SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period March 31, 1994
Commission file number 1-3919
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 37-0364250
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, TX 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 458-0028
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
Number of shares of common stock outstanding at April 30, 1994: 5,592,751
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1993
and March 31, 1994 3-4
Consolidated Statements of Operations - Three months
ended March 31, 1993 and 1994 5
Consolidated Statement of Stockholders' Deficit
- Three months ended March 31, 1994 6
Consolidated Statements of Cash Flows - Three months
ended March 31, 1993 and 1994 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, MARCH 31,
ASSETS 1993 1994
<S> <C> <C>
Current assets:
Accounts and notes receivable $ 38,513 $ 49,157
Inventories 35,544 36,698
Deferred income taxes 5,437 4,776
Prepaid expenses and other 1,257 1,019
Total current assets 80,751 91,650
Property, plant and equipment 222,601 224,604
Less accumulated depreciation 141,832 144,963
Net property, plant and equipment 80,769 79,641
Other assets:
Intangible pension asset 12,067 11,612
Deferred income taxes 28,056 30,333
Other 5,011 4,947
Total other assets 45,134 46,892
$206,654 $218,183
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
December 31, MARCH 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 1993 1994
<S> <C> <C>
Current liabilities:
Notes payable and current maturities of
long-term debt $ 8,148 $ 17,394
Accounts payable 24,189 24,198
Accounts payable to affiliates 111 21
Accrued pension cost 9,556 8,812
Accrued OPEB cost 7,243 7,243
Other accrued liabilities 25,119 26,507
Total current liabilities 74,366 84,175
Noncurrent liabilities:
Long-term debt 19,042 18,477
Accrued pension cost 60,102 62,941
Accrued OPEB cost 96,336 96,784
Other 7,716 7,468
Total noncurrent liabilities 183,196 185,670
Stockholders' deficit:
Common stock 6,244 6,304
Additional paid-in capital 18,803 19,255
Pension liabilities adjustment (35,317) (37,570)
Accumulated deficit (40,047) (39,639)
Treasury stock, at cost (591) (12)
Total stockholders' deficit (50,908) (51,662)
$206,654 $218,183
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
1993 1994
<S> <C> <C>
Revenues and other income:
Net sales $81,130 $87,580
Other 89 65
81,219 87,645
Costs and expenses:
Cost of goods sold 73,975 80,362
Selling 1,292 1,353
General and administrative 4,208 4,626
Interest 782 629
80,257 86,970
Income before income taxes 962 675
Provision for income taxes 370 267
Net income $ 592 $ 408
Income per common and common equivalent share $ .11 $ .07
Weighted average common and common equivalent
shares outstanding 5,511 5,550
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Three months ended March 31, 1994
(In thousands)
<TABLE>
<CAPTION>
Additional Pension Total
Common paid-in liabilities Accumulated Treasury stockholders'
stock capital adjustment deficit stock deficit
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 $6,244 $18,803 $(35,317) $(40,047) $(591) $(50,908)
Net income - - - 408 - 408
Issuance of common
stock 60 452 - - 622 1,134
Purchase of treasury
stock - - - - (43) (43)
Pension adjustment - - (2,253) - - (2,253)
Balance at
March 31, 1994 $6,304 $19,255 $(37,570) $(39,639) $ (12) $(51,662)
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1993 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 592 $ 408
Adjustments:
Depreciation 2,939 3,131
Noncash OPEB cost 617 448
Other, net (166) (92)
Change in assets and liabilities:
Accounts and notes receivable (12,853) (10,727)
Inventories 2,765 (1,154)
Accounts payable 2,252 (81)
Other, net (366) 920
Total adjustments (4,812) (7,555)
Net cash used by operating activities (4,220) (7,147)
Cash flows from investing activities -
capital expenditures (1,751) (2,003)
Cash flows from financing activities:
Revolving credit facility, net 6,946 9,284
Other notes payable and long-term debt:
Additions 23 133
Principal payments (925) (736)
Common stock issued (purchased), net (73) 469
Net cash provided by financing activities 5,971 9,150
Net change in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
Cash and cash equivalents at end of period $ - $ -
Supplemental disclosures
Cash paid for:
Interest, net of amount capitalized $ 812 $ 603
Income taxes 66 24
Treasury stock contributed to employee benefit plan - 622
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Keystone Consolidated Industries, Inc. (the "Company") is a majority-owned
subsidiary of Contran Corporation ("Contran"). At March 31, 1994, Contran held,
directly or indirectly, approximately 62% of the Company's outstanding common
stock.
