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, 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 ofI.R.S. Employer
incorporation or organization)Identification No.)
5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, TX 75240-2697
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(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 4, 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 June 30, 2000 3-4
Consolidated Statements of Operations - Three months
and six months ended June 30, 1999 and 2000 5
Consolidated Statements of Cash Flows - Six months
ended June 30, 1999 and 2000 6
Consolidated Statement of Stockholders' Equity - Six
months ended June 30, 2000 7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
ASSET 1999 2000
----------- --------
Current assets:
<S> <C> <C>
Notes and accounts receivable ................. $ 32,010 $ 43,593
Receivable from Alter Recycling Company, L.L.C 809 716
Inventories ................................... 66,083 55,270
Deferred income taxes ......................... 17,396 15,999
Prepaid expenses and other .................... 1,364 401
-------- --------
Total current assets ....................... 117,662 115,979
-------- --------
Property, plant and equipment ................... 357,877 362,560
Less accumulated depreciation ................... 207,721 214,843
-------- --------
Net property, plant and equipment .......... 150,156 147,717
-------- --------
Other assets:
Restricted investments ........................ 9,180 9,186
Prepaid pension cost .......................... 126,126 127,597
Deferred financing costs ...................... 3,034 2,910
Goodwill ...................................... 1,002 939
Deferred income taxes ......................... -- 3,697
Investment in Alter Recycling Company, L.L.C .. 281 29
Other ......................................... 3,477 3,173
-------- --------
Total other assets ......................... 143,100 147,531
-------- --------
$410,918 $411,227
======== ========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 2000
---------- --------
Current liabilities:
<S> <C> <C>
Notes payable and current maturities of
long-term debt .............................. $ 45,986 $ 54,854
Accounts payable .............................. 30,689 35,145
Accounts payable to affiliates ................ 70 --
Accrued OPEB cost ............................. 9,500 9,500
Other accrued liabilities ..................... 45,337 39,970
-------- --------
Total current liabilities ................. 131,582 139,469
-------- --------
Noncurrent liabilities:
Long-term debt ................................ 100,871 100,491
Accrued OPEB cost ............................. 98,802 98,357
Deferred income taxes ......................... 1,100 --
Negative goodwill ............................. 22,709 22,031
Other ......................................... 9,539 9,024
-------- --------
Total noncurrent liabilities .............. 233,021 229,903
-------- --------
Minority interest ............................... -- 58
-------- --------
Stockholders' equity:
Common stock .................................. 10,656 10,792
Additional paid-in capital .................... 52,398 53,071
Accumulated deficit ........................... (16,727) (22,054)
Treasury stock, at cost ....................... (12) (12)
-------- --------
Total stockholders' equity ................ 46,315 41,797
-------- --------
$410,918 $411,227
======== ========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------
1999 2000 1999 2000
---- ---- ---- ----
Revenues and other income:
<S> <C> <C> <C> <C>
Net sales ............................ $105,924 $ 95,382 $197,641 $191,804
Interest ............................. 107 139 189 265
Other, net ........................... 192 (61) 313 (39)
-------- -------- -------- --------
106,223 95,460 198,143 192,030
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold ................... 93,484 91,515 177,147 181,496
Selling .............................. 2,107 1,714 3,910 3,514
General and administrative ........... 5,104 4,244 11,185 9,268
Overfunded defined benefit pension
credit .............................. (1,500) (736) (4,000) (1,472)
Interest ............................. 3,529 3,897 7,045 7,610
-------- -------- -------- --------
102,724 100,634 195,287 200,416
-------- -------- -------- --------
3,499 (5,174) 2,856 (8,386)
Equity in losses of Alter Recycling
Company, L.L.C ....................... -- (221) -- (252)
-------- -------- -------- --------
Income (loss) before income ta ...... 3,499 (5,395) 2,856 (8,638)
Provision (benefit) for income ta ...... 918 (2,049) 623 (3,369)
Minority interest in after-tax
earnings ............................. 102 49 102 58
-------- -------- -------- --------
Net income (loss) ................... $ 2,479 $ (3,395) $ 2,131 $ (5,327)
======== ======== ======== ========
Net income (loss) per share:
Basic ................................ $ .25 $ (.34) $ .21 $ (.53)
======== ======== ======== ========
Diluted .............................. $ .25 $ (.34) $ .21 $ (.53)
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Basic ................................ 9,927 10,062 9,882 10,017
