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 March 31, 2000
--------------
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 May 11, 2000: 10,061,969
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1999
and March 31, 2000 3-4
Consolidated Statements of Operations - Three months
ended March 31, 1999 and 2000 5
Consolidated Statements of Cash Flows - Three months
ended March 31, 1999 and 2000 6
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2000 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1999 2000
----------- ---------
Current assets:
<S> <C> <C>
Notes and accounts receivable ...................... $ 32,010 $ 49,371
Receivable from Alter Recycling Company, L.L.C ..... 809 833
Inventories ........................................ 66,083 60,135
Deferred income taxes .............................. 17,396 17,025
Prepaid expenses and other ......................... 1,364 1,143
-------- --------
Total current assets ............................ 117,662 128,507
-------- --------
Property, plant and equipment ........................ 357,877 358,869
Less accumulated depreciation ........................ 207,721 210,645
-------- --------
Net property, plant and equipment ............... 150,156 148,224
-------- --------
Other assets:
Restricted investments ............................. 9,180 9,310
Prepaid pension cost ............................... 126,126 126,862
Deferred financing costs ........................... 3,034 3,023
Goodwill ........................................... 1,002 971
Deferred income taxes .............................. -- 582
Investment in Alter Recycling Company L.L.C ........ 281 250
Other .............................................. 3,477 3,341
-------- --------
Total other assets .............................. 143,100 144,339
-------- --------
$410,918 $421,070
======== ========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
1999 2000
----------- ---------
Current liabilities:
<S> <C> <C>
Notes payable and current maturities of
long-term debt ............................... $ 45,986 $ 58,036
Accounts payable ............................... 30,689 37,374
Accounts payable to affiliates ................. 70 --
Accrued OPEB cost .............................. 9,500 9,500
Other accrued liabilities ...................... 45,337 40,248
--------- ---------
Total current liabilities .................. 131,582 145,158
--------- ---------
Noncurrent liabilities:
Long-term debt ................................. 100,871 100,525
Accrued OPEB cost .............................. 98,802 98,383
Deferred income taxes .......................... 1,100 --
Negative goodwill .............................. 22,709 22,370
Other .......................................... 9,539 9,448
--------- ---------
Total noncurrent liabilities ............... 233,021 230,726
--------- ---------
Minority interest ................................ -- 9
--------- ---------
Stockholders' equity:
Common stock ................................... 10,656 10,790
Additional paid-in capital ..................... 52,398 53,058
Accumulated deficit ............................ (16,727) (18,659)
Treasury stock, at cost ........................ (12) (12)
--------- ---------
Total stockholders' equity ................. 46,315 45,177
--------- ---------
$ 410,918 $ 421,070
========= =========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1999 2000
---- ----
Revenues and other income:
<S> <C> <C>
Net sales ........................................... $ 91,717 $ 96,422
Interest ............................................ 82 126
Other, net .......................................... 121 22
-------- --------
91,920 96,570
-------- --------
Costs and expenses:
Cost of goods sold .................................. 83,663 89,981
Selling ............................................. 1,803 1,800
General and administrative .......................... 6,081 5,024
Overfunded defined benefit pension credit ........... (2,500) (736)
Interest ............................................ 3,516 3,713
-------- --------
92,563 99,782
-------- --------
(643) (3,212)
Equity in losses of Alter Recycling Company L.L.C . -- (31)
-------- --------
Loss before income taxes ........................ (643) (3,243)
Income tax benefit .................................... (295) (1,320)
Minority interest in after-tax earnings ............... -- 9
-------- --------
Net loss .......................................... $ (348) $ (1,932)
======== ========
Net loss per share:
Basic ............................................... $ (.04) $ (.19)
======== ========
Diluted ............................................. $ (.04) $ (.19)
======== ========
Weighted average common and common equivalent
shares outstanding:
Basic ............................................... 9,838 9,971
======== ========
Diluted ............................................. 9,838 9,971
======== ========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1999 2000
--- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss ............................................ $ (348) $ (1,932)
Depreciation and amortization ....................... 5,853 4,558
