Exhibit 99.3
PART I—FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
KOPPERS HOLDINGS INC.
CONSOLIDATED STATEMENT OF OPERATIONS
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Dollars in millions, except per share amounts) | (Unaudited) | (Unaudited) | ||||||||||||||
Net sales | $ | 291.6 | $ | 375.3 | $ | 564.3 | $ | 706.5 | ||||||||
Cost of sales (excluding items below) | 238.5 | 306.1 | 472.4 | 581.8 | ||||||||||||
Depreciation and amortization | 6.3 | 6.4 | 12.3 | 13.3 | ||||||||||||
Selling, general and administrative expenses | 13.5 | 16.7 | 27.9 | 33.5 | ||||||||||||
Operating profit | 33.3 | 46.1 | 51.7 | 77.9 | ||||||||||||
Other loss | (0.2 | ) | (0.3 | ) | (0.2 | ) | (0.3 | ) | ||||||||
Interest expense | 10.0 | 10.6 | 20.2 | 21.5 | ||||||||||||
Income before income taxes | 23.1 | 35.2 | 31.3 | 56.1 | ||||||||||||
Income taxes | 10.5 | 12.5 | 13.9 | 20.6 | ||||||||||||
Income from continuing operations | 12.6 | 22.7 | 17.4 | 35.5 | ||||||||||||
Income from discontinued operations, net of tax benefit of $—, $(0.9), $— and $(2.0) | — | 2.0 | — | 3.0 | ||||||||||||
Loss on sale of discontinued operations, net of tax benefit of $—, $—, $0.2 and $— | (0.1 | ) | — | (0.3 | ) | — | ||||||||||
Net income | 12.5 | 24.7 | 17.1 | 38.5 | ||||||||||||
Net income attributable to noncontrolling interests | 0.8 | 0.4 | 1.3 | 1.0 | ||||||||||||
Net income attributable to Koppers | $ | 11.7 | $ | 24.3 | $ | 15.8 | $ | 37.5 | ||||||||
Earnings per common share attributable to Koppers common shareholders: | ||||||||||||||||
Basic – | ||||||||||||||||
Continuing operations | $ | 0.57 | $ | 1.06 | $ | 0.78 | $ | 1.65 | ||||||||
Discontinued operations | — | 0.10 | (0.01 | ) | 0.15 | |||||||||||
Earnings per basic common share | $ | 0.57 | $ | 1.16 | $ | 0.77 | $ | 1.80 | ||||||||
Diluted – | ||||||||||||||||
Continuing operations | $ | 0.57 | $ | 1.06 | $ | 0.78 | $ | 1.64 | ||||||||
Discontinued operations | — | 0.10 | (0.01 | ) | 0.15 | |||||||||||
Earnings per diluted common share | $ | 0.57 | $ | 1.16 | $ | 0.77 | $ | 1.79 | ||||||||
Weighted average shares outstanding(in thousands): | ||||||||||||||||
Basic | 20,445 | 20,844 | 20,437 | 20,836 | ||||||||||||
Diluted | 20,542 | 20,923 | 20,513 | 20,912 | ||||||||||||
Dividends declared per common share | $ | 0.22 | $ | 0.22 | $ | 0.44 | $ | 0.44 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOPPERS HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEET
| June 30, 2009 | December 31, 2008 | |||||||
| (Dollars in millions, except per share amounts) | (Unaudited) | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 110.0 | $ | 63.1 | ||||
Short-term investments | 0.1 | 1.7 | ||||||
Restricted cash | — | 4.2 | ||||||
Accounts receivable, net of allowance of $0.5 and $0.5 | 118.1 | 112.1 | ||||||
Inventories, net | 144.9 | 171.8 | ||||||
Deferred tax assets | 2.6 | 2.6 | ||||||
Other current assets | 15.8 | 16.9 | ||||||
Total current assets | 391.5 | 372.4 | ||||||
Equity in non-consolidated investments | 5.7 | 6.0 | ||||||
Property, plant and equipment, net | 144.1 | 144.8 | ||||||
Goodwill | 60.9 | 58.4 | ||||||
Deferred tax assets | 58.6 | 56.0 | ||||||
Other assets | 21.6 | 23.5 | ||||||
Total assets | $ | 682.4 | $ | 661.1 | ||||
Liabilities | ||||||||
Accounts payable | $ | 64.2 | $ | 82.1 | ||||
Accrued liabilities | 63.8 | 61.8 | ||||||
Dividends payable | 4.5 | 4.5 | ||||||
Short-term debt and current portion of long-term debt | 0.2 | 0.2 | ||||||
Total current liabilities | 132.7 | 148.6 | ||||||
Long-term debt | 383.5 | 374.7 | ||||||
Accrued postretirement benefits | 78.1 | 75.7 | ||||||
Other long-term liabilities | 36.2 | 36.1 | ||||||
Total liabilities | 630.5 | 635.1 | ||||||
Commitments and contingent liabilities (Note 17) | ||||||||
Equity | ||||||||
Senior Convertible Preferred Stock, $0.01 par value per share; 10,000,000 shares authorized; no shares issued | — | — | ||||||
Common Stock, $0.01 par value per share; 40,000,000 shares authorized; 21,121,212 and 21,097,443 shares issued | 0.2 | 0.2 | ||||||
Additional paid-in capital | 127.3 | 126.6 | ||||||
Retained deficit | (31.2 | ) | (37.8 | ) | ||||
Accumulated other comprehensive loss | (29.6 | ) | (47.4 | ) | ||||
Treasury stock, at cost, 669,340 and 668,716 shares | (23.6 | ) | (23.6 | ) | ||||
Total Koppers stockholders’ equity | 43.1 | 18.0 | ||||||
Noncontrolling interests | 8.8 | 8.0 | ||||||
Total equity | 51.9 | 26.0 | ||||||
Total liabilities and equity | $ | 682.4 | $ | 661.1 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOPPERS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
| Six Months Ended June 30, | ||||||||
| 2009 | 2008 | |||||||
| (Dollars in millions) | (Unaudited) | |||||||
Cash provided by (used in) operating activities | ||||||||
Net income | $ | 17.1 | $ | 38.5 | ||||
Adjustments to reconcile net cash provided by operating activities: | ||||||||
Depreciation and amortization | 13.2 | 15.5 | ||||||
Loss on disposal of fixed assets | 0.7 | — | ||||||
Deferred income taxes | (3.0 | ) | 1.2 | |||||
Equity income, net of dividends received | 0.9 | 0.5 | ||||||
Change in other liabilities | 6.7 | (0.8 | ) | |||||
Non-cash interest expense | 9.2 | 8.4 | ||||||
Stock-based compensation | 2.2 | 2.2 | ||||||
Other | 0.2 | 2.0 | ||||||
(Increase) decrease in working capital: | ||||||||
Accounts receivable | (1.5 | ) | (49.6 | ) | ||||
Inventories | 34.6 | (3.2 | ) | |||||
Accounts payable | (19.3 | ) | 0.3 | |||||
Accrued liabilities and other working capital | 1.8 | 4.6 | ||||||
Net cash provided by operating activities | 62.8 | 19.6 | ||||||
Cash provided by (used in) investing activities: | ||||||||
Capital expenditures | (6.8 | ) | (14.3 | ) | ||||
Net cash proceeds (payments) from divestitures and asset sales | (1.1 | ) | 0.2 | |||||
Net cash used in investing activities | (7.9 | ) | (14.1 | ) | ||||
Cash provided by (used in) financing activities: | ||||||||
Borrowings of revolving credit | — | 178.5 | ||||||
Repayments of revolving credit | — | (176.0 | ) | |||||
Repayments of long-term debt | (0.1 | ) | (6.0 | ) | ||||
Repurchases of Common Stock | — | (0.9 | ) | |||||
Dividends paid | (9.0 | ) | (8.1 | ) | ||||
Net cash used in financing activities | (9.1 | ) | (12.5 | ) | ||||
Effect of exchange rate changes on cash | 1.1 | 0.1 | ||||||
Net increase (decrease) in cash and cash equivalents | 46.9 | (6.9 | ) | |||||
Add: Cash of assets held for sale at beginning of year | — | 0.6 | ||||||
Less: Cash of assets held for sale at end of period | — | (1.4 | ) | |||||
Cash and cash equivalents at beginning of year | 63.1 | 16.9 | ||||||
Cash and cash equivalents at end of period | $ | 110.0 | $ | 9.2 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOPPERS HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of Koppers Holdings Inc.’s and its subsidiaries’ (“Koppers”, “Koppers Holdings” or the “Company”) financial position and interim results as of and for the periods presented have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. The Company has evaluated all subsequent events through August 6, 2009, the date the financial statements were issued. Because the Company’s business is seasonal, results for interim periods are not necessarily indicative of those that may be expected for a full year. The Condensed Consolidated Balance Sheet for December 31, 2008 has been summarized from the audited balance sheet contained in the Annual Report on Form 10-K for the year ended December 31, 2008. Certain amounts in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current year presentation.
The financial information included herein should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2008.
2. Accounting Changes
The Company adopted the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standard No. 160,Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”) effective January 1, 2009. SFAS 160 changes the classification of noncontrolling interests on the balance sheet and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. Under the new standard, noncontrolling interests are considered equity and are to be reported as an element of stockholders’ equity rather than within the mezzanine or liability sections of the balance sheet. In addition, the reporting of net income related to noncontrolling interest has changed from past practice. Under the new standard, net income encompasses the total income before the deduction of net income attributable to noncontrolling interests. Increases and decreases in the noncontrolling ownership interest amount are accounted for as equity transactions.
The Company adopted SFAS No. 141(R),Applying the Acquisition Method effective January 1, 2009. SFAS No. 141(R) provides guidance for the recognition of the fair values of the assets acquired upon initially obtaining control, including the elimination of the step acquisition model. The standard does not have a significant impact on the Company’s results of operations, financial condition or liquidity.
The Company adopted FSP SFAS No. 107-1 and Accounting Principles Board Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments”(“FSP SFAS 107-1 and APB Opinion 28-1”) effective June 30, 2009. FSP FAS No. 107-1 and APB Opinion 28-1 requires fair value disclosures for financial instruments that are not reflected in the Condensed Consolidated Balance Sheet at fair value. Prior to the issuance of FSP SFAS 107-1 and APB Opinion No. 28-1, the fair values of those assets and liabilities were disclosed only annually. With the issuance of FSP SFAS 107-1 and APB Opinion 28-1, the Company is now required to disclose this information on a quarterly basis, providing quantitative and qualitative information about fair value estimates for all financial instruments not measured in the Condensed Consolidated Balance Sheet at fair value. The adoption of the standard does not have a significant impact on the Company’s results of operations, financial condition or liquidity.
