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 September 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 November 9, 1998: 9,837,495
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1997
and September 30, 1998 3-4
Consolidated Statements of Operations - Three months
and nine months ended September 30, 1997 and 1998 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1997 and 1998 6
Consolidated Statement of Redeemable Preferred Stock
and Common Stockholders' Equity - Nine months
ended September 30, 1998 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1997 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,622 $ -
Notes and accounts receivable 37,841 42,210
Inventories 53,930 49,110
Deferred income taxes 18,869 19,503
Prepaid expenses 1,175 1,583
Total current assets 134,437 112,406
Property, plant and equipment 293,883 339,691
Less accumulated depreciation 181,129 195,503
Net property, plant and equipment 112,754 144,188
Other assets:
Restricted investments 7,694 8,156
Prepaid pension cost 111,072 118,155
Deferred financing costs 3,795 3,609
Goodwill 1,229 1,144
Other 3,150 4,219
Total other assets 126,940 135,283
$374,131 $391,877
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1997 1998
<S> <C> <C>
Current liabilities:
Notes payable and current maturities of
long-term debt $ 3,789 $ 17,548
Accounts payable 29,679 33,064
Accrued OPEB cost 8,415 8,415
Other accrued liabilities 39,870 34,808
Total current liabilities 81,753 93,835
Noncurrent liabilities:
Long-term debt 103,055 102,033
Accrued OPEB cost 101,470 101,026
Deferred income taxes 2,963 5,336
Negative goodwill 25,421 24,404
Other 11,758 10,570
Total noncurrent liabilities 244,667 243,369
Redeemable preferred stock 3,500 -
Stockholders' equity:
Common stock 10,029 10,560
Additional paid-in capital 47,191 51,716
Accumulated deficit (12,997) (7,591)
Treasury stock, at cost (12) (12)
Total stockholders' equity 44,211 54,673
$374,131 $391,877
</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,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $85,046 $87,125 $277,427 $289,148
Interest 570 119 577 440
Other, net 1,223 11 1,658 439
86,839 87,255 279,662 290,027
Costs and expenses:
Cost of goods sold 76,889 81,207 247,481 265,217
Selling 1,082 1,357 3,542 4,432
General and administrative 3,830 5,829 13,110 12,587
Overfunded defined benefit pension
credit (3,241) (2,467) (4,741) (7,083)
Interest 2,383 2,483 5,119 7,362
80,943 88,409 264,511 282,515
Income (loss) before income taxes 5,896 (1,154) 15,151 7,512
Provision (benefit) for income taxes 2,197 (447) 5,481 1,949
Net income (loss) 3,699 (707) 9,670 5,563
Dividends on preferred stock 70 17 210 157
Net income (loss) available for
common shares $ 3,629 $ (724) $ 9,460 $ 5,406
Net income (loss) per share
available for common shares:
Basic $ .39 $ (.07) $ 1.02 $ .58
Diluted $ .38 $ (.07) $ 1.01 $ .57
Weighted average common and common
equivalent shares outstanding:
Basic 9,285 9,661 9,262 9,446
Diluted 9,583 9,661 9,384 9,613
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,670 $ 5,563
Depreciation and amortization 9,692 14,535
Amortization of deferred financing costs 337 378
Deferred income taxes 2,492 1,735
Other, net 137 859
Change in assets and liabilities:
Notes and accounts receivable (2,320) (6,658)
Inventories (2,885) 4,820
Accounts payable (4,065) 3,385
Prepaid pension cost (4,741) (7,083)
Other, net 6,433 (6,435)
Net cash provided by operating activities 14,750 11,099
Cash flows from investing activities:
Capital expenditures (17,400) (46,526)
Proceeds from sale of property, plant and equipment 2,708 10
Other, net 166 (725)
Net cash used by investing activities (14,526) (47,241)
Cash flows from financing activities:
Revolving credit facilities, net (31,095) 13,738
Other notes payable and long-term debt:
Additions 100,294 95
Principal payments (19,502) (1,096)
Preferred stock dividend payments (210) (157)
Deferred financing costs paid (3,767) -
Exercise of warrants and redemption of preferred
stock, net - 701
Common stock issued - other 317 239
Net cash provided by financing activities 46,037 13,520
Net change in cash and cash equivalents 46,261 (22,622)
Cash and cash equivalents, beginning of period - 22,622
Cash and cash equivalents, end of period $ 46,261 $ -
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized $ 4,037 $ 10,351
Income taxes 2,700 139
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
Nine months ended September 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 - - - 5,563 - 5,563
Exercise of warrants and redemption
of preferred stock, net (3,500) 448 3,753 - - 4,201
Issuance of common stock - other - 83 772 - - 855
Preferred dividends declared 157 - - (157) - (157)
Preferred dividends paid (157) - - - - -
Balance - September 30, 1998 $ - $10,560 $51,716 $ (7,591) $ (12) $54,673
</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 September 30, 1998 and the consolidated statements
of operations and cash flows for the interim periods ended September 30, 1997
and 1998, and the consolidated statement of redeemable preferred stock and
common stockholders' equity for the interim period ended September 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 50% of the Company's outstanding stock at September
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.
