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 June 30, 1997
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
incorporation or organization) Identification No.)
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: (972) 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 August 11, 1997 9,287,898
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1996
and June 30, 1997 3-4
Consolidated Statements of Operations - Three months
and six months ended June 30, 1996 and 1997 5
Consolidated Statements of Cash Flows - Six months
ended June 30, 1996 and 1997 6
Consolidated Statement of Redeemable Preferred Stock
and Common Stockholders' Equity - Six months
ended June 30, 1997 7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1996 1997
<S> <C> <C>
Current assets:
Notes and accounts receivable $35,974 $ 43,798
Inventories 36,533 35,834
Deferred income taxes 16,381 17,488
Prepaid expenses 1,542 626
Total current assets 90,430 97,746
Property, plant and equipment 262,441 271,333
Less accumulated depreciation 169,833 176,680
Net property, plant and equipment 92,608 94,653
Other assets:
Restricted investments 7,691 7,442
Prepaid pension cost 104,726 106,226
Deferred income taxes 2,181 -
Other 4,732 4,391
Total other assets 119,330 118,059
$302,368 $310,458
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1996 1997
<S> <C> <C>
Current liabilities:
Notes payable and current maturities of
long-term debt $ 34,760 $ 39,204
Accounts payable 34,419 31,485
Accounts payable to affiliates 159 167
Accrued OPEB cost 8,368 8,397
Other accrued liabilities 28,631 32,722
Total current liabilities 106,337 111,975
Noncurrent liabilities:
Long-term debt 17,020 15,306
Accrued OPEB cost 100,818 101,271
Negative goodwill 27,057 26,099
Other 16,466 14,697
Total noncurrent liabilities 161,361 157,373
Redeemable preferred stock 3,500 3,500
Stockholders' equity:
Common stock 9,920 9,994
Additional paid-in capital 46,347 46,882
Accumulated deficit (25,085) (19,254)
Treasury stock, at cost (12) (12)
Total stockholders' equity 31,170 37,610
$302,368 $310,458
</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,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $90,655 $103,232 $170,118 $192,381
Other, net 154 243 186 442
90,809 103,475 170,304 192,823
Costs and expenses:
Cost of goods sold 83,288 89,801 157,675 170,592
Selling 967 1,215 2,006 2,460
General and administrative 4,314 4,897 9,296 9,280
Overfunded defined benefit pension
credit - (750) - (1,500)
Interest 902 1,346 1,869 2,736
89,471 96,509 170,846 183,568
Income (loss) before income taxes 1,338 6,966 (542) 9,255
Provision for income taxes (benefit) 528 2,619 (215) 3,284
Net income (loss) 810 4,347 (327) 5,971
Dividends on preferred stock - 70 - 140
Net income (loss) available for
common shares $ 810 $ 4,277 $ (327) $ 5,831
Primary net income (loss) available
for common shares per common and
common equivalent share $ .14 $ .46 $ (.06) $ .63
Fully diluted net income (loss)
available for common shares per
common and common equivalent share $ .14 $ .45 $ (.06) $ .62
Weighted average common and common
equivalent shares outstanding:
Primary 5,693 9,295 5,678 9,279
Fully diluted 5,693 9,406 5,678 9,335
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1996 and 1997
(In thousands)
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (327) $5,971
Depreciation and amortization 7,095 6,536
Deferred income taxes (2,009) 1,074
Other, net 518 753
5,277 14,334
Change in assets and liabilities:
Notes and accounts receivable (8,977) (8,025)
Inventories 8,829 699
Accounts payable (3,220) (2,926)
Pension (3,900) (1,500)
Other, net 2,938 4,334
Net cash provided by operating activities 947 6,916
Cash flows from investing activities:
Capital expenditures (7,400) (9,616)
Other 104 110
Net cash used by investing activities (7,296) (9,506)
Cash flows from financing activities:
Revolving credit facility, net 8,179 4,456
Other notes payable and long-term debt:
Additions 11 247
Principal payments (1,841) (1,973)
