ITEM 1. FINANCIAL STATEMENTS
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
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”, the “Company”, “we” or “us”) 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. Because our 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 as of December 31, 2018 has been summarized from the audited balance sheet contained in the Annual Report on Form 10-K as of and for the year ended December 31, 2018. Certain prior period amounts in the notes to the consolidated financial statements have been reclassified to conform to the current period’s presentation.
The financial information included herein should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.
2. New Accounting Pronouncements
In August 2018, the Securities and Exchange Commission (“SEC”) issued SEC Release No. 33-10532, “Disclosure Update and Simplification”, which expanded the interim period disclosure requirements for stockholders' equity. Under the release, a reconciliation of the changes in each caption of stockholders' equity must be provided in a note or separate statement for each period that an income statement is required to be filed. We reflected the requirements of this release in “Note 6 – Comprehensive Income and Equity”.
In August 2017, the Financial Accounting Standards Board ("FASB") issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” This ASU amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. We adopted this ASU effective January 1, 2018 and we reclassified a $3.9 million unrealized gain, net of tax, from retained earnings to accumulated other comprehensive loss upon adoption.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The new standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. We are evaluating the effect the guidance will have on our consolidated financial statements, which is not expected to be material.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases. The standard was effective January 1, 2019 and measurement and presentation of expenses depends on classification as a finance or operating lease. We adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach with no restatement of comparative periods presented. The adoption is accounted for as a change in accounting principle in conformity with FASB Accounting Standards Codification 250, “Accounting Changes and Error Corrections”.
We elected a suite of practical expedients, including retaining our current classification of existing leases upon adoption, separating lease and non-lease components for certain asset classes and excluding leases expiring within twelve months. The initial impact of adopting this new standard on our consolidated statement of operations and consolidated statement of cash flows was not material. Approximately $119 million of right-of-use assets and lease liabilities were recognized in the consolidated balance sheet upon adoption. Refer to “Note 16 – Leases” for more details regarding leases as of September 30, 2019.
3. Plant Closures and Divestitures
Over the past five years, we have been restructuring our Carbon Materials and Chemicals (“CMC”) segment in order to concentrate our facilities in regions where we believe we hold key competitive advantages to better serve our global customers. These closure activities include:
5
|
|
•
|
The cessation of naphthalene refining activities at our Follansbee, West Virginia coal tar distillation facility in the fourth quarter of 2018 subsequent to the commissioning of a new naphthalene refining plant in Stickney, Illinois. In August 2019, we ceased remaining production activities at the plant.
|
|
|
•
|
In September 2018, we sold our UK-based specialty chemicals business.
|
|
|
•
|
In November 2016, we sold our 30-percent interest in Tangshan Kailuan Koppers Carbon Chemical Company Limited (“TKK”) located in the Hebei Province in China.
|
|
|
•
|
In July 2016, we discontinued coal tar distillation activities at our CMC plant located in Clairton, Pennsylvania. In October 2018, we sold the facility and as part of the transaction, we transferred cash to the buyer and the buyer assumed decommissioning, demolition and site restoration responsibilities.
|
|
|
•
|
In March 2016, we discontinued production at our 60-percent owned CMC plant located in Tangshan, China.
|
|
|
•
|
In February 2016, we ceased coal tar distillation and specialty pitch operations at both of our United Kingdom CMC facilities. In July 2016, we sold substantially all of our CMC tar distillation properties and assets in the United Kingdom.
|
|
|
•
|
In April 2014, we ceased coal tar distillation activities at our CMC facility located in Uithoorn, the Netherlands.
|
Other closure and divestiture activity relates to our Railroad Utility Products and Services (“RUPS”) segment. These activities include:
|
|
•
|
In August 2019, we sold our utility pole treatment plant located in Blackstone, Virginia.
|
|
|
•
|
In August 2015, we closed a crosstie treating plant located in Green Spring, West Virginia.
|
|
|
•
|
In July 2015, we sold the assets of our 50 percent interest in KSA Limited Partnership, a concrete crosstie manufacturer.
|
In addition, in 2011, we ceased carbon black production at our CMC facility located in Kurnell, Australia. Costs associated with this closure are included in income from discontinued operations on the consolidated statement of operations and comprehensive income.
Details of the restructuring activities and related reserves are as follows:
|
|
|
Severance and
employee benefits
|
|
|
Environmental
remediation
|
|
|
Asset
Retirement
|
|
|
Other
|
|
|
Total
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve at December 31, 2017
|
|
$
|
1.7
|
|
|
$
|
2.7
|
|
|
$
|
10.6
|
|
|
$
|
3.3
|
|
|
$
|
18.3
|
|
|
Accrual
|
|
|
0.0
|
|
|
|
0.9
|
|
|
|
1.8
|
|
|
|
2.2
|
|
|
|
4.9
|
|
|
Cost charged against assets
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(2.1
|
)
|
|
|
(2.1
|
)
|
|
Reversal of accrued charges
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.9
|
)
|
|
|
0.0
|
|
|
|
(0.9
|
)
|
|
Cash paid
|
|
|
0.0
|
|
|
|
(3.4
|
)
|
|
|
(7.9
|
)
|
|
|
(0.5
|
)
|
|
|
(11.8
|
)
|
|
Currency translation
|
|
|
0.0
|
|
|
|
(0.2
|
)
|
|
|
0.0
|
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
Reserve at December 31, 2018
|
|
$
|
1.7
|
|
|
$
|
0.0
|
|
|
$
|
3.6
|
|
|
$
|
2.8
|
|
|
$
|
8.1
|
|
|
Accrual
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
2.6
|
|
|
|
3.0
|
|
|
|
5.6
|
|
|
Cost charged against assets
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(3.0
|
)
|
|
|
(3.0
|
)
|
|
Reversal of accrued charges
|
|
|
(0.4
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.4
|
)
|
|
Cash paid
|
|
|
(0.4
|
)
|
|
|
0.0
|
|
|
|
(5.2
|
)
|
|
|
0.0
|
|
|
|
(5.6
|
)
|
|
Reserve at September 30, 2019
|
|
$
|
0.9
|
|
|
$
|
0.0
|
|
|
$
|
1.0
|
|
|
$
|
2.8
|
|
|
$
|
4.7
|
|
4. Acquisitions
On April 10, 2018, Koppers Inc. acquired Cox Industries, Inc. (“Cox”) for net cash consideration of $201.3 million. The transaction was funded by borrowings on Koppers Inc.’s credit facility discussed in “Note 14 - Debt.” Cox was renamed Koppers Utility and Industrial Products Inc. (“UIP”) subsequent to the acquisition. UIP is a manufacturer of treated wood transmission and distribution poles for utility and cooperative utility companies. It is also a manufacturer of treated wood pilings used for construction and marine applications. UIP manufactures and sells its treated wood poles and pilings through a network of eight manufacturing facilities and 19 distribution yards located throughout the United States. UIP treats its products with a variety of wood protection chemicals, including chromated copper arsenate and creosote, which are produced by our PC and CMC segments, respectively.
On February 28, 2018, Koppers Inc. acquired M.A. Energy Resources, LLC (“MAER”) for net cash consideration of $62.8 million. The purchase price was funded by borrowings on Koppers Inc.’s credit facility. MAER was renamed Koppers Recovery Resources LLC (“KRR”) subsequent to the acquisition. KRR is a vertically-integrated company that provides material recovery services for crossties that have been taken out of service and other biomass material.
6
KRR converts this recovered material into alternative fuels, such as crosstie-derived or biomass-derived fuel, that are used as a substitute for conventional higher-cost carbon-based fuel. KRR currently operates two processing facilities, each of which is located to serve its Class I railroad customer base.
Combined costs related to these two acquisitions were $0.6 million and $6.2 million for the three and nine months ended September 30, 2018, respectively, and are recorded within selling, general and administrative expenses in the consolidated statement of operations.
The following unaudited pro forma information presents a summary of our revenues and income from continuing operations as if the UIP acquisition occurred on January 1, 2017 (the first day of the most recently completed fiscal year prior to the acquisition). The unaudited pro forma information is not necessarily indicative of operating results that would have been achieved had the acquisition been completed as of January 1, 2017 and is not intended to project our future financial results after the acquisition. The unaudited pro forma information is based on certain assumptions, which management believes are reasonable, and does not reflect the cost of any integration activities or the benefits from the acquisition and synergies that may be derived from any integration activities.
