<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1998
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to Commission file number
1-12716
KOPPERS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1588399
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
436 SEVENTH AVENUE
PITTSBURGH, PENNSYLVANIA 15219
(412) 227-2001
(Address of principal executive offices)
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Voting Common Stock and Senior Convertible Preferred Stock, both par value
$.01 per share, outstanding at April 14, 1998 amounted to 1,412,305 and
2,288,481 shares, respectively.
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share figures)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Net sales.................................................. $ 156,452 $ 133,980
Operating expenses:
Cost of sales............................................ 131,570 115,222
Depreciation and amortization............................ 7,544 5,902
Selling, general and administrative...................... 9,387 6,755
--------- ---------
Total operating expenses............................... 148,501 127,879
--------- ---------
Operating profit........................................... 7,951 6,101
Equity in earnings of affiliates........................... 21 1,990
--------- ---------
Income before interest expense, income taxes and minority
interest.................................................. 7,972 8,091
Interest expense........................................... 7,073 4,145
--------- ---------
Income before income taxes and minority interest........... 899 3,946
Income taxes............................................... 69 556
Minority interest.......................................... 187 --
--------- ---------
Net income................................................. $ 643 $ 3,390
========= =========
Basic earnings per share of common stock................... $ 0.36 $ 0.39
========= =========
Diluted earnings per share of common stock................. $ 0.14 $ 0.37
========= =========
</TABLE>
See accompanying notes.
2
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997*
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 12,975 $ 19,993
Accounts receivable less allowance for doubtful
accounts
of $863 in 1998 and $797 in 1997................... 80,721 83,818
Inventories:
Raw materials..................................... 42,100 41,960
Work in process................................... 3,370 2,938
Finished goods.................................... 60,952 61,652
LIFO reserve...................................... (12,161) (10,908)
--------- ---------
Total inventories............................... 94,261 95,642
Deferred tax benefit................................ 24,441 24,441
Other............................................... 1,989 1,576
--------- ---------
Total current assets.............................. 214,387 225,470
Investments........................................... 18,038 18,275
Fixed assets.......................................... 378,097 378,176
Less: accumulated depreciation...................... (191,754) (187,292)
--------- ---------
Net fixed assets.................................. 186,343 190,884
Goodwill, net of accumulated amortization............. 30,871 31,395
Other assets.......................................... 35,147 34,151
--------- ---------
Total assets...................................... $ 484,786 $ 500,175
========= =========
</TABLE>
- --------
*Summarized from audited fiscal year 1997 balance sheet.
See accompanying notes.
3
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands except per share figures)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997*
----------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 41,204 $ 48,935
Accrued liabilities................................ 49,080 56,092
Current portion of term loans...................... 11,243 11,243
-------- --------
Total current liabilities........................ 101,527 116,270
Long-term debt:
Revolving credit................................... 9,396 --
Term loans......................................... 127,639 123,318
Senior Subordinated Notes due 2007................. 175,000 175,000
Senior Notes....................................... 11,094 11,094
-------- --------
Total long-term debt............................. 323,129 309,412
Other long-term reserves............................. 60,381 62,717
-------- --------
Total liabilities................................ 485,037 488,399
Common stock subject to redemption................... 24,541 26,355
Senior Convertible Preferred Stock, $.01 par value
per share; 3,000 shares authorized; 2,288 shares
issued in 1998 and 2,146 in 1997.................... 23 21
Voting common stock, $.01 par value per share; 10,000
shares authorized, 4,590 shares issued in 1998 and
1997................................................ 46 46
Non-voting common stock, $.01 par value per share;
10,000 shares authorized, zero shares issued in 1998
and 907 in 1997..................................... -- 9
Capital in excess of par value....................... 9,713 8,712
Retained earnings (deficit).......................... (4,932) 3,838
Accumulated other comprehensive loss:
Foreign currency translation adjustment............ (5,480) (4,391)
Treasury stock, at cost, 2,862 shares in 1998 and
2,783 shares in 1997................................ (24,162) (22,814)
-------- --------
Total liabilities and stockholders' equity....... $484,786 $500,175
======== ========
</TABLE>
- --------
*Summarized from audited fiscal year 1997 balance sheet.
See accompanying notes.
