SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period September 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 o fI.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 _____
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Number of shares of common stock outstanding at November 13, 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 September 30, 2000 3-4
Consolidated Statements of Operations - Three months
and nine months ended September 30, 1999 and 2000 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1999 and 2000 6
Consolidated Statement of Stockholders' Equity - Nine
months ended September 30, 2000 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1999 2000
----------- -------------
Current assets:
<S> <C> <C>
Notes and accounts receivable ................. $ 32,010 $ 35,113
Receivable from unconsolidated equity affiliate 809 560
Inventories ................................... 66,083 55,504
Deferred income taxes ......................... 17,396 15,893
Prepaid expenses and other .................... 1,364 1,101
-------- --------
Total current assets ....................... 117,662 108,171
-------- --------
Property, plant and equipment ................... 357,877 364,766
Less accumulated depreciation ................... 207,721 219,536
-------- --------
Net property, plant and equipment .......... 150,156 145,230
-------- --------
Other assets:
Restricted investments ........................ 9,180 9,350
Prepaid pension cost .......................... 126,126 128,858
Deferred financing costs ...................... 3,034 2,798
Goodwill ...................................... 1,002 908
Deferred income taxes ......................... -- 4,690
Investment in unconsolidated equity affiliate . 281 --
Other ......................................... 3,477 2,940
-------- --------
Total other assets ......................... 143,100 149,544
-------- --------
$410,918 $402,945
======== ========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Notes payable and current maturities of
long-term debt ...................... $ 45,986 $ 53,797
Accounts payable ...................... 30,689 35,647
Accounts payable to affiliates ........ 70 5
Accrued OPEB cost ..................... 9,500 9,500
Other accrued liabilities ............. 45,337 35,821
--------- ---------
Total current liabilities ......... 131,582 134,770
--------- ---------
Noncurrent liabilities:
Long-term debt ........................ 100,871 100,476
Accrued OPEB cost ..................... 98,802 97,866
Deferred income taxes ................. 1,100 --
Negative goodwill ..................... 22,709 21,692
Other ................................. 9,539 9,437
--------- ---------
Total noncurrent liabilities ...... 233,021 229,471
--------- ---------
Stockholders' equity:
Common stock .......................... 10,656 10,792
Additional paid-in capital ............ 52,398 53,071
Accumulated deficit ................... (16,727) (25,147)
Treasury stock, at cost ............... (12) (12)
--------- ---------
Total stockholders' equity ........ 46,315 38,704
--------- ---------
$ 410,918 $ 402,945
========= =========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ------- -------------------------
1999 2000 1999 2000
---- ---- ---- ----
Revenues and other income:
<S> <C> <C> <C> <C>
Net sales ....................... $ 79,738 $ 82,787 $ 277,379 $ 274,591
Interest ........................ 138 134 327 399
Other, net ...................... -- 137 313 98
-------- --------- --------- ---------
79,876 83,058 278,019 275,088
-------- --------- --------- ---------
Costs and expenses:
Cost of goods sold .............. 76,226 78,844 253,373 260,340
Selling ......................... 1,630 1,453 5,540 4,967
General and administrative ...... 4,423 4,395 15,608 13,663
Pension expense (credit) ......... 185 (1,260) (3,815) (2,732)
Interest ........................ 3,507 3,894 10,552 11,504
-------- --------- --------- ---------
85,971 87,326 281,258 287,742
-------- --------- --------- ---------
(6,095) (4,268) (3,239) (12,654)
Equity in losses of unconsolidated
equity affiliate ................ (9) (29) (9) (281)
-------- --------- --------- ---------
Loss before income taxes ....... (6,104) (4,297) (3,248) (12,935)
Income tax benefit ................ (1,911) (1,146) (1,288) (4,515)
Minority interest in after tax
earnings (losses) ............... (75) (58) 27 --
-------- --------- --------- ---------
Net loss ....................... $ (4,118) $ (3,093) $ (1,987) $ (8,420)
======== ========= ========= =========
Net loss per share:
Basic ........................... $ (.41) $ (.31) $ (.20) $ (.84)
======== ========= ========= =========
Diluted ......................... $ (.41) $ (.31) $ (.20) $ (.84)
======== ========= ========= =========
Weighted average common and common
equivalent shares outstanding:
Basic ........................... 9,927 10,062 9,897 10,032
======== ========= ========= =========
Diluted ......................... 9,927 10,062 9,897 10,032
======== ========= ========= =========
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1999 2000
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss ........................................... $ (1,987) $ (8,420)
