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, 1998
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 July 30, 1998: 9,807,993
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1997
and June 30, 1998 3-4
Consolidated Statements of Operations - Three months
and six months ended June 30, 1997 and 1998 5
Consolidated Statements of Cash Flows - Six months
ended June 30, 1997 and 1998 6
Consolidated Statement of Redeemable Preferred Stock
and Common Stockholders' Equity - Six months
ended June 30, 1998 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1997 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,622 $ -
Notes and accounts receivable 37,841 48,723
Inventories 53,930 49,238
Deferred income taxes 18,869 18,367
Prepaid expenses 1,175 931
Total current assets 134,437 117,259
Property, plant and equipment 293,883 320,712
Less accumulated depreciation 181,129 190,795
Net property, plant and equipment 112,754 129,917
Other assets:
Restricted investments 7,694 8,007
Prepaid pension cost 111,072 115,688
Deferred financing costs 3,795 3,720
Goodwill 1,229 1,172
Other 3,150 4,313
Total other assets 126,940 132,900
$374,131 $380,076
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1997 1998
<S> <C> <C>
Current liabilities:
Notes payable and current maturities of
long-term debt $ 3,789 $ 3,452
Accounts payable 29,679 33,128
Accrued OPEB cost 8,415 8,415
Other accrued liabilities 39,870 36,616
Total current liabilities 81,753 81,611
Noncurrent liabilities:
Long-term debt 103,055 102,308
Accrued OPEB cost 101,470 101,447
Deferred income taxes 2,963 4,341
Negative goodwill 25,421 24,743
Other 11,758 11,087
Total noncurrent liabilities 244,667 243,926
Redeemable preferred stock 3,500 3,500
Stockholders' equity:
Common stock 10,029 10,088
Additional paid-in capital 47,191 47,830
Accumulated deficit (12,997) (6,867)
Treasury stock, at cost (12) (12)
Total stockholders' equity 44,211 51,039
$374,131 $380,076
</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,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $103,232 $105,919 $192,381 $202,023
Interest 3 95 7 321
Other, net 240 315 435 428
103,475 106,329 192,823 202,772
Costs and expenses:
Cost of goods sold 89,801 95,837 170,592 184,010
Selling 1,215 1,556 2,460 3,075
General and administrative 4,897 3,292 9,280 6,758
Overfunded defined benefit pension
credit (750) (2,308) (1,500) (4,616)
Interest 1,346 2,286 2,736 4,879
96,509 100,663 183,568 194,106
Income before income taxes 6,966 5,666 9,255 8,666
Provision for income taxes 2,619 1,598 3,284 2,396
Net income 4,347 4,068 5,971 6,270
Dividends on preferred stock 70 70 140 140
Net income available for common
shares $ 4,277 $ 3,998 $ 5,831 $ 6,130
Net income per share available for
common shares:
Basic $ .46 $ .43 $ .63 $ .66
Diluted $ .46 $ .42 $ .63 $ .64
Weighted average common and common
equivalent shares outstanding:
Basic 9,264 9,358 9,250 9,338
Diluted 9,305 9,579 9,295 9,552
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $5,971 $ 6,270
Depreciation and amortization 6,536 9,775
Amortization of deferred financing costs 88 252
Deferred income taxes 1,074 1,876
Other, net 753 79
Change in assets and liabilities:
Notes and accounts receivable (8,025) (11,857)
Inventories 699 4,692
Prepaid pension cost (1,500) (4,616)
Accounts payable (2,926) 3,449
Other, net 4,246 (3,343)
Net cash provided by operating activities 6,916 6,577
Cash flows from investing activities:
Capital expenditures (9,616) (27,311)
Other, net 110 (746)
Net cash used by investing activities (9,506) (28,057)
Cash flows from financing activities:
Revolving credit facilities, net 4,456 (318)
Other notes payable and long-term debt:
Additions 247 3
Principal payments (1,973) (769)
Common stock issued - 82
Preferred stock dividend payments (140) (140)
Net cash provided (used) by financing activitie 2,590 (1,142)
Net change in cash and cash equivalents - (22,622)
Cash and cash equivalents, beginning of period - 22,622
Cash and cash equivalents, end of period $ - $ -
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized $ 2,980 $ 5,166
Income taxes 928 133
Common stock contributed to employee benefit plan $ 578 $ 616
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Six months ended June 30, 1998
(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, 1997 $3,500 $10,029 $47,191 $(12,997) $ (12) $44,211
Net income - - - 6,270 - 6,270
Issuance of common stock - 59 639 - - 698
Preferred dividends declared 140 - - (140) - (140)
Preferred dividends paid (140) - - - - -
Balance -June 30, 1998 $3,500 $10,088 $47,830 $ (6,867) $ (12) $51,039
</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, 1997 has been condensed from
the Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1998 and the consolidated statements of
operations and cash flows for the interim periods ended June 30, 1997 and 1998,
and the consolidated statement of redeemable preferred stock and common
stockholders' equity for the interim period ended June 30, 1998, 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, 1997 (the "Annual
Report").
