<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, 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,
outstanding at October 16, 2000 amounted to 1.4 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>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- ------- -------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales..................................................................... $194.9 $170.8 $535.6 $501.0
Operating expenses:
Cost of sales.............................................................. 160.3 137.4 444.3 415.3
Depreciation and amortization.............................................. 7.7 6.9 21.7 20.8
Selling, general and administrative........................................ 11.3 9.8 30.3 26.9
--------- ------- -------- ---------
Total operating expenses............................................. 179.3 154.1 496.3 463.0
--------- ------- -------- ---------
Operating profit.............................................................. 15.6 16.7 39.3 38.0
Equity in earnings of affiliates.............................................. 0.4 0.6 2.0 1.2
Other income.................................................................. 2.3 - 6.5 -
--------- ------- -------- ---------
Income before interest expense, income taxes and minority interest............ 18.3 17.3 47.8 39.2
Interest expense.............................................................. 7.0 7.3 21.0 21.3
--------- ------- -------- ---------
Income before income taxes and minority interest.............................. 11.3 10.0 26.8 17.9
Income taxes.................................................................. 5.3 (1.2) 12.2 (1.9)
Minority interest............................................................. 0.2 0.1 0.7 0.3
--------- ------- -------- ---------
Net income........................................................... $ 5.8 $ 11.1 $ 13.9 $ 19.5
========= ======= ======== =========
Basic earnings per share of common stock...................................... $ 4.19 $ 7.95 $10.04 $13.26
========= ======= ======== =========
Diluted earnings per share of common stock.................................... $ 1.51 $ 2.90 $ 3.62 $ 4.99
========= ======= ======== =========
</TABLE>
See accompanying notes.
2
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- -------------
(Unaudited) *
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 13.3 $ 18.3
Accounts receivable less allowance for doubtful accounts of
$1.0 in 2000 and $1.1 in 1999............................... 104.6 75.7
Inventories:
Raw materials........................................... 56.9 49.5
Work in process......................................... 3.8 2.5
Finished goods.......................................... 54.4 49.9
LIFO reserve............................................ (11.8) (10.1)
------- -------
Total inventories.................................. 103.3 91.8
Deferred tax benefit......................................... 6.9 7.0
Other........................................................ 3.3 1.5
------- -------
Total current assets.................................... 231.4 194.3
Investments............................................................ 6.1 17.3
Fixed assets........................................................... 389.5 355.6
Less: accumulated depreciation......................................... (212.4) (176.2)
------- -------
Net fixed assets............................................. 177.1 179.4
Goodwill, net of accumulated amortization.............................. 30.4 28.0
Deferred tax benefit................................................... 37.0 42.0
Other assets........................................................... 18.8 16.7
------- -------
Total assets............................................ $ 500.8 $ 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>
September 30, December 31,
2000 1999
--------------- -------------
(Unaudited) *
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 55.9 $ 41.3
Accrued liabilities............................................................ 48.3 36.4
Current portion of term loans.................................................. 14.7 19.3
------ ------
Total current liabilities................................................... 118.9 97.0
Long-term debt:
Revolving credit............................................................... 12.1 2.0
Term loans..................................................................... 89.5 102.4
Senior Subordinated Notes due 2007............................................. 175.0 175.0
Senior Notes................................................................... 11.1 11.1
------ ------
Total long-term debt........................................................ 287.7 290.5
Other long-term reserves.............................................................. 57.3 56.8
------ ------
Total liabilities........................................................... 463.9 444.3
Common stock subject to redemption.................................................... 25.5 25.6
Senior convertible preferred stock, $.01 par value per share; 10.0 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..................................................................... 38.7 24.6
Accumulated other comprehensive loss:
Foreign currency translation adjustment........................................ (16.7) (8.9)
Treasury stock, at cost, 1.2 shares in 2000 and 1.0 in 1999........................... (17.7) (14.8)
------ ------
Total liabilities and stockholders' equity.................................. $500.8 $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>
Nine Months Ended
September 30,
2000 1999
------ ------
(Unaudited)
<S> <C> <C>
Cash provided by operating activities.................... $ 25.4 $ 31.3
Cash provided by (used in) investing activities:
