<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, 2000
[_]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 24, 2000 amounted to 1.3 million and 2.3
million shares, respectively.
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions except per share figures)
<TABLE>
<CAPTION>
Six Months
Three Months Ended Ended
June 30, June 30,
------------------- -------------
2000 1999 2000 1999
--------- --------- ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales................................. $ 179.8 $ 172.8 $340.7 $330.2
Operating expenses:
Cost of sales........................... 147.5 142.4 284.1 277.9
Depreciation and amortization........... 7.0 7.1 14.0 13.9
Selling, general and administrative..... 9.6 8.7 18.9 17.1
--------- --------- ------ ------
Total operating expenses.............. 164.1 158.2 317.0 308.9
--------- --------- ------ ------
Operating profit.......................... 15.7 14.6 23.7 21.3
Equity in earnings of affiliates.......... 0.5 0.3 1.5 0.6
Other income.............................. 2.2 -- 4.2 --
--------- --------- ------ ------
Income before interest expense, income
taxes and minority interest.............. 18.4 14.9 29.4 21.9
Interest expense.......................... 7.0 7.1 13.9 14.0
--------- --------- ------ ------
Income before income taxes and minority
interest................................. 11.4 7.8 15.5 7.9
Income taxes.............................. 5.1 (0.7) 6.9 (0.7)
Minority interest......................... 0.3 (0.1) 0.5 0.2
--------- --------- ------ ------
Net income............................ $ 6.0 $ 8.6 $ 8.1 $ 8.4
========= ========= ====== ======
Basic earnings per share of common stock.. $ 4.39 $ 5.71 $ 5.85 $ 5.58
========= ========= ====== ======
Diluted earnings per share of common
stock.................................... $ 1.58 $ 2.18 $ 2.11 $ 2.13
========= ========= ====== ======
</TABLE>
See accompanying notes.
2
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited) *
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 11.4 $ 18.3
Accounts receivable less allowance for doubtful
accounts of
$1.0 in 2000 and $1.1 in 1999...................... 100.9 75.7
Inventories:
Raw materials..................................... 59.6 49.5
Work in process................................... 2.4 2.5
Finished goods.................................... 53.6 49.9
LIFO reserve...................................... (11.2) (10.1)
------- -------
Total inventories............................... 104.4 91.8
Deferred tax benefit................................ 7.1 7.0
Other............................................... 5.5 1.5
------- -------
Total current assets............................ 229.3 194.3
Investments........................................... 6.0 17.3
Fixed assets.......................................... 386.7 355.6
Less: accumulated depreciation........................ (207.0) (176.2)
------- -------
Net fixed assets.................................... 179.7 179.4
Goodwill, net of accumulated amortization............. 31.9 28.0
Deferred tax benefit.................................. 38.1 42.0
Other assets.......................................... 18.8 16.7
------- -------
Total assets.................................... $ 503.8 $ 477.7
======= =======
</TABLE>
--------
*Summarized from audited fiscal year 1999 balance sheet.
See accompanying notes.
3
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions except per share figures)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited) *
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 58.2 $41.3
Accrued liabilities................................. 40.9 36.4
Current portion of term loans....................... 14.8 19.3
------ ------
Total current liabilities......................... 113.9 97.0
Long-term debt:
Revolving credit.................................... 20.5 2.0
Term loans.......................................... 90.9 102.4
Senior Subordinated Notes due 2007.................. 175.0 175.0
Senior Notes........................................ 11.1 11.1
------ ------
Total long-term debt.............................. 297.5 290.5
Other long-term reserves.............................. 60.1 56.8
------ ------
Total liabilities................................. 471.5 444.3
Common stock subject to redemption.................... 25.5 25.6
Senior convertible preferred stock, $.01 par value per
share; 3.0 shares authorized; 2.3 shares issued in
2000 and 1999........................................ -- --
Voting common stock, $.01 par value per share; 37.0
shares authorized,
2.6 shares issued in 2000 and 2.5 shares issued in
1999................................................. -- --
Capital in excess of par value........................ 7.7 7.5
Receivable from Director for purchase of common
stock................................................ (0.6) (0.6)
Retained earnings..................................... 32.8 24.6
Accumulated other comprehensive loss:
Foreign currency translation adjustment............. (15.7) (8.9)
Treasury stock, at cost, 1.2 shares in 2000 and 1.0 in
1999................................................. (17.4) (14.8)
------ ------
Total liabilities and stockholders' equity........ $503.8 $477.7
====== ======
</TABLE>
--------
*Summarized from audited fiscal year 1999 balance sheet.
