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 September 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 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: (972) 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 November 10, 1997: 9,297,533
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1996
and September 30, 1997 3-4
Consolidated Statements of Operations - Three months
and nine months ended September 30, 1996 and 1997 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1996 and 1997 6-7
Consolidated Statement of Redeemable Preferred Stock
and Common Stockholders' Equity (Deficit) - Nine
months ended September 30, 1997 8
Notes to Consolidated Financial Statements 9-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, SEPTEMBER 30,
ASSETS 1996 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 46,261
Notes and accounts receivable 35,974 38,081
Inventories 36,533 39,418
Deferred income taxes 16,381 19,722
Prepaid expenses 1,542 915
Total current assets 90,430 144,397
Property, plant and equipment 262,441 271,018
Less accumulated depreciation 169,833 174,915
Net property, plant and equipment 92,608 96,103
Other assets:
Restricted investments 7,691 7,507
Prepaid pension cost 104,726 109,468
Deferred income taxes 2,181 -
Deferred financing costs 332 3,762
Other 4,400 5,157
Total other assets 119,330 125,894
$302,368 $366,394
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, SEPTEMBER 30,
1996 1997
<S> <C> <C>
Current liabilities:
Notes payable and current maturities of
long-term debt $ 34,760 $ 334
Accounts payable 34,419 30,513
Accounts payable to affiliates 159 -
Accrued OPEB cost 8,368 8,409
Other accrued liabilities 28,631 37,702
Total current liabilities 106,337 76,958
Noncurrent liabilities:
Long-term debt 17,020 101,143
Accrued OPEB cost 100,818 101,611
Negative goodwill 27,057 25,760
Other 16,466 15,866
Total noncurrent liabilities 161,361 244,380
Redeemable preferred stock 3,500 3,500
Stockholders' equity:
Common stock 9,920 10,027
Additional paid-in capital 46,347 47,166
Accumulated deficit (25,085) (15,625)
Treasury stock, at cost (12) (12)
Total stockholders' equity 31,170 41,556
$302,368 $366,394
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $82,703 $85,046 $252,821 $277,427
Interest 34 570 47 577
Other, net 117 1,223 290 1,658
82,854 86,839 253,158 279,662
Costs and expenses:
Cost of goods sold 74,531 76,889 232,206 247,481
Selling 992 1,082 2,998 3,542
General and administrative 5,197 3,830 14,493 13,110
Overfunded defined benefit
pension credit - (3,241) - (4,741)
Interest 808 2,383 2,677 5,119
81,528 80,943 252,374 264,511
Income before income taxes 1,326 5,896 784 15,151
Provision for income taxes 534 2,197 319 5,481
Net income 792 3,699 465 9,670
Dividends on preferred stock - 70 - 210
Net income available for common
shares
$ 792 $ 3,629 $ 465 $ 9,460
Primary net income available for
common shares per common and
common equivalent share $ .14 $ .38 $ .08 $ 1.01
Fully diluted net income available
for common shares per common and
common equivalent share $ .14 $ .38 $ .08 $ 1.00
Weighted average common and common
equivalent shares outstanding:
Primary 5,690 9,587 5,682 9,386
Fully diluted 5,690 9,628 5,682 9,443
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 465 $ 9,670
Depreciation and amortization 10,530 9,692
Amortization of deferred financing costs 118 337
Deferred income taxes (2,271) 2,492
Other, net 1,075 137
Change in assets and liabilities:
Notes and accounts receivable (7,754) (2,320)
Inventories 5,564 (2,885)
Accounts payable 1,960 (4,065)
Pension cost (4,871) (4,742)
Other, net 961 6,434
Net cash provided by operating activities 5,777 14,750
Cash flows from investing activities:
Capital expenditures (10,423) (17,400)
Merger costs (935) -
Proceeds from sale of property, plant and equipment 4 2,708
Other, net 125 166
Net cash used by investing activities (11,229) (14,526)
Cash flows from financing activities:
Revolving credit facility, net (458) (31,095)
Other notes payable and long-term debt:
Borrowings 9,461 100,294
Principal payments (3,336) (19,502)
Preferred stock dividend payments - (210)
Deferred financing costs paid (215) (3,767)
Common stock issued - 317
Net cash provided by financing activities 5,452 46,037
Net change in cash and cash equivalents - 46,261
Cash and cash equivalents, beginning of period - -
Cash and cash equivalents, end of period $ - $ 46,261
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1997
<S> <C> <C>
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized $ 3,031 $ 4,037
Income taxes 991 2,700
Common stock contributed to employee benefit plan $ 522 $ 578
Business combination:
Net assets consolidated:
Noncash assets $101,981 $ -
Liabilities (60,906) -
Negative goodwill (5,727) -
35,348 -
Redeemable preferred stock issued, including
accumulated unpaid dividends (5,100) -