The consolidated balance sheet at December 31, 1993 has been condensed from
the Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 1994 and the consolidated statements of
operations and cash flows for the interim periods ended March 31, 1993 and 1994,
and the consolidated statement of stockholders' deficit for the interim period
ended March 31, 1994 have been prepared by the Company without audit. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows have been made. However, it should be
understood that accounting measurements at interim dates may be less precise
than at year end. The results of operations for the interim periods are not
necessarily indicative of the operating results for a full year or of future
operations.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1993 (the "Annual
Report").
Note 2 - Income per share:
Income per share is based on the weighted average number of common and
common equivalent shares outstanding during each period.
Note 3 - Inventories:
Inventories are stated at the lower of cost or market. The last-in, first-
out ("LIFO") method is used to determine the cost of approximately 73% of
inventories held at March 31, 1994 (71% at December 31, 1993) and the first-in,
first-out or average cost methods are used to determine the cost of all other
inventories.
<TABLE>
<CAPTION>
December 31, MARCH 31,
1993 1994
(In thousands)
<S> <C> <C>
Raw materials $ 9,944 $ 9,191
Work in process 9,963 11,329
Finished products 14,250 15,329
Supplies 14,115 13,577
48,272 49,426
Less LIFO reserve 12,728 12,728
$35,544 $36,698
</TABLE>
Note 4 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, MARCH 31,
1993 1994
<S> <C> <C>
(In thousands)
Commercial credit agreements:
Revolving credit facility $ 3,911 $13,195
Term loan 19,439 18,883
Other 3,840 3,793
27,190 35,871
Less current maturities 8,148 17,394
$19,042 $18,477
</TABLE>
The Company maintains a $35 million revolving credit facility which matures
December 31, 1996, is collateralized primarily by the Company's trade
receivables and inventories, and bears interest at the prime rate plus 1.5% (an
effective rate of 7.5% at March 31, 1994). The amount of available borrowings
is based on formula-determined amounts of trade receivables and inventories,
less the amount of outstanding letters of credit (approximately $.4 million at
March 31, 1994). At March 31, 1994, the available borrowings under this credit
facility were $21.4 million. This credit facility requires that the Company's
daily cash receipts be used to reduce the outstanding borrowings, which results
in the Company maintaining zero cash balances.
The Company's term loan with the financial institution that provides the
Company's revolving credit facility bears interest at the prime rate plus 1% and
is due in installments through December 31, 1996. The loan requires compliance
with the restrictive covenants, security agreement and certain other terms of
the revolving credit facility, is further collateralized by the Company's
property, plant and equipment, and becomes due and payable if the Company
terminates its revolving credit facility.
The Company's credit agreements contain restrictive covenants including a
prohibition against the payment of dividends without lender consent and certain
minimum working capital and net worth requirements.
Note 5 - Income taxes:
The difference between the provision for income taxes and the amounts that
would be expected using the U.S. federal statutory income tax rate is primarily
related to state income taxes. The components of the net deferred tax asset are
summarized below.
<TABLE>
<CAPTION>
Deferred tax
assets (liabilities)
December 31, March 31,
1993 1994
(In thousands)
<S> <C> <C>
Tax effect of temporary differences relating to:
Inventories $ 1,623 $ 1,666
Property and equipment (11,845) (11,383)
Accrued pension cost 18,206 18,970
Accrued OPEB cost 40,396 40,571
Accrued liabilities and other deductible
differences 6,978 7,421
Other taxable differences (583) (584)
Net operating loss carryforwards 2,376 1,675
Alternative minimum tax credit carryforwards 6,342 6,773
Valuation allowance (30,000) (30,000)
Net deferred tax asset 33,493 35,109
Less current deferred tax asset 5,437 4,776
Noncurrent deferred tax asset $ 28,056 $ 30,333
</TABLE>
There was no change in the deferred tax valuation allowance during the first
three months of 1993 or 1994.