Contran Corporation ("Contran") and other entities related to Harold C.
Simmons hold approximately 49% of the Company's outstanding stock at June 30,
1998. Contran may be deemed to control the Company.
Note 2 - Acquisition:
In November 1994, the Company entered into a Joint Venture Agreement with
an unrelated party and acquired a 20% interest in Engineered Wire Products, Inc.
("EWP"), a manufacturer and distributor of wire mesh for the concrete pipe and
road construction business. On December 23, 1997, Keystone acquired the
remaining 80% of EWP (the "Acquisition") and EWP became a wholly-owned
subsidiary of Keystone. Keystone paid $11.2 million in cash to acquire the
remaining 80% interest in the joint venture using available funds on hand.
Keystone accounted for the step acquisition of EWP by the purchase method
of accounting and the purchase price has been allocated to the individual assets
acquired and liabilities assumed of EWP based upon preliminary estimated fair
values. The actual allocation of the purchase price may be different from the
preliminary allocation due to adjustments in the purchase price and refinements
in estimates of the fair values of the net assets acquired.
The following pro forma financial information has been prepared assuming
the Acquisition and Keystone's August 1997 $100 million bond offering and
application of the net proceeds therefrom occurred on January 1, 1997. The pro
forma financial information is not necessarily indicative of actual results had
these transactions occurred at January 1, 1997, nor do they purport to represent
results of future operations of the combined companies.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1997 June 30, 1997
(In millions, except per share data)
<S> <C> <C>
Revenues and other income $110.4 $202.7
Operating income 9.6 13.1
Net income 4.2 5.2
Net income available to common
stockholders 4.1 5.0
Net income available for common
shares per common share - diluted $ .44 $ .54
</TABLE>
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 75% 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,
1997 1998
(In thousands)
<S> <C> <C>
Raw materials:
Steel and wire products $17,609 $15,790
Household cleaning products 854 1,034
18,463 16,824
Work in process -
Steel and wire products 15,475 14,205
Finished products:
Steel and wire products 16,707 16,879
Household cleaning products 150 212
16,857 17,091
Supplies -
Steel and wire products 16,290 14,273
67,085 62,393
Less LIFO reserve:
Steel and wire products 13,096 13,096
Household cleaning products 59 59
13,155 13,155
$53,930 $49,238
</TABLE>
Note 4 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
(In thousands)
<S> <C> <C>
9 5/8% Senior Secured Notes, due August 2007 $100,000 $100,000
Commercial credit agreements:
Revolving credit facility - Keystone - 153
Revolving credit facility - EWP 2,471 2,000
Term loan - EWP 1,603 1,312
Other 2,770 2,295
106,844 105,760
Less current maturities 3,789 3,452
$103,055 $102,308
</TABLE>
Note 5 - Income taxes:
Summarized below are (i) the differences between the provision for income
taxes and the amounts that would be expected using the U.S. federal statutory
income tax rate of 35%, and (ii) the components of the comprehensive provision
for income taxes.