4
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Cash provided by (used in) operating activities.......... $ (6,157) $ (360)
Cash provided by (used in) investing activities:
Capital expenditures................................... (2,712) (3,492)
Other.................................................. 82 60
--------- ---------
Net cash used in investing activities................ (2,630) (3,432)
Cash provided by (used in) financing activities:
Borrowings from revolving credit....................... 36,038 36,250
Repayments of revolving credit......................... (28,250) (28,750)
Repayment of long-term debt............................ (669) (37)
Proceeds from long-term debt........................... 7,000 --
Payment of deferred financing costs.................... -- (103)
Purchases of voting common stock....................... (2,582) (540)
Purchase of non-voting common stock.................... (11,423) --
Issuance of Senior Convertible Preferred Stock......... 2,000 --
Dividends on common stock.............................. -- (746)
--------- ---------
Net cash provided by financing activities............ 2,114 6,074
--------- ---------
Effect of exchange rates on cash......................... (345) --
--------- ---------
Net increase (decrease) in cash.......................... (7,018) 2,282
Cash and cash equivalents at beginning of period......... 19,993 1,526
--------- ---------
Cash and cash equivalents at end of period............... $ 12,975 $ 3,808
========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional
information on the results of operations and the financial position of the
Company. Those comments should be read in conjunction with these notes. The
Company's annual report on Form 10-K for the fiscal year ended December 31,
1997 includes additional information about the Company, its operations, and
its financial position, and should be read in conjunction with this quarterly
report on Form 10-Q.
(2) The results for the interim periods are not necessarily indicative of
the results to be expected for the full fiscal year.
(3) In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
(4) First quarter 1998 results reflect consolidation of Koppers Australia
Pty. Limited ("Koppers Australia") as a result of the purchase in December
1997 of the remaining 50% of the common stock of Koppers Australia not owned
by the Company.
(5) In the first quarter of 1998, the Company purchased the remaining
906,600 shares of outstanding non-voting common stock of the Company for $11.4
million. The shares were subsequently retired and cancelled. Additionally,
during the first quarter of 1998 the Company issued 142,857 shares of Senior
Convertible Preferred Stock for $2.0 million to Saratoga Partners III, L.P. to
be held in trust for Brown University.
Environmental Indemnity and Guarantee
(6) The facilities of the Company are subject to a number of federal, state
and local laws and regulations governing, among other things, 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.
These laws and regulations are subject to frequent amendment. The Company
expects to incur substantial costs for ongoing compliance with such laws and
regulations. In addition, it is possible that the Company may face third-party
claims for cleanup or for injuries resulting from contamination.
The Company has several environmental indemnification agreements related to
the various former owners of its operating locations. The most significant of
these indemnifications was obtained at the Company's inception. At the
formation of the Company in 1988, the Company and Beazer East, Inc. ("Beazer
East", formerly known as Koppers Company, Inc.) entered into an asset purchase
agreement (the "Asset Purchase Agreement"). Under the terms of the Asset
Purchase Agreement, Beazer East assumed the liability for and indemnified the
Company against cleanup liabilities for past contamination occurring prior to
the purchase date at properties acquired from Beazer East, as well as third-
party claims arising from such past contamination (the "Indemnity"). Beazer
Limited unconditionally guaranteed Beazer East's performance of the Indemnity
pursuant to a guarantee (the "Guarantee"). However, if such indemnification
was not available for any reason, including the inability of Beazer East
and/or Beazer Limited to make such indemnification payments, the Company may
not have sufficient resources to meet such liabilities.
Beazer East has adhered to the terms of the Indemnity agreement and is
actively fulfilling its obligations to conduct investigative and remedial
programs at the properties which the Company acquired from Beazer East in
accordance with the requirements of regulatory authorities. The Indemnity is
not applicable to sites acquired since the formation of the Company, for which
separate indemnifications have been negotiated where appropriate. At the
properties which the Company acquired subsequent to the acquisition of the
Beazer East properties, all remedial actions are being performed in accordance
with applicable regulations and all indemnification obligations are being
honored.
6
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
In the event that Beazer East and Beazer Limited do not continue to fulfill
their commitment under the Indemnity and the Guarantee, the Company may be
required to pay costs covered by the Indemnity. The Company believes that for
the last three years amounts paid by Beazer East under the Indemnity have
averaged approximately $14 million per year. The requirement to pay such costs
without reimbursement would have a material adverse effect on the business,
financial condition, cash flow and results of operations of the Company.
Furthermore, if the Company were required to record a liability in respect of
matters covered by the Indemnity on its balance sheet, the result could be
that the Company would have significant negative net worth.
In addition, Beazer East is presently defending certain toxic tort actions
arising from the operation of assets prior to the inception of the Company
which were acquired from Beazer East. These tort actions were not assumed by
the Company under the Asset Purchase Agreement and, in any event, are within
the scope of the Indemnity.
