Overview

We are a leading integrated global provider of carbon compounds and commercial wood treatment products and services. Our products are used in a variety of niche applications in a diverse range of end-markets, including the aluminum, railroad, specialty chemical, utility, rubber, concrete and steel industries. We serve our customers through a comprehensive global manufacturing and distribution network, with manufacturing facilities located in the United States, Australia, China, the United Kingdom, Denmark and the Netherlands.

We operate two principal businesses: Carbon Materials & Chemicals (CM&C) and Railroad & Utility Products (R&UP).

Through our CM&C business, we process coal tar into a variety of products, including carbon pitch, creosote, naphthalene and phthalic anhydride, which are intermediate materials necessary in the production of aluminum, the pressure treatment of wood and the production of carbon black, the production of high-strength concrete, and the production of plasticizers and specialty chemicals, respectively. Through our R&UP business, we believe that we are the largest supplier of railroad crossties to the North American railroads. Our other commercial wood treatment products include utility poles for the electric and telephone utility industries in North America and Australia. We also provide rail joint bar products as well as various services to the railroad industry.

In October 2012 we entered into an agreement with Nippon Steel and Sumikin Chemical and several other entities to develop and construct a fully integrated coal tar based carbon products complex in Pizhou City, Jiangsu Province, China. The complex will include a 300,000 metric ton tar distillation facility that will be majority-owned by Koppers, as well as a carbon black plant and a needle coke plant that will be owned by Nippon Steel and Sumikin Chemical. A significant portion of the products produced at the tar distillation plant will be sold under a long-term supply contract with Nippon Steel and Sumikin Chemical to supply their carbon black and needle coke plants. The project has commenced and construction of the tar distillation plant is expected to be completed in mid-2014.

Outlook

Trend Overview

Our businesses and results of operations are impacted by various competitive and other factors including (i) the impact of global economic conditions on demand for our products; (ii) raw materials pricing and availability, in particular the amount and quality of coal tar available in global markets, which is negatively affected by reductions in 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 and phthalic anhydride; (iv) competitive conditions in global carbon pitch markets; and (v) changes in foreign exchange rates.

The availability of coal tar is linked to levels of metallurgical coke production. As the global steel industry has reduced production of steel and metallurgical coke, the volumes of coal tar by-product were also reduced. Our ability to obtain coal tar and the price we are able to negotiate has a significant impact on the level of profitability of our business. Many of our sales contracts include provisions that allow for price increases based on increases in the price of raw materials, which has allowed us to generally maintain profit dollars in our core businesses. However, significant increases in raw material costs can result in margin dilution if only the increased cost of the raw material is passed on to the customer. Additionally, in certain regions such as China that have competing markets for coal tar, or in regions where the available supply of our products exceeds demand, we may not be able to recover raw material cost increases in the selling prices for our end products.

The primary product produced by CM&C is carbon pitch, which is sold primarily to the aluminum industry to be used in the production of carbon anodes. The smelting of aluminum requires significant amounts of energy, which is a major cost component for the aluminum industry. As a result, new production facilities are being built in regions with low energy costs such as the Middle East, while regions with higher energy costs such as the United States and Western Europe have seen significant amounts of smelting capacity idled or closed over the last several years.

In late 2011 and early 2012, reductions in aluminum pricing resulted in additional closures and curtailments in Europe and Australia that have resulted in lower sales volumes of carbon pitch for us in those regions. While we expect to recover some of

these lower volumes from operations in China, margins may be negatively affected as our increased presence in Asia has had a dilutive effect on margins due to market conditions in that region as well as the joint venture ownership structures of our Chinese operations.

Our businesses and results of operations were negatively affected in 2012 by difficult economic conditions in Europe. Certain key end markets experienced significant reductions in demand that have negatively affected the profitability for some of our products produced and sold in Europe, and we expect this to continue through 2013.