Amortization of deferred financing costs ............ 130 119
Deferred income taxes ............................... 2,249 (1,310)
Other, net .......................................... (443) (302)
Change in assets and liabilities:
Accounts receivable ............................... (12,436) (17,478)
Inventories ....................................... 1,345 5,948
Prepaid pension cost .............................. (2,500) (736)
Accounts payable .................................. (3,797) 6,615
Other, net ........................................ (3,984) (4,194)
-------- --------
Net cash used by operating activities ........... (13,931) (8,712)
-------- --------
Cash flows from investing activities:
Capital expenditures ................................ (6,537) (2,910)
Other, net .......................................... (151) (82)
-------- --------
Net cash used by investing activities ........... (6,688) (2,992)
-------- --------
Cash flows from financing activities:
Revolving credit facilities, net .................... 21,074 12,192
Other notes payable and long-term debt:
Additions ......................................... 103 17
Principal payments ................................ (558) (505)
-------- --------
Net cash provided by financing activities ....... 20,619 11,704
-------- --------
Net change in cash and cash equivalents ............... -- --
Cash and cash equivalents, beginning of period ........ -- --
-------- --------
Cash and cash equivalents, end of period .............. $ -- $ --
======== ========
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized ............... $ 5,840 $ 6,039
Income taxes ...................................... 673 28
Common stock contributed to employee benefit plan ... $ 722 $ 794
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2000
(In thousands)
<TABLE>
<CAPTION>
Additional
Common paid-in Accumulated Treasury
Stock capital deficit stock Total
------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1999 $ 10,656 $ 52,398 $(16,727) $ (12) $ 46,315
Net loss .................. -- -- (1,932) -- (1,932)
Issuance of common stock .. 134 660 -- -- 794
-------- -------- -------- -------- --------
Balance - March 31, 2000 .. $ 10,790 $ 53,058 $(18,659) $ (12) $ 45,177
======== ======== ======== ======== ========
</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, 1999 has been condensed
from the Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2000 and the consolidated statements of
operations and cash flows for the interim periods ended March 31, 1999 and 2000,
and the consolidated statement of stockholders' equity for the interim period
ended March 31, 2000, 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, 1999 (the "Annual
Report").
At March 31, 2000, Contran Corporation ("Contran") and other entities
related to Mr. Harold C. Simmons, beneficially own approximately 50% 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, including
derivatives embedded in non-derivative host contracts. As permitted by the
transition requirements of SFAS No. 133, as amended, Keystone will exempt from
the scope of SFAS No. 133 all host contracts containing embedded derivatives
which were acquired or issued prior to January 1, 1999.
<PAGE>
Note 2 - Inventories:
Inventories are stated at the lower of cost or market. At December 31,
1999 and March 31, 2000, the last-in, first-out ("LIFO") method was used to
determine the cost of approximately 79% of total inventories and the first-in,
first-out or average cost methods was used to determine the cost of other
inventories.
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
(In thousands)
Raw materials -
<S> <C> <C>
Steel and wire products .................................. $20,985 $17,038
------- -------
Work in process -
Steel and wire products .................................. 12,657 10,252
------- -------
Finished products:
Steel and wire products .................................. 20,179 19,070
Lawn and garden products ................................. 5,595 4,381
------- -------
25,774 23,451
------- -------
Supplies -
Steel and wire products .................................. 15,378 18,105
------- -------
74,794 68,846
Less LIFO reserve -
Steel and wire products .................................. 8,711 8,711
------- -------
$66,083 $60,135
======= =======
</TABLE>
Note 3 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
(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 ............................................. 35,568 47,812
EWP .................................................. 4,908 4,397
Garden Zone .......................................... 3,541 4,000
Term loan - EWP ........................................ 437 292
Other .................................................... 2,403 2,060
-------- --------
146,857 158,561
Less current maturities ................................ 45,986 58,036
-------- --------
$100,871 $100,525
======== ========
</TABLE>
<PAGE>
Note 4 - Income taxes:
Summarized below are (i) the differences between the income tax benefit
and the amounts that would be expected using the U.S. federal statutory income
tax rate of 35%, and (ii) the components of the income tax benefit.