Common stock issued (29,313) -
Cash paid $ 935 $ -
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Nine months ended September 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 - - - 9,670 - 9,670
Issuance of common stock - 107 819 - - 926
Preferred dividends declared 210 - - (210) - (210)
Preferred dividends paid (210) - - - - -
Balance - September 30, 1997 $3,500 $10,027 $47,166 $(15,625) $ (12) $41,556
</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 September 30, 1997 and the consolidated statements
of operations and cash flows for the interim periods ended September 30, 1996
and 1997, and the consolidated statement of redeemable preferred stock and
common stockholders' equity for the interim period ended September 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 available for common shares per common and common
equivalent share:
Net income 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 Nine months ended
September 30, September 30,
1996 1996
(In millions, except per share data)
<S> <C> <C>
Revenues and other income $87.0 $264.8
Net income 1.2 .3
Net income available to common
stockholders 1.1 .1
Net income (loss) per Keystone
common share $ .12 $ (.01)
</TABLE>
Assuming the Acquisition and pension plan merger occurred January 1, 1996,
pro forma net periodic defined benefit pension expense amounted to approximately
$.4 million and $2.8 million during the three month and nine month periods,
respectively, ended September 30, 1996. Historical pension expense during the
same periods amounted to approximately $1.0 million, and $4.8 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, SEPTEMBER 30,
1996 1997
(In thousands)
<S> <C> <C>
Raw materials:
Steel and wire products $12,548 $15,078
Household cleaning products 526 461
13,074 15,539
Work in process -
Steel and wire products 12,824 12,323
Finished products:
Steel and wire products 9,954 10,364
Household cleaning products 96 286
10,050 10,650
Supplies:
Steel and wire products 13,612 13,934
49,560 52,446
Less LIFO reserve:
Steel and wire products 12,996 12,997
Household cleaning products 31 31
13,027 13,028
$36,533 $39,418
</TABLE>
Note 5 - Notes payable and long-term debt:
On August 7, 1997, the Company issued $100 million principal amount of 9
5/8% Senior Secured Notes (the "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
outstanding borrowings under the Company's revolving credit facility.
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 financial ratios, as defined by the
Indenture. The Indenture also limits the ability of the Company to pay
dividends or make other restricted payments, as defined.
<TABLE>
<CAPTION>
December 31, SEPTEMBER 30,
1996 1997
(In thousands)
<S> <C> <C>
9 5/8% Senior Secured Notes $ - $100,000
Commercial credit agreements:
Revolving credit facility 31,095 -
Term loan 19,166 -
Urban and Community Development Assistance Grants 1,267 1,075
Other 252 402
51,780 101,477
Less current maturities 34,760 334
$ 17,020 $101,143
</TABLE>
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 Nine months ended
September 30, September 30,
1996 1997 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Expected tax expense, at statutory
rate $ 464 $ 2,064 $ 274 $ 5,303
U.S. state income taxes, net (88) 4 (119) 332
Amortization of negative goodwill - (119) - (448)
Other, net 158 248 164 294
Provision for income taxes charged
to results of operations 534 2,197 319 5,481
Stockholders' equity - pension
component -
(969) - 2,272
Comprehensive provision for income
taxes $ (435) $ 2,197 $ 2,591 $ 5,481
Comprehensive provision for income
taxes:
Currently payable:
U.S. federal $ 1,308 $ 872 $ 3,921 $ 5,185
U.S. state (4) (95) 468 668
Alternative minimum tax credits (507) (508) (1,797) (2,864)
Net currently payable 797 269 2,592 2,989
Deferred income taxes, net (1,232) 1,928 (1) 2,492
$ (435) $ 2,197 $ 2,591 $ 5,481
</TABLE>
Prior to the Acquisition, DeSoto received an Income Tax Examination Changes
notice 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. In October 1997,
DeSoto settled the matter with the IRS for a payment of approximately $2.6
million, including interest of approximately $1.1 million. Such payment was
within previously accrued amounts.
Note 7 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, SEPTEMBER 30,
1996 1997
(In thousands)
<S> <C> <C>
Current:
Salary, wages, vacations and other
employee expenses $11,085 $10,479
Environmental 5,354 7,660
Disposition of facilities 3,518 2,463
Interest 452 1,589
Self insurance 1,585 6,710
Legal and professional 1,542 1,290
Other 5,095 7,511
$28,631 $37,702
Noncurrent:
Environmental $12,787 $ 9,693
Deferred gain 2,383 2,086
Other 1,296 4,087
$16,466 $15,866
</TABLE>
Note 8 - Contingencies:
At September 30, 1997, the Company's financial statements reflected accrued
liabilities of $17.4 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.
