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, 1999
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 5, 1999: 9,926,531
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998
and September 30, 1999 3-4
Consolidated Statements of Operations - Three months
and nine months ended September 30, 1998 and 1999 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1998 and 1999 6
Consolidated Statement of Stockholders' Equity - Nine
months ended September 30, 1999 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1999
----------- -------------
Current assets:
<S> <C> <C>
Accounts and notes receivable .................. $ 36,786 $ 38,625
Inventories .................................... 52,239 62,279
Deferred income taxes .......................... 18,985 16,293
Prepaid expenses and other ..................... 3,916 1,698
-------- --------
Total current assets ........................ 111,926 118,895
-------- --------
Property, plant and equipment .................... 354,682 355,372
Less accumulated depreciation .................... 198,582 204,841
-------- --------
Net property, plant and equipment ........... 156,100 150,531
-------- --------
Other assets:
Restricted investments ......................... 8,624 9,037
Prepaid pension cost ........................... 120,516 124,331
Deferred financing costs ....................... 3,493 3,149
Goodwill ....................................... 1,115 1,030
Other .......................................... 4,083 4,169
-------- --------
Total other assets .......................... 137,831 141,716
-------- --------
$405,857 $411,142
======== ========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
Current liabilities:
Notes payable and current maturities of
<S> <C> <C>
long-term debt ............................... $ 29,912 $ 52,489
Accounts payable ............................... 34,002 23,377
Accrued OPEB cost .............................. 10,000 10,000
Other accrued liabilities ...................... 37,457 38,178
--------- ---------
Total current liabilities .................. 111,371 124,044
--------- ---------
Noncurrent liabilities:
Long-term debt ................................. 101,852 100,899
Accrued OPEB cost .............................. 99,047 98,306
Deferred income taxes .......................... 6,162 3,124
Negative goodwill .............................. 24,065 23,048
Other .......................................... 10,283 9,882
--------- ---------
Total noncurrent liabilities ............... 241,409 235,259
--------- ---------
Minority interest ................................ -- 27
--------- ---------
Stockholders' equity:
Common stock ................................... 10,569 10,656
Additional paid-in capital ..................... 51,763 52,398
Accumulated deficit ............................ (9,243) (11,230)
Treasury stock, at cost ........................ (12) (12)
--------- ---------
Total stockholders' equity ................. 53,077 51,812
--------- ---------
$ 405,857 $ 411,142
========= =========
</TABLE>
<PAGE>
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,
-------------------- ----------------------
1998 1999 1998 1999
---- ---- ---- ----
Revenues and other income:
<S> <C> <C> <C> <C>
Net sales ........................ $ 87,125 $ 79,738 $ 289,148 $ 277,379
Interest ......................... 119 138 440 327
Other, net ....................... 11 -- 439 313
--------- --------- --------- ---------
87,255 79,876 290,027 278,019
--------- --------- --------- ---------
Costs and expenses:
Cost of goods sold ............... 81,207 76,226 265,217 253,373
Selling .......................... 1,357 1,630 4,432 5,540
General and administrative ....... 5,829 4,423 12,587 15,608
Pension expense(credit) .......... (2,467) 185 (7,083) (3,815)
Interest ......................... 2,483 3,507 7,362 10,552
--------- --------- --------- ---------
88,409 85,971 282,515 281,258
--------- --------- --------- ---------
(1,154) (6,095) 7,512 (3,239)
Equity in losses of Alter
Recycling Company L.L.C ........... -- (9) -- (9)
--------- --------- --------- ---------
Income (loss) before income taxes (1,154) (6,104) 7,512 (3,248)
Provision (benefit) for income taxes (447) (1,911) 1,949 (1,288)
Minority interest in after tax
earnings (losses) ................ -- (75) -- 27
--------- --------- --------- ---------
Net income (loss) ............... (707) (4,118) 5,563 (1,987)
Dividends on preferred stock ....... 17 -- 157 --
--------- --------- --------- ---------
Net income (loss) available for
common shares ................ $ (724) $ (4,118) $ 5,406 $ (1,987)
========= ========= ========= =========
Net income (loss) per share available for common shares:
Basic ............................ $ (.07) $ (.41) $ .58 $ (.20)
========= ========= ========= =========
Diluted .......................... $ (.07) $ (.41) $ .57 $ (.20)
