaired, the asset is written down to its fair value using discounted future cash flows and, if available, quoted market prices. Refer to Note 4 – “Plant Closures and Divestitures” for additional information. Goodwill and other intangible assets – Goodwill and other purchased intangible assets are included in the identifiable assets of the business segment to which they have been assigned. Goodwill is not amortized and is subject to an impairment test that we conduct annually or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. 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. If assumptions or estimates in the fair value calculations change or if future forecasted cash flows or future forecasted growth rates vary from what was planned, this may impact the impairment analysis. We performed an impairment test for goodwill for each of the reporting units using the above quantitative testing approach. Based on the evaluations performed, we determined that the fair value of each of the reporting units exceeded its carrying amount, and therefore, we determined that goodwill was no t impaired. Identifiable intangible assets, other than goodwill, are recorded at fair value. Identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. Deferred income taxes – Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in earnings in the period the new laws are enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. 54 Koppers Holdings Inc. 2021 Annual Report Leases – Lease arrangements are determined whether or not to be a lease at inception. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments. ROU lease liabilities are recognized based on the present value of the future minimum lease payments over the term of the lease as of the start date and may include consideration of certain adjustments including non-lease components. ROU assets are determined based on the determined ROU lease liability and may include the consideration of certain adjustments including initial direct costs, prepaid lease payments, lease incentives received, and non-lease components. The option to extend or terminate a lease is included in the determination of the ROU asset and lease liability only when it is reasonably certain that we will exercise that option. Asset retirement obligations – Asset retirement obligations are initially recorded at present value and are capitalized as part of the cost of the related long-lived asset when sufficient information is available to estimate present value. The capitalized costs are subsequently charged to depreciation expense over the estimated useful life of the related long-lived asset. The present value of the obligation is determined by calculating the discounted value of expected future cash flows and accretion expense is recorded each month to ultimately increase this obligation to fair value. We recognize asset retirement obligations for the removal and disposal of residues; dismantling of certain tanks required by governmental authorities; cleaning and dismantling costs for owned rail cars; cleaning costs for leased rail cars and barges; and site demolition, when required by governmental authorities or by contract. The following table describes changes to our asset retirement obligation liabilities: December 31, 2021 2020 (Dollars in millions) Asset retirement obligation at beginning of year $ 19.8 $ 20.7 Accretion expense 1.0 1.1 Revision in estimated cash flows (a) ( 0.3 ) 4.6 Cash expenditures ( 7.3 ) ( 6.6 ) Balance at end of period $ 13.2 $ 19.8 (a) Revision in estimated cash flows for 2020 includes $ 2.9 million of charges related to restructuring activities. See Note 4 – “Plant Closures and Divestitures” for additional information. Litigation and contingencies – Amounts associated with litigation and contingencies are accrued when management, after taking into consideration the facts and circumstances of each matter including any settlement offers, has determined that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Legal costs for litigation are expensed as incurred with the exception of legal fees relating to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”), sites. Environmental liabilities – We accrue for remediation costs and penalties when the responsibility to remediate is probable and the amount of related cost is reasonably estimable. If only a range of potential liability can be estimated and no amount within the range is more probable than another, the accrual is recorded at the low end of that range. Remediation liabilities are discounted if the amount and timing of the cash disbursements are readily determinable. COVID-19 Assessment In March 2020, the World Health Organization categorized the current coronavirus disease (“COVID-19”) as a pandemic. COVID-19 continues to impact the United States and other countries across the world, and the duration and ultimate severity of its effects are currently unknown. This current level of uncertainty over the economic and operational impacts of COVID-19 means the related future financial impact cannot be reasonably estimated at this time. Our consolidated financial statements presented herein reflect certain estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of such assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Such estimates and assumptions affect, among other things, our goodwill, long-lived asset and intangible asset valuation; inventory valuation; valuation of deferred income taxes; the allowance for doubtful accounts; and measurement of cash incentive plans. Events and changes in circumstances arising after December 31, 2021, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods. 55 3. New Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04: Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides temporary optional expedients and exceptions to U.S. GAAP on contract modifications, hedging relationships, and other transactions affected by reference rate reform to ease entities' financial reporting burdens as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. Our debt agreements include the use of alternate rates when LIBOR is not available and we do not maintain hedging relationships applicable to this ASU. We do not expect the application of this update to have a material impact on our financial statements and, to the extent we enter into modifications of agreements that are impacted by the LIBOR phase-out, we will apply such guidance to those contract modifications. In January 2020, the FASB issued ASU No. 2020-01, “ Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This ASU is effective for fiscal years beginning after December 15, 2020. The adoption of ASU No. 2020-01 did not have a material impact on our consolidated financial statements. 4. Plant Closures and Divestitures Over the past seven years, we have been restructuring our Carbon Materials and Chemicals (“CMC”) segment in order to concentrate our facilities in regions where we believe we hold key competitive advantages to better serve our global customers. These closure activities include: • In June 2021, we sold a subsidiary related to our closed facility located in Uithoorn, the Netherlands and we recorded a gain on sale of $ 0.3 million. In April 2014, we had ceased coal tar distillation activities at the facility. • In February 2021, we sold our closed Follansbee, West Virginia coal tar distillation facility and we recorded a gain on sale of $ 5.7 million, consisting of $ 2.6 million from cash proceeds in addition to the assumption of certain liabilities by the buyer. • In September 2020, we sold Koppers (Jiangsu) Carbon Chemical Company Limited (“KJCC”) . Refer to Note 5 – “Discontinued Operations” for more details. • In October 2018, we sold our closed Clairton, Pennsylvania coal tar distillation facility. In March 2021, certain post-sale conditions were achieved and the buyer of the property released cash held in escrow to us resulting in a gain on sale of $ 1.8 million Other closure and divestiture activity relates to our Railroad Utility Products and Services (“RUPS”) segment. In October 2021, we sold our closed Denver, Colorado crosstie treating facility and we recorded a gain on sale of $ 23.4 million. 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. Details of the restructuring activities and related reserves are as follows: Severance and employee benefits Asset retirement Other Total (Dollars in millions) Reserve at December 31, 2019 $ 0.9 $ 0.7 $ 2.4 $ 4.0 Accrual 0.5 2.9 3.4 6.8 Costs charged against assets 0.0 0.0 ( 3.4 ) ( 3.4 ) Reversal of accrued charges ( 0.3 ) 0.0 0.0 ( 0.3 ) Cash paid ( 0.2 ) ( 0.8 ) ( 0.3 ) ( 1.3 ) Currency translation 0.0 0.0 0.2 0.2 Reserve at December 31, 2020 $ 0.9 $ 2.8 $ 2.3 $ 6.0 Accrual 0.0 0.0 2.4 2.4 Costs charged against assets 0.0 0.0 ( 2.4 ) ( 2.4 ) Reversal of accrued charges ( 0.2 ) ( 0.7 ) 0.0 ( 0.9 ) Cash paid ( 0.7 ) ( 1.9 ) 0.0 ( 2.6 ) Sale of subsidiary 0.0 ( 0.2 ) ( 2.3 ) ( 2.5 ) Reserve at December 31, 2021 $ 0.0 $ 0.0 $ 0.0 $ 0.0 56 Koppers Holdings Inc. 2021 Annual Report 5. Discontinued Operations 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. (the Buyers). 