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1999 2000
---- ----
(In thousands)
<S> <C> <C>
Expected tax benefit, at statutory rate ............... $ (225) $(1,135)
U. S. state income taxes, net ......................... 19 (73)
Amortization of goodwill .............................. (109) (108)
Other, net ............................................ 20 (4)
------- -------
Income tax benefit .................................... $ (295) $(1,320)
======= =======
Comprehensive benefit for income taxes:
Currently refundable:
U.S. federal ...................................... $(2,307) $ (10)
U.S. state ........................................ (237) --
------- -------
Net currently refundable ........................ (2,544) (10)
Deferred income taxes, net .......................... 2,249 (1,310)
------- -------
$ (295) $(1,320)
======= =======
</TABLE>
Note 5 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
----------------------
(In thousands)
Current:
<S> <C> <C>
Employee benefits ........................................ $13,181 $11,414
Environmental ............................................ 10,093 10,446
Self insurance ........................................... 7,218 7,263
Interest ................................................. 4,034 1,591
Disposition of former facilities ......................... 617 595
Legal and professional ................................... 829 750
Accrued maintenance ...................................... -- 813
Other .................................................... 9,365 7,376
------- -------
$45,337 $40,248
======= =======
Noncurrent:
Environmental ............................................ $ 8,143 $ 8,078
Deferred gain ............................................ 274 250
Other .................................................... 1,122 1,120
------- -------
$ 9,539 $ 9,448
======= =======
</TABLE>
Keystone generally undertakes planned major maintenance activities on
an annual basis, usually in the fourth quarter of each year. These major
maintenance activities are conducted during a shut-down of the Company's steel
and rod mills. Repair and maintenance costs estimated to be incurred in
connection with these planned major maintenance activities are accrued in
advance on a straight-line basis throughout the year and are included in cost of
goods sold.
Note 6 - Operations:
The Company's operations are 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 distribution of wire, plastic and wood lawn and
garden products to retailers through Garden Zone.
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
1999 2000
--- ----
(In thousands)
Revenues:
<S> <C> <C>
Steel and wire products ............................. $ 89,848 $ 94,193
Lawn and garden products ............................ 3,029 2,261
-------- --------
92,877 96,454
Elimination of intersegment revenues ................ (1,160) (32)
-------- --------
$ 91,717 $ 96,422
======== ========
Loss before income taxes:
Operating profit:
Steel and wire products ........................... $ 3,219 $ 767
Lawn and garden products .......................... (156) 113
-------- --------
3,063 880
Equity in loss of Alter Recycling Company, L.L.C .... -- (31)
General corporate items:
Interest income ................................... 82 126
General expense, net .............................. (272) (505)
Interest expense .................................... (3,516) (3,713)
-------- --------
$ (643) $ (3,243)
======== ========
</TABLE>
Note 7 - Contingencies:
At March 31, 2000, the Company's financial statements reflected accrued
liabilities of $18.5 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 believes it is a leading manufacturer of steel 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. 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").
Beginning in August 1999, Keystone is also engaged in scrap recycling
through its unconsolidated 50% interest in Alter Recycling Company, L.L.C.
("ARC").
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that 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 any assurance that
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. While it is not possible to
identify all factors, Keystone continues to face many risks and uncertainties.
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 fillings 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), customer inventory levels, general economic conditions, competitive
products and substitute products, customer and competitor strategies, the impact
of pricing and production decisions, the possibility of labor disruptions,
environmental matters, government regulations and possible changes therein, the
ultimate resolution of pending litigation, successful implementation of the
Company's capital improvements plan, international trade policies of the United
States and certain foreign countries, and any possible future litigation and
other risks and uncertainties as discussed in this Quarterly Report and the
Annual Report, including, without limitation, the section referenced above.
