# Koppers Holdings Inc. (KOP) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Koppers Holdings Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1315257/000095017025028542/kop-20241231.htm
Accession: 0000950170-25-028542
Filing date: 2025-02-27
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/KOP/
All MD&A years: /company/KOP/mda/
Previous year: /company/KOP/mda/fy2023/ (FY 2023)
Next year: /company/KOP/mda/fy2025/ (FY 2025)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

See description of the segments in Item 1 – Business.

Non-GAAP Financial Measures

We utilize certain financial measures that are not in accordance with U.S. generally accepted accounting principles (U.S. GAAP) to analyze and manage the performance of our business. We believe that adjusted EBITDA provides information useful to investors in understanding the underlying operational performance of the company, our business and performance trends, and facilitates comparisons between periods. The exclusion of certain items permits evaluation and a comparison between periods of results for business operations, and it is on this basis that our management internally assesses our performance. Adjusted EBITDA is the measure of profitability we use to evaluate our businesses. 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, as well as one of the measures used to determine performance and related payouts for certain performance share units granted to management.

Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP financial measures and should be read in conjunction with the relevant GAAP financial measures. Other companies in a similar industry may define or calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, these non-GAAP financial measures should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP.

Adjusted EBITDA is a non-GAAP financial measure defined as income from continuing operations before interest, income taxes, depreciation, amortization and other adjustments. These other adjustments are items that we believe are not representative of underlying business performance. Adjusted items typically include certain expenses associated with impairment, restructuring and plant closure costs, significant gains and losses on asset disposals or business combinations, LIFO, mark-to-market commodity hedging, cloud-computing amortization expenses and other unusual items. The LIFO expense adjustment removes the entire impact of LIFO and effectively reflects the results as if we were on a FIFO inventory basis. An Adjusted EBITDA Reconciliation is presented in the Segment Results section and reconciles net income to adjusted EBITDA on a consolidated basis.

We do not provide reconciliations of guidance for adjusted EBITDA and adjusted EPS to comparable GAAP measures, in reliance on the unreasonable efforts exception. We are unable, without unreasonable efforts, to forecast certain items required to develop meaningful comparable GAAP financial measures. These items include, but are not limited to, restructuring and impairment charges, acquisition-related costs, mark-to-market commodity hedging, and LIFO adjustments that are difficult to forecast for a GAAP estimate and may be significant. Forward-looking statements, including the guidance below, are based upon current expectations and are subject to factors that could cause actual results to differ materially from those set forth below. Please see “Forward-Looking Statements” for more information.

Outlook

After considering the current intensely competitive environment, global economic conditions, as well as ongoing uncertainty associated with geopolitical and supply chain challenges, we anticipate taking measures to streamline our organization to support an increasingly cost-conscious customer base. These actions, some of which are one-time savings and some of which are expected to be permanent savings, are intended to ensure that we extend our decade-long growth in profitability and support a higher margin profile by leveraging a smaller global team highly focused on serving customer preferences.

Our keys to success in 2025 include:

•
For our RUPS segment, our focus is to (i) recoup cost increases, including the value of our creosote preservative in the market, (ii) maximize opportunities for increased volumes, including expanding our customer base into the Texas, western and midwestern utility pole markets and (iii) lower operating and selling, general and administrative expenses.

•
For our PC segment, our focus is to (i) acquire new customers in our residential preservatives markets to offset certain customer market share losses, (ii) expand market share in our industrial preservatives markets and (iii) align and improve our cost structure.

•
For our CMC segment, our focus is to (i) execute on domestic plant restructuring projects, (ii) optimize and develop markets for enhanced carbon products and (iii) implement global tar and pitch strategies.

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Koppers Holdings Inc. 2024 Annual Report

Significant market indicators for our businesses include:

•
The Railway Tie Association’s estimate of total crosstie purchases in 2025 is approximately 19.5 million ties, with approximately 13.3 million for Class I railroads. This is slightly lower than the estimated 2024 crosstie purchases of approximately 19.6 million crossties with the small decrease expected to be from Class I railroads. We expect the crosstie market to remain stable.