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2018
|
|
|
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Pro forma revenue
|
|
$
|
442.7
|
|
|
$
|
1,335.5
|
|
|
Pro forma income from continuing operations
attributable to Koppers
|
|
|
7.9
|
|
|
|
34.5
|
|
|
Pro forma earnings per share - continuing operations:
|
|
|
|
|
|
|
|
|
|
Basic -
|
|
$
|
0.38
|
|
|
$
|
1.64
|
|
|
Diluted -
|
|
$
|
0.36
|
|
|
$
|
1.58
|
|
5. Revenue Recognition
Effective January 1, 2018 we adopted ASC 606, “Revenue from Contracts with Customers”, using the modified retrospective method. The cumulative effect to the opening balance of retained earnings recognized at January 1, 2018 was an increase of $0.3 million, consisting of $5.3 million in revenue and $5.0 million in cost of goods sold not previously recognized during the year ended December 31, 2017. ASC 606 impacted the timing of revenue recognized related to certain services to untreated crossties within our RUPS segment where those specific performance obligations were fulfilled prior to shipment and were historically not recognized as revenue until shipped. Refer to “Note 9 – Segment Information” for relevant disclosures regarding the disaggregation of revenue.
Contract Balances
The timing of revenue recognition in accordance with ASC 606 results in both billed accounts receivable and unbilled receivables, both classified as accounts receivable, net of allowance within the condensed consolidated balance sheet. Contract assets of $5.4 million and $10.5 million are recorded within accounts receivable, net of allowance within the consolidated balance sheet as of September 30, 2019 and December 31, 2018, respectively.
6. Comprehensive Income and Equity
Total comprehensive income for the three and nine months ended September 30, 2019 and 2018 is summarized in the table below:
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20.4
|
|
|
$
|
6.9
|
|
|
$
|
47.2
|
|
|
$
|
31.6
|
|
|
Changes in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
(11.4
|
)
|
|
|
(2.9
|
)
|
|
|
(10.6
|
)
|
|
|
(18.9
|
)
|
|
Unrealized loss on cash flow hedges, net
of tax benefit of $1.7, $3.7, $0.6 and $12.0
|
|
|
(3.7
|
)
|
|
|
(6.3
|
)
|
|
|
(1.4
|
)
|
|
|
(20.3
|
)
|
|
Change in accounting standard
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
Unrecognized pension net loss, net of tax
expense of $0.1, $0.1, $0.3, and $0.3
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
Total comprehensive income (loss)
|
|
|
5.5
|
|
|
|
(2.0
|
)
|
|
|
35.9
|
|
|
|
(6.5
|
)
|
|
Comprehensive income (loss) attributable to
noncontrolling interests
|
|
|
0.2
|
|
|
|
(1.1
|
)
|
|
|
0.8
|
|
|
|
4.7
|
|
|
Comprehensive income (loss) attributable to Koppers
|
|
$
|
5.3
|
|
|
$
|
(0.9
|
)
|
|
$
|
35.1
|
|
|
$
|
(11.2
|
)
|
7
Amounts reclassified from accumulated other comprehensive loss to net income consist of amounts shown for changes in or amortization of unrecognized pension net loss. This component of accumulated other comprehensive loss is included in the computation of net periodic pension cost as disclosed in “Note 13 – Pensions and Post-Retirement Benefit Plans.” Other amounts reclassified from accumulated other comprehensive loss include income related to derivative financial instruments, net of tax, of $1.8 million and $3.3 million for the three and nine months ended September 30, 2019, respectively, and $1.1 million and $6.5 million for the three and nine months ended September 30, 2018, respectively.
The following tables present the change in equity for the three months ended September 30, 2019 and 2018, respectively:
|
(Dollars in millions)
|
|
Common Stock
|
|
|
Additional Paid-In Capital
|
|
|
Retained Earnings
|
|
|
Accumulated Other Comprehensive (Loss)
|
|
|
Treasury Stock
|
|
|
Noncontrolling
Interests
|
|
|
Total Equity
|
|
|
Balance at June 30,
2019
|
|
$
|
0.2
|
|
|
$
|
212.4
|
|
|
$
|
53.5
|
|
|
$
|
(83.7
|
)
|
|
$
|
(90.8
|
)
|
|
$
|
11.4
|
|
|
$
|
103.0
|
|
|
Net income
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
19.8
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.6
|
|
|
|
20.4
|
|
|
Issuance of common stock
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
Employee stock plans
|
|
|
0.0
|
|
|
|
3.1
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
3.1
|
|
|
Other comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
adjustment
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
(11.0
|
)
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)
|
|
|
(11.4
|
)
|
|
Unrealized loss on
cash flow hedges
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(3.7
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(3.7
|
)
|
|
Unrecognized pension
net loss
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.2
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.2
|
|
|
Balance at September 30, 2019
|
|
$
|
0.2
|
|
|
$
|
215.9
|
|
|
$
|
73.3
|
|
|
$
|
(98.1
|
)
|
|
$
|
(90.9
|
)
|
|
$
|
11.6
|
|
|
$
|
112.0
|
|
|
(Dollars in millions)
|
|
Common Stock
|
|
|
Additional Paid-In Capital
|
|
|
Retained Earnings
|
|
|
Accumulated Other Comprehensive (Loss)
|
|
|
Treasury Stock
|
|
|
Noncontrolling
Interests
|
|
|
Total Equity
|
|
|
Balance at June 30,
2018
|
|
$
|
0.2
|
|
|
$
|
198.7
|
|
|
$
|
22.2
|
|
|
$
|
(65.1
|
)
|
|
$
|
(65.6
|
)
|
|
$
|
11.7
|
|
|
$
|
102.1
|
|
|
Net income
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
7.6
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.6
|
)
|
|
|
6.9
|
|
|
Issuance of common stock
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
Employee stock plans
|
|
|
0.0
|
|
|
|
3.2
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
3.2
|
|
|
Other comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
adjustment
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(2.4
|
)
|
|
|
0.0
|
|
|
|
(0.5
|
)
|
|
|
(2.9
|
)
|
|
Unrealized loss on
cash flow hedges
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(6.3
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(6.3
|
)
|
|
Unrecognized pension
net loss
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
Repurchases of common
stock
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(24.2
|
)
|
|
|
0.0
|
|
|
|
(24.2
|
)
|
|
Balance at September 30, 2018
|
|
$
|
0.2
|
|
|
$
|
202.2
|
|
|
$
|
29.8
|
|
|
$
|
(73.5
|
)
|
|
$
|
(89.8
|
)
|
|
$
|
10.5
|
|
|
$
|
79.4
|
|
8
The following tables present the change in equity for the nine months ended September 30, 2019 and 2018, respectively:
|
(Dollars in millions)
|
|
Common Stock
|
|
|
Additional Paid-In Capital
|
|
|
Retained Earnings
|
|
|
Accumulated Other Comprehensive (Loss)
|
|
|
Treasury Stock
|
|
|
Noncontrolling
Interests
|
|
|
Total Equity
|
|
|
Balance at December 31,
2018
|
|
$
|
0.2
|
|
|
$
|
206.0
|
|
|
$
|
27.2
|
|
|
$
|
(87.2
|
)
|
|
$
|
(90.0
|
)
|
|
$
|
10.8
|
|
|
$
|
67.0
|
|
|
Net income
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
46.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
1.2
|
|
|
|
47.2
|
|
|
Issuance of common stock
|
|
|
0.0
|
|
|
|
1.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
1.0
|
|
|
Employee stock plans
|
|
|
0.0
|
|
|
|
9.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
9.0
|
|
|
Other comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
adjustment
|
|
|
0.0
|
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
(10.2
|
)
|
|
|
0.0
|
|
|
|
(0.4
|
)
|
|
|
(10.6
|
)
|
|
Unrealized loss on
cash flow hedges
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(1.4
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(1.4
|
)
|
|
Unrecognized pension
net loss
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.7
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.7
|
|
|
Repurchases of common
stock
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.9
|
)
|
|
|
0.0
|
|
|
|
(0.9
|
)
|
|
Balance at September 30, 2019
|
|
$
|
0.2
|
|
|
$
|
215.9
|
|
|
$
|
73.3
|
|
|
$
|
(98.1
|
)
|
|
$
|
(90.9
|
)
|
|
$
|
11.6
|
|
|
$
|
112.0
|
|
|
(Dollars in millions)
|
|
Common Stock
|
|
|
Additional Paid-In Capital
|
|
|
Retained Earnings
|
|
|
Accumulated Other Comprehensive (Loss)
|
|
|
Treasury Stock
|
|
|
Noncontrolling
Interests
|
|
|
Total Equity
|
|
|
Balance at December 31,
2017
|
|
$
|
0.2
|
|
|
$
|
190.6
|
|
|
$
|
7.4
|
|
|
$
|
(40.1
|
)
|
|
$
|
(58.2
|
)
|
|
$
|
5.9
|
|
|
$
|
105.8
|
|
|
Net income
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
26.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
5.6
|
|
|
|
31.6
|
|
|
Issuance of common stock
|
|
|
0.0
|
|
|
|
2.5
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
2.5
|
|
|
Employee stock plans
|
|
|
0.0
|
|
|
|
9.3
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
9.3
|
|
|
Other comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
adjustment
|
|
|
0.0
|
|
|
|
(0.2
|
)
|
|
|
0.0
|
|
|
|
(17.7
|
)
|
|
|
0.0
|
|
|
|
(1.0
|
)
|
|
|
(18.9
|
)
|
|
Unrealized loss on
cash flow hedges
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(20.3
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(20.3
|
)
|
|
Change in accounting
standard
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(3.6
|
)
|
|
|
3.9
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
Unrecognized pension
net loss
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.8
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.8
|
|
|
Repurchases of common
stock
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(31.6
|
)
|
|
|
0.0
|
|
|
|
(31.6
|
)
|
|
Balance at September 30, 2018
|
|
$
|
0.2
|
|
|
$
|
202.2
|
|
|
$
|
29.8
|
|
|
$
|
(73.5
|
)
|
|
$
|
(89.8
|
)
|
|
$
|
10.5
|
|
|
$
|
79.4
|
|
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 non-vested 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 loss per common share, if any.