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 production and sales
volume data for the periods indicated:
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1999 2000
---- ----
(In thousands of tons)
Production volume:
Billets:
<S> <C> <C>
Produced ........................................... 155 196
Purchased .......................................... 28 --
Rod ................................................. 172 197
Sales volume:
Fabricated wire products ............................ 85 82
Industrial wire ..................................... 38 36
Steel rod ........................................... 54 81
--- ---
177 199
=== ===
</TABLE>
The following table sets forth the components of the Company's net
sales for the periods indicated.
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
(In millions)
1999 2000
---- ----
Steel and wire products:
<S> <C> <C>
Fabricated wire products ............................ $ 58.7 $ 56.2
Industrial wire ..................................... 17.6 16.1
Rod ................................................. 13.2 21.6
Other ............................................... .3 .3
----- -----
89.8 94.2
Lawn and garden products .............................. 1.9 2.2
----- -----
$ 91.7 $ 96.4
======= =======
</TABLE>
The following table sets forth selected operating data of the Company
as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1999 2000
---- ----
<S> <C> <C>
Net sales ............................................. 100.0% 100.0%
Cost of goods sold .................................... 91.2 93.3
Gross profit .......................................... 8.8 6.7
Selling expense ....................................... 2.0 1.9
General and administrative expense .................... 6.6 5.2
Overfunded defined benefit pension credit ............. (2.7) (.8)
Loss before income taxes .............................. (.7)% (3.4)%
Income tax benefit .................................... (.3) (1.4)%
----- -----
Net loss .............................................. (.4)% (2.0)%
===== =====
</TABLE>
<PAGE>
Billet production increased 27% from 155,000 tons during the first
quarter of 1999 to 196,000 tons, a record level of billet production for
Keystone in a single quarter. As a result of the increased billet production,
Keystone did not purchase any billets during the 2000 first quarter compared
with purchases of 28,000 tons during the 1999 first quarter. Rod production
increased 15% to 197,000 tons from 172,000 tons in the 1999 first quarter. The
2000 quarter's rod production was the most for Keystone in a first quarter and
the second highest produced in a single quarter.
As a result of improvements made to Keystone's steel mill during 1998
and 1999, billet production capacity is 1 million tons. However, the Company is
presently limited by its Illinois Environmental Protection Agency (the "IEPA")
construction permit to annual billet production of 820,000 tons. Keystone
applied for modifications to its permit to allow billet production of the 1
million ton capacity. In April 2000, the IEPA notified the Company that the
modified permit complies with applicable Federal and state air pollution control
laws and rules. Before the permit can be issued, the IEPA must hold a 30 day
public comment period. If no substantial comments are received, the permit will
be issued on May 20, 2000. Issuance of the permit would allow Keystone to
produce 1 million tons of billets, the capacity of its furnace. However, because
the Company's rod mill has a capacity of only approximately 800,000 tons,
billets produced in excess of that amount would be sold externally or rolled
into rod through a tolling arrangement with another manufacturer.
Net sales of $96.4 million in the 2000 first quarter were up 5 percent
from $91.7 million in the same period in 1999. The increase in sales was due to
a 12% increase in shipments of the Company's steel and wire products partially
offset by a 7% overall decrease in product per ton selling prices. The overall
price decline was partially due to a charge in product mix. Carbon steel rod,
Keystone's lowest-price product, accounted for 41% of steel and wire shipments
in the 2000 first quarter versus 30% in the 1999 first quarter. Shipments of rod
increased 49% while per ton selling prices of rod increased 10%. Industrial wire
shipments during 2000 declined 6% from the 1999 quarter while per ton selling
prices declined 3%. Fabricated wire product shipments declined 3% during the
2000 first quarter as compared to the 1999 first quarter while per ton selling
prices declined 1%.