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 Nine months ended
September 30, 1997 September 30, 1997
(In millions, except per share data)
<S> <C> <C>
Revenues and other income $90.3 $293.0
Operating income 9.0 22.1
Net income 5.6 10.8
Net income available to common
stockholders 5.5 10.6
Net income available for common
shares per common share - diluted $ .59 $ 1.13
</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 78% 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,
1997 1998
(In thousands)
<S> <C> <C>
Raw materials:
Steel and wire products $17,609 $21,200
Household cleaning products 854 798
18,463 21,998
Work in process -
Steel and wire products 15,475 11,038
Finished products:
Steel and wire products 16,707 14,974
Household cleaning products 150 243
16,857 15,217
Supplies -
Steel and wire products 16,290 14,012
67,085 62,265
Less LIFO reserve:
Steel and wire products 13,096 13,096
Household cleaning products 59 59
13,155 13,155
$53,930 $49,110
</TABLE>
Note 4 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, September 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 - 13,209
Revolving credit facility - EWP 2,471 3,000
Term loan - EWP 1,603 1,166
Other 2,770 2,206
106,844 119,581
Less current maturities 3,789 17,548
$103,055 $102,033
</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>
Nine months ended
September
30,
1997 1998
<S> <C> <C>
Expected tax expense, at statutory rate $ 5,303 $2,629
U.S. state income taxes, net 332 217
Amortization of negative goodwill (448) (326)
Other, net 294 (571)
Comprehensive provision for income taxes $ 5,481 $1,949
Comprehensive provision for income taxes:
Currently payable:
U.S. federal $ 5,185 $ 184
U.S. state 668 33
Alternative minimum tax credits (2,864) (3)
Net currently payable 2,989 214
Deferred income taxes, net 2,492 1,735
$ 5,481 $1,949
</TABLE>
Note 6 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(In thousands)
<S> <C> <C>
Current:
Salary, wages, vacations and other
employee expenses $12,275 $11,163
Environmental 7,498 6,415
Self insurance 6,605 6,517
Interest 4,146 1,613
Disposition of facilities 2,306 1,471
Legal and professional 1,199 930
Other 5,841 6,699
$39,870 $34,808
Noncurrent:
Environmental $ 8,606 $ 7,905
Deferred gain 1,987 1,476
Other 1,165 1,189
$11,758 $10,570
</TABLE>
Note 7 - Contingencies:
At September 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 - Preferred Stock:
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, Keystone was required 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
$701,000.
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, possible disruptions of normal business
activity from Year 2000 issues 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,
1997 1998 1997 1998
(In thousands of tons)
<S> <C> <C> <C> <C>
Production volume:
Billets:
Produced 149 163 488 524
Purchased 29 - 67 -
Rod 165 167 546 518
Sales volume:
Fabricated wire products 56 80 181 252
Industrial wire 43 43 132 130
Steel rod 64 51 230 170
163 174 543 552
</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 September
30, 30,
1997 1998 1997 1998
(In millions)
<S> <C> <C> <C> <C>
Fabricated wire products $39.5 $50.9 $128.6 $167.8
Industrial wire 20.5 20.3 62.9 62.2
Rod 21.3 14.0 72.4 50.0
Household cleaning products and
other 3.7 1.9 13.5 9.1
$85.0 $87.1 $277.4 $289.1
</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,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 90.4 93.2 89.2 91.7
Gross profit 9.6 6.8 10.8 8.3
Selling expense 1.3 1.6 1.3 1.5
General and administrative expense 4.5 6.7 4.7 4.4
Overfunded defined benefit pension
credit 3.8 2.8 1.7 2.4
Income (loss) before income taxes 6.9% (1.3)% 5.5% 2.6%
Provision (benefit) for income
taxes 2.6 (.5) 2.0 .7
Net income (loss) 4.3% (.8)% 3.5% 1.9%
</TABLE>
Billet and rod production during the 1998 third quarter increased to
163,000 tons and 167,000 tons, respectively, compared with 149,000 tons and
165,000 tons during the 1997 third quarter. This increase was principally due
to a two-week annual maintenance shutdown in the 1997 third quarter, which will
occur during the fourth quarter in 1998. Keystone did not purchase any billets
during the 1998 third quarter, whereas 29,000 tons were purchased during the
1997 third quarter at $238 per ton.