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 pre-tax gain on the sale of KJCC was $ 44.1 million and the after-tax gain on the sale was $ 35.8 million for the year ended December 31, 2020. Restricted cash of $ 2.3 million is being held in an escrow account and is recorded within cash and cash equivalents as of December 31, 2021 to cover potential customary indemnity claims by the Buyers for a remaining period of three months . On December 23, 2021, the Buyers issued claims totaling $ 1.6 million, of which our share is $ 1.2 million. We have rejected the claims and until these claims are resolved, the escrow amount will not be fully released. The sale of KJCC represented a strategic shift that has a major effect on our operations and financial results and was, therefore, classified as discontinued operations in our consolidated financial statements and notes, which have been restated accordingly. Net sales and operating (loss) profit from discontinued operations for the years ended December 31, 2020 and 2019 consist of the following amounts: Year Ended December 31, 2020 2019 (Dollars in millions) Net sales $ 31.6 $ 135.8 Operating (loss) profit ( 5.0 ) 5.8 The cash flows related to KJCC have not been restated in the Consolidated Statement of Cash Flows. Net cash inflows and outflows from discontinued operations for the years ended December 31, 2020 and 2019 consist of the following amounts: Year Ended December 31, 2020 2019 (Dollars in millions) Net cash provided by operating activities $ 0.7 $ 21.4 Net cash used in investing activities ( 0.9 ) ( 3.8 ) Net cash used in financing activities 0.0 ( 19.8 ) Effect of exchange rate changes on cash ( 0.5 ) ( 0.3 ) Net decrease in cash and cash equivalents ( 0.7 ) ( 2.5 ) In addition, we ceased carbon black production at our CMC facility located in Kurnell, Australia during 2011. Costs associated with this closure are included in income (loss) from discontinued operations on the consolidated statement of operations. 6. Fair Value Measurements Carrying amounts and the related estimated fair values of our financial instruments as of December 31, 2021 and 2020 are as follows: December 31, 2021 December 31, 2020 Fair Value Carrying Value Fair Value Carrying Value (Dollars in millions) Financial assets: Investments and other assets $ 1.3 $ 1.3 $ 1.2 $ 1.2 Financial liabilities: Long-term debt (including current portion) $ 804.1 $ 789.1 $ 799.2 $ 784.2 Investments and other assets – Represents the broker-quoted cash surrender value on universal life insurance policies. This asset is classified as Level 2 in the valuation hierarchy and is measured from values received from financial institutions. Debt – The fair value of our long-term debt is estimated based on the market prices for the same or similar issuances or on the current rates offered to us for debt of the same remaining maturities (Level 2). The fair value of our Credit Facility approximates carrying value due to the variable rate nature of this instrument. 57 7. Earnings and Dividends per Common Share The computation of basic earnings per common share for the periods presented is based upon the weighted average number of common shares outstanding during the periods. The computation of diluted earnings per common share includes the effect of non-vested nonqualified stock options and stock units assuming such options and stock units were outstanding common shares at the beginning of the period. The effect of antidilutive securities is excluded from the computation of diluted loss per common share, if any. The following table sets forth the computation of basic and diluted earnings per common share: Year Ended December 31, 2021 2020 2019 (Dollars in millions, except share amounts, in thousands, and per share amounts) Net income attributable to Koppers $ 85.2 $ 122.0 $ 66.6 Less: Income (loss) from discontinued operations, net of tax 0.1 ( 3.9 ) 3.7 (Loss) gain on sale of discontinued operations ( 0.3 ) 35.8 0.0 Noncontrolling interest related to discontinued operations 0.0 ( 1.0 ) 0.8 Income from continuing operations attributable to Koppers $ 85.4 $ 89.1 $ 63.7 Weighted average common shares outstanding: Basic 21,238 20,992 20,665 Effect of dilutive securities 687 382 403 Diluted 21,925 21,374 21,068 Earnings per common share – continuing operations: Basic earnings per common share $ 4.02 $ 4.25 $ 3.09 Diluted earnings per common share 3.90 4.17 3.03 Other data: Antidilutive securities excluded from computation of diluted earnings per common share 436 717 764 On February 23, 2022 , the board of directors declared a quarterly dividend of five cents per common share, payable on April 4, 2022 to shareholders of record as of March 18, 2022 . 8. Stock-based Compensation We have outstanding stock-based compensation awards that were granted under the amended and restated 2005 Long-Term Incentive Plan (the “2005 LTIP”), the 2018 Long-Term Incentive Plan (the “2018 LTIP”) and the 2020 Long-Term Incentive Plan, as amended (the “2020 LTIP”). The 2005 LTIP, the 2018 LTIP and the 2020 LTIP are collectively referred to as the “LTIP”. The LTIP provides for the grant to eligible persons of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance awards, dividend equivalents and other stock-based awards, which are collectively referred to as the “awards.” On May 6, 2021, the shareholders approved an amendment to our 2020 LTIP and an Amended and Restated Employee Stock Purchase Plan to increase the number of shares available for grant by 1,500,000 and 300,000 , respectively. Restricted Stock Units and Performance Stock Units Under the LTIP, the board of directors grants restricted stock units and performance stock units to certain employee participants (collectively, the “stock units”). Compensation expense for non-vested stock units is recorded over the vesting period based on the fair value at the date of grant. The fair value of restricted stock units is the market price of the underlying common stock on the date of grant and the fair value of performance stock units is determined using a Monte Carlo valuation model. For grants to most employees, the restricted stock units vest in four equal annual installments. Restricted stock units that have one-year vesting periods are also issued as compensation under the LTIP to members of the board of directors and, from time to time, are issued to employees with vesting periods of two years or less. Performance stock units have vesting based upon a market condition. These performance stock units have multi-year performance objectives and a three-year period for vesting (if the applicable performance objective is achieved). The applicable performance objective is based on our total shareholder return relative to the Standard & Poor’s SmallCap 600 Materials Index. The number of performance stock units granted represents the target award and participants have the ability to earn between zero and 200 percent of the target award based upon actual performance. If minimum performance criteria are not achieved , no performance stock units will vest. We have the discretion to settle the awards in cash rather than shares, although we currently expect that all awards will be settled by the issuance of shares. 58 Koppers Holdings Inc. 2021 Annual Report We calculated the fair value of the performance stock unit awards on the date of the grant using assumptions listed below: January 2021 Grant March 2020 Grant March 2019 Grant Grant date price per share of stock performance award $ 29.84 $ 19.63 $ 26.63 Expected dividend yield per share 0.00 % 0.00 % 0.00 % Expected volatility 68.70 % 45.60 % 39.00 % Risk-free interest rate 0.16 % 0.72 % 2.50 % Look-back period in years 3.00 2.83 2.82 Grant date fair value per share of stock performance award $ 41.50 $ 11.56 $ 40.30 Dividends declared, if any, on our common stock during the period prior to vesting of the stock units are credited at equivalent value as additional stock units and become payable as additional common shares upon vesting. In the event of termination of employment, other than retirement, death or disability, any non-vested stock units are forfeited, including additional stock units credited from dividends. In the event of termination of employment due to retirement, death or disability, pro-rata vesting of the stock units over the service period will result. There are special vesting provisions for the stock units related to a change in control. The following table shows a summary of the performance stock units as of December 31, 2021: Performance Period Minimum Shares Target Shares Maximum Shares 2019 – 2021 256,958 256,958 256,958 2020 – 2022 0 75,395 150,835 2021 – 2023 41,897 141,813 241,747 The minimum, target and maximum shares above reflect the impact from completed performance periods. Performance stock units granted in March 2019 for the 2019 – 2021 performance period will vest in March 2021 at 182.7 percent of the original target share amount of 140,665 stock units. The following table shows a summary of the status and activity of non-vested stock awards for the year ended December 31, 2021: Restricted Stock Units Performance Stock Units Total Stock Units Weighted Average Grant Date Fair Value per Unit Non-vested at January 1, 2021 509,509 391,744 901,253 $ 25.48 Granted 225,049 149,874 374,923 $ 34.89 Performance share adjustment 0 ( 60,540 ) ( 60,540 ) $ 5.55 Vested ( 224,017 ) ( 1,821 ) ( 225,838 ) $ 23.40 Forfeited ( 4,636 ) ( 5,091 ) ( 9,727 ) $ 17.36 Non-vested at December 31, 2021 505,905 474,166 980,071 $ 30.79 Stock Options Stock options to most executive officers vest and become exercisable in four equal annual installments. The stock options have a term of ten years . In the event of termination of employment, other than retirement, death or disability, any non-vested options are forfeited. In the event of termination of employment due to retirement, death or disability, pro-rata vesting of the options over the service period will result. There are special vesting provisions for the stock options related to a change in control. 