<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 SEPTEMBER 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 October 21, 1998 amounted to 1,526,256 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales............................ $ 181,153 $ 160,721 $511,835 $452,260
Operating expenses:
Cost of sales...................... 148,726 133,293 421,643 380,825
Depreciation and amortization...... 7,641 6,001 22,745 17,908
Selling, general and
administrative.................... 10,011 6,909 29,216 21,559
--------- --------- -------- --------
Total operating expenses......... 166,378 146,203 473,604 420,292
--------- --------- -------- --------
Operating profit..................... 14,775 14,518 38,231 31,968
Equity in earnings of affiliates..... 1,093 1,346 1,989 4,696
Other expense........................ -- -- -- 1,414
--------- --------- -------- --------
Income before interest expense,
income tax provision (benefit) and
minority interest................... 15,868 15,864 40,220 35,250
Interest expense..................... 7,294 4,054 21,983 12,387
--------- --------- -------- --------
Income before income tax provision
(benefit) and minority interest..... 8,574 11,810 18,237 22,863
Income tax provision (benefit)....... (1,273) (612) (131) 704
Minority interest.................... 124 -- 519 --
--------- --------- -------- --------
Net income....................... $ 9,723 $ 12,422 $ 17,849 $ 22,159
========= ========= ======== ========
Basic earnings per share of common
stock............................... $ 6.38 $ 1.41 $ 11.09 $ 2.52
========= ========= ======== ========
Diluted earnings per share of common
stock............................... $ 2.42 $ 1.34 $ 4.27 $ 2.40
========= ========= ======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(Unaudited) *
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 14,186 $ 19,993
Accounts receivable less allowance for doubtful
accounts of $964 in 1998 and $797 in 1997........ 84,281 83,818
Inventories:
Raw materials................................... 45,463 41,960
Work in process................................. 2,551 2,938
Finished goods.................................. 54,559 61,652
LIFO reserve.................................... (11,934) (10,908)
-------- --------
Total inventories............................. 90,639 95,642
Deferred tax benefit.............................. 24,462 24,441
Other............................................. 697 1,576
-------- --------
Total current assets............................ 214,265 225,470
Investments......................................... 18,829 18,275
Fixed assets........................................ 319,408 378,176
Less: accumulated depreciation...................... (144,352) (187,292)
-------- --------
Net fixed assets.................................. 175,056 190,884
Goodwill, net of accumulated amortization........... 28,133 31,395
Other assets........................................ 40,891 34,151
-------- --------
Total assets.................................... $477,174 $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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(Unaudited) *
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 39,501 $ 48,935
Accrued liabilities.............................. 40,150 56,092
Current portion of term loans.................... 11,945 11,243
-------- --------
Total current liabilities...................... 91,596 116,270
Long-term debt:
Revolving credit................................. 300 --
Term loans....................................... 136,145 123,318
Senior Subordinated Notes due 2007............... 175,000 175,000
Senior Notes due 2004............................ 11,094 11,094
-------- --------
Total long-term debt........................... 322,539 309,412
Other long-term reserves........................... 60,211 62,717
-------- --------
Total liabilities.............................. 474,346 488,399
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.................................. 15,174 3,838
Accumulated other comprehensive loss:
Foreign currency translation adjustment.......... (13,115) (4,391)
Treasury stock, at cost, 3,209 shares in 1998 and
2,783 shares in 1997.............................. (30,113) (22,814)
-------- --------
Total liabilities and stockholders' equity..... $477,174 $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>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Cash provided by operating activities..................... $ 7,731 $ 35,563
Cash provided by (used in) investing activities:
Capital expenditures.................................... (10,525) (12,999)
Acquisitions............................................ (2,600) --
Other................................................... 14 623
--------- ---------
Net cash used in investing activities................. (13,111) (12,376)
Cash provided by (used in) financing activities:
Borrowings from revolving credit........................ 105,458 101,500
Repayments of revolving credit.......................... (105,100) (118,500)
Proceeds from long-term debt............................ 26,893 --
Repayment of long-term debt............................. (6,618) (3,111)
Payment of deferred financing costs..................... (362) (486)
Net purchases of voting common stock.................... (9,073) (1,381)
Purchase of non-voting common stock..................... (11,423) --
Issuance of Senior Convertible Preferred Stock.......... 2,000 --
Dividends on common stock............................... -- (2,244)
--------- ---------
Net cash provided by (used in) financing activities... 1,775 (24,222)
--------- ---------
Effect of exchange rates on cash.......................... (2,202) --
--------- ---------
Net decrease in cash...................................... (5,807) (1,035)
Cash and cash equivalents at beginning of period.......... 19,993 1,526
--------- ---------
Cash and cash equivalents at end of period................ $ 14,186 $ 491
========= =========
</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) 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 approximately $14 million per year. The requirement to pay such costs
without reimbursement would have a
6
<PAGE>
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.