Net sales increased to $87.1 million during the 1998 third quarter from
$85.0 million in the same period a year ago as a 7 percent increase in volume
and a favorable change in product mix were partially offset by lower overall
product selling prices. During the 1998 third quarter, fabricated wire
products, industrial wire and rod selling prices declined by 9%, 3% and 17%,
respectively, from 1997 third quarter selling prices. However, due to the
change in product mix, overall selling prices declined by only 2%. During the
third quarter of 1998, higher-priced fabricated wire products comprised 46% of
total tons shipped, whereas fabricated wire products comprised 34% of total tons
shipped during the third quarter of 1997. Approximately one-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 nine months of 1998 increased 4% to $289.1 million
from $277.4 million for the first nine months of 1997. Industrial wire selling
prices remained constant between the two periods, while fabricated wire products
and rod selling prices declined by 7% and 6%, respectively. The first nine
months of 1998 were also favorably impacted by the change in product mix due
primarily to the EWP acquisition as fabricated wire products comprised 46% of
total tons shipped, whereas fabricated wire products comprised 33% of total tons
shipped during the first nine months of 1997.
The 1998 third quarter's gross margin of 6.8 percent was lower than the 9.6
percent recorded during the comparable period in 1997 primarily as a result of
lower sales prices, higher energy costs due primarily to a new power contract
discussed below and production inefficiencies. The decline in gross margin was
partially offset by lower scrap costs and $2.7 million in legal settlements with
two suppliers in the 1998 period. During the 1998 third quarter, the Company
purchased 201,000 tons of scrap at an average price of $111 per ton as compared
to 1997 third quarter purchases of 159,000 tons at an average price of $122 per
ton.
For the first nine months of 1998, Keystone's gross margin declined to 8.3
percent from 10.8 percent during the 1997 period. This decline was due
primarily to lower sales prices, higher energy costs, increased production and
material handling costs and production inefficiencies, including unplanned
equipment downtime during the first quarter of 1998 and power interruptions
during the second quarter of 1998. The decline was partially offset by lower
scrap costs and the favorable legal settlements. During the first nine months
of 1998, the Company purchased 572,000 tons of scrap at an average price of $119
per ton as compared to 1997 purchases of 519,000 tons at an average price of
$122 per ton.
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. During the 1998 second
quarter, the Company entered into a new service contract with the electric
utility at its Peoria facility. The new contract requires the Company to pay
higher rates during months with high demands. Overall, the new contract is
expected to increase energy costs by approximately $2 million per year as
compared to the prior contract.
Selling expenses increased to $1.4 million in the third quarter of 1998
from $1.1 million in the 1997 third quarter, but remained relatively constant as
a percentage of net sales. Selling expenses increased to $4.4 million in the
first nine months of 1998 from $3.5 million in the first nine months of 1997,
but also remained relatively constant as a percentage of net sales.
General and administrative expenses increased to $5.8 million during the
third quarter of 1998 as compared to $3.8 million during the third quarter of
1997 due primarily to $1.1 million of bad debt expense related to a customer's
bankruptcy and higher environmental expense. During the first nine months of
1998, general and administrative expenses amounted to $12.6 million as compared
to $13.1 million during the first nine months of 1997 but as a percent of net
sales, were comparable with the first nine months of 1997 as higher bad debt
expense and environmental charges were offset by lower legal and insurance
expense.
Other income during the 1997 third quarter included a pretax gain of
approximately $1.8 million from the sale of a building.
Interest expense in the third quarter of 1998 was comparable with the third
quarter of 1997. Interest expense in the first nine months of 1998 was higher
than the first nine months of 1997 due principally to higher borrowing levels.
These higher borrowing levels 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 $106.5 million in the first nine months of 1998
as compared to $64.1 million in the first nine months 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 5 to the Consolidated Financial Statements.
As a result of the items discussed above, the Company incurred a net loss
during the third quarter of 1998 of $707,000 as compared to net income of $3.7
million in the third quarter of 1997, and net income during the first nine
months of 1998 decreased to $5.6 million from $9.7 million in the first nine
months 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 September 30, 1998 the Company had working capital of $18.6 million,
including $1.3 million of notes payable and current maturities of long-term debt
as well as outstanding borrowings under the Company's revolving credit
facilities of $16.2 million. 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 $41 million and $3
million, respectively, at September 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 nine months of 1998, the Company's operating activities
provided approximately $11.1 million of cash compared to $14.8 million in the
first nine months of 1997. Lower earnings in the 1998 period and higher
interest payments due to the issuance of the Notes in August 1997 reduced 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 nine months of 1998 and 1997 amounted to $10.4 million and $4.0
million, respectively. 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 of, or certain years of, environmental related
liabilities. Such amount is included in the Company's self insurance accruals
at December 31, 1997 and September 30, 1998.