•
Market demand for utilities poles is expected to grow in 2025 with most of the growth concentrated in the second half of the year, while demand in the first half is expected to remain relatively flat. Key drivers include aging pole infrastructure, the expansion of renewable energy, vehicle electrification, grid-hardening measures and extreme weather protection. Recently, the realization of potential productivity gains from artificial intelligence (AI) has significantly increased the demand for electricity. Technology companies are now securing power supplies for data centers to fuel AI, resulting in higher volume demand for both distribution and transmission wood poles. We will continue to focus on expanding our presence in the western and midwestern United States and Canada along with improving our efficiency and capturing new customers to increase our market share.

•
Product demand for our PC business has historically been associated with consumer spending on home repair and remodeling projects in North America. The Leading Indicator of Remodeling Activity (LIRA) reported by the Joint Center for Housing Studies of Harvard University projects that year-over-year spending for annual homeowner renovation and maintenance expenditures is expected to grow by 1.2 percent in 2025. While the LIRA projects a mild increase in 2025, our PC business expects flat or lower volumes as a result of customer market share shifts.

•
For the external markets served by our CMC business, we have experienced a slowdown in the near-term in manufacturing overall, including the steel, aluminum and carbon black industries. The availability of coal tar, the primary raw material for our CMC business, is linked to levels of metallurgical coke production. As the global steel industry, excluding Asia, has reduced the production of steel using metallurgical coke, the volumes of coal tar have been reduced. We are actively working to mitigate the impacts of the long-term decline of coal tar supply by gaining market acceptance for petroleum-blended products, investing in projects to increase distillation yields and balancing raw material supply and cost with customer demand and pricing.

Our businesses and results of operations are affected by various competitive and other factors including (i) the impact of global economic conditions on demand for our products, including the impact of imported products from competitors in certain regions where we operate; (ii) raw material pricing and availability, in particular the cost and availability of hardwood lumber for railroad crossties, softwood lumber for utility poles, scrap copper prices, and the cost and amount of coal tar available in global markets, which is negatively affected by reductions in blast furnace steel production; (iii) volatility in oil prices, which impacts the cost of coal tar and certain other raw materials, as well as selling prices and margins for certain of our products including carbon black feedstock, phthalic anhydride, and naphthalene; (iv) competitive conditions in our performance chemicals business and global carbon pitch markets; (v) changes in foreign exchange rates; and (vi) the other factors set forth in the section titled "Forward-Looking Statements." Any or all of these or other factors could impact our actual results for 2025.

Seasonality and Effects of Weather on Operations

Our quarterly operating results fluctuate due to a variety of factors that are outside of our control, including inclement weather conditions, which in the past have affected operating results. Operations at some of our facilities have at times been reduced during the winter months. Moreover, demand for some of our products declines during periods of inclement weather. As a result of the foregoing, we anticipate that we may experience material fluctuations in quarterly operating results. Historically, our operating results have been significantly lower in the first and fourth calendar quarters as compared to the second and third calendar quarters.

Results of Operations – Comparison of Years Ended December 31, 2024 and December 31, 2023

Consolidated Results

Net sales for the years ended December 31, 2024 and 2023 are summarized by segment in the following table:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2024","","","2023","","","Change","","","% Change"],["(Dollars in millions)"],["Railroad and Utility Products and Services","","$","942.7","","","$","897.9","","","$","44.8","","","","5.0","%"],["Performance Chemicals","","","651.6","","","","671.6","","","","(20.0",")","","","-3.0","%"],["Carbon Materials and Chemicals","","","497.8","","","","584.7","","","","(86.9",")","","","-14.9","%"],["Total","","$","2,092.1","","","$","2,154.2","","","$","(62.1",")","","","-2.9","%"]]
[[/GREPCENT_TABLE]]

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Koppers Holdings Inc. 2024 Annual Report

RUPS net sales increased largely due to $29.5 million of pricing increases for crossties and utility poles, along with higher volumes for these products and an increase in activity in our railroad bridge services business, partly offset by lower activity in our crosstie recovery business. Volumes in our domestic utility pole business increased 6.9 percent primarily as a result of our acquisition of Brown Wood and was partly offset by a decrease in our legacy utility pole business due to temporary customer overstock and budget realignment.