Preferred stock dividend payments - (140)
Net cash provided by financing activities 6,349 2,590
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 $ 2,060 $ 2,980
Income taxes 278 928
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Six months ended June 30, 1997
(In thousands)
<TABLE>
<CAPTION>
Common stockholders' equity
Redeemable Additional
preferred Common paid-in Accumulated Treasury
stock Stock capital (deficit) stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 $3,500 $9,920 $46,347 $(25,085) $ (12) $31,170
Net income - - - 5,971 - 5,971
Issuance of common stock - 74 535 - - 609
Preferred dividends declared 140 - - (140) - (140)
Preferred dividends paid (140) - - - - -
Balance -June 30, 1997 $3,500 $9,994 $46,882 $(19,254) $ (12) $37,610
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
The consolidated balance sheet at December 31, 1996 has been condensed from
the Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1997 and the consolidated statements of
operations and cash flows for the interim periods ended June 30, 1996 and 1997,
and the consolidated statement of redeemable preferred stock and common
stockholders' equity for the interim period ended June 30, 1997, have each 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, 1996 (the "Annual
Report").
Contran Corporation ("Contran") holds, directly or through subsidiaries,
approximately 41% of the Company's outstanding stock. Contran may be deemed to
control the Company.
Note 2 - Net income (loss) available for common shares per common and common
equivalent share:
Net income (loss) per share is based on the weighted average number of
common and common equivalent shares outstanding during each year. Outstanding
stock options and other common stock equivalents are excluded from the
computations when the effect of their assumed exercise is antidilutive.
Effective December 31, 1997, the Company will retroactively adopt Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
earnings per share pursuant to SFAS No. 128 will not be materially different
from earnings per share presented herein and diluted earnings per share pursuant
to SFAS No. 128 is not expected to be materially different from basic earnings
per share.
Note 3 - Acquisition:
On September 27, 1996, the stockholders of Keystone and DeSoto, Inc.
("DeSoto") approved the merger of the two companies (the "Acquisition") in which
DeSoto became a wholly-owned subsidiary of Keystone. The Acquisition included
the simultaneous merger of Keystone's three underfunded defined benefit pension
plans with and into DeSoto's overfunded defined benefit pension plan, which
resulted in an overfunded plan for financial reporting purposes.
The following pro forma financial information has been prepared assuming
the Acquisition and the simultaneous merger of the defined benefit pension plans
occurred as of January 1, 1996. The pro forma financial information also
reflects adjustments to assume that the April 1996 sale of DeSoto's Union City,
California business occurred as of December 31, 1995. The pro forma financial
information is not necessarily indicative of actual results had the transactions
occurred at the beginning of the period, nor do they purport to represent
results of future operations of the merged companies.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1996 June 30, 1996
(In millions, except per share data)
<S> <C> <C>
Revenues and other income $94.4 $177.7
Net income (loss) .2 (.9)
Net income (loss) available to
common stockholders .1 (1.1)
Net income (loss) per Keystone
common share $ .01 $ (.12)
</TABLE>
Assuming the Acquisition and pension plan merger occurred January 1, 1996,
pro forma net periodic defined benefit pension expense amounted to approximately
$1.2 million and $2.4 million during the three month and six month periods,
respectively, ended June 30, 1996. Historical pension expense during the same
periods amounted to approximately $1.9 million, and $3.8 million, respectively.