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
(Dollars in millions, except share amounts, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Koppers
|
|
$
|
19.8
|
|
|
$
|
7.6
|
|
|
$
|
46.0
|
|
|
$
|
26.0
|
|
|
(Loss) income from discontinued operations
|
|
|
(0.1
|
)
|
|
|
0.0
|
|
|
|
(0.1
|
)
|
|
|
0.4
|
|
|
Income from continuing operations attributable to Koppers
|
|
$
|
19.9
|
|
|
$
|
7.6
|
|
|
$
|
46.1
|
|
|
$
|
25.6
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,684
|
|
|
|
20,946
|
|
|
|
20,641
|
|
|
|
20,992
|
|
|
Effect of dilutive securities
|
|
|
346
|
|
|
|
754
|
|
|
|
267
|
|
|
|
900
|
|
|
Diluted
|
|
|
21,030
|
|
|
|
21,700
|
|
|
|
20,908
|
|
|
|
21,892
|
|
|
Earnings per common share – continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.96
|
|
|
$
|
0.36
|
|
|
$
|
2.23
|
|
|
$
|
1.22
|
|
|
Diluted earnings per common share
|
|
|
0.94
|
|
|
|
0.35
|
|
|
|
2.20
|
|
|
|
1.17
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities excluded from computation of
diluted earnings per common share
|
|
|
720
|
|
|
|
571
|
|
|
|
773
|
|
|
|
214
|
|
8. Stock-based Compensation
We have outstanding stock-based compensation awards that were granted under the amended and restated 2005 Long-Term Incentive Plan (the “2005 LTIP”) and the 2018 Long-Term Incentive Plan (the “2018 LTIP”). Both the 2005 LTIP and the 2018 LTIP are collectively referred to as the “LTIP”. On May 3, 2018, the 2018 LTIP was approved by our shareholders and the 2005 LTIP was frozen. Similar to the 2005 LTIP, the 2018 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.”
Restricted Stock Units and Performance Stock Units
Under the LTIP, the board of directors grants restricted stock units and performance stock units to certain employee participants (collectively, the “stock units”). Compensation expense for non-vested stock units is recorded over the vesting period based on the fair value at the date of grant. The fair value of restricted stock units is the market price of the underlying common stock on the date of grant and the fair value of performance stock units is determined using a Monte Carlo valuation model. For grants to most employees, the restricted stock units vest in four equal annual installments. Restricted stock units that have one-year vesting periods are also issued under the LTIP to members of the board of directors in connection with annual director compensation and, from time to time, are issued to employees in connection with employee compensation with vesting periods of typically two years or less.
Performance stock units have vesting based upon a market condition. These performance stock units have multi-year performance objectives and a three-year period for vesting (if the applicable performance objective is achieved). The applicable performance objective is based on our total shareholder return relative to the Standard & Poor’s SmallCap 600 Materials Index. The number of performance stock units granted represents the target award and participants have the ability to earn between zero and 200 percent of the target award based upon actual performance. If minimum performance criteria are not achieved, no performance stock units will vest. We have the discretion to settle the award in cash rather than shares, although we currently expect that all awards will be settled by the issuance of shares. Performance stock units for the 2016-2018 performance period vested at 13 percent of the target share amount in March 2019.
10
We calculated the fair value of the performance stock unit awards on the date of grant using the assumptions listed below:
|
|
|
March 2019 Grant
|
|
|
May 2018 Grant
|
|
|
March 2018 Grant
|
|
|
March 2017 Grant
|
|
|
Grant date price per share of
performance award
|
|
$
|
26.63
|
|
|
$
|
39.10
|
|
|
$
|
41.60
|
|
|
$
|
44.10
|
|
|
Expected dividend yield per
share
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Expected volatility
|
|
|
39.00
|
%
|
|
|
39.40
|
%
|
|
|
39.40
|
%
|
|
|
43.50
|
%
|
|
Risk-free interest rate
|
|
|
2.50
|
%
|
|
|
2.35
|
%
|
|
|
2.35
|
%
|
|
|
1.54
|
%
|
|
Look-back period in years
|
|
|
2.82
|
|
|
|
2.84
|
|
|
|
2.84
|
|
|
|
2.83
|
|
|
Grant date fair value per share
|
|
$
|
40.30
|
|
|
$
|
44.29
|
|
|
$
|
47.12
|
|
|
$
|
64.02
|
|
Dividends declared, if any, on our common stock during the period prior to vesting 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 non-vested 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.
The following table shows a summary of the performance stock units as of September 30, 2019:
|
Performance Period
|
|
Minimum
Shares
|
|
|
Target
Shares
|
|
|
Maximum
Shares
|
|
|
2017 – 2019
|
|
|
0
|
|
|
|
110,262
|
|
|
|
220,524
|
|
|
2018 – 2020
|
|
|
0
|
|
|
|
128,093
|
|
|
|
256,186
|
|
|
2019 – 2021
|
|
|
0
|
|
|
|
156,287
|
|
|
|
312,574
|
|
The following table shows a summary of the status and activity of non-vested stock units for the nine months ended September 30, 2019:
|
|
|
Restricted
Stock Units
|
|
|
Performance
Stock Units
|
|
|
Total
Stock Units
|
|
|
Weighted Average
Grant Date Fair
Value per Unit
|
|
|
Non-vested at December 31, 2018
|
|
|
223,561
|
|
|
|
271,123
|
|
|
|
494,684
|
|
|
$
|
45.65
|
|
|
Granted
|
|
|
228,281
|
|
|
|
156,287
|
|
|
|
384,568
|
|
|
$
|
32.20
|
|
|
Vested
|
|
|
(103,547
|
)
|
|
|
(32,768
|
)
|
|
|
(136,315
|
)
|
|
$
|
28.67
|
|
|
Forfeited
|
|
|
(1,736
|
)
|
|
|
0
|
|
|
|
(1,736
|
)
|
|
$
|
26.63
|
|
|
Non-vested at September 30, 2019
|
|
|
346,559
|
|
|
|
394,642
|
|
|
|
741,201
|
|
|
$
|
40.16
|
|
Stock Options
Stock options to most executive officers vest and become exercisable in four equal annual installments. The stock options have a term of ten years. In the event of termination of employment, other than retirement, death or disability, any non-vested 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.