PC net sales decreased due primarily to sales to the recently acquired Brown Wood of approximately $9 million no longer being included in our reported sales beginning April 1, 2024, lower volumes of our industrial non-copper based preservatives and lower pricing of $3.1 million in the Americas.

CMC net sales decreased largely due to $81.4 million of lower sales prices across most products, especially carbon pitch where prices were down approximately 20 percent globally, along with $25.0 million of lower volumes of carbon pitch. The decreases in carbon pitch prices and volumes were driven by reduced market demand in the current year period. These decreases were partly offset by volume increases for phthalic anhydride and other products.

Cost of sales as a percentage of net sales was 80 percent for both periods as lower raw material costs were offset by the market driven reduction in sales. Significant items impacting cost of sales in individual operating segments are discussed as part of "Segment adjusted EBITDA and adjusted EBITDA margin" herein.

Depreciation and amortization expenses were $10.5 million higher when compared to the prior year period as a result of recent capital expenditures including growth projects such as the expansion of our RUPS facility in North Little Rock, Arkansas and the yield enhancement project at our CMC facility in Nyborg, Denmark, as well as the acquisition of Brown Wood. Additionally, asset retirement obligations in our European CMC operations and its related depreciation expense increased during 2024 when compared to the prior year period.

Selling, general and administrative expenses were $5.2 million higher when compared to the prior year period due mainly to an increase in compensation-related costs along with an increase in professional service and insurance expenses.

Impairment and restructuring charges were $16.9 million in 2024 due primarily to the decision to discontinue phthalic anhydride production at our facility in Stickney, Illinois and our workforce reduction program across selected U.S. locations to streamline operations and reduce costs. See Note 3 – Acquisitions, Divestitures and Discontinued Operations.

Loss (gain) on sale of assets was primarily related to the liquidation of our former coal tar distillation facility located in China while the gain on sale of assets for 2023 was related to a sale of assets at that same facility. See Note 3 – Acquisitions, Divestitures and Discontinued Operations.

Interest expense was $5.2 million higher when compared to the prior year period due to higher borrowings and interest rates, partly offset by the write-off of debt issuance costs in 2023.

Loss on pension settlement was $4.0 million in 2024. See Note 14 – Pensions and Post-Retirement Benefit Plans.

Income tax expense decreased by $14.1 million when compared to the prior year period due primarily to lower income before income taxes. See Note 10 – Income Taxes.

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Koppers Holdings Inc. 2024 Annual Report

Segment Results

Segment adjusted EBITDA and adjusted EBITDA margin is summarized in the following table:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2024","","","2023","","","Change","","","% Change"],["(Dollars in millions)"],["Adjusted EBITDA:"],["Railroad and Utility Products and Services","","$","82.3","","","$","84.0","","","$","(1.7",")","","","-2.0","%"],["Performance Chemicals","","","142.7","","","","123.1","","","","19.6","","","","15.9","%"],["Carbon Materials and Chemicals","","","36.6","","","","49.3","","","","(12.7",")","","","-25.8","%"],["Total Adjusted EBITDA","","$","261.6","","","$","256.4","","","$","5.2","","","","2.0","%"],["Adjusted EBITDA margin as a percentage of GAAP sales:"],["Railroad and Utility Products and Services","","","8.7","%","","","9.4","%","","","-0.7","%","","","-7.4","%"],["Performance Chemicals","","","21.9","%","","","18.3","%","","","3.6","%","","","19.7","%"],["Carbon Materials and Chemicals","","","7.4","%","","","8.4","%","","","-1.0","%","","","-11.9","%"]]
[[/GREPCENT_TABLE]]

RUPS adjusted EBITDA decreased due primarily to $50.3 million of higher raw material, operating and allocated selling, general and administrative expenses, which combined to more than offset net sales increases and $11.8 million from improved plant utilization.