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 approximately $6 million to relocate and integrate such
equipment into its manufacturing facilities, $5 million of which has been
incurred through September 30, 1998. The majority of the remaining costs are
expected to be incurred in the 1998 fourth quarter. 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 nine months of 1998, the Company made capital expenditures
of approximately $46.5 million primarily related to upgrades of production
equipment at its facility in Peoria, Illinois and the Insteel equipment
purchase. Capital expenditures for all of 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. Keystone completed
the installation of the new caster in the third quarter of 1998. The remaining
capital expenditures will be funded using borrowing availability under the
Company's revolving credit facilities.
At September 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 remainder of 1998 and the year ending December 31,
1999. 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.
Year 2000 Issue
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition.
The Company is in the process of taking an inventory of its information
systems to determine the modifications to existing software and new software
required to mitigate any Year 2000 issues. The Company's evaluation includes
information systems infrastructure, financial and administrative systems,
process control and manufacturing operating systems as well as significant
vendors and customers. The Company expects this inventory will be completed
during the 1998 fourth quarter. Because the majority of Keystone's significant
information systems have recently been installed or updated, many of the
Company's systems and related software are already Year 2000 compliant.
Keystone is utilizing both internal and external sources to reprogram or
replace and test its software and the Company expects to have its evaluation
completed by the end of 1998 and required modifications completed prior to
December 31, 1999.
Although the Company expects its critical systems to be compliant by
December 31, 1999, there is no assurance these results will be achieved.
However, the impact of a failure of any of the Company's information systems
would be mitigated to the extent that other alternate processes, including
manual processes, were able to meet processing requirements. Presently,
Keystone expects alternate procedures would be able to meet the Company's
processing needs. In addition, excluding recent equipment additions that are
Year 2000 compliant, a significant portion of Keystone's plant and equipment is
aged and doesn't include imbedded chip technology susceptible to Year 2000
issues.
Keystone relys on third parties for raw materials, utilities,
transportation and other key services. In addition, the Company is dependent
upon its customers for cash flow. The Company has initiated formal
communications with its significant suppliers and large customers to determine
the extent to which the Company is vulnerable to those third parties' failure to
eliminate their own Year 2000 Issues. Keystone presently expects to complete
these third party communications during the 1998 fourth quarter and will at that
time begin developing contingency plans for potential non-compliance by these
third parties. Year 2000 Issues that adversely impact these third parties could
also effect the operations of the Company. There can be no assurance the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.
Because the Company has not completed the evaluation of its Year 2000
Issue, it is not able to quantify the costs that may be incurred in order to
eliminate any Year 2000 Issues. The total costs that will be incurred by
Keystone in connection with resolving its Year 2000 Issues will be impacted by
the Company's ability to successfully identify its Year 2000 Issues, the level
of effort required to remediate the issue and the ability of third parties to
successfully address their own Year 2000 Issues. Total costs incurred to date
relative to the remediation of the Company's Year 2000 Issues have been expensed
as incurred and have not been material.
The costs of the project and the date on which the Company plans to
complete its Year 2000 assessment and remediation are based on management's
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ significantly
from those plans. Specific factors that might cause differences from
management's estimates include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
relevant computer codes, and similar uncertainties. Management believes the
Company is devoting the necessary resources to identify and resolve significant
Year 2000 Issues in a timely manner.
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 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is included herein:
27.1 Financial Data Schedule for the nine month period ended
September 30, 1998.
(b) Reports on Form 8-K filed during the quarter ended September 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: November 10, 1998 By /s/Harold M. Curdy
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: November 10, 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 nine
months ended September 30, 1998 and is qualified in its entirety by reference to
such.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 46,443
<ALLOWANCES> 4,233
<INVENTORY> 49,110
<CURRENT-ASSETS> 112,406
<PP&E> 339,691
<DEPRECIATION> 195,503
<TOTAL-ASSETS> 391,877
<CURRENT-LIABILITIES> 93,835
<BONDS> 102,033
0
0
<COMMON> 10,560
<OTHER-SE> 44,113
<TOTAL-LIABILITY-AND-EQUITY> 391,877
<SALES> 289,148
<TOTAL-REVENUES> 290,027
<CGS> 265,217
<TOTAL-COSTS> 265,217
<OTHER-EXPENSES> 8,644
<LOSS-PROVISION> 1,292
<INTEREST-EXPENSE> 7,362
<INCOME-PRETAX> 7,512
<INCOME-TAX> 1,949
<INCOME-CONTINUING> 5,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,563
<EPS-PRIMARY> .58
<EPS-DILUTED> .57
</TABLE>
