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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2002
[_] 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 (I.R.S.
jurisdiction Employer Identification
of incorporation or No.)
organization)
436 Seventh Avenue
Pittsburgh, Pennsylvania 15219
(Address of principal executive offices)
(412) 227-2001
(Registrant's telephone number, including area code)
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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 [_]
Common Stock, par value $.01 per share, outstanding at July 10, 2002
amounted to 1.2 million shares.
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
------ ------- ------ -------
(Unaudited) (Unaudited)
Net sales......................................................... $191.6 $189.3 $356.9 $364.0
Operating expenses:
Cost of sales.................................................. 159.9 154.5 303.3 303.6
Depreciation and amortization.................................. 7.1 7.5 14.0 15.1
Selling, general and administrative............................ 11.5 12.3 20.3 23.0
Restructuring charges.......................................... -- -- -- 3.3
------ ------- ------ -------
Total operating expenses................................... 178.5 174.3 337.6 345.0
------ ------- ------ -------
Operating profit.................................................. 13.1 15.0 19.3 19.0
Equity in earnings of affiliates.................................. 0.1 0.1 0.1 0.2
Other income...................................................... 2.9 2.6 5.0 4.6
------ ------- ------ -------
Income before interest expense, income taxes and minority interest 16.1 17.7 24.4 23.8
Interest expense.................................................. 6.0 6.2 11.7 12.8
------ ------- ------ -------
Income before income taxes and minority interest.................. 10.1 11.5 12.7 11.0
Income tax provision.............................................. 4.3 5.6 4.9 4.3
Minority interest................................................. 0.2 0.2 0.4 0.3
------ ------- ------ -------
Net income..................................................... $ 5.6 $ 5.7 $ 7.4 $ 6.4
====== ======= ====== =======
Basic earnings (loss) per share................................... $ 4.79 ($ 2.61) $ 0.74 ($ 2.12)
====== ======= ====== =======
Diluted earnings (loss) per share................................. $ 1.60 ($ 2.61) $ 0.74 ($ 2.12)
====== ======= ====== =======
2
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
June 30, December 31,
2002 2001
----------- ------------
(Unaudited) *
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 5.3 $ 5.2
Accounts receivable less allowance for doubtful accounts of $1.0 in 2002 and
2001....................................................................... 109.0 84.3
Inventories:
Raw materials............................................................ 54.7 53.8
Work in process.......................................................... 3.6 3.7
Finished goods........................................................... 57.3 58.0
LIFO reserve............................................................. (10.3) (9.3)
------- -------
Total inventories..................................................... 105.3 106.2
Deferred tax benefit..................................................... 6.3 6.2
Other.................................................................... 3.6 4.0
------- -------
Total current assets.................................................. $ 229.5 $ 205.9
Equity in non-consolidated investments.......................................... 11.9 12.2
Fixed assets.................................................................... 403.6 389.8
Less: accumulated depreciation.................................................. (246.1) (230.5)
------- -------
Net fixed assets......................................................... $ 157.5 $ 159.3
Goodwill, net of accumulated amortization....................................... 28.8 27.0
Deferred tax benefit............................................................ 33.5 35.3
Other assets.................................................................... 14.4 15.5
------- -------
Total assets.......................................................... $ 475.6 $ 455.2
======= =======
* Summarized from audited fiscal year 2001 balance sheet.
See accompanying notes.
