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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended September 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 jurisdiction (I.R.S. Employer
of incorporation Identification No.)
or organization)
436 Seventh Avenue
Pittsburgh, Pennsylvania 15219
(Address of principal executive offices)
(412) 227-2001
(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 [_]
Common Stock, par value $.01 per share, outstanding at October 10, 2002
amounted to 1.1 million shares.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions except per share amounts)
Three Months Ended Nine Months
Ended September Ended September
30, 30,
2002 2001 2002 2001
(Unaudited) (Unaudited)
Net sales $ 198.2 $ 176.7 $ 555.1 $ 540.7
Operating expenses:
Cost of sales 164.8 144.7 468.1 448.3
Depreciation and amortization 7.2 7.6 21.2 22.7
Selling, general and administrative 11.7 11.5 32.0 34.5
Restructuring charges -- -- -- 3.3
Total operating expenses 183.7 163.8 521.3 508.8
Operating profit 14.5 12.9 33.8 31.9
Equity in earnings of affiliates --- 0.2 0.1 0.4
Other income 2.5 2.1 7.5 6.7
Income before interest expense, income taxes and minority interest 17.0 15.2 41.4 39.0
Interest expense 5.7 6.3 17.4 19.1
Income before income taxes and minority interest 11.3 8.9 24.0 19.9
Income tax provision 4.6 4.1 9.5 8.3
Minority interest 0.2 0.2 0.6 0.6
Net income $ 6.5 $ 4.6 $ 13.9 $ 11.0
Basic earnings per share $ 5.77 $ 3.42 $ 6.23 $ 1.36
Diluted earnings per share $ 1.87 $ 1.25 $ 3.95 $ 1.36
See accompanying notes.
2
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
September 30, December 31,
2002 2001
(Unaudited) *
ASSETS
Current assets:
Cash and cash equivalents $ 9.1 $ 5.2
Accounts receivable less allowance for doubtful accounts of $1.0 in 2002 and 2001 104.1 84.3
Inventories:
Raw materials 49.0 53.8
Work in process 3.5 3.7
Finished goods 54.6 58.0
LIFO reserve (10.7) (9.3)
Total inventories 96.4 106.2
Deferred tax benefit 6.3 6.2
Other 4.0 4.0
Total current assets $ 219.9 $ 205.9
Equity in non-consolidated investments 11.9 12.2
Fixed assets 407.7 389.8
Less: accumulated depreciation (253.6) (230.5)
Net fixed assets $ 154.1 $ 159.3
Goodwill, net of accumulated amortization 28.4 27.0
Deferred tax benefit 31.7 35.3
Other assets 13.6 15.5
Total assets $ 459.6 $ 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)
September 30, December 31,
2002 2001
(Unaudited) *
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 58.2 $ 57.8
Accrued liabilities 44.4 45.7
Current portion of term loans 17.8 13.2
Senior Notes due 2004 11.1 --
Total current liabilities $ 131.5 $ 116.7
Long-term debt:
Revolving credit 22.3 10.2
Term loans 43.5 59.5
Senior Subordinated Notes due 2007 175.0 175.0
Senior Notes due 2004 -- 11.1
Total long-term debt $ 240.8 $ 255.8
Other long-term reserves 57.8 57.6
Total liabilities $ 430.1 $ 430.1
Common stock subject to redemption 26.1 22.3
Minority interest 5.1 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 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 41.1 40.6
Accumulated other comprehensive loss:
Foreign currency translation adjustment (18.7) (24.3)
Minimum pension liability, net of tax (4.1) (4.1)
Total accumulated other comprehensive loss (22.8) (28.4)
Treasury stock, at cost, 1.7 shares in 2002 and 1.5 shares in 2001 (32.1) (25.9)
Total liabilities and stockholders' equity $ 459.6 $ 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)
Nine Months Ended
September 30,
2002 2001
(Unaudited)
Cash provided by operating activities $ 30.8 $ 44.2
Cash provided by (used in) investing activities:
Capital expenditures (12.7) (7.6)
Acquisitions and related capital expenditures -- (6.2)
Other 1.4 2.1
Net cash (used in) investing activities (11.3) (11.7)
Cash provided by (used in) financing activities:
Borrowings from revolving credit 178.0 139.7
Repayments of revolving credit (167.0) (137.4)
Repayment of long-term debt (11.4) (12.9)
Dividends paid (9.8) (14.6)
Purchases of common stock (5.7) (4.7)
Net cash (used in) financing activities (15.9) (29.9)
Effect of exchange rates on cash 0.3 (0.3)
Net increase in cash 3.9 2.3
Cash and cash equivalents at beginning of period 5.2 6.8
Cash and cash equivalents at end of period $ 9.1 $ 9.1
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 October 1, 2002 the Company repurchased $11.1 million of Senior Notes
due 2004 at par pursuant to the indenture related to these notes. The
repurchase represented all of the remaining outstanding notes due 2004.