PC adjusted EBITDA increased despite lower sales, as a result of lower raw material and logistics costs offsetting lower sales prices. Lower raw material costs were favorably impacted by timing, including an increase in gains realized from our copper-hedging program, net of an increase in the cost of scrap copper recognized to date.

CMC adjusted EBITDA decreased as a result of lower sales prices, lower plant utilization and higher operating expenses, partly offset by a $56.5 million reduction in raw material costs, particularly in Europe, as well as lower allocated selling, general and administrative costs and higher volumes of phthalic anhydride.

The discussion and analysis of our consolidated results of operations and cash flows for the years ended December 31, 2023 compared to December 31, 2022 was included in our Annual Report on Form 10-K for the year ended December 31, 2023 under Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations which was previously filed with the SEC.

Adjusted EBITDA Reconciliation. The following table reconciles net income, the most directly comparable financial measure determined and reported in accordance with U.S. GAAP, to adjusted EBITDA on a consolidated basis:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2024","","","2023"],["(Dollars in millions)"],["Net income","","$","48.6","","","$","89.8"],["Interest expense","","","76.2","","","","71.0"],["Depreciation and amortization","","","67.5","","","","57.0"],["Income tax provision","","","20.7","","","","34.8"],["Sub-total","","","213.0","","","","252.6"],["Adjustments to arrive at adjusted EBITDA:"],["LIFO expense(1)","","","6.1","","","","6.0"],["Impairment, restructuring and plant closure costs","","","17.3","","","","0.1"],["Loss (gain) on sale of assets","","","10.7","","","","(1.8",")"],["Mark-to-market commodity hedging losses (gains)","","","7.9","","","","(0.5",")"],["Acquisition inventory step-up amortization","","","2.3","","","","0.0"],["Pension settlement","","","4.0","","","","0.0"],["Amortization of cloud-based software implementation costs","","","0.3","","","","0.0"],["Total adjustments","","","48.6","","","","3.8"],["Adjusted EBITDA","","$","261.6","","","$","256.4"]]
[[/GREPCENT_TABLE]]

(1) The LIFO expense adjustment removes the entire impact of LIFO and effectively reflects the results as if we were on a FIFO inventory basis.

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Koppers Holdings Inc. 2024 Annual Report

Cash Flow

Net cash provided by operating activities for the year ended December 31, 2024 was $119.4 million compared to $146.1 million in the prior year. For both periods, the primary source of cash was net income, excluding non-cash items, less working capital usage which was higher in the current year primarily as a result of the timing of purchases and payments.

Net cash used in investing activities for the year ended December 31, 2024 was $173.3 million compared to $116.0 million in the prior year. The increase was due to cash paid for the Brown Wood acquisition, partly offset by lower capital expenditures. Capital expenditures were higher in the prior year period due to investment in growth projects, such as the expansion of our RUPS facility in North Little Rock, Arkansas which was completed in the fourth quarter of 2023 and a yield enhancement project at our CMC facility in Nyborg, Denmark which was completed in the first quarter of 2024.

Net cash provided by financing activities for the year ended December 31, 2024 was $35.7 million compared to $2.6 million in the prior year. The primary source of financing cash flows for the year ended December 31, 2024 was net borrowings of $88.7 million and the primary uses of financing cash flows were repurchases of common stock, including payments related to taxes withheld under stock-based compensation plans, and dividends paid. In the prior year, the sources of financing cash flows were net borrowings of $23.1 million and issuances of common stock due to the exercise of stock options and the primary uses of financing cash flows were repurchases of common stock, payments of debt issuance costs and dividends paid.

Liquidity and Capital Resources

As of December 31, 2024, liquidity from our Credit Facility and cash on hand was approximately $381 million. Our Credit Facility is described in Note 15 – Debt.

Our need for cash in the next twelve months relates primarily to contractual obligations which includes debt service, pension plan funding, purchase commitments and operating leases, as well as working capital, capital spending, dividends and share repurchases. We may also use cash to pursue other potential strategic acquisitions or voluntary pension plan contributions, including pension plan settlements. Capital expenditures in 2025, excluding acquisitions, if any, are expected to total approximately $65 million and are expected to be funded by cash from operations. We anticipate that our liquidity will continue to be adequate to fund our cash requirements for at least the next twelve months.