59 Compensation expense for non-vested stock options is recorded over the vesting period based on the fair value at the date of grant. We calculated the fair value of stock options on the date of grant using the Black-Scholes-Merton model and the assumptions listed below: January 2021 Grant March 2020 Grant March 2019 Grant March 2018 Grant Grant date price per share of stock option award $ 29.84 $ 19.63 $ 26.63 $ 41.60 Expected dividend yield per share 0.00 % 0.00 % 0.00 % 0.00 % Expected life in years 6.64 6.40 6.14 5.73 Expected volatility 54.80 % 42.85 % 39.44 % 37.05 % Risk-free interest rate 0.59 % 0.87 % 2.53 % 2.67 % Grant date fair value per share of stock option award $ 15.79 $ 8.42 $ 11.29 $ 16.38 Prior to February 2022, we had not declared a dividend since 2014. The expected life in years is based on historical exercise data of options previously granted by us. Expected volatility is based on the historical volatility of our common stock and the historical volatility of certain other similar public companies. The risk-free interest rate is based on U.S. Treasury bill rates for the expected life of the option. The following table shows a summary of the status and activity of stock options for the year ended December 31, 2021: Options Weighted Average Exercise Price per Option Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in millions) Outstanding at December 31, 2020 1,120,254 $ 26.89 Granted 90,879 $ 29.84 Exercised ( 71,785 ) $ 17.74 Expired ( 71,346 ) $ 40.66 Forfeited ( 13,836 ) $ 22.12 Outstanding at December 31, 2021 1,054,166 $ 26.89 4.99 $ 7.7 Exercisable at December 31, 2021 760,208 $ 27.38 3.91 $ 5.8 Stock Compensation Expense Total stock-based compensation expense recognized under our LTIP and employee stock purchase plan for the three years ended December 31, 2021 is as follows: Year Ended December 31, 2021 2020 2019 (Dollars in millions) Stock-based compensation expense recognized: Selling, general and administrative expenses $ 13.0 $ 11.3 $ 12.1 Less related income tax benefit 3.7 2.2 0.2 Decrease in net income attributable to Koppers $ 9.3 $ 9.1 $ 11.9 Intrinsic value of exercised stock options $ 2.2 $ 0.0 $ 1.1 Cash received from the exercise of stock options $ 2.3 $ 0.0 $ 2.9 As of December 31, 2021, total future compensation expense related to non-vested stock-based compensation arrangements totaled $ 16.2 million and the weighted-average period over which this expense is expected to be recognized is approximately 25 months. 60 Koppers Holdings Inc. 2021 Annual Report 9. Segment Information We have three reportable segments: Railroad and Utility Products and Services, Performance Chemicals and Carbon Materials and Chemicals. Our reportable segments contain multiple aggregated business units since management believes the long-term financial performance of these business units is affected by similar economic conditions. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes. Our RUPS segment sells treated and untreated wood products, manufactured products and services primarily to the railroad and public utility markets. Railroad products and services include procuring and treating items such as crossties, switch ties and various types of lumber used for railroad bridges and crossings and the manufacture of rail joint bars. Utility products include transmission and distribution poles and pilings. The segment also operates a railroad services business that conducts engineering, design, repair and inspection services for railroad bridges, a business related to the recovery of used crossties and utility poles and a business related to the inspection of utility poles. Our PC segment develops, manufactures, and markets wood preservation chemicals and wood treatment technologies and services a diverse range of end-markets including infrastructure, residential and commercial construction, and agriculture. Our CMC segment is primarily a manufacturer of creosote, carbon pitch, naphthalene, phthalic anhydride and carbon black feedstock. Creosote is used in the treatment of wood and carbon black feedstock is used in the production of carbon black. Carbon pitch is used in the production of aluminum and steel in electric arc furnaces. Naphthalene is used for the production of phthalic anhydride and as a surfactant in the production of concrete. Phthalic anhydride is used in the production of plasticizers, polyester resins and alkyd paints. During 2021, we determined that our primary measure of segment profitability is adjusted earnings before interest, income taxes, depreciation, amortization and certain non-cash and/or non-recurring items that do not contribute directly to management’s evaluation of our operating results (as defined by us, “adjusted EBITDA"). These items include impairment, restructuring and plant closure costs, mark-to-market commodity hedging, gain on sale of assets and non-cash LIFO effects. This presentation is consistent with how our chief operating decision maker evaluates the results of operations and makes strategic decisions about the business. In addition, adjusted EBITDA is the primary measure used to determine the level of achievement of management’s short-term incentive goals and related payout. For these reasons, we believe that adjusted EBITDA represents the most relevant measure of segment profit and loss. Adjusted EBITDA is reconciled to net income, the most directly comparable financial measure determined and reported in accordance with U.S. GAAP. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment transactions are eliminated in consolidation. 61 The following table sets forth certain sales and operating data, for our segments for the periods indicated: Year Ended December 31, 2021 2020 2019 (Dollars in millions) Revenues from external customers: Railroad and Utility Products and Services $ 729.9 $ 759.1 $ 733.5 Performance Chemicals 503.3 526.3 448.3 Carbon Materials and Chemicals (a) 445.4 383.7 455.2 Total $ 1,678.6 $ 1,669.1 $ 1,637.0 Intersegment revenues: Performance Chemicals $ 15.9 $ 13.7 $ 12.6 Carbon Materials and Chemicals 75.3 78.7 75.2 Total $ 91.2 $ 92.4 $ 87.8 Depreciation and amortization expense: Railroad and Utility Products and Services $ 22.3 $ 20.1 $ 19.4 Performance Chemicals 17.9 18.1 18.3 Carbon Materials and Chemicals (b) 17.5 15.9 13.7 Total $ 57.7 $ 54.1 $ 51.4 Adjusted EBITDA: Railroad and Utility Products and Services $ 45.4 $ 65.3 $ 60.2 Performance Chemicals 101.8 100.7 68.6 Carbon Materials and Chemicals 76.3 45.0 73.5 Corporate 0.0 0.0 ( 1.2 ) Total $ 223.5 $ 211.0 $ 201.1 Capital expenditures: Railroad and Utility Products and Services $ 62.0 $ 31.3 $ 11.6 Performance Chemicals 17.7 12.1 9.7 Carbon Materials and Chemicals (c) 42.9 24.8 15.5 Corporate 2.4 1.6 0.4 Total $ 125.0 $ 69.8 $ 37.2 ( a ) Revenue excludes KJCC discontinued operations of $ 31.6 million and $ 135.8 million for the years ended December 31, 2020 and 2019, respectively. (b) Depreciation and amortization expense excludes KJCC discontinued operations of $ 0.6 million and $ 3.7 million for the years ended December 31, 2020 and 2019, respectively. ( c ) Capital expenditures includes KJCC discontinued operations of $ 0.6 million and $ 3.9 million for the years ended December 31, 2020 and 2019, respectively. 62 Koppers Holdings Inc. 2021 Annual Report The following table reconciles net income to adjusted EBITDA on a consolidated basis as calculated by us for the years indicated below: Year Ended December 31, (amounts in millions) 2021 2020 2019 Net income $ 84.9 $ 121.0 $ 67.4 Interest expense 40.5 48.9 61.7 Depreciation and amortization 57.7 54.1 51.4 Depreciation in impairment and restructuring charges 0.7 2.0 3.4 Income taxes 34.5 21.0 0.0 Discontinued operations 0.2 ( 31.9 ) ( 3.7 ) Sub-total 218.5 215.1 180.2 Adjustments to arrive at adjusted EBITDA: Impairment, restructuring and plant closure costs (1) 4.2 15.7 20.4 (Gain) on sale of assets ( 31.2 ) 0.0 0.0 LIFO expense (benefit) 28.2 ( 13.7 ) 4.5 Mark-to-market commodity hedging losses (gains) 3.8 ( 9.2 ) ( 4.0 ) Pension settlement 0.0 0.1 0.0 Discretionary incentive (2) 0.0 3.0 0.0 Total adjustments 5.0 ( 4.1 ) 20.9 Adjusted EBITDA $ 223.5 $ 211.0 $ 201.1 (1) Includes costs associated with restructuring, sales and closures of certain RUPS and CMC facilities as described in Note 4 – “Plant Closures and Divestitures”. (2) Represents a one-time employee incentive associated with the sale of KJCC as described in Note 5 – “Discontinued Operations”. The following table sets forth tangible and intangible assets allocated to each of our segments as of the dates indicated: December 31, 2021 2020 (Dollars in millions) Segment assets: Railroad and Utility Products and Services $ 594.1 $ 583.1 Performance Chemicals 586.9 536.1 Carbon Materials and Chemicals 447.1 424.2 Segment assets 1,628.1 1,543.4 Cash and cash equivalents 0.0 0.4 Income tax receivable 8.6 1.2 Prepaid insurance and other assets 7.9 7.0 Deferred taxes 0.0 28.8 Property, plant and equipment, net 6.6 5.9 Operating lease right-of-use assets 10.7 11.9 Total $ 1,661.9 $ 1,598.6 Goodwill: Railroad and Utility Products and Services $ 120.9 $ 121.1 Performance Chemicals 175.1 176.7 Total $ 296.0 $ 297.8 63 Revenues and Long-lived Assets by Geographic Area Year Revenue Long-lived assets (Dollars in millions) United States 2021 $ 1,134.2 $ 857.3 2020 1,170.1 832.0 2019 1,141.2 796.0 Australasia 2021 230.6 78.9 2020 194.3 82.0 2019 199.6 76.6 Europe 2021 195.8 63.3 2020 162.3 83.2 2019 177.5 70.2 Other countries 2021 118.0 19.3 2020 142.4 18.5 2019 118.7 19.3 Total (a) 2021 $ 1,678.6 $ 1,018.8 2020 $ 1,669.1 $ 1,015.7 2019 $ 1,637.0 $ 962.1 (a) Revenue excludes KJCC discontinued operations of $ 31.6 million and $ 135.8 million for the years ended December 31, 2020 and 2019, respectively. Long-lived assets exclude $ 59.3 million of assets of discontinued operations held for sale related to our KJCC business as of December 31, 2019. Revenues by geographic area in the above table are attributed by the destination country of the sale. Revenues from non-U.S. countries totaled $ 544.4 million in 2021, $ 499.0 million in 2020 and $ 495.8 million in 2019. Segment Revenues for Significant Product Lines Year Ended December 31, 2021 2020 2019 (Dollars in millions) Railroad and Utility Products and Services: Railroad treated products $ 414.4 $ 405.1 $ 419.6 Utility poles 228.0 241.7 222.0 Railroad infrastructure services 56.0 63.5 36.5 Rail joints 22.7 20.3 26.8 Other products 8.8 28.6 28.6 729.9 759.1 733.5 Performance Chemicals: Wood preservative products 489.1 510.7 418.8 Other products 14.2 15.6 29.5 503.3 526.3 448.3 Carbon Materials and Chemicals: Pitch and related products 260.3 230.9 272.4 Phthalic anhydride and other chemicals 75.6 66.4 77.9 Creosote and distillates 52.1 40.0 46.3 Naphthalene 27.1 19.7 24.9 Other products 30.3 26.7 33.7 445.4 383.7 455.2 Total (a) $ 1,678.6 $ 1,669.1 $ 1,637.0 (a) Revenue excludes KJCC discontinued operations of $ 31.6 million and $ 135.8 million for the years ended December 31, 2020 and 2019, respectively . 