========= ========= ========= =========
Weighted average common and common equivalent shares outstanding:
Basic ............................ 9,661 9,927 9,446 9,897
========= ========= ========= =========
Diluted .......................... 9,661 9,927 9,613 9,897
========= ========= ========= =========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) .................................... $ 5,563 $ (1,987)
Depreciation and amortization ........................ 14,535 16,439
Amortization of deferred financing costs ............. 378 389
Deferred income taxes ................................ 1,735 (346)
Other, net ........................................... 859 (3,687)
Change in assets and liabilities:
Accounts receivable ................................ (6,658) (209)
Inventories ........................................ 4,820 (10,881)
Prepaid pension cost ............................... (7,083) (3,815)
Accounts payable ................................... 3,385 (9,305)
Other, net ......................................... (6,435) 3,450
-------- --------
Net cash provided (used) by operating activities . 11,099 (9,952)
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (46,526) (12,438)
Other, net ........................................... (715) 766
-------- --------
Net cash used by investing activities ............ (47,241) (11,672)
-------- --------
Cash flows from financing activities:
Revolving credit facilities, net ..................... 13,738 22,220
Other notes payable and long-term debt:
Additions .......................................... 95 659
Principal payments ................................. (1,096) (1,255)
Preferred stock dividend payments .................... (157) --
Exercise of warrants and redemption of preferred
stock, net ......................................... 701 --
Common stock issued - other .......................... 239 --
-------- --------
Net cash provided by financing activities ........ 13,520 21,624
-------- --------
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 ................ $ 10,351 $ 12,644
Income taxes (refund received) ..................... 139 (3,533)
Common stock contributed to employee benefit plan .... $ 616 $ 722
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Additional
Common paid-in Accumulated Treasury
stock capital deficit stock Total
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1998 $ 10,569 $ 51,763 $ (9,243) $ (12) $ 53,077
Net loss ................... -- -- (1,987) -- (1,987)
Issuance of common stock ... 87 635 -- -- 722
-------- -------- -------- -------- --------
Balance - September 30, 1999 $ 10,656 $ 52,398 $(11,230) $ (12) $ 51,812
======== ======== ======== ======== ========
</TABLE>
<PAGE>
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, 1998 has been condensed
from the audited consolidated financial statements of Keystone Consolidated
Industries, Inc. ("Keystone" or the "Company") at that date. The consolidated
balance sheet at September 30, 1999 and the consolidated statements of
operations and cash flows for the interim periods ended September 30, 1998 and
1999, and the consolidated statement of stockholders' equity for the interim
period ended September 30, 1999, 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, 1998 (the "Annual
Report").
At September 30, 1999, Contran Corporation ("Contran") and other
entities related to Mr. Harold C. Simmons own approximately 49% of the Company.
Substantially all of Contran's outstanding voting stock is held either by trusts
established for the benefit of certain children and grandchildren of Mr.
Simmons, of which Mr. Simmons is sole trustee, or by Mr. Simmons directly. The
Company may be deemed to be controlled by Contran and Mr. Simmons.
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, no later than the first quarter of 2001. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The impact on the Company of adopting
SFAS No. 133, if any, has not yet been determined but will be dependent upon the
extent to which the Company is a party to derivative contracts or hedging
activities covered by SFAS No. 133 at the time of adoption.
<PAGE>
Note 2 - Joint ventures:
In January 1999, Keystone and two unrelated parties formed Garden Zone
LLC ("Garden Zone"), a joint venture to supply wire, wood and plastic products
to the consumer lawn and garden markets. Keystone owns 51% of the joint venture
and, as such, Keystone's consolidated financial statements at September 30, 1999
include the accounts of Garden Zone. Neither Keystone nor the other owners
contributed any capital or other assets to the Garden Zone joint venture, but
Keystone did guarantee Garden Zone's new $4 million revolving credit agreement.
See Note 5. Garden Zone commenced operations in February 1999 and through
September 30, 1999 earned $55,000, of which $28,000 accrued to Keystone for
financial reporting purposes.