(5) 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.
(6) 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, which approximates the amount expensed in 2001. 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 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
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
In July 2002 the Financial Accounting Standards Board issued Statement
No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of
costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
(7) 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 East (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 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 filed
various post-trial motions in connection with the trial, and the presiding judge
denied all motions other than that Beazer East and CSX had operated the facility
as a joint venture. The parties have the right to appeal these rulings.
The claims of the remaining plaintiffs (approximately 85) 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 not occur until July 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 include 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 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.
8
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
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 has been entered and there is a hearing
scheduled for December 2002 to determine the acceptance by the Court. 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.
(8) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2002 2001
(In millions except earnings
per share)
Numerators for basic and diluted:
Net income to common stockholders $ 6.5 $ 4.6 $ 13.9 $ 11.0
Preferred stock dividend -- -- (6.5) (9.1)
Numerator for basic earnings per common share $ 6.5 $ 4.6 $ 7.4 $ 1.9
Denominators:
Weighted-average common shares 1.1 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 -- 0.1
Dilutive potential common shares 2.3 2.4 2.3 2.4
Denominators for diluted earnings per share-adjusted weighted-average shares and
assumed conversions 3.4 3.7 3.5 3.7
Basic earnings per share $ 5.77 $ 3.42 $ 6.23 $ 1.36
Diluted earnings per share $ 1.87 $ 1.25 $ 3.95 $ 1.36
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 nine months
ended September 30, 2001 since it would have resulted in an antidilutive effect.
(9) Comprehensive Income
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2002 2001
(In millions) (In millions)
Net income $ 6.5 $ 4.6 $ 13.9 $ 11.0
Other comprehensive income:
Unrealized currency translation gain (loss) (1.6) (0.2) 5.6 (4.6)
Total comprehensive income $ 4.9 $ 4.4 $ 19.5 $ 6.4
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 Ended Nine Months
September 30, Ended September 30,
2002 2001 2002 2001
(Dollars in millions)
Net sales:
Carbon Materials & Chemicals $ 110.8 $ 105.3 $ 306.8 $ 323.6
Railroad & Utility Products 87.4 71.4 248.3 217.1
Total $ 198.2 $ 176.7 $ 555.1 $ 540.7
Percentage of net sales:
Carbon Materials & Chemicals 55.9% 59.6% 55.3% 59.8%
Railroad & Utility Products 44.1% 40.4% 44.7% 40.2%
Total 100.0% 100.0% 100.0% 100.0%
Gross margin (after depreciation and amortization):
Carbon Materials & Chemicals 15.7% 16.2% 14.1% 15.3%
Railroad & Utility Products 10.6% 10.9% 9.5% 9.9%
Total 13.2% 13.8% 11.9% 12.9%
Operating profit:
Carbon Materials & Chemicals $ 9.4 $ 9.3 $ 21.7 $ 26.0
Railroad & Utility Products 5.6 4.1 13.3 7.3
All Other (0.5) (0.5) (1.2) (1.4)
Total $ 14.5 $ 12.9 $ 33.8 $ 31.9
10
Comparison of Results of Operations for the Three Months Ended September 30,
2002 and 2001.