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.
(5) 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 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 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.
At the acquisition of the Monessen, Pennsylvania coke facility (the
"Monessen Facility"), the Company entered into a consent order and agreement
with the Pennsylvania Department of Environmental Protection ("PADEP") (the
"Monessen Consent Order") pursuant to which the Company's liabilities for
environmental
7
<PAGE>
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 was not 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.
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. 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.
8
<PAGE>
(6) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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.. $9,723 $12,422 $17,849 $22,159
Denominators:
Weighted-average voting common
shares.............................. 1,524 5,184 1,593 5,180
Weighted-average non-voting common
shares.............................. -- 3,628 17 3,628
--------- ---------- --------- ---------
Denominators for basic earnings per
share................................ 1,524 8,812 1,610 8,808
Effect of dilutive securities:
Senior Convertible Preferred Stock... 2,288 -- 2,285 --
Employee stock options............... 207 426 280 439
--------- ---------- --------- ---------
Dilutive potential common shares...... 2,495 426 2,565 439
Denominators for diluted earnings per
share-adjusted
weighted-average shares and assumed
conversions.......................... 4,019 9,238 4,175 9,247
Basic earnings per share............ $6.38 $1.41 $11.09 $2.52
Diluted earnings per share.......... $2.42 $1.34 $4.27 $2.40
</TABLE>
(7) Comprehensive Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net income............................ $9,723 $12,422 $17,849 $22,159
Other comprehensive income:
Unrealized currency translation
loss............................... (4,193) (1,911) (8,724) (5,770)
-------- --------- -------- --------
Total comprehensive income........ $5,530 $10,511 $ 9,125 $16,389
======== ========= ======== ========
</TABLE>
9
<PAGE>
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. Additionally, Koppers Australia, which
operates in businesses similar to the Company's Carbon Materials & Chemicals
and Railroad & Utility Products businesses, has been incorporated into those
segments. Segment information has been reconfigured to reflect these changes,
and 1997 has been restated to provide comparability with the current
presentation.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
NET SALES (Dollars in
thousands):
Carbon Materials & Chemicals... $ 94,877 $ 74,207 $266,387 $219,031
Railroad & Utility Products.... 85,768 72,665 242,658 193,807
Woodward Coke.................. 508 13,849 2,790 39,422
--------- --------- -------- --------
Total......................... $181,153 $160,721 $511,835 $452,260
SEGMENT SALES AS PERCENTAGE OF
TOTAL:
Carbon Materials & Chemicals... 52.4% 46.2% 52.1% 48.4%
Railroad & Utility Products.... 47.3% 45.2% 47.4% 42.9%
Woodward Coke.................. 0.3% 8.6% 0.5% 8.7%
--------- --------- -------- --------
Total......................... 100.0% 100.0% 100.0% 100.0%
GROSS MARGIN BY SEGMENT (AFTER
DEPRECIATION AND AMORTIZATION):
Carbon Materials & Chemicals... 16.3% 19.1% 15.1% 16.8%
Railroad & Utility Products.... 11.6% 11.7% 11.9% 11.7%
Woodward Coke.................. -- (6.9%) -- (12.9%)
--------- --------- -------- --------
Total......................... 13.7% 13.3% 13.2% 11.8%
OPERATING MARGIN BY SEGMENT:
Carbon Materials & Chemicals... 12.0% 17.6% 10.5% 14.0%
Railroad & Utility Products.... 8.7% 9.3% 8.9% 8.9%
Woodward Coke.................. -- (11.7%) -- (17.8%)
Corporate Unallocated
Overhead...................... (2.2%) (2.3%) (2.2%) (2.0%)
--------- --------- -------- --------
Total......................... 8.2% 9.0% 7.5% 7.1%
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997.
Net Sales. Net sales for the three months ended September 30, 1998 were
12.7% higher than the same period in 1997, primarily as a result of
approximately $26 million of net sales from Koppers Australia netted against a
$13.8 million reduction in sales as a result of the closure of Woodward Coke.