Capital expenditures.................................. (9.1) (13.2)
Acquisitions and related costs, net of cash acquired.. (13.5) (1.4)
Other................................................. 0.1 0.5
------ ------
Net cash (used in) investing activities.......... (22.5) (14.1)
Cash provided by (used in) financing activities:
Borrowings from revolving credit...................... 69.5 56.8
Repayments of revolving credit........................ (59.2) (55.6)
Repayment of long-term debt........................... (15.2) (6.4)
Purchases of voting common stock...................... (2.7) (2.1)
------ ------
Net cash (used in) financing activities.......... (7.6) (7.3)
Effect of exchange rates on cash......................... (0.3) 0.3
------ ------
Net increase (decrease) in cash.......................... (5.0) 10.2
Cash and cash equivalents at beginning of period......... 18.3 16.7
------ ------
Cash and cash equivalents at end of period............... $ 13.3 $ 26.9
====== ======
</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. ("Koppers" or 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, now known as Koppers Denmark A/S
("Koppers Europe"), for approximately $13 million in cash and the
assumption of certain liabilities (the "Koppers Europe 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 Koppers
Europe. Koppers Europe 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) 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.
(6) 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.
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.
6
<PAGE>
In the event that Beazer East and Beazer Limited (which have been acquired
by Hanson PLC) 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 operations at the 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
were 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
operations at the 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.
(7) 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 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 has entered
into negotiations with the EPA to 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.
7
<PAGE>
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 facilities of Koppers
Australia Pty. Limited ("Koppers Australia") 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. The Mayfield plant has notified the
environmental authorities that it is a "contaminated site" under a Section 60
notification. The environmental authorities have responded to the Section 60
notification and because of the proactive stance by Koppers Australia to
increase the groundwater monitoring over the next three to four years, the
authorities are likely to accept Koppers Australia's recommended actions rather
than impose their conditions. 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 Koppers Europe,
which has one operating location in Denmark and three operating locations (plus
one closed site which is being dismantled) 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.
8
<PAGE>
(8) 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,
2000 1999 2000 1999
----- ----- ------ ------
<S> <C> <C> <C> <C>
(In millions except earnings per share)
Numerators for basic and diluted earnings per share:
Net income to common stockholders..................................... $ 5.8 $11.1 $ 13.9 $ 19.5
Denominators:
Weighted-average voting common stock.................................... 1.4 1.4 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 3.8 3.9 3.9
Basic earnings per share............................................... $4.19 $7.95 $10.04 $13.26
Diluted earnings per share............................................. $1.51 $2.90 $ 3.62 $ 4.99
</TABLE>
(9) Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----- ----- ------ ------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Net income............................................................... $ 5.8 $11.1 $ 13.9 $ 19.5
Other comprehensive income:
Unrealized currency translation (loss)................................. (1.0) (0.7) (7.8) (0.3)
----- ----- ------ ------
Total comprehensive income........................................... $ 4.8 $10.4 $ 6.1 $ 19.2
===== ===== ====== ======
</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>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------ ------ ------ -------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net sales:
Carbon Materials & Chemicals........................ $119.3 $ 96.2 $307.2 $266.2
Railroad & Utility Products......................... 75.6 74.6 228.4 234.8
------ ------ ------ ------
Total.............................................. $194.9 $170.8 $535.6 $501.0
Percentage of net sales:
Carbon Materials & Chemicals........................ 61.2% 56.3% 57.4% 53.1%
Railroad & Utility Products......................... 38.8% 43.7% 42.6% 46.9%
------ ------ ------ ------
Total.............................................. 100.0% 100.0% 100.0% 100.0%
Gross margin (after depreciation and amortization):
Carbon Materials & Chemicals........................ 16.1% 16.7% 15.6% 13.6%
Railroad & Utility Products......................... 10.5% 14.6% 10.0% 12.8%
All Other........................................... (0.1%) (0.2%) (0.2%) (0.2%)
------ ------ ------ ------
Total.............................................. 13.8% 15.5% 13.0% 13.0%
Operating profit:
Carbon Materials & Chemicals........................ $ 11.5 $ 10.1 $ 28.7 $ 19.6
Railroad & Utility Products......................... 4.3 7.0 11.9 19.6
All Other........................................... (0.2) (0.4) (1.3) (1.2)
------ ------ ------ ------
Total.............................................. $ 15.6 $ 16.7 $ 39.3 $ 38.0
</TABLE>
Comparison of Results of Operations for the Three Months Ended September 30,
2000 and 1999.