64 Koppers Holdings Inc. 2021 Annual Report 10. Income Taxes Income Tax Provision Components of our income tax provision are as follows: Year Ended December 31, 2021 2020 2019 (Dollars in millions) Current: Federal $ ( 1.5 ) $ 0.8 $ ( 3.5 ) State 0.9 0.7 0.5 Foreign 18.2 11.1 14.4 Total current tax provision 17.6 12.6 11.4 Deferred: Federal 10.6 6.1 3.1 State 1.1 1.6 0.4 Foreign 5.2 0.7 ( 14.9 ) Total deferred tax provision (benefit) 16.9 8.4 ( 11.4 ) Total income tax provision $ 34.5 $ 21.0 $ 0.0 Income before income taxes from foreign operations for 2021, 2020 and 2019 was $ 71.8 million, $ 52.4 million and $ 69.9 million, respectively. The provision for income taxes is reconciled with the federal statutory income tax rate as follows: Year Ended December 31, 2021 2020 2019 Federal income tax rate 21.0 % 21.0 % 21.0 % Foreign earnings taxed at different rates 4.3 2.9 ( 0.2 ) State income taxes, net of federal tax benefit 2.1 2.2 1.1 Valuation allowance adjustments 1.9 ( 12.1 ) 9.1 GILTI inclusion, net of foreign tax credits 0.2 4.0 1.4 Intra-entity transfer of intangible assets 0.0 0.0 ( 23.4 ) Deferred tax adjustments ( 0.2 ) ( 2.2 ) 0.0 Change in tax contingency reserves ( 1.1 ) ( 0.2 ) ( 7.0 ) Other 0.6 3.5 ( 2.0 ) 28.8 % 19.1 % 0.0 % For each of the three years ended December 31, 2021, 2020 and 2019, we have recorded valuation allowance adjustments related to the value of certain deferred tax assets. In 2021, we recorded a $3.3 million valuation allowance against net deferred tax assets of our United Kingdom entities as a result of a recent history of pre-tax losses and the reversal of a deferred tax liability associated with a defined benefit pension plan. In 2020 and 2019, the valuation allowance adjustment was impacted by the interest expense deduction in the United States. As originally enacted, the interest expense deduction is limited to 30 percent of adjusted taxable income as defined under the tax regulations and any such limitation that is disallowed in a year can be carried forward to future years. As of December 31, 2019, we had recorded a cumulative valuation allowance totaling $ 13.3 million for the disallowed interest expense deduction due to the uncertainly of when we could utilize the carryforward amounts. During 2020, new regulations were enacted and these new regulations impacted our interest expense limitation in our 2018 and 2019 U.S. tax returns. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and a provision of the CARES Act increased the allowable business interest expense deduction to 50 percent of adjusted taxable income retroactively to January 1, 2019. In July 2020, the Internal Revenue Service released regulations that were retroactive to January 1, 2018 and favorably impacted our calculation of adjusted taxable income. After application of these new regulations, the limitation of our interest expense deduction was significantly reduced when compared to the same calculations under the previous regulations. Due to these changes, in the year ended December 31, 2020 we recorded an income tax benefit of $ 13.3 million, to adjust a previously recorded valuation allowance for disallowed interest expense deductions that are eligible for carry-forward as we determined that we would be able to fully utilize these disallowed interest expense deductions. Effective January 1, 2021, the limitation on the deduction was restored to 30 percent. 65 In the year ended December 31, 2019, we recognized a one-time deferred tax benefit of $ 14.9 million upon the completion of a Dutch legal entity restructuring project. This restructuring resulted in an intra-entity transfer of certain intangible assets and intellectual property, which under Dutch tax law were valued at fair value and are amortized over a period of 9 to 14 years . Taxes Excluded from Net Income Attributable to Koppers The amount of deferred income tax (benefit) expense included in comprehensive income but excluded from net income attributable to Koppers relating primarily to adjustments to copper swap contracts is ($ 0.5 ) million, $ 12.6 million, and $ 4.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. The amount of deferred income tax (benefit) expense included in comprehensive income but excluded from net income attributable to Koppers relating to adjustments to reflect the unfunded status of employee post-retirement benefit plans is $( 1.3 ) million, $( 0.4 ) million, and $ 0.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. Deferred Tax Assets and Liabilities Deferred income taxes reflect the net tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows: Year Ended December 31, 2021 2020 (Dollars in millions) Deferred tax assets: Federal and state tax loss carryforwards, expiring from 2021 to 2040 $ 24.4 $ 18.3 Tax credits 17.5 20.0 Pension and other postretirement benefits obligations 9.6 9.7 Reserves, including insurance and environmental 9.0 11.7 Foreign tax loss carryforwards 7.4 7.5 Accrued employee compensation 7.1 6.6 Inventory 5.9 6.2 Asset retirement obligations 4.5 6.8 Other 3.3 3.1 Valuation allowance ( 44.5 ) ( 44.6 ) Total deferred tax assets 44.2 45.3 Deferred tax liabilities: Tax over book depreciation and amortization 44.0 28.1 Gain on derivative contracts 14.3 16.3 Other 4.3 3.8 Total deferred tax liabilities 62.6 48.2 Net deferred tax liabilities $ ( 18.4 ) $ ( 2.9 ) As a result of the Tax Act and the one-time mandatory transition tax, all previously unremitted earnings for which a U.S. deferred tax liability had not been accrued have now been subject to U.S. tax. As of December 31, 2021, there was approximately $ 504 million of such unremitted earnings. Substantially all unremitted earnings will remain indefinitely invested in our foreign subsidiaries for the foreseeable future unless we can remit any earnings as a dividend in a tax-free manner. In the event any earnings are remitted as a dividend with a tax cost due to currency gains or losses, state taxes, or foreign withholding taxes, we estimate that we will not incur significant additional taxes on those potential remittances. Management evaluated the ability to realize the deferred tax assets that are related to our domestic operations, particularly in light of our domestic financial reporting losses. In assessing the need for a valuation allowance, management considered all positive and negative evidence related to the realization of our net deferred tax assets. We believe that it will be in a taxable income position in the foreseeable future and it will have sufficient taxable income to utilize deferred tax assets related to its domestic operations. A valuation allowance is necessary when it is more likely than not that a deferred tax asset will not be realized. Certain deferred tax assets reflected above are not expected to be realized and a valuation allowance has been provided for them. 66 Koppers Holdings Inc. 2021 Annual Report Valuation allowances are recorded to offset the following deferred tax assets: December 31, 2021 2020 State temporary differences, net operating losses and tax credits $ 19.2 $ 19.1 Federal foreign tax credits 16.1 18.8 Foreign temporary differences, net operating losses and capital losses 9.1 6.7 Federal temporary differences 0.1 0.0 Total valuation allowances $ 44.5 $ 44.6 Unrecognized Tax Benefits A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: December 31, 2021 2020 2019 (Dollars in millions) Balance at beginning of year $ 2.5 $ 2.1 $ 7.0 Additions based on tax provisions related to the current year 0.1 0.2 0.1 Additions for tax provisions of prior years 0.0 0.5 0.0 Reductions resulting from a lapse in the statute of limitations ( 1.1 ) ( 0.3 ) ( 0.3 ) Reductions of tax provisions of prior years 0.0 0.0 ( 1.8 ) Reductions resulting from audit closures 0.0 0.0 ( 2.9 ) Balance at end of year $ 1.5 $ 2.5 $ 2.1 As of December 31, 2021 and 2020, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, was approximately $ 1.5 million and $ 2.5 million, respectively. We recognize interest expense and any related penalties from unrecognized tax benefits in income tax expense. For the year ended December 31, 2021, we recognized ($ 0.4 ) million in interest and penalties. As of December 31, 2021 and 2020, we had accrued interest and penalties of approximately $ 0.4 million and $ 0.8 million, respectively. We believe that it is reasonably possible that the amount of unrecognized tax benefits will decrease in the next twelve months by approximately $ 0.2 million due to the expirations of certain limitations and potential audit resolutions. We do not anticipate significant increases to the amount of unrecognized tax benefits within the next twelve months. Koppers Holdings and its subsidiaries file income tax returns in the U.S. federal jurisdiction, individual U.S. state jurisdictions and non-U.S. jurisdictions. With few exceptions, we are no longer subject to U.S. federal, U.S. state, or non-U.S. income tax examinations by tax authorities for years before 2016. 