Gross profit during the 2000 first quarter declined to $6.4 million
from $8.1 million in the 1999 first quarter as the Company's gross margin
declined from 8.8% in the 1999 period to 6.7% in the 2000 first quarter. This
decrease in gross margin was due primarily to higher costs for scrap steel,
Keystone's primary raw material, and the lower overall per-ton selling price of
the Company's products. During the 2000 first quarter, the Company purchased
194,000 tons of scrap at an average price of $111 per ton as compared to 1999
first quarter purchases of 111,000 tons at an average price of $80 per ton.
During the 1999 first quarter, Keystone purchased 28,000 tons of billets at an
average price of $199 per ton, as compared to none in the 2000 first quarter.
Selling expenses in the 2000 first quarter of $1.8 million were
comparable with selling expenses in the first quarter of 1999.
General and administrative expenses during the 2000 first quarter
decreased $1.1 million to $5.0 million from $6.1 million in the 1999 first
quarter due primarily to an unfavorable legal settlement of $460,000 in the 1999
first quarter and administrative expenses associated with the start-up of Garden
Zone during the 1999 first quarter.
The overfunded defined benefit pension credit in the first quarter of
2000 was $736,000 as compared to $2.5 million in the first quarter of 1999. The
decline was primarily a result of the increased pension benefits included in the
Company's May 1999 labor contract with the Peoria facility's union. Keystone
currently anticipates the total 2000 overfunded defined benefit pension credit
will approximate $3.0 million as compared to a total credit in 1999 of $5.6
million.
Interest expense in the first quarter of 2000 was slightly higher than
the first quarter of 1999 due principally to higher average borrowing levels
under the Company's revolving credit facilities. Average borrowings by the
Company under its revolving credit facilities, term loans and 9 5/8% Senior
Secured Notes approximated $150.7 million in the first quarter of 2000 as
compared to $142.1 million in the first quarter of 1999. During the first
quarter of 2000, the average interest rate paid by the Company was 9.4% per
annum as compared to 9.3% per annum in the first quarter of 1999.
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 first quarter of 2000 of $1.9 million as compared to a net loss
of $348,000 in the first quarter of 1999.
During December 1998, Keystone completed the installation of a new
electric arc furnace at its steel mill. The Company experienced production
problems related to the start-up of the new furnace throughout 1999 and the
first quarter of 2000. These problems were identified during 1999. Keystone had
previously believed the problems would have been resolved, and the equipment
performing at desired levels, during the first quarter of 2000. However,
Keystone currently believes the production problems were not corrected until
April 2000.
Keystone has announced a $12 per-ton increase in rod selling prices for
all shipments ordered after April 1, 2000. The company anticipates such price
increase will be fully implemented by July 1, 2000. The Company has also
announced a $12 per-ton increase in industrial wire selling prices for all
orders after May 1, 2000. Several other domestic rod producers have announced
price increases ranging from $15 to $20 per ton effective with shipments July 1,
2000. The Company is evaluating similar price increase and will make a decision
soon. However, due to the decline in the level of rod imports and firming rod
import prices, Keystone currently believes any similar additional price
increases would be substantially realized. Despite strong market demand and
increased selling price, management believes the Company will record a loss
during the second quarter of 2000 due to expected higher scrap costs and the
delay in resolving the production problems discussed above. However, management
currently believes Keystone will be profitable for calendar 2000.
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 facilities during the
first quarter of each year.