See accompanying notes.
4
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
--------------
2000 1999
------ ------
(Unaudited)
<S> <C> <C>
Cash provided by operating activities........................... $ 8.9 $ 5.3
Cash provided by (used in) investing activities:
Capital expenditures.......................................... (4.7) (8.5)
Acquisitions and related costs, net of cash acquired.......... (12.6) --
Other......................................................... 0.1 0.7
------ ------
Net cash (used in) investing activities..................... (17.2) (7.8)
Cash provided by (used in) financing activities:
Borrowings from revolving credit.............................. 46.7 51.0
Repayments of revolving credit................................ (28.1) (50.4)
Repayment of long-term debt................................... (13.5) (6.3)
Payment of deferred financing costs........................... -- (0.5)
Purchases of voting common stock.............................. (2.6) (0.4)
------ ------
Net cash provided by (used in) financing activities......... 2.5 (6.6)
Effect of exchange rates on cash................................ (1.1) 0.4
------ ------
Net (decrease) in cash.......................................... (6.9) (8.7)
Cash and cash equivalents at beginning of period................ 18.3 16.7
------ ------
Cash and cash equivalents at end of period...................... $ 11.4 $ 8.0
====== ======
</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
Koppers Industries, Inc. (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, 1999 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) During the second quarter the Company purchased the remaining 50% of its
Danish joint venture, Tarconord A/S ("Tarconord"), for approximately $13
million in cash and the assumption of certain liabilities (the "Tarconord
Acquisition"). The transaction, which is being accounted for as a
purchase, will result in goodwill that will be amortized over a 20 year
period. The initial allocation of purchase price is preliminary and may
change as additional information becomes available. The Company's second
quarter results include one month of consolidation and two months of
equity income for Tarconord. Tarconord is a tar distillation operation
comprised of four operating locations, one in Denmark and three in the
United Kingdom, which generated approximately $90 million in sales in
1999.
(5) During the second quarter, the Company redeemed for cash $0.1 million of
shares held by active employees under the Company's 2000 stock redemption
program.
(6) Other income reflects the monetization of energy tax credits related to
the production of coke at the Company's facility in Monessen,
Pennsylvania (the "Monessen Facility") (the "Monessen Transaction"). See
Note 7 of the Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
(7) 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 agreements was entered into at the Company's inception in 1988 between
the Company and Beazer East, Inc. ("Beazer East", formerly known as Koppers
Company, Inc.) (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.
6
<PAGE>
Beazer East has adhered to the terms of the Indemnity and is actively
fulfilling its obligations to conduct investigative and remedial programs at
most of 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 that 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 commitments 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 $11 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 with respect
to 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 may be defending certain toxic tort actions arising
from the operation of assets prior to the inception of the Company which were
acquired from Beazer East. These tort actions were not assumed by the Company
under the Asset Purchase Agreement and, in any event, are within the scope of
the Indemnity.
The Company has been named in a toxic tort action, along with other
defendants, arising from the Company's operations at its wood treating
facility in Green Spring, West Virginia ("Green Spring"). Plaintiff
allegations include various personal injury and property damage theories
related to plant operations from the mid-1940's through 1992. As a result of
previous lawsuits among CSX Transportation, Inc. ("CSX"), Beazer East and the
Company, CSX has assumed Beazer East's obligations under the Indemnity in
connection with Green Spring. There can be no assurance that CSX will perform
its obligations and if Koppers was required to pay such costs, it could have a
material adverse effect on the business, financial condition, cash flow and
results of operations of the Company. The Company is currently unable to
estimate a range of potential loss, if any, related to this matter. Although
management believes that some of the matters in this claim are within the
scope of the Indemnity, there can be no assurance that an unfavorable outcome
would not have a material adverse effect on the business, financial condition,
cash flow and results of operations of the Company.
The Company has also been named in a toxic tort action that arises from the
Company's operations at its wood treating facility in North Little Rock,
Arkansas. Plaintiff allegations include various personal injury and property
damage theories related to plant operations for an unspecified period of time.
The Company is currently unable to estimate a range of potential loss, if any,
related to this matter. Although management believes that some of the matters
in this claim are within the scope of the Indemnity, there can be no assurance
that an unfavorable outcome would not 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 certain liabilities, including
environmental, relating to the former Koppers Company, Inc. 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.