The Company adopted SFAS No. 165,“Subsequent Events” (“SFAS 165”) effective June 30, 2009. SFAS 165 establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The adoption of the standard does not have a significant impact on the Company’s results of operations, financial condition or liquidity.
3. Fair Value Measurements
Carrying amounts and the related estimated fair values of the Company’s financial instruments as of June 30, 2009 and December 31, 2008 are as follows:
| June 30, 2009 | December 31, 2008 | |||||||||||
| Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||
| (Dollars in millions) | ||||||||||||
Financial assets: | ||||||||||||
Cash and cash equivalents, including restricted cash | $ | 110.0 | $ | 110.0 | $ | 67.3 | $ | 67.3 | ||||
Short-term investments | 0.1 | 0.1 | 1.7 | 1.7 | ||||||||
Investments and other assets(a) | 2.9 | 2.9 | 3.2 | 3.2 | ||||||||
Financial liabilities: | ||||||||||||
Long-term debt (including current portion) | $ | 365.7 | $ | 383.7 | $ | 325.4 | $ | 374.9 | ||||
| (a) | Excludes equity method investments. |
Cash and short-term investments – The carrying amount approximates fair value because of the short maturity of those instruments.
Investments and other assets –Represents the broker-quoted cash surrender value on universal life insurance policies and the interest rate swap fair value adjustment. At June 30, 2009, the interest rate swap is valued at $1.6 million and cash surrender values on insurance policies totaled $1.3 million. Both assets are classified as Level 2 in the valuation hierarchy and are measured from quotes and values received from financial institutions.
Long-term debt – The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the revolving credit facilities approximate carrying value due to the variable rate nature of these instruments.
4. Dividends
On August 5, 2009, the Company’s board of directors declared a quarterly dividend of 22 cents per common share, payable on October 5, 2009 to shareholders of record as of August 17, 2009.
5. Business Disposition
On October 1, 2008, Koppers Inc. and a limited partner sold Koppers Monessen Partners LP (“Monessen”) to ArcelorMittal S.A. for cash of $160.0 million plus working capital of $10.0 million. Monessen is a metallurgical furnace coke facility that was 95 percent owned by Koppers Inc. (which served as the general partner) and five percent owned by a limited partner. Effective as of the end of the second quarter of 2008, Monessen was classified as a discontinued operation in the Company’s statement of operations and its assets and liabilities were reclassified as “held for sale” in the balance sheet. Monessen was part of the Carbon Materials & Chemicals business segment.
Net sales and operating profit from discontinued operations for the three and six months ended June 30, 2009 and June 30, 2008 consist of the following amounts:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||
| (Dollars in millions) | |||||||||||||
Net sales | $ | — | $ | 17.0 | $ | — | $ | 33.3 | |||||
Operating profit | — | 1.2 | — | 1.1 | |||||||||
Diluted earnings per share: | |||||||||||||
Income from discontinued operations | $ | — | $ | 0.10 | $ | — | $ | 0.15 | |||||
Loss on sale of discontinued operations | — | — | (0.01 | ) | — | ||||||||
Earnings per common share – discontinued operations | $ | — | $ | 0.10 | $ | (0.01 | ) | $ | 0.15 | ||||
6. Comprehensive Income and Equity
Total comprehensive income for the three and six months ended June 30, 2009 and 2008 is summarized in the table below:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Net income | $ | 12.5 | $ | 24.7 | $ | 17.1 | $ | 38.5 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Change in currency translation adjustment | 19.9 | 5.0 | 16.1 | 12.2 | ||||||||||||
Change in unrecognized pension transition asset, net of tax | (0.1 | ) | (0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||||
Change in unrecognized pension net loss, net of tax | 1.0 | 0.1 | 1.9 | (0.3 | ) | |||||||||||
Total comprehensive income | 33.3 | 29.7 | 35.0 | 50.3 | ||||||||||||
Less: net income attributable to noncontrolling interests | 0.8 | 0.4 | 1.3 | 1.0 | ||||||||||||
Comprehensive income attributable to Koppers | $ | 32.5 | $ | 29.3 | $ | 33.7 | $ | 49.3 | ||||||||
The following tables present the change in equity for the six months ended June 30, 2009 and June 30, 2008, respectively:
(Dollars in millions) | Total Koppers Stockholders’ Equity’ | Noncontrolling Interests | Total Equity | |||||||||
Balance at January 1, 2009 | $ | 18.0 | $ | 8.0 | $ | 26.0 | ||||||
Net income | 15.8 | 1.3 | 17.1 | |||||||||
Other comprehensive income (loss) | 17.9 | — | 17.9 | |||||||||
Issuance of common stock | 0.5 | — | 0.5 | |||||||||
Dividends to Koppers stockholders | (9.1 | ) | — | (9.1 | ) | |||||||
Dividends to noncontrolling interests | — | (0.5 | ) | (0.5 | ) | |||||||
Balance at June 30, 2009 | $ | 43.1 | $ | 8.8 | $ | 51.9 | ||||||
(Dollars in millions) | Total Koppers Stockholders’ Equity’ | Noncontrolling Interests | Total Equity | |||||||||
Balance at January 1, 2008 | $ | (23.3 | ) | $ | 9.4 | $ | (13.9 | ) | ||||
Net income | 37.5 | 1.0 | 38.5 | |||||||||
Other comprehensive income (loss) | 11.8 | — | 11.8 | |||||||||
Currency revaluation | — | 0.6 | 0.6 | |||||||||
Issuance of common stock | 1.1 | — | 1.1 | |||||||||
Repayment of receivable from Director | 0.6 | — | 0.6 | |||||||||
Dividends to Koppers stockholders | (9.2 | ) | — | (9.2 | ) | |||||||
Dividends to noncontrolling interests | — | (2.7 | ) | (2.7 | ) | |||||||
Repurchases of common stock | (0.9 | ) | — | (0.9 | ) | |||||||
Balance at June 30, 2008 | $ | 17.6 | $ | 8.3 | $ | 25.9 | ||||||
7. Earnings per Common Share
The computation of basic earnings per common share for the periods presented is based upon the weighted average number of common shares outstanding during the periods. The computation of diluted earnings per common share includes the effect of nonvested nonqualified stock options and restricted stock units assuming such options and stock units were outstanding common shares at the beginning of the period. The effect of antidilutive securities is excluded from the computation of diluted earnings per common share.
The following table sets forth the computation of basic and diluted earnings per common share:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||
| (Dollars in millions, except share amounts, in thousands, and per share amounts) | ||||||||||||||
Net income attributable to Koppers | $ | 11.7 | $ | 24.3 | $ | 15.8 | $ | 37.5 | ||||||
Less: Discontinued operations | (0.1 | ) | 2.0 | (0.3 | ) | 3.0 | ||||||||
Income from continuing operations attributable to Koppers | $ | 11.8 | $ | 22.3 | $ | 16.1 | $ | 34.5 | ||||||
Weighted average common shares outstanding: | ||||||||||||||
Basic | 20,445 | 20,844 | 20,437 | 20,836 | ||||||||||
Effect of dilutive securities | 97 | 79 | 76 | 76 | ||||||||||
Diluted | 20,542 | 20,923 | 20,513 | 20,912 | ||||||||||
Earnings per common share – continuing operations: | ||||||||||||||
Basic earnings per common share | $ | 0.57 | $ | 1.06 | $ | 0.78 | $ | 1.65 | ||||||
Diluted earnings per common share | 0.57 | 1.06 | $ | 0.78 | 1.64 | |||||||||
Other data: | ||||||||||||||
Antidilutive securities excluded from computation of diluted earnings per common share | 269 | 46 | 230 | 32 | ||||||||||
8. Stock-based Compensation
In December 2005, the Company’s board of directors and shareholders adopted the 2005 Long-Term Incentive Plan (the “LTIP”). The LTIP provides for the grant to eligible persons of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance awards, dividend equivalents and other stock-based awards, which are collectively referred to as the awards.
Under the LTIP, the board of directors granted restricted stock units and performance stock units to certain employee participants (collectively, the “stock units”) in 2007 and 2008. With respect to the 2007 grant, the restricted stock units will vest ratably each year over a period of three years for most participants, assuming continued employment. With respect to the 2008 grant, the restricted stock units will vest on the third anniversary of the grant date, assuming continued employment by the participant. The performance stock units granted in both years will vest upon the attainment of the applicable performance objective at the end of a three-year measurement period. The applicable performance objective is based upon a three-year cumulative value creation calculation commencing on the first day of each grant year. The number of performance stock units granted represents the target award and participants have the ability to earn between zero and 150 percent of the target award based upon actual performance. If minimum performance criteria are not achieved, no performance stock units will vest.
On February 16, 2009, the board of directors awarded 70,527 restricted stock units and 144,327 performance stock units to certain employee participants (collectively, the “stock units”) with a grant date of February 20, 2009. The restricted stock units will vest in February 2012, assuming continued employment by the participant. The performance stock units will vest upon the attainment of the applicable performance objective at the end of a three-year measurement period ending on December 31, 2011. The applicable performance objective is based upon a three-year cumulative value creation calculation commencing January 1, 2009. The number of performance stock units granted represents the target award and participants have the ability to earn between zero and 150 percent of the target award based upon actual performance. If minimum performance criteria are not achieved, no performance stock units will vest.
Dividends declared on the Company’s common stock during the restriction period of the stock units are credited at equivalent value as additional stock units and become payable as additional common shares upon vesting. In the event of termination of employment, other than retirement, death or disability, any nonvested stock units are forfeited, including additional stock units credited from dividends. In the event of termination of employment due to retirement, death or disability, pro-rata vesting of the stock units over the service period will result. There are special vesting provisions for the stock units related to a change in control.
In accordance with accounting standards, compensation expense for nonvested stock units is recorded over the vesting period based on the fair value at the date of grant. The fair value of stock units is the market price of the underlying common stock on the date of grant.
