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 quarter ended June 30, 1995
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 Section 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 July 24, 1995: 5,636,507
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1994
and June 30, 1995 3-4
Consolidated Statements of Operations - Three months
and six months ended June 30, 1994 and 1995 5
Consolidated Statements of Cash Flows - Six months
ended June 30, 1994 and 1995 6
Consolidated Statement of Stockholders' Deficit - Six
months ended June 30, 1995 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, JUNE 30,
ASSETS 1994 1995
<S> <C> <C>
Current assets:
Notes and accounts receivable $ 41,915 $ 43,814
Accounts receivable from affiliate - 70
Inventories 35,861 40,760
Deferred income taxes 4,552 3,188
Prepaid expenses and other 2,057 1,486
Total current assets 84,385 89,318
Property, plant and equipment 231,708 238,515
Less accumulated depreciation 150,561 156,785
Net property, plant and equipment 81,147 81,730
Other assets:
Unrecognized pension obligation 10,247 9,337
Deferred income taxes 23,783 19,549
Notes receivable 1,397 1,189
Other 4,642 5,507
Total other assets 40,069 35,582
$205,601 $206,630
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
December 31, JUNE 30,
LIABILITIES AND STOCKHOLDERS' DEFICIT 1994 1995
<S> <C> <C>
Current liabilities:
Notes payable and current long-term debt $ 10,714 $ 20,491
Accounts payable 28,418 28,582
Accounts payable to affiliate 191 -
Accrued pension cost 13,735 10,628
Accrued OPEB cost 6,825 7,883
Other accrued liabilities 21,973 21,076
Total current liabilities 81,856 88,660
Noncurrent liabilities:
Long-term debt 15,340 13,546
Accrued pension cost 40,470 25,600
Accrued OPEB cost 98,310 97,499
Other 10,204 10,479
Total noncurrent liabilities 164,324 147,124
Stockholders' deficit:
Common stock 6,313 6,357
Additional paid-in capital 19,393 19,948
Accumulated deficit (32,486) (29,355)
Net pension liabilities adjustment (33,787) (26,092)
Treasury stock, at cost (12) (12)
Total stockholders' deficit (40,579) (29,154)
$205,601 $206,630
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1994 1995 1994 1995
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $102,549 $95,482 $190,129 $186,250
Other 62 165 127 324
102,611 95,647 190,256 186,574
Costs and expenses:
Cost of goods sold 90,515 84,227 170,877 167,504
Selling, general and
administrative 5,669 5,768 11,648 12,260
Interest - notes payable and
long-term debt 738 897 1,367 1,634
Interest credit related to
excise tax (3,853) - (3,853) -
93,069 90,892 180,039 181,398
Income before income taxes 9,542 4,755 10,217 5,176
Provision for income taxes 3,703 1,879 3,970 2,045
Net income $ 5,839 $ 2,876 $ 6,247 $ 3,131
Income per common and
common equivalent share $ 1.04 $ .50 $ 1.11 $ .55
Weighted average common and common
equivalent shares outstanding 5,613 5,657 5,581 5,650
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1994 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,247 $ 3,131
Depreciation 6,489 6,569
Deferred income taxes 2,631 678
Other, net 733 141
Change in assets and liabilities:
Notes and accounts receivable (11,054) (1,927)
Inventories (174) (4,899)
Accounts payable 4,522 (27)
Accrued pension cost (5,954) (4,452)
Accrued excise tax and related interest (5,053) (1,033)
Other, net 1,172 922
Net cash used by operating activities (441) (897)
Cash flows from investing activities:
Capital expenditures (6,090) (7,575)
Proceeds from disposition of property and equipment - 487
Net cash used by investing activities (6,090) (7,088)
Cash flows from financing activities:
Revolving credit facility, net 7,502 9,787
Other notes payable and long-term debt:
Additions 163 81
Principal payments (1,603) (1,885)
Common stock issued, net 469 2
Net cash provided by financing activities 6,531 7,985
Net change in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
Cash and cash equivalents, end of period $ - $ -
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized $ 1,362 $ 1,743
Income taxes 1,028 869
Stock contributed to employee benefit plan $ 622 $ 597
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Six months ended June 30, 1995
(In thousands)
<TABLE>
<CAPTION>
Additional Net pension Total
Common paid-in Accumulated liabilities Treasury stockholders'
stock capital deficit adjustment stock deficit
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 $6,313 $19,393 $(32,486) $(33,787) $(12) $(40,579)
Net income - - 3,131 - - 3,131
Issuance of common
stock 44 555 - - - 599
Pension adjustment - - - 7,695 - 7,695
Balance at
June 30, 1995 $6,357 $19,948 $(29,355) $(26,092) $ (12) $(29,154)
</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 June 30, 1995, Contran held,
directly or indirectly, approximately 68% of the Company's outstanding common
stock.