The Company recently evaluated the environmental liabilities related to the
manufacturing sites acquired by the Company at its formation in 1988,
primarily located in the United States. The evaluation was based on a report
prepared by an independent consultant, which in turn was based on public
documents that had been submitted to various federal and state regulatory
entities on specific sites. In addition to the public documents, the
evaluation and report were also based on assumptions about the course of
future regulatory remediation requirements and the technical knowledge of the
Company and the independent consultant. The evaluation and report estimated
that approximately $111.1 million will be expended at these sites for
environmental remediation during the period of 1998 to 2042. The Company
estimates that approximately $92.9 million of this amount is covered under the
Indemnity, that it is responsible for approximately $0.1 million, and that
identified third parties are responsible for the remaining $18.1 million.
Information derived from the independent consultant's report indicates that,
for the years ending December 31, 1998, 1999, 2000, 2001, and 2002
environmental expenses will total approximately $3.8 million, $8.1 million,
$6.9 million, $9.1 million and $10.8 million, respectively. There can be no
assurance, however, that the actual liabilities associated with the
investigation and remediation of these sites will not exceed this estimate.
The factors that could affect the estimate include: new information about the
contamination at these sites, new interpretations of existing environmental
laws, new environmental laws, and more vigorous enforcement policies of
regulatory authorities. Further, in the event that Beazer East does not
fulfill its commitments, the Company may be required to pay costs that could
have a material adverse effect on the business, financial condition, cash flow
and results of operations of the Company.
Other Environmental Matters
(7) The Jefferson County Department of Health ("Jefferson County") issued a
notice of violation in March 1996 in connection with various alleged
violations of Jefferson County's air pollution control regulations for
emissions from coke oven batteries at the Company's Woodward, Alabama coke
facility ("Woodward Coke") during the period May 26, 1992 through March 1,
1996. On February 14, 1997 the United States Environmental Protection Agency
("EPA") issued a notice of violation covering the same issues that were raised
in the Jefferson County notice of violation. Thereafter, the Company
discovered that certain benzene abatement equipment at Woodward Coke had not
been operational for several months. Following a preliminary investigation,
the Company also discovered that certain environmental reports and records
contained incomplete and inaccurate information and that certain environmental
reports and certifications were not filed when required. The Company has
notified Jefferson County, the State of Alabama and the EPA of the
environmental irregularities, and the environmental reporting status of
Woodward Coke has been brought up to date by the Company. Counsel and
independent investigators were retained to conduct a complete and thorough
investigation, and the benzene abatement equipment had been returned to
service prior to the ceasing of
7
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
operations at Woodward Coke in January 1998. However, the Company could be
subject to significant liability in connection with these matters, including
fines and civil and criminal penalties and the risk of third-party lawsuits.
The Company and Jefferson County have negotiated a settlement agreement (the
"Settlement Agreement") which included both the original Jefferson County
notice of violation and the self-reported benzene abatement violations. The
Settlement Agreement also required the Company to pay a civil penalty in the
amount of $450,000 to Jefferson County, which was paid in 1997. On February 9,
1998 Jefferson County proposed a modified settlement agreement to address
alleged air exceedences from August 1997 through January 1998 which includes
an additional penalty in the amount of $575,000. The Company is currently in
the process of reviewing the proposed modification, and has entered into
negotiations with Jefferson County regarding this matter. There can be no
assurance that the settlement with Jefferson County will deter the EPA from
pursuing its notice of violation and that the EPA will not seek additional
actions or penalties that could have a material adverse effect on the
business, financial condition, cash flow and results of operations of the
Company.
During the investigation of Woodward Coke described above, it was also
discovered that certain environmental records and reports relating to
discharges of treated process water and treated storm water contained
incomplete and inaccurate information. Corrected reports have been submitted
to the State of Alabama and the EPA. While no notice of violation has been
issued in connection with this matter, it is believed likely that a notice of
violation will be issued and substantial penalties may be sought by the State
of Alabama or the EPA.
The Pennsylvania Department of Environmental Protection ("PADEP") previously
issued a notice of violation alleging that the boilers at the Monessen,
Pennsylvania coke facility (the "Monessen Facility") are emitting greater
quantities of nitrogen oxides than allowed under a plan approved by PADEP. The
Company also received a notice of violation in connection with a failure to
conduct timely emission monitoring testing on the boilers at the Monessen
Facility. The Company has installed additional equipment and modified existing
equipment to improve the quality of boiler emissions. Resolution of these
matters could have a negative effect on the business, financial condition,
cash flow and results of operations of the Company. The Company has submitted
an amended plan approval application to PADEP that provides for limitations on
the operation of the two boilers at the Monessen Facility. PADEP is currently
reviewing this application. As a result of the failure to meet the original
nitrogen oxide emission limitations, it is expected that PADEP will propose a
civil penalty in an amount of approximately $100,000. However, there can be no
assurance that a higher penalty will not be sought.