The following table shows a summary of the performance stock units as of June 30, 2009:
Performance Period | Minimum Shares | Target Shares | Maximum Shares | |||
2007 – 2009 | — | 65,140 | 97,710 | |||
2008 – 2010 | — | 46,774 | 70,161 | |||
2009 – 2011 | — | 141,732 | 212,598 |
The following table shows a summary of the status and activity of nonvested stock awards for the six months ended June 30, 2009:
| Restricted Stock Units | Performance Stock Units | Total Stock Units | Weighted Average Grant Date Fair Value per Unit | |||||||||
Nonvested at January 1, 2009 | 48,700 | 112,907 | 161,607 | $ | 31.82 | |||||||
Granted | 70,527 | 144,327 | 214,854 | $ | 15.26 | |||||||
Credited from dividends | 659 | 1,499 | 2,158 | $ | 39.21 | |||||||
Vested | (5,769 | ) | — | (5,769 | ) | $ | 25.91 | |||||
Forfeited | (1,730 | ) | (2,595 | ) | (4,325 | ) | $ | 15.26 | ||||
Nonvested June 30, 2009 | 112,387 | 256,138 | 368,525 | $ | 22.50 | |||||||
Also on February 16, 2009, the board of directors awarded 142,704 stock options to certain executive officers which vest and become exercisable upon the completion of a three-year service period commencing on the third anniversary of the grant date of February 20, 2009. The stock options have a term of 10 years. In the event of termination of employment, other than retirement, death or disability, any nonvested options are forfeited. In the event of termination of employment due to retirement, death or disability, pro-rata vesting of the options over the service period will result. There are special vesting provisions for the stock options related to a change in control.
In accordance with accounting standards, compensation expense for unvested stock options is recorded over the vesting period based on the fair value at the date of grant. The fair value of stock options on the date of grant is calculated using the Black-Scholes-Merton model and the assumptions listed below:
| February 2009 Grant | February 2008 Grant | May 2007 Grant | ||||||||||
Grant date price per share of option award | $ | 15.26 | $ | 39.99 | $ | 29.97 | ||||||
Expected dividend yield per share | 2.50 | % | 2.00 | % | 2.50 | % | ||||||
Expected life in years | 6.5 | 6.5 | 6.5 | |||||||||
Expected volatility | 51.00 | % | 40.67 | % | 40.39 | % | ||||||
Risk-free interest rate | 2.05 | % | 3.28 | % | 4.45 | % | ||||||
Grant date fair value per share of option awards | $ | 6.19 | $ | 14.79 | $ | 11.01 | ||||||
The dividend yield is based on the Company’s current and prospective dividend rate which calculates a continuous dividend yield based upon the market price of the underlying common stock. The expected life in years is based on the simplified method permitted under Securities and Exchange Commission Staff Accounting Bulletin No. 107 which calculates the average of the weighted vesting term and the contractual term of the option. This method was selected due to the lack of historical exercise data with respect to the Company. Expected volatility is based on the historical volatility of the Company’s common stock and the historical volatility of certain other similar public companies. The risk-free interest rate is based on U.S. Treasury bill rates for the expected life of the option.
The following table shows a summary of the status and activity of stock options for the six months ended June 30, 2009:
| Options | Weighted Average Exercise Price per Option | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in millions) | |||||||
Outstanding at January 1, 2009 | 103,312 | $ | 34.40 | |||||||
Granted | 142,704 | $ | 15.26 | |||||||
Outstanding at June 30, 2009 | 246,016 | $ | 23.30 | 9.03 | $ | 1.6 | ||||
Exercisable at June 30, 2009 | — | $ | — | — | $ | — | ||||
Total stock-based compensation expense recognized for the three and six months ended June 30, 2009 and 2008 is as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
| (Dollars in millions) | ||||||||||||
Stock-based compensation expense recognized: | ||||||||||||
Selling, general and administrative expenses | $ | 1.4 | $ | 1.6 | $ | 2.2 | $ | 2.2 | ||||
Less related income tax benefit | 0.6 | 0.6 | 0.9 | 0.8 | ||||||||
| $ | 0.8 | $ | 1.0 | $ | 1.3 | $ | 1.4 | |||||
For the six months ended June 30, 2009, shares issued under the LTIP for board of director compensation totaled 18,000 shares. As of June 30, 2009, total future compensation expense related to non-vested stock-based compensation arrangements totaled $7.0 million and the weighted-average period over which this cost is expected to be recognized is approximately 25 months.
9. Segment Information
The Company has two reportable operating segments: Carbon Materials & Chemicals and Railroad & Utility Products. The Company’s reportable segments are business units that offer different products. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes. The business units have been aggregated into two reportable segments since management believes the long-term financial performance of these business units is affected by similar economic conditions.
The Company’s Carbon Materials & Chemicals segment is primarily a supplier of carbon pitch, phthalic anhydride, creosote, carbon black and carbon black feedstock. Carbon pitch is used primarily by the aluminum industry as a binder in the manufacture of anodes. Phthalic anhydride is used in the manufacture of plasticizers, unsaturated polyester resins, alkyd resins and dye making. Creosote is used in the protection of timber products against insects, fungal decay and weathering. Carbon black and carbon black feedstock are used in the production of rubber tires.
The Company’s Railroad & Utility Products segment provides various products and services to railroads, including crossties (both wood and concrete), track panels and switch pre-assemblies and disposal services. The segment also supplies treated wood poles to electric and telephone utilities and provides products to, and performs various wood treating services for, construction and other commercial applications.
The Company evaluates performance and determines resource allocations based on a number of factors, the primary measure being operating profit or loss. Operating profit does not include equity in earnings of affiliates, other income, interest expense or income taxes. Operating profit also excludes the operating costs of Koppers Holdings Inc., the parent company of Koppers Inc. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies contained in the Annual Report on Form 10-K for the year ended December 31, 2008. Intersegment transactions are eliminated in consolidation.
The following table sets forth certain sales and operating data, net of all intersegment transactions, for the Company’s segments for the periods indicated:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Revenues from external customers: | ||||||||||||||||
Carbon Materials & Chemicals | $ | 160.9 | $ | 250.9 | $ | 306.4 | $ | 473.4 | ||||||||
Railroad & Utility Products | 130.7 | 124.4 | 257.9 | 233.1 | ||||||||||||
Total | $ | 291.6 | $ | 375.3 | $ | 564.3 | $ | 706.5 | ||||||||
Intersegment revenues: | ||||||||||||||||
Carbon Materials & Chemicals | $ | 29.4 | $ | 18.7 | $ | 50.2 | $ | 34.7 | ||||||||
Railroad & Utility Products | — | — | — | — | ||||||||||||
Total | $ | 29.4 | $ | 18.7 | $ | 50.2 | $ | 34.7 | ||||||||
Depreciation and amortization expense: | ||||||||||||||||
Carbon Materials & Chemicals | $ | 4.5 | $ | 4.7 | $ | 8.7 | $ | 9.9 | ||||||||
Railroad & Utility Products | 1.8 | 1.7 | 3.6 | 3.4 | ||||||||||||
Total | $ | 6.3 | $ | 6.4 | $ | 12.3 | $ | 13.3 | ||||||||
Operating profit: | ||||||||||||||||
Carbon Materials & Chemicals | $ | 19.9 | $ | 37.3 | $ | 26.4 | $ | 62.3 | ||||||||
Railroad & Utility Products | 14.1 | 10.0 | 26.4 | 17.2 | ||||||||||||
Corporate | (0.7 | ) | (1.2 | ) | (1.1 | ) | (1.6 | ) | ||||||||
Total | $ | 33.3 | $ | 46.1 | $ | 51.7 | $ | 77.9 | ||||||||
The following table sets forth certain tangible and intangible assets allocated to each of the Company’s segments as of the dates indicated:
| June 30, 2009 | December 31, 2008 | |||||
| (Dollars in millions) | ||||||
Segment assets: | ||||||
Carbon Materials & Chemicals | $ | 400.4 | $ | 402.1 | ||
Railroad & Utility Products | 149.9 | 152.0 | ||||
All other | 132.1 | 107.0 | ||||
Total | $ | 682.4 | $ | 661.1 | ||
Goodwill: | ||||||
Carbon Materials & Chemicals | $ | 58.8 | $ | 56.6 | ||
Railroad & Utility Products | 2.1 | 1.8 | ||||
Total | $ | 60.9 | $ | 58.4 | ||
10. Income Taxes
Effective Tax Rate
Income taxes as a percentage of pretax income was 45.6 percent and 35.6 percent for the three months ended June 30, 2009 and 2008, respectively. There were no discrete items included in the estimated effective tax rate for either period. The effective tax rate for the second quarter of 2009 differs from the U.S. federal statutory rate of 35.0 percent primarily due to taxes on foreign earnings (+9.9 percent) and state taxes (+1.6 percent) partially offset by the domestic production activities deduction (-1.9 percent). With respect to the second quarter of 2008, the effective tax rate differs from the federal statutory rate primarily due to state taxes, net of federal benefit (+0.9 percent) and other permanent items (+0.7 percent) partially offset by the domestic production activities deduction (-1.2 percent).
Income taxes as a percentage of pretax income was 44.5 percent and 36.8 percent for the six months ended June 30, 2009 and 2008, respectively, There were no discrete items included in the estimated effective tax rate for either period. The effective tax rate for the first six months of 2009 differs from the U.S. federal statutory rate of 35.0 percent primarily due to taxes on foreign earnings (+8.2 percent) and state taxes (+2.0 percent) partially offset by the domestic production activities deduction (-1.9 percent). With respect to the first six months of 2008, the effective tax rate differs from the federal statutory rate primarily due to state taxes, net of federal benefit (+1.0 percent) and foreign taxes (+1.0 percent).
The income tax provision for interim periods is based on an estimated annual effective tax rate, which requires management to make its best estimate of annual pretax income by domestic and foreign jurisdictions and other items that impact taxable income. During the year, management regularly updates estimates based on changes in various factors such as product prices, shipments, product mix, operating and administrative costs, earnings mix by taxable jurisdiction, repatriation of foreign earnings and uncertain tax positions. To the extent that actual results vary from the estimates at the end of the second quarter, the actual tax provision recognized for 2009 could be materially different from the forecasted annual tax provision as of the end of the second quarter.
Uncertain Tax Positions
The Company or one of its subsidiaries files income tax returns in U.S. federal jurisdiction, individual U.S. state jurisdictions and non-U.S. jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004.
As of June 30, 2009 and December 31, 2008, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, was approximately $3.3 million and $3.2 million, respectively. Unrecognized tax benefits totaled $4.0 million as of June 30, 2009 and December 31, 2008. The Company recognizes interest expense and any related penalties from uncertain tax positions in income tax expense. As of June 30, 2009 and December 31, 2008, the Company had accrued approximately $0.9 million and $0.7 million for interest and penalties, respectively.