Net sales for Carbon Materials & Chemicals increased by 27.9% as Koppers
Australia contributed $20.9 million of net sales to this segment. Net sales
for the domestic portion of the business were the same as the prior year
period as a 30.1% reduction in phthalic anhydride ("PAA") prices was offset by
increased sales of refined tar and creosote. The lower prices for PAA were
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
10
<PAGE>
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 18.0% compared to the prior year quarter due to
$5.2 million of net sales from Koppers Australia and 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 13.7% in the
third quarter of 1998 from 13.3% 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 16.3% from 19.1% due primarily to a 30.1% reduction in prices for PAA as
compared to the prior year quarter. Gross margin for Railroad & Utility
Products decreased to 11.6% as compared to 11.7% in the prior year quarter due
to higher volumes of untreated railroad crossties, which generally 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 September 30, 1998 increased
to 5.5% of net sales from 4.3% of net sales in the same period last year as a
result of the consolidation of Koppers Australia and $0.8 million of Year 2000
computer costs.
Equity in Earnings of Affiliates. Equity earnings for the third quarter of
1998 were $0.3 million lower than the prior year period primarily as a result
of the consolidation of Koppers Australia in 1998.
Interest Expense. Interest expense increased by $3.2 million in the third
quarter of 1998 as compared to the prior year as the result of higher debt
levels in 1998 from the recapitalization of the Company and the acquisition of
Koppers Australia.
Income Taxes. The Company's effective income tax rate for the three months
ended September 30, 1998 decreased to (14.8%) as compared to (5.2%) in the
prior year period due to lower 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 September 30, 1998
compared to the same period last year decreased by $2.7 million as higher
interest expense and lower PAA prices in 1998 more than offset earnings from
Koppers Australia, the closure of Woodward Coke in January 1998 and higher
earnings for Railroad & Utility Products.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997.
Net Sales. Net sales for the nine months ended September 30, 1998 were 13.2%
higher than the same period in 1997, as approximately $79 million of net sales
from the recent acquisition of Koppers Australia more than offset a reduction
of $39.4 million of sales as a result of the closure of Woodward Coke. Net
sales for Carbon Materials & Chemicals increased by 21.6% as Koppers Australia
contributed $63.8 million of net sales to this segment. Net sales for the
domestic portion of Carbon Materials & Chemicals decreased by 7.5% compared to
the prior year period due to reductions in sales for PAA as a result of lower
pricing coupled with reductions in carbon pitch volumes. Net sales for
Railroad & Utility Products increased by 25.2% compared to the prior year due
to $15.0 million in net sales from Koppers Australia coupled with 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 13.2% in the
first nine months of 1998 from 11.8% for the same period last year, as the
positive effects of the ceasing of operations at Woodward Coke and the
acquisition of Koppers Australia
11
<PAGE>
more than offset lower PAA prices in 1998. Gross margins for Carbon Materials
& Chemicals decreased to 15.1% from 16.8% as a result of a 23.5% reduction in
PAA prices as compared to the prior year period, coupled with higher unit
costs for carbon pitch as a result of lower production volumes in 1998. Gross
margin for Railroad & Utility Products increased to 11.9% as compared to 11.7%
in the prior year period 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 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 nine months ended September 30, 1998 increased
to 5.7% of net sales from 4.8% of net sales in the same period last year as a
result of the consolidation of Koppers Australia and $1.6 million of Year 2000
computer costs more than offsetting $0.8 million of severance charges in the
prior year period.
Equity in Earnings of Affiliates. Equity earnings for the first nine months
of 1998 were $2.7 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 $9.6 million in the first
nine months of 1998 as compared to the prior year as the result of higher debt
levels in 1998 from the recapitalization of the Company and the acquisition of
Koppers Australia.
Income Taxes. The Company's effective income tax rate for the nine months
ended September 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 nine months ended September 30, 1998 compared
to the same period last year decreased primarily as the result of $9.6 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 September 30, 1998 the Company had cash and cash equivalents of $14.2
million and $73.2 million of availability under the revolving credit facility
for working capital purposes, subject to limitations under existing debt
covenants. As of September 30, 1998 $9.6 million of commitments were utilized
by outstanding standby letters of credit, $40.9 million of commitments were
utilized for debt support for Koppers Australia, and there were $0.3 million
in outstanding borrowings for working capital purposes.
Cash provided by operating activities totaled $7.7 million for the nine
months ended September 30, 1998 compared to $35.6 million of cash provided by
operating activities for the same period last year due primarily to a working
capital increase of $23.4 million for the first nine months of 1998 compared
to a working capital increase of $4.2 million in the prior year period. The
working capital increase for 1998 is due primarily to plant closing costs for
Woodward Coke and contractual benefit payments related to the acquisition of
Koppers Australia.
Capital expenditures excluding acquisitions were $10.5 million for the nine
months ended September 30, 1998 versus $13.0 million for the same period last
year due in part to lower requirements for environmental capital expenditures
as compared to the prior year.