(8) Other Environmental Matters
In October 1996 the Company received a Clean Water Act information request
from the United States Environmental Protection Agency ("EPA"). This
information request asked for comprehensive information for a period of five
years on discharge permits, applications for discharge permits, discharge
monitoring reports, and the analytical data in support of the reports and
applications. The Company responded to the information request
7
<PAGE>
and delivered the requested information to the EPA in November 1996. During
the subsequent two-year period, the Company has supplemented its initial
response. In January 1999 the Company met with officials of the EPA to discuss
the EPA's review of the information submitted by the Company and the EPA
requested additional information from October 1996 to December 1998. The
Company has provided all requested information and appropriate technical
information clarifying a number of issues leading to allegations of violation
by the EPA. In July 2000 the Company received a settlement demand from the EPA
requesting $4.5 million in settlement of the civil violations related to the
Clean Water Act. The Company intends to conduct negotiations with the EPA and
further discuss the terms of the proposed settlement, and believes it has
adequate reserves regarding this matter. However, there can be no assurance
that any additional monetary penalty will not have a material adverse effect
on the business, financial condition, cash flow and results of operations of
the Company.
During a Company-initiated investigation at the Company's coke facility in
Woodward, Alabama ("Woodward Coke") prior to its closure in January 1998, it
was discovered that certain environmental records and reports relating to the
discharge of treated process water contained incomplete and inaccurate
information. Corrected reports were submitted to the State of Alabama and the
EPA. In June 1997, during a routine third party environmental compliance audit
of the Logansport, Louisiana wood treating plant ("Logansport"), it was
discovered that certain records and reports relating to the discharge 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. No regulatory agency has issued a notice of violation
or requested a penalty in regard to the corrected reports submitted for
Woodward Coke or Logansport. There can be no assurance that any monetary
penalty will not have a material adverse effect on the business, financial
condition, cash flow and results of operations of the Company.
At the acquisition of 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 cleanup have been capped at $0.6
million for matters identified pursuant to the Monessen Consent Order. In
December 1999, the Monessen Consent Order was amended to substitute new duties
for certain of the old duties specified in the original order as part of the
procedure to have PADEP recognize the impact of the Monessen Transaction on
the Monessen Facility. Although the seller of that facility provided an
environmental indemnification to the Company, 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 $0.6 million 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.
On occasion, Australian operations have been served with notices relating to
environmental compliance issues arising in connection with their facilities.
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. The Takura, Queensland facility is listed on
the Queensland register of contaminated sites as a "probable site". In
addition, Koppers Australia has identified various levels of groundwater
contamination at the Mayfield, New South Wales and Bunbury, Western Australia
facilities. As recommended in a recently completed environmental audit, and
from comments made by the environmental authorities, the Mayfield plant is now
required to notify that it is a "contaminated site" under a Section 60
notification to the environmental authorities. This notification has been made
in the second quarter of 2000. Although the relevant regulatory authorities in
Australia have not required the investigation or remediation of these or other
Koppers Australia facilities to date, these authorities may require such work
if the Company 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.
In May 2000 the Company purchased the remaining 50% of Tarconord, which has
one operating location in Denmark and three operating locations in the United
Kingdom. Although there are ongoing environmental
8
<PAGE>
compliance and legacy issues at each of these locations, there are currently
no outstanding notices of violation or consent decrees regarding compliance or
remediation issues. However, costs associated with compliance and remediation
may be substantial and there can be no assurance that such costs will not have
a material adverse effect on the business, financial condition, cash flow and
results of operations of the Company.