Compensation expense for non-vested stock options is recorded over the vesting period based on the fair value at the date of grant. We calculated the fair value of stock options on the date of grant using the Black-Scholes-Merton model and the assumptions listed below:
|
|
|
March 2019 Grant
|
|
|
May 2018 Grant
|
|
|
March 2018 Grant
|
|
|
March 2017 Grant
|
|
|
March 2016 Grant
|
|
|
Grant date price per share of stock
option award
|
|
$
|
26.63
|
|
|
$
|
39.10
|
|
|
$
|
41.60
|
|
|
$
|
44.10
|
|
|
$
|
18.11
|
|
|
Expected dividend yield per share
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Expected life in years
|
|
|
6.14
|
|
|
|
5.73
|
|
|
|
5.73
|
|
|
|
5.77
|
|
|
|
5.96
|
|
|
Expected volatility
|
|
|
39.44
|
%
|
|
|
37.05
|
%
|
|
|
37.05
|
%
|
|
|
39.70
|
%
|
|
|
40.86
|
%
|
|
Risk-free interest rate
|
|
|
2.53
|
%
|
|
|
2.82
|
%
|
|
|
2.67
|
%
|
|
|
2.13
|
%
|
|
|
1.45
|
%
|
|
Grant date fair value per share
|
|
$
|
11.29
|
|
|
$
|
15.48
|
|
|
$
|
16.38
|
|
|
$
|
17.90
|
|
|
$
|
7.41
|
|
11
We suspended our dividend in February 2015 and we do not expect to declare any dividends for the foreseeable future. The expected life in years is based on historical exercise data of options previously granted by us. Expected volatility is based on the historical volatility of our 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 nine months ended September 30, 2019:
|
|
|
Options
|
|
|
Weighted Average
Exercise Price
per Option
|
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
|
Aggregate Intrinsic
Value (in millions)
|
|
|
Outstanding at December 31, 2018
|
|
|
981,940
|
|
|
$
|
29.63
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
145,301
|
|
|
$
|
26.63
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,988
|
)
|
|
$
|
24.74
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(14,650
|
)
|
|
$
|
40.04
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
1,108,603
|
|
|
$
|
29.11
|
|
|
|
5.71
|
|
|
$
|
5.8
|
|
|
Exercisable at September 30, 2019
|
|
|
788,468
|
|
|
$
|
28.07
|
|
|
|
4.42
|
|
|
$
|
4.9
|
|
Stock Compensation Expense
Total stock-based compensation expense recognized under our LTIP and employee stock purchase plan for the three and nine months ended September 30, 2019 and 2018 is as follows:
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
3.0
|
|
|
$
|
3.2
|
|
|
$
|
9.0
|
|
|
$
|
9.3
|
|
|
Less related income tax benefit
|
|
|
0.9
|
|
|
|
1.2
|
|
|
|
2.8
|
|
|
|
3.5
|
|
|
Decrease in net income attributable to Koppers
|
|
$
|
2.1
|
|
|
$
|
2.0
|
|
|
$
|
6.2
|
|
|
$
|
5.8
|
|
|
Intrinsic value of exercised stock options
|
|
$
|
0.0
|
|
|
$
|
0.1
|
|
|
$
|
0.0
|
|
|
$
|
1.1
|
|
|
Cash received from the exercise of stock options
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.1
|
|
|
$
|
2.5
|
|
As of September 30, 2019, total future compensation expense related to non-vested stock-based compensation arrangements totaled $19.9 million and the weighted-average period over which this expense is expected to be recognized is approximately 27 months.
9. Segment Information
We have three reportable segments: Railroad and Utility Products and Services, Performance Chemicals and Carbon Materials and Chemicals. Our reportable segments contain multiple aggregated business units since management believes the long-term financial performance of these business units is affected by similar economic conditions. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes.
Our Railroad and Utility Products and Services segment sells treated and untreated wood products, manufactured products and services primarily to the railroad and public utility markets. Railroad products and services include procuring and treating items such as crossties, switch ties and various types of lumber used for railroad bridges and crossings and the manufacture of rail joint bars. The segment also operates a railroad services business that conducts engineering, design, repair and inspection services for railroad bridges and a business related to the recovery of used crossties. In April 2018, we acquired UIP, a manufacturer of treated wood utility transmission and distribution poles for utility and cooperative utility companies. It is also a manufacturer of treated wood pilings used for construction and marine applications. In February 2018, we acquired KRR, a vertically-integrated provider of crosstie recovery and disposal services. KRR converts recovered material into alternative fuels, such as crosstie-derived or biomass-derived fuel, that is used as a substitute for conventional higher-cost carbon-based fuel.
Our Performance Chemicals segment develops, manufactures, and markets wood preservation chemicals and wood treatment technologies and services a diverse range of end-markets including infrastructure, residential and commercial construction, and agriculture.
Our Carbon Materials and Chemicals segment is primarily a manufacturer of creosote, carbon pitch, naphthalene, phthalic anhydride and carbon black feedstock. Creosote is used in the treatment of wood and carbon black feedstock is used in the production of carbon black. Carbon pitch is used in the production of aluminum and steel in electric arc furnaces.
12
Naphthalene is used for the production of phthalic anhydride and as a surfactant in the production of concrete. Phthalic anhydride is used in the production of plasticizers, polyester resins and alkyd paints.
We evaluate performance and determine resource allocations based on a number of factors, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) and operating profit or loss from operations. Operating profit does not include other loss, interest expense, income taxes or operating costs of Koppers Holdings Inc.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, except for those described in “Note 2 – New Accounting Pronouncements.” Intersegment transactions are eliminated in consolidation.
The following table sets forth certain sales and operating data, net of all intersegment transactions, for our segments for the periods indicated:
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railroad and Utility Products and Services
|
|
$
|
198.8
|
|
|
$
|
185.0
|
|
|
$
|
564.0
|
|
|
$
|
470.6
|
|
|
Performance Chemicals
|
|
|
123.9
|
|
|
|
108.2
|
|
|
|
343.7
|
|
|
|
320.7
|
|
|
Carbon Materials and Chemicals
|
|
|
152.2
|
|
|
|
149.5
|
|
|
|
471.9
|
|
|
|
493.5
|
|
|
Total
|
|
$
|
474.9
|
|
|
$
|
442.7
|
|
|
$
|
1,379.6
|
|
|
$
|
1,284.8
|
|
|
Intersegment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Chemicals
|
|
|
3.2
|
|
|
|
3.8
|
|
|
|
9.4
|
|
|
|
8.0
|
|
|
Carbon Materials and Chemicals
|
|
|
20.3
|
|
|
|
21.4
|
|
|
|
56.9
|
|
|
|
58.8
|
|
|
Total
|
|
$
|
23.5
|
|
|
$
|
25.2
|
|
|
$
|
66.3
|
|
|
$
|
66.8
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railroad and Utility Products and Services
|
|
$
|
4.8
|
|
|
$
|
4.9
|
|
|
$
|
14.4
|
|
|
$
|
12.8
|
|
|
Performance Chemicals
|
|
|
4.5
|
|
|
|
4.4
|
|
|
|
14.0
|
|
|
|
13.3
|
|
|
Carbon Materials and Chemicals
|
|
|
5.0
|
|
|
|
3.7
|
|
|
|
13.9
|
|
|
|
12.4
|
|
|
Total
|
|
$
|
14.3
|
|
|
$
|
13.0
|
|
|
$
|
42.3
|
|
|
$
|
38.5
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railroad and Utility Products and Services
|
|
$
|
11.3
|
|
|
$
|
5.8
|
|
|
$
|
31.8
|
|
|
$
|
5.9
|
|
|
Performance Chemicals
|
|
|
11.7
|
|
|
|
11.0
|
|
|
|
38.5
|
|
|
|
28.2
|
|
|
Carbon Materials and Chemicals
|
|
|
17.1
|
|
|
|
14.9
|
|
|
|
37.8
|
|
|
|
64.6
|
|
|
Corporate(a)
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
|
|
(1.6
|
)
|
|
|
(1.9
|
)
|
|
Total
|
|
$
|
39.6
|
|
|
$
|
31.2
|
|
|
$
|
106.5
|
|
|
$
|
96.8
|
|
|
|
(a)
|
Operating loss for Corporate includes primarily general and administrative costs for Koppers Holdings Inc., the parent company of Koppers Inc.
