<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 June 30, 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 July 16, 1998 amounted to 1,523,942 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales................................ $ 174,230 $ 157,559 $330,682 $291,539
Operating expenses:
Cost of sales.......................... 142,193 132,311 273,763 247,533
Depreciation and amortization.......... 7,560 6,005 15,104 11,907
Selling, general and administrative.... 8,972 7,895 18,359 14,650
--------- --------- -------- --------
Total operating expenses............. 158,725 146,211 307,226 274,090
--------- --------- -------- --------
Operating profit......................... 15,505 11,348 23,456 17,449
Equity in earnings of affiliates......... 875 1,360 896 3,351
Other expense............................ -- 1,414 -- 1,414
--------- --------- -------- --------
Income before interest expense, income
taxes
and minority interest................... 16,380 11,294 24,352 19,386
Interest expense......................... 7,616 4,188 14,689 8,333
--------- --------- -------- --------
Income before income taxes and minority
interest................................ 8,764 7,106 9,663 11,053
Income taxes............................. 1,073 760 1,142 1,316
Minority interest........................ 208 -- 395 --
--------- --------- -------- --------
Net income............................. $ 7,483 $ 6,346 $ 8,126 $ 9,737
========= ========= ======== ========
Basic earnings per share of common stock. $ 4.95 $ 0.72 $ 4.91 $ 1.11
========= ========= ======== ========
Diluted earnings per share of common
stock................................... $ 1.84 $ 0.69 $ 1.91 $ 1.05
========= ========= ======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(Unaudited) *
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 10,763 $ 19,993
Accounts receivable less allowance for doubtful
accounts
of $773 in 1998 and $797 in 1997................... 87,107 83,818
Inventories:
Raw materials..................................... 41,167 41,960
Work in process................................... 1,744 2,938
Finished goods.................................... 62,235 61,652
LIFO reserve...................................... (11,463) (10,908)
--------- ---------
Total inventories............................... 93,683 95,642
Deferred tax benefit................................ 24,441 24,441
Other............................................... 726 1,576
--------- ---------
Total current assets.............................. 216,720 225,470
Investments........................................... 18,306 18,275
Fixed assets.......................................... 373,528 378,176
Less: accumulated depreciation...................... (192,365) (187,292)
--------- ---------
Net fixed assets.................................. 181,163 190,884
Goodwill, net of accumulated amortization............. 29,988 31,395
Other assets.......................................... 36,702 34,151
--------- ---------
Total assets...................................... $ 482,879 $ 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>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(Unaudited) *
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 42,670 $ 48,935
Accrued liabilities................................. 38,399 56,092
Current portion of term loans....................... 12,945 11,243
-------- --------
Total current liabilities......................... 94,014 116,270
Long-term debt:
Revolving credit.................................... 7,000 --
Term loans.......................................... 139,045 123,318
Senior Subordinated Notes due 2007.................. 175,000 175,000
Senior Notes due 2004............................... 11,094 11,094
-------- --------
Total long-term debt.............................. 332,139 309,412
Other long-term reserves.............................. 59,439 62,717
-------- --------
Total liabilities................................. 485,592 488,399
Common stock subject to redemption.................... 20,917 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; 37,000
shares authorized,
4,733 shares issued in 1998 and 4,590 in 1997........ 47 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........................ 9,895 8,712
Retained earnings..................................... 5,451 3,838
Accumulated other comprehensive loss:
Foreign currency translation adjustment............... (8,922) (4,391)
Treasury stock, at cost, 3,209 shares in 1998 and
2,783 shares in 1997................................. (30,124) (22,814)
-------- --------
Total liabilities and stockholders' equity........ $482,879 $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>
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Cash provided by (used in) operating activities............. $ (7,620) $ 17,789
Cash provided by (used in) investing activities:
Capital expenditures...................................... (6,570) (8,117)
Acquisitions.............................................. (2,600) --
Other..................................................... 140 109
-------- --------
Net cash used in investing activities................... (9,030) (8,008)
Cash provided by (used in) financing activities:
Borrowings from revolving credit.......................... 72,250 67,000
Repayments of revolving credit............................ (65,250) (69,750)
Repayment of long-term debt............................... (5,230) (3,075)
Proceeds from long-term debt.............................. 26,000 --
Payment of deferred financing costs....................... (370) (466)
Net purchases of voting common stock...................... (9,084) (732)
Purchase of non-voting common stock....................... (11,423) --
Issuance of Senior Convertible Preferred Stock............ 2,000 --
Dividends on common stock................................. -- (1,495)
-------- --------
Net cash provided by (used in) financing activities..... 8,893 (8,518)
-------- --------
Effect of exchange rates on cash............................ (1,473) --
-------- --------
Net increase (decrease) in cash............................. (9,230) 1,263
Cash and cash equivalents at beginning of period............ 19,993 1,526
-------- --------
Cash and cash equivalents at end of period.................. $ 10,763 $ 2,789
======== ========
</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) In the second quarter of 1998, the Company completed the stock purchase
and redemption plan by purchasing approximately 0.3 million shares of common
stock from current and former employees and directors of the Company for $5.4
million. Including activity from the first quarter of 1998, the Company
purchased 0.5 million shares of common stock and sold 0.1 million shares for a
net cash outlay of approximately $8 million.