The consolidated balance sheet at December 31, 1994 has been condensed from
the Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1995 and the consolidated statements of
operations and cash flows for the interim periods ended June 30, 1994 and 1995,
and the consolidated statement of stockholders' deficit for the interim period
ended June 30, 1995 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, 1994 (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.
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 three-fourths
of total inventories and the first-in, first-out or average cost methods are
used to determine the cost of other inventories.
<TABLE>
<CAPTION>
December 31, JUNE 30,
1994 1995
(In thousands)
<S> <C> <C>
Raw materials $12,672 $13,572
Work in process 8,086 14,816
Finished products 14,501 12,336
Supplies 14,407 13,841
49,666 54,565
Less LIFO reserve 13,805 13,805
$35,861 $40,760
</TABLE>
Note 4 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, JUNE 30,
1994 1995
(In thousands)
<S> <C> <C>
Commercial credit agreements:
Revolving credit facility $ 6,531 $16,318
Term loan 16,382 14,716
Other 3,141 3,003
26,054 34,037
Less current maturities 10,714 20,491
$15,340 $13,546
</TABLE>
The Company's $35 million revolving credit facility 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 10.5% at June 30, 1995). The amount of available borrowings is based on
formula-determined amounts of trade receivables and inventories, less the amount
of outstanding letters of credit. Additional borrowings available were $18.3
million at June 30, 1995. The Company's daily cash receipts are required to be
used to reduce the outstanding borrowings, which results in the Company
maintaining zero cash balances.
The Company's term loan bears interest at the prime rate plus 1% and is due
in installments through December 31, 1996. The loan is collateralized by the
Company's property, plant and equipment, and has cross default provisions
relating to the revolving credit facility.
The 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 net deferred tax asset at each of December 31, 1994 and June 30, 1995 is
net of a $30 million valuation allowance. There was no change in the deferred
tax valuation allowance during the first half of 1994 or 1995.
Note 6 - Pension plans:
Variances from actuarial assumptions, including the rate of return on
pension plan assets, will result in 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. At June 30,
1995, the remaining balance of such deferred contributions was approximately
$9.1 million. Such 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 - Excise tax settlement:
As discussed in the Annual Report, the Company satisfied a portion of its
1983 and 1984 funding obligations to the Keystone Master Pension Trust (the
"Keystone Trust") with contributions 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 ruled the
contributions were prohibited transactions. The case was remanded to the Tax
Court to determine the amount due. During 1993, the Company accrued
$7.1 million for the estimated cost of the 5% excise taxes and related interest
and, to avoid a second tier excise tax, made a "correction" payment of $2.3
million to its pension plans.
In June 1994, the Company and the IRS agreed on the amount due and entered
into a Closing Agreement which was approved by the Tax Court in July 1994.
Pursuant to the terms of the Closing Agreement, in June 1994, the Company made
an additional "correction" payment of approximately $3.3 million to its pension
plans, and agreed to pay $3.1 million in excise tax and accrued interest over a
two-year period beginning in June 1994. As a result, 1994 results include a
$4 million reduction in previously accrued expenses related to this matter.
Note 8 - 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 disposal
of radioactive arc dust. 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 was no significant change in the status
of these environmental matters during the first six months of 1995.
Other litigation. The Company is engaged in various legal proceedings
incidental to its normal business activities. In the opinion of the Company,
none of such proceedings are material in relation to the Company's consolidated
financial position, results of operations or liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The Company's principal 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 second quarter of 1995 decreased $7.1 million, or 7% from
the comparable 1994 period. Tons of rod sold decreased 13% (74,000 tons
compared to 85,000 tons), while tons of wire and wire products sold decreased
10% (109,000 tons compared to 121,000 tons). Wire and wire products selling
prices increased 3% and rod selling prices increased 7% during the second
quarter of 1995 as compared to the second quarter of 1994.
Net sales for the first half of 1995 decreased $3.9 million, or 2%, from the
comparable 1994 period. Tons of rod sold decreased 9% (139,000 tons compared to
153,000 tons), while tons of wire and wire products sold decreased 2% (221,000
tons compared to 226,000 tons). Wire and wire products selling prices increased
1% and rod selling prices increased 6% during the first half of 1995 as compared
to the first half of 1994.
The Company believes the 11% decline in overall sales volume during the 1995
second quarter and a 17% year-to-year decline in order backlog as of June 30,
1995 is a result of several factors, including customers reducing their
inventory levels, increased rod imports and reduced orders due to the Company's
announced wire sales price increase for April orders. In addition, the Company
believes this price increase, which was not widely followed in the industry and
met with customer resistance, resulted in some reduction in market share. The
Company has rescinded the April price increase in response to competitive
pressure and is presently regaining market share. The Company anticipates
certain of these factors will continue to impact revenues through the end of
1995. However, despite these negative factors and the decreased June 30, 1995
backlog, the Company currently is forecasting that revenues for the remainder of
1995 will approximate those of the second half of 1994.