|
13
The following table sets forth revenues for significant product lines, net of all intersegment transactions, for our segments for the periods indicated:
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railroad and Utility Products and Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railroad treated products
|
|
$
|
111.5
|
|
|
$
|
96.7
|
|
|
$
|
306.5
|
|
|
$
|
259.8
|
|
|
Utility poles
|
|
|
61.5
|
|
|
|
59.5
|
|
|
|
176.1
|
|
|
|
129.9
|
|
|
Rail joints
|
|
|
5.5
|
|
|
|
8.5
|
|
|
|
22.2
|
|
|
|
26.5
|
|
|
Railroad infrastructure services
|
|
|
9.9
|
|
|
|
10.0
|
|
|
|
29.5
|
|
|
|
26.2
|
|
|
Other products
|
|
|
10.4
|
|
|
|
10.3
|
|
|
|
29.7
|
|
|
|
28.2
|
|
|
Total
|
|
|
198.8
|
|
|
|
185.0
|
|
|
|
564.0
|
|
|
|
470.6
|
|
|
Performance Chemicals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wood preservative products
|
|
|
115.5
|
|
|
|
101.8
|
|
|
|
319.0
|
|
|
|
295.7
|
|
|
Other products
|
|
|
8.4
|
|
|
|
6.4
|
|
|
|
24.7
|
|
|
|
25.0
|
|
|
Total
|
|
|
123.9
|
|
|
|
108.2
|
|
|
|
343.7
|
|
|
|
320.7
|
|
|
Carbon Materials and Chemicals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pitch and related products
|
|
|
96.6
|
|
|
|
88.9
|
|
|
|
298.2
|
|
|
|
305.5
|
|
|
Creosote and distillates
|
|
|
17.2
|
|
|
|
19.2
|
|
|
|
54.6
|
|
|
|
62.2
|
|
|
Phthalic anhydride and other chemicals
|
|
|
17.7
|
|
|
|
23.3
|
|
|
|
58.7
|
|
|
|
64.3
|
|
|
Naphthalene
|
|
|
10.5
|
|
|
|
8.8
|
|
|
|
32.8
|
|
|
|
32.1
|
|
|
Other products
|
|
|
10.1
|
|
|
|
9.3
|
|
|
|
27.8
|
|
|
|
29.4
|
|
|
Total
|
|
|
152.2
|
|
|
|
149.5
|
|
|
|
471.9
|
|
|
|
493.5
|
|
|
Total
|
|
$
|
474.9
|
|
|
$
|
442.7
|
|
|
$
|
1,379.6
|
|
|
$
|
1,284.8
|
|
The following table sets forth tangible and intangible assets allocated to each of our segments as of the dates indicated:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
Railroad and Utility Products and Services
|
|
$
|
557.2
|
|
|
$
|
538.0
|
|
|
Performance Chemicals
|
|
|
461.6
|
|
|
|
446.9
|
|
|
Carbon Materials and Chemicals
|
|
|
481.6
|
|
|
|
457.1
|
|
|
All other
|
|
|
53.0
|
|
|
|
37.9
|
|
|
Total(a)
|
|
$
|
1,553.4
|
|
|
$
|
1,479.9
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
Railroad and Utility Products and Services
|
|
$
|
120.6
|
|
|
$
|
121.1
|
|
|
Performance Chemicals
|
|
|
174.2
|
|
|
|
175.4
|
|
|
Total
|
|
$
|
294.8
|
|
|
$
|
296.5
|
|
|
|
(a)
|
Increase in total assets as of September 30, 2019 includes $116.0 million attributable to the implementation of ASU No. 2016-02 “Leases (Topic 842).”
|
10. Income Taxes
Effective Tax Rate
The income tax provision for interim periods is comprised of an estimated annual effective income tax rate applied to current year ordinary income and tax associated with discrete items. These discrete items generally relate to excess stock compensation deductions, changes in tax laws, adjustments to unrecognized tax benefits and changes of estimated tax to the actual liability determined upon filing tax returns. To determine the annual effective tax rate, management is required to make estimates of annual pretax income in each domestic and foreign jurisdiction in which we conduct business. Entities that have historical pre-tax losses and current year estimated pre-tax losses that are not projected to generate a future benefit are excluded from the estimated annual effective income tax rate.
14
The estimated annual effective income tax rate, excluding discrete items discussed above, was 31.1 percent and 37.1 percent for the nine months ended September 30, 2019 and 2018, respectively. The estimated annual effective income tax rate differs from the U.S. federal statutory tax rate due to:
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Federal income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
Interest expense deduction limitation
|
|
|
8.2
|
|
|
|
7.7
|
|
|
Nondeductible expenses
|
|
|
1.6
|
|
|
|
2.6
|
|
|
GILTI inclusion, net of foreign tax credits
|
|
|
0.9
|
|
|
|
16.7
|
|
|
State income taxes, net of federal tax benefit
|
|
|
0.7
|
|
|
|
(0.8
|
)
|
|
Change in tax contingency reserves
|
|
|
0.1
|
|
|
|
0.2
|
|
|
Valuation allowance adjustments
|
|
0.0
|
|
|
|
(11.5
|
)
|
|
Foreign earnings taxed at different rates
|
|
|
(1.0
|
)
|
|
|
1.8
|
|
|
Other
|
|
|
(0.4
|
)
|
|
|
(0.6
|
)
|
|
Estimated annual effective income tax rate
|
|
|
31.1
|
%
|
|
|
37.1
|
%
|
In 2018, the estimated annual effective income tax rate included a benefit related to the release of a valuation allowance adjustment for a subsidiary in China. Management determined that sufficient positive evidence existed to support that this entity’s net operating losses were more likely than not to be realized.
Income taxes as a percentage of pretax income were 14.9 percent for the three months ended September 30, 2019. This is lower than the estimated annual effective income tax rate due to discrete items. Discrete items included in income taxes for the three months ended September 30, 2019 were a net benefit of $3.0 million. Discrete items were primarily related to favorable provision-to-return adjustments that were recorded as a result of filing the Company’s 2018 U.S. tax return. These favorable adjustments were predominately due to various tax return positions which enabled us to increase our U.S. taxable income and therefore decrease the limitation on our interest expense deduction as originally estimated.
Income taxes as a percentage of pretax income were 55.5 percent for the three months ended September 30, 2018. This was higher than the estimated annual effective income tax rate due to a higher estimated interest expense deduction limitation. Discrete items included in income taxes for the three months ended September 30, 2018 were a net cost of $1.0 million, which includes additional income tax expense to account for the filing of the Company’s 2017 domestic and foreign tax returns.
Income taxes as a percentage of pretax income were 19.6 percent for the nine months ended September 30, 2019. This is lower than the estimated annual effective income tax rate due to discrete items. Discrete items included in income taxes for the nine months ended September 30, 2019 were a net benefit of $6.7 million. Discrete items were primarily related to the reversal of various unrecognized tax benefits due to the closure of the Company’s U.S. tax audit and favorable provision-to-return adjustments that were recorded as a result of filing the Company’s 2018 U.S. tax return. These favorable adjustments were predominately due to various tax return positions which enabled us to increase our U.S. taxable income and therefore decrease the limitation on our interest expense deduction as originally estimated.
Income taxes as a percentage of pretax income were 43.9 percent for the nine months ended September 30, 2018. This was higher than the estimated annual effective income tax rate due to discrete items. Discrete items included in income taxes for the nine months ended September 30, 2018 were a net cost of $3.8 million. Discrete items of $6.1 million include income tax expense related to the impact of the Tax Act and based on the filings of the Company’s 2017 domestic and foreign tax returns. This expense is offset by $2.3 million of excess tax benefits for stock-based compensation and an income tax benefit of $0.5 million for the reversal of uncertain tax positions due to statute expirations.
During the year, management regularly updates estimates of pre-tax income and income tax expense based on changes in pre-tax income projections by taxable jurisdiction, repatriation of foreign earnings, unrecognized tax benefits and other tax matters. To the extent that actual results vary from these estimates, the actual annual effective income tax rate at the end of the year could be materially different from the estimated annual effective income tax rate for the nine months ended September 30, 2019.
Unrecognized Tax Benefits
We and our subsidiaries file income tax returns in the U.S. federal jurisdiction, individual U.S. state jurisdictions and non-U.S. jurisdictions. With few exceptions, we are no longer subject to U.S. federal, U.S. state, or non-U.S. income tax examinations by tax authorities for years prior to 2015.
15
Unrecognized tax benefits totaled $2.1 million and $7.0 million as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019 and December 31, 2018, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, was approximately $2.0 million and $3.7 million, respectively. We recognize interest expense and any related penalties from unrecognized tax benefits in income tax expense. As of September 30, 2019 and December 31, 2018, we had accrued approximately $0.8 million and $2.2 million for interest and penalties, respectively.
We do not anticipate material changes to the amount of unrecognized tax benefits within the next twelve months.