(9) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three
Months Six Months
Ended Ended
June 30, June 30,
----------- -----------
2000 1999 2000 1999
----- ----- ----- -----
(In millions except
earnings per share)
<S> <C> <C> <C> <C>
Numerators for basic and diluted earnings per share:
Net income to common stockholders.................... $ 6.0 $ 8.6 $ 8.1 $ 8.4
Denominators:
Weighted-average voting common stock................. 1.4 1.5 1.4 1.5
Effect of dilutive securities:
Senior convertible preferred stock................... 2.3 2.3 2.3 2.3
Employee stock options............................... 0.1 0.1 0.2 0.1
----- ----- ----- -----
Dilutive potential common shares....................... 2.4 2.4 2.5 2.4
Denominators for diluted earnings per share--adjusted
weighted-average shares and assumed conversions....... 3.8 3.9 3.9 3.9
Basic earnings per share............................. $4.39 $5.71 $5.85 $5.58
Diluted earnings per share........................... $1.58 $2.18 $2.11 $2.13
</TABLE>
(10) Comprehensive Income
<TABLE>
<CAPTION>
Three
Months Six Months
Ended Ended
June 30, June 30,
------------ -----------
2000 1999 2000 1999
----- ----- ----- ----
(In (In
millions) millions)
<S> <C> <C> <C> <C>
Net income............................................ $ 6.0 $ 8.6 $ 8.1 $8.4
Other comprehensive income:
Unrealized currency translation gain (loss)......... (5.0) 1.5 (6.7) 0.4
----- ----- ----- ----
Total comprehensive income........................ $ 1.0 $10.1 $ 1.4 $8.8
===== ===== ===== ====
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
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>
Six Months
Three Months Ended Ended
June 30, June 30,
--------------------- ---------------
2000 1999 2000 1999
--------- --------- ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net sales:
Carbon Materials & Chemicals...... $ 103.8 $ 89.6 $188.0 $170.0
Railroad & Utility Products....... 76.0 83.2 152.7 160.2
--------- --------- ------ ------
Total........................... $ 179.8 $ 172.8 $340.7 $330.2
========= ========= ====== ======
Percentage of net sales:
Carbon Materials & Chemicals...... 57.7% 51.9% 55.2% 51.5%
Railroad & Utility Products....... 42.3% 48.1% 44.8% 48.5%
--------- --------- ------ ------
Total........................... 100.0% 100.0% 100.0% 100.0%
========= ========= ====== ======
Gross margin (after depreciation and
amortization):
Carbon Materials & Chemicals...... 17.9% 14.9% 15.3% 12.4%
Railroad & Utility Products....... 9.6% 12.6% 9.8% 11.5%
All Other......................... (0.3%) (0.3%) (0.3%) (0.3%)
--------- --------- ------ ------
Total........................... 14.1% 13.5% 12.5% 11.6%
========= ========= ====== ======
Operating profit:
Carbon Materials & Chemicals...... $ 12.5 $ 8.0 $ 17.1 $ 10.5
Railroad & Utility Products....... 3.8 7.2 7.7 11.9
All Other......................... (0.6) (0.6) (1.1) (1.1)
--------- --------- ------ ------
Total........................... $ 15.7 $ 14.6 $ 23.7 $ 21.3
========= ========= ====== ======
</TABLE>
Comparison of Results of Operations for the Three Months Ended June 30, 2000
and 1999.
Net Sales. Net sales for the three months ended June 30, 2000 were higher
than the same period in 1999, as higher sales for Carbon Materials & Chemicals
more than offset lower sales for Railroad & Utility Products. Net sales for
Carbon Materials & Chemicals increased due to $8.0 million in sales from the
Tarconord Acquisition and higher phthalic anhydride ("PAA") sales prices. PAA
prices increased by 30% due to an increase 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, increases in the price of orthoxylene generally result
in proportionally higher PAA prices. Net sales for Railroad & Utility Products
decreased as sales volumes for railroad crossties were lower due to volume
reductions for commercial railroads and lower volumes for utility poles.
Inter-segment revenues were $3.5 million and $4.6 million for Carbon Materials
& Chemicals for the quarters ended June 30, 2000 and 1999, respectively.
Gross Profit after Depreciation and Amortization. As a percent of net sales,
gross profit after depreciation and amortization increased primarily as the
result of higher gross margin for Carbon Materials & Chemicals. Gross margin
for Carbon Materials & Chemicals increased due primarily to an increase in PAA
prices of approximately 30%. Gross margin for Railroad & Utility Products
decreased due primarily to asset write-downs related to the utility pole
business, and higher unit costs for railroad crossties as a result of the
lower volumes noted above.
Selling, General and Administrative Expense. As a percent of net sales,
selling, general and administrative expense increased due to higher costs for
benefits and travel expenses.
10
<PAGE>
Equity in Earnings of Affiliates. Equity earnings increased as a result of
higher earnings from Tarconord A/S, which became a consolidated entity in June
2000 as a result of the Tarconord Acquisition.
Other Income. Other income for 2000 reflects the monetization of energy tax
credits related to the production of coke at the Monessen Facility. See Note 7
of the Notes to Consolidated Financial Statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
Interest Expense. Interest expense decreased slightly due to lower exchange
rates for Koppers Australia.