11. Inventories
Net inventories as of June 30, 2009 and December 31, 2008 are summarized in the table below:
| June 30, 2009 | December 31, 2008 | |||||
| (Dollars in millions) | ||||||
Raw materials | $ | 87.4 | $ | 99.6 | ||
Work in process | 8.0 | 13.6 | ||||
Finished goods | 89.8 | 101.5 | ||||
| 185.2 | 214.7 | |||||
Less revaluation to LIFO | 40.3 | 42.9 | ||||
Net | $ | 144.9 | $ | 171.8 | ||
12. Property, Plant and Equipment
Property, plant and equipment as of June 30, 2009 and December 31, 2008 are summarized in the table below:
| June 30, 2009 | December 31, 2008 | |||||
| (Dollars in millions) | ||||||
Land | $ | 6.6 | $ | 6.3 | ||
Buildings | 22.2 | 21.0 | ||||
Machinery and equipment | 486.5 | 469.4 | ||||
| 515.3 | 496.7 | |||||
Less accumulated depreciation | 371.2 | 351.9 | ||||
Net | $ | 144.1 | $ | 144.8 | ||
13. Pensions and Postretirement Benefit Plans
The Company and its subsidiaries maintain a number of defined benefit and defined contribution plans to provide retirement benefits for employees in the U.S., as well as employees outside the U.S. These plans are maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974 (“ERISA”), local statutory law or as determined by the board of directors. The defined benefit pension plans generally provide benefits based upon years of service and compensation. Pension plans are funded except for three domestic non-qualified defined benefit pension plans for certain key executives. The Company has frozen its U.S. qualified and corresponding non-qualified defined benefit pension plans for salaried employees effective December 31, 2006. In addition, the Company has negotiated “soft” freezes with respect to a number of hourly defined benefit pension plans. Such negotiated agreements preclude new employees from entering the defined benefit pension plans.
The defined contribution plans generally provide retirement assets to employee participants based upon employer and employee contributions to the participant’s individual investment account. The Company also provides retiree medical insurance coverage to certain U.S. employees and a life insurance benefit to most U.S. employees.
Expense related to the Company’s defined contribution plan totaled $— million and $0.9 million for the three months ended June 30, 2009 and 2008, respectively, and $1.2 million and $2.3 million for the six months ended June 30, 2009 and 2008, respectively. Expense related to the Company’s other postretirement benefit plans totaled $0.2 for each of the three months ended June 30, 2009 and 2008, respectively, and $0.4 million for each of the six months ended June 30, 2009 and 2008, respectively.
The following table provides the components of net periodic benefit cost for the pension plans for the three months ended June 30, 2009 and 2008:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Service cost | $ | 0.7 | $ | 0.8 | $ | 1.4 | $ | 1.6 | ||||||||
Interest cost | 2.6 | 3.0 | 5.2 | 6.0 | ||||||||||||
Expected return on plan assets | (2.1 | ) | (3.6 | ) | (4.2 | ) | (7.0 | ) | ||||||||
Settlements | — | — | — | (0.1 | ) | |||||||||||
Amortization of prior service cost | 0.1 | 0.1 | 0.2 | 0.2 | ||||||||||||
Amortization of net loss | 1.6 | 0.1 | 3.2 | 0.2 | ||||||||||||
Amortization of transition asset | (0.1 | ) | (0.1 | ) | (0.2 | ) | (0.2 | ) | ||||||||
Net periodic benefit cost | $ | 2.8 | $ | 0.3 | $ | 5.6 | $ | 0.7 | ||||||||
14. Debt
Debt at June 30, 2009 and December 31, 2008 was as follows:
| Weighted Average Interest Rate | Maturity | June 30, 2009 | December 31, 2008 | ||||||||
| (Dollars in millions) | |||||||||||
Revolving Credit Facility | — | % | 2012 | $ | — | $ | — | ||||
Senior Secured Notes | 9 7/8 | % | 2013 | 187.4 | 187.8 | ||||||
Senior Discount Notes | 9 7/8 | % | 2014 | 195.9 | 186.6 | ||||||
Other debt, including capital leases | 8.00 | % | Various | 0.4 | 0.5 | ||||||
Total | 383.7 | 374.9 | |||||||||
Less short-term debt and current maturities of long-term debt | 0.2 | 0.2 | |||||||||
Long-term debt | $ | 383.5 | $ | 374.7 | |||||||
Revolving Credit Facility
The Koppers Inc. revolving credit facility agreement, as amended and restated, provides for a revolving credit facility of up to $300.0 million at variable rates. Borrowings under the revolving credit facility are secured by a first priority lien on substantially all of Koppers Inc.’s assets, including the assets of certain significant subsidiaries. The credit facility contains certain covenants that limit capital expenditures by Koppers Inc. and restrict its ability to incur additional indebtedness, create liens on its assets, enter into leases, pay dividends and make investments or acquisitions. In addition, such covenants give rise to events of default upon the failure by Koppers Inc. to meet certain financial ratios.
As of June 30, 2009, the Company had $219.8 million of unused revolving credit availability for working capital purposes after restrictions from various debt covenants, lien limitations and certain letter of credit commitments. As of June 30, 2009, $12.1 million of commitments were utilized by outstanding letters of credit.
Senior Secured Notes
The 9 7/8 percent Senior Secured Notes due 2013 (the “Senior Secured Notes”) are guaranteed, jointly and severally, on a senior secured basis by certain of the Company’s subsidiaries. Interest is payable semiannually in arrears on April 15 and October 15 of each year. The Senior Secured Notes and subsidiary guarantees are senior obligations of Koppers Inc. and its subsidiary guarantors, respectively, and are secured by a second priority lien on and security interest in substantially all of the assets owned by Koppers Inc. and its subsidiary guarantors that secure Koppers Inc.’s obligations under its revolving credit facility. After October 15, 2008, the Company is entitled to redeem all or a portion of the Senior Secured Notes at a redemption price of 104.938 percent of principal value, declining annually in ratable amounts until the redemption price is equivalent to the principal value.
The Company has a notional $50.0 million interest rate swap to convert a portion of the Senior Secured Notes from fixed-interest rate debt to floating-interest rate debt. Accordingly, the interest rate swap is reflected at fair value in other assets at June 30, 2009 and at December 31, 2008. The Senior Secured Notes subject to the notional amount of the interest rate swap is reflected at fair value at each balance sheet date. At June 30, 2009 and December 31, 2008, the impact of the interest rate swap increased the carrying value of the Senior Secured Notes by $1.6 million and $1.9 million, respectively.
The indentures governing the Senior Secured Notes include customary covenants that restrict, among other things, the ability of Koppers Inc. and its subsidiaries to incur additional debt, pay dividends or make certain other restricted payments, incur liens, merge or sell all or substantially all of the assets of Koppers Inc. or its subsidiaries or enter into various transactions with affiliates.
Senior Discount Notes
Koppers Holdings’ 9 7/8 percent Senior Discount Notes due 2014 (the “Senior Discount Notes”) have a principal amount at maturity of $203.0 million. No cash interest is required to be paid prior to November 15, 2009. The accreted value of each Senior Discount Note increases from the date of issuance until November 15, 2009, at a rate of 9 7/8 percent per annum compounded semiannually such that on November 19, 2009 the accreted value will equal $203.0 million, the principal amount due at maturity. Subsequent to November 19, 2009, cash interest on the Senior Discount Notes will accrue and be payable semi-annually in arrears on May 15 and November 15 of each year, commencing on May 15, 2010.
The Senior Discount Notes are effectively subordinated to the Company’s existing and future secured indebtedness, and are structurally subordinated to all of the existing and future indebtedness and other liabilities and preferred equity of the Company’s subsidiaries. On or after November 15, 2009, the Company is entitled to redeem all or a portion of the Senior Discount Notes at a redemption price of 104.938 percent of principal value, declining annually in ratable amounts until the redemption price is equivalent to the principal value.
Guarantees
The Company’s 60-percent owned subsidiary in China has issued a guarantee of $17.9 million in support of the Company’s 30-percent investment in Tangshan Koppers Kailuan Carbon Chemical Company Limited (“TKK”). The guarantee relates to bank debt incurred by TKK and expires in 2013.
15. Asset Retirement Obligations
The Company recognizes asset retirement obligations for the removal and disposal of residues; dismantling of certain tanks required by governmental authorities; cleaning and dismantling costs for owned rail cars; and cleaning costs for leased rail cars and barges. The following table reflects changes in the carrying values of asset retirement obligations:
| June 30, 2009 | December 31, 2008 | |||||||
| (Dollars in millions) | ||||||||
Balance at beginning of year | $ | 13.9 | $ | 18.1 | ||||
Accretion expense | 0.6 | 1.6 | ||||||
Revision in estimated cash flows, net | (0.3 | ) | 0.3 | |||||
Expenses incurred | (0.7 | ) | (6.0 | ) | ||||
Currency translation | — | (0.1 | ) | |||||
Balance at end of period | $ | 13.5 | $ | 13.9 | ||||
16. Deferred Revenue from Extended Product Warranty Liabilities
The Company defers revenues associated with extended product warranty liabilities based on historical loss experience and sales of extended warranties on certain products. The following table reflects changes in the carrying values of deferred revenue:
| June 30, 2009 | December 31, 2008 | |||||||
| (Dollars in millions) | ||||||||
Balance at beginning of year | $ | 7.5 | $ | 8.2 | ||||
Deferred revenue for sales of extended warranties | 0.1 | 0.5 | ||||||
Revenue earned | (0.5 | ) | (1.2 | ) | ||||
Balance at end of period | $ | 7.1 | $ | 7.5 | ||||
17. Commitments and Contingent Liabilities
The Company and its subsidiaries are involved in litigation and various proceedings relating to environmental laws and regulations and toxic tort, product liability and other matters. Certain of these matters are discussed below. The ultimate resolution of these contingencies is subject to significant uncertainty and should the company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, these legal matters could, individually or in the aggregate, be material to the consolidated financial statements.
Legal Proceedings
Coal Tar Pitch Cases. Koppers Inc., along with other defendants, is currently a defendant in lawsuits filed in a variety of states in which the plaintiffs claim they suffered a variety of illnesses (including cancer) as a result of exposure to coal tar pitch sold by the defendants. There are 110 plaintiffs in 61 cases pending as of June 30, 2009 as compared to 99 plaintiffs in 55 cases at December 31, 2008. As of June 30, 2009, there are a total of 55 cases pending in state court in Pennsylvania, one case each pending in state courts in Tennessee, Washington and Illinois, two cases pending in an Indiana state court and one case pending in the United States District Court for the District of Oregon.