In July 1999, Keystone formed Alter Recycling Company, L.L.C. ("ARC"),
a joint venture with Alter Peoria, Inc., to operate a Scrap recycling operation
at Keystone's facility in Peoria, Illinois. ARC sells scrap steel to Keystone
and others. Upon formation, Keystone contributed the property and equipment of
its current Peoria scrap facility (net book value of approximately $335,000) to
the joint venture. Keystone does not currently anticipate it will be required to
make any other contributions to fund or operate this joint venture. The Company
recognized no gain or loss upon formation of ARC and the Company's investment in
ARC is accounted for by the equity method. At September 30, 1999, the Company's
investment in ARC amounted to $326,000 and is included in other assets. ARC
commenced operations in August 1999 and through September 30, 1999, the Company
had purchased approximately $1.5 million of scrap from ARC. There were no
payables to ARC at September 30, 1999.
Note 3 - Disposition:
In January 1999, Keystone's wholly-owned subsidiary, DeSoto, Inc.
("DeSoto") sold its household cleaning products division. DeSoto did not record
any gain or loss as a result of this sale. Subsequent to the sale, DeSoto
changed its name to Sherman Wire Company.
Note 4 - Inventories:
Inventories are stated at the lower of cost or market. At December 31,
1998 and September 30, 1999, the last-in, first-out ("LIFO") method was used to
determine the cost of approximately three-fourths of total inventories and the
first-in, first-out or average cost methods were used to determine the cost of
other inventories.
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(In thousands)
Raw materials:
<S> <C> <C>
Steel and wire products .......................... $17,400 $17,093
Household cleaning products ...................... 650 --
------- -------
18,050 $17,093
------- -------
Work in process -
Steel and wire products .......................... 8,642 9,093
------- -------
Finished products:
Steel and wire products .......................... 12,797 20,195
Lawn and garden products ......................... -- 5,252
Household cleaning products ...................... 249 --
------- -------
13,046 25,447
------- -------
Supplies:
Steel and wire products .......................... 16,894 14,980
------- -------
56,632 66,613
------- -------
Less LIFO reserve:
Steel and wire products .......................... 4,334 4,334
Household cleaning products ...................... 59 --
------- -------
4,393 4,334
------- -------
$52,239 $62,279
======= =======
</TABLE>
Note 5 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(In thousands)
<S> <C> <C>
9 5/8% Senior Secured Notes, due August 2007 ......... $100,000 $100,000
Commercial credit agreements:
Revolving credit facilities:
Keystone ......................................... 24,580 41,500
EWP .............................................. 4,000 5,300
Garden zone ...................................... -- 4,000
Term loan - EWP .................................... 1,020 583
Other ................................................ 2,164 2,005
-------- --------
131,764 153,388
Less current maturities ............................ 29,912 52,489
-------- --------
$101,852 $100,899
======== ========
</TABLE>
<PAGE>
Note 6 - Income taxes:
Summarized below are the differences between the provision (benefit)
for income taxes and the amounts that would be expected using the U.S. federal
statutory income tax rate of 35%.
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1999
------- --------
(In thousands)
<S> <C> <C>
Expected tax expense (benefit), at statutory rate .... $ 2,629 $(1,137)
U.S. state income taxes, net ......................... 217 155
Amortization of goodwill ............................. (326) (326)
Other, net ........................................... (571) 20
------- -------
Provision (benefit) for income taxes ................ $ 1,949 $(1,288)
======= =======
</TABLE>
Note 7 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(In thousands)
Current:
<S> <C> <C>
Employee benefits .............. $11,560 $10,933
Environmental .................. 7,165 9,341
Self insurance ................. 6,950 6,613
Interest ....................... 4,054 1,601
Disposition of former facilities 1,452 633
Legal and professional ......... 795 919
Other .......................... 5,481 8,138
------- -------
$37,457 $38,178
======= =======
Nnoncurrent:
Environmental .................. $ 8,175 $ 8,290
Other .......................... 2,108 1,592
------- -------
$10,283 $ 9,882
======= =======
</TABLE>
Note 8 - Operations:
During 1998, the Company's operations were comprised of two segments;
the manufacture and sale of carbon steel rod, wire and wire products for
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer markets and the manufacture and sale of
household cleaning products.
In January 1999, Keystone sold its household cleaning products
division. See Note 3. At December 31, 1998, identifiable segment assets related
to the household cleaning products division amounted to approximately $2.3
million.