Income Taxes. The Company's effective income tax rate increased
significantly due to higher taxable income, which includes the effect of the
monetization of energy tax credits at the Monessen Facility. See Note 7 of the
Notes to Consolidated Financial Statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
Comparison of Results of Operations for the Six Months Ended June 30, 2000 and
1999.
Net Sales. Net sales for the six months ended June 30, 2000 were higher than
the same period in 1999 as lower sales for Railroad & Utility Products were
more than offset by higher sales for Carbon Materials & Chemicals. Net sales
for Carbon Materials & Chemicals increased due to a 30% increase in PAA prices
and $8 million of sales from Tarconord. Net sales for Railroad & Utility
Products decreased due to lower prices for railroad crossties and lower
volumes for utility poles. Inter-segment revenues were $8.5 million and $8.4
million for Carbon Materials & Chemicals for the six months ended June 30,
2000 and 1999, respectively.
Gross Profit after Depreciation and Amortization. As a percent of net sales,
gross profit after depreciation and amortization increased primarily as the
result of higher gross margin for Carbon Materials & Chemicals. Gross margin
for Carbon Materials & Chemicals increased as a 30% increase in PAA prices
more than offset the effects of lower prices for furnace coke and nonrecurring
environmental expenses. Gross margin for Railroad & Utility Products decreased
due primarily to asset write-downs in the utility pole business and
nonrecurring environmental expenses.
Selling, General and Administrative Expense. As a percent of net sales,
selling, general and administrative expense increased due to higher costs for
salaries, benefits and travel expenses.
Equity in Earnings of Affiliates. Equity earnings increased as a result of
higher earnings from Tarconord A/S, which became a consolidated entity in June
2000 as a result of the Tarconord Acquisition.
Other Income. Other income for 2000 reflects the monetization of energy tax
credits related to the production of coke at the Monessen Facility. See Note 7
of the Notes to Consolidated Financial Statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
Interest Expense. Interest expense decreased slightly due to lower exchange
rates for Koppers Australia.
Income Taxes. The Company's effective income tax rate increased
significantly due to higher taxable income, which includes the effect of the
monetization of energy tax credits at the Monessen Facility. See Note 7 of the
Notes to Consolidated Financial Statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
Liquidity and Capital Resources
The Company's liquidity needs are primarily for debt service, capital
maintenance and acquisitions. The Company believes that its cash flows from
operations and available borrowings under its bank credit facilities will be
sufficient to fund its anticipated liquidity requirements for the next twelve
months. In the event that the foregoing sources are not sufficient to fund the
Company's expenditures and service its indebtedness, the Company would be
required to raise additional funds.
11
<PAGE>
As of June 30, 2000 the Company had $11.4 million of cash and cash
equivalents and $63.2 million of revolving credit availability for working
capital purposes, subject to restrictions imposed under various debt
covenants. As of June 30, 2000, $9.4 million of commitments were utilized by
outstanding standby letters of credit.
Net cash provided by operating activities increased primarily due to
utilization of deferred taxes in 2000 as a result of the Monessen Transaction.
Capital expenditures for the Company decreased as the result of decreases in
planned capital expenditures as compared to the prior year.
Net cash provided by financing activities increased due primarily to
borrowings from the revolving credit facility to finance the Tarconord
Acquisition. The Company is in the process of finalizing amendments to its
bank covenants as a result of this transaction.
Stock Redemptions
During the second quarter, the Company redeemed for cash $0.1 million of
shares held by active employees under the Company's 2000 stock redemption
program. Additionally, the Company paid $0.5 million for statutory minimum tax
withholdings on behalf of employees who exercised stock options and utilized
option shares for required tax withholdings.
Acquisitions
During the second quarter the Company purchased the remaining 50% of
Tarconord, for approximately $13 million in cash and the assumption of certain
liabilities. The transaction, which is being accounted for as a purchase, will
result in goodwill that will be amortized over a 20-year period. The initial
allocation of purchase price is preliminary and may change as additional
information becomes available. Tarconord is a tar distillation operation
comprised of four operating locations, one in Denmark and three in the United
Kingdom, which generated approximately $90 million in sales in 1999.
Impact of Recently Issued Accounting Standards
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, originally
effective for fiscal years beginning after June 15, 1999, has been deferred
and will be effective for fiscal years beginning after June 15, 2000. The
Company does not expect the effect of the adoption of this statement to be
material.
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"). In the United States, 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
12
<PAGE>
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.