The plaintiffs in all 61 pending cases seek to recover compensatory damages, while plaintiffs in 49 cases also seek to recover punitive damages. The plaintiffs in the 55 cases filed in Pennsylvania state court seek unspecified damages in excess of the court’s minimum jurisdictional limit. The plaintiffs in the two cases filed in Indiana state court and the one case filed in Washington state court also seek damages in an unspecified amount. The plaintiff in the Oregon case seeks damages in excess of $1.8 million. The plaintiffs in the Tennessee state court case each seek damages of $15.0 million. The plaintiff in the Illinois state court case seeks compensatory damages in excess of $50,000.
The other defendants in these lawsuits vary from case to case and include companies such as Beazer East, Inc., United States Steel Corporation, Honeywell International Inc., Vertellus Specialties Inc., Dow Chemical Company, Rust-Oleum Corporation, UCAR Carbon Company, Inc., Exxon Mobil Corporation, Chemtura Corporation, SGL Carbon Corporation, Alcoa, Inc., and PPG Industries, Inc. Discovery is proceeding in these cases. The Company has not provided a reserve for these lawsuits because, at this time, the Company cannot reasonably determine the probability of a loss, and the amount of loss, if any, cannot be reasonably estimated. Although Koppers Inc. is vigorously defending these cases, an unfavorable resolution of these matters may have a material adverse effect on the Company’s business, financial condition, cash flows and results of operations.
Somerville Cases. Koppers Inc. is currently defending five sets of state court cases in Texas (Antu, Baade, Davis, Hensen and Moses) involving approximately 150 plaintiffs who allegedly have worked or resided in Somerville, Texas, where Koppers Inc. has operated a wood treatment plant since 1995. Koppers has been named, but not served, in another case (Asselin) that has 11 more plaintiffs who allegedly worked or resided in Somerville, Texas. These cases are pending in Burleson County, Texas and in Tarrant County, Texas. The BNSF Railway Company (“BNSF”) has also been named as a defendant in these cases. The complaints allege that plaintiffs have suffered personal injuries (including death, in some cases) resulting from exposure to wood preservative chemicals used at the Somerville, Texas wood treatment plant. The complaints in theMoses, Davis andAsselin cases additionally allege that plaintiffs have suffered property damage.
The complaints seek to recover various damages for each plaintiff, including compensatory and punitive damages within the jurisdictional limits of the court for, among other things, bodily injuries, pain and mental anguish, emotional distress, medical monitoring, medical expenses, diminished earning capacity, permanent disability, physical impairment and/or disfigurement, loss of companionship and society, loss of consortium, devaluation of property, loss of use and enjoyment of personal property, loss of use and enjoyment of real property, property damage, property remediation costs, funeral and burial expenses and lost wages.
There are a total of 44 plaintiffs (six of whom have claims pending against only the BNSF) in theMoses cases. These plaintiffs seek compensatory and punitive damages in an unspecified amount in excess of the court’s minimum jurisdictional limit for alleged personal injuries and property damages. There are a total of ten plaintiffs in theAntucase, four of whom have claims pending against only the BNSF. These plaintiffs also seek compensatory and punitive damages in an unspecified amount in excess of the court’s minimum jurisdictional limit. The plaintiffs in theHensen case seek compensatory and punitive damages in excess of $75,000 each. TheHensen case identifies a total of 93 plaintiffs, one of whom has a claim pending against only the BNSF. TheDaviscase involves one plaintiff who seeks compensatory and punitive damages in an unspecified amount in excess of the court’s minimum jurisdictional limit. There are a total of 25 plaintiffs in theBaade case. These plaintiffs seek compensatory and punitive damages in an unspecified amount in excess of the court’s minimum jurisdictional limit for alleged personal injuries.
In addition to the cases pending in state court, the Company is currently defending one case that is pending on appeal in the United States Court of Appeals for the Fifth Circuit. That case,Bullard, involves a total of 144 plaintiffs who seek compensatory damages in an unspecified amount in excess of the court’s minimum jurisdictional limit for alleged personal injuries. The BNSF is also a named defendant in the Bullard case, along with three additional defendants. The Company has not provided a reserve for these matters because, at this time, it cannot reasonably determine the probability of a loss, and the amount of loss, if any, cannot be reasonably estimated. Although Koppers Inc. is vigorously defending these cases, an unfavorable resolution of these matters may have a material adverse effect on the Company’s business, financial condition, cash flows and results of operations.
Grenada – All Cases. Koppers Inc., together with various co-defendants (including Beazer East), has been named as a defendant in toxic tort lawsuits in state court in Mississippi (see “Grenada – State Court Cases” below) and in federal court in Mississippi (see “Grenada – Federal Court Cases” below) arising from the operation of the Grenada facility. The complaints allege that plaintiffs were exposed to harmful levels of various toxic chemicals, including creosote, pentachlorophenol, polycyclic aromatic hydrocarbons and dioxin, as a result of soil, surface water and groundwater contamination and air emissions from the Grenada facility and, in some cases, from an adjacent manufacturing facility operated by Heatcraft, Inc. Based on the experience of Koppers Inc. in defending previous toxic tort cases, the Company does not believe that the damages sought by the plaintiffs in the state and federal court cases are supported by the facts of the cases. The Company has not provided a reserve for these lawsuits because, at this time, it cannot reasonably determine the probability of a loss, and the amount of loss, if any, cannot be reasonably estimated. Although Koppers Inc. intends to vigorously defend these cases, there can be no assurance that an unfavorable resolution of these matters will not have a material adverse effect on the Company’s business, financial condition, cash flows and results of operations. See “Environmental and Other Liabilities Retained or Assumed by Others” for additional information.
Grenada – Federal Court Cases.
Beck Case – The complaint in this case was originally filed by approximately 110 plaintiffs. Pursuant to an order granting defendants’ motion to sever, the court dismissed the claims of 98 plaintiffs in theBeck case without prejudice to their right to re-file their complaints. In December 2005, 94 of the 98 plaintiffs in theBeck case whose claims were dismissed re-filed their complaints. The plaintiffs in the 94 cases that were re-filed seek compensatory damages from the defendants of at least $5.0 million for each of eight counts and punitive damages of at least $10.0 million for each of three counts (in addition to damages in an unspecified amount for alleged trespass and nuisance). No discovery orders have been issued with respect to the 94 additional cases. The claims of 11 of the 12 plaintiffs whose claims were not dismissed are still pending. The 11 remaining plaintiffs seek compensatory damages from the defendants in an unspecified amount and punitive damages of $20.0 million for each of four counts.
The first of these trials commenced in April 2006, and the jury returned a verdict against Koppers Inc. for compensatory damages of 20 percent of $785,000 (after reduction by the court) and no liability for punitive damages. Koppers Inc.
appealed the judgment entered against it to the United States Court of Appeals for the Fifth Circuit which granted a reversal of the district court’s judgment in June 2008. The Court of Appeals subsequently denied plaintiff’s petition for rehearing in October 2008. In February 2009 the district court denied plaintiffs’ motion to consolidate three of the remaining 11 cases for trial. A discovery schedule has been set for the next case which is scheduled to go to trial in February 2010.
In February 2009, the Company filed a petition with the United States Court of Appeals for the Fifth Circuit asking it to transfer the future trials of theBeck federal cases from Greenville, Mississippi to Oxford, Mississippi, where plaintiffs originally filed suit. In April 2009, a three judge panel of the Fifth Circuit granted the petition to transfer the trials to Oxford. The plaintiff has filed a petition to vacate the decision of the three-judge panel and there has been no ruling on the plaintiff’s petition.
Ellis Case – There are approximately 1,180 plaintiffs in this case. Each plaintiff seeks compensatory damages from the defendants of at least $5.0 million for each of seven counts and punitive damages of at least $10.0 million for each of three counts (in addition to damages for an unspecified amount for trespass and nuisance). TheEllis complaint also requests injunctive relief. These cases have been stayed pending the completion of the trials for the remaining 11 plaintiffs in theBeck case.
Grenada – State Court Cases. The state court cases were brought on behalf of approximately 214 plaintiffs in five counties in Mississippi. Each plaintiff seeks compensatory damages from the defendants of at least $5.0 million for each of up to eight counts and punitive damages of at least $10.0 million for each of three counts. Certain plaintiffs also seek damages for alleged trespass and private nuisance in unspecified amounts together with injunctive relief. The Mississippi Supreme Court ordered that the claims of the plaintiffs in the pending state court cases filed in counties other than Grenada County (approximately 110 cases) be severed and transferred to Grenada County. Plaintiffs’ counsel attempted to transfer ten such cases to Grenada County but all ten cases were dismissed by the Court. Motions to dismiss the remaining plaintiffs in the four non-Grenada County cases are pending. In February 2009, the court in Washington County entered an order granting plaintiffs 30 days from January 30, 2009 to show good cause why the cases pending in Washington County should not be dismissed. Plaintiffs requested 60 days to effectuate a settlement with a defendant other than Koppers Inc. The plaintiffs have since filed stipulations of dismissal with respect to all of their claims involving the other defendant. Those dismissal orders have been entered. However, a total of seven plaintiffs have refused to accept the settlement agreement. Those plaintiffs have instead had their claims dismissed without prejudice as to the other defendant, with leave to refile within one year.
With respect to the state court case that was originally filed in Grenada County, the court granted the defendants’ motion to sever the claims of these plaintiffs for improper joinder. These plaintiffs then filed 104 individual complaints in Grenada County. Substantially 46 of the cases have been dismissed for various procedural reasons, and summary judgments based on the Mississippi statute of limitations have been entered in 40 of the cases. Plaintiffs have appealed the summary judgment orders to the Mississippi Supreme Court. Briefing in those appeals is ongoing. In the remaining 18 cases, motions to dismiss or, in the alternative, summary judgment, are pending before the Circuit Court.
On March 3, 2009, one of the plaintiffs who had been dismissed in the state court cases filed suit in Grenada County Circuit Court against Koppers Inc., Beazer East, Three Rivers Management, Inc. and the Illinois Central Railroad Company. Plaintiff is seeking actual and compensatory damages in excess of $20.0 million and punitive damages in an unspecified amount. The defendants have answered the complaint and discovery is proceeding.