At March 31, 2000 Keystone had negative working capital of $16.7
million, including $1.8 million of notes payable and current maturities of
long-term debt as well as outstanding borrowings under the Company's revolving
credit facilities of $56.2 million. The amount of available borrowings under
these revolving 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 revolving credit
facilities may be limited. At March 31, 2000, unused credit available for
borrowing under Keystone's $60 million revolving credit facility, which expires
December 31, 2001, and EWP's $6 million revolving credit facility, which expires
June 30, 2000, were $11.1 million and $345,000, respectively. Garden Zone's $4
million revolving credit facility, which expires December 11, 2000, was fully
drawn at March 31, 2000. The terms of the indenture will permit Keystone to
borrow all of the $11.1 million unused credit available under Keystone's $60
million revolving credit facility during the second quarter of 2000. Keystone's
$60 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.
EWP has begun discussions with its lender relative to renewing and extending its
$6 million revolving credit facility upon its maturity.
During the first quarter of 2000, Keystone's operating activities used
approximately $8.7 million of cash compared to $13.9 million in the first
quarter of 1999 due primarily to increases in accounts payable.
During the first quarter of 2000, the Company made capital expenditures
of approximately $2.9 million as compared to $6.5 million in the 1999 first
quarter. Capital expenditures for 2000 are currently estimated to be
approximately $13.6 million and are related primarily to upgrades of production
equipment. These capital expenditures will be funded using cash flows from
operations together with borrowing availability under Keystone's revolving
credit facilities.
At March 31, 2000, the Company's financial statements reflected accrued
liabilities of $18.5 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. In
April 2000, the National Environmental Law Center and affiliated local public
interest groups, advised Keystone, the United States Environmental Protection
Agency and the Illinois Environmental Protection Agency ("the IEPA") of its
intent to file suit against Keystone in Federal court for allegedly discharging
excessive amounts of ammonia into the Illinois River in violation of the Clean
Water Act. Keystone had been reporting the ammonia discharges to the IEPA while
attempting to locate the source. The Company has now located the ammonia source
and is in the process of developing corrective action. Keystone has requested a
meeting with the IEPA to resolve the alleged violations and to enter into a
consent decree relative to future ammonia discharges.
In April 2000, the membership of the International Association of
Machinists and Aerospace Workers (Local 1570), which represents approximately
160 employees at Keystone's Sherman Wire Company ("Sherman") in Sherman, Texas,
ratified a new three-year agreement with Sherman that provides for, among other
things, increased wages and benefits for the membership.
Keystone 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. Keystone 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. Keystone 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,
Keystone'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 be
sufficient to fund the anticipated needs of the Company's operations and capital
improvements for 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.
There can be no assurance the Company would be able to obtain an adequate amount
of additional financing.
<PAGE>
PART II.
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 exhibits are included herein:
27.1 --Financial Data Schedule for the three month period ended
March 31, 2000.
(b) Reports on Form 8-K filed during the quarter ended March 31, 2000:
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: May 11, 2000 By /s/Harold M. Curdy
----------------------------------
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: May 11, 2000 By /s/Bert E. Downing, Jr.
----------------------------------
Bert E. Downing, Jr.
Vice President and Corporate Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Keytone
Consolidated Industries, Inc.'s consolidated financial statements for the three
months ended March 31, 2000 and is qualified in its entirety by reference to
such.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 52,594
<ALLOWANCES> 2,390
<INVENTORY> 60,135
<CURRENT-ASSETS> 128,507
<PP&E> 358,869
<DEPRECIATION> 210,645
<TOTAL-ASSETS> 421,070
<CURRENT-LIABILITIES> 145,158
<BONDS> 100,525
0
0
<COMMON> 10,790
<OTHER-SE> 34,387
<TOTAL-LIABILITY-AND-EQUITY> 421,070
<SALES> 96,422
<TOTAL-REVENUES> 96,570
<CGS> 89,981
<TOTAL-COSTS> 89,981
<OTHER-EXPENSES> 5,995
<LOSS-PROVISION> 93
<INTEREST-EXPENSE> 3,713
<INCOME-PRETAX> (3,243)
<INCOME-TAX> (1,320)
<INCOME-CONTINUING> (1,932)
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<NET-INCOME> (1,932)
<EPS-BASIC> (.19)
<EPS-DILUTED> (.19)
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