3
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions except per share amounts)
June 30, December 31,
2002 2001
----------- ------------
(Unaudited) *
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 57.5 $ 57.8
Accrued liabilities............................................................... 43.8 45.7
Revolving credit.................................................................. 12.4 --
Current portion of term loans..................................................... 18.8 13.2
------ ------
Total current liabilities..................................................... $132.5 $116.7
Long-term debt:
Revolving credit.................................................................. 29.0 10.2
Term loans........................................................................ 44.9 59.5
Senior Subordinated Notes due 2007................................................ 175.0 175.0
Senior Notes due 2004............................................................. 11.1 11.1
------ ------
Total long-term debt.......................................................... $260.0 $255.8
Other long-term reserves............................................................. 57.4 57.6
------ ------
Total liabilities............................................................. $449.9 $430.1
Common stock subject to redemption................................................... 23.0 22.3
Minority interest.................................................................... 4.9 4.7
Senior Convertible Preferred Stock, $.01 par value per share; 10.0 shares authorized;
2.3 shares issued in 2002 and 2001................................................. -- --
Common stock, $.01 par value per share; 37.0 shares authorized, 2.8 shares issued in
2002 and 2.6 shares in 2001........................................................ -- --
Capital in excess of par value....................................................... 12.7 12.4
Receivable from Director for purchase of common stock................................ (0.6) (0.6)
Retained earnings.................................................................... 37.7 40.6
Accumulated other comprehensive loss:
Foreign currency translation adjustment........................................... (17.1) (24.3)
Minimum pension liability, net of tax............................................. (4.1) (4.1)
------ ------
Total accumulated other comprehensive loss.................................... (21.2) (28.4)
Treasury stock, at cost, 1.7 shares in 2002 and 1.3 shares in 2001................... (30.8) (25.9)
------ ------
Total liabilities and stockholders' equity.................................... $475.6 $455.2
====== ======
*Summarized from audited fiscal year 2001 balance sheet.
See accompanying notes.
4
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Six Months Ended
June 30,
---------------
2002 2001
------- ------
(Unaudited)
Cash provided by operating activities.......................... $ 1.4 $ 18.5
Cash provided by (used in) investing activities:
Capital expenditures........................................ (8.6) (4.8)
Acquisitions and related capital expenditures............... -- (6.2)
Other....................................................... 1.1 2.3
------- ------
Net cash (used in) investing activities................. (7.5) (8.7)
Cash provided by (used in) financing activities:
Borrowings from revolving credit............................ 133.8 101.5
Repayments of revolving credit.............................. (103.9) (77.7)
Repayment of long-term debt................................. (9.2) (11.0)
Dividends paid.............................................. (9.9) (14.6)
Purchases of common stock................................... (4.4) (4.0)
------- ------
Net cash provided by (used in) financing activities..... 6.4 (5.8)
Effect of exchange rates on cash............................... (0.2) --
------- ------
Net increase in cash........................................... 0.1 4.0
Cash and cash equivalents at beginning of period............... 5.2 6.8
------- ------
Cash and cash equivalents at end of period..................... $ 5.3 $ 10.8
======= ======
See accompanying notes.
5
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and Results
of Operations which follows these notes contains additional information on
the results of operations and the financial position of the Company. That
information should be read in conjunction with these notes. The Company's
annual report on Form 10-K for the fiscal year ended December 31, 2001
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 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) On March 21, 2002 the Company's Board of Directors declared a dividend of
$2.85 per share to common and preferred stockholders of record on March 26,
which was paid on or about April 1.
(5) Impact of Recently Issued Accounting Standards
In June 2001 the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill will no
longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives. The Company has applied the new rules on
accounting for goodwill in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an
increase in net income of $0.8 million for fiscal year 2002. The Company
performed the first of the required impairment tests of goodwill as of
January 1, 2002 and has determined that there is no impact on the earnings
or financial position of the Company as of the date of adoption.
In July 2001 the Financial Accounting Standards Board issued Statement
No. 143, Accounting for Asset Retirement Obligations, effective for fiscal
years beginning after June 15, 2002. The Statement provides accounting
requirements for retirement obligations associated with tangible long-lived
assets. The obligations affected are those for which there is a legal
obligation to settle as a result of existing or enacted law. The Company has
not yet determined the effect, if any, of the adoption of this Statement.
In October 2001 the Financial Accounting Standards Board issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
effective for fiscal years beginning after December 15, 2001. The new rules
on asset impairment supersede FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and provide a single accounting model for long-lived assets to be disposed
of. Effective January 1, 2002 the Company adopted the provisions of
Statement No. 144, which had no impact on the earnings or financial position
of the Company.
In April 2002 the Financial Accounting Standards Board issued Statement
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, effective for fiscal years
beginning after June 15, 2002. For most companies, Statement No. 145 will
require gains and losses on extinguishments of debt to be classified as
income or loss from continuing operations rather than as extraordinary items
as previously required under Statement No. 4. Extraordinary treatment will
be required for certain extinguishments as provided in APB Opinion No. 30.
