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, 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 August 9, 1999: 9,926,531
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998
and June 30, 1999 3-4
Consolidated Statements of Income - Three months
and six months ended June 30, 1998 and 1999 5
Consolidated Statements of Cash Flows - Six months
ended June 30, 1998 and 1999 6
Consolidated Statement of Stockholders' Equity - Six
months ended June 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 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1998 1999
<S> <C> <C>
Current assets:
Notes and accounts receivable $ 36,786 $46,380
Inventories 52,239 51,124
Deferred income taxes 18,985 16,389
Prepaid expenses and other 3,916 3,897
Total current assets 111,926 117,790
Property, plant and equipment 354,682 354,590
Less accumulated depreciation 198,582 200,803
Net property, plant and equipment 156,100 153,787
Other assets:
Restricted investments 8,624 8,912
Prepaid pension cost 120,516 124,516
Deferred financing costs 3,493 3,263
Goodwill 1,115 1,059
Other 4,083 4,030
Total other assets 137,831 141,780
$405,857 $413,357
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1998 1999
<S> <C> <C>
Current liabilities:
Notes payable and current maturities of
long-term debt $ 29,912 $ 37,051
Accounts payable 34,002 32,931
Accrued OPEB cost 10,000 10,000
Other accrued liabilities 37,457 38,529
Total current liabilities 111,371 118,511
Noncurrent liabilities:
Long-term debt 101,852 101,274
Accrued OPEB cost 99,047 98,735
Deferred income taxes 6,162 5,432
Negative goodwill 24,065 23,387
Other 10,283 9,986
Total noncurrent liabilities 241,409 238,814
Minority interest - 102
Stockholders' equity:
Common stock 10,569 10,656
Additional paid-in capital 51,763 52,398
Accumulated deficit (9,243) (7,112)
Treasury stock, at cost (12) (12)
Total stockholders' equity 53,077 55,930
$405,857 $413,357
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $105,919 $105,924 $202,023 $197,641
Interest 95 107 321 189
Other, net 315 192 428 313
106,329 106,223 202,772 198,143
Costs and expenses:
Cost of goods sold 95,837 93,484 184,010 177,147
Selling 1,556 2,107 3,075 3,910
General and administrative 3,292 5,104 6,758 11,185
Overfunded defined benefit pension
credit (2,308) (1,500) (4,616) (4,000)
Interest 2,286 3,529 4,879 7,045
100,663 102,724 194,106 195,287
Income before income taxes 5,666 3,499 8,666 2,856
Provision for income taxes 1,598 918 2,396 623
Minority interest in after-tax
earnings - 102 - 102
Net income 4,068 2,479 6,270 2,131
Dividends on preferred stock 70 - 140 -
Net income available for common
shares $ 3,998 $ 2,479 $ 6,130 $ 2,131
Net income per share available for
common shares:
Basic $ .43 $ .25 $ .66 $ .21
Diluted $ .42 $ .25 $ .64 $ .21
Weighted average common and common
equivalent shares outstanding:
Basic 9,358 9,927 9,338 9,882
Diluted 9,579 9,927 9,552 9,882
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,270 $ 2,131
Depreciation and amortization 9,775 11,865
Amortization of deferred financing costs 252 260
Deferred income taxes 1,876 1,865
Other, net 79 (2,572)
Change in assets and liabilities:
Accounts receivable (11,857) (7,862)
Inventories 4,692 275
Prepaid pension cost (4,616) (4,000)
Accounts payable 3,449 249
Other, net (3,343) 1,779
Net cash provided by operating activities 6,577 3,990
Cash flows from investing activities:
Capital expenditures (27,311) (10,498)
Other, net (746) (53)
Net cash used by investing activities (28,057) (10,551)
Cash flows from financing activities:
Revolving credit facilities, net (318) 7,124
Other notes payable and long-term debt:
Additions 3 210
Principal payments (769) (773)
Common stock issued 82 -
Preferred stock dividend payments (140) -
Net cash provided (used) by financing activitie (1,142) 6,561
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 $ 5,166 $ 6,808
Income taxes (refund received) 133 (651)
Common stock contributed to employee benefit plan $ 616 $ 722
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Additional
Common paid-in Accumulated Treasury
Stock capital deficit stock Total
<S> <C> <C>
Balance - December 31, 1998 $10,569 $51,763 $(9,243) $ (12) $53,077
Net income - - 2,131 - 2,131
Issuance of common stock 87 635 - - 722
Balance - June 30, 1999 $10,656 $52,398 $(7,112) $ (12) $55,930
</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, 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 June 30, 1999 and the consolidated statements of income and
cash flows for the interim periods ended June 30, 1998 and 1999, and the
consolidated statement of stockholders' equity for the interim period ended June
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 June 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.