Gross profit was $11.3 million for the second quarter of 1995, a decrease of
$.7 million from the comparable 1994 period. However, the gross profit margin
was 11.8%, up from 11.7% in the comparable 1994 period. Gross profit was $18.7
million for the first half of 1995, a decrease of $.5 million, and the year-to-
date gross profit margin of 10.1% was comparable to the 1994 period. Higher
product selling prices in 1995 positively impacted gross margins while margins
were negatively impacted by higher rod conversion costs, higher scrap costs and
increased costs related to production outages at the Peoria rod mill during the
first quarter of 1995.
Scrap prices were approximately 4% and 2% higher during the second quarter
and first half, respectively, of 1995 as compared to the 1994 periods. Scrap
steel costs are currently expected to increase slightly from current levels
during the second half of 1995.
During the first half of 1995, billet and rod production at the Peoria steel
mill of 326,000 tons and 353,000 tons, respectively, approximated production in
the 1994 period. As the Company's billet production capacity is less than its
rod production capacity, the Company periodically purchases billets from other
suppliers to increase the utilization of the rod mill and thus assure the
Company's ability to meet its customers' orders. The decision to purchase
billets depends on billet prices, product demand and other market conditions.
During the first half of 1995 the Company purchased 56,000 tons of billets
compared to 54,000 tons purchased in the first half of 1994. Due to higher than
normal billet inventory levels at June 30, 1995 and lower than planned short-
term sales forecasts, the Company currently does not anticipate purchasing
billets during the remainder of 1995 whereas 41,000 tons were purchased during
the last half of 1994.
Selling, general and administrative expenses, as a percentage of net sales,
increased slightly from the 1994 to 1995 periods. Interest expense increased in
the 1995 periods due to higher interest rates and increased borrowings under the
Company's revolving credit facility.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's cash flows from operating activities are affected by the
seasonality of its business as sales of certain products used in the
agricultural and construction industries are typically highest during the second
quarter and lowest during the fourth quarter of each year. These seasonal
fluctuations, as well as the normal December shutdown for maintenance and
repairs at the Company's Peoria, Illinois facility impact the timing of
production, sales and purchases.
At June 30, 1995, the Company had working capital of $.7 million. Notes
payable and current long-term debt, deductions in the computation of such
working capital, aggregated $20.5 million at June 30, 1995, and included
outstanding borrowings of $16.3 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 borrowings available were $18.3
million at June 30, 1995. The Company's daily cash receipts are required to be
used to reduce the outstanding borrowings, which results in the Company
maintaining zero cash balances. Borrowings under the revolving credit facility
mature December 31, 1996.
Pension contributions and capital expenditures during the first half of 1995
amounted to $9.7 million and $7.6 million, respectively, and are currently
estimated to be approximately $20.8 million and $20 million for the full year,
respectively.
Management has budgeted profitable results of operations with sufficient
cash flows from operations and financing activities to meet its anticipated
operating needs for the remainder of 1995. 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 and
selling prices; rod imports; 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 accruals, 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 or 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.
PART II.
ITEM 1. Legal Proceedings
Reference is made to disclosure provided under the caption "Current
litigation" in Note 13 to the Consolidated Financial Statements included in the
Annual Report.
Note 8 to the Consolidated Financial Statements is incorporated herein by
reference.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) The following exhibit is included herein:
27.1 Financial Data Schedule for the six month period ended June 30, 1995.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1995:
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: July 27, 1995 By /s/Harold M. Curdy
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: July 27, 1995 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: July 27, 1995 By ___________________________________
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: July 27, 1995 By ___________________________________
Bert E. Downing, Jr.
Corporate Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KEYSTONE
CONSOLIDATED INDUSTRIES, INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 44,395
<ALLOWANCES> 511
<INVENTORY> 40,760
<CURRENT-ASSETS> 4,674
<PP&E> 238,515
<DEPRECIATION> 156,785
<TOTAL-ASSETS> 206,630
<CURRENT-LIABILITIES> 88,660
<BONDS> 13,546
<COMMON> 6,357
0
0
<OTHER-SE> (35,511)
<TOTAL-LIABILITY-AND-EQUITY> 206,630
<SALES> 186,250
<TOTAL-REVENUES> 186,574
<CGS> 167,504
<TOTAL-COSTS> 167,504
<OTHER-EXPENSES> 12,218
<LOSS-PROVISION> 42
<INTEREST-EXPENSE> 1,634
<INCOME-PRETAX> 5,176
<INCOME-TAX> 2,045
<INCOME-CONTINUING> 3,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,131
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