Statement No. 145 also amends
6
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Statement No. 13 to require certain modifications to capital leases be
treated as a sale-leaseback and modifies the accounting for sub-leases when
the original lessee remains a secondary obligor (or guarantor). In addition,
the FASB rescinded Statement No. 44, which addressed the accounting for
intangible assets of motor carriers and made numerous technical corrections.
The Company has not yet determined the effect, if any, of the adoption of
this Statement.
(6) Environmental and Other Matters
The Company is subject to federal, state, local and foreign laws and
regulations and potential liabilities relating to, 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. The Company expects to incur substantial costs for ongoing
compliance with such laws and regulations. The Company may also face
governmental or third-party claims for cleanup or for injuries resulting
from contamination at sites associated with past and present operations. The
Company accrues for environmental liabilities when a determination can be
made that they are probable and reasonably estimable.
Environmental and Other Liabilities Retained or Assumed by Others
The Company has agreements with former owners of certain of its operating
locations under which the former owners retained or assumed and agreed to
indemnify the Company against certain environmental and other liabilities. The
most significant of these agreements was entered into at the Company's
inception in 1988 with Beazer East, Inc. ("Beazer East"). Under the purchase
agreement executed at the Acquisition (the "Asset Purchase Agreement"), Beazer
East assumed the responsibility for and agreed to indemnify the Company against
certain liabilities, damages, losses and costs, to the extent attributable to
acts or omissions occurring prior to the Acquisition, including, with certain
limited exceptions, liabilities and costs of compliance with environmental laws
(the "Indemnity"). Beazer Limited unconditionally guaranteed Beazer East's
performance of the Indemnity pursuant to a guarantee (the "Guarantee"). Beazer
Limited became a wholly-owned indirect subsidiary of Hanson PLC on December 4,
1991. In 1998 Hanson PLC signed an agreement 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) are underwritten by subsidiaries of two of the
world's largest reinsurance companies, Centre Solutions (a member of the Zurich
Group) and Swiss Re.
The Indemnity provides different mechanisms by which Beazer East is to
indemnify Koppers with regard to environmental claims or environmental cleanup
liabilities and imposes certain conditions on the Company before receiving such
indemnification. The Company believes that it has taken appropriate steps to
satisfy all of such conditions.
Five sites owned and/or operated by Koppers are listed on the National
Priorities List ("NPL") promulgated under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). The
sites include the recently closed wood treating facility and adjacent
cogeneration facility located in Feather River, California ("Feather River");
the Gainesville, Florida wood treating facility; the Galesburg, Illinois wood
treating facility; the Florence, South Carolina wood treating facility; and the
Follansbee, West Virginia carbon materials and chemicals facility. In addition,
many Koppers sites are or have been operated under Resource Conservation and
Recovery Act ("RCRA") permits, and RCRA remedial and closure activities are
being conducted on several of these sites. Currently, at the properties
acquired from Beazer East (which include all of the NPL sites and all but one
of the RCRA-permitted sites), substantially all investigative, cleanup and
closure activities are being conducted and paid for by Beazer East pursuant to
the terms of the Indemnity.
7
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
To date, the parties that retained, assumed or agreed to indemnify the
Company against the liabilities referred to above have performed their
obligations in all material respects. However, disputes have arisen with such
parties as to the obligation of such parties to indemnify in certain cases. The
Company believes that for the last three years amounts paid by Beazer East that
are the subject of the environmental remediation portion of the Indemnity have
averaged approximately $9 million per year. If for any reason (including
disputed coverage or financial incapability) one or more of such parties fails
to perform their obligations and the Company is held liable for or otherwise
required to pay all or part of such liabilities without reimbursement, the
imposition of such liabilities on the Company could have a material adverse
effect on the Company's business, financial condition, cash flow and results of
operations. In addition, if the Company were required to record a liability
with respect to all or a portion of such matters on its balance sheet, the
amount of its total liabilities could exceed the book value of its assets by an
amount that could be significant.