Note 4 - 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,
1996 1997
(In thousands)
<S> <C> <C>
Raw materials:
Steel and wire products $12,548 $12,108
Household cleaning products 526 557
13,074 12,665
Work in process -
Steel and wire products 12,824 12,764
Finished products:
Steel and wire products 9,954 9,320
Household cleaning products 96 335
10,050 9,655
Supplies:
Steel and wire products 13,612 13,777
49,560 48,861
Less LIFO reserve:
Steel and wire products 12,996 12,996
Household cleaning products 31 31
13,027 13,027
$36,533 $35,834
</TABLE>
Note 5 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
(In thousands)
<S> <C> <C>
Commercial credit agreements:
Revolving credit facility $31,095 $35,551
Term loan 19,166 17,499
Urban and Community Development Assistance Grants 1,267 1,075
Other 252 385
51,780 54,510
Less current maturities 34,760 39,204
$17,020 $15,306
</TABLE>
See Note 9 - Subsequent Event.
Note 6 - 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 presented
in the table below.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Expected tax expense, at statutory
rate $ 468 $ 2,438 $ (190) $ 3,239
U.S. state income taxes, net 64 294 (31) 361
Amortization of negative goodwill - (118) - (329)
Other, net (4) 5 6 13
Provision for income taxes charged
to results of operations 528 2,619 (215) 3,284
Stockholders' equity - pension
component (1,337) 3,241 -
-
Comprehensive provision for income
taxes $ (809) $ 2,619 $ 3,026 $ 3,284
Comprehensive provision for income
taxes:
Currently payable:
U.S. federal $ 2,370 $ 2,579 $ 2,612 $ 3,537
U.S. state 461 519 472 696
Alternative minimum tax credits (1,091) (1,409) (1,290) (2,023)
Net currently payable 1,740 1,689 1,794 2,210
Deferred income taxes, net (2,549) 930 1,232 1,074
$ (809) $ 2,619 $ 3,026 $ 3,284
</TABLE>
Prior to the Acquisition, DeSoto received a Report of Tax Examination
charges from the Internal Revenue Service that proposed adjustments resulting in
additional taxes, penalties and interest for the years 1990 through 1993.
DeSoto filed a formal appeal of the proposed adjustments and, in prior years,
accrued an estimate of its liability related to this matter. On August 5, 1997,
DeSoto entered into a tentative agreement with the IRS to settle the matter
within previously accrued amounts.
Note 7 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
(In thousands)
<S> <C> <C>
Current:
Salary, wages, vacations and other
employee expenses $11,085 $10,357
Environmental 5,354 6,964
Disposition of facilities 3,518 2,986
Self insurance 1,585 2,305
Legal and professional 1,542 1,264
Other 5,547 8,846
$28,631 $32,722
Noncurrent:
Environmental $12,787 $10,667
Deferred gain 2,383 2,185
Other 1,296 1,845
$16,466 $14,697
</TABLE>
Note 8 - Contingencies:
At June 30, 1997, the Company's financial statements reflected accrued
liabilities of $17.6 million for estimated remedial costs arising from
environmental issues. There is no assurance regarding the ultimate cost of
remedial measures that might eventually be required by environmental authorities
or that additional environmental hazards, requiring further remedial
expenditures, might not be asserted by such authorities or private parties.
Accordingly, the ultimate costs of remedial measures may exceed the amounts
currently accrued.
For additional information related to commitments and contingencies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Annual Report.
Note 9 - Subsequent event:
On August 7, 1997, the Company completed a $100 million offering of 9
5/8% Senior Secured Notes. The notes are due in August 2007 and are
collateralized by a second priority lien on substantially all of the existing
and future fixed assets of the Company. A portion of the $97 million net
proceeds was used to prepay and terminate the Company's term loan and repay
borrowings under the Company's revolving credit facility.
The Senior Secured Notes (the "Notes") were issued pursuant to an Indenture
(the "Indenture") which, among other things, provides for optional redemptions,
mandatory redemptions and certain covenants including provisions that, among
other things, limit the ability of the Company to sell capital stock of
subsidiaries, enter into sale and leaseback transactions and transactions with
affiliates, create new liens and incur additional debt. In addition, the
Company's ability to borrow in excess of $25 million under the Company's $55
million Revolving Credit Facility is dependent upon maintenance of certain cash
flow ratios, as defined by the Indenture. The Indenture also limits the ability
of the Company to pay dividends or other restricted payments, as defined.