Note 6 - Pension plans:
Variances from actuarial assumptions, including the rate of return on
pension plan assets, will continue to result in additional increases or
decreases in accrued pension costs, deferred taxes, stockholders' deficit,
pension expense and related funding requirements in future periods.
During the early 1980's the Company received permission from the Internal
Revenue Service to defer certain annual pension plan contributions aggregating
$32 million. At March 31, 1994, the remaining balance of such deferred
contributions was approximately $12.5 million. The deferred amounts, with
interest, are payable to the plans through 2000 and are collateralized by a lien
on all of the Company's assets.
Note 7 - Contingencies:
Environmental matters
As discussed in the Annual Report, the Company is involved in the closure of
inactive waste disposal units as well as the long-term storage or disposal of
radioactive arc dust at its Peoria, Illinois facility. In addition, the Company
is subject to federal and state "Superfund" legislation at three sites involving
cleanup of landfills and disposal facilities which allegedly received hazardous
substances generated by discontinued operations of the Company. The Company has
accrued its estimated costs related to these issues. The Company believes its
comprehensive general liability insurance policies provide indemnification for
certain costs the Company incurs at the "Superfund" sites and has recorded
receivables for the estimated insurance recoveries. There were no significant
changes in the status of these environmental matters during the first quarter of
1994.
Current litigation
As discussed in the Annual Report, in 1983 and 1984, the Company satisfied
a portion of its funding obligations to the Keystone Master Pension Trust
through the contribution of certain real property that the IRS contended were
prohibited transactions. In May 1993, the U.S. Supreme Court reversed lower
court decisions favorable to the Company and remanded the case to the tax court
to determine the amount due. During 1993, the Company accrued $7.1 million for
the estimated costs of the 5% nondeductible excise taxes and related interest.
In addition, to avoid a second tier $9.6 million excise tax, the Company made a
"correction" payment of $2.3 million to its pension plans in June 1993. The
Company is currently negotiating a settlement of this matter with the IRS and
has reached a preliminary understanding whereby the amount of excise taxes and
related interest will be reduced by approximately $4 million and the Company
will make an additional "correction" payment of $3.3 million to its pension
plans. Should this preliminary understanding become the final settlement, the
Company would recognize, as a change in estimate, an approximate $2.5 million
after-tax reduction in previously-recorded expense.
Also as discussed in the Annual Report, the Company is involved in an
adversary proceeding against the Company relating to the bankruptcy of the
purchaser of two former divisions of the Company. The Company believes the
adversary proceeding is without merit and intends to vigorously defend its
interests. There was no significant change in the status of this litigation
during the first quarter of 1994.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
The Company's cash flows from operating activities are affected by the
seasonality of its business which resulted in increases in accounts receivable
and the outstanding balance under its revolving credit facility during the first
three months of both 1993 and 1994. The increases in accounts receivable were
also due partially to lower year-end accounts receivable balances resulting from
the normal two-week December shutdown for maintenance and repairs at the Peoria,
Illinois facility. In addition, cash used by operating activities was higher
during the first quarter of 1994 due principally to increases in pension
contributions and inventory levels, decreased accounts payable and lower income
from operations compared to the 1993 period.
Pension contributions during the first three months of 1994 amounted to $3.4
million, an increase of $1.6 million from the 1993 period. The Company
currently expects to contribute an additional $15.8 million during the remainder
of 1994 for a total of $19.2 million compared to total pension contributions in
1993 of $15.0 million. Pension contributions in 1993 included the additional
$2.3 million payment to the pension plans made in 1993 in order to avoid a
second tier excise tax related to the adverse May 1993 U.S. Supreme Court
decision (see Note 7 to the Consolidated Financial Statements). The higher
pension contributions in 1994 include approximately $3 million of planned
contributions in excess of expected minimum funding requirements and the
possible $3.3 million additional contribution discussed in Note 7 to the
Consolidated Financial Statements.