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 June 30, 1999
include the accounts of Garden Zone. Neither Keystone or 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 June
30, 1999 earned $208,000, of which $106,000 accrued to Keystone for financial
reporting purposes.
In July 1999, Keystone formed a joint venture with Alter Peoria, Inc., an
unrelated entity, to operate a scrap recycling operation at Keystone's facility
in Peoria, Illinois. The joint venture is known as Alter Recycling Company,
L.L.C. and Keystone's 50% interest is owned through one of Keystone's wholly-
owned subsidiaries, Sherman Wire Company (formerly DeSoto, Inc.). Upon
formation, Keystone contributed the property and equipment of its current Peoria
scrap facility (June 30, 1999 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.
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 June 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.
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
(In thousands)
<S> <C> <C>
Raw materials:
Steel and wire products $17,400 $16,884
Household cleaning products 650 -
18,050 16,884
Work in process -
Steel and wire products 8,642 5,591
Finished products:
Steel and wire products 12,797 16,115
Lawn and garden products - 2,162
Household cleaning products 249 -
13,046 18,277
Supplies:
Steel and wire products 16,894 14,706
56,632 55,458
Less LIFO reserve:
Steel and wire products 4,334 4,334
Household cleaning products 59 -
4,393 4,334
$52,239 $51,124
</TABLE>
Note 5 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, June 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 27,922
EWP 4,000 4,542
Garden Zone - 3,240
Term loan - EWP 1,020 729
Other 2,164 1,892
131,764 138,325
Less current maturities 29,912 37,051
$101,852 $101,274
</TABLE>
Note 6 - Income taxes:
Summarized below are 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%.
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1999
(In thousands)
<S> <C> <C>
Expected tax expense, at statutory rate $3,033 $1,000
U. S. state income taxes, net 198 316
Amortization of goodwill (218) (217)
Other, net (617) (476)
Provision for income taxes $2,396 $ 623
</TABLE>
Note 7 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
(In thousands)
<S> <C> <C>
Current:
Employee benefits $11,560 $10,714
Environmental 7,165 8,662
Self insurance 6,950 6,689
Interest 4,054 4,048
Disposition of former facilities 1,452 1,227
Legal and professional 795 914
Other 5,481 6,275
$37,457 $38,529
Noncurrent:
Environmental $ 8,175 $ 8,296
Other 2,108 1,690
$10,283 $ 9,986
</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. Beginning in 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 June 30, 1999
were approximately $4.8 million. 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.
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1999
(In thousands)
<S> <C> <C>
Revenues:
Steel and wire products $195,500 $189,831
Lawn and garden products - 10,319
Household cleaning products 6,523 -
202,023 200,150
Elimination of intersegment revenues - (2,509)
$202,023 $197,641
Income before income taxes:
Operating profit:
Steel and wire products $ 11,823 $ 10,163
Lawn and garden products - 296
Household cleaning products 44 -
11,867 10,459
General corporate items:
Interest income 321 189
General income (expense), net 1,357 (747)
Interest expense (4,879) (7,045)
$ 8,666 $ 2,856
</TABLE>
Note 9 - Contingencies:
At June 30, 1999, the Company's financial statements reflected accrued
liabilities of $17.0 million for estimated remedial costs arising from
environmental issues. There is no assurance regarding the ultimate cost of
remedial measures that might eventually be required by environmental authorities
or that additional environmental hazards, requiring further remedial
expenditures, might not be asserted by such authorities or private parties.
Accordingly, the ultimate costs of remedial measures may exceed the amounts
currently accrued.
For additional information related to commitments and contingencies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
Keystone 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.
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 and possible
disruptions of normal business activity from Year 2000 issues. 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.