(5) Environmental Indemnity and Guarantee
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.
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
6
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
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.
In 1997 the Company 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.
On August 5, 1998 Hanson PLC announced that an agreement had been signed
under which the funding and risk of the environmental liabilities relating to
the former Koppers Company operations of Beazer PLC (which includes locations
purchased from Beazer East by the Company) will be underwritten by
subsidiaries of two of the world's largest reinsurance companies, Centre
Solutions (a member of the Zurich Group) and Swiss Re.
(6) Other Environmental Matters
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
7
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
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 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 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") were 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 to an acceptable level. As
a result of the failure to meet the original nitrogen oxide emission
limitations, a final settlement has been reached in which the Company will pay
a civil penalty in the amount of $100,000.
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.
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 likely that a
notice of violation will be issued and civil penalties will be sought by the
local municipality, the State of Louisiana and the EPA.
8
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
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.
On occasion, Koppers Australia Pty. Limited ("Koppers Australia") has been
served with notices relating to environmental compliance issues arising in
connection with its operations. 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 a
contaminated site. In addition, Koppers Australia has identified various
levels of groundwater contamination at the Mayfield, New South Wales facility.
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.
(7) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
(In thousands except earnings per share)
<S> <C> <C> <C> <C>
Numerators for basic and diluted
earnings per share:
Net income to common
stockholders.................... $ 7,483 $ 6,346 $ 8,126 $ 9,737
Denominators:
Weighted-average voting common
shares............................ 1,512 5,192 1,629 5,178
Weighted-average non-voting common
shares............................ -- 3,628 25 3,628
---------- ---------- --------- ---------
Denominators for basic earnings per
share............................... 1,512 8,820 1,654 8,806
Effect of dilutive securities:
Senior Convertible Preferred Stock. 2,288 -- 2,284 --
Employee stock options............. 257 443 317 446
---------- ---------- --------- ---------
Dilutive potential common shares..... 2,545 443 2,601 446
Denominators for diluted earnings per
share--adjusted
weighted-average shares and assumed
conversions......................... 4,057 9,263 4,255 9,252
Basic earnings per share......... $ 4.95 $ 0.72 $ 4.91 $ 1.11
Diluted earnings per share....... $ 1.84 $ 0.69 $ 1.91 $ 1.05
</TABLE>
9
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
(8) Comprehensive Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net income........................... $ 7,483 $ 6,346 $ 8,126 $ 9,737
Other comprehensive income:
Unrealized currency translation
loss.............................. (4,000) (946) (5,089) (3,859)
--------- --------- -------- --------
Total comprehensive income....... $ 3,483 $ 5,400 $ 3,037 $ 5,878
========= ========= ======== ========
</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 was 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. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
NET SALES (Dollars in
thousands):
Carbon Materials & Chemicals.. $ 66,544 $ 75,959 $128,628 $144,824
Railroad & Utility Products... 79,529 67,626 147,161 121,142
Koppers Australia............. 27,948 -- 52,611 --
Woodward Coke................. 209 13,974 2,282 25,573
--------- --------- -------- --------
Total....................... $ 174,230 $ 157,559 $330,682 $291,539
SEGMENT SALES AS PERCENTAGE OF
TOTAL:
Carbon Materials & Chemicals.. 38.2% 48.2% 38.9% 49.7%
Railroad & Utility Products... 45.7% 42.9% 44.5% 41.5%
Koppers Australia............. 16.0% -- 15.9% --
Woodward Coke................. 0.1% 8.9% 0.7% 8.8%
--------- --------- -------- --------
Total....................... 100.0% 100.0% 100.0% 100.0%
GROSS MARGIN BY SEGMENT (AFTER
DEPRECIATION AND AMORTIZATION):
Carbon Materials & Chemicals.. 13.7% 17.1% 12.9% 15.6%
Railroad & Utility Products... 12.9% 12.4% 11.3% 11.7%
Koppers Australia............. 22.0% -- 18.5% --
Woodward Coke................. -- (13.3%) -- (16.2%)
--------- --------- -------- --------
Total....................... 14.1% 12.2% 12.6% 11.0%
OPERATING MARGIN BY SEGMENT:
Carbon Materials & Chemicals.. 10.0% 13.1% 8.8% 12.2%
Railroad & Utility Products... 10.6% 9.8% 8.8% 8.8%
Koppers Australia............. 16.0% -- 12.1% --
Woodward Coke................. -- (17.5%) -- (21.1%)
Corporate Unallocated
Overhead..................... (2.3%) (1.8%) (2.2%) (1.9%)
--------- --------- -------- --------
Total....................... 8.9% 7.2% 7.1% 6.0%
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998
AND 1997.