Discontinued Operations. The Company sold its 51 percent interest in Koppers Arch Investments Pty Limited and its subsidiaries (“Koppers Arch”) in July 2007 to Arch Chemicals, Inc. and has provided an indemnity to Arch Chemicals for the Company’s share of liabilities, if any, arising from certain types of obligations and claims that arose prior to the Company’s sale of its interest in Koppers Arch. Koppers Inc. has received four notices from Arch Chemicals asserting claims for indemnification under the share purchase agreement. The first notice relates to environmental issues related to the condition of certain property associated with the Auckland, New Zealand operations of Koppers Arch Wood Protection (NZ) Limited. Reserving all rights, Koppers has agreed to participate in the payment of attorneys’ fees and related expenses relating to this matter until further notice. Another notice relates to claims of allegedly defective poles supplied by Arch Wood Protection (NZ) Limited. The Company has been informed that the estimated cost of replacing the poles in question, if replacement is required, is approximately $1 million. The other notices relate to legal actions that have been
filed in the High Court of New Zealand Auckland Registry against a third party and against Arch Wood Protection (NZ) Limited by a competitor of Arch Wood Protection (NZ) Limited. The competitor/plaintiff alleges, among other things, claims of defamation, injurious falsehood, conspiracy and violation of the New Zealand Fair Trading Act. Reserving all rights, Koppers has agreed to participate in the payment of attorneys’ fees and related expenses relating to these matters until further notice. The plaintiff seeks damages of approximately $7 million. The Company has not provided a reserve for these matters because, at this time, it cannot reasonably determine the probability of a loss, and the amount of loss, if any, cannot be reasonably estimated. An unfavorable resolution of these matters may have a material adverse effect on the Company’s business, financial condition, cash flows and results of operations.
Other Matters. In early 2009, the Company responded to a questionnaire from India’s Ministry of Commerce and Industry inquiring about the Company’s sales of carbon black into the Indian market. The Association of Carbon Black Manufacturers contends that carbon black manufacturers from a number of countries including Australia are dumping carbon black into the Indian market. The Ministry of Commerce and Industry has issued preliminary findings to impose tariffs on imports of carbon black from the countries in question, including Australia. The Company continues to defend itself in these proceedings which are continuing.
Legal Reserves Rollforward. The following table reflects changes in the accrued liability for legal proceedings:
| June 30, 2009 | December 31, 2008 | ||||||
| (Dollars in millions) | |||||||
Balance at beginning of year | $ | — | $ | 0.4 | |||
Reversal of reserves | — | (0.3 | ) | ||||
Cash expenditures | — | (0.2 | ) | ||||
Currency translation | — | 0.1 | |||||
Balance at end of period | $ | — | $ | — | |||
Reversal of reserves in 2008 primarily relates to the reversal of the Grenada federal court verdict that was reversed by an appeals court.
Environmental and Other Litigation Matters
The Company is subject to federal, state, local and foreign laws and regulations and potential liabilities relating to the protection of the environment and human health and safety including, among other things, the cleanup of contaminated sites, 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’s subsidiaries expect to incur substantial costs for ongoing compliance with such laws and regulations. The Company’s subsidiaries may also face governmental or third-party claims, or otherwise incur costs, relating to cleanup of, 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, assumed and/or agreed to indemnify the Company against certain environmental and other liabilities. The most significant of these agreements was entered into at Koppers Inc.’s formation on December 29, 1988 (the “Acquisition”). Under the related asset purchase agreement between the Company and Beazer East, subject to certain limitations, Beazer East retained the responsibility for and agreed to indemnify the Company against certain liabilities, damages, losses and costs, including, with certain limited exceptions, liabilities under and costs to comply with environmental laws to the extent attributable to acts or omissions occurring prior to the Acquisition and liabilities related to products sold by Beazer East prior to the Acquisition (the “Indemnity”). Beazer Limited, the parent company of Beazer East, unconditionally guaranteed Beazer East’s performance of the Indemnity pursuant to a guarantee (the “Guarantee”). In 1998, the parent company of Beazer East purchased an insurance policy under which the funding and risk of certain environmental and other liabilities relating to the former Koppers Company, Inc. operations of Beazer East (which includes locations purchased from Beazer East by the Company) are underwritten by Centre Solutions (a member of the Zurich Group) and Swiss Re. Beazer East is a wholly-owned indirect subsidiary of Heidelberg Cement AG.
The Indemnity provides different mechanisms, subject to certain limitations, by which Beazer East is obligated to indemnify Koppers Inc. with regard to certain environmental, product and other liabilities and imposes certain conditions on Koppers Inc. before receiving such indemnification, including, in some cases, certain limitations regarding the time period as to which claims for indemnification can be brought. In July 2004, Koppers Inc. and Beazer East agreed to amend the environmental indemnification provisions of the December 29, 1988 asset purchase agreement to extend the indemnification period for pre-closing environmental liabilities through July 2019. As consideration for the amendment, Koppers Inc. paid Beazer East a total of $7.0 million and agreed to share toxic tort litigation defense costs arising from any sites acquired from Beazer East. The July 2004 amendment did not change the provisions of the Indemnity with respect to indemnification for non-environmental claims, such as product liability claims, which claims may continue to be asserted after July 2019.
Qualified expenditures under the Indemnity are not subject to a monetary limit. Qualified expenditures under the Indemnity include (i) environmental cleanup liabilities required by third parties, such as investigation, remediation and closure costs, relating to pre-December 29, 1988, or Pre-Closing, acts or omissions of Beazer East or its predecessors; (ii) environmental claims by third parties for personal injuries, property damages and natural resources damages relating to Pre-Closing acts or omissions of Beazer East or its predecessors; (iii) punitive damages for the acts or omissions of Beazer East and its predecessors without regard to the date of the alleged conduct and (iv) product liability claims for products sold by Beazer East or its predecessors without regard to the date of the alleged conduct. If the third party claims described in sections (i) and (ii) above are not made by July 2019, Beazer East will not be required to pay the costs arising from such claims under the Indemnity. However, with respect to any such claims which are made by July 2019, Beazer East will continue to be responsible for such claims under the Indemnity beyond July 2019. The Indemnity provides for the resolution of issues between Koppers Inc. and Beazer East by an arbitrator on an expedited basis upon the request of either party. The arbitrator could be asked, among other things, to make a determination regarding the allocation of environmental responsibilities between Koppers Inc. and Beazer East. Arbitration decisions under the Indemnity are final and binding on the parties.
Contamination has been identified at most of the Company’s manufacturing and other sites. Three sites currently owned and operated by the Company in the United States are listed on the National Priorities List promulgated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”). Currently, at the properties acquired from Beazer East (which include all of the National Priorities List sites and all but one of the sites permitted under the Resource Conservation and Recovery Act (“RCRA”)), a significant portion of all investigative, cleanup and closure activities are being conducted and paid for by Beazer East pursuant to the terms of the Indemnity. In addition, other of the Company’s sites are or have been operated under RCRA and various other environmental permits, and remedial and closure activities are being conducted at some of these sites.
To date, the parties that retained, assumed and/or agreed to indemnify the Company against the liabilities referred to above, including Beazer East, have performed their obligations in all material respects. The Company believes that, for the last three years, amounts paid by Beazer East as a result of its environmental remediation obligations under the Indemnity have averaged in total approximately $11.7 million per year. Periodically, issues have arisen between Koppers Inc. and Beazer East and/or other indemnitors that have been resolved without arbitration. Koppers Inc. and Beazer East engage in discussions from time to time that involve, among other things, the allocation of environmental costs related to certain operating and closed facilities.
If for any reason (including disputed coverage or financial incapability) one or more of such parties fail 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 its business, financial condition, cash flows and results of operations. Furthermore, the Company could be required to record a contingent liability on its balance sheets with respect to such matters, which could result in a negative adjustment to the Company’s net worth.
Domestic Environmental Matters. The Company has been named as a potentially responsible party (a “PRP”) at the Portland Harbor CERCLA site located on the Willamette River in Oregon. The Company has replied to an EPA Information request and has executed a PRP agreement which outlines the process to develop an allocation of past and future costs. The Company currently operates a coal tar pitch terminal near the site. The current estimate for past costs incurred in the remedial investigation/feasibility study is $100 million. Separate from the EPA activities, a natural resources damages assessment is being conducted by a local trustee group. The Company has not provided a reserve for this matter because, at this time, it cannot reasonably determine the probability of a loss, and the amount of loss, if any, cannot be reasonably estimated. An unfavorable resolution of this matter may have a material adverse effect on the Company’s business, financial condition, cash flows and results of operations.
The Illinois Environmental Protection Agency (the “IEPA”) has requested that Koppers Inc. conduct a voluntary investigation of soil and groundwater at its Stickney, Illinois carbon materials and chemicals facility. The IEPA advised Koppers Inc. that it made such request as a result of a reported release of oil-like material from Koppers Inc.’s property into an adjacent river canal. Koppers Inc. is conducting such investigation in cooperation with Beazer East. The Company and Beazer East have engaged consultants to assist the Company in preparing an estimate of potential costs and have commenced investigation on this site pursuant to a Plan submitted to the IEPA. The Company has provided a reserve for this matter totaling $1.6 million as of June 30, 2009.
In August 2005, the Pennsylvania Department of Environmental Protection (the “PADEP”) proposed a fine related to alleged water discharge exceedances from a storm water sewer pipe at the Company’s tar distillation facility in Clairton, Pennsylvania. In December 2006, the Company reached a preliminary settlement of the fine with the PADEP for $0.5 million, subject to the negotiation and execution of a consent order with the PADEP. Negotiations with respect to the consent order are continuing and may result in an increase in the amount of the fine payable by the Company. Accordingly, the Company has reserved the amount of the estimated settlement. The Company also proposed to undertake certain engineering and capital improvements to address this matter. In December 2007, the Company agreed to contribute the capital improvements, primarily a new sewer line, to the city of Clairton and accordingly, has provided a reserve of $1.6 million as of June 30, 2009.
Australian Environmental Matters. Soil and groundwater contamination has been detected at certain of the Company’s Australian facilities. At the Company’s tar distillation facility in Newcastle, New South Wales, Australia, soil contamination from an abandoned underground coal tar pipeline and other groundwater contamination have been detected at a property adjacent to the facility. In December 2006 the Company and the owner of the adjacent property reached an agreement in principle pursuant to which the Company will contribute $1.5 million and the owner of the adjacent property will contribute $5.3 million toward remediation of the property. Subject to the approval of a remediation action plan by local environmental authorities, the agreement in principle provides that the Company will assume responsibility for the management of the remediation effort and will indemnify the current owner for any remediation costs in excess of its agreed contribution. At the completion of the remediation, the agreement in principle provides that the property will be transferred to the Company. The Company has reserved its expected total remediation costs of $1.5 million at June 30, 2009.
Other Australian environmental matters include soil and groundwater remediation at two former wood products facilities in Australia which are being prepared for future sale. With respect to the first facility in Hume, Australia, contaminated soil has been remediated and groundwater contamination has been detected. With respect to the second facility in Thornton, Australia, a remediation action plan is being developed to address contaminated soil and groundwater. The Company has reserved $3.5 million for remediation costs at these sites which represents its best estimate of groundwater and soil remediation.