11. Inventories Inventories as of December 31, 2021 and 2020 were as follows: December 31, 2021 2020 (Dollars in millions) Raw materials $ 266.8 $ 233.7 Work in process 12.6 12.4 Finished goods 112.1 99.3 391.5 345.4 Less revaluation to LIFO 77.7 49.6 Inventories, net $ 313.8 $ 295.8 67 12. Property, Plant and Equipment Property, plant and equipment as of December 31, 2021 and 2020 were as follows: December 31, 2021 2020 (Dollars in millions) Land $ 15.2 $ 16.7 Buildings 75.8 75.0 Machinery and equipment 836.8 812.1 927.8 $ 903.8 Less accumulated depreciation 438.7 494.7 Property, plant and equipment, net $ 489.1 $ 409.1 Depreciation expense for the years ended December 31, 2021, 2020 and 2019 amounted to $ 39.4 million, $ 33.7 million and $ 30.7 million, respectively. Depreciation expense excludes KJCC discontinued operations of $ 0.6 million and $ 3.7 million for the years ended December 31, 2020 and 2019, respectively. Impairments – We did no t incur impairment charges in 2021, 2020 or 2019. 13. Goodwill and Other Identifiable Intangible Assets The change in the carrying amount of goodwill attributable to each reporting unit for the years ended December 31, 2021 and December 31, 2020 was as follows: Performance Chemicals Railroad Products and Services Utility Products Total (Dollars in millions) Balance at December 31, 2019 $ 175.4 $ 41.0 $ 79.7 $ 296.1 Currency translation 1.3 0.1 0.3 1.7 Balance at December 31, 2020 $ 176.7 $ 41.1 $ 80.0 $ 297.8 Currency translation ( 1.6 ) 0.0 ( 0.2 ) ( 1.8 ) Balance at December 31, 2021 $ 175.1 $ 41.1 $ 79.8 $ 296.0 Goodwill represents the excess of the cost over the fair value of acquired identifiable tangible and intangible assets and liabilities assumed from businesses acquired. Goodwill is tested for impairment at the reporting unit level annually in the fourth quarter or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists, using discounted cash flows. We performed a quantitative 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 forecasted future growth rates such as revenue and the discount rate. We determined that the estimated fair values exceeded the carrying values of all the reporting units, and accordingly, there was no impairment of goodwill incurred for each of the three years ended December 31, 2021. Our identifiable intangible assets are being amortized over their estimated useful lives and are summarized below: December 31, 2021 2020 Estimated life in years Weighted average remaining life in years Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net (Dollars in millions) Customer contracts 9 to 18 9.8 $ 226.9 $ 97.6 $ 129.3 $ 228.5 $ 84.7 $ 143.8 Technology 4 to 12 4.6 26.5 25.9 0.6 26.8 23.6 3.2 Trademarks 2 to 17 10.4 7.6 6.4 1.2 7.9 5.8 2.1 Supply contracts 10 0.0 2.4 2.4 0.0 2.6 2.6 0.0 Non-compete agreements 12 2.8 1.7 1.3 0.4 1.7 1.0 0.7 Favorable lease agreements 0 0.0 0.0 0.0 0.0 0.8 0.8 0.0 Total 9.7 $ 265.1 $ 133.6 $ 131.5 $ 268.3 $ 118.5 $ 149.8 68 Koppers Holdings Inc. 2021 Annual Report In 2021, the gross carrying value of identifiable intangible assets decreased by a net $ 3.2 million, primarily due to foreign exchange translation. Total amortization expense related to these identifiable intangible assets was $ 18.3 million, $ 19.8 million and $ 20.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. Estimated amortization expense for the next five years is summarized below: Estimated annual amortization (Dollars in millions) 2022 $ 14.9 2023 14.6 2024 14.3 2025 13.8 2026 12.5 14. Pensions and Post-Retirement Benefit Plans We maintain a number of defined benefit and defined contribution plans to provide retirement benefits for employees in the United States, as well as employees outside the United States. These plans are maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974 (“ERISA”), local statutory law or as determined by the board of directors. The defined benefit pension plans generally provide benefits based upon years of service and compensation. Pension plans are funded except for three domestic non-qualified defined benefit pension plans for certain key executives. In the United States, all qualified and two of the non-qualified defined benefit pension plans for salaried and hourly employees have been closed to new participants and have been frozen. Accordingly, these pension plans no longer accrue additional years of service or recognize future increases in compensation for benefit purposes. The defined contribution plans generally provide retirement assets to employee participants based upon employer and employee contributions to the participant’s individual investment account. We also provide retiree medical insurance coverage to certain U.S. employees and a life insurance benefit to most U.S. employees. For salaried employees, the retiree medical and retiree insurance plans have been closed to new participants. Expense related to defined contribution plans totaled $ 9.1 million, $ 8.4 million and $ 8.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. Net periodic pension costs for 2021, 2020 and 2019 were as follows: Year Ended December 31, Pension Benefits Other Benefits 2021 2020 2019 2021 2020 2019 (Dollars in millions) Service cost $ 1.5 $ 1.4 $ 1.5 $ 0.1 $ 0.1 $ 0.1 Interest cost 5.2 6.4 7.8 0.3 0.3 0.4 Expected return on plan assets ( 7.4 ) ( 7.9 ) ( 7.9 ) 0.0 0.0 0.0 Amortization of net loss (gain) 1.4 1.7 1.6 0.0 ( 0.2 ) ( 0.2 ) Settlements and curtailments 0.0 0.1 0.0 0.0 0.0 0.0 Net periodic benefit cost $ 0.7 $ 1.7 $ 3.0 $ 0.4 $ 0.2 $ 0.3 69 The change in the funded status of the pension and postretirement plans as of December 31, 2021 and December 31, 2020 is as follows: Year Ended December 31, Pension Benefits Other Benefits 2021 2020 2021 2020 (Dollars in millions) Change in benefit obligation: Benefit obligation at beginning of year $ 233.3 $ 219.8 $ 10.5 $ 9.2 Service cost 1.5 1.4 0.1 0.1 Interest cost 5.2 6.4 0.3 0.3 Actuarial (gains) losses ( 9.0 ) 17.3 ( 0.6 ) 1.3 Settlements 0.0 ( 2.2 ) 0.0 0.0 Currency translation ( 0.6 ) 2.6 0.0 0.0 Benefits paid ( 10.8 ) ( 12.0 ) ( 0.5 ) ( 0.4 ) Benefit obligation at end of year 219.6 233.3 9.8 10.5 Change in plan assets: Fair value of plan assets at beginning of year 208.0 191.5 0.0 0.0 Actual return on plan assets ( 8.9 ) 23.6 0.0 0.0 Employer contribution 2.3 3.9 0.5 0.4 Settlements 0.0 ( 2.2 ) 0.0 0.0 Currency translation ( 0.6 ) 3.2 0.0 0.0 Benefits paid ( 10.8 ) ( 12.0 ) ( 0.5 ) ( 0.4 ) Fair value of plan assets at end of year 190.0 208.0 0.0 0.0 Funded status of the plan $ ( 29.6 ) $ ( 25.3 ) $ ( 9.8 ) $ ( 10.5 ) In 2021, the net actuarial gain of $ 9.0 million is due principally to the increase of 38 basis points in the discount rate used to measure the benefit obligation as of December 31, 2021 compared to the prior year. As discussed further in the following paragraph, the actual return on plan assets was negative in 2021 primarily due to the purchase of a bulk annuity insurance policy in February 2021 related to our defined benefit pension plan in the United Kingdom. As of December 31, 2021, the fair value of the bulk annuity insurance policy of $ 52.3 million is based on the calculated pension benefit obligation and is classified as Level 3 within the fair value hierarchy. During 2021, we entered into a buy-in bulk annuity insurance policy in exchange for a premium payment of $ 67.8 million, which is subject to adjustment as a result of subsequent data cleansing activities. Under the terms of this buy-in insurance policy, the insurer is liable to pay the benefits of our defined benefit pension plan in the United Kingdom, but the plan still retains full legal responsibility to pay the benefits to the members of the plan using the insurance payments. The buy-in policy will be treated as a plan asset going forward until such time as the buy-in policy is converted to a buy-out policy, which is when individual insurance policies will be assigned to each member of the plan and the plan will no longer have legal responsibility to pay the benefits to the members. The data cleansing effort is expected to be completed in late 2022 or early 2023 at which time the pension obligation will be irrevocably settled. Upon that event, we will recognize a pre-tax pension settlement loss of approximately $ 22 million. This pension plan has a benefit obligation of $ 54.2 million and plan assets of $ 52.5 million as of December 31, 2021. 