======== ======== ======== ========
Diluted .............................. 9,927 10,062 9,882 10,017
======== ======== ======== ========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1999 2000
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) .................................. $ 2,131 $ (5,327)
Depreciation and amortization ...................... 11,865 9,207
Amortization of deferred financing costs ........... 260 239
Deferred income taxes .............................. 1,865 (3,401)
Other, net ......................................... (2,572) (141)
Change in assets and liabilities:
Accounts receivable .............................. (7,862) (11,633)
Inventories ...................................... 275 10,813
Prepaid pension cost ............................. (4,000) (1,472)
Accounts payable ................................. 249 4,386
Other, net ....................................... 1,779 (3,697)
-------- --------
Net cash provided (used) by operating activities 3,990 (1,026)
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (10,498) (7,449)
Other, net ......................................... (53) (13)
-------- --------
Net cash used by investing activities .......... (10,551) (7,462)
-------- --------
Cash flows from financing activities:
Revolving credit facilities, net ................... 7,124 9,161
Other notes payable and long-term debt:
Additions ........................................ 210 27
Principal payments ............................... (773) (700)
-------- --------
Net cash provided by financing activities ...... 6,561 8,488
-------- --------
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 .............. $ 6,808 $ 7,383
Income tax refund received ....................... (651) (636)
Common stock contributed to employee benefit plan .. $ 722 $ 809
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 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 .................. -- -- (5,327) -- (5,327)
Issuance of common stock .. 136 673 -- -- 809
------- ---------- ---------- ---- --------
Balance - June 30, 2000 ... $10,792 $ 53,071 $ (22,054) $(12) $ 41,797
======= ========== ========== ==== ========
</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 June 30, 2000 and the consolidated statements of
operations and cash flows for the interim periods ended June 30, 1999 and 2000,
and the consolidated statement of stockholders' equity for the interim period
ended June 30, 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 June 30, 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.
The Company will adopt the Securities and Exchange Commission's ("the
SEC") Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition, as
amended, in the fourth quarter of 2000. SAB No. 101 provides guidance on the
recognition, presentation and disclosure of revenue, including specifying basic
criteria that must be met before revenue can be recognized. The impact on
Keystone of adopting SAB No. 101, if any, has not yet been determined, in part
because the SEC is continuing to provide additional informal guidance and
clarification concerning the exact requirements of SAB No. 101. If the impact of
adopting SAB No. 101 is material, the Company will adopt SAB No. 101
retroactively to the beginning of 2000, and previously-reported results of
operations for the first three quarters of 2000 would be restated.
<PAGE>
Note 2 - Inventories:
Inventories are stated at the lower of cost or market. At December 31,
1999 and June 30, 2000, the last-in, first-out ("LIFO") method was used to
determine the cost of approximately 79% and 76%, respectively, 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,
1999 2000
------------ --------
(In thousands)
Raw materials:
<S> <C> <C>
Steel and wire products ............................. $ 20,985 $21,358
---------- -------
Work in process -
Steel and wire products ............................. 12,657 6,347
---------- -------
Finished products:
Steel and wire products ............................. 20,179 17,179
Lawn and garden products ............................ 5,595 3,455
---------- -------
25,774 20,634
---------- -------
Supplies:
Steel and wire products ............................. 15,378 15,642
---------- -------
74,794 63,981
---------- -------
Less LIFO reserve:
Steel and wire products ............................. 8,711 8,711
---------- -------
$ 66,083 $55,270
========== =======
</TABLE>
Note 3 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, June 30,
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 45,022
EWP .................................... 4,908 4,990
Garden Zone ............................ 3,541 3,166
Term loan - EWP .......................... 437 146
Other ...................................... 2,403 2,021
-------- --------
146,857 155,345
Less current maturities .................. 45,986 54,854
-------- --------
$100,871 $100,491
======== ========
</TABLE>
<PAGE>
In June 2000, EWP renewed and extended its revolving credit facility
for two years until June 2002. Under the terms of the renewal, the revolving
credit facility was increased from $6 million to $7 million and the facility's
borrowing base was expanded.