Several of our products, particularly carbon black feedstock and phthalic anhydride, have end market pricing that is linked to oil. Historically, when oil prices increase we have benefited in terms of revenues and profitability from the higher pricing for these products as the cost of coal tar has not increased proportionally with oil. However, over the past few years, our coal tar costs have demonstrated a stronger correlation with the price of oil, which has resulted in higher raw material and finished product costs as the price of oil has increased. In response, we have instituted price increases in an attempt to recover the higher coal tar costs from our customers.

The primary end-market for R&UP is the North American railroad industry, which has a large installed base of wood crossties that require periodic replacement. As a result, our volumes for crossties and our operating results for this business have historically been relatively stable. However, our railroad business can be negatively affected by weather conditions that make it difficult for sawmills that provide our raw material to harvest timber from the forests. Additionally, some of our Class I railroad customers, who make up the largest portion of our business, may reduce inventory levels at certain times to manage working capital, which can adversely affect our volumes and profitability during certain periods.

We also sell crossties to commercial customers consisting primarily of short-line railroads, whose buying patterns have historically been influenced by general economic conditions. As a result, during recessionary periods, sales volumes to our commercial customers have typically been reduced, resulting in lower revenues and profitability for our business.

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 several 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, 2012 and
December 31, 2011

Consolidated Results

Net sales for the years ended December 31, 2012 and 2011 are summarized by
segment in the following table:



                                                             Year
                                                            Ended
                                                     December 31,         Net
                                               2012          2011      Change
           (Dollars in millions)
           Carbon Materials & Chemicals   $   999.7     $   943.1          +6 %
           Railroad & Utility Products        555.3         523.1          +6 %

                                          $ 1,555.0     $ 1,466.2          +6 %

Carbon Materials & Chemicals net sales for the year ended December 31, 2012 increased by $56.6 million or six percent. Sales volumes for distillates increased sales by six percent over the prior year due to higher sales volumes of carbon black feedstock for Chinese operations combined with higher sales volumes of carbon black feedstock from Australian operations to third parties as a result of the closure of our carbon black plant in 2011. Sales prices for distillates increased sales by two percent due mainly to higher oil prices. Sales prices for pitch increased sales by five percent due to higher raw material costs, and were partially offset by lower sales volumes for pitch of four percent of sales as lower sales volumes for North America, Australia and Europe were partially offset by higher sales volumes from Chinese operations. The lower sales volumes were due mainly to aluminum smelter closures and production cutbacks. Foreign currency translation resulted in a decrease in sales of two percent.

Railroad & Utility Products net sales for the year ended December 31, 2012 increased by $32.2 million or six percent. Sales prices for railroad crossties increased sales by five percent and were partially offset by lower sales volumes for crossties of two percent of sales for the year ended December 31, 2011, with the higher sales prices driven mainly by higher sales volumes of value added products to our Class I railroad customers. Sales volumes and prices for utility poles increased sales by one percent each driven by higher sales volumes in the United States and Australia and higher sales prices in Australia due to product mix.

Cost of sales as a percentage of net sales was 85 percent for the year ended December 31, 2012 which was unchanged from the prior year. Overall, cost of sales increased by $82.3 million when compared to the prior year period due primarily to higher CM&C and R&UP sales volumes.

Depreciation and amortization for the year ended December 31, 2012 was $1.3 million higher when compared to the prior year due partially to a fixed asset impairment charge of $0.6 million related to future capital requirements in excess of net cash generation expected from an electricity co-generation facility located at one of the Company's wood treatment plants in the United States.

Selling, general and administrative expenses for the year ended December 31, 2012 were $1.3 million higher when compared to the prior year period due primarily to higher compensation-related expenses.

Interest expense for the year ended December 31, 2012 was $0.7 million higher when compared to the prior year period reflecting a mix of changes in average levels of borrowings and interest rates in 2012.