<TABLE>
<CAPTION>
Six months ended
June 30,
1997 1998
<S> <C> <C>
Expected tax expense, at statutory rate $ 3,239 $3,033
U.S. state income taxes, net 361 198
Amortization of goodwill (329) (218)
Other, net 13 (617)
Comprehensive provision for income taxes $ 3,284 $2,396
Comprehensive provision for income taxes:
Currently payable:
U.S. federal $ 3,537 $ 843
U.S. state 696 60
Alternative minimum tax credits (2,023) (383)
Net currently payable 2,210 520
Deferred income taxes, net 1,074 1,876
$ 3,284 $2,396
</TABLE>
Note 6 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
(In thousands)
<S> <C> <C>
Current:
Salary, wages, vacations and other
employee expenses $12,275 $10,006
Environmental 7,498 6,115
Self insurance 6,605 6,483
Interest 4,146 4,054
Disposition of facilities 2,306 1,808
Legal and professional 1,199 889
Other 5,841 7,261
$39,870 $36,616
Noncurrent:
Environmental $ 8,606 $ 8,135
Deferred gain 1,987 1,789
Other 1,165 1,163
$11,758 $11,087
</TABLE>
Note 7 - Contingencies:
At June 30, 1998, the Company's financial statements reflected accrued
liabilities of $14.3 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 8 - Subsequent event:
In July 1998, the holders of warrants to purchase 447,900 shares of
Keystone's common stock at $9.38 per share exercised these warrants. Under the
terms of the warrants, proceeds from the warrants exercised were used by
Keystone to redeem all of the outstanding preferred stock, which was also held
by the warrant holders, at the aggregate $3.5 million redemption price. Net
cash proceeds to the Company approximated $684,000.
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,
1997 1998 1997 1998
(In thousands of tons)
<S> <C> <C> <C> <C>
Production volume:
Billets:
Produced 185 190 339 361
Purchased 27 - 38 -
Rod 203 179 381 351
Sales volume:
Fabricated wire products 64 95 125 172
Industrial wire 51 45 89 87
Steel rod 89 55 166 119
204 195 380 378
</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,
1997 1998 1997 1998
(In millions)
<S> <C> <C> <C> <C>
Fabricated wire products $ 46.3 $ 64.4 $89.2 $116.9
Industrial wire 24.1 21.4 42.3 41.9
Rod 27.9 16.3 51.1 36.0
Household cleaning products and
other 4.9 9.8 3.8 7.2
$103.2 $105.9 $192.4 $202.0
</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,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 87.0 90.5 88.7 91.1
Gross profit 13.0 9.5 11.3 8.9
Selling expense 1.2 1.5 1.3 1.5
General and administrative expense 4.7 3.1 4.8 3.3
Overfunded defined benefit pension
credit (.7) (2.2) (.8) (2.3)
Income before income taxes 6.7% 5.3% 4.8% 4.3%
Provision for income taxes 2.5 1.5 1.7 1.2
Net income 4.2% 3.8% 3.1% 3.1%
</TABLE>
As a result of increased billet production during both the second quarter
and first six months of 1998 as compared to the same periods in 1997, as well as
lower sales volumes, Keystone did not purchase any billets during 1998 as
compared to 27,000 tons of billets purchased in the second quarter of 1997 at an
average price of $235 per ton and 38,000 tons at an average price of $236 per
ton purchased during the first six months of 1997. The decrease in billet
purchases, and an increase in billet inventories, resulted in 12% and 8%
declines in rod production during the 1998 second quarter and first six months
of 1998, respectively.
Net sales increased to $105.9 million during the 1998 second quarter from
$103.2 million in the same period a year ago primarily as a result of a
favorable change in product mix combined with an increase in overall product
selling prices and offset by a 4% decline in volume. Industrial wire selling
prices increased by 1%, while fabricated wire products and carbon steel rod
selling prices declined by 7% and 6%, respectively. However, due to the change
in product mix, overall selling prices increased by 8%. During the second
quarter of 1998, higher-priced fabricated wire products comprised 49% of total
tons shipped, whereas during the second quarter of 1997, fabricated wire
products comprised 31% of total tons shipped. Approximately half of the change
in the percentage of fabricated wire products included in the product mix
between the two periods is a result of Keystone's acquisition of Engineered Wire
Products, Inc. ("EWP") in December 1997. EWP's products sell for lower prices
than do Keystone's other fabricated wire products.
Net sales for the first six months of 1998 increased 5% to $202 million
from $192.4 million for the first six months of 1997. Industrial wire selling
prices increased by 2%, while fabricated wire products and carbon steel rod
selling prices declined by 5% and 2%, respectively. The first six months of
1998 were also favorably impacted by the change in product mix due primarily to
the EWP acquisition as fabricated wire products comprised 45% of total tons
shipped, whereas during the first six months of 1997 fabricated wire products
comprised 32% of total tons shipped.