Beginning in February 1999, Keystone is also engaged in the
distribution of wire, plastic and wood lawn and garden products to retailers
through Garden Zone. Garden Zone's identifiable segment assets at September 30,
1999 were approximately $6.0 million.
<PAGE>
Beginning in August 1999, Keystone is also engaged in a scrap recycling
joint venture through its 50% interest in ARC, an unconsolidated equity
affiliate.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1998 1999 1998 1999
------- ------- -------- --------
(In thousands)
Revenues:
<S> <C> <C> <C> <C>
Steel and wire products $85,444 $77,677 $280,944 $267,508
Lawn and garden products - 2,434 - 12,753
Household cleaning products 1,681 - 8,204 -
------- ------- -------- --------
87,125 80,111 289,148 280,261
Elimination of intersegment
revenues - (373) - (2,882)
------- ------- -------- --------
$87,125 $79,738 $289,148 $277,379
======= ======= ======== ========
Income (loss) before income taxes:
Operating profit (loss):
Steel and wire products $ 1,885 $(2,392) $13,708 $ 7,771
Lawn and garden products - (73) - 223
Household cleaning products (379) - (335) -
------- ------- -------- ---------
1,506 (2,465) 13,373 7,994
General corporate items:
Interest income 119 138 440 327
General income (expense), net (296) (261) 1,061 (1,008)
Interest expense (2,483) (3,507) (7,362) (10,552)
Equity in losses of ARC - (9) - (9)
------- ------- -------- --------
Income (loss) before income
taxes $(1,154) $(6,104) $ 7,512 $ (3,248)
======= ======= ======== ========
</TABLE>
Note 9 - Contingencies:
At September 30, 1999, the Company's financial statements reflected
accrued liabilities of $17.6 million for estimated remedial costs arising from
environmental issues. There is no assurance regarding the ultimate cost of
remedial measures that might eventually be required by environmental authorities
or that additional environmental hazards, requiring further remedial
expenditures, might not be asserted by such authorities or private parties.
Accordingly, the ultimate costs of remedial measures may exceed the amounts
currently accrued.
For additional information related to commitments and contingencies,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Annual Report.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
Keystone Consolidated Industries, Inc. ("Keystone" or the "Company") 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.
Beginning in January 1999, Keystone is also engaged in the distribution
of wire, plastic and wood lawn and garden products to retailers through its
51%-owned subsidiary Garden Zone LLC ("Garden Zone"), a joint venture between
Keystone and two unrelated parties. See Note 2 to the Consolidated Financial
Statements.
Beginning in August 1999, Keystone is also engaged in scrap recycling
through its unconsolidated 50% interest in Alter Recycling Company, L.L.C.
("ARC"). See Note 2 to the Consolidated Financial Statements.
Prior to January 1999, Keystone was also engaged in the manufacture and
distribution of household cleaning products through its wholly-owned subsidiary
DeSoto, Inc. ("DeSoto"). In January 1999, DeSoto sold its household cleaning
products division and changed its name to Sherman Wire Company. See Note 3 to
the Consolidated Financial Statements.