Green Spring
The Company was named as a defendant in a toxic tort action, along with
Beazer East and CSX Transportation, Inc. ("CSX"), arising from the operation of
the Company's wood treating facility in Green Spring, West Virginia ("Green
Spring"). A trial of the claims of eight "test" plaintiffs began on March 11,
2002. As a result of the Company's motion for summary judgment filed before the
commencement of the trial and the Company's motion for a directed verdict
during the trial, the court found the claims against the Company to be without
merit and dismissed all such claims. The Court entered final judgment for the
Company on June 25, 2002. The Company believes that it has no liability to
these eight plaintiffs based on the allegations in the lawsuit. The court also
ruled, among other things, that the Company was not the successor company to
Beazer East and that the plaintiffs could introduce no evidence against the
Company for events that occurred before the creation of the Company on December
29, 1988.
Although the claims of the eight "test" plaintiffs against the Company were
dismissed, the trial continued against Beazer East and CSX. In April 2002 the
jury returned its verdict in the trial of the claims of the eight "test"
plaintiffs. The jury found in favor of Beazer East and CSX with respect to the
claims of four of the eight "test" plaintiffs relating to medical monitoring.
With regard to the remaining four plaintiffs, the jury awarded damages against
Beazer East and CSX totaling $825,000. Plaintiffs, Beazer East and CSX have
filed various post-trial motions in connection with the trial. The parties are
awaiting the judge's ruling on such motions. An appeal could follow the judge's
ruling on these post-trial motions.
The claims of the remaining plaintiffs (approximately 100) against the
Company, Beazer East and CSX were stayed by the judge during the pendency of
the trial of the claims of the eight "test" plaintiffs. The remaining
plaintiffs may or may not pursue their claims against the Company based on the
results of the trial of the claims of such "test" plaintiffs. If such claims
are pursued, the trial of the next group of plaintiffs will likely not occur
until the summer of 2003. Plaintiffs are current and former employees of Green
Spring, family members of such employees and residents from the communities
surrounding Green Spring. Plaintiffs' allegations against the defendants
included personal injuries and property damage related to the operation of
Green Spring from the mid-1940's through 1992. As a result of previous
litigation among CSX, Beazer East and the Company, CSX has assumed a portion of
Beazer East's obligations to the Company under the Indemnity in connection with
the litigation involving Green Spring.
North Little Rock
The Company and other defendants were also sued in a toxic tort action
arising from the operation of the Company's wood treating facility in North
Little Rock, Arkansas ("North Little Rock"). Plaintiffs' allegations included
personal injuries and property damage relating to the operation of North Little
Rock. The trial began on
8
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
January 29, 2002 and continued until February 9, 2002, at which time the case
was settled by the Company for an amount substantially below plaintiffs'
pre-trial settlement demand and was expensed in the first quarter of 2002. The
settlement included a release of all claims pending by the plaintiffs against
the Company in connection with the operation of North Little Rock.
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 on discharge permits,
applications for discharge permits, discharge monitoring reports, and the
analytical data in support of the reports and applications. The EPA
subsequently alleged that the Company violated various provisions of the Clean
Water Act. In July 2000 the Company received a settlement demand from the EPA
requesting $4.5 million in settlement of alleged civil violations of the Clean
Water Act. EPA and the Company subsequently agreed, among other things, to a
$2.9 million settlement, payable over three years. The Company and EPA continue
to negotiate other issues related to the form of the civil settlement agreement.
Additionally, during a Company-initiated investigation at the Company's coke
facility located in Woodward, Alabama ("Woodward Coke") prior to its closure in
January 1998, it was discovered that certain environmental records and reports
related to the discharge of treated process water contained incomplete and
inaccurate information. Corrected reports were submitted to the State of
Alabama and the EPA. Appropriate governmental agencies have been investigating
this matter, which led to a settlement demand in February 2001 of $5 million
and certain admissions. The government and the Company subsequently agreed,
among other things, to a $3.0 million settlement, payable over three years. The
Company and the government have completed their negotiation of the settlement
agreement. The Company's plea is expected to be entered in the near term. Prior
to the acceptance by the Court of the plea agreement, there can be no assurance
that the terms of the plea agreement will not change.
If the terms of the plea agreement or the civil settlement agreement change,
there can be no assurance that the outcome of either or both of these matters
would not have a material adverse effect on the business, financial condition,
cash flow and results of operations of the Company.