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 Nine months ended
September 30, September 30,
1996 1997 1996 1997
(In thousands of tons)
<S> <C> <C> <C> <C>
Production volume:
Billets:
Produced 172 149 481 488
Purchased 15 29 36 67
Rod 179 165 516 546
Sales volume:
Fabricated wire products 55 56 172 181
Industrial wire 43 43 122 132
Steel rod 75 64 232 230
173 163 526 543
</TABLE>
The following table sets forth the components of the Company's net sales
for the periods indicated.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1997 1996 1997
(In millions)
<S> <C> <C> <C> <C>
Fabricated wire products $39.1 $39.5 $124.1 $128.6
Industrial wire 20.5 20.5 58.4 62.9
Rod 22.7 21.3 69.1 72.4
Household cleaning products and
other .4 3.7 1.2 13.5
$82.7 $85.0 $252.8 $277.4
</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 Nine months ended
September 30, September 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 90.1 90.4 91.8 89.2
Gross profit 9.9 9.6 8.2 10.8
Selling expense 1.2 1.3 1.2 1.3
General and administrative expense 6.3 4.5 5.7 4.7
Overfunded defined benefit pension
credit - 3.8 - 1.7
Income before income taxes 1.6 6.9 .3 5.5
Provision for income taxes .6 2.6 .1 2.0
Net income 1.0% 4.3% .2% 3.5%
</TABLE>
In previous years, the Company conducted an annual two-week shutdown in
December for maintenance and repairs at its Peoria, Illinois facility. In 1997,
the maintenance shutdown was completed in the third quarter. As such, volume of
steel and wire products shipped in the third quarter of 1997 declined 6% as
compared to the third quarter of 1996. Despite lower volumes in the 1997 third
quarter, a 5% overall increase in steel and wire product selling prices resulted
in overall steel and wire product sales declining only 1% from the 1996 third
quarter level. Selling prices for rod and industrial wire increased 10% and 1%
in 1997, respectively, while fabricated wire product selling prices declined
slightly. During the first nine months of 1997 overall steel and wire products
selling prices increased 2% over the first nine months of 1996. Rod selling
prices increased 6% in the first nine months of 1997 while fabricated wire
products selling prices decreased 1% and industrial wire selling prices remained
level with those of the same period in 1996. As a result of these increased
selling prices, as well as higher sales volumes in the first nine months of
1997, steel and wire product sales increased 5% over the same period in 1996.
Gross profit remained constant at $8.2 million as compared to the 1996
third quarter. Gross profit margin decreased to 9.6% in 1997 from 9.9% in 1996,
primarily as a result of higher rod conversion costs, power interruptions in
1997 at the Company's Peoria, Illinois facility and increased purchased billets,
all partially offset by lower scrap costs and reduced pension expense. The
Company purchases electrical energy for the Peoria facility under an
interruptible service contract which provides for more economical electricity
rates but allows the utility to refuse or interrupt power to the Company's
manufacturing facilities during periods of peak demand. During the 1997 third
quarter, the Company purchased 159,000 tons of scrap at an average price of $122
per ton as compared to 1996 third quarter purchases of 180,000 tons at an
average price of $127 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 $1.0 million
in the third 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
$3.2 million in the third quarter of 1997.
Gross profit increased approximately 45% to $29.9 million in the first nine
months of 1997 from $20.6 million in the first nine months of 1996. Gross
profit margin increased to 10.8% in 1997 from 8.2% in 1996, primarily as a
result of lower scrap costs and pension expense offset by higher rod conversion
costs and increased purchased billets. During the first nine months of 1997,
the Company purchased 519,000 tons of scrap at an average price of $122 per ton
as compared to 1996 purchases of 489,000 tons at an average price of $127 per
ton. Pension expense charged to cost of goods sold was $4.8 million in the
first nine months of 1996. As a result of the overfunded status of the
Company's defined benefit pension plan, Keystone recorded a pension credit of
$4.7 million in the first nine months of 1997.
Selling expenses increased to $1.1 million in the third quarter of 1997
from $1.0 million in the 1996 third quarter, but remained relatively constant as
a percentage of net sales. Selling expenses increased to $3.5 million in the
first nine months of 1997 from $3.0 million in the first nine months of 1996,
but also remained relatively constant as a percentage of net sales.