70 Koppers Holdings Inc. 2021 Annual Report Plan Data Year Ended December 31, Pension Benefits Other Benefits 2021 2020 2021 2020 (Dollars in millions) Amounts recognized in the balance sheet consist of: Noncurrent assets $ 0.8 $ 12.1 $ 0.0 $ 0.0 Current liabilities 1.0 1.0 0.6 0.7 Noncurrent liabilities 29.4 36.4 9.2 9.8 Pension plans with projected benefit obligations in excess of plan assets: Benefit obligation $ 215.7 $ 172.5 Fair value of plan assets 185.3 135.0 Pension plans with accumulated benefit obligations in excess of plan assets: Accumulated benefit obligation $ 215.5 $ 172.2 Fair value of plan assets 185.3 135.0 The measurement date for all pension and postretirement assets and obligations is December 31 for each respective year. The accumulated benefit obligation for all defined benefit pension plans as of December 31, 2021 and 2020 was $ 219.1 million and $ 232.5 million, respectively. Expected Contributions for the 2022 Fiscal Year Our expected contributions for 2022 are estimated to be $ 1.0 million for pension plans and $ 0.6 million for other benefit plans. Projected Benefit Payments Benefit payments for pension benefits, which are primarily funded by the pension plan assets, and other benefits, which are funded by general corporate assets, are expected to be paid as follows: Pension Benefits Other Benefits (Dollars in millions) 2022 $ 11.7 $ 0.6 2023 11.5 0.6 2024 11.5 0.6 2025 12.0 0.6 2026 12.6 0.6 Next five years 59.5 3.0 Weighted-Average Assumptions December 31, Pension Benefits Other Benefits 2021 2020 2021 2020 Discount rate 2.67 % 2.29 % 2.97 % 2.66 % Expected return on plan assets 3.91 3.67 Rate of compensation increase 3.00 3.41 Initial medical trend rate 5.40 5.40 Basis for the Selection of the Long-Term Rate of Return on Assets The long-term rate of return on assets assumption was determined by using the plan’s asset allocation as described in the plan’s investment policy and modeling a distribution of compound average returns over a time horizon. The model uses asset class return, variance, and correlation assumptions to produce the expected return. The return assumptions used forward looking gross returns influenced by the current bond yields, corporate bond spreads and equity risk premiums based on current market conditions. 71 In general, the long-term rate of return is the sum of the portion of total assets in each asset class multiplied by the expected return for that class, adjusted for expected expenses to be paid from the assets. To develop the expected long-term rate of return on assets assumption, we considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. Investment Strategy The weighted average asset allocation for our pension plans as of December 31 by asset category is as follows: December 31, 2021 2020 Debt securities 49 % 70 % Equity securities 21 21 Other 30 9 100 % 100 % Our investment strategy for our pension plans is to maintain an adequate level of diversification, to reduce interest rate and market risk and to provide adequate liquidity to meet immediate and future benefit payment requirements. Our overall investment strategy is to achieve a mix of growth seeking assets, principally U.S. and international public company equity securities and income generating assets, principally debt securities, real estate and cash. For all pension plans not engaged in a buy-out process, we target an allocation of 30 percent to 40 percent growth seeking assets and 60 percent to 70 percent income generating assets on an overall basis. We utilize investment managers to assist in identifying and monitoring investments that meet these allocation criteria. With respect to the U.S. defined benefit plan, we have implemented a strategy of reallocating pension assets from growth seeking assets to income generating assets as certain funded status levels are reached. All assets are invested in pooled or commingled investment vehicles with the exception of the insurance annuity contract. Our interest in these investment vehicles is expressed as a unit of account with a value per unit that is the result of the accumulated values of the underlying investments. Equity securities held within these investment vehicles are typically priced on a daily basis using the closing market price from the exchange through which the security is traded. Debt securities held within these investment vehicles are typically priced on a daily basis by independent pricing services. Certain investments are valued using the net asset value (“NAV”) practical expedient and have not been categorized in the fair value hierarchy but are included to reconcile the fair value hierarchy to the total fair value of plan assets. The fair value of real estate investments is either priced through a listing on an exchange or are subject to periodic appraisals. The following tables set forth by level, our pension plan assets at fair value, within the fair value hierarchy, as of December 31, 2021 and December 31, 2020: December 31, 2021 Quoted prices in active markets for identical assets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Total (Dollars in millions) U.S. equity securities $ 0.0 $ 7.9 $ 0.0 $ 7.9 International equity securities 0.0 17.9 0.0 17.9 U.S. debt securities 0.0 64.9 0.0 64.9 International debt securities 0.0 3.6 0.0 3.6 Insurance annuity contract and other investments 0.0 0.6 52.3 52.9 Cash and cash equivalents 0.0 2.1 0.0 2.1 $ 0.0 $ 97.0 $ 52.3 $ 149.3 Investments measured at NAV (a) 40.7 Total assets at fair value $ 190.0 (a) The fair value amounts presented in the table above are intended to permit reconciliations of the fair value hierarchy to the total plan assets. 72 Koppers Holdings Inc. 2021 Annual Report December 31, 2020 Quoted prices in active markets for identical assets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Total (Dollars in millions) U.S. equity securities $ 0.0 $ 8.1 $ 0.0 $ 8.1 International equity securities 0.0 19.3 0.0 19.3 U.S. debt securities 0.0 68.6 0.0 68.6 International debt securities 0.0 62.7 0.0 62.7 Other investments 0.0 0.6 0.0 0.6 Cash and cash equivalents 0.0 11.2 0.0 11.2 $ 0.0 $ 170.5 $ 0.0 $ 170.5 Investments measured at NAV (a) 37.5 Total assets at fair value $ 208.0 (a) The fair value amounts presented in the table above are intended to permit reconciliations of the fair value hierarchy to the total plan assets. Incentive Plan We have short-term management incentive plans that pay cash bonuses if certain Company performance goals are met. Expenses incurred for these plans was $ 14.9 million in 2021, $ 17.3 million in 2020 and $ 12.2 million in 2019. 15. Debt Debt as of December 31, 2021 and 2020 was as follows: December 31, Weighted Average Interest Rate Maturity 2021 2020 Term Loan 2.38 % 2024 $ 2.0 $ 12.2 Revolving Credit Facility 2.38 % 2024 287.1 272.0 Senior Notes due 2025 6.00 % 2025 500.0 500.0 Total debt 789.1 784.2 Less short-term debt and current maturities of long-term debt 2.0 10.1 Less unamortized debt issuance costs 5.6 8.3 Long-term debt $ 781.5 $ 765.8 Credit Facility The Company maintains a $ 600.0 million senior secured revolving credit facility and a $ 100.0 million secured term loan facility (collectively, the “Credit Facility”), as amended. The secured term loan has a quarterly amortization of $ 2.5 million and the interest rate on the Credit Facility is variable and is based on LIBOR . Borrowings under the Credit Facility are secured by a first priority lien on substantially all of the assets of Koppers Inc., Koppers Holdings Inc. and their material domestic subsidiaries. The Credit Facility contains certain covenants for Koppers Inc. and its restricted subsidiaries that limit capital expenditures, additional indebtedness, liens, dividends, investments or acquisitions. In addition, such covenants give rise to events of default upon the failure by Koppers Inc. and its restricted subsidiaries to meet certain financial ratios. As of December 31, 2021, we had $ 305.2 million of unused revolving credit availability for working capital purposes after restrictions from certain letter of credit commitments and other covenants. As of December 31, 2021, $ 7.8 million of commitments were utilized by outstanding letters of credit. Senior Notes due 2025 The 2025 Notes are senior obligations of Koppers Inc., are unsecured and are guaranteed by Koppers Holdings Inc. and certain of Koppers Inc.’s domestic subsidiaries. The 2025 Notes pay interest semi-annually in arrears on February 15 and August 15 and will mature on February 15, 2025 unless earlier redeemed or repurchased. We were entitled to redeem all or a portion of the 2025 Senior Notes at a redemption price of 104.5 percent of principal value, which declines to a redemption price of 101.5 percent on or after February 15, 2022 until the redemption price is equivalent to the principal value on April 15, 2023. 73 The indenture governing the 2025 Notes includes customary covenants that restrict, among other things, the ability of Koppers Inc. and its restricted subsidiaries to incur additional debt, pay dividends or make certain other restricted payments, incur liens, merge or sell all or substantially all of the assets of Koppers Inc. or its subsidiaries or enter into various transactions with affiliates. Debt Maturities and Deferred Financing Costs At December 31, 2021 the aggregate debt maturities for the next five years are as follows: (Dollars in millions) 2022 $ 2.0 2023 0.0 2024 287.1 2025 500.0 2026 0.0 Total debt $ 789.1 Unamortized debt issuance costs (net of accumulated amortization of $ 12.1 million and $ 9.4 million at December 31, 2021 and 2020, respectively) were $ 5.6 million and $ 8.3 million at December 31, 2021 and 2020, respectively, and are included as a deduction from the carrying amount of long-term debt. 16. Leases We recognize lease obligations and associated right-of-use assets for existing non-cancelable leases. We have non-cancelable operating leases primarily associated with railcars, office and manufacturing facilities, storage tanks, ships, production equipment and vehicles. Many of our leases include both lease (e.g., fixed rent) and non-lease components (e.g., maintenance and services). For certain asset classes such as railcars, storage tanks and ships, we have separated the lease and non-lease components based on the estimated stand-alone price for each component. For the remaining asset classes, we have elected to account for these components as a single lease component. In addition, we exclude leases expiring within twelve months from balance sheet recognition. Many of our leases include one or more options to renew. We evaluate renewal options at the lease commencement date and regularly thereafter to determine if we are reasonably certain to exercise the option, in which case we include the renewal period in our lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available to determine the present value of the lease payments. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Operating lease costs were $ 30.2 million and $ 31.2 million and variable lease costs were $ 3.3 million and $ 3.5 million during the years ended December 31, 2021 and 2020, respectively. The following table presents information about the amount and timing of cash flows arising from our operating leases as of December 31, 2021: (Dollars in millions) 2022 $ 28.0 2023 21.7 2024 17.7 2025 14.4 2026 10.4 Thereafter 25.0 Total lease payments $ 117.2 Less: Interest ( 25.6 ) Present value of lease liabilities $ 91.6 74 Koppers Holdings Inc. 2021 Annual Report Supplemental consolidated balance sheet information related to leases is as follows: December 31, 2021 2020 (Dollars in millions) Operating leases: Operating lease right-of-use assets $ 91.2 $ 102.5 Current operating lease liabilities $ 21.3 $ 21.2 Operating lease liabilities 70.3 81.3 Total operating lease liabilities $ 91.6 $ 102.5 Weighted average remaining lease term, in years 5.8 6.4 Weighted average discount rate 7.4 % 7.5 % 17. Derivative Financial Instruments We utilize derivative instruments to manage exposures to risks that have been identified and measured and are capable of being controlled. The primary risks that we manage by using derivative instruments are commodity price risk associated with copper and foreign currency exchange risk associated with a number of currencies, principally the U.S. dollar, the Euro and British pounds. Swap contracts on copper are used to manage the price risk associated with forecasted purchases of materials used in our manufacturing processes. Generally, we will not hedge cash flow exposures for durations longer than 36 months and we have hedged certain volumes of copper through the end of 2022. We enter into foreign currency forward contracts to manage foreign currency risk associated with our receivable and payable balances in addition to foreign-denominated sales. Generally, we enter into master netting arrangements with the counterparties and offset net derivative positions with the same counterparties. Currently, our agreements do not require cash collateral. ASC Topic 815-10, “Derivatives and Hedging,” requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. Derivative instruments’ fair value is determined using significant other observable inputs, or Level 2 in the fair value hierarchy. In accordance with ASC Topic 815-10, we designate certain of our commodity swaps as cash flow hedges of forecasted purchases of commodities. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instruments representing hedge ineffectiveness are recognized in current earnings. For those commodity swaps where hedge accounting is not elected, the fair value of the commodity swap is recognized as an asset or liability in the consolidated balance sheet and the related gain or loss on the derivative is reported in current earnings. These amounts are classified in cost of sales in the consolidated statement of operations. As of December 31, 2021 and December 31, 2020, we had outstanding copper swap contracts of the following amounts: Units Outstanding (in Pounds) Net Fair Value - Asset (Liability) December 31, December 31, 2021 2020 2021 2020 (Amounts in millions) Cash flow hedges 29.0 62.3 $ 53.8 $ 58.3 Not designated as hedges 6.1 11.5 7.1 10.9 Total 35.1 73.8 $ 60.9 $ 69.2 As of December 31, 2021 and December 31, 2020, the fair value of the outstanding copper swap contracts is recorded in the balance sheet as follows: December 31, 2021 2020 (Dollars in millions) Derivative contracts $ 60.9 $ 37.3 Non-current derivative contracts 0.0 31.9 Net asset on balance sheet $ 60.9 $ 69.2 Accumulated other comprehensive gain, net of tax $ 40.6 $ 44.4 In the next twelve months , we estimate that $ 41.4 million of unrealized gains, net of tax, related to commodity price hedging will be reclassified from other comprehensive income into earnings. See the consolidated statement of comprehensive income and consolidated statement of shareholders’ equity for amounts recorded in other comprehensive income and for amounts reclassified from accumulated other comprehensive income into net income for the periods specified below. 75 For the years ended December 31, 2021 and 2020, the following amounts were recognized in earnings related to copper swap contracts: Year Ended December 31, 2021 2020 (Dollars in millions) (Loss) gain from contracts where hedge accounting was not elected $ ( 3.8 ) $ 9.2 The fair value associated with forward contracts related to foreign currency that are not designated as hedges are immediately charged to earnings. These amounts are classified in cost of sales in the consolidated statement of operations. As of December 31, 2021 and 2020, the fair value of outstanding foreign currency forward contracts is recorded in the balance sheet as follows: December 31, 2021 2020 (Dollars in millions) Derivative contracts $ 0.1 $ 1.2 Accrued liabilities ( 0.5 ) ( 0.5 ) Net (liability) asset on balance sheet $ ( 0.3 ) $ 0.7 As of December 31, 2021 and 2020, the net currency units outstanding were: December 31, 2021 2020 (In millions) British Pounds GBP 0.0 GBP 2.0 United States Dollars USD 21.4 USD 7.6 18. Common Stock and Senior Convertible Preferred Stock Changes in senior convertible preferred stock, common stock and treasury stock for the three years ended December 31, 2021 are as follows: December 31, 2021 2020 2019 (Shares in thousands) Senior Convertible Preferred Stock: Balance at beginning and end of year 0 0 0 Common Stock: Balance at beginning of year 23,688 23,321 23,029 Issued for employee stock plans 339 367 292 Balance at end of year 24,027 23,688 23,321 Treasury Stock: Balance at beginning of year ( 2,590 ) ( 2,516 ) ( 2,480 ) Shares repurchased ( 341 ) ( 74 ) ( 36 ) Balance at end of year ( 2,931 ) ( 2,590 ) ( 2,516 ) 76 Koppers Holdings Inc. 2021 Annual Report 19. Commitments and Contingent Liabilities We are involved in litigation and various proceedings relating to environmental laws and regulations, product liability and other matters. Certain of these matters are discussed below. The ultimate resolution of these contingencies is subject to significant uncertainty and should we fail to prevail in any of these legal matters or should several of these legal matters be resolved against us in the same reporting period, these legal matters could, individually or in the aggregate, be material to the consolidated financial statements. Legal Proceedings Coal Tar Pitch Cases . Koppers Inc. is one of several defendants in lawsuits filed in two states in which the plaintiffs claim they suffered a variety of illnesses (including cancer) as a result of exposure to coal tar pitch sold by the defendants. There were 59 plaintiffs in 31 cases pending as of December 31, 2021, compared to 64 plaintiffs in 34 cases pending as of December 31, 2020. As of December 31, 2021 , there were 30 cases pending in the Court of Common Pleas of Allegheny County, Pennsylvania, and one case pending in the Circuit Court of Knox County, Tennessee. The plaintiffs in all 31 pending cases seek to recover compensatory damages. Plaintiffs in 26 of those cases also seek to recover punitive damages. The plaintiffs in the 30 cases filed in Pennsylvania seek unspecified damages in excess of the court’s minimum jurisdictional limit. The plaintiff in the Tennessee state court case seeks damages of $ 15.0 million. The other defendants in these lawsuits vary from case to case and include companies such as Beazer East, Inc. (“Beazer East”), Honeywell International Inc., Graftech International Holdings, Dow Chemical Company, UCAR Carbon Company, Inc., and SGL Carbon Corporation. Discovery is proceeding in these cases. No trial dates have been set in any of these cases. We have no t provided a reserve for the coal tar pitch lawsuits because, at this time, we cannot reasonably determine the probability of a loss, and the amount of loss, if any, cannot be reasonably estimated. The timing of resolution of these cases cannot be reasonably determined. Although Koppers Inc. is vigorously defending these cases, an unfavorable resolution of these matters may have a material adverse effect on our business, financial condition, cash flows and results of operations. Environmental and Other Litigation Matters 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. We expect to incur substantial costs for ongoing compliance with such laws and regulations. We may also face governmental or third-party claims, or otherwise incur costs, relating to cleanup of, or for injuries resulting from, contamination at sites associated with past and present operations. We accrue for environmental liabilities when a determination can be made that a liability is probable and reasonably estimable. Environmental and Other Liabilities Retained or Assumed by Others We have agreements with former owners of certain of our operating locations under which the former owners retained, assumed and/or agreed to indemnify us against certain environmental and other liabilities. The most significant of these agreements was entered into at Koppers Inc.’s formation on December 29, 1988 (the “Acquisition”). Under the related asset purchase agreement between Koppers Inc. and Beazer East, subject to certain limitations, Beazer East retained the responsibility for and agreed to indemnify Koppers Inc. against certain liabilities, damages, losses and costs, including, with certain limited exceptions, liabilities under and costs to comply with environmental laws to the extent attributable to acts or omissions occurring prior to the