At March 31, 1994, the Company's working capital was $7.5 million. Notes
payable and current maturities of long-term debt, deductions in the computation
of such working capital, aggregated $17.4 million at March 31, 1994, and
included outstanding borrowings of $13.2 million under the Company's $35 million
revolving credit facility. The amount of available borrowings is based on
formula-determined amounts of trade receivables and inventories, less the amount
of outstanding letters of credit, and additional available borrowings were $21.4
million at March 31, 1994. The revolving credit facility requires that the
Company's daily cash receipts be used to reduce the outstanding borrowings,
which results in the Company maintaining zero cash balances. Borrowings under
the revolving credit facility currently mature December 31, 1996.
Capital expenditures in 1994 are currently estimated to be approximately $18
million for the full year, including approximately $5 million related to
information processing systems at the Company's Peoria, Illinois facility and $2
million related to environmental items.
For 1994, management has budgeted profitable results of operations with
sufficient cash flows from operations and financing activities to meet its
anticipated operating needs. This budget is based upon management's assessment
of various financial and operational factors including, but not limited to,
assumptions relating to product shipments, product mix, foreign competition, and
selling prices; production schedules; productivity rates; raw materials,
electricity, labor, employee benefit and other fixed and variable costs; working
capital requirements; interest rates; repayments of long-term debt; capital
expenditures; and available borrowings under the Company's revolving credit
facility. However, potential liabilities under environmental laws and
regulations with respect to the disposal and clean-up of wastes beyond present
estimates, any significant increases in the required minimum fundings to the
Company's pension funds or in the cost of providing medical coverage to active
and retired employees, could have a material adverse affect on the future
liquidity, financial condition and results of operations of the Company.
Additionally, any significant decline in the Company's markets or market share,
any inability to maintain satisfactory billet and rod production levels, or any
other unanticipated costs, if significant, could result in a need for funds
greater than the Company currently has available. There can be no assurance the
Company would be able to obtain an adequate amount of additional financing.
RESULTS OF OPERATIONS:
The Company's operations are the manufacture and sale of carbon steel rod,
wire and wire products for agricultural, industrial, construction, commercial,
original equipment manufacturers and retail consumer markets. Historically, the
Company has experienced greater sales and profits during the first half of the
year due to the seasonality of sales in principal wire products markets,
including the agricultural and construction markets.
Net sales for the first quarter of $87.6 million represents an increase of
8% over the comparable 1993 quarter primarily due to higher selling prices.
Tons of product sold were comparable in both periods with wire and wire products
sales increasing 2% to 105,000 tons and rod sales decreasing 4% to 68,000 tons.
Despite higher product selling prices in 1994, margins and net income declined
due principally to the continued high cost of scrap steel, the Company's primary
raw material, increased pressure from imports on certain product selling prices,
and inclement weather resulting in production outages and increased costs.
During the first quarter of 1994, billet production of 151,000 tons was
comparable to the 1993 period, whereas steel rod production increased 4% to
171,000 tons, or 91% of the currently estimated capacity. During the first
quarters of 1994 and 1993, the Company purchased 30,000 and 26,000 tons of
billets, respectively, for conversion to rods.
Scrap steel costs in the first quarter of 1994 were approximately 34% higher
than one year ago but are currently expected to decline from current levels
during the second quarter. A cost decline could help the Company to reestablish
historic gross profit margins later in the year.
Selling, general and administrative expenses, as a percentage of net sales,
were comparable in both periods.
Interest expense declined in the 1994 period due primarily to lower interest
rates and lower average borrowing levels.
PART II.
ITEM 1. Legal Proceedings
Reference is made to disclosure provided under the caption "Current
litigation" in Note 14 to the Consolidated Financial Statements included in the
Annual Report.
ITEM 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K filed during the quarter ended March 31, 1994:
None.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Keystone Consolidated Industries, Inc.
(Registrant)
Date: May 9, 1994 By /s/Harold M. Curdy
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: May 9, 1994 By /s/Bert E. Downing, Jr.
Bert E. Downing, Jr.
Corporate Controller
(Principal Accounting Officer)
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Keystone Consolidated Industries, Inc.
(Registrant)
Date: May 9, 1994 By ___________________________________
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: May 9, 1994 By ___________________________________
Bert E. Downing, Jr.
Corporate Controller
(Principal Accounting Officer)