We manage our working capital to increase our flexibility to pay down debt. The amount of our outstanding debt and our overall cash flows will fluctuate throughout any operating period based upon, among other things, the timing of receipts from customers and payments to vendors. As of December 31, 2024 and 2023, approximately 85 percent of accounts payable was current and 15 percent was 1-30 days past due.

On February 27, 2025, we announced that the board of directors approved a $100 million share repurchase program. The repurchase program has no expiration date and replaces our previous share repurchase program of $100 million, which was approved in August 2021 and had approximately $11 million remaining.

Restrictions on Dividends to Koppers Holdings

Koppers Holdings depends on the dividends from the earnings of Koppers Inc. and its subsidiaries to generate the funds necessary to meet its financial obligations, including the payment of any declared dividend of Koppers Holdings. The Credit Facility permits Koppers Inc. to make dividend payments to Koppers Holdings if certain conditions are met, including, among other permitted dividend payments, the ability to fund the payment of regularly scheduled dividends on Koppers Holdings common stock and repurchases of Koppers Holdings common stock, in an aggregate amount per fiscal year not to exceed the greater of $50.0 million, with unused amounts in any fiscal year being carried over to the succeeding fiscal year, and 6.0 percent of market capitalization.

Purchase Commitments and Contractual Obligations

Purchase commitments consist primarily of raw materials purchase contracts. These are typically not fixed price arrangements; the prices are based on prevailing market prices. As a result, we generally expect to be able to hedge the purchases with sales at those future prices.

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["","","2025","","","2026-2027","","","2028-2029","","","Thereafter","","","Total"],["(Dollars in millions)"],["Purchase commitments","","$","207.5","","","$","306.9","","","$","76.6","","","$","0.2","","","$","591.2"]]
[[/GREPCENT_TABLE]]

Contractual obligations are primarily related to our debt agreements and operating leases. See Note 15 – Debt for discussion of the contractual obligations under our debt agreements, including interest payments and the timing of principal repayments. See Note 16 – Leases for discussion of our operating lease obligations.

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Koppers Holdings Inc. 2024 Annual Report

Pension and other employee benefit plan funding contributions (for defined benefit plans) are expected to total approximately $4.0 million in 2025, for normal plan operations. Estimated funding obligations are determined by asset performance, workforce and retiree demographics, tax and employment laws and other actuarial assumptions, which may change the annual funding obligations in addition to decisions to fund in excess of statutorily required amounts. In addition, we terminated our largest United States qualified defined benefit plan through a funding payment of $14 million in February 2025. The funded status of our defined benefit plans is disclosed in Note 14 – Pensions and Post-Retirement Benefit Plans.

See Note 10 – Income Taxes for discussion of unrecognized tax benefits. Because of the high degree of uncertainty regarding the timing of future cash outflows associated with these liabilities, we are unable to estimate the years in which settlement will occur with the respective taxing authorities.

Bank Debt Covenants at December 31, 2024

The bank debt covenants that affect availability of the Credit Facility and which may restrict the ability of Koppers Inc. to pay dividends include the following financial ratios:

▪
The total net leverage ratio is calculated as of the last day of each fiscal quarter in accordance with the Credit Facility definitions of consolidated total net debt divided by consolidated EBITDA and is not permitted to exceed 5.0. The total net leverage ratio as of December 31, 2024 was 3.20. Effective during the second quarter of 2025, the total net leverage ratio will not be permitted to exceed 4.75.

▪
The cash interest coverage ratio, calculated as of the last day of each fiscal quarter, is not permitted to be less than 2.0. The cash interest coverage ratio as of December 31, 2024 was 3.95.

We are currently in compliance with all covenants governing the Credit Facility. Our continued ability to meet these financial covenants can be affected by events beyond our control.