On June 12, 1996 PADEP issued a notice of violation in connection with an
alleged noncompliance with the terms of a consent agreement between the
Company and PADEP regarding liability for environmental conditions existing at
the time the Company purchased the Monessen Facility (the "Consent
Agreement"). The notice of violation alleged that the Company had not
implemented the corrective actions required under the Consent Agreement in a
timely fashion. The Company has completed the implementation of the corrective
actions at issue and has settled this matter by payment of a fine in the
amount of $261,000 in January 1998. At the Monessen Facility, the Company has
entered into a consent order and agreement with the EPA (the "Monessen Consent
Order") pursuant to which the Company's liabilities for environmental cleanup
have been capped at $550,000 for matters identified pursuant to the Monessen
Consent Order. Although an environmental indemnification was provided to the
Company by the seller of that facility, the Company does not expect that such
obligations will be honored. If contamination at the Monessen Facility should
be discovered which has not been identified pursuant to the Monessen Consent
Order, or if the EPA should require cleanup above the $550,000 "cap" contained
in the Monessen Consent Order, the costs associated with such events could
have a material adverse effect on the Company's business, financial condition,
cash flow and results of operations.
8
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
In June 1997, during a routine environmental compliance audit of the
Logansport, Louisiana wood treating plant, it was discovered that certain
records and reports relating to discharges of treated process water contained
incomplete and inaccurate information. Corrected reports have been submitted
to the local municipality, the State of Louisiana and the EPA. While no notice
of violation has been issued in connection with this matter, it is believed
that it is likely a notice of violation will be issued and civil penalties
will be sought by the local municipality, the State of Louisiana and the EPA.
In September 1996, the Company was served with a notice of violation from
the Illinois Environmental Protection Agency ("IEPA") relating to 16 releases
of hazardous materials which occurred at or from its facility located in
Stickney, Illinois between January 24, 1990 and May 3, 1996. The Company has
entered into negotiations with the IEPA to investigate four of the releases
which had the potential to cause groundwater contamination. Although the
Company believes that all such releases were remediated when they occurred,
there can be no assurances that the IEPA will not require additional action in
connection with this matter.
In addition to the environmental issues discussed above, the Company has
received or expects to receive notices of violations and requests for
information at its Monessen Facility and the Stickney, Illinois and
Follansbee, West Virginia tar distillation and chemicals facilities that
relate to matters which the Company does not believe will have a material
impact on the business, financial condition, cash flow and results of
operations of the Company.
On occasion, Koppers Australia has been served with notices relating to
environmental compliance issues arising in connection with its operations.
Koppers Australia was served with a notice by the Tasmanian Department of
Environment and Land Management ("DELM") which alleged that the Longford,
Tasmania facility was not in compliance with certain water discharge
requirements. Koppers Australia is currently in negotiations with the DELM
with respect to this issue. In addition, historic operations conducted at the
Koppers Australia facilities have resulted in identified and potential soil
and groundwater contamination of varying degrees. The Trentham, Victoria
facility is listed on the Victorian Register of Contaminated Sites as
"probable sites". In addition, Koppers Australia has identified various levels
of groundwater contamination at the Mayfield, New South Wales and Bunbury,
Western Australia facilities. Although the relevant regulatory authorities
have not required the investigation or remediation of these or other Koppers
Australia facilities to date, these authorities may require such work if
Koppers Australia does not undertake such activities itself. Costs associated
with these activities may be material and there can be no assurance that such
costs will not have a material adverse effect on the business, financial
condition, cash flow and results of operations of the Company.