(7) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Six Months
Ended June 30, Ended June 30,
------------ -------------
2002 2001 2002 2001
----- ------ ----- ------
(In millions except earnings
per share)
Numerators for basic and diluted:
Net income to common stockholders............................................ $ 5.6 $ 5.7 $ 7.4 $ 6.4
Preferred stock dividend..................................................... -- (9.1) (6.5) (9.1)
----- ------ ----- ------
Numerator for basic earnings per common share............................. $ 5.6 ($ 3.4) $ 0.9 ($ 2.7)
Denominators:
Weighted-average common shares............................................... 1.2 1.3 1.2 1.3
Effect of dilutive securities:
Senior convertible preferred stock........................................... 2.3 2.3 2.3 2.3
Employee stock options....................................................... -- 0.1 -- 0.2
----- ------ ----- ------
Dilutive potential common shares................................................ 2.3 2.4 2.3 2.5
Denominators for diluted earnings per share-adjusted weighted-average shares and
assumed conversions........................................................... 3.5 3.7 3.5 3.8
Basic earnings (loss) per share.............................................. $4.79 ($2.61) $0.74 ($2.12)
Diluted earnings (loss) per share............................................ $1.60 ($2.61) $0.74 ($2.12)
9
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The senior convertible preferred stock and employee stock options were not
included in the computation of diluted earnings per share for the three months
ended June 30, 2001 and the six months ended June 30, 2002 and 2001 since it
would have resulted in an antidilutive effect.
(8) Comprehensive Income
Three Months Six Months
Ended June 30, Ended June 30,
------------- -------------
2002 2001 2002 2001
----- ----- ----- -----
(In millions) (In millions)
Net income..................................... $ 5.6 $ 5.7 $ 7.4 $ 6.4
Other comprehensive income:
Unrealized currency translation gain (loss). 6.0 (0.3) 7.2 (4.3)
----- ----- ----- -----
Total comprehensive income.............. $11.6 $ 5.4 $14.6 $ 2.1
===== ===== ===== =====
10
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:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
------ ------ ------ ------
(Dollars in millions)
Net sales:
Carbon Materials & Chemicals.................... $106.8 $111.2 $196.0 $218.3
Railroad & Utility Products..................... 84.8 78.1 160.9 145.7
------ ------ ------ ------
Total....................................... $191.6 $189.3 $356.9 $364.0
Percentage of net sales:
Carbon Materials & Chemicals.................... 55.7% 58.7% 54.9% 60.0%
Railroad & Utility Products..................... 44.3% 41.3% 45.1% 40.0%
------ ------ ------ ------
Total....................................... 100.0% 100.0% 100.0% 100.0%
Gross margin (after depreciation and amortization):
Carbon Materials & Chemicals.................... 14.9% 17.3% 13.2% 15.3%
Railroad & Utility Products..................... 10.8% 10.9% 8.9% 9.8%
------ ------ ------ ------
Total....................................... 12.8% 14.4% 11.1% 12.4%
Operating profit:
Carbon Materials & Chemicals.................... $ 8.4 $ 10.7 $ 12.3 $ 16.7
Railroad & Utility Products..................... 5.1 4.7 7.7 3.2
All Other....................................... (0.4) (0.4) (0.7) (0.9)
------ ------ ------ ------
Total....................................... $ 13.1 $ 15.0 $ 19.3 $ 19.0
Comparison of Results of Operations for the Three Months Ended June 30, 2002
and 2001.
Net Sales. Net sales for the three months ended June 30, 2002 were slightly
higher than the same period in 2001, as higher sales for Railroad & Utility
Products more than offset lower sales for Carbon Materials & Chemicals. Net
sales for Carbon Materials & Chemicals decreased due to lower volumes in the
United States for carbon pitch and phthalic anhydride ("PAA"). Net sales for
Railroad & Utility Products increased due primarily to higher sales volumes for
railroad crossties. Inter-segment revenues were $5.0 million and $4.7 million
for Carbon Materials & Chemicals for the quarters ended June 30, 2002 and 2001,
respectively.
Gross Margin after Depreciation and Amortization. Gross margin after
depreciation and amortization decreased for both segments. Gross margin for
Carbon Materials & Chemicals decreased due to lower volumes and prices for PAA,
lower volumes for carbon pitch and lower pricing for furnace coke. Gross margin
for Railroad & Utility Products decreased slightly as increased profits from
higher sales volumes for railroad crossties were offset by legal costs related
to a settlement regarding environmental matters.