Depreciation and amortization ...................... 16,439 13,664
Amortization of deferred financing costs ........... 389 359
Deferred income taxes .............................. (284) (4,287)
Other, net ......................................... (3,687) (1,221)
Change in assets and liabilities:
Accounts receivable .............................. (209) (2,392)
Inventories ...................................... (10,881) 10,579
Prepaid pension cost ............................. (3,815) (2,732)
Accounts payable ................................. (9,305) 4,893
Other, net ....................................... 3,388 (8,120)
-------- --------
Net cash provided (used) by operating activities (9,952) 2,323
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (12,438) (9,692)
Other, net ......................................... 766 (47)
-------- --------
Net cash used by investing activities .......... (11,672) (9,739)
-------- --------
Cash flows from financing activities:
Revolving credit facilities, net ................... 22,220 8,702
Other notes payable and long-term debt:
Additions ........................................ 659 201
Principal payments ............................... (1,255) (1,487)
-------- --------
Net cash provided by financing activities ...... 21,624 7,416
-------- --------
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 .............. $ 12,644 $ 13,595
Income taxes (refund received) ................... (3,533) $ (766)
Common stock contributed to employee benefit plan .. $ 722 $ 809
</TABLE>
<PAGE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 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 ................... -- -- (8,420) -- (8,420)
Issuance of common stock ... 136 673 -- -- 809
------- ------- -------- ---- --------
Balance - September 30, 2000 $10,792 $53,071 $(25,147) $(12) $ 38,704
======= ======= ======== ==== ========
</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 September 30, 2000 and the consolidated statements
of operations and cash flows for the interim periods ended September 30, 1999
and 2000, and the consolidated statement of stockholders' equity for the interim
period ended September 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 September 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, but is
not expected to be material. 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.
Note 2 - Inventories:
Inventories are stated at the lower of cost or market. At December 31,
1999 and September 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, September 30,
1999 2000
------------ -------------
(In thousands)
Raw materials:
<S> <C> <C>
Steel and wire products ......... $20,985 $17,893
------- -------
Work in process -
Steel and wire products ....... 12,657 10,279
------- -------
Finished products:
Steel and wire products ....... 20,179 17,253
Lawn and garden products ...... 5,595 3,075
------- -------
25,774 20,328
------- -------
Supplies:
Steel and wire products ....... 15,378 15,715
------- -------
74,794 64,215
------- -------
Less LIFO reserve:
Steel and wire products ....... 8,711 8,711
------- -------
$66,083 $55,504
======= =======
</TABLE>
Note 3 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, September 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 44,144
EWP .................................... 4,908 5,830
Garden Zone ............................ 3,541 2,745
Term loan - EWP .......................... 437 152
Other ...................................... 2,403 1,402
-------- --------
146,857 154,273
Less current maturities .................. 45,986 53,797
-------- --------
$100,871 $100,476
======== ========
</TABLE>
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>
Nine months ended
September 30,
----------------------------
1999 2000
---- ----
(In thousands)
<S> <C> <C>
Expected tax benefit, at statutory rate $(1,137) $(4,527)
U.S. state income taxes, net .......... 155 96
Amortization of goodwill .............. (326) (323)
Other, net ............................ 20 239
------- -------
Income tax benefit .................... $(1,288) $(4,515)
======= =======
Comprehensive income tax benefit:
Currently payable (refundable):
U.S. Federal ...................... $(1,118) $ (271)
U.S. State ........................ 114 43
------- -------
Net currently payable (refundable (1,004) (228)
Deferred income taxes, net ........ (284) (4,287)
------- -------
$(1,288) $(4,515)
======= =======
</TABLE>
Note 5 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
Current:
<S> <C> <C>
Employee benefits .............. $13,181 $10,943
Environmental .................. 10,093 8,637
Self insurance ................. 7,218 7,398
Interest ....................... 4,034 1,694
Disposition of former facilities 617 341
Legal and professional ......... 829 555
Accrued maintenance ............. -- 789
Other .......................... 9,365 5,464
------- -------
$45,337 $35,821
======= =======
Noncurrent:
Environmental .................. $ 8,143 $ 8,436
Deferred gain .................. 274 --
Other .......................... 1,122 1,001
------- -------
$ 9,539 $ 9,437
======= =======
</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.