9
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
Earnings Per Share
(8) The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
---------- ----------
(In thousands except
earnings per share)
<S> <C> <C>
Numerators for basic and diluted earnings per share:
Net income to common stockholders.................... $ 643 $ 3,390
Denominators:
Weighted-average voting common shares.................. 1,746 5,164
Weighted-average non-voting common shares.............. 50 3,628
---------- ----------
Denominators for basic earnings per share................ 1,796 8,792
Effect of dilutive securities:
Senior Convertible Preferred Stock..................... 2,279 --
Employee stock options................................. 362 449
---------- ----------
Dilutive potential common shares......................... 2,641 449
Denominators for diluted earnings per share--adjusted
weighted-average
shares and assumed conversions.......................... 4,437 9,241
Basic earnings per share............................. $ 0.36 $ 0.39
Diluted earnings per share........................... $ 0.14 $ 0.37
</TABLE>
Comprehensive Income
(9) During the three months ended March 31, 1998 the Company adopted the
provisions of Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. Total comprehensive income for the three months ended
March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Net income.................................................... $ 643 $ 3,390
Other comprehensive income:
Unrealized currency translation loss........................ (1,089) (2,913)
------- -------
Total comprehensive income (loss)......................... $ (446) $ 477
======= =======
</TABLE>
10
<PAGE>
KOPPERS INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Change in Composition of Segments. In early 1998, the Company ceased
operations at Woodward Coke; subsequently, its remaining operational coke
facility located in Monessen, Pennsylvania has been added to the Carbon
Materials & Chemicals division. Accordingly, segment information has been
reconfigured to reflect these organizational changes, and 1997 has been
restated to provide comparability with the current changes. Additionally,
Koppers Australia is being reported as a separate business segment to reflect
current organizational structure.
The following table sets forth certain sales and operating data, net of all
inter-segment transactions, for the Company's businesses for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
NET SALES (Dollars in thousands):
Carbon Materials & Chemicals.......................... $ 62,084 $ 68,865
Railroad & Utility Products........................... 67,632 53,516
Koppers Australia..................................... 24,663 --
Woodward Coke......................................... 2,073 11,599
-------- --------
Total............................................... $156,452 $133,980
SEGMENT SALES AS PERCENTAGE OF TOTAL:
Carbon Materials & Chemicals.......................... 39.7% 51.4%
Railroad & Utility Products........................... 43.2% 39.9%
Koppers Australia..................................... 15.8% --
Woodward Coke......................................... 1.3% 8.7%
-------- --------
Total............................................... 100.0% 100.0%
GROSS MARGIN BY SEGMENT (AFTER DEPRECIATION AND
AMORTIZATION):
Carbon Materials & Chemicals.......................... 12.0% 14.1%
Railroad & Utility Products........................... 9.5% 10.7%
Koppers Australia..................................... 16.4% --
Woodward Coke......................................... -- (19.6%)
-------- --------
Total............................................... 11.1% 9.6%
OPERATING MARGIN BY SEGMENT:
Carbon Materials & Chemicals.......................... 7.6% 11.1%
Railroad & Utility Products........................... 6.7% 7.4%
Koppers Australia..................................... 7.6% --
Woodward Coke......................................... -- (25.6%)
Corporate Unallocated Overhead........................ (2.0%) (1.9%)
-------- --------
Total............................................... 5.1% 4.6%
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997.
Net Sales. Net sales for the three months ended March 31, 1998 were 16.8%
higher than the same period in 1997, primarily as a result of $24.7 million of
net sales from the recent acquisition of Koppers Australia. Net sales for
Carbon Materials & Chemicals decreased by 9.8% due primarily to reductions in
sales for phthalic
11
<PAGE>
KOPPERS INDUSTRIES, INC.
anhydride ("PAA") which were impacted by lower prices caused by reductions in
the price of orthoxylene, the primary feedstock for PAA for all domestic
producers other than the Company. In general, domestic PAA producers use the
price of orthoxylene to determine pricing and therefore, reductions in the
price of orthoxylene generally result in proportionally lower PAA prices. Net
sales for Railroad & Utility Products increased by 26.4% compared to the prior
year quarter due primarily to increases in sales volumes and prices for
untreated railroad crossties. Net sales for Woodward Coke represent
liquidation of remaining inventories.
Gross Profit after Depreciation and Amortization. As a percent of net sales,
gross profit after depreciation and amortization increased to 11.1% in the
first quarter of 1998 from 9.6% for the same period last year, primarily as
the result of the ceasing of operations at Woodward Coke. Gross margins for
Carbon Materials & Chemicals decreased to 12.0% from 14.1% due to a 12.4%
reduction in PAA prices, coupled with higher unit costs due to lower product
volumes. Gross margin for Railroad & Utility Products decreased to 9.5% as
compared to 10.7% in the prior year quarter due to higher volumes of untreated
railroad crossties, which typically have lower margins than treated crossties.