The 1998 second quarter gross margin percentage of 9.5% was lower than the
13% recorded during the comparable period in 1997 primarily as a result of
increased scrap, production and material handling costs and power interruptions
at the Company's largest facility which is located in Peoria, Illinois.
Keystone 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. Keystone's scrap costs
increased 3.6% during the 1998 second quarter as compared to the same period a
year ago. During the 1998 second quarter, the Company purchased 165,000 tons of
scrap at an average price of $125 per ton as compared to 1997 second quarter
purchases of 208,000 tons at an average price of $121 per ton.
For the first six months of 1998, Keystone's gross margin percentage
decreased to 8.9% from 11.3% during the 1997 period. This decline was due
primarily to increased scrap, production and material handling costs and power
interruptions as well as production inefficiencies due primarily to unplanned
equipment downtime in the Company's steel mill during the first quarter of 1998.
During the first six months of 1998, the Company purchased 340,000 tons of scrap
at an average price of $125 per ton as compared to 1997 purchases of 360,000
tons at an average price of $122 per ton.
Selling expenses increased to $1.6 million in the second quarter of 1998
from $1.2 million in the 1997 second quarter, but remained relatively constant
as a percentage of net sales. Selling expenses increased to $3.1 million in the
first half of 1998 from $2.5 million in the first half of 1997, but also
remained relatively constant as a percentage of net sales.
General and administrative expenses declined to $3.3 million during the
second quarter of 1998 as compared to $4.9 million during the second quarter of
1997. During the first half of 1998, general and administrative expenses
amounted to $6.8 million as compared to $9.3 million during the first half of
1997. These decreases were primarily due to lower legal and general insurance
expenses partially offset by increases due to the acquisition of EWP.
Interest expense in the second quarter of 1998 was higher than the second
quarter of 1997 due principally to higher average borrowing levels and interest
rates. These higher borrowing levels and interest rates were due primarily to
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 facilities, term loans and the Notes approximated $105.3
million in the second quarter of 1998 as compared to $54.8 million in the second
quarter of 1997. During the second quarter of 1998, the average interest rate
paid by the Company was 9.6% per annum as compared to 9.5% per annum in the
second quarter of 1997.
Interest expense in the first half of 1998 was also higher than the first
half of 1997 due principally to higher borrowing levels. Average borrowings by
the Company under its revolving credit facilities, term loans and the Notes
approximated $105.8 million in the first half of 1998 as compared to $56.2
million in the first half of 1997. During the first half of 1998, the average
interest rate paid by the Company was 9.6% per annum as compared to 9.4% per
annum in the first half of 1997.
As a result of the August 1997 issuance of the Notes, interest expense in
calendar 1998 will be greater than interest expense in calendar 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 5 to the Consolidated Financial Statements.
As a result of the items discussed above, net income during the second
quarter of 1998 declined to $4.1 million from $ 4.3 million in the second
quarter of 1997, and net income during the first half of 1998 increased to $6.3
million from $6.0 million in the first half of 1997.
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, 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, 1998 the Company had working capital of $35.6 million,
including $3.5 million of notes payable and current maturities of long-term
debt. The outstanding borrowings under the Company's revolving credit
facilities were $2.2 million at June 30, 1998. The amount of available
borrowings under these credit facilities is based on formula-determined amounts
of trade receivables and inventories, less the amount of outstanding letters of
credit. Under the terms of the Indenture related to the Senior Secured Notes,
the Company's ability to borrow in excess of $25 million under its $55 million
revolving credit facility is dependent upon maintenance of a consolidated cash
flow ratio (as defined) for the most recently completed four fiscal quarters of
at least 2.5 to 1. Additional available borrowings under Keystone's $55 million
revolving credit facility, which expires December 31, 1999, and EWP's $6 million
revolving credit facility, which expires June 30, 2000, were $54.3 million and
$4.0 million, respectively, at June 30, 1998, all of which could be borrowed
under the Terms of the Indenture. The Company's $55 million revolving credit
facility requires daily cash receipts be used to reduce outstanding borrowings,
which results in the Company maintaining zero cash balances when there are
balances outstanding under this credit facility.