Note 4 - Income taxes:
Summarized below are (i) the differences between the provision for
income taxes or 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 provision (benefit) for income taxes.
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1999 2000
---- ----
(In thousands)
<S> <C> <C>
Expected tax expense (benefit), at statutory rate $ 1,000 $(3,023)
U.S. state income taxes, net 316 (162)
Amortization of goodwill (217) (217)
Other, net 476 33
------- -------
Income tax provision (benefit) $ 623 $(3,369)
======= =======
Copmprehensive income tax provision (benefit):
Currently payable (refundable):
U.S. Federal $(1,354) $ (22)
U.S. Sate 112 54
------- -------
Net currently payable (refundable) (1,242) 32
Deferred income taxes, net 1,865 (3,401)
------- -------
$ 623 $(3,369)
======= =======
</TABLE>
Note 5 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ --------
(In thousands)
Current:
<S> <C> <C>
Employee benefits $13,181 $11,310
Environmental 10,093 10,073
Self insurance 7,218 7,345
Interest 4,034 4,021
Disposition of former facilities 617 303
Legal and professional 829 741
Accrued maintenance - 557
Other 9,365 5,620
------- -------
$45,337 $39,970
======= =======
Noncurrent:
Environmental $ 8,143 $ 8,033
Deferred gain 274 -
Other 1,122 991
------- -------
$ 9,539 $ 9,024
======= =======
</TABLE>
<PAGE>
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 Alter Recycling Company, L.L.C., an
unconsolidated equity affiliate.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- ---------------------
1999 2000 1999 2000
---- ---- ---- ----
(In thousands)
Revenues:
<S> <C> <C> <C> <C>
Steel and wire products ......... $ 99,983 $92,807 $189,831 $187,000
Lawn and garden products ........ 7,290 2,671 10,319 4,932
-------- ------- -------- --------
107,273 95,478 200,150 191,932
Elimination of intersegment
revenues ...................... (1,349) (96) (2,509) (128)
-------- ------- -------- --------
$105,924 $95,382 $197,641 $191,804
======== ======= ======== ========
Income (loss) before income taxes:
Operating profit (loss):
Steel and wire products ....... $ 6,944 $ (870) $ 10,163 $ (103)
Lawn and garden products ...... 452 199 296 312
-------- ------- -------- --------
7,396 (671) 10,459 209
Equity in losses of Alter
Recycling Company, L.L.C ........ -- (221) -- (252)
General corporate items:
Interest income ............... 107 139 189 265
General income (expense), net . (475) (745) (747) (1,250)
Interest expense ................ (3,529) (3,897) (7,045) (7,610)
-------- ------- -------- --------
$ 3,499 $(5,395) $ 2,856 $ (8,638)
======== ======= ======== ========
</TABLE>
Note 7 - Contingencies:
At June 30, 2000, the Company's financial statements reflected accrued
liabilities of $18.1 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.
In April 2000, the National Environmental Law Center ("the NELC") and
affiliated 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. During May 2000,
the Company believed it had located the source of the ammonia and remedied the
process that was creating the ammonia. However, in June 2000, Keystone again
allegedly discharged an excessive amount of ammonia into the Illinois River. In
June 2000, the State of Illinois served Keystone with a complaint alleging over
100 discharges of ammonia and zinc into the waters of the state in excess of
permitted limits. The State of Illinois claims it is without an adequate remedy
at law and will be irreparably injured if the violations continued and, as such,
is requesting preliminary, and after trial, permanent injunctions. In addition,
the complaint requests civil penalties of $50,000 for each violation and $10,000
for each day during which each violation occurs. The Company continues to
investigate the allegations and attempt to locate and eliminate the source of
the excessive ammonia. Until the investigation is complete, Keystone is unable
to determine if any of the claimed violations occurred. The Company believes
that in light of the complaint by the State of Illinois, the threatened NELC
suit will not be filed.
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 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% ownership interest in 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 beliefs 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 Keystone believes the expectations reflected in such forward-looking
statements are reasonable, it cannot give assurances 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 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), 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.