Acquisition and liabilities related to products sold by Beazer East prior to the Acquisition (the “Indemnity”). Beazer Limited, the parent company of Beazer East, unconditionally guaranteed Beazer East’s performance of the Indemnity pursuant to a guarantee (the “Guarantee”). The Indemnity provides different mechanisms, subject to certain limitations, by which Beazer East is obligated to indemnify Koppers Inc. with regard to certain environmental, product and other liabilities and imposes certain conditions on Koppers Inc. before receiving such indemnification, including, in some cases, certain limitations regarding the time period as to which claims for indemnification can be brought. In July 2004, Koppers Inc. and Beazer East agreed to amend the environmental indemnification provisions of the December 29, 1988 asset purchase agreement to extend the indemnification period for pre-closing environmental liabilities, subject to the following paragraph, and agreed to share toxic tort litigation defense arising from any sites acquired from Beazer East. 77 Qualified expenditures under the Indemnity are not subject to a monetary limit. Qualified expenditures under the Indemnity include (i) environmental cleanup liabilities required by third parties, such as investigation, remediation and closure costs, relating to pre-December 29, 1988 (“Pre-Closing”) acts or omissions of Beazer East or its predecessors; (ii) environmental claims by third parties for personal injuries, property damages and natural resources damages relating to Pre-Closing acts or omissions of Beazer East or its predecessors; (iii) punitive damages for the acts or omissions of Beazer East and its predecessors without regard to the date of the alleged conduct and (iv) product liability claims for products sold by Beazer East or its predecessors without regard to the date of the alleged conduct. The indemnification period ended July 14, 2019 (the “Claim Deadline”) and Beazer East may now tender certain third-party claims described in sections (i) and (ii) above to Koppers Inc. However, to the extent the third-party claims described in sections (i) and (ii) above were tendered to Beazer East by the Claim Deadline, Beazer East will continue to be required to pay the costs arising from such claims under the Indemnity. Furthermore, the Claim Deadline did not change the provisions of the Indemnity with respect to indemnification for non-environmental claims, such as product liability claims, which claims may continue to be tendered by Koppers Inc. to Beazer East. The Indemnity provides for the resolution of issues between Koppers Inc. and Beazer East by an arbitrator on an expedited basis upon the request of either party. The arbitrator could be asked, among other things, to make a determination regarding the allocation of environmental responsibilities between Koppers Inc. and Beazer East. Arbitration decisions under the Indemnity are final and binding on the parties. Contamination has been identified at most manufacturing and other sites of our subsidiaries. One site currently owned and operated by Koppers Inc. in the United States is listed on the National Priorities List promulgated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”). Currently, at the properties acquired from Beazer East (which includes the National Priorities List site and all but one of the sites permitted under the Resource Conservation and Recovery Act (“RCRA”)), a significant portion of all investigative, cleanup and closure activities are being conducted and paid for by Beazer East pursuant to the terms of the Indemnity. In addition, other of Koppers Inc.’s sites are or have been operated under RCRA and various other environmental permits, and remedial and closure activities are being conducted at some of these sites. To date, the parties that retained, assumed and/or agreed to indemnify us against the liabilities referred to above, including Beazer East, have performed their obligations in all material respects. We believe that, for the last three years ended December 31, 2021, amounts paid by Beazer East as a result of its environmental remediation obligations under the Indemnity have averaged, in total, approximately $ 6.4 million per year. Periodically, issues have arisen between Koppers Inc. and Beazer East and/or other indemnitors that have been resolved without arbitration. Koppers Inc. and Beazer East engage in discussions from time to time that involve, among other things, the allocation of environmental costs related to certain operating and closed facilities. If for any reason (including disputed coverage or financial incapability) one or more of such parties fail to perform their obligations and we are held liable for or otherwise required to pay all or part of such liabilities without reimbursement, the imposition of such liabilities on us could have a material adverse effect on our business, financial condition, cash flows and results of operations. Furthermore, we could be required to record a contingent liability on our balance sheet with respect to such matters, which could result in a negative impact to our business, financial condition, cash flows and results of operations. Domestic Environmental Matters. Koppers Inc. has been named as one of the potentially responsible parties (“PRPs”) at the Portland Harbor CERCLA site located on the Willamette River in Oregon. Koppers Inc. operated a coal tar pitch terminal near the site. Koppers Inc. has responded to an EPA information request and has executed a PRP agreement which outlines a private process to develop an allocation of past and future costs among more than 80 parties to the site. Koppers Inc. believes it is a de minimis contributor at the site. The EPA issued its Record of Decision (“ROD”) in January 2017 for the Portland Harbor CERCLA site. The selected remedy includes a combination of sediment removal, capping, enhanced and monitored natural recovery and riverbank improvements. The ROD does not determine who is responsible for remediation costs. At that time, the net present value and undiscounted costs of the selected remedy as estimated in the ROD are approximately $ 1.1 billion and $ 1.7 billion, respectively. These costs may increase given the remedy will not be implemented for several years. Responsibility for implementing and funding that work will be decided in the separate private allocation process which is ongoing. 78 Koppers Holdings Inc. 2021 Annual Report Additionally, Koppers Inc. is involved in two separate matters involving natural resource damages at the Portland Harbor site. One matter involves claims by the trustees to recover damages based upon an assessment of damages to natural resources caused by the releases of hazardous substances to the Willamette River. The assessment serves as the foundation to estimate liabilities for settlements of natural resource damages claims or litigation to recover from those who do not settle with the trustee groups. Koppers Inc. has been engaged in a process to resolve its natural resource damage liabilities for the assessment area. A second matter involves a lawsuit filed in January 2017 by the Yakama Nation in Oregon federal court. Yakama Nation seeks recovery for response costs and the costs of assessing injury to natural resources to waterways beyond the current assessment area. Following the most recent court rulings, the Yakama Nation case has been stayed pending completion of the private allocation process for the Portland Harbor CERCLA site. In September 2009, Koppers Inc. received a general notice letter notifying it that it may be a PRP at the Newark Bay CERCLA site. In January 2010, Koppers Inc. submitted a response to the general notice letter asserting that Koppers Inc. is a de minimis party at this site. We have accrued the estimated costs of participating in the PRP group at the Portland Harbor and Newark Bay CERCLA sites and estimated de minimis contributor settlement amounts at the sites totaling $ 3.5 million as of December 31, 2021. The actual cost could be materially higher as there has not been a determination of how those costs will be allocated among the PRPs at the sites. Accordingly, an unfavorable resolution of these matters may have a material adverse effect on our business, financial condition, cash flows and results of operations. There are two plant sites related to the Performance Chemicals business and one plant site related to the Utility and Industrial Products business in the United States where we have recorded environmental remediation liabilities for soil and groundwater contamination which occurred prior to our acquisition of the businesses. As of December 31, 2021, our estimated environmental remediation liability for these acquired sites totals $ 4.2 million. Foreign Environmental Matters . There is one plant site related to the Performance Chemicals business located in Australia where we have recorded an environmental remediation liability for soil and groundwater contamination which occurred prior to the acquisition of the business. As of December 31, 2021, our estimated environmental remediation liability for the acquired site totals $ 1.4 million. Environmental Reserves Rollforward . The following table reflects changes in the accrual for environmental remediation. A total of $ 2.8 million and $ 2.9 million are classified as current liabilities as of December 31, 2021 and December 31, 2020, respectively : December 31, 2021 2020 (Dollars in millions) Balance at beginning of year $ 11.0 $ 9.5 Expense 0.3 1.8 Revision of reserves ( 0.1 ) 0.0 Cash expenditures ( 0.4 ) ( 0.4 ) Currency translation ( 0.1 ) 0.1 Balance at end of period $ 10.7 $ 11.0 79 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.