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 "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations," are forward looking statements that represent
management's belief and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "should," "anticipates," "expected" or comparable
terminology, or by discussions of strategies or trends. Although the Company
believes the expectations reflected in such forward-looking statements are
reasonable, it cannot give assurances these expectations will prove to be
correct. Such statements by their nature involve substantial risks and
uncertainties that could significantly impact expected results, and actual
future results could differ materially from those described in such
forward-looking statements. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission including, but 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, customer and competitor strategies, the impact
of pricing and production decisions, environmental matters, government
regulations and possible changes therein, 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
international trade policies of the United States and certain foreign countries.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
<PAGE>
The following table sets forth the Company's steel and wire products
production and sales volume data for the periods indicated.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1998 1999 1998 1999
---- ---- ---- ----
(In thousands of tons)
Production volume:
billets:
<S> <C> <C> <C> <C>
Produced ......................... 163 174 524 503
Purchased ........................ -- 12 -- 42
Rod ............................... 167 173 518 519
Sales volume:
Fabricated wire products .......... 80 70 252 251
Industrial wire ................... 43 32 130 110
Steel rod ......................... 51 55 170 166
--------- --------- --------- ---------
174 157 552 527
========= ========= ========= =========
</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,
--------------------- ----------------------
1998 1999 1998 1999
------- ---------- --------- ---------
(In millions)
Steel and wire products:
<S> <C> <C> <C> <C>
Fabricated wire products ......... $ 50.9 $ 47.9 $ 167.8 $ 172.4
Industrial wire .................. 20.3 15.0 62.1 51.0
Rod .............................. 14.0 14.5 50.0 43.1
Other ............................ .2 .2 1.0 1.0
--------- --------- --------- ---------
85.4 77.6 280.9 267.5
Lawn and garden products ........... -- 2.1 -- 9.9
Household cleaning products ........ 1.7 -- 8.2 --
--------- --------- --------- ---------
$ 87.1 $ 79.7 $ 289.1 $ 277.4
========= ========= ========= =========
</TABLE>
<PAGE>
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,
-------------------- ------------------------
1998 1999 1998 1999
-------- --------- --------- -------
<S> <C> <C> <C> <C>
Net sales .......................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ................. 93.2 95.6 91.7 91.3
--------- --------- --------- ---------
Gross profit ....................... 6.8 4.4 8.3 8.7
Selling expense .................... 1.6 2.0 1.5 2.0
General and administrative expense . 6.7 5.6 4.4 5.6
Overfunded defined benefit pension
(credit) expense .................. (2.8) .2 (2.4) (1.4)
Income (loss) before income taxes .. (1.3)% (7.7) 2.6% (1.2)
Provision (benefit) for income
taxes ............................. (.5) (2.4) .7 (.5)
Minority interest in after-tax
earnings (losses) ................ -- (.1) -- --
--------- --------- --------- ---------
Net income (loss) .................. (.8)% (5.4)% 1.9% (.7)%
========= ========= ========= =========
</TABLE>
Although billet production increased in the third quarter of 1999 as
compared to the same period in 1998, billet production in the first nine months
of 1999 declined as compared to billet production in the first nine months of
1998. Purchased billets enabled the Company's rod production in the third
quarter and the first nine months of 1999 to increase over the levels in the
same periods during 1998.
Net sales of $79.7 million in the 1999 third quarter declined from 1998
third quarter levels due primarily to lower shipments of steel and wire
products. Total shipments of steel and wire products declined 10% from 1998
third-quarter levels. Fabricated wire products and industrial wire sales volume
decreased 12% and 26%, respectively, while carbon steel rod sales volume
increased 8%. The overall per-ton selling price of the Company's steel and wire
products increased 1% during the 1999 third quarter compared with the 1998 third
quarter. Per-ton selling prices of fabricated wire products increased 7% while
carbon steel rod selling prices decreased 4%. Per-ton selling prices of
industrial wire were relatively level.
During the first nine months of 1999, net sales decreased 4% to $277.4
million from $289.1 million in the first nine months of 1998 due primarily to a
4% decline in shipments and a 1% decline in per-ton selling prices of steel and
wire products. Industrial wire and carbon steel rod shipments declined 15% and
2%, respectively, while fabricated wire products shipments were relatively
unchanged compared with 1998 levels. Per-ton selling prices of industrial wire
and carbon steel rod declined 3% and 12%, respectively, while fabricated wire
products per-ton selling prices increased 3%.
The 1999 third quarter gross margin percentage of 4.4% was lower than
the 6.8% recorded during the comparable period in 1998 as lower costs for scrap
steel, the Company's primary raw material, and slightly higher selling prices
were more than offset by the effect of the lower sales volume, higher production
costs associated with the start-up of new equipment installed at the Company's
steel mini-mill located in Peoria, Illinois, purchased billet costs and an
unexpected $2.2 million fuel-adjustment charge from the Peoria plant's
electricity provider. The Company believes it has identified the start-up
problems and expects to have these problems resolved and the equipment
performing at the desired levels during the 2000 first quarter. However,
Keystone believes those problems will continue to adversely impact earnings
throughout the remainder of 1999 and the first quarter of 2000. Keystone's scrap
costs decreased 14% during the 1999 third quarter as compared to the same period
a year ago. During the 1999 third quarter, the Company purchased 206,000 tons of
scrap at an average price of $95 per ton as compared to 1998 third quarter
purchases of 201,000 tons at an average price of $111 per ton. In addition, the
Company recorded a $2.2 million benefit during the 1999 third quarter as a
result of favorable legal settlements with two electrode vendors related to
alleged price fixing. The Company does not anticipate it will receive any
further electrode settlements. The Company purchased 12,000 tons of billets
during the 1999 third quarter at an average price of $190 per ton as compared to
none in the 1998 third quarter.