The following pro forma balance sheet information has been prepared
assuming the Offering and the application of the net proceeds thereof was
completed on June 30, 1997.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Cash and cash equivalents $ 43,275
Other current assets 97,746
Property, plant and equipment 94,653
Other assets 121,559
$357,233
Current maturities of long-term debt $ 320
Other current liabilities 72,703
Long-term debt 101,140
Other long-term liabilities 142,067
Redeemable preferred stock 3,500
Stockholders' equity 37,503
$357,233
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
Keystone is a leading manufacturer of fabricated wire products, industrial
wire and carbon steel rod for the agricultural, industrial, construction,
original equipment manufacturer 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.
The statements in this Quarterly Report on Form 10-Q relating to matters
that are not historical facts including, but not limited to, statements found in
this Item 2 - Management's Discussion And Analysis Of Financial Condition And
Results Of Operations", are forward looking statements that involve a number of
risks and uncertainties. Factors that could cause actual future results to
differ materially from those expressed in such forward looking statements
include, but are not limited to, cost of raw materials, future supply and demand
for the Company's products (including cyclicality thereof), general economic
conditions, competitive products and substitute products, customers and
competitor strategies, the impact of pricing and production decisions,
environmental matters, government regulations and possible changes therein, and
the ultimate resolution of pending litigation, successful implementation of the
Company's capital improvements plan and any possible future litigation as
discussed in this Quarterly Report and the Annual Report, including, without
limitation, the section referenced above.
The following table sets forth the Company's production and sales volume
data for the periods indicated.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1997 1996 1997
(In thousands of tons)
<S> <C> <C> <C> <C>
Production volume:
Billets:
Produced 165 185 309 339
Purchased 17 27 21 38
Rod 176 203 337 381
Sales volume:
Fabricated wire products 60 64 116 125
Industrial wire 42 51 79 89
Steel rod 89 89 157 166
191 204 352 380
</TABLE>
The following table sets forth the components of the Company's net sales
for the periods indicated.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1997 1996 1997
(In millions)
<S> <C> <C> <C> <C>
Fabricated wire products $44.1 $ 46.3 $ 85.1 $89.2
Industrial wire 19.8 24.1 38.0 42.3
Steel rod 26.3 27.9 46.4 51.1
Household cleaning products and
other .5 4.9 .6 9.8
$90.7 $103.2 $170.1 $192.4
</TABLE>
The following table sets forth selected operating data of the Company as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Three months ended Six months ended
JUNE 30, JUNE 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 91.9 87.0 92.7 88.7
Gross profit 8.1 13.0 7.3 11.3
Selling expense 1.1 1.2 1.2 1.3
General and administrative expense 4.8 4.7 5.5 4.8
Overfunded defined benefit pension
credit - .7 - .8
Income (loss) before income taxes 1.5% 6.7 (.3)% 4.8
Provision (benefit) for income
taxes
.6 2.5 (.1)% 1.7
Net income (loss) .9% 4.2% (.2)% 3.1%
</TABLE>
On April 11, 1997, the International Trade Commission preliminarily ruled
that the U.S. wire rod industry was materially injured or threatened with
material injury by the alleged dumping of subsidized imports of wire rod by
certain countries. Since that ruling, imports of wire rod have decreased and
imported tons have carried higher prices. During the second quarter of 1997, the
Company implemented an average $7 per ton price increase for industrial wire,
carbon steel rod and certain fabricated wire products. As a result of the
increased selling prices, fabricated wire products and rod selling prices during
the second quarter of 1997 increased 2% and 7%, respectively, over the 1996
second quarter. Industrial wire selling prices remained relatively constant
between the two periods. Rod selling prices increased 4% while fabricated wire
products and industrial wire selling prices decreased 2% and 1%, respectively,
during the first six months of 1997 as compared to the first six months of 1996.