Selling, General and Administrative Expense. As a percent of net sales,
selling, general and administrative expense decreased due primarily to lower
severance charges compared to the prior year.
Other Income. Other income includes the monetization of energy tax credits
related to the production of coke at the Company's facility located in
Monessen, Pennsylvania (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, 2001.
11
Interest Expense. Interest expense decreased due to lower debt levels and
lower interest rates.
Comparison of Results of Operations for the Six Months Ended June 30, 2002 and
2001.
Net Sales. Net sales for the six months ended June 30, 2002 were lower than
the same period in 2001, as higher sales for Railroad & Utility Products were
more than offset by lower sales for Carbon Materials & Chemicals. Net sales for
Carbon Materials & Chemicals decreased due to lower volumes for carbon pitch
and lower volumes and prices for PAA. Net sales for Railroad & Utility Products
increased due primarily to higher sales volumes for railroad crossties.
Inter-segment revenues were $10.2 million and $9.2 million for Carbon Materials
& Chemicals for the six months ended June 30, 2002 and 2001, respectively.
Gross Margin after Depreciation and Amortization. Gross margin after
depreciation and amortization decreased for both segments. Gross margin for
Carbon Materials & Chemicals decreased due to lower volumes and pricing for PAA
and lower pricing for furnace coke. Gross margin for Railroad & Utility
Products decreased due to a settlement regarding environmental matters.
Selling, General and Administrative Expense. As a percent of net sales,
selling, general and administrative expense decreased due primarily to an
actuarial gain from postretirement benefit settlements related to a former
operating location.
Restructuring Charges. Charges for 2001 relate to the closure of Feather
River in the first quarter of 2001. See "Liquidity and Capital
Resources--Restructuring Charges."
Other Income. Other income includes the monetization of energy tax credits
related to the production of coke at the Company's facility located in
Monessen, Pennsylvania (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, 2001.
Interest Expense. Interest expense decreased due to lower debt levels and
lower interest rates.
Liquidity and Capital Resources
The Company's liquidity needs are primarily for debt service, capital
maintenance and acquisitions. The Company believes that its cash flow from
operations and available borrowings under its bank credit facilities will be
sufficient to fund its anticipated liquidity requirements for at least 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 June 30, 2002 the Company had $5.3 million of cash and cash
equivalents and $7.5 million of unused revolving credit availability for
working capital purposes after restrictions by various debt covenants and
letter of credit commitments. As of June 30, 2002 $11.2 million of commitments
were utilized by outstanding standby letters of credit.
Net cash provided by operating activities was near break-even due primarily
to an increase in accounts receivable from year-end 2001. Cash provided by
operating activities in the first six months of 2001 was due primarily to
decreases in accounts receivable and inventories from year-end 2000.
Capital expenditures excluding acquisitions were higher than the prior year
as projects previously delayed have been started or completed. Acquisitions and
related capital expenditures for 2001 included $5.2 million for Koppers (China)
Carbon and Chemical Co. Limited ("Koppers China"), a 60%-owned tar distillation
facility, and $1 million for the acquisition of the remaining 50% of a timber
preservation chemicals business located in South Africa.
Net cash provided by financing activities in 2002 related to borrowings from
the revolving credit facility to finance the increase in accounts receivable,
purchases of stock from retirees and the payment of a dividend. Net
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cash used by financing activities in the prior year period related primarily to
stock repurchased from retirees and the payment of a dividend.
Restructuring Charges. In February 2001 the Company's Board of Directors
approved the closure of Feather River effective in March 2001. This resulted in
a restructuring charge of $3.3 million in the first quarter of 2001, primarily
for the dismantling of existing buildings and equipment. Completion of the
closure is expected by the end of the third quarter of 2002. As of June 30,
2002, approximately $1.1 million of reserves remain for dismantling expenses.
Schedule of Certain Contractual Obligations
The following table details the future projected payments for the Company's
significant contractual obligations.
Contractual Obligations
Payments Due by Period
-------------------------------------
Less than 1-3 4-5 After 5
Total 1 year years years years
------ --------- ------ ----- -------
(Dollars in millions)
Long Term Debt.................... $291.2 $31.2 $ 85.0 $ -- $175.0
Operating Leases.................. $ 87.3 $19.2 $ 31.0 $17.5 $ 19.6
------ ----- ------ ----- ------
Total Contractual Cash Obligations $378.5 $50.4 $116.0 $17.5 $194.6
Schedule of Certain Other Commercial Commitments
The following table details the future projected payments for the Company's
significant other commercial commitments.