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 Six months ended
1998 1999 1998 1999
(In thousands of tons)
<S> <C> <C> <C> <C>
Production volume:
Billets:
Produced 190 174 361 328
Purchased - 2 - 30
Rod 179 174 351 346
Sales volume:
Fabricated wire products 95 96 172 181
Industrial wire 45 40 87 78
Steel rod 55 57 119 111
195 193 378 370
</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,
1998 1999 1998 1999
(In millions)
<S> <C> <C> <C> <C>
Steel and wire products:
Fabricated wire products $ 64.4 $65.8 $116.9 $124.6
Industrial wire 21.4 18.3 41.9 35.9
Rod 16.3 15.4 36.0 28.6
Other .4 .5 .7 .7
102.5 100.0 195.5 189.8
Lawn and garden products - 5.9 - 7.8
Household cleaning products 3.4 - 6.5 -
$105.9 $105.9 $202.0 $197.6
</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,
1998 1999 1997 1998
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 90.5 88.3 91.1 89.6
Gross profit 9.5 11.7 8.9 10.4
Selling expense 1.5 2.0 1.5 2.0
General and administrative expense 3.1 4.8 3.3 5.7
Overfunded defined benefit pension
credit (2.2) (1.4) (2.3) (2.0)
Income before income taxes 5.3% 3.3% 4.3% 1.5%
Provision for income taxes 1.5 .9 1.2 .3
Minority interest in after-tax
earnings - .1 - .1
Net income 3.8% 2.3% 3.1% 1.1%
</TABLE>
Billet production declined in the second quarter and first six months of
1999 as compared to the same periods in 1998. As a result of this decline in
billet production, the Company purchased billets which enabled the Company's rod
production during the 1999 periods to decline only slightly from the 1998
production levels.
Net sales of $105.9 million in the 1999 second quarter approximated the
1998 second quarter as net sales from the Company's lawn and garden products
segment formed during the 1999 first quarter offset lower overall sales volumes
and selling prices related to the Company's steel and wire products segment and
the absence of revenues from the Company's household cleaning products segment
sold in January 1999. Fabricated wire products and carbon steel rod sales
volume increased 1% and 3%, respectively, while industrial wire sales volume
declined 11%. Per ton selling prices of fabricated wire products increased 2%,
while carbon steel rod and industrial wire selling prices decreased 9% and 4%,
respectively. Overall steel and wire product selling prices declined 1% during
the 1999 second quarter as compared to the 1998 second quarter.
During the first half of 1999, net sales decreased 2% to $197.6 million
from $202.0 million in the first half of 1998. Fabricated wire products
shipments increased 5% while industrial wire and carbon steel rod shipments
declined 10% and 7%, respectively, compared with 1998 levels. Per-ton selling
prices of carbon steel rod and industrial wire declined 15% and 5%,
respectively, while fabricated wire products per-ton selling prices increased
1%. Overall steel and wire product selling prices declined 1% during the first
half of 1999 as compared to the same period in 1998.
The 1999 second quarter gross margin percentage of 11.7% was higher than
the 9.5% recorded during the comparable period in 1998 as lower costs for scrap
steel, the Company's primary raw material, were partially offset by the effect
of the lower sales volume and selling prices, and higher production costs
associated with the start-up of new equipment installed at the Company's steel
mini-mill located in Peoria, Illinois. 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 by the start of the 2000 first
quarter. However, Keystone believes those problems will continue to adversely
impact earnings throughout the second half of 1999. Keystone's scrap costs
decreased 30% during the 1999 second quarter as compared to the same period a
year ago. During the 1999 second quarter, the Company purchased 224,000 tons of
scrap at an average price of $88 per ton as compared to 1998 second quarter
purchases of 196,000 tons at an average price of $125 per ton. In addition, the
Company recorded a $498,000 benefit during the 1999 second quarter as a result
of a favorable legal settlement with an electrode vendor related to alleged
price fixing.
For the first six months of 1999, Keystone's gross margin percentage
increased to 10.4% from 8.9% during the 1998 period. This increase was due
primarily to lower costs for scrap steel and the favorable vendor settlement
partially offset by the effect of lower sales volume and selling prices, higher
production costs associated with the new equipment start-up problems and
purchased billet costs. During the first six months of 1999, the Company
purchased 336,000 tons of scrap at an average price of $85 per ton as compared
to 1998 purchases of 371,000 tons at an average price of $125 per ton, a 32%
price decline. The Company purchased 30,000 tons of billets during the first
half of 1999 at an average price of $185 per ton as compared to none in the
first half of 1998.
Selling expenses increased to $2.1 million in the second quarter of 1999
from $1.6 million in the 1998 second quarter and increased to $3.9 million in
the first half of 1999 from $3.1 million in the first half 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 increased to $5.1 million during the
second quarter of 1999 as compared to $3.3 million during the second quarter of
1998 primarily due to higher general insurance charges in the 1999 second
quarter as well as higher administrative expenses associated with the Company's
lawn and garden products segment and an unfavorable legal settlement. During
the first half of 1999, general and administrative expenses amounted to $11.2
million as compared to $6.8 million during the first half of 1998 primarily due
to higher general insurance expense, higher 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 six months
included a legal fee reimbursement of $380,000.