Net Sales. Net sales for the three months ended June 30, 1998 were 10.6%
higher than the same period in 1997, primarily as a result of approximately
$28 million of net sales from the acquisition of Koppers Australia netted
against a $13.8 million reduction in sales as a result of the closure of
Woodward Coke. Net
11
<PAGE>
KOPPERS INDUSTRIES, INC.
sales for Carbon Materials & Chemicals decreased by 12.4% due to reductions in
sales for phthalic 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. Additionally, carbon pitch volumes were lower than the prior year
period; this effect was partially offset by higher volumes of creosote and
refined tar. Net sales for Railroad & Utility Products increased by 17.6%
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 14.1% in the
second quarter of 1998 from 12.2% for the same period last year, primarily as
the result of the ceasing of operations at Woodward Coke and the acquisition of
Koppers Australia. Gross margins for Carbon Materials & Chemicals decreased to
13.7% from 17.1% due primarily to a 26% reduction in prices for PAA as compared
to the prior year quarter. Gross margin for Railroad & Utility Products
increased to 12.9% as compared to 12.4% in the prior year quarter due to higher
volumes and prices for railroad 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 June 30, 1998 increased to
5.2% of net sales from 5.0% of net sales in the same period last year primarily
as a result of Year 2000 computer update costs and other consulting costs more
than offsetting $0.8 million of severance charges in the prior year quarter.
Equity in Earnings of Affiliates. Equity earnings for the second quarter of
1998 were $0.5 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.
Other Expense. Other expense in 1997 consisted of the write-off of deferred
charges related to an initial public offering ("IPO") of common stock which was
withdrawn in the second quarter of 1997.
Interest Expense. Interest expense increased by $3.4 million in the second
quarter of 1998 as compared to the prior year as the result of higher debt
levels in 1998 from the recent recapitalization of the Company and the
acquisition of Koppers Australia.
Income Taxes. The Company's effective income tax rate for the three months
ended June 30, 1998 increased to 12.2% as compared to 10.7% in the prior year
period due to higher taxable earnings in 1998; the reduction from statutory
rates for both periods is due primarily to energy tax credits from the Monessen
Facility.
Net Income. Net income for the three months ended June 30, 1998 compared to
the same period last year increased by $1.1 million as earnings from Koppers
Australia, the closure of Woodward Coke and higher earnings for Railroad &
Utility Products offset higher interest expense and lower PAA prices in 1998.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1997.
Net Sales. Net sales for the six months ended June 30, 1998 were 13.4% higher
than the same period in 1997, as $52.6 million of net sales from the recent
acquisition of Koppers Australia more than offset a reduction of $23.3 million
of sales as a result of the closure of Woodward Coke. Net sales for Carbon
Materials &
12
<PAGE>
KOPPERS INDUSTRIES, INC.
Chemicals decreased by 11.2% due to reductions in sales for PAA coupled with
reductions in carbon pitch volumes. Net sales for Railroad & Utility Products
increased by 21.5% compared to the prior year due primarily to increases in
sales volumes and prices for 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 12.6% in the
first six months of 1998 from 11.0% for the same period last year, primarily as
the result of the ceasing of operations at Woodward Coke and the acquisition of
Koppers Australia. Gross margins for Carbon Materials & Chemicals decreased to
12.9% from 15.6% primarily as result of a 29.2% reduction in PAA prices. Gross
margin for Railroad & Utility Products decreased to 11.3% as compared to 11.7%
in the prior year period 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 to additional depreciation and
amortization for 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 six months ended June 30, 1998 increased to 5.6%
of net sales from 5.0% of net sales in the same period last year primarily as a
result of $0.9 million of Year 2000 computer update costs and costs associated
with the integration of Koppers Australia more than offsetting $0.8 million of
severance charges in the prior year period.
Equity in Earnings of Affiliates. Equity earnings for the first six months of
1998 were $2.5 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 $6.4 million in the first six
months of 1998 as compared to the prior year as the result of higher debt
levels in 1998 from the recent recapitalization of the Company and the
acquisition of Koppers Australia.