11. Inventories
Net inventories as of September 30, 2019 and December 31, 2018 are summarized in the table below:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
213.0
|
|
|
$
|
199.5
|
|
|
Work in process
|
|
|
13.0
|
|
|
|
16.0
|
|
|
Finished goods
|
|
|
112.0
|
|
|
|
128.1
|
|
|
|
|
$
|
338.0
|
|
|
$
|
343.6
|
|
|
Less revaluation to LIFO
|
|
|
63.8
|
|
|
|
58.9
|
|
|
Net
|
|
$
|
274.2
|
|
|
$
|
284.7
|
|
12. Property, Plant and Equipment
Property, plant and equipment as of September 30, 2019 and December 31, 2018 are summarized in the table below:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
17.1
|
|
|
$
|
17.5
|
|
|
Buildings
|
|
|
63.4
|
|
|
|
65.1
|
|
|
Machinery and equipment
|
|
|
805.3
|
|
|
|
800.9
|
|
|
|
|
$
|
885.8
|
|
|
$
|
883.5
|
|
|
Less accumulated depreciation
|
|
|
476.4
|
|
|
|
465.6
|
|
|
Net
|
|
$
|
409.4
|
|
|
$
|
417.9
|
|
Impairments – There were no impairment charges incurred for the nine months ended September 30, 2019 and 2018.
13. Pensions and Post-Retirement Benefit Plans
We 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.
In the U.S., all qualified and two of the non-qualified defined benefit pension plans for salaried and hourly employees have been closed to new participants and have been frozen. Accordingly, these pension plans no longer accrue additional years of service or recognize future increases in compensation for benefit purposes.
The defined contribution plans generally provide retirement assets to employee participants based upon employer and employee contributions to the participant’s individual investment account. We also provide retiree medical insurance coverage to certain U.S. employees and a life insurance benefit to most U.S. employees. For salaried employees, the retiree medical and retiree insurance plans have been closed to new participants.
16
The following table provides the components of net periodic benefit cost for the pension plans for the three and nine months ended September 30, 2019 and 2018:
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
|
$
|
1.1
|
|
|
$
|
1.4
|
|
|
Interest cost
|
|
|
1.9
|
|
|
|
1.8
|
|
|
|
5.9
|
|
|
|
5.6
|
|
|
Expected return on plan assets
|
|
|
(1.9
|
)
|
|
|
(2.1
|
)
|
|
|
(5.9
|
)
|
|
|
(6.4
|
)
|
|
Amortization of net loss
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
1.2
|
|
|
|
1.1
|
|
|
Net periodic benefit cost
|
|
$
|
0.8
|
|
|
$
|
0.6
|
|
|
$
|
2.3
|
|
|
$
|
1.7
|
|
|
Defined contribution plan expense
|
|
$
|
2.2
|
|
|
$
|
1.3
|
|
|
$
|
6.3
|
|
|
$
|
5.5
|
|
14. Debt
Debt as of September 30, 2019 and December 31, 2018 was as follows:
|
|
|
Weighted
Average
Interest Rate
|
|
|
Maturity
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
|
5.19
|
%
|
|
2024
|
|
$
|
85.0
|
|
|
$
|
92.5
|
|
|
Revolving Credit Facility
|
|
|
5.19
|
%
|
|
2024
|
|
|
385.0
|
|
|
|
390.0
|
|
|
Construction and other loans
|
|
|
6.04
|
%
|
|
2020
|
|
|
0.5
|
|
|
|
20.1
|
|
|
Senior Notes due 2025
|
|
|
6.00
|
%
|
|
2025
|
|
|
500.0
|
|
|
|
500.0
|
|
|
Debt
|
|
|
|
|
|
|
|
|
970.5
|
|
|
|
1,002.6
|
|
|
Less short-term debt and current maturities of
long-term debt
|
|
|
|
|
|
|
|
|
10.3
|
|
|
|
11.6
|
|
|
Less unamortized debt issuance costs
|
|
|
|
|
|
|
|
|
11.4
|
|
|
|
12.2
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
$
|
948.8
|
|
|
$
|
978.8
|
|
Credit Facility
On May 1, 2019, we entered into the Third Amendment (the “Third Amendment”) to our $600 million senior secured revolving credit facility and our $100 million secured term loan facility (collectively the “Credit Facility”) to, among other things: (1) reset the Credit Facility termination date to May 1, 2024; and (2) revise certain financial statement covenants and related definitions and other covenants, including revising the definition of Consolidated EBITDA to increase the permitted add back of non-recurring, non-cash charges incurred in connection with the discontinuation or sale of business operations and excluding dividends and distributions made during the fiscal quarter ended September 30, 2018 from the definition of fixed charge coverage ratio. All other material terms, conditions and covenants with respect to the Credit Facility remain unchanged.
The secured term loan has a quarterly amortization of $2.5 million and the interest rate on the Credit Facility is variable and is based on LIBOR.
Borrowings under the Credit Facility are secured by a first priority lien on substantially all of the assets of Koppers Inc., Koppers Holdings Inc. and their material domestic subsidiaries. The Credit Facility contains certain covenants for Koppers Inc. and its restricted subsidiaries that limit capital expenditures, additional indebtedness, liens, dividends, investments or acquisitions. In addition, such covenants give rise to events of default upon the failure by Koppers Inc. and its restricted subsidiaries to meet certain financial ratios.
As of September 30, 2019, we had $207.6 million of unused revolving credit availability for working capital purposes after restrictions from certain letter of credit commitments and other covenants. As of September 30, 2019, $7.5 million of commitments were utilized by outstanding letters of credit.
17
Construction Loans
Our 75-percent owned subsidiary, Koppers (Jiangsu) Carbon Chemical Company Limited (“KJCC”) entered into a committed loan facility agreement with a third-party bank consisting of a working capital line and a construction loan. As of September 30, 2019, there are no borrowings under the working capital line and the construction loan was fully repaid in September 2019. Borrowings under the working capital line would be secured by a letter of credit issued by a bank under the Credit Facility.
Senior Notes due 2025
The 2025 Notes are senior obligations of Koppers Inc., are unsecured and are guaranteed by Koppers Holdings Inc. and certain of Koppers Inc.’s domestic subsidiaries. The 2025 Notes pay interest semi-annually in arrears on February 15 and August 15 and will mature on February 15, 2025 unless earlier redeemed or repurchased. On or after February 15, 2020, we are entitled to redeem all or a portion of the 2025 Senior Notes at a redemption price of 104.5 percent of principal value, declining to a redemption price of 101.5 percent on or after February 15, 2022 until the redemption price is equivalent to the principal value on April 15, 2023.
The indenture governing the 2025 Senior Notes includes customary covenants that restrict, among other things, the ability of Koppers Inc. and its restricted 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.
15. Asset Retirement Obligations
We recognize asset retirement obligations for the removal and disposal of residues; dismantling of certain tanks required by governmental authorities; cleaning and dismantling costs for owned railcars; cleaning costs for leased railcars and barges; and site demolition, when required by governmental authorities or by contract. The following table reflects changes in the carrying values of asset retirement obligations:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation at beginning of year
|
|
$
|
27.0
|
|
|
$
|
37.1
|
|
|
Accretion expense
|
|
|
1.2
|
|
|
|
1.7
|
|
|
Revision in estimated cash flows
|
|
|
4.0
|
|
|
|
0.8
|
|
|
Cash expenditures
|
|
|
(9.1
|
)
|
|
|
(12.5
|
)
|
|
Currency translation
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
Balance at end of period
|
|
$
|
23.0
|
|
|
$
|
27.0
|
|
16. Leases
As described in Note 2 – “New Accounting Pronouncements,” on January 1, 2019, we adopted the provisions of ASU 2016-02 and recognized lease obligations and associated right-of-use assets for existing non-cancelable leases. We have non-cancelable operating leases primarily associated with railcars, office and manufacturing facilities, storage tanks, ships, production equipment and vehicles. Many of our leases include both lease (e.g., fixed rent) and non-lease components (e.g., maintenance and services). For certain asset classes such as railcars, storage tanks and ships, we have separated the lease and non-lease components based on the estimated stand-alone price for each component. For the remaining asset classes, we have elected the practical expedient to account for these components as a single lease component.
Many of our leases include one or more options to renew. The exercise of the lease renewal option is generally at our sole discretion. We evaluate renewal options at the lease commencement date and regularly thereafter to determine if we are reasonably certain to exercise the option, in which case we include the renewal period in our lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available to determine the present value of the lease payments.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Operating lease costs were $7.1 million and $23.0 million and variable lease costs were $0.8 million and $2.5 million during the three and nine months ended September 30, 2019, respectively.