Other Commercial Commitments
Payments Due by Period
-----------------------------------
Less than 1-3 4-5 After 5
Total 1 year years years years
----- --------- ----- ----- -------
(Dollars in millions)
Lines of Credit (Unused).... $47.4 $ -- $47.4 $-- $--
Standby Letters of Credit... $11.2 $11.2 $ -- $-- $--
Guarantees.................. $ 2.5 $ -- $ 2.5 $-- $--
----- ----- ----- --- ---
Total Commercial Commitments $61.1 $11.2 $49.9 $-- $--
Environmental and Other Matters
The Company is subject to federal, state, local and foreign laws and
regulations and potential liabilities relating to, 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. The Company expects to incur substantial costs for ongoing
compliance with such laws and regulations. The Company may also face
governmental or third-party claims for cleanup or for injuries resulting from
contamination at sites associated with past and present operations. The Company
accrues for environmental liabilities when a determination can be made that
they are probable and reasonably estimable.
Environmental and Other Liabilities Retained or Assumed by Others
The Company has agreements with former owners of certain of its operating
locations under which the former owners retained or assumed and agreed to
indemnify the Company against certain environmental and other liabilities. The
most significant of these agreements was entered into at the Company's
inception in 1988
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with Beazer East. Under the Asset Purchase Agreement, Beazer East assumed the
responsibility for and agreed to indemnify the Company against certain
liabilities, damages, losses and costs, to the extent attributable to acts or
omissions occurring prior to the Acquisition, including, with certain limited
exceptions, liabilities and costs of compliance with environmental laws. Beazer
Limited unconditionally guaranteed Beazer East's performance of the Indemnity
pursuant to the Guarantee. Beazer Limited became a wholly-owned indirect
subsidiary of Hanson PLC on December 4, 1991. In 1998 Hanson PLC signed an
agreement 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)
are underwritten by subsidiaries of two of the world's largest reinsurance
companies, Centre Solutions (a member of the Zurich Group) and Swiss Re.
The Indemnity provides different mechanisms by which Beazer East is to
indemnify Koppers with regard to environmental claims or environmental cleanup
liabilities and imposes certain conditions on the Company before receiving such
indemnification. The Company believes that it has taken appropriate steps to
satisfy all of such conditions.
Five sites owned and/or operated by Koppers are listed on the NPL
promulgated under CERCLA. The sites include the recently closed Feather River;
the Gainesville, Florida wood treating facility; the Galesburg, Illinois wood
treating facility; the Florence, South Carolina wood treating facility; and the
Follansbee, West Virginia carbon materials and chemicals facility. In addition,
many Koppers sites are or have been operated under RCRA permits, and RCRA
remedial and closure activities are being conducted on several of these sites.
Currently, at the properties acquired from Beazer East (which include all of
the NPL sites and all but one of the RCRA-permitted sites), substantially all
investigative, cleanup and closure activities are being conducted and paid for
by Beazer East pursuant to the terms of the Indemnity.
To date, the parties that retained, assumed or agreed to indemnify the
Company against the liabilities referred to above have performed their
obligations in all material respects. However, disputes have arisen with such
parties as to the obligation of such parties to indemnify in certain cases. The
Company believes that for the last three years amounts paid by Beazer East that
are the subject of the environmental remediation portion of the Indemnity have
averaged approximately $9 million per year. If for any reason (including
disputed coverage or financial incapability) one or more of such parties fails
to perform their obligations and the Company is held liable for or otherwise
required to pay all or part of such liabilities without reimbursement, the
imposition of such liabilities on the Company could have a material adverse
effect on the Company's business, financial condition, cash flow and results of
operations. In addition, if the Company were required to record a liability
with respect to all or a portion of such matters on its balance sheet, the
amount of its total liabilities could exceed the book value of its assets by an
amount that could be significant.