Other Matters

Foreign Operations and Foreign Currency Transactions

We are subject to foreign currency translation fluctuations due to our foreign operations. See the Consolidated Statement of Comprehensive Income for the impact that exchange rate fluctuations had on comprehensive income. Foreign currency transaction gains and losses result from transactions denominated in a currency that is different from the currency used by the entity to prepare its financial statements. Foreign currency transaction gains (losses) were $(0.9) million, $1.0 million, and $(0.8) million for the years ended December 31, 2024, 2023 and 2022, respectively.

Recently Issued Accounting Guidance

Information regarding recently issued accounting guidance is contained in Note 2 – Summary of Significant Accounting Policies.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to use judgment in making estimates and assumptions that affect the reported amounts of revenues and expenses, assets and liabilities, and the disclosure of contingent liabilities. The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Our management’s estimates are based on the relevant information available at the end of each period. With the exception of the revenue recognition policy, each of the following policies contain critical accounting estimates.

Revenue Recognition. 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. See Note 2 – Summary of Significant Accounting Policies for our revenue recognition policy.

Goodwill and Intangible Assets. Goodwill is assessed for impairment annually, using a quantitative goodwill impairment test, or more frequently if a change in circumstances or the occurrence of events indicates the carrying value may not be recoverable. We annually evaluate the remaining useful life of the intangible asset being amortized to determine whether events or circumstances warrant a revision to the remaining period of amortization. See Note 13 – Goodwill and Intangible Assets for our goodwill and intangible assets accounting policy.

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Koppers Holdings Inc. 2024 Annual Report

We utilize the work of third-party specialists to assist in the fair value estimates. The key assumptions for the market and income approaches we use to determine fair value of our reporting units are updated at least annually. Those key assumptions include discount rates (12.0 percent – 18.0 percent), market multiples (5.1 – 7.0 times adjusted EBITDA) and terminal growth rates (5.0 – 6.5 times adjusted EBITDA) as well as future forecasts of revenue growth and adjusted EBITDA, which are based on our strategic plan. The strategic plan is updated as part of the annual planning process and is reviewed and approved by management and the Board of Directors. The strategic plan may be revised as necessary during the fiscal year based on changes in operating or economic conditions. The actual fair value may vary from our estimate under the market approach for many reasons, including because the peer group valuation differs from how investors value our business, valuation multiples change as a result of market conditions, changes in our business assumptions and other factors. Discount rates may be impacted by adverse changes in macroeconomic environment, volatility in the equity and debt markets or other factors. Our key assumptions are materially consistent with prior year.

During the fourth quarter of 2024, we performed an impairment test for goodwill for each of our reporting units using the quantitative approach. We determined the fair value of each of the reporting units exceeded its respective carrying amount; therefore, we determined that goodwill was not impaired at any of our reporting units as of December 31, 2024. The estimated fair value, as calculated at October 31, 2024, for the three reporting units ranged from approximately 22 percent to 103 percent greater than their carrying value (eight percent to 110 percent at the previous impairment assessment date). Our reporting units could experience impairment in the future if we do not achieve our profitability projections, there is a change in key assumptions underlying the valuation or if we experience a substantial decrease in our stock price.

While we can implement certain strategies to address changes in economic and operating conditions, adverse changes in the future could reduce the future revenue and cash flows used to estimate reporting unit fair values, which could trigger a future impairment charge. Additionally, disruptions to our business such as prolonged recessionary periods or unexpected significant declines in operating results of the relevant reporting units could result in charges for goodwill and other asset impairments in future periods. An estimate of the sensitivity to changes in our assumptions is not practicable given the numerous assumptions that can materially affect our estimates.

Deferred Tax Assets. See Note 10 – Income Taxes for information on deferred tax activity. Our deferred tax assets and liabilities are predominantly related to our domestic entities. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In evaluating the need for a valuation allowance, management considers various factors, including the expected level of future taxable income, available tax planning strategies and reversals of existing taxable temporary differences, all of which are subject to change based on business conditions and changes in tax law and regulations.

The realization of a majority of our deferred tax assets is not subject to any expiration and is dependent upon the reversal of the underlying temporary differences. To the extent future taxable income projections are not achieved, we could be required to record a valuation allowance against certain deferred tax assets, which would result in additional income tax expense.