For the first nine months of 1999, Keystone's gross margin percentage
increased to 8.7% from 8.3% during the 1998 period. This increase was due
primarily to lower costs for scrap steel and $2.7 million of favorable electrode
vendor settlements partially offset by the effect of lower sales volume and
selling prices, higher production costs associated with the new equipment
start-up problems, purchased billet costs and the $2.2 million fuel-adjustment
charge. During the first nine months of 1999, the Company purchased 542,000 tons
of scrap at an average price of $89 per ton as compared to 1998 purchases of
572,000 tons at an average price of $119 per ton, a 25% decline. The Company
purchased 42,000 tons of billets during the first nine months of 1999 at an
average price of $196 per ton as compared to none in the first nine months of
1998.
Selling expenses increased to $1.6 million in the third quarter of 1999
from $1.4 million in the 1998 third quarter and increased to $5.5 million in the
first nine months of 1999 from $4.4 million in the first nine months of 1998,
primarily as a result of the higher selling expenses associated with the
Company's lawn and garden products segment.
General and administrative expenses decreased to $4.4 million during
the third quarter of 1999 as compared to $5.8 million during the third quarter
of 1998 primarily due to a $1.1 million charge to bad debt expense related to a
customers bankruptcy during the 1998 third quarter. There was no such charge in
the 1999 third quarter. During the first nine months of 1999, general and
administrative expenses amounted to $15.6 million as compared to $12.6 million
during the first nine months of 1998 primarily due to higher general insurance
expense, costs associated with the start-up of the Company's lawn and garden
products segment, unfavorable legal settlements and higher environmental
charges. In addition, the 1998 first nine months included a legal fee
reimbursement of $380,000.
Due to a reduction in the estimated pension credit for 1999, the
Company recorded pension expense of $185,000 in the third quarter of 1999
compared with a pension credit of $2.5 million in the 1998 third quarter. This
change in estimate was primarily a result of the increased pension benefits
included in the Company's new labor contract with the Peoria facility's union.
The Company anticipates the total pension credit in 1999 will approximate $5.1
million as compared to a total pension credit of $9.4 million in 1998.
Interest expense in the third quarter of 1999 was higher than the third
quarter of 1998 due principally to higher average borrowing levels partially
offset by lower interest rates. Average borrowings by the Company under its
revolving credit facilities, EWP term loan and Senior Secured Notes approximated
$144.2 million in the third quarter of 1999 as compared to $107.9 million in the
third quarter of 1998. During the third quarter of 1999, the average interest
rate paid by the Company was 9.3% per annum as compared to 9.6% per annum in the
third quarter of 1998.
Interest expense in the first nine months of 1999 was also higher than
the first nine months of 1999 due principally to higher borrowing levels also
partially offset by lower interest rates. Average borrowings by the Company
under its revolving credit facilities, EWP term loan and Senior Secured Notes
approximated $143.3 million in the first nine months of 1999 as compared to
$106.5 million in the first nine months of 1998. During the first nine months of
1999, the average interest rate paid by the Company was 9.3% per annum as
compared to 9.6% per annum in the first nine months of 1998.
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, the Company incurred a net
loss of $4.1 million during the 1999 third quarter as compared to a net loss in
the 1998 third quarter of $707,000, and incurred a net loss during the first
nine months of 1999 of $2.0 million as compared to net income of $5.5 million in
the first nine months of 1998.
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, 1999 the Company had negative working capital of $5.1
million, including $1.7 million of notes payable and current maturities of
long-term debt as well as the outstanding borrowings under the Company's
revolving credit facilities of $50.8 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 Company's 9 5/8% Senior Secured
Notes, Keystone's ability to borrow under its $55 million revolving credit
facility may be limited. At September 30, 1999, unused credit available for
borrowing 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 $7.3 million, and $700,000, respectively. The terms of the
indenture will permit Keystone to borrow all of the $7.3 million unused credit
available under Keystone's $55 million revolving credit facility, during the
fourth quarter of 1999. Keystone'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. Garden Zone's $4 million revolving
credit facility, which expires December 11, 1999, was fully drawn at September
30, 1999. Keystone and Garden Zone are currently both negotiating with lenders
to renew or replace their existing revolving credit facilities that expire in
December 1999.