Interest expense in the second quarter of 1999 was higher than the second
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
$143.6 million in the second quarter of 1999 as compared to $105.3 million in
the second quarter of 1998. During the second quarter of 1999, the average
interest rate paid by the Company was 9.1% per annum as compared to 9.6% per
annum in the second quarter of 1998.
Interest expense in the first half of 1999 was also higher than the first
half of 1998 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 $142.9
million in the first half of 1999 as compared to $105.8 million in the first
half of 1998. During the first half 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 half
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, net income during the second
quarter of 1999 declined to $2.5 million from $ 4.1 million in the second
quarter of 1998, and net income during the first half of 1999 declined to $2.1
million from $6.3 million in the first half 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 June 30, 1999 the Company had negative working capital of $721,000,
including $1.4 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 $35.7 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 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. At June 30, 1999, unused credit available for borrowing
under Keystone's $55 million revolving credit facility, which expires December
31, 1999, EWP's $6 million revolving credit facility, which expires June 30,
2000, and Garden Zone's $4 million revolving credit facility which expires
December 11, 1999 were $26.0 million, $1.5 million and $.5 million,
respectively. However, the terms of the indenture prohibit Keystone from
borrowing in excess of an additional $14.5 million, in the aggregate, during the
third 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.
During the first half of 1999, the Company's operating activities provided
approximately $4.0 million of cash compared to $6.6 million in the first half of
1998 principally due to lower earnings in the 1999 period.
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 half of 1999 were considerably less than
capital expenditures during the 1998 first half. During the first half of 1999,
the Company made capital expenditures of approximately $10.5 million as compared
to $27.3 million in the 1998 first half. Capital expenditures for 1999 are
currently estimated to be approximately $20 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 June 30, 1999, the Company's financial statements reflected accrued
liabilities of $17.0 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 will be limited by the terms
of the indenture related to the 9 5/8% Senior Secured Notes.
Approximately 1,700 of the Company's employees in Peoria, Illinois are
represented by the Independent Steel Workers Alliance ("ISWA"). In May 1999,
ISWA membership ratified a new three year agreement with the Company that
provides for, among other things, increased wages and pension benefits for the
membership.
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 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, 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 completed by the end of the third quarter
of 1999 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 initiated formal
communications 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. Notwithstanding the Company's efforts, the ability of the
Company to affect the Year 2000 Issues preparedness of such customers and
suppliers is limited. Keystone presently expects to complete these third party
communications during the 1999 third 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
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.
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.
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 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.
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 4. Submission of Matters to a Vote of Security Holders
On May 6, 1999, the annual meeting of the stockholders of Keystone was held
for the purpose of voting to elect two directors for terms of three years.
Results of voting at the annual meeting are detailed below (9,837,495 common
shares were entitled to vote at the meeting).
<TABLE>
<CAPTION>
For Withheld Total
<S> <C> <C> <C>
Directors:
Glenn R. Simmons 6,958,608 7,350 6,965,958
J. Walter Tucker, Jr. 6,958,777 7,181 6,965,958
</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, 1999.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1999:
None.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Keystone Consolidated Industries, Inc.
(Registrant)
Date: August 12, 1999 By /s/Harold M. Curdy
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: August 12, 1999 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, 1999 and is qualified in its entirety by reference to
such.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 48,887
<ALLOWANCES> 2,507
<INVENTORY> 51,124
<CURRENT-ASSETS> 117,790
<PP&E> 354,590
<DEPRECIATION> 200,803
<TOTAL-ASSETS> 413,357
<CURRENT-LIABILITIES> 118,511
<BONDS> 101,274
0
0
<COMMON> 10,656
<OTHER-SE> 45,274
<TOTAL-LIABILITY-AND-EQUITY> 413,357
<SALES> 197,641
<TOTAL-REVENUES> 197,641
<CGS> 177,147
<TOTAL-COSTS> 177,147
<OTHER-EXPENSES> 11,095
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,045
<INCOME-PRETAX> 2,856
<INCOME-TAX> 623
<INCOME-CONTINUING> 2,131
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<NET-INCOME> 2,131
<EPS-BASIC> .21
<EPS-DILUTED> .21
</TABLE>