Asset Retirement Obligations. We measure asset retirement obligations using certain assumptions including estimates regarding the recovery of residues in storage tanks, which can vary from actual residues recovered on retirement. In the event that the amount of residue, the effort required to remove the residue or regulatory requirements vary from our estimates, we could incur additional significant charges to income and increases in cash expenditures related to the disposal of those residues. Certain conditional asset retirement obligations related to facilities have not been recorded in the consolidated financial statements due to uncertainties surrounding the ultimate settlement date and estimate of fair value related to a legal obligation to perform an asset retirement activity. At the date a reasonable estimate of the ultimate settlement amount and timing can be made, we will record an asset retirement obligation, and such amounts may be material to the consolidated financial statements in the period in which they are recorded. See Note 2 – Summary of Significant Accounting Policies for information on expense recognized during the past two years. An estimate of the sensitivity to changes in our assumptions is not practicable given the numerous assumptions that can materially affect our estimates.

Pension and Post-retirement Benefits. Accounting for pension and other post-retirement benefit obligations involves numerous assumptions, the most significant of which relate to the discount rate for measuring the present value of future plan obligations and the expected long-term return on plan assets.

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Koppers Holdings Inc. 2024 Annual Report

We develop our demographics and utilize the work of third-party actuaries to assist in the measurement of these obligations. We have selected different discount rates for our pension plans and our other post-retirement benefit plans due to the different projected benefit payment patterns. In determining the assumed discount rates at December 31, 2024, we used our third-party actuary’s discount rate model. This model calculates an equivalent single discount rate for the projected benefit plan cash flows using a hypothetical bond portfolio to match expected cash flows under our benefit plans. The bonds used are rated AA or higher by a recognized rating agency, and only non-callable bonds are included with the exception of those with a make-whole call feature. The actuary limited the selection to those bonds with a minimum of 100,000 outstanding issues. Outlier bonds whose yields exceeded two standard deviations from the yield curve derived from similar quality bonds were excluded.

Of the assumptions used to measure the year-end obligations and estimated annual net periodic benefit cost, the discount rate has the most significant effect on the periodic benefit cost reported for the plans. Decreasing the discount rates by 0.25 percent for our pension plans and 0.25 percent for our other post-retirement benefit plans would increase pension obligations and other post-retirement benefit plan obligations by $3.1 million. Increasing the discount rates by the same amount would not have a material effect on defined benefit pension expense and other post-retirement benefit plan expense.

The asset rate of return assumption considers the asset mix of the plans (currently targeted at 100 percent fixed income securities and cash equivalents for the funded U.S. pension plan), past performance and other factors, including expected re-allocations of asset mix occurring within a reasonable period of time. Our asset rate of return assumption is 4.92 percent for 2024 defined benefit pension expense. Decreasing the asset rate of return assumption by 0.25 percent would increase our defined benefit pension expense by $0.3 million.

See Note 14 – Pensions and Post-Retirement Benefit Plans for detailed information about the assumptions used to calculate the components of our annual defined benefit pension and other post-retirement plan expense, as well as the obligations and accumulated other comprehensive loss reported on the year-end balance sheets.

Environmental Liabilities. As discussed under Environmental Matters in Item 1 – Business and Note 17 to the Consolidated Financial Statements, we are subject to federal, state, local, and foreign laws and regulations, and potential liabilities relating to the protection of the environment and human health and safety. We expect to incur substantial costs for ongoing compliance with such laws and regulations. We may also incur costs as a result of governmental or third-party claims, or other requirements, 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 they are probable and reasonably estimable. The amount accrued is determined through the evaluation of various information, which could include claims, settlement offers, demands by government agencies, estimates performed by independent third parties, identification of other responsible parties and an assessment of their ability to contribute, and our prior experience. Inherent uncertainties exist in such estimates primarily due to unknown conditions and other circumstances, changing governmental regulations and legal standards regarding liability, and evolving technologies. See Note 17 – Commitments and Contingent Liabilities for information about environmental liabilities.