Green Spring
The Company was named as a defendant in a toxic tort action, along with
Beazer East and CSX, arising from the operation of the Company's wood treating
facility in Green Spring. A trial of the claims of eight "test" plaintiffs
began on March 11, 2002. As a result of the Company's motion for summary
judgment filed before the commencement of the trial and the Company's motion
for a directed verdict during the trial, the court found the claims against the
Company to be without merit and dismissed all such claims. The Court entered
final judgment for the Company on June 25, 2002. The Company believes that it
has no liability to these eight plaintiffs based on the allegations in the
lawsuit. The court also ruled, among other things, that the Company was not the
successor company to Beazer East and that the plaintiffs could introduce no
evidence against the Company for events that occurred before the creation of
the Company on December 29, 1988.
Although the claims of the eight "test" plaintiffs against the Company were
dismissed, the trial continued against Beazer East and CSX. In April 2002 the
jury returned its verdict in the trial of the claims of the eight "test"
plaintiffs. The jury found in favor of Beazer East and CSX with respect to the
claims of four of the eight
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"test" plaintiffs relating to medical monitoring. With regard to the remaining
four plaintiffs, the jury awarded damages against Beazer East and CSX totaling
$825,000. Plaintiffs, Beazer East and CSX have filed various post-trial motions
in connection with the trial. The parties are awaiting the judge's ruling on
such motions. An appeal could follow the judge's ruling on these post-trial
motions.
The claims of the remaining plaintiffs (approximately 100) against the
Company, Beazer East and CSX were stayed by the judge during the pendency of
the trial of the claims of the eight "test" plaintiffs. The remaining
plaintiffs may or may not pursue their claims against the Company based on the
results of the trial of the claims of such "test" plaintiffs. If such claims
are pursued, the trial of the next group of plaintiffs will likely not occur
until the summer of 2003. Plaintiffs are current and former employees of Green
Spring, family members of such employees and residents from the communities
surrounding Green Spring. Plaintiffs' allegations against the defendants
included personal injuries and property damage related to the operation of
Green Spring from the mid-1940's through 1992. As a result of previous
litigation among CSX, Beazer East and the Company, CSX has assumed a portion of
Beazer East's obligations to the Company under the Indemnity in connection with
the litigation involving Green Spring.
North Little Rock
The Company and other defendants were also sued in a toxic tort action
arising from the operation of North Little Rock. Plaintiffs' allegations
included personal injuries and property damage relating to the operation of
North Little Rock. The trial began on January 29, 2002 and continued until
February 9, 2002, at which time the case was settled by the Company for an
amount substantially below plaintiffs' pre-trial settlement demand and was
expensed in the first quarter of 2002. The settlement included a release of all
claims pending by the plaintiffs against the Company in connection with the
operation of North Little Rock.
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 on
discharge permits, applications for discharge permits, discharge monitoring
reports, and the analytical data in support of the reports and applications.
The EPA subsequently alleged that the Company violated various provisions of
the Clean Water Act. In July 2000 the Company received a settlement demand from
the EPA requesting $4.5 million in settlement of alleged civil violations of
the Clean Water Act. EPA and the Company subsequently agreed, among other
things, to a $2.9 million settlement, payable over three years. The Company and
EPA continue to negotiate other issues related to the form of the civil
settlement agreement.
Additionally, during a Company-initiated investigation at Woodward Coke
prior to its closure in January 1998, it was discovered that certain
environmental records and reports related to the discharge of treated process
water contained incomplete and inaccurate information. Corrected reports were
submitted to the State of Alabama and the EPA. Appropriate governmental
agencies have been investigating this matter, which led to a settlement demand
in February 2001 of $5 million and certain admissions. The government and the
Company subsequently agreed, among other things, to a $3.0 million settlement,
payable over three years. The Company and the government have completed their
negotiation of the settlement agreement. The Company's plea is expected to be
entered in the near term. Prior to the acceptance by the Court of the plea
agreement, there can be no assurance that the terms of the plea agreement will
not change.
If the terms of the plea agreement or the civil settlement agreement change,
there can be no assurance that the outcome of either or both of these matters
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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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: On April 5, 2002 the Company filed a report on Form
8-K regarding the declaration of a dividend on March 21, 2002 amounting to
$2.85 per common and preferred share payable on or about April 1, 2002.
16
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: July 22, 2002 By: /s/ Donald E. Davis
------------------------------------ -----------------------------------
Donald E. Davis,
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer)
17