Gross profit increased approximately 81% to $13.4 million in the second
quarter of 1997 from $7.4 million in the 1996 second quarter. Gross profit
increased to 13.0% in 1997 from 8.1% in 1996, primarily as a result of lower
scrap costs and pension expense as well as slightly lower rod conversion costs.
During the 1997 second quarter, the Company purchased 208,000 tons of scrap at
an average price of $121 per ton as compared to 1996 second quarter purchases of
151,000 tons at an average price of $128 per ton. The acquisition of DeSoto in
September 1996 included the simultaneous merger of the Company's and DeSoto's
defined benefit pension plans. Pension expense charged to cost of goods sold
was $1.9 million in the second quarter of 1996. The merger of the Company's
defined benefit pension plans in connection with the acquisition of DeSoto in
September 1996 resulted in a single overfunded defined benefit pension plan. As
a result of the overfunded status of this plan, the Company recorded a pension
credit of $750,000 in the second quarter of 1997.
Gross profit increased approximately 76% to $21.8 million in the first half
of 1997 from $12.4 million in the first half of 1996. Gross profit increased to
11.3% in 1997 from 7.3% in 1996, primarily as a result of lower scrap costs and
pension expense as well as slightly lower rod conversion costs. During the
first six months of 1997, the Company purchased 360,000 tons of scrap at an
average price of $122 per ton as compared to 1996 purchases of 309,000 tons at
an average price of $129 per ton. Pension expense charged to cost of goods sold
was $3.8 million in the first half of 1996. As a result of the overfunded
status of the Company's defined benefit pension plan, Keystone recorded a
pension credit of $1.5 million in the first half of 1997.
Selling expenses increased to $1.2 million in the second quarter of 1997
from $1.0 million in the 1996 second quarter, but remained relatively constant
as a percentage of net sales. Selling expenses increased to $2.5 million in the
first half of 1997 from $2.0 million in the first half of 1996, but also
remained relatively constant as a percentage of net sales.
General and administrative expenses increased $.6 million during the second
quarter of 1997 as compared to the second quarter of 1996. This increase was
primarily due to higher employee related expenses. General and administrative
expenses remained constant at $9.3 million during the first half of 1997 as
compared to the first half of 1996. This was primarily due to higher employee
related expenses offset by $.9 million in amortization of negative goodwill
resulting from the DeSoto acquisition. At June 30, 1997, the Company's
financial statements reflected accrued liabilities of $17.6 million for
estimated remediation costs arising from environmental issues. There is no
assurance regarding the ultimate cost of remedial measures that might eventually
be required by environmental authorities or that additional environmental
hazards, requiring further remedial expenditures, might not be asserted by such
authorities or private parties. Accordingly, the ultimate costs of remedial
measures may exceed the amounts currently accrued.
Interest expense in the second quarter of 1997 was higher than the second
quarter of 1996 due principally to higher average borrowing levels. Average
borrowings by the Company under its revolving credit facility and term loan
approximated $54.8 million in the second quarter of 1997 as compared to $39.7
million in the second quarter of 1996. During the second quarter of 1997, the
average interest rate paid by the Company was 9.5% per annum as compared to
9.25% per annum in the second quarter of 1996.
Interest expense in the first half of 1997 was higher than the first half
of 1996 due principally to higher borrowing levels. Average borrowings by the
Company under its revolving credit facility and term loan approximated $56.2
million in the first half of 1997 as compared to $39.2 million in the first half
of 1996. During the first half of 1997, the average interest rate paid by the
Company was 9.4% per annum as compared to 9.3% per annum in the first half of
1996.
As a result of the sale of Senior Secured Notes discussed below, interest
expense in the future is expected to be greater than the historic levels in the
second half of 1996 or the first half of 1997.