Depreciation and Amortization. The increase in depreciation and amortization
for 1998 as compared to the prior year was due primarily to additional
depreciation and amortization as a result of the acquisition of Koppers
Australia more than offsetting the reduction in depreciation as a result of
the closure of Woodward Coke.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the three months ended March 31, 1998 increased to
6.0% of net sales from 5.0% of net sales in the same period last year
primarily as a result of $0.7 million of Year 2000 computer update costs and
costs associated with the integration of Koppers Australia.
Equity in Earnings of Affiliates. Equity earnings for the first quarter of
1998 were $2.0 million lower than the prior year period as a result of the
consolidation of Koppers Australia coupled with lower earnings from Tarconord
A/S in 1998.
Interest Expense. Interest expense increased by $3.0 million in the first
quarter of 1998 as compared to the prior year as the result of higher debt
levels in 1998 from the recent recapitalization and acquisition of Koppers
Australia.
Income Taxes. The Company's effective income tax rate for the three months
ended March 31, 1998 decreased to 7.7% as compared to 14.1% in the prior year
period due to lower taxable earnings in 1998 as a result of cash expenditures
related to 1997 restructuring charges.
Net Income. Net income for the three months ended March 31, 1998 compared to
the same period last year decreased primarily as the result of $3.0 million in
additional interest expense coupled with lower PAA prices.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998 the Company had cash and cash equivalents of $13.0
million and $85.5 million of availability under the revolving credit facility
for working capital purposes, subject to limitations under existing debt
covenants. As of March 31, 1998, $11.3 million of commitments were utilized by
outstanding standby letters of credit, $49.7 million of commitments were
utilized for debt support for Koppers Australia, and there were $9.4 million
in outstanding borrowings for working capital purposes.
Cash used in operating activities totaled $6.2 million for the three months
ended March 31, 1998 compared to $0.4 million for the same period last year
due to lower net income in 1998 and a working capital increase of
12
<PAGE>
KOPPERS INDUSTRIES, INC.
$9.8 million for the first quarter of 1998 compared to a working capital
increase of $6.6 million in the prior year period.
Capital expenditures were $2.7 million for the three months ended March 31,
1998 versus $3.5 million for the same period last year due in part to lower
requirements for environmental capital expenditures as compared to the prior
year.
Financing activities provided $2.1 million in cash for the three months
ended March 31, 1998 compared to providing $6.1 million for the same period
last year. Cash provided in 1998 included approximately $15 million of
borrowings used to purchase $14 million of voting and non-voting common stock,
plus $2 million of proceeds from the issuance of additional Senior Convertible
Preferred Stock. Cash supplied by financing activities in 1997 was the result
of approximately $7 million in borrowings used to provide for working capital
requirements.
Environmental Matters
Like companies involved in similar environmentally sensitive businesses, the
Company's operations and properties are subject to extensive federal, state,
local and foreign environmental laws and regulations, including those
concerning, among other things, the treatment, storage and disposal of wastes,
the investigation and remediation of contaminated soil and groundwater, the
discharge of effluents into waterways, the emissions of substances into the
air or otherwise relating to environmental protection and various health and
safety matters (collectively, "Environmental Laws"). The Clean Air Act and
Clean Water Act, each as amended, impose stringent standards on air emissions
and water discharges, respectively. Under RCRA, a facility that treats, stores
or disposes of hazardous waste on-site may be liable for corrective action
costs, and a facility that holds a RCRA permit may have to incur costs
relating to the closure of certain "hazardous" or "solid" waste management
units. Under CERCLA and similar state laws, an owner or operator of property
at which releases of hazardous substances have occurred may be liable for
investigation and remediation of any resulting contamination and related
natural resource damages. In addition, under CERCLA, the generator of
hazardous substances may be strictly, and jointly and severally liable for any
required investigation or remediation at third-party disposal sites and
related natural resource damages. The Environmental Laws are subject to
frequent amendment. The sanction for failure to comply with such Environmental
Laws can include significant civil penalties, criminal penalties, injunctive
relief and denial or loss of, or imposition of significant restrictions on,
environmental permits. In addition, the Company could be subject to suit by
third parties in connection with violations of or liability under
Environmental Laws.