Income taxes for the year ended December 31, 2012 were $5.4 million lower when compared to the prior year period. Our effective income tax rate for the year ended December 31, 2012 was 33.1 percent as compared to the prior year period of 40.2 percent. The decrease in the effective income tax rate is primarily due to lower net tax reserves of $2.4 million recorded during 2012 as compared to 2011. Income tax expense was also favorably impacted in 2012 by the recognition of tax benefits related to prior years related to foreign tax credits and domestic manufacturing deductions totaling $1.6 million and the recognition of certain state tax net operating loss carryforwards related to prior tax years of $1.5 million.

Segment Results

Segment operating profit for the years ended December 31, 2012 and 2011 is
summarized by segment in the following table:



                                                             Year Ended
                                                           December 31,
                                                      2012         2011        % Change
  (Dollars in millions)
  Operating profit:
  Carbon Materials & Chemicals                     $  83.1      $  89.1              -7 %
  Railroad & Utility Products                         45.1         34.8             +30 %
  Corporate                                           (1.6 )       (1.2 )           -33 %

                                                   $ 126.6      $ 122.7              +3 %


  Operating profit as a percentage of net sales:
  Carbon Materials & Chemicals                         8.3 %        9.4 %          -1.1 %
  Railroad & Utility Products                          8.1 %        6.7 %          +1.4 %

                                                       8.1 %        8.4 %          -0.3 %

Carbon Materials & Chemicals operating profit for the year ended December 31, 2012 decreased by $6.0 million or seven percent over the prior year. CM&C operating profit as a percent of sales decreased to 8.3 percent from 9.4 percent in the prior year due mainly to lower pitch volumes, lower naphthalene prices and higher raw material costs combined with a $3.1 million increase in our allowance for doubtful accounts due to a customer collection issue in Europe, $2.5 million of costs related to a pitch tank leak in Australia, and $1.9 million of charges related to a plant outage in The Netherlands. The pitch tank leak and plant outage are net of insurance recoveries. These items were partially offset by a refund of $3.6 million resulting from a supplier audit of material transport weights.

Railroad & Utility Products operating profit for the year ended December 31, 2012 increased by $10.3 million or 30 percent. Operating profit as a percentage of sales increased to 8.1 percent from 6.7 percent in the prior year as higher sales prices for railroad crossties driven by higher volumes of value added products more than offset lower sales volumes for crossties. Operating profit was also positively impacted by higher profitability and margins from our utility pole business.

Results of Operations - Comparison of Years Ended December 31, 2011 and
December 31, 2010

Consolidated Results

Net sales for the years ended December 31, 2011 and 2010 are summarized by
segment in the following table:



                                                             Year
                                                            Ended
                                                     December 31,          Net
                                               2011          2010       Change
           (Dollars in millions)
           Carbon Materials & Chemicals   $   943.1     $   740.6          +27 %
           Railroad & Utility Products        523.1         449.9          +16 %

                                          $ 1,466.2     $ 1,190.5          +23 %

Carbon Materials & Chemicals net sales for the year ended December 31, 2011 increased by $202.5 million or 27 percent over the prior year. Pricing for carbon materials increased sales by four percent over the prior year due to higher raw material costs, and volumes for carbon materials increased sales by eight percent due to higher demand in all geographic regions as global aluminum production increased over the prior year.

Distillate pricing increased sales by three percent due to higher average worldwide oil prices as compared to the prior year. The increase in distillate sales volumes was due primarily to higher creosote sales in North America and higher carbon black feedstock sales in Europe compared to the prior year.

For coal tar chemicals, increases in phthalic anhydride prices in the U.S. of three percent of sales offset a reduction in naphthalene prices of one percent of sales. Sales of other products increased by one percent of sales as compared to the prior year driven primarily by increased sales volumes from Chinese operations.

Foreign currency translation resulted in an increase in sales of six percent.