12
<PAGE>
Financing activities provided $1.8 million in cash for the nine months ended
September 30, 1998 compared to using $24.2 million in cash for the same period
last year. Cash provided in 1998 included approximately $20 million of term
borrowings used to purchase 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 the Resource Conservation and
Recovery Act, as amended ("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 the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("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.
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
13
<PAGE>
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.
Under the terms of the Asset Purchase Agreement 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 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 condition, cash flow and results of operations.
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.
Status of Restructuring Reserves
The Company reported restructuring charges of $45.4 million in the fourth
quarter of 1997, of which approximately $20 million are estimated to be cash
charges. As of September 30, 1998 approximately $9 million
14
<PAGE>
of cash charges related to restructuring had been expended, while liquidation
of working capital at Woodward Coke provided approximately $6 million in cash.
The majority of the remaining cash charges are primarily for employee benefits
which are expected to be paid gradually over the next 8-10 years.
Impact of Year 2000
Most of the Company's computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has organized its activities to address Year 2000 issues in
three phases: 1) initial assessment; 2) remediation; and 3) implementation and
testing. There is considerable overlap in these phases due to the timing and
nature of this project. The Company has substantially completed the first
phase, which included an assessment of hardware and software applications;
assessment of embedded chips in manufacturing equipment and various process
control systems; identification of, and communication with, significant
vendors and customers; establishment of compliance and testing programs; and
development of the project plan.
The Company has assessed its information technology systems, such as
business computing systems, end user computer systems and technical
infrastructure, as well as embedded systems commonly found in manufacturing
and service equipment, testing equipment and environmental operations. The
assessments also included an evaluation of the readiness of its suppliers and
service providers, personal computers, communication systems and electronic
data interchange (EDI). The Company has completed the majority of the
assessment phase, and is in the process of remediation for most of its
systems. Options for remediation may include replacement, modification or
continued use depending on information gathered during the assessment stage.
The remediated systems will then be tested and reviewed before the
determination is made as to the readiness of the system. A project committee
meets regularly to review the status of the investigation into and resolution
of the Year 2000 issues.
The Year 2000 project is expected to be completed by June 30, 1999, which is
prior to any anticipated impact on the Company's operations. The Company
believes that with modifications to existing software, the Year 2000 Issue
will not pose significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 Issue could have a material adverse
effect on the results of operations of the Company.
The primary financial information systems for the Company include 1)
Corporate; 2) Carbon Materials & Chemicals; 3) Railroad & Utility Products;
and 4) Koppers Australia. Assessments have been completed for all these
systems, and remediation is approximately 50% complete for the Corporate,
Carbon Materials & Chemicals and Railroad & Utility Products systems. The
Koppers Australia system is in the process of significant replacement with a
Year 2000-compliant system.
Non-financial information systems and embedded systems for the Company
consist primarily of process control systems for the various manufacturing
processes the Company uses in manufacturing its products, as well as
environmental process controls. Engineers and consultants have been engaged to
assess and remediate such non-financial and embedded systems as deemed
necessary.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. There can be no assurance that the systems of
other companies on which the Company's systems rely will be corrected on a
timely basis and will not have a material adverse effect on the Company's
results of operations.
15
<PAGE>
The total Year 2000 project cost is estimated at approximately $3.0 million,
$2.5 million of which is expected to be expensed when incurred. To date, the
Company has incurred and expensed approximately $1.8 million, primarily for
assessment and remediation costs.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no assurance that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
The Company is developing a contingency plan which outlines alternatives
available to the Company in the event that critical systems fail in the year
2000. This contingency plan, which is estimated to be completed by June 30,
1999 will outline the steps to be taken in the event that problems occur in
critical systems such as invoicing, inventory control and certain production
processes.
Safe Harbor Statement
This discussion contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from those forward-looking statements. The
Company's efforts to ensure its operations are not materially affected by the
arrival of the year 2000 depend upon the accuracy and completeness of its
remediation assessments and activities. In addition, the Company could be
adversely impacted by the failures of third parties with which it has a
material relationship for which the Company's contingency plans are
inadequate. Furthermore, the Company's efforts are dependent upon the
continued availability of qualified personnel.
There are other important factors not described above which could also cause
actual results to differ materially from those in any forward-looking
statement made for or on behalf of the Company.
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.
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It
requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (i.e., gains and losses) depends on the intended use of the
derivative and the resulting designation. Statement No. 133 is effective for
fiscal years beginning after June 15, 1999. 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 third 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 November 12, 1998 /s/ Donald E. Davis
------------------------- -------------------------------------
Donald E. Davis,
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer)
18
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