Jefferson County issued a notice of violation in March 1996 in connection
with various alleged violations of Jefferson County's air pollution control
regulations for emissions from coke oven batteries at Woodward Coke during the
period May 26, 1992 through March 1, 1996. On February 14, 1997 the EPA issued
a notice of violation covering the same issues that were raised in the
Jefferson County notice of violation. Thereafter, the Company discovered that
certain benzene abatement equipment at Woodward Coke had not been operational
for several months. Following a preliminary investigation, the Company also
discovered that certain environmental reports and records contained incomplete
and inaccurate information and that certain environmental reports and
certifications were not filed when required. The Company has notified
Jefferson County, the State of Alabama and the EPA of the environmental
irregularities, and the environmental reporting status of Woodward Coke has
been brought up to date by the Company. Counsel and independent investigators
were retained to conduct a complete and thorough investigation, and the
benzene abatement equipment had been returned to service prior to the ceasing
of operations in January 1998. However, the Company could be subject to
significant liability in connection with these matters, including fines and
civil and criminal penalties and the risk of third-party lawsuits. The Company
and Jefferson County have negotiated a Settlement Agreement which included
both the original Jefferson County notice of violation and the self-reported
benzene abatement violations. The Settlement Agreement also required the
Company to pay a civil penalty in the amount of $450,000 to Jefferson County,
13
<PAGE>
KOPPERS INDUSTRIES, INC.
which was paid in 1997. On February 9, 1998 Jefferson County proposed a
modified settlement agreement to address alleged air exceedences from August
1997 through January 1998 which includes an additional penalty in the amount of
$575,000. The Company is currently in the process of reviewing the proposed
modification, and has entered into negotiations with Jefferson County regarding
this matter. There can be no assurance that the settlement with Jefferson
County will deter the EPA from pursuing its notice of violation and that the
EPA will not seek additional actions or penalties that could have a material
adverse effect on the business, financial condition, cash flow and results of
operations of the Company.
During the investigation of Woodward Coke described above, it was also
discovered that certain environmental records and reports relating to
discharges of treated process water and treated storm water contained
incomplete and inaccurate information. Corrected reports have been submitted to
the State of Alabama and the EPA. While no notice of violation has been issued
in connection with this matter, it is believed likely that a notice of
violation will be issued and substantial penalties may be sought by the State
of Alabama or the EPA.
PADEP previously issued a notice of violation alleging that the boilers at
the Monessen Facility are emitting greater quantities of nitrogen oxides than
allowed under a plan approved by PADEP. The Company also received a notice of
violation in connection with a failure to conduct timely emission monitoring
testing on the boilers at the Monessen Facility. The Company has installed
additional equipment and modified existing equipment to improve the quality of
boiler emissions. Resolution of these matters could have a negative effect on
the business, financial condition, cash flow and results of operations of the
Company. The Company has submitted an amended plan approval application to
PADEP that provides for limitations on the operation of the two boilers at the
Monessen Facility. PADEP is currently reviewing this application. As a result
of the failure to meet the original nitrogen oxide emission limitations, it is
expected that PADEP will propose a civil penalty in an amount of approximately
$100,000. However, there can be no assurance that a higher penalty will not be
sought.
On June 12, 1996 PADEP issued a notice of violation in connection with an
alleged noncompliance with the terms of a Consent Agreement. The notice of
violation alleged that the Company had not implemented the corrective actions
required under the Consent Agreement in a timely fashion. The Company has
completed the implementation of the corrective actions at issue and has settled
this matter by payment of a fine in the amount of $261,000 in January 1998.
Under the terms of the Asset Purchase Agreement between Koppers Industries,
Inc. and Old Koppers (now known as Beazer East, Inc.) at the formation of the
Company in 1988, Beazer East assumed the liability for and indemnified the
Company against (among other things) cleanup liabilities for contamination
occurring prior to the purchase date at sites acquired from Beazer East, and
third-party claims arising from such contamination in the Indemnity. Beazer
East's performance of the Indemnity is unconditionally guaranteed by Beazer
Limited under the Guarantee. Contamination identified at sites owned and/or
operated by the Company is being investigated and remediated under CERCLA, RCRA
or state cleanup programs. Currently, at the sites acquired from Beazer East
(which include all of the CERCLA sites and all but one of the RCRA sites),
substantially all investigation and remediation activities are being conducted
and paid for by Beazer East pursuant to the terms of the Indemnity; however,
there can be no assurance that Beazer East and Beazer Limited will continue to
meet their obligations. In the event they do not, the Company may be required
to pay such costs, which are believed to have averaged approximately $14.0
million per year for the last three years. In addition, the government and
other third parties have the right under applicable Environmental Laws to seek
relief directly from the Company for any and all such costs and liabilities.
The requirements to pay such costs and assume such liabilities without
reimbursement would have a material adverse affect on the business, financial
condition, cash flow and results of operations of the Company. Furthermore, if
the Company were required to record a liability in respect of environmental
matters covered by the Indemnity on its balance sheet, the result could be that
the Company would have significant negative net worth.