Railroad & Utility Products net sales for the year ended December 31, 2011 increased by $73.2 million or 16 percent. Sales prices and volumes for railroad crossties increased three percent and six percent, respectively for the year ended December 31, 2011, driven by higher volumes of untreated crossties from the Class I railroad customers and higher volumes and prices for crossties sold to commercial customers. Price increases for treating services increased one percent while volumes decreased two percent as a result of higher volumes of treated ties sold to commercial customers. With respect to other products, higher volumes of six percent related to sales of rail joint bars and related products from the Portec acquisition in December 2010.

Cost of sales as a percentage of net sales was 85 percent for the year ended December 31, 2011 as compared to 84 percent for the year ended December 31, 2010. Overall, cost of sales increased by $238.9 million when compared to the prior year period due primarily to higher CM&C and R&UP sales volumes.

Depreciation and amortization for the year ended December 31, 2011 was $0.3 million higher when compared to the prior year.

Selling, general and administrative expenses for the year ended December 31, 2011 were $11.9 million higher when compared to the prior year period due primarily to higher compensation-related expenses.

Interest expense for the year ended December 31, 2011 was $0.1 million higher when compared to the prior year period reflecting a small increase in the average level of borrowing in 2011.

Income taxes for the year ended December 31, 2011 were $9.8 million higher when compared to the prior year period due primarily to the increase in pretax income of $22.7 million as compared to the prior year. Our effective income tax rate for the year ended December 31, 2011 was 40.2 percent as compared to the prior year period of 39.3 percent. The increase in the effective income tax rate is primarily due to a $3.5 million tax reserve associated with our European restructuring project.

Segment Results

Segment operating profit for the years ended December 31, 2011 and 2010 is
summarized by segment in the following table:



                                                            Year Ended
                                                          December 31,
                                                      2011        2010        % Change
  (Dollars in millions)
  Operating profit:
  Carbon Materials & Chemicals                     $  89.1      $ 76.7             +16 %
  Railroad & Utility Products                         34.8        23.0             +51 %
  Corporate                                           (1.2 )      (1.6 )           +25 %

                                                   $ 122.7      $ 98.1             +25 %


  Operating profit as a percentage of net sales:
  Carbon Materials & Chemicals                         9.4 %      10.4 %          -1.0 %
  Railroad & Utility Products                          6.7 %       5.1 %          +1.6 %

                                                       8.4 %       8.2 %          +0.2 %

Carbon Materials & Chemicals operating profit for the year ended December 31, 2011 increased by $12.4 million or 16 percent. Operating profit as a percentage of net sales decreased to 9.4 percent from 10.4 percent as higher raw material costs and lower sales prices for naphthalene more than offset higher sales prices for pitch and phthalic anhydride.

Railroad & Utility Products operating profit for the year ended December 31, 2011 increased by $11.8 million or 51 percent. Operating profit as a percentage of net sales increased to 6.7 percent from 5.1 percent in the prior year as a result of higher untreated crosstie volumes combined with higher prices and volumes for commercial crossties, higher volumes of value added products and the acquisition of the rail joint bar business in December 2010.

Cash Flow

Net cash provided by operating activities was $77.8 million for the year ended December 31, 2012 as compared to net cash provided by operating activities of $76.9 million for the year ended December 31, 2011. Net working capital uses for 2012 were $19.4 million as compared to net working capital uses of $5.7 million in 2011. The increase in working capital requirements in 2012 was primarily due to increases in inventory totaling $26.5 million as a result of increased demand for crossties and increased levels of carbon materials to better manage supply chain requirements.

Net cash provided by operating activities was $76.9 million for the year ended December 31, 2011 as compared to net cash provided by operating activities of $105.3 million for the year ended December 31, 2010. Net cash flows from operating activities decreased by approximately $28 million between periods due primarily to increased requirements for working capital. Net working capital uses for 2011 were $5.7 million which was due primarily to increases in accounts receivable of $33.2 million partially offset by an increase in accounts payable of $15.3 million. The increase is due to higher sales and related purchasing activity in 2011.