The principal reasons for the difference between the U.S. federal statutory
income tax rate and the Company's effective income tax rates are explained in
Note 6 to the Consolidated Financial Statements.
As a result of the items discussed above, net income during the second
quarter of 1997 increased to $4.3 million from $.8 million in the second quarter
of 1996, and net income during the first half of 1997 increased to $5.8 million
from a loss of $.3 million in the first half of 1996.
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 historical December shutdown for maintenance and
repairs at the Company's Peoria facility, impact the timing of production, sales
and purchases and have typically resulted in a use of cash from operations and
increases in the outstanding balance under the Company's revolving credit
facility during the first quarter of each year.
At June 30, 1997 the Company had a working capital deficit of $14.2
million, including $39.2 million of notes payable and current maturities of
long-term debt. The outstanding borrowings under the Company's $55 million
revolving credit facility were $35.6 million at June 30, 1997. The amount of
available borrowings under the Company's revolving credit facility is based on
formula-determined amounts of trade receivables and inventories, less the amount
of outstanding letters of credit. Additional available borrowings under the
Company's revolving credit facility, which expires December 31, 1999, were $19.2
million at June 30, 1997. The Company's revolving credit facility requires
daily cash receipts be used to reduce outstanding borrowings, which results in
the Company maintaining zero cash balances.
On August 7, 1997, the Company completed a $100 million offering of 9
5/8% Senior Secured Notes. The notes are due in August 2007 and are
collateralized by a second priority lien on substantially all of the existing
and future fixed assets of the Company. A portion of the $97 million net
proceeds was used to retire the Company's term loan and repay borrowings under
the Company's revolving credit facility. The balance of the net proceeds will
be used for general corporate purposes, primarily financing capital
expenditures. The Senior Secured Notes (the "Notes") were issued pursuant to an
Indenture (the "Indenture") which, among other things, provides for optional
redemptions, mandatory redemptions and certain covenants including provisions
that, among other things, limit the ability of the Company to sell capital stock
of subsidiaries, enter into sale and leaseback transactions and transactions
with affiliates, create new liens and incur additional debt. In addition, the
Company's ability to borrow in excess of $25 million under the Company's $55
million Revolving Credit Facility is dependent upon maintenance of certain cash
flow ratios, as defined by the Indenture. The Indenture also limits the ability
of the Company to pay dividends or other restricted payments, as defined. If
the Offering had been completed on June 30, 1997, the Company's working capital
deficit would be eliminated and working capital would have increased $82.2
million to $68.0 million and the Company would have had $54.6 million of
available borrowings under its revolving credit facility.
During the first half of 1997, the Company's operating activities provided
approximately $6.9 million of cash compared to $.9 million in the first half of
1996. In addition to higher earnings in the 1997 period, cash flow from
operations was impacted by changes in relative levels of assets and liabilities,
including levels of pension fundings. Defined benefit pension plan
contributions were $7.7 million in the first half of 1996. Due to the DeSoto
merger, the Company did not make any contributions to its pension plan during
the first half of 1997 and does not expect to be required to make contributions
to the pension plan during the remainder of 1997. Future variances from
actuarially assumed rates, including the rate of return on pension plan assets,
may result in increases or decreases to pension expense or credit and funding
requirements in future periods. Immediately following the Acquisition, Keystone
was obligated to, and did, cause DeSoto to pay certain of DeSoto's trade
creditors (the "Trade Credit Group") 80% of the balance of the trade payables
then due to the Trade Credit Group. The remaining 20% of the balance ($1.4
million) due to the Trade Credit Group, plus interest at 8%, was paid by DeSoto
in February 1997.
The Company has commenced a three year, $75 million capital improvements
plan to upgrade certain of its plant and equipment and eliminate production
capacity bottlenecks in order to reduce costs and improve production efficiency.