14
<PAGE>
KOPPERS INDUSTRIES, INC.
The Indemnity does not afford the Company indemnification against
environmental costs and liabilities relating to activities or conditions
occurring or arising after the Company was formed and commenced operations,
nor is the Indemnity applicable to liabilities arising in connection with
subsequent acquisitions. At the Clairton, Pennsylvania tar distillation
facility, the Somerville, Texas wood treating facility and the Monessen
Facility (each of which the Company acquired subsequent to the acquisition of
the Beazer East sites), investigations and remediations are being performed.
All applicable indemnification obligations are being honored at the Clairton
and Somerville facilities and the Company believes that the sellers (or their
predecessors) at both of these facilities will continue to conduct and finance
most activities directly. Although the Company is not aware of any reason why
such environmental indemnification obligations will not be performed, if the
Company were required to pay costs associated with these two sites, it could
have a material adverse effect on the Company's business, financial condition,
cash flow and results of operations. At the Monessen Facility, the Company has
entered into the Monessen Consent Order with PADEP pursuant to which the
Company's liabilities for environmental cleanup have been capped at $550,000
for matters identified pursuant to the Monessen Consent Order. Although an
environmental indemnification was provided to the Company by the seller of
that facility, the Company does not expect that such obligations will be
honored. If contamination at the Monessen Facility should be discovered which
is not identified pursuant to the Monessen Consent Order or if the EPA should
require cleanup above the $550,000 "cap" contained therein, costs associated
with such events could have a material adverse effect on the Company's
business, financial position, cash flow and results of operations.
Other Matters
For a fee, the Company treats waste water produced by Beazer East during
Beazer East's remediation of certain of the Company's facilities. Beazer East
performs these remediation activities pursuant to the Indemnity. During the
summer of 1997, Beazer East challenged the amounts of the charges for waste
water treatment services at the Florence, South Carolina wood treating
facility and the Follansbee, West Virginia tar distillation facility. Beazer
East alleged they had been overcharged by approximately $2.2 million
(including interest) at Florence and by approximately $3.1 million (including
interest) at Follansbee. The Company has contested these allegations and
believes that if an overcharge occurred, the amount of the overcharge is less
than Beazer East has alleged.
Stock Purchase and Redemption Plan
As part of the recapitalization which began in December 1997, the Company
initiated a stock purchase and redemption plan. In the first quarter of 1998,
the Company redeemed approximately 0.2 million shares for a net cash outlay of
$2.6 million, in accordance with the plan. Management estimates that net stock
redemptions in the second quarter as a result of the purchase and redemption
plan will be 0.4 million shares, resulting in additional cash outlays of
approximately $6 million.
Status of Restructuring Reserves
The Company reported restructuring charges of $45.4 million in the fourth
quarter of 1997, $24.4 million of which are expected to be cash charges. As of
March 31, 1998 approximately $4.3 million of these cash charges had been
expended.
Impact of Recently Issued Accounting Standards
Statement No. 130, Reporting Comprehensive Income, requires enterprises to
classify items of comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital. Statement
No. 130 was adopted by the Company in the first quarter of 1998. Prior year
amounts have been restated to conform to the requirements of Statement No.
130.
15
<PAGE>
KOPPERS INDUSTRIES, INC.
Statement No. 131, Disclosure about Segments of an Enterprise and Related
Information changes the way companies report segment information. Statement
No. 131 is required in annual reports for 1998 and in interim financial
statements beginning in 1999. The Company does not expect the effect of the
adoption of this statement to be material.
Statement No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, was issued in February 1998. The Statement supersedes
the disclosure requirements in Statements No. 87, Employers' Accounting for
Pensions, No. 88, Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. The overall
objective is to improve and standardize disclosures about pensions and other
postretirement benefits and to make the required information easier to prepare
and more understandable. Statement No. 132 eliminates certain existing
disclosure requirements, but at the same time adds new disclosures. Statement
No. 132 is effective for fiscal years beginning after December 15, 1997. The
Company does not expect the effect of the adoption of this statement to be
material.
16
<PAGE>
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in the status of legal proceedings as
previously reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits:
27.1 Financial Data Schedule
(b)Reports on Form 8-K:
The Company filed a Form 8-KA on January 23, 1998 which included the required
financial statements and additional information required related to the
acquisition of Koppers Australia.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOPPERS INDUSTRIES, INC.
(Registrant)
Date May 14, 1998 /s/ Donald E. Davis
--------------------- -------------------------------------
Donald E. Davis,
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer)
18
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