<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 Six months ended
June 30, June 30,
------------------ ----------------
1999 2000 1999 2000
---- ---- ---- ----
(In thousands of tons)
Production volume:
Billets:
<S> <C> <C> <C> <C>
Produced .................... .......... 174 137 328 332
Purchased .............................. 2 8 30 8
Rod ..................................... 174 150 346 348
Sales volume:
Fabricated wire products ................ 96 94 181 177
Industrial wire ......................... 40 35 78 71
Steel rod ............................... 57 53 111 133
--- --- --- ---
193 182 370 381
=== === === ===
</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,
------------------ ------------------
1999 2000 1999 2000
---- ---- ---- ----
(In millions)
Steel and wire products:
<S> <C> <C> <C> <C>
Fabricated wire products ......... $ 65.8 $ 62.3 $ 124.6 $ 118.5
Industrial wire .................. 18.3 15.9 35.9 32.0
Rod .............................. 15.4 14.1 28.6 35.7
Other ............................ .5 .5 .7 .8
-------- ------ ------ ------
100.0 92.8 189.8 187.0
Lawn and garden products ........... 5.9 2.6 7.8 4.8
-------- ------ ------ ------
$ 105.9 $ 95.4 $ 197.6 $ 191.8
======== ====== ====== ======
</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 Six months ended
June 30, June 30,
------------------ --------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ......................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ................ 88.3 95.9 89.6 94.6
------- ----- ----- -----
Gross profit ...................... 11.7 4.1 10.4 5.4
Selling expenses .................. 2.0 1.8 2.0 1.8
General and administrative expenses 4.8 4.4 5.7 4.8
Overfunded defined benefit pension
credit ........................... (1.4) (.8) (2.0) (.8)
Income (loss) before income taxes . 3.3% (5.7)% 1.5% (4.5)%
Income tax provision (benefit) .... .9 (2.1) .3 (1.8)
Minority interest in after-tax
earnings ........................ .1 - .1 -
------- ----- ----- -----
Net income (loss) ................. 2.3% (3.6)% 1.1% (2.7)%
======= ===== ===== =====
</TABLE>
Billet production during the second quarter of 2000 declined 37,000
tons or 21% to 137,000 tons from 174,000 tons during the second quarter of 1999.
The primary reasons for this decline were the extended outage incurred in
connection with the correction of the infrastructure problems related to
Keystone's capital improvements that were completed during 1998 and a
"break-out" that occurred at the Company's electric arc furnace during June
2000. Due to the decline in billet production, Keystone purchased 8,000 tons of
billets during the 2000 second quarter as compared to purchases of 2,000 tons
during the 1999 second quarter. As a result of the decline in billet production,
and despite the increased billet purchases, rod production during the second
quarter of 2000 declined to 150,000 tons as compared to production of 174,000
tons in the 1999 second quarter.
Despite lower production levels during the second quarter, billet and
rod production during the first six months of 2000 both increased slightly as
compared to the first six months of 1999. These increases were due to the high
levels of production during the first quarter of 2000. Billet production in the
first six months of 2000 increased 4,000 tons from production in the first six
months of 1999 and rod production in the first six months of 2000 increased
2,000 tons from production in the first six months of 1999.
As a result of improvements made to Keystone's steel mill during 1998
and 1999, billet production capacity is 1 million tons. However, through June
2000 the Company was 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 and in June 2000, the IEPA issued the permit.
Issuance of the permit allows Keystone to now produce 1 million tons of billets,
the capacity of its furnace. Although the Company's rod mill has a capacity of
only approximately 800,000 tons, Keystone has developed several options that
will allow it to sell any excess billet production into the marketplace.
Keystone currently intends to attempt to operate the furnace at its capacity.
Net sales of $95.4 million in the 2000 second quarter were down 10%
from $105.9 million during the same period in 1999. This decline in sales was
due primarily to a 6% decline in shipments of the Company's steel and wire
products combined with a 2% decline in overall per-ton product selling prices.