Environmental Reserves Rollforward. The following table reflects changes in the accrued liability for environmental matters:
| June 30, 2009 | December 31, 2008 | |||||||
| (Dollars in millions) | ||||||||
Balance at beginning of year | $ | 11.7 | $ | 12.5 | ||||
Expense | 0.3 | 1.9 | ||||||
Reversal of reserves | — | (0.1 | ) | |||||
Cash expenditures | (0.5 | ) | (1.4 | ) | ||||
Currency translation | 0.9 | (1.2 | ) | |||||
Balance at end of period | $ | 12.4 | $ | 11.7 | ||||
18. Subsequent Event
On September 4, 2009, the Company filed an amended registration statement on Form S-3 with the Securities and Exchange Commission. Under this registration statement, Koppers Holdings may sell a combination of securities including common stock, debt securities, preferred stock, depository shares and warrants, from time to time in one or more offerings with an aggregate offering price of up to $325 million. In addition, Koppers Inc. may sell debt securities from time to time under the registration statement. Debt securities may be fully and unconditionally guaranteed, on a joint and several basis, by Koppers Holdings, Koppers Inc. and/or other guarantor subsidiaries which will correspond to subsidiaries in the United States, Europe and Australia. The non-guarantor subsidiaries consist of certain subsidiaries in the United States, China and Mauritius. The guarantor subsidiaries that issue guarantees, if any, will be determined when a debt offering actually occurs under the registration statement and accordingly, the condensed consolidated financial information for subsidiary guarantors will be revised to identify the subsidiaries that actually provided guarantees.
Separate condensed consolidating financial statement information for the parent, Koppers Inc., domestic guarantor subsidiaries, foreign guarantor subsidiaries and non-guarantor subsidiaries as of June 30, 2009 and December 31, 2008 and for the three and six month periods ended June 30, 2009 and June 30, 2008 is as follows:
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2009
| Parent | Koppers Inc. | Domestic Guarantor Subsidiaries | Foreign Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
Net sales | $ | — | $ | 195.1 | $ | 6.3 | $ | 86.2 | $ | 19.7 | $ | (15.7 | ) | $ | 291.6 | |||||||||||||
Cost of sales including depreciation and amortization | — | 169.4 | (0.8 | ) | 70.7 | 16.4 | (10.9 | ) | 244.8 | |||||||||||||||||||
Selling, general and administrative | 0.7 | 6.9 | 0.4 | 4.7 | 0.8 | — | 13.5 | |||||||||||||||||||||
Operating profit | (0.7 | ) | 18.8 | 6.7 | 10.8 | 2.5 | (4.8 | ) | 33.3 | |||||||||||||||||||
Other income (expense) | 15.4 | 0.1 | (0.1 | ) | — | (0.2 | ) | (15.4 | ) | (0.2 | ) | |||||||||||||||||
Interest expense (income) | 4.7 | 5.6 | — | 0.9 | — | (1.2 | ) | 10.0 | ||||||||||||||||||||
Income taxes | (1.7 | ) | 8.7 | — | 2.8 | 0.7 | — | 10.5 | ||||||||||||||||||||
Income from continuing operations | 11.7 | 4.6 | 6.6 | 7.1 | 1.6 | (19.0 | ) | 12.6 | ||||||||||||||||||||
Discontinued operations | — | (0.1 | ) | — | — | — | — | (0.1 | ) | |||||||||||||||||||
Noncontrolling interests | — | — | — | — | 0.8 | — | 0.8 | |||||||||||||||||||||
Net income attributable to Koppers | $ | 11.7 | $ | 4.5 | $ | 6.6 | $ | 7.1 | $ | 0.8 | $ | (19.0 | ) | $ | 11.7 | |||||||||||||
Condensed Consolidating Statement of Operations For the Three Months Ended June 30, 2008
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| Parent | Koppers Inc. | Domestic Guarantor Subsidiaries | Foreign Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
Net sales | $ | — | $ | 220.7 | $ | 14.8 | $ | 131.0 | $ | 24.9 | $ | (16.1 | ) | $ | 375.3 | |||||||||||||
Cost of sales including depreciation and amortization | — | 190.1 | 1.8 | 105.3 | 22.3 | (7.0 | ) | 312.5 | ||||||||||||||||||||
Selling, general and administrative | 1.2 | 7.9 | 0.3 | 6.3 | 1.0 | — | 16.7 | |||||||||||||||||||||
Operating profit | (1.2 | ) | 22.7 | 12.7 | 19.4 | 1.6 | (9.1 | ) | 46.1 | |||||||||||||||||||
Other income (expense) | 27.9 | — | (0.1 | ) | — | (0.2 | ) | (27.9 | ) | (0.3 | ) | |||||||||||||||||
Interest expense (income) | 4.3 | 7.1 | — | 1.7 | — | (2.5 | ) | 10.6 | ||||||||||||||||||||
Income taxes | (1.9 | ) | 7.9 | 0.2 | 5.0 | 1.3 | — | 12.5 | ||||||||||||||||||||
Income from continuing operations | 24.3 | 7.7 | 12.4 | 12.7 | 0.1 | (34.5 | ) | 22.7 | ||||||||||||||||||||
Discontinued operations | — | — | — | — | 2.0 | — | 2.0 | |||||||||||||||||||||
Noncontrolling interests | — | — | — | — | 0.4 | — | 0.4 | |||||||||||||||||||||
Net income attributable to Koppers | $ | 24.3 | $ | 7.7 | $ | 12.4 | $ | 12.7 | $ | 1.7 | $ | (34.5 | ) | $ | 24.3 | |||||||||||||
Condensed Consolidating Statement of Operations For the Six Months Ended June 30, 2009
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| |||||||||||||||||||||||||||
| Parent | Koppers Inc. | Domestic Guarantor Subsidiaries | Foreign Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
Net sales | $ | — | $ | 385.1 | $ | 17.0 | $ | 153.5 | $ | 39.2 | $ | (30.5 | ) | $ | 564.3 | |||||||||||||
Cost of sales including depreciation and amortization | — | 339.0 | 4.8 | 132.0 | 33.5 | (24.6 | ) | 484.7 | ||||||||||||||||||||
Selling, general and administrative | 1.1 | 14.8 | 0.8 | 9.4 | 1.8 | — | 27.9 | |||||||||||||||||||||
Operating profit | (1.1 | ) | 31.3 | 11.4 | 12.1 | 3.9 | (5.9 | ) | 51.7 | |||||||||||||||||||
Other income (expense) | 22.7 | 0.2 | (0.2 | ) | — | (0.2 | ) | (22.7 | ) | (0.2 | ) | |||||||||||||||||
Interest expense (income) | 9.4 | 11.3 | — | 1.8 | — | (2.3 | ) | 20.2 | ||||||||||||||||||||
Income taxes | (3.6 | ) | 13.2 | 0.1 | 3.1 | 1.1 | — | 13.9 | ||||||||||||||||||||
Income from continuing operations | 15.8 | 7.0 | 11.1 | 7.2 | 2.6 | (26.3 | ) | 17.4 | ||||||||||||||||||||
Discontinued operations | — | (0.3 | ) | — | — | — | — | (0.3 | ) | |||||||||||||||||||
Noncontrolling interests | — | — | — | — | 1.3 | — | 1.3 | |||||||||||||||||||||
Net income attributable to Koppers | $ | 15.8 | $ | 6.7 | $ | 11.1 | $ | 7.2 | $ | 1.3 | $ | (26.3 | ) | $ | 15.8 | |||||||||||||
Condensed Consolidating Statement of Operations For the Six Months Ended June 30, 2008
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| |||||||||||||||||||||||||||
| Parent | Koppers Inc. | Domestic Guarantor Subsidiaries | Foreign Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
Net sales | $ | — | $ | 414.0 | $ | 25.2 | $ | 251.4 | $ | 43.7 | $ | (27.8 | ) | 706.5 | ||||||||||||||
Cost of sales including depreciation and amortization | — | 360.5 | 1.3 | 206.8 | 38.1 | (11.6 | ) | 595.1 | ||||||||||||||||||||
Selling, general and administrative | 1.6 | 16.3 | 0.6 | 12.7 | 2.3 | — | 33.5 | |||||||||||||||||||||
Operating profit | (1.6 | ) | 37.2 | 23.3 | 31.9 | 3.3 | (16.2 | ) | 77.9 | |||||||||||||||||||
Other income (expense) | 44.1 | — | (0.1 | ) | — | (0.2 | ) | (44.1 | ) | (0.3 | ) | |||||||||||||||||
Interest expense (income) | 8.5 | 14.7 | — | 3.5 | — | (5.2 | ) | 21.5 | ||||||||||||||||||||
Income taxes | (3.5 | ) | 13.0 | 0.3 | 8.1 | 2.7 | — | 20.6 | ||||||||||||||||||||
Income from continuing operations | 37.5 | 9.5 | 22.9 | 20.3 | 0.4 | (55.1 | ) | 35.5 | ||||||||||||||||||||
Discontinued operations | — | — | — | — | 3.0 | — | 3.0 | |||||||||||||||||||||
Noncontrolling interests | — | — | — | — | 1.0 | — | 1.0 | |||||||||||||||||||||
Net income attributable to Koppers | $ | 37.5 | $ | 9.5 | $ | 22.9 | $ | 20.3 | $ | 2.4 | $ | (55.1 | ) | 37.5 | ||||||||||||||
Condensed Consolidating Balance Sheet June 30, 2009
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| Parent | Koppers Inc. | Domestic Guarantor Subsidiaries | Foreign Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 0.2 | $ | 64.8 | $ | — | $ | 34.6 | $ | 10.4 | $ | — | $ | 110.0 | ||||||||||||||
S-T investments & restricted cash | — | — | — | — | 0.1 | — | 0.1 | |||||||||||||||||||||
Accounts receivable, net | 3.5 | 100.5 | 407.4 | 41.7 | 40.6 | (475.6 | ) | 118.1 | ||||||||||||||||||||
Inventories, net | — | 77.6 | — | 60.2 | 8.2 | (1.1 | ) | 144.9 | ||||||||||||||||||||