General and administrative expenses decreased $1.4 million during the third
quarter of 1997 as compared to the third quarter of 1996. This decrease was
primarily due to lower environmental charges in the 1997 third quarter. General
and administrative expenses also decreased $1.4 million during the first nine
months of 1997 as compared to the first nine months of 1996, due primarily to
lower environmental charges. At September 30, 1997, the Company's financial
statements reflected accrued liabilities of $17.4 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 third quarter of 1997 was higher than the third
quarter of 1996 due principally to higher average borrowing levels as a result
of the issuance of $100 million principal amount of 9 5/8% Senior Secured Notes
(the "Notes") in August 1997. Average borrowings by the Company under its
revolving credit facility, term loan and the Notes approximated $80.0 million in
the third quarter of 1997 as compared to $34.1 million in the third quarter of
1996. During the third quarter of 1997, the average interest rate paid by the
Company was 9.6% per annum as compared to 9.3% per annum in the third quarter of
1996.
Interest expense in the first nine months of 1997 was higher than the first
nine months of 1996 due principally to higher borrowing levels. Average
borrowings by the Company under its revolving credit facility, term loan and the
Notes approximated $64.1 million in the first nine months of 1997 as compared to
$37.5 million in the first nine months of 1996. During the first nine months of
1997, the average interest rate paid by the Company was 9.5% per annum as
compared to 9.3% per annum in the first nine months of 1996.
As a result of the issuance of the Notes, interest expense in the future
will be greater than the historic levels in the fourth quarter of 1996 or the
first nine months of 1997.
In August 1997, the Company recorded a pre-tax gain of approximately $1.8
million resulting from the sale of a building that was used by one of the
Company's former operating divisions. The operating division was sold in 1989,
but the Company retained the building.
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 third
quarter of 1997 increased to $3.7 million from $.8 million in the third quarter
of 1996, and net income during the first nine months of 1997 increased to $9.7
million from $.5 million in the first nine months 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 annual 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 during the first
quarter of each year.
On August 7, 1997, the Company issued $100 million principal amount of
the 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 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. The
Indenture also limits the ability of the Company to pay dividends or make other
restricted payments, as defined.
At September 30, 1997 the Company had working capital of $67.4 million,
including $46.3 million of cash and cash equivalents. The Company did not have
any outstanding borrowings under the $55 million revolving credit facility at
September 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.
The Company's ability to borrow in excess of $25 million under the revolving
credit facility is dependent upon maintenance of certain cash flow ratios, as
defined by the Indenture. Available borrowings under the Company's revolving
credit facility, which expires December 31, 1999, were $54.4 million at
September 30, 1997.
During the first nine months of 1997, the Company's operating activities
provided approximately $14.8 million of cash compared to $5.8 million in the
first nine months 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 $9.7 million in the first nine months of 1996. Due to
the DeSoto merger, the Company did not make any contributions to its pension
plan during the first nine months of 1997 and does not expect to be required to
make contributions to the pension plan during the remainder of 1997 or in 1998.
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. During the third quarter of
1997, DeSoto received approximately $4.7 million from one of its insurors in
exchange for releasing the insuror from coverage for certain years of
environmental related liabilities. Such amount is included in the Company's
self insurance accruals at September 30, 1997. 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 nine months of 1997, the Company made
capital expenditures of approximately $17.4 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 is limited by the terms of the
Indenture.
Management believes the cash flows from operations together with available
cash will provide sufficient funds to meet its anticipated operating and capital
expenditure needs for the remainder of 1997 and the year ending December 31,
1998. 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.
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) 27.1 Financial Data Schedule for the nine month period ended
September 30, 1997.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1997:
A current report on Form 8-K, dated as of August 7, 1997, was filed to
report the Company had completed a private placement of $100 million
principal amount of 9 5/8% Senior Secured Notes maturing in August 2007.
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: November 12, 1997 By /s/Harold M. Curdy
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: November 12, 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 three
months ended September 30, 1997 and is qualified in its entirety by reference to
such.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 46,261
<SECURITIES> 0
<RECEIVABLES> 38,728
<ALLOWANCES> 647
<INVENTORY> 39,418
<CURRENT-ASSETS> 144,397
<PP&E> 271,018
<DEPRECIATION> 174,915
<TOTAL-ASSETS> 366,394
<CURRENT-LIABILITIES> 76,958
<BONDS> 101,143
3,500
0
<COMMON> 10,027
<OTHER-SE> 31,529
<TOTAL-LIABILITY-AND-EQUITY> 366,394
<SALES> 277,427
<TOTAL-REVENUES> 279,662
<CGS> 247,481
<TOTAL-COSTS> 247,481
<OTHER-EXPENSES> 11,733
<LOSS-PROVISION> 178
<INTEREST-EXPENSE> 5,119
<INCOME-PRETAX> 15,151
<INCOME-TAX> 5,481
<INCOME-CONTINUING> 9,670
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<NET-INCOME> 9,670
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<EPS-DILUTED> 1.00
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