In addition, Garden Zone's sales during the 2000 second quarter were down $3.3
million from the 1999 second quarter to $2.6 million primarily due to lower
shipments to a major customer. The production outages in Keystone's steel mill
during the second quarter of 2000 were responsible for the lower steel and wire
product shipment levels during the 2000 second quarter. Shipments of carbon
steel rod declined 8% during the 2000 second quarter as compared to the 1999
second quarter while per-ton selling prices declined 1%. Industrial wire
shipments declined 11% while per-ton selling prices declined 2%. Fabricated wire
products shipments during the 2000 second quarter declined 2% as compared to the
1999 second quarter while per-ton selling prices declined 3%.
Net sales of $191.8 million in the first six months of 2000 were down
3% from $197.6 million in the first six months of 1999. This decline in sales
was primarily due to a 2% decline in per-ton selling prices of the Company's
steel and wire products partially offset by a 3% increase in shipments. In
addition, Garden Zone's sales during the first six months of 2000 were down $3.0
million from the same period in 1999 to $4.8 million primarily due to the lower
shipments to the major customer. Despite lower steel and wire product shipments
during the 2000 second quarter, higher shipments during the 2000 first quarter
resulted in the higher product shipments during the first six months of 2000 as
compared to the first six months of 1999. Carbon steel rod shipments increased
20% during the first six months of 2000 compared to the 1999 second quarter
while per-ton selling prices increased 4%. Industrial wire shipments declined 9%
while per-ton selling prices declined 3%. Fabricated wire products shipments
during the first six months of 2000 declined 3% as compared to the first six
months of 1999 while per-ton selling prices declined 2%.
Gross profit during the 2000 second quarter declined to $3.9 million
from $12.4 million in the 1999 second quarter as the Company's gross margin
declined from 11.7% in the 1999 period to 4.1% in the 2000 second quarter. This
decrease in gross margin was due primarily to higher costs for scrap steel,
Keystone's primary raw material, the lower overall per-ton selling price of the
Company's products and higher production costs due to extended production
outages caused by planned repairs and the furnace break-out. During the 2000
second quarter, the Company purchased 197,000 tons of scrap at an average price
of $104 per ton as compared to 1999 second quarter purchases of 224,000 tons at
an average price of $88 per ton. During the 1999 second quarter, Keystone
purchased 2,000 tons of billets at an average price of $187 per ton, as compared
to 8,000 tons in the 2000 second quarter at an average price of $215 per ton.
The second quarter production outages and the furnace break-out adversely
impacted gross profit by approximately $3.6 million including lost billet
production of 39,000 tons.
Gross profit during the first six months of 2000 declined to $10.3
million from $20.5 million in the first six months of 1999 as the Company's
gross margin declined from 10.4% in the 1999 period to 5.4% in the first six
months of 2000. This decrease in gross margin was also due primarily to higher
costs for scrap steel, the lower overall per-ton selling price of the Company's
products and higher production costs. During the first six months of 2000, the
Company purchased 390,000 tons of scrap at an average price of $108 per ton as
compared to 1999 purchases of 336,000 tons at an average price of $85 per ton.
During the first six months of 1999, Keystone purchased 30,000 tons of billets
at an average price of $198 per ton, as compared to 8,000 in the first six
months of 2000 at an average price of $215 per ton. The production outages and
furnace break-out during the first six months of 2000 adversely impacted gross
profit by $5.3 million including lost billet production of 64,000 tons.
Selling expenses of $1.7 million during the second quarter of 2000 and
$3.5 million during the first six months of 2000 were both approximately
$400,000 lower than the same periods in 1999, but were relatively constant as a
percentage of sales.
General and administrative expenses declined to $4.2 million during the
second quarter of 2000 as compared to $5.1 million during the second quarter of
1999 primarily due to higher administrative expenses associated with start-up of
Garden Zone and an unfavorable legal settlement, both during the second quarter
of 1999. During the first half of 2000, general and administrative expenses
amounted to $9.3 million as compared to $11.2 million during the first half of
1999, also primarily due to the higher costs associated with the start-up of
Garden Zone and unfavorable legal settlements during the 1999 period.