The principal components of the Company's capital improvements plan include
reconfiguring its electric arc furnace, replacing the caster and upgrading its
wire and rod mills. During the first half of 1997, the Company made capital
expenditures of approximately $9.6 million primarily related to upgrades of
production equipment and an information systems project at its facility in
Peoria, Illinois. Capital expenditures for 1997 are currently estimated to be
approximately $26 million and are related primarily to upgrades and
debottlenecking of production equipment.
The Company incurs significant ongoing costs for plant and equipment and
substantial employee medical benefits for both current and retired employees.
As such, the Company is vulnerable to business downturns and increases in costs,
and accordingly, routinely compares its liquidity requirements and capital needs
against its estimated future operating cash flows. As a result of this process,
the Company has in the past, and may in the future, reduce controllable costs,
modify product mix, acquire and dispose of businesses, restructure certain
indebtedness, and raise additional equity capital. The Company will continue to
evaluate the need for similar actions or other measures in the future in order
to meet its obligations. The Company also routinely evaluates acquisitions of
interests in, or combinations with, companies related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities or increasing the indebtedness of the Company. The Company's
ability to incur new debt in the future will be limited by the terms of the
Indenture.
Management believes the cash flows from operations together with available
cash as a result of the Offering will provide sufficient funds to meet its
anticipated operating and capital expenditure needs for the year ending December
31, 1997. This belief 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, production
schedules, productivity rates, raw materials, electricity, labor, employee
benefits and other fixed and variable costs, working capital requirements and
capital expenditures. However, liabilities under environmental laws and
regulations with respect to the clean-up and disposal of wastes, any significant
increases in the cost of providing medical coverage to active and retired
employees, significant declines in the Company's end user markets or market
share, the inability to maintain satisfactory billet and rod production levels,
or other unanticipated costs, if significant, could have a material adverse
effect on the future liquidity, financial condition and results of operations of
the Company.
PART II. OTHER INFORMATION
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 4. Submission of Matters to a Vote of Security Holders
On May 9, 1997, the annual meeting of the stockholders of Keystone was held
for the purpose of voting to elect one director for a term of two years and
three directors for terms of three years and to approve and adopt the Keystone
Consolidated Industries, Inc. 1997 Long-term Incentive Plan.
Result of voting at the annual meeting are detailed below (9,208,014 common
shares and 435,458 preferred shares were issued and outstanding and entitled to
vote at the meeting).
<TABLE>
<CAPTION>
For Withheld Abstained Total
<S> <C> <C> <C> <C>
Directors:
Richard N. Ullman 5,739,360 8,659 - 5,748,019
Thomas E. Barry 5,739,360 8,659 - 5,748,019
William P. Lyons 5,739,036 8,983 - 5,748,019
William Spier 5,738,524 9,495 - 5,748,019
Incentive Plan 5,551,570 187,474 8,975 5,748,019
</TABLE>
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, 1997.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1997:
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: August 14, 1997 By /s/Harold M. Curdy
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: August 14, 1997 By /s/Bert E. Downing, Jr.
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, 1997 and is qualified in its entirety by reference to
such.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 44,446
<ALLOWANCES> 648
<INVENTORY> 35,834
<CURRENT-ASSETS> 97,746
<PP&E> 271,333
<DEPRECIATION> 176,680
<TOTAL-ASSETS> 310,458
<CURRENT-LIABILITIES> 111,975
<BONDS> 15,306
3,500
0
<COMMON> 9,994
<OTHER-SE> 27,616
<TOTAL-LIABILITY-AND-EQUITY> 310,458
<SALES> 192,381
<TOTAL-REVENUES> 192,823
<CGS> 170,592
<TOTAL-COSTS> 170,592
<OTHER-EXPENSES> 10,061
<LOSS-PROVISION> 179
<INTEREST-EXPENSE> 2,736
<INCOME-PRETAX> 9,255
<INCOME-TAX> 3,284
<INCOME-CONTINUING> 5,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,971
<EPS-PRIMARY> .63
<EPS-DILUTED> .62
</TABLE>