18
The following table presents information about the amount and timing of cash flows arising from our operating leases as of September 30, 2019:
|
(Dollars in millions)
|
|
|
|
|
|
2019
|
|
$
|
7.4
|
|
|
2020
|
|
|
28.2
|
|
|
2021
|
|
|
23.3
|
|
|
2022
|
|
|
20.1
|
|
|
2023
|
|
|
15.2
|
|
|
Thereafter
|
|
|
56.5
|
|
|
Total lease payments
|
|
$
|
150.6
|
|
|
Less: Interest
|
|
|
(33.7
|
)
|
|
Present value of lease liabilities
|
|
$
|
116.9
|
|
Supplemental consolidated balance sheet information related to leases is as follows:
|
|
|
September 30, 2019
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
116.0
|
|
|
Current operating lease liabilities
|
|
$
|
22.1
|
|
|
Operating lease liabilities
|
|
|
94.8
|
|
|
Total operating lease liabilities
|
|
$
|
116.9
|
|
|
Weighted average remaining lease term, in years
|
|
|
7.1
|
|
|
Weighted average discount rate
|
|
|
7.7
|
%
|
17. Derivative Financial Instruments
We utilize derivative instruments to manage exposures to risks that have been identified and measured and are capable of being controlled. The primary risks managed by us by using derivative instruments are commodity price risk associated with copper and foreign currency exchange risk associated with a number of currencies, principally the U.S. dollar, the Canadian dollar, the New Zealand dollar, the Euro and British pounds. Swap contracts on copper are used to manage the price risk associated with forecasted purchases of materials used in our manufacturing processes. Generally, we will not hedge cash flow exposures for durations longer than 36 months and we have hedged certain volumes of copper through early 2022. We enter into foreign currency forward contracts to manage foreign currency risk associated with our receivable and payable balances and foreign currency denominated sales. Generally, we enter into master netting arrangements with the counterparties and offset net derivative positions with the same counterparties. Currently, our agreements do not require cash collateral.
ASC Topic 815-10, “Derivatives and Hedging,” requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. Derivative instruments’ fair value is determined using significant other observable inputs, or Level 2 in the fair value hierarchy. In accordance with ASC Topic 815-10, we designate certain of our commodity swaps as cash flow hedges of forecasted purchases of commodities. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
19
For those commodity swaps which are not designated as cash flow hedges, the fair value of the commodity swap is recognized as an asset or liability in the consolidated balance sheet and the related gain or loss on the derivative is reported in current earnings. These amounts are classified in cost of sales in the consolidated statement of operations.
As of September 30, 2019 and December 31, 2018, we had outstanding copper swap contracts of the following amounts:
|
|
|
Units Outstanding (in Pounds)
|
|
|
Net Fair Value - Asset (Liability)
|
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
(Amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
63.1
|
|
|
|
35.5
|
|
|
$
|
(8.4
|
)
|
|
$
|
(6.8
|
)
|
|
Not designated as hedges
|
|
|
18.8
|
|
|
|
13.3
|
|
|
|
(2.2
|
)
|
|
|
(2.4
|
)
|
|
Total
|
|
|
81.9
|
|
|
|
48.8
|
|
|
$
|
(10.6
|
)
|
|
$
|
(9.2
|
)
|
As of September 30, 2019 and December 31, 2018, the fair value of the outstanding copper swap contracts is recorded in the balance sheet as follows:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
(7.7
|
)
|
|
|
(9.0
|
)
|
|
Other long-term liabilities
|
|
|
(2.9
|
)
|
|
|
(0.2
|
)
|
|
Net liability on balance sheet
|
|
$
|
(10.6
|
)
|
|
$
|
(9.2
|
)
|
|
Accumulated other comprehensive loss, net of tax
|
|
$
|
(6.5
|
)
|
|
$
|
(5.3
|
)
|
Based upon contracts outstanding at September 30, 2019, in the next twelve months we estimate that $4.6 million of unrealized losses, net of tax, related to commodity price hedging will be reclassified from comprehensive income into earnings.
See “Note 6 – Comprehensive Income and Equity”, for amounts recorded in comprehensive income and for amounts reclassified from accumulated other comprehensive loss to net income for the periods specified below. For the three and nine months ended September 30, 2019 and 2018, the (loss) gain from contracts not designated as hedges is as follows:
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from contracts not designated as hedges
|
|
$
|
(1.2
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
0.1
|
|
|
$
|
(5.5
|
)
|
The fair value associated with forward contracts related to foreign currency that are not designated as hedges are immediately charged to earnings. These amounts are classified in cost of sales in the Condensed Consolidated Statement of Operations and Comprehensive Income.
As of September 30, 2019 and December 31, 2018, the fair value of outstanding foreign currency forward contracts is recorded in the balance sheet as follows:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
Accrued liabilities
|
|
|
(0.8
|
)
|
|
|
(1.0
|
)
|
|
Net asset (liability) on balance sheet
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
As of September 30, 2019 and December 31, 2018, the net currency units outstanding for these contracts were:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
British Pounds
|
|
|
GBP 4.2
|
|
|
|
GBP 5.7
|
|
|
New Zealand Dollars
|
|
|
NZD 16.0
|
|
|
|
NZD 16.0
|
|
|
United States Dollars
|
|
|
USD 10.0
|
|
|
|
USD 6.0
|
|
|
Canadian Dollars
|
|
|
CAD 20.0
|
|
|
|
CAD 0.0
|
|
|
Euro
|
|
|
EUR 1.2
|
|
|
|
EUR 1.2
|
|
20
18. Commitments and Contingent Liabilities
We are involved in litigation and various proceedings relating to environmental laws and regulations, 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 we fail to prevail in any of these legal matters or should several of these legal matters be resolved against us 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. is one of several defendants in lawsuits filed in two 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 were 64 plaintiffs in 34 cases pending as of September 30, 2019, compared to 65 plaintiffs in 35 cases pending as of December 31, 2018. As of September 30, 2019, there were 33 cases pending in the Court of Common Pleas of Allegheny County, Pennsylvania, and one case pending in the Circuit Court of Knox County, Tennessee.
The plaintiffs in all 34 pending cases seek to recover compensatory damages. Plaintiffs in 29 of those cases also seek to recover punitive damages. The plaintiffs in the 33 cases filed in Pennsylvania seek unspecified damages in excess of the court’s minimum jurisdictional limit. The plaintiff in the Tennessee state court case seeks damages of $15.0 million. The other defendants in these lawsuits vary from case to case and include companies such as Beazer East, Inc. (“Beazer East”), Honeywell International Inc., Graftech International Holdings, Dow Chemical Company, UCAR Carbon Company, Inc., and SGL Carbon Corporation. Discovery is proceeding in these cases. No trial dates have been set in any of these cases.
Pavement Sealer Cases. Koppers Inc. is one of ten defendants in separate federal lawsuits, which have been filed since December 2018, by eleven municipalities in the state of Minnesota. The other defendants in these lawsuits include Beazer East, Ruetgers Canada, Inc., Stella-Jones Corp., Coopers Creek Chemical Corporation, Lone Star Specialty Products, LLC, Bonsal American, Inc., The Brewer Company, Specialty Technology & Research, Inc. and Vance Brothers, Inc. These lawsuits were filed in the United States District Court for the District of Minnesota. Plaintiffs in each of the lawsuits claim that contamination allegedly caused by coal tar-based pavement sealer products has impacted their stormwater retention ponds, resulting in substantially increased disposal costs when the ponds are periodically dredged. The plaintiffs seek to recover compensatory damages and other costs in addition to compelling the defendants to remove the alleged contamination from the plaintiffs’ stormwater retention ponds and other stormwater-management devices. The cases are being coordinated by the Court for discovery purposes only, which has not commenced. On May 17, 2019, defendants (including Koppers Inc.) filed a joint motion to dismiss the lawsuits and four defendants (not including Koppers Inc.) filed individual motions to dismiss for lack of personal jurisdiction. The hearing on these motions was held on September 20, 2019 and the Court has not yet issued a ruling. No trial dates have been set in any of these lawsuits.
We have not provided a reserve for the coal tar pitch or pavement sealer lawsuits because, at this time, we cannot reasonably determine the probability of a loss, and the amount of loss, if any, cannot be reasonably estimated. The timing of resolution of these cases cannot be reasonably determined. Although Koppers Inc. is vigorously defending these cases, an unfavorable resolution of these matters may have a material adverse effect on our business, financial condition, cash flows and results of operations.
Environmental and Other Litigation Matters
We are 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. We expect to incur substantial costs for ongoing compliance with such laws and regulations. We 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. We accrue for environmental liabilities when a determination can be made that a liability is probable and reasonably estimable.
Environmental and Other Liabilities Retained or Assumed by Others. We have agreements with former owners of certain of our operating locations under which the former owners retained, assumed and/or agreed to indemnify us 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 Koppers Inc. and Beazer East, subject to certain limitations, Beazer East retained the responsibility for and agreed to indemnify Koppers Inc. 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”).