The overfunded defined benefit pension credit in the second quarter of
2000 was $736,000 as compared to $1.5 million in the second quarter of 1999 and
was $1.5 million during the first six months of 2000 as compared to $4.0 million
during the same period in 1999. These declines in the pension credit were
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 second quarter of 2000 was higher than the
second quarter of 1999 due principally to higher average borrowing levels and
higher interest rates. Average borrowings by the Company under its revolving
credit facilities, EWP term loan and Senior Secured Notes approximated $152.2
million in the second quarter of 2000 as compared to $143.6 million in the
second quarter of 1999. During the second quarter of 2000, the average interest
rate paid by the Company was 9.6% per annum as compared to 9.1% per annum in the
second quarter of 1999.
Interest expense in the first half of 2000 was also higher than the
first half of 1999 due principally to higher borrowing levels and higher
interest rates. Average borrowings by the Company under its revolving credit
facilities, EWP term loan and Senior Secured Notes approximated $151.4 million
in the first half of 2000 as compared to $142.9 million in the first half of
1999. During the first half of 2000, the average interest rate paid by the
Company was 9.5% per annum as compared to 9.3% per annum in the first half 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 4 to the Consolidated Financial Statements.
As a result of the items discussed above, the Company incurred a net
loss during the second quarter of 2000 of $3.4 million as compared to net income
of $2.5 million in the second quarter of 1999, and a net loss during the first
half of 2000 of $5.3 million as compared to net income of $2.1 million in the
first half 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 half 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 May
2000.
Keystone enacted a $12 per-ton increase in rod selling prices for all
shipments ordered after April 1, 2000 and believes such price increase was fully
implemented by July 1, 2000. The Company also enacted a $12 per-ton increase in
industrial wire selling prices for all orders after May 1, 2000. At the present
time, the industrial wire price increase has not been fully realized. Despite
strong market demand and increased selling prices, management currently believes
the Company will record a loss during the second half of 2000 due to expected
increasing scrap costs and lower sales volumes as a result of lower than normal
inventory levels due to the delay in resolving the production problems discussed
above and the break-out at Keystone's electric arc furnace in June.
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 June 30, 2000 the Company had negative working capital of $23.5
million, including $1.7 million of notes payable and current maturities of
long-term debt as well as outstanding borrowings under the Company's revolving
credit facilities of $53.2 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 June 30, 2000, unused credit available for
borrowing under Keystone's $60 million revolving credit facility, which expires
December 31, 2001, EWP's $7 million revolving credit facility, which expires
June 30, 2002, and Garden Zone's $4 million revolving credit facility, which
expires December 11, 2000 were $13.9 million, $2.0 million and $.3 million,
respectively. The terms of the indenture will permit Keystone to borrow all of
the unused credit available under its revolving credit facilities during the
third 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.
During the first half of 2000, the Company's operating activities used
approximately $1.0 million of cash compared to $4.0 million provided by
operations in the first half of 1999 principally due to lower earnings in the
2000 period.
During the first half of 2000, the Company made capital expenditures of
$7.4 million as compared to $10.5 million in the 1999 first half. Capital
expenditures for 2000 are currently estimated to be approximately $14.0 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 June 30, 2000, the Company's financial statements reflected accrued
liabilities of $18.1 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.
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 will be limited by the terms
of the indenture related to the 9 5/8% Senior Secured Notes.
Management currently 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 its 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.
ACCOUNTING PRINCIPLES NOT YET ADOPTED:
See Note 1 to the Consolidated Financial Statements.
<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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On May 16, 2000, the annual meeting of the stockholders of Keystone was
held for the purpose of voting to elect one director for a term of two years and
two directors for terms of three years.
Results of voting at the annual meeting are detailed below (10,160,186
common shares were entitled to vote at the meeting).
<TABLE>
<CAPTION>
For Withheld Total
--------- -------- ---------
Directors:
Two-year term
<S> <C> <C> <C>
Steven L. Watson ........................ 6,927,431 48,097 6,975,528
Three-year term
Thomas E. Barry ......................... 6,925,336 50,192 6,975,528
William P. Lyons, Jr .................... 6,925,189 50,339 6,975,528
William Spier ........................... 6,926,311 49,217 6,975,528
</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, 2000.
(b) Reports on Form 8-K filed during the quarter ended June 30, 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: August 8, 2000 By /s/Bert E. Downing, Jr.
------------------------------------
Bert E. Downing, Jr.
Vice President and Corporate Controller
(Principal Financial and Accounting
Officer)