Income Taxes. The Company's effective income tax rate for the six months
ended June 30, 1998 remained stable as compared to the prior year, with the
reduction from statutory rates due primarily to energy tax credits at the
Monessen Facility.
Net Income. Net income for the six months ended June 30, 1998 compared to the
same period last year decreased primarily as the result of $6.4 million in
additional interest expense coupled with lower PAA prices more than offsetting
the acquisition of Koppers Australia, the closure of Woodward Coke and higher
earnings from Railroad & Utility Products.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998 the Company had cash and cash equivalents of $10.8
million and $79.3 million of availability under the revolving credit facility
for working capital purposes, subject to limitations under existing debt
covenants. As of June 30, 1998 $11.3 million of commitments were utilized by
outstanding standby letters of credit, $45.0 million of commitments were
utilized for debt support for Koppers Australia, and there were $7.0 million in
outstanding borrowings for working capital purposes.
Cash used in operating activities totaled $7.6 million for the six months
ended June 30, 1998 compared to $17.8 million of cash provided by operating
activities for the same period last year due to a working capital increase of
$25.6 million for the first six months of 1998 compared to a working capital
increase of $2.6 million in the prior year period. The working capital increase
for 1998 was due primarily to plant closing costs for Woodward Coke and
contractual benefit payments related to the acquisition of Koppers Australia.
Capital expenditures were $6.6 million for the six months ended June 30, 1998
versus $8.1 million for the same period last year due in part to the timing of
the commencement of certain projects as compared to the prior year.
13
<PAGE>
KOPPERS INDUSTRIES, INC.
Financing activities provided $8.9 million in cash for the six months ended
June 30, 1998 compared to using $8.5 million in cash for the same period last
year. Cash provided in 1998 included approximately $21 million of term
borrowings used to purchase $20 million of voting and non-voting common stock.
Cash used by financing activities in 1997 was primarily for debt repayment.
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, in addition to the
changes listed above, 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.
14
<PAGE>
KOPPERS INDUSTRIES, INC.
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 were 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. As a result of the failure to meet the original nitrogen
oxide emission limitations, a final settlement has been reached in which the
Company will pay a civil penalty in the amount of $100,000.
Under the terms of the Asset Purchase Agreement, 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 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.
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.
15
<PAGE>
KOPPERS INDUSTRIES, INC.
On August 5, 1998 Hanson PLC announced that an agreement had been signed
under which the funding and risk of the environmental liabilities relating to
the former Koppers Company operations of Beazer PLC (which includes locations
purchased from Beazer East by the Company) will be underwritten by
subsidiaries of two of the world's largest reinsurance companies, Centre
Solutions (a member of the Zurich Group) and Swiss Re.
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 second quarter of 1998,
the Company purchased approximately 0.3 million shares of common stock from
current and former employees and directors of the Company for $5.4 million.
Including activity from the first quarter of 1998, the Company purchased 0.5
million shares of common stock and sold 0.1 million shares for a net cash
outlay of approximately $8 million, completing the stock purchase and
redemption plan.
Status of Restructuring Reserves
The Company reported restructuring charges of $45.4 million in the fourth
quarter of 1997. As of June 30, 1998 approximately $7.6 million of cash
charges had been expended.
Impact of Recently Issued Accounting Standards
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:
There were no reports on Form 8-K filed by the Company in the second quarter of
1998.
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 August 14, 1998 /s/ Donald E. Davis
--------------------- -------------------------------------
Donald E. Davis,
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 0 10,673
<SECURITIES> 0 0
<RECEIVABLES> 0 87,880
<ALLOWANCES> 0 (773)
<INVENTORY> 0 93,683
<CURRENT-ASSETS> 0 216,720
<PP&E> 0 373,528
<DEPRECIATION> 0 192,365
<TOTAL-ASSETS> 0 482,879
<CURRENT-LIABILITIES> 0 94,014
<BONDS> 0 186,094
0 0
0 23
<COMMON> 0 47
<OTHER-SE> 0 (2,783)
<TOTAL-LIABILITY-AND-EQUITY> 0 482,879
<SALES> 174,230 330,682
<TOTAL-REVENUES> 174,230 330,682
<CGS> 142,193 273,763
<TOTAL-COSTS> 158,725 307,226
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,616 14,689
<INCOME-PRETAX> 8,972 10,058
<INCOME-TAX> 1,073 1,142
<INCOME-CONTINUING> 7,483 8,126
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,483 8,126
<EPS-PRIMARY> 4.95 4.91
<EPS-DILUTED> 1.84 1.91
</TABLE>