Environmental Indemnity and Guarantee
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 entered into the
Asset Purchase Agreement. Under the terms of the Asset Purchase Agreement,
Beazer East indemnified the Company by issuing the Indemnity and 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 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
that 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 $11 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 was 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 may be 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.
Other Environmental Matters
In October 1996 the Company received a Clean Water Act information request
from the EPA. This information request asked for comprehensive information for
a period of five years on discharge permits,
13
<PAGE>
applications for discharge permits, discharge monitoring reports, and the
analytical data in support of the reports and applications. The Company
responded to the information request and delivered the requested information
to the EPA in November 1996. During the subsequent two-year period, the
Company supplemented its initial response. In January 1999 the Company met
with officials of the EPA to discuss the EPA's review of the information
submitted by the Company and the EPA requested additional information from
October 1996 to December 1998. The Company has provided all requested
information and appropriate technical information clarifying a number of
issues leading to allegations of violation by the EPA. In July 2000 the
Company received a settlement demand from the EPA requesting $4.5 million in
settlement of the civil violations related to the Clean Water Act. The Company
intends to conduct negotiations with the EPA and further discuss the terms of
the proposed settlement, and believes it has adequate reserves regarding this
matter. However, there can be no assurance that any additional monetary
penalty will not have a material adverse effect on the business, financial
condition, cash flow and results of operations of the Company.
During a Company-initiated investigation at Woodward Coke prior to its
closure in January 1998, it was discovered that certain environmental records
and reports relating to the discharge of treated process water contained
incomplete and inaccurate information. Corrected reports were submitted to the
State of Alabama and the EPA. In June 1997, during a routine third party
environmental compliance audit of Logansport, it was discovered that certain
records and reports relating to the discharge 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. No
regulatory agency has issued a notice of violation or requested a penalty in
regard to the corrected reports submitted for Woodward Coke or Logansport.
There can be no assurance that any monetary penalty will not have a material
adverse effect on the business, financial condition, cash flow and results of
operations of the Company.
The Company has been named in a toxic tort action, along with other
defendants, arising from the Company's operations at Green Spring. Plaintiff
allegations include various personal injury and property damage theories
related to plant operations from the mid-1940's through 1992. As a result of
previous lawsuits among CSX, Beazer East and the Company, CSX has assumed
Beazer East's obligations under the Indemnity in connection with Green Spring.
There can be no assurance that CSX will perform its obligations and if Koppers
was required to pay such costs, it could have a material adverse effect on the
business, financial condition, cash flow and results of operations of the
Company. The Company is currently unable to estimate a range of potential
loss, if any, related to this matter. Although management believes that some
of the matters in this claim are within the scope of the Indemnity, there can
be no assurance that an unfavorable outcome would not have a material adverse
effect on the business, financial condition, cash flow and results of
operations of the Company.
The Company has also been named in a toxic tort action that arises from the
Company's operations at its wood treating facility in North Little Rock,
Arkansas. Plaintiff allegations include various personal injury and property
damage theories related to plant operations for an unspecified period of time.
The Company is currently unable to estimate a range of potential loss, if any,
related to this matter. Although management believes that some of the matters
in this claim are within the scope of the Indemnity, there can be no assurance
that an unfavorable outcome would not have a material adverse effect on the
business, financial condition, cash flow and results of operations of the
Company.
On occasion, Australian operations have been served with notices relating to
environmental compliance issues arising in connection with their 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. The Takura, Queensland facility is listed on
the Queensland register of contaminated sites as a "probable site". In
addition, Koppers Australia has identified various levels of groundwater
contamination at the Mayfield, New South Wales and Bunbury, Western Australia
facilities. As recommended in a recently completed environmental audit, and
from comments made by the environmental authorities, the Mayfield plant is now
required to notify that it is a "contaminated site" under a Section 60
notification to the environmental authorities. This notification has been made
in the second quarter of 2000. Although the relevant regulatory authorities in
Australia have not required
14
<PAGE>
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.
In May 2000 the Company purchased the remaining 50% of Tarconord, which has
one operating location in Denmark and three operating locations in the United
Kingdom. Although there are ongoing environmental compliance and legacy issues
at each of these locations, there are currently no outstanding notices of
violation or consent decrees regarding compliance or remediation issues.
However, costs associated with compliance and remediation may be substantial
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.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in the status of legal proceedings as
previously reported.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits:
<C> <S>
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
</TABLE>
15
<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, 2000 /s/ Donald E. Davis
-------------------------------------
Donald E. Davis,
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer)
16