Deferred tax assets | — | 4.1 | (1.5 | ) | — | — | — | 2.6 | ||||||||||||||||||||
Other current assets | — | 9.3 | — | 5.4 | 1.1 | — | 15.8 | |||||||||||||||||||||
Total current assets | 3.7 | 256.3 | 405.9 | 141.9 | 60.4 | (476.7 | ) | 391.5 | ||||||||||||||||||||
Equity investments | 212.0 | 77.1 | 14.9 | 15.4 | 4.4 | (318.1 | ) | 5.7 | ||||||||||||||||||||
Property, plant and equipment, net | — | 87.9 | — | 38.9 | 17.3 | — | 144.1 | |||||||||||||||||||||
Goodwill | — | 36.9 | — | 22.7 | 1.3 | — | 60.9 | |||||||||||||||||||||
Deferred tax assets | 24.6 | 74.5 | (45.7 | ) | 4.6 | 0.6 | — | 58.6 | ||||||||||||||||||||
Other noncurrent assets | 2.8 | 17.3 | — | 0.1 | 1.4 | — | 21.6 | |||||||||||||||||||||
Total assets | $ | 243.1 | $ | 550.0 | $ | 375.1 | $ | 223.6 | $ | 85.4 | $ | (794.8 | ) | $ | 682.4 | |||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||
Accounts payable | $ | — | $ | 424.5 | $ | 6.2 | $ | 82.9 | $ | 26.1 | $ | (475.5 | ) | $ | 64.2 | |||||||||||||
Accrued liabilities | 4.1 | 9.6 | 14.0 | 23.8 | 16.8 | — | 68.3 | |||||||||||||||||||||
Short-term debt and current portion of long-term debt | — | 0.2 | — | — | — | — | 0.2 | |||||||||||||||||||||
Total current liabilities | 4.1 | 434.3 | 20.2 | 106.7 | 42.9 | (475.5 | ) | 132.7 | ||||||||||||||||||||
Long-term debt | 195.9 | 187.6 | — | — | — | — | 383.5 | |||||||||||||||||||||
Other long-term liabilities | — | 74.6 | — | 8.2 | 31.5 | — | 114.3 | |||||||||||||||||||||
Total liabilities | 200.0 | 696.5 | 20.2 | 114.9 | 74.4 | (475.5 | ) | 630.5 | ||||||||||||||||||||
Koppers stockholders’ equity | 43.1 | (146.5 | ) | 354.9 | 108.7 | 2.2 | (319.3 | ) | 43.1 | |||||||||||||||||||
Noncontrolling interests | — | — | — | — | 8.8 | — | 8.8 | |||||||||||||||||||||
Total liabilities and equity | $ | 243.1 | $ | 550.0 | $ | 375.1 | $ | 223.6 | $ | 85.4 | $ | (794.8 | ) | $ | 682.4 | |||||||||||||
Condensed Consolidating Balance Sheet December 31, 2008
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| Parent | Koppers Inc. | Domestic Guarantor Subsidiaries | Foreign Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 37.5 | $ | — | $ | 18.7 | $ | 6.9 | $ | — | $ | 63.1 | ||||||||||||||
S-T investments & restricted cash | — | — | — | (0.1 | ) | 6.0 | — | 5.9 | ||||||||||||||||||||
Accounts receivable, net | 4.6 | 94.4 | 388.0 | 42.5 | 40.7 | (458.1 | ) | 112.1 | ||||||||||||||||||||
Inventories, net | — | 100.4 | — | 64.1 | 7.3 | — | 171.8 | |||||||||||||||||||||
Deferred tax assets | — | 4.1 | (1.5 | ) | — | — | — | 2.6 | ||||||||||||||||||||
Other current assets | — | 10.1 | — | 5.9 | 0.9 | — | 16.9 | |||||||||||||||||||||
Total current assets | 4.6 | 246.5 | 386.5 | 131.1 | 61.8 | (458.1 | ) | 372.4 | ||||||||||||||||||||
Equity investments | 180.2 | 77.0 | 15.6 | 13.2 | 4.0 | (284.0 | ) | 6.0 | ||||||||||||||||||||
Property, plant and equipment, net | — | 92.3 | — | 35.2 | 17.3 | — | 144.8 | |||||||||||||||||||||
Goodwill | — | 37.0 | — | 20.1 | 1.3 | — | 58.4 | |||||||||||||||||||||
Deferred tax assets | 21.4 | 74.9 | (45.7 | ) | 4.4 | 1.0 | — | 56.0 | ||||||||||||||||||||
Other noncurrent assets | 3.0 | 19.1 | — | — | 1.4 | — | 23.5 | |||||||||||||||||||||
Total assets | $ | 209.2 | $ | 546.8 | $ | 356.4 | $ | 204.0 | $ | 86.8 | $ | (742.1 | ) | $ | 661.1 | |||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||
Accounts payable | $ | 0.1 | $ | 424.4 | $ | 5.9 | $ | 79.3 | $ | 30.5 | $ | (458.1 | ) | $ | 82.1 | |||||||||||||
Accrued liabilities | 4.5 | 8.7 | 14.0 | 24.0 | 15.1 | — | 66.3 | |||||||||||||||||||||
Short-term debt and current portion of long-term debt | — | 0.2 | — | — | — | — | 0.2 | |||||||||||||||||||||
Total current liabilities | 4.6 | 433.3 | 19.9 | 103.3 | 45.6 | (458.1 | ) | 148.6 | ||||||||||||||||||||
Long-term debt | 186.6 | 188.1 | — | — | — | — | 374.7 | |||||||||||||||||||||
Other long-term liabilities | — | 72.1 | — | 7.4 | 32.3 | — | 111.8 | |||||||||||||||||||||
Total liabilities | 191.2 | 693.5 | 19.9 | 110.7 | 77.9 | (458.1 | ) | 635.1 | ||||||||||||||||||||
Koppers stockholders’ equity | 18.0 | (146.7 | ) | 336.5 | 93.3 | 0.9 | (284.0 | ) | 18.0 | |||||||||||||||||||
Noncontrolling interests | — | — | — | — | 8.0 | — | 8.0 | |||||||||||||||||||||
Total liabilities and equity | $ | 209.2 | $ | 546.8 | $ | 356.4 | $ | 204.0 | $ | 86.8 | $ | (742.1 | ) | $ | 661.1 | |||||||||||||
Condensed Consolidating Statement of Cash Flows For the Six Months Ended June 30, 2009
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| Parent | Koppers Inc. | Domestic Guarantor Subsidiaries | Foreign Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
Cash provided by (used in) operating activities | $ | 9.2 | $ | 42.7 | $ | — | $ | 15.1 | $ | 5.0 | $ | (9.2 | ) | $ | 62.8 | |||||||||||||
Cash provided by (used in) investing activities: | ||||||||||||||||||||||||||||
Capital expenditures and acquisitions | — | (4.2 | ) | — | (1.1 | ) | (1.5 | ) | — | (6.8 | ) | |||||||||||||||||
Net cash proceeds (payments) from divestitures and asset sales | — | (1.1 | ) | — | — | — | — | (1.1 | ) | |||||||||||||||||||
Net cash (used in) investing activities | — | (5.3 | ) | — | (1.1 | ) | (1.5 | ) | — | (7.9 | ) | |||||||||||||||||
Cash provided by (used in) financing activities: | ||||||||||||||||||||||||||||
Borrowings (repayments) of long-term debt | — | (0.1 | ) | — | — | — | — | (0.1 | ) | |||||||||||||||||||
Dividends paid | (9.0 | ) | (9.2 | ) | — | — | — | 9.2 | (9.0 | ) | ||||||||||||||||||
Net cash provided by (used in) financing activities | (9.0 | ) | (9.3 | ) | — | — | — | 9.2 | (9.1 | ) | ||||||||||||||||||
Effect of exchange rates on cash | — | (0.8 | ) | — | 1.9 | — | — | 1.1 | ||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 0.2 | 27.3 | — | 15.9 | 3.5 | — | 46.9 | |||||||||||||||||||||
Cash and cash equivalents at beginning of year | — | 37.6 | — | 18.6 | 6.9 | — | 63.1 | |||||||||||||||||||||
Cash and cash equivalents at end of period | $ | 0.2 | $ | 64.9 | $ | — | $ | 34.5 | $ | 10.4 | $ | — | $ | 110.0 | ||||||||||||||
Condensed Consolidating Statement of Cash Flows For the Six Months Ended June 30, 2008
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| Parent | Koppers Inc. | Domestic Guarantor Subsidiaries | Foreign Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
Cash provided by (used in) operating activities | $ | 8.9 | $ | 10.8 | $ | — | $ | 6.7 | $ | 1.3 | $ | (8.1 | ) | $ | 19.6 | |||||||||||||
Cash provided by (used in) investing activities: | ||||||||||||||||||||||||||||
Capital expenditures and acquisitions | — | (7.4 | ) | — | (2.6 | ) | (4.3 | ) | — | (14.3 | ) | |||||||||||||||||
Net cash proceeds (payments) from divestitures and asset sales | — | — | — | — | 0.2 | — | 0.2 | |||||||||||||||||||||
Net cash (used in) investing activities | — | (7.4 | ) | — | (2.6 | ) | (4.1 | ) | — | (14.1 | ) | |||||||||||||||||
Cash provided by (used in) financing activities: | ||||||||||||||||||||||||||||
Borrowings (repayments) of long-term debt | — | 6.0 | — | (9.5 | ) | — | — | (3.5 | ) | |||||||||||||||||||
Dividends paid | (8.1 | ) | (8.1 | ) | — | — | — | 8.1 | (8.1 | ) | ||||||||||||||||||
Stock issued (repurchased) | (0.9 | ) | — | — | — | — | — | (0.9 | ) | |||||||||||||||||||
Net cash provided by (used in) financing activities | (9.0 | ) | (2.1 | ) | — | (9.5 | ) | — | 8.1 | (12.5 | ) | |||||||||||||||||
Effect of exchange rates on cash | — | (1.2 | ) | — | 1.2 | 0.1 | — | 0.1 | ||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | (0.1 | ) | 0.1 | — | (4.2 | ) | (2.7 | ) | — | (6.9 | ) | |||||||||||||||||
Add: Cash of assets held for sale at beginning of year | — | — | — | — | 0.6 | — | 0.6 | |||||||||||||||||||||
Less: Cash of assets held for sale at end of year | — | — | — | — | (1.4 | ) | — | (1.4 | ) | |||||||||||||||||||
Cash and cash equivalents at beginning of year | 0.2 | — | — | 7.3 | 9.4 | — | 16.9 | |||||||||||||||||||||
Cash and cash equivalents at end of period | $ | 0.1 | $ | 0.1 | $ | — | $ | 3.1 | $ | 5.9 | $ | — | $ | 9.2 | ||||||||||||||