21
Beazer Limited, the parent company of Beazer East, unconditionally guaranteed Beazer East’s performance of the Indemnity pursuant to a guarantee (the “Guarantee”).
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, subject to the following paragraph, and agreed to share toxic tort litigation defense arising from any sites acquired from Beazer East.
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 (“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. The indemnification period ended July 14, 2019 (the “Claim Deadline”) and Beazer East may now tender certain third-party claims described in sections (i) and (ii) above to Koppers Inc. However, to the extent the third-party claims described in sections (i) and (ii) above were tendered to Beazer East by the Claim Deadline, Beazer East will continue to be required to pay the costs arising from such claims under the Indemnity. Furthermore, the Claim Deadline 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 tendered by Koppers Inc. to Beazer East.
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 manufacturing and other sites of our subsidiaries. One site currently owned and operated by Koppers Inc. in the United States is 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 includes the National Priorities List site 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 Koppers Inc.’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 us against the liabilities referred to above, including Beazer East, have performed their obligations in all material respects. We believe that, for the last three years ended December 31, 2018, amounts paid by Beazer East as a result of its environmental remediation obligations under the Indemnity have averaged, in total, approximately $11 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 we are held liable for or otherwise required to pay all or part of such liabilities without reimbursement, the imposition of such liabilities on us could have a material adverse effect on our business, financial condition, cash flows and results of operations. Furthermore, we could be required to record a contingent liability on our balance sheet with respect to such matters, which could result in a negative impact to our business, financial condition, cash flows and results of operations.
Domestic Environmental Matters. On June 4, 2018, Koppers Inc. received a letter from the U.S. Environmental Protection Agency ("EPA") concerning potential violations of the Clean Water Act observed during inspections and review of Spill Prevention, Control and Countermeasure Plans and Facility Response Plans at our facilities in Follansbee, WV; Green Spring, WV; and Clairton, PA. In addition, the EPA reviewed one facility’s compliance with an earlier consent order regarding above ground storage tank integrity testing. We continue to meet and correspond with the EPA to discuss and present relevant information related to the allegations. We currently cannot estimate the potential penalties, fines or other expenditures, if any, that may result from any EPA actions relating to the alleged potential violations and, therefore, we cannot determine if the ultimate outcome of this matter will have a material impact on our financial position, results of operations or cash flows.
22
Koppers Inc. has been named as one of the potentially responsible parties (“PRPs”) at the Portland Harbor CERCLA site located on the Willamette River in Oregon. Koppers Inc. operated a coal tar pitch terminal near the site. Koppers Inc. has responded to an EPA information request and has executed a PRP agreement which outlines a private process to develop an allocation of past and future costs among more than 80 parties to the site. Koppers Inc. believes it is a de minimis contributor at the site.
The EPA issued its Record of Decision (“ROD”) in January 2017 for the Portland Harbor CERCLA site. The selected remedy includes a combination of sediment removal, capping, enhanced and monitored natural recovery and riverbank improvements. The ROD does not determine who is responsible for remediation costs. The net present value and undiscounted costs of the selected remedy as estimated in the ROD are approximately $1.1 billion and $1.7 billion, respectively. Responsibility for implementing and funding that work will be decided in the separate private allocation process, which is ongoing.
Additionally, Koppers Inc. is involved in two separate natural resource damages assessments at the Portland Harbor site. An assessment is intended to identify damages to natural resources caused by the releases of hazardous substances to the Willamette River and to serve as the foundation to estimate liabilities for settlements of natural resource damages claims or litigation to recover from those who do not settle with the trustee groups. One of the natural resource damage assessments was filed in January 2017 by the Yakama Nation in Oregon federal court. Yakama Nation seeks recovery for future response costs and the costs of assessing injury to natural resources and recovery for past costs of overseeing investigations conducted on the site. Although certain motions are still pending, under the recent court rulings, the Yakama Nation case will be stayed pending completion of the private allocation process for the Portland Harbor CERCLA site.
In September 2009, Koppers Inc. received a general notice letter notifying it that it may be a PRP at the Newark Bay CERCLA site. In January 2010, Koppers Inc. submitted a response to the general notice letter asserting that Koppers Inc. is a de minimis party at this site.
We have accrued the estimated costs of participating in the PRP group at the Portland Harbor and Newark Bay CERCLA sites and estimated de minimis settlement amounts at the sites totaling $2.2 million at September 30, 2019. The actual cost could be materially higher as there has not been a determination of how those costs will be allocated among the PRPs at the sites. Accordingly, an unfavorable resolution of these matters may have a material adverse effect on our business, financial condition, cash flows and results of operations.
There are two plant sites related to the Performance Chemicals business and one plant site related to the Utility and Industrial Products business in the United States where we have recorded environmental remediation liabilities for soil and groundwater contamination which occurred prior to our acquisition of the businesses. As of September 30, 2019, our estimated environmental remediation liability for these acquired sites totals $4.4 million.
Foreign Environmental Matters. On October 10, 2019, the New South Wales Environment Protection Authority (“NSW EPA”) filed a proceeding against one of our Australian subsidiaries, Koppers Carbon Materials & Chemicals Pty. Ltd. (“KCMC”), in relation to an incident which occurred at our Mayfield, Australia plant on October 20, 2018. The NSW EPA alleges that KCMC committed an offense under Australian law by failing to maintain its plant and equipment in a proper and efficient working condition. The NSW EPA alleges that KCMC did not properly maintain a valve which failed and released heated coal tar pitch into a bunded area on our site and released fumes into the atmosphere. The first hearing on the proceeding is scheduled to be held on November 22, 2019 in the Land and Environment Court of New South Wales. The maximum fine for the proceeding is $1.0 million AUD (approximately $0.7 million USD) plus legal costs incurred by the NSW EPA. The Land and Environment Court also has the authority to order KCMC to make certain improvements to its operations at the site of the incident. We have accrued our estimated liability associated with the proceeding during the three months ended September 30, 2019. We also continue to meet and correspond with the NSW EPA to discuss and present relevant information related to inquiries regarding other incidents at the facility, primarily related to odor complaints. We currently cannot estimate the potential penalties, fines or other expenditures, if any, that may result from these NSW EPA inquiries and, therefore, we cannot determine if the ultimate outcome of this matter will have a material impact on our financial position, results of operations or cash flows.
There is one plant site related to the Performance Chemicals business located in Australia where we have recorded an environmental remediation liability for soil and groundwater contamination which occurred prior to the acquisition of the business. As of September 30, 2019, our estimated environmental remediation liability for this acquired site totals $1.3 million.
23
Environmental Reserves Rollforward. The following table reflects changes in the accrued liability for environmental matters, of which $2.9 million and $3.5 million are classified as current liabilities at September 30, 2019 and December 31, 2018, respectively:
|
|
|
Period ended
|
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
10.1
|
|
|
$
|
13.9
|
|
|
Expense
|
|
|
0.4
|
|
|
|
0.9
|
|
|
Reversal of reserves
|
|
|
(0.6
|
)
|
|
|
(2.4
|
)
|
|
Cash expenditures
|
|
|
(0.2
|
)
|
|
|
(3.8
|
)
|
|
Acquisition
|
|
|
0.0
|
|
|
|
1.9
|
|
|
Currency translation
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)
|
|
Balance at end of period
|
|
$
|
9.6
|
|
|
$
|
10.1
|
|
19. Related Party Transactions
At December 31, 2017, KJCC had an outstanding loan from its 25-percent non-controlling shareholder of $2.5 million. This loan was repaid in November 2018.
20. Fair Value Measurements
Carrying amounts and the related estimated fair values of our financial instruments as of September 30, 2019 and December 31, 2018 are as follows:
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
Fair Value
|
|
|
Carrying
Value
|
|
|
Fair Value
|
|
|
Carrying
Value
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, including restricted cash
|
|
$
|
40.7
|
|
|
$
|
40.7
|
|
|
$
|
40.6
|
|
|
$
|
40.6
|
|
|
Investments and other assets(a)
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
1.2
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
951.5
|
|
|
$
|
970.5
|
|
|
$
|
945.3
|
|
|
$
|
1,002.6
|
|
|
(a)
|
Excludes equity method investments.
|
Cash and cash equivalents – The carrying value 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. This asset is classified as Level 2 in the valuation hierarchy and is measured from values received from financial institutions.
Debt – The fair value of our long-term debt is estimated based on the market prices for the same or similar issuances or on the current rates offered to us for debt of the same remaining maturities (Level 2). The fair value of our Credit Facility approximates carrying value due to the variable rate nature of this instrument.
24