During the first half of 1998, the Company's operating activities provided
approximately $6.6 million of cash compared to $6.9 million in the first half of
1997. Although higher earnings in the 1998 period reduced the amount of cash
used by operating activities, higher interest payments due to the issuance of
the Notes in August 1997 negatively impacted cash flows from operating
activities. Interest payments of $4.8 million are due on the Notes in the first
and third quarters of each year. Cash paid for interest during the first half
of 1998 and 1997 amounted to $5.2 million and $3.0 million, respectively.
In February 1998, the Company purchased certain agricultural fencing
product manufacturing equipment and related inventory from Insteel Industries,
Inc. ("Insteel"), for approximately $13 million. Keystone expects to incur
capital costs of $6 million to $9 million to relocate and integrate such
equipment into its manufacturing facilities. As part of the agreement with
Insteel, Keystone also acquired Insteel's former customer list and certain other
records and Insteel agreed not to compete with Keystone in the North American
agricultural fencing products business for a period of five years.
During the first half of 1998, the Company made capital expenditures of
approximately $27.3 million primarily related to the Insteel equipment purchase
and upgrades of production equipment at its facility in Peoria, Illinois.
Capital expenditures for 1998, including those related to the purchase of
equipment from Insteel, are currently estimated to be approximately $57 million
and are related primarily to upgrades and debottlenecking of production
equipment. During 1997, the Company commenced a three year, $75 million capital
improvement 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. These capital expenditures will be funded
using borrowing availability under the Company's revolving credit facilities.
At June 30, 1998, the Company's financial statements reflected accrued
liabilities of $14.3 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 costs of remedial measures may exceed the amounts accrued.
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 the funds
available under the Company's revolving credit facilities will provide
sufficient funds to fund the anticipated needs of its operations and capital
improvements plan for 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 and available
borrowings under the Company's revolving credit facilities. However,
liabilities under environmental laws and regulations with respect to the clean-
up and disposal of wastes, or any significant increases in the cost of providing
medical coverage to active and retired employees could have a material adverse
effect on the future liquidity, financial condition and results of operations of
the Company. Additionally, 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 result in
a need for funds greater than the Company currently has available.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to disclosure provided under the caption "Current
litigation" in Note 7 to the Consolidated Financial Statements included in the
Annual Report.
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 8, 1998, the annual meeting of the stockholders of Keystone was held
for the purpose of voting to elect two directors for terms of three years and to
approve and an amendment to the Keystone Consolidated Industries, Inc. 1997
Long-term Incentive Plan, to increase the number of shares of common stock
available for issuance thereunder from 300,000 to 500,000.
Result of voting at the annual meeting are detailed below (9,358,393 common
shares and 435,458 preferred shares, each with one vote and voting together as a
single class, were entitled to vote at the meeting).
<TABLE>
<CAPTION>
For Withheld Abstained Total
<S> <C> <C> <C> <C>
Directors:
Paul M. Bass, Jr. 6,005,920 10,981 - 6,016,901
David E. Connor 6,005,611 11,290 - 6,016,901
Amendment to Incentive
Plan 5,694,565 313,532 8,804 6,016,901
</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, 1998.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1998:
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 30, 1998 By /s/Harold M. Curdy
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: July 30, 1998 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, 1998 and is qualified in its entirety by reference to
such.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 51,758
<ALLOWANCES> 3,035
<INVENTORY> 49,238
<CURRENT-ASSETS> 117,259
<PP&E> 320,712
<DEPRECIATION> 190,795
<TOTAL-ASSETS> 380,076
<CURRENT-LIABILITIES> 81,611
<BONDS> 102,308
3,500
0
<COMMON> 10,088
<OTHER-SE> 40,951
<TOTAL-LIABILITY-AND-EQUITY> 380,076
<SALES> 202,023
<TOTAL-REVENUES> 202,772
<CGS> 184,010
<TOTAL-COSTS> 184,010
<OTHER-EXPENSES> 5,123
<LOSS-PROVISION> 94
<INTEREST-EXPENSE> 4,879
<INCOME-PRETAX> 8,666
<INCOME-TAX> 2,396
<INCOME-CONTINUING> 6,270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,270
<EPS-PRIMARY> .66
<EPS-DILUTED> .64
</TABLE>