Net cash used in investing activities was $39.9 million for the year ended December 31, 2012 as compared to net cash used in investing activities of $44.7 million for the year ended December 31, 2011. Increased acquisition expenditures of $14.0 million in 2012 were partially offset by the repayment of $2.2 million from the loan to Tangshan Koppers Kailuan Carbon Chemical Company Limited and lower capital expenditures of $4.3 million.

Net cash used in investing activities was $44.7 million for the year ended December 31, 2011 as compared to net cash used in investing activities of $63.4 million for the year ended December 31, 2010. Decreased acquisition expenditures of $34.9 million were partially offset by a loan to Tangshan Koppers Kailuan Carbon Chemical Company Limited of $11.7 million.

Net cash used in financing activities was $27.3 million for the year ended December 31, 2012 as compared to net cash used in financing activities of $13.3 million for the year ended December 31, 2011. The increase in cash used for financing activities was principally due to net treasury stock repurchases of $8.1 million and net repayments of the revolving credit facility of $6.4 million as compared to net borrowings of debt totaling $5.4 million for the year ended December 31, 2011.

Net cash used in financing activities was $13.3 million for the year ended December 31, 2011 as compared to net cash used in financing activities of $64.3 million for the year ended December 31, 2010. Net repayments of debt totaled $40.0 million in the year ended December 31, 2010 as compared to net borrowings of debt totaling $5.4 million for the year ended December 31, 2011.

Dividends paid were $19.5 million for the year ended December 31, 2012 as compared to dividends paid of $18.2 million for the year ended December 31, 2011. Dividends reflect an annual dividend rate of 96 cents per common share in 2012 as compared to an annual dividend rate of 88 cents per common share in 2011.

Liquidity and Capital Resources

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. Koppers Inc.'s credit agreement prohibits it from making dividend payments to us unless (1) such dividend payments are permitted by the indenture governing Koppers Inc.'s Senior Notes and (2) no event of default or potential default has occurred or is continuing under the credit agreement. The indenture governing Koppers Inc.'s Senior Notes restricts its ability to finance our payment of dividends if (1) a default has occurred or would result from such financing,
(2) a restricted subsidiary of Koppers Inc. which is not a guarantor under the indenture is not able to incur additional indebtedness (as defined in the indenture), and (3) the sum of all restricted payments (as defined in the indenture) have exceeded the permitted amount (which we refer to as the "basket") at such point in time.

The basket is governed by a formula based on the sum of a beginning amount, plus or minus a percentage of Koppers Inc.'s consolidated net income (as defined in the indenture), plus the net proceeds of Koppers Inc.'s qualified stock issuance or conversions of debt to qualified stock, plus the net proceeds from the sale of or a reduction in an investment (as defined in the indenture) or the value of the assets of an unrestricted subsidiary which is designated a restricted subsidiary. At December 31, 2012 the basket totaled $201.8 million.
Notwithstanding such restrictions, the indenture governing Koppers Inc.'s Senior Notes permits an additional aggregate amount of $20.0 million each fiscal year to finance dividends on the capital stock of Koppers Holdings, whether or not there is any basket availability, provided that at the time of such payment, no default in the indenture has occurred or would result from financing the dividends.

In addition, certain required coverage ratios in Koppers Inc.'s revolving credit facility may restrict the ability of Koppers Inc. to pay dividends. See "-Debt Covenants."

Liquidity

The Koppers Inc. revolving credit facility agreement provides for a revolving credit facility of up to $300.0 million at variable interest rates. Borrowings under the revolving credit facility are secured by a first priority lien on substantially all of the assets of Koppers Inc. and its material domestic subsidiaries. The revolving credit facility contains certain covenants for Koppers Inc. and its restricted subsidiaries that limit capital expenditures, additional indebtedness, liens, dividends and 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, 2012, we had $290.0 million of unused revolving credit availability for working capital purposes after restrictions by various debt covenants and certain letter of credit commitments. As of December 31, 2012, $10.0 million of commitments were utilized by outstanding letters of credit.

The following table summarizes our estimated liquidity as of December 31, 2012 (dollars in millions):

. . .