Net Sales. Net sales for the three months ended September 30, 2002 were
higher than the same period in 2001 due to higher sales for both Carbon
Materials & Chemicals and Railroad & Utility Products. Net sales for Carbon
Materials & Chemicals increased due primarily to higher sales volumes for
creosote. Net sales for Railroad & Utility Products increased due primarily to
higher sales volumes for railroad crossties in the United States. Inter-segment
revenues were $6.3 million and $4.4 million for Carbon Materials & Chemicals for
the quarters ended September 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 primarily to lower volumes for carbon
pitch in the United States. Gross margin for Railroad & Utility Products
decreased slightly as increased profits from higher sales volumes for railroad
crossties were offset by lower volumes and margins for utility poles.
Selling, General and Administrative Expense. As a percent of net sales,
selling, general and administrative expense decreased due primarily to lower
legal costs 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.
Interest Expense. Interest expense decreased due to lower debt levels and
lower interest rates.
Comparison of Results of Operations for the Nine Months Ended September 30, 2002
and 2001.
Net Sales. Net sales for the nine months ended September 30, 2002 were
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 for carbon
pitch in the United States and lower volumes and prices for phthalic anhydride
("PAA"). Net sales for Railroad & Utility Products increased due primarily to
higher sales volumes for railroad crossties in the United States. Inter-segment
revenues were $16.9 million and $13.7 million for Carbon Materials & Chemicals
for the nine months ended September 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 for carbon pitch in
the United States, 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 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.
11
As of September 30, 2002 the Company had $9.1 million of cash and cash
equivalents and $31.8 million of unused revolving credit availability for
working capital purposes after restrictions by various debt covenants and letter
of credit commitments. As of September 30, 2002 $11.3 million of commitments
were utilized by outstanding standby letters of credit.
Net cash provided by operating activities was lower than the prior year due
primarily to an increase in accounts receivable from year-end 2001 which more
than offset inventory reductions.
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 used in 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 cash used by
financing activities in the prior year period related primarily to stock
repurchased from retirees and the payment of a dividend. On October 1, 2002 the
Company repurchased Senior Notes due 2004 at par for $11.1 million pursuant to
the indenture related to these notes.
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. As of September 30,
2002 the dismantling and closure is substantially complete and the remaining
reserves are not significant.
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 $ 269.7 $ 28.9 $ 65.8 $ -- $ 175.0
Operating Leases $ 87.3 $ 19.2 $ 31.0 $ 17.5 $ 19.6
Total Contractual Cash Obligations $ 357.0 $ 48.1 $ 96.8 $ 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) $ 64.6 $ -- $ 64.6 $ -- $ --
Standby Letters of Credit $ 11.3 $ 11.3 $ -- $ -- $ --
Guarantees $ 2.5 $ -- $ 2.5 $ -- $ --
Total Commercial Commitments $ 78.4 $ 11.3 $ 67.1 $ -- $ --
12
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. 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
East (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 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
13
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 filed various post-trial motions in
connection with the trial, and the presiding judge denied all motions other than
that Beazer East and CSX had operated the facility as a joint venture. The
parties have the right to appeal these rulings.
The claims of the remaining plaintiffs (approximately 85) 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 not occur until July 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 include 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.
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 has been entered and
there is a hearing scheduled for December 2002 to detemine acceptance by the
Court. 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.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2002 an evaluation was performed under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the Chief Executive Officer and the Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective as of September 30,
2002. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to September 30, 2002.
14
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.34 Treatment Services Agreement between the Company and CSX
Transportation, Inc. dated October 4, 2002. Certain portions of the
Treatment Services Agreement have been omitted pursuant to a request for
confidential treatment. The entire Treatment Services Agreement has been
filed confidentially with the Securities and Exchange Commission.
99.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: None
15
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: October 30, 2002 By: /s/ Donald E. Davis
Donald E. Davis,
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer)
16
CERTIFICATIONS
I, Walter W. Turner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Koppers
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weakness in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 30, 2002
----------------
/s/ Walter W. Turner
-------------------------------------
Walter W. Turner
President and Chief Executive Officer
17
I, Donald E. Davis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Koppers
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weakness in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 30, 2002
----------------
/s/ Donald E. Davis
------------------------------------------
Donald E. Davis
Vice President and Chief Financial Officer
18