Net Sales. Net sales for the three months ended September 30, 2000 were
higher than the same period in 1999 primarily due to higher sales for Carbon
Materials & Chemicals which increased primarily due to the Koppers Europe
Acquisition. Net sales for Railroad & Utility Products increased slightly as
higher sales volumes for railroad crossties offset lower prices for railroad
crossties and lower volumes for utility poles. Inter-segment revenues were $6.2
million and $4.9 million for Carbon Materials & Chemicals for the quarters ended
September 30, 2000 and 1999, respectively.
Gross Profit after Depreciation and Amortization. As a percent of net
sales, gross profit after depreciation and amortization decreased primarily as
the result of lower gross margin for Railroad & Utility Products. Gross margin
for Carbon Materials & Chemicals decreased due primarily to lower volumes and
prices for furnace coke. Gross margin for Railroad & Utility Products decreased
due primarily to lower prices for untreated and commercial railroad crossties.
Selling, General and Administrative Expense. As a percent of net sales,
selling, general and administrative expense increased slightly due to higher
benefits and travel expenses.
Equity in Earnings of Affiliates. Equity earnings decreased as a result of
the consolidation of Koppers Europe.
10
<PAGE>
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 debt
levels.
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 Nine Months Ended September 30, 2000
and 1999.
Net Sales. Net sales for the nine months ended September 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 27% increase in
PAA prices and $33 million of sales from Koppers Europe. Net sales for Railroad
& Utility Products decreased due to lower prices for railroad crossties and
lower volumes for utility poles. Inter-segment revenues were $14.7 million and
$13.3 million for Carbon Materials & Chemicals for the nine months ended
September 30, 2000 and 1999, respectively.
Gross Profit after Depreciation and Amortization. As a percent of net
sales, gross profit after depreciation and amortization remained the same, as
higher gross margin for Carbon Materials & Chemicals offset lower gross margin
for Railroad & Utility Products. Gross margin for Carbon Materials & Chemicals
increased as a 27% 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 to lower pricing for commercial
crossties, 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 salaries,
benefits and travel expenses.
Equity in Earnings of Affiliates. Equity earnings increased as a result of
higher earnings from Tarconord A/S prior to the Koppers Europe Acquisition in
May 2000.
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 overall
debt levels and 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.
As of September 30, 2000 the Company had $13.3 million of cash and cash
equivalents and $90.5 million of revolving credit availability for working
capital purposes, subject to restrictions imposed under various debt covenants.
As of September 30, 2000 $8.8 million of commitments were utilized by
outstanding standby letters of credit.
11
<PAGE>
Net cash provided by operating activities decreased as utilization of
deferred taxes in 2000 as a result of the Monessen Transaction partially offset
lower net income and higher working capital requirements in 2000 as compared to
the prior year period.
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 Koppers Europe
Acquisition.
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 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.
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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, 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
has entered into negotiations with the EPA to 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 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 were 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.
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The Company has also been named in a toxic tort action that arises from the
operations at the 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 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. The
Mayfield plant has notified the environmental authorities that it is a
"contaminated site" under a Section 60 notification. The environmental
authorities have responded to the Section 60 notification and because of the
proactive stance by Koppers Australia to increase the groundwater monitoring
over the next three to four years, the authorities are likely to accept Koppers
Australia's recommended actions rather than impose their conditions. 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 Koppers Europe,
which has one operating location in Denmark and three operating locations (plus
one closed site which is being dismantled) 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
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
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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 3, 2000 /s/ Donald E. Davis
-------------------
Donald E. Davis,
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer)
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