During the first nine months of 1999, the Company's operating
activities used approximately $10.0 million of cash compared to $11.1 million
provided in the first nine months of 1998 principally due to lower earnings in
the 1999 period and an increase in inventory levels during 1999.
During 1997, the Company commenced a $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.
Keystone substantially completed the capital improvement plan during 1998. As
such, capital expenditures in the first nine months of 1999 were considerably
less than capital expenditures during the first nine months of 1998. During the
first nine months of 1999, the Company made capital expenditures of
approximately $12.4 million as compared to $46.5 million in the first nine
months of 1998. Capital expenditures for 1999 are currently estimated to be
approximately $18 million and are related primarily to upgrades and
debottlenecking of production equipment. These capital expenditures will be
funded using borrowing availability under the Company's revolving credit
facilities.
At September 30, 1999, the Company's financial statements reflected
accrued liabilities of $17.6 million for estimated remediation costs arising
from environmental issues. There is no assurance regarding the ultimate cost of
remedial measures that might eventually be required by environmental authorities
or that additional environmental hazards, requiring further remedial
expenditures, might not be asserted by such authorities or private parties.
Accordingly, the 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. However, the Company's ability to incur new debt in
the future may be limited by the terms of the indenture related to the 9 5/8%
Senior Secured Notes.
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 planned
capital improvements for the remainder of 1999 and the year ending December 31,
2000. 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, interest rates, repayments of long-term debt,
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 has substantially completed 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. 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/or hardware with imbedded chips and the
Company expects to have its evaluation 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 relies 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 formally communicated with its
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to eliminate their own Year 2000
Issues. Keystone has completed these third party communications and has
developed contingency plans for potential non-compliance by these third parties.
Confirmations received by the Company indicate such customers and suppliers
generally are in the process of becoming Year 2000 compliant by December 31,
1999. Notwithstanding the Company's efforts, the ability of the Company to
affect the Year 2000 Issues preparedness of such customers and suppliers is
limited. Year 2000 Issues that adversely impact these third parties could also
affect 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.
The Company has substantially completed the evaluation of its Year 2000
Issue. 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
Company does not anticipate any remaining costs to be incurred relative to Year
2000 Issues will be material.
Although not anticipated, the most reasonably likely worst-case scenario
of failure by the Company or its key suppliers or customers to become year 2000
compliant would be a short-term slowdown or cessation of manufacturing
operations at one or more facilities and a short-term inability on the part of
the Company to process orders and billings in a timely manner, and to deliver
product to customers.
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 assurance 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to disclosure provided under the caption "Current
litigation" in Note 15 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,
1999.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1999:
None.
<PAGE>
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 8, 1999 BY /S/HAROLD M. CURDY
-------------------------------------
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
DATE: NOVEMBER 8, 1999 BY /S/BERT E. DOWNING, JR.
-------------------------------------
Bert E. Downing, Jr.
Corporate Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Ths schedule contains summary financial information extracted from Keytone
Consolidated Industries, Inc.'s consolidated financial statements for the nine
months ended September 30, 1999 and is qualified in its entirety by reference to
such.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> Sep-30-1999
<CASH> 0
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<RECEIVABLES> 40,340
<ALLOWANCES> 1,715
<INVENTORY> 62,279
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<PP&E> 355,372
<DEPRECIATION> 204,841
<TOTAL-ASSETS> 411,142
<CURRENT-LIABILITIES> 124,004
<BONDS> 100,899
0
0
<COMMON> 10,656
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<TOTAL-LIABILITY-AND-EQUITY> 411,142
<SALES> 277,379
<TOTAL-REVENUES> 278,019
<CGS> 253,373
<TOTAL-COSTS> 253,373
<OTHER-EXPENSES> 20,287
<LOSS-PROVISION> (2,954)
<INTEREST-EXPENSE> 10,552
<INCOME-PRETAX> (3,248)
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<NET-INCOME> (1,987)
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