<PAGE>
Beginning in August 1999, Keystone is also engaged in a scrap recycling
joint venture through its 50% interest in an unconsolidated equity affiliate.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ------------------------
1999 2000 1999 2000
---- ---- ---- ----
(In thousands)
Revenues:
<S> <C> <C> <C> <C>
Steel and wire products .......... $ 77,677 $ 81,795 $ 267,508 $ 268,795
Lawn and garden products ......... 2,434 1,051 12,753 5,983
-------- --------- --------- ---------
80,111 82,846 280,261 274,778
Elimination of intersegment
revenues ....................... (373) (59) (2,882) (187)
-------- --------- --------- ---------
$ 79,738 $ 82,787 $ 277,379 $ 274,591
======== ========= ========= =========
Loss before income taxes:
Operating profit (loss):
Steel and wire products ........ $ (2,392) $ 181 $ 7,771 $ (161)
Lawn and garden products ....... (73) (85) 223 227
-------- --------- --------- ---------
(2,465) 96 7,994 66
General corporate items:
Interest income ................ 138 134 327 399
General expense, net ........... (261) (604) (1,008) (1,615)
Interest expense ................. (3,507) (3,894) (10,552) (11,504)
Equity in losses of unconsolidated
equity affiliate ............... (9) (29) (9) (281)
-------- --------- --------- ---------
Loss before income taxes ....... $ (6,104) $ (4,297) $ (3,248) $ (12,935)
======== ========= ========= =========
</TABLE>
Note 7 - Contingencies:
At September 30, 2000, the Company's financial statements reflected
accrued liabilities of $17.1 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.
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 any 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, future supply and demand for the
Company's products (including cyclicality thereof), customer inventory levels,
changes in raw material and other operating costs (such as scrap and energy),
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 (such as
those requiring emission and discharge standards for existing and new
facilities), 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 steel and wire products
production and sales volume data for the periods indicated.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1999 2000 1999 2000
---- ---- ---- ----
(In thousands of tons)
Production volume:
Billets:
<S> <C> <C> <C> <C>
Produced .............. 174 196 503 529
Purchased ............. 12 -- 42 8
Rod .................... 173 185 519 533
Sales volume:
Fabricated wire products 70 76 251 253
Industrial wire ........ 32 30 110 101
Steel rod .............. 55 68 166 201
--- --- --- ---
157 174 527 555
=== === === ===
</TABLE>
The following table sets forth the components of the Company's net
sales for the periods indicated.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
1999 2000 1999 2000
---- ---- ---- ----
(In millions)
Steel and wire products:
<S> <C> <C> <C> <C>
Fabricated wire products $ 47.9 $ 49.5 $ 172.4 $ 168.0
Industrial wire ........ 15.0 13.5 51.0 45.5
Rod .................... 14.5 18.4 43.1 54.1
Other .................. .2 .4 1.0 1.2
------- -------- ------- -------
77.6 81.8 267.5 268.8
Lawn and garden products . 2.1 1.0 9.9 5.8
------- -------- ------- -------
$ 79.7 $ 82.8 $ 277.4 $ 274.6
======= ======== ======== ========
</TABLE>
<PAGE>
The following table sets forth selected operating data of the Company
as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- ---------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ........................ 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ............... 95.6 95.2 91.3 94.8
----- ----- ----- -----
Gross profit ..................... 4.4 4.8 8.7 5.2
Selling expense .................. 2.0 1.8 2.0 1.8
General and administrative expense 5.6 5.3 5.6 5.0
Loss before income taxes ......... (7.7)% (5.2)% (1.2)% (4.7)%
Benefit for income taxes ......... (2.4) (1.4) (.5) (1.6)
Minority interest in after-tax
earnings (losses) .............. (.1) (.1) - -
----- ----- ----- -----
Net loss ......................... (5.4)% (3.7)% (.7)% (3.1)%
===== ===== ===== =====
</TABLE>
Billet production during the third quarter of 2000 increased 22,000
tons or 13% to 196,000 tons from 174,000 tons during the third quarter of 1999.
The 196,000 tons of billet production was the same as that of the 2000 first
quarter, which was a record level of billet production for a single quarter. As
a result of the increased billet production, Keystone did not purchase any
billets during the 2000 third quarter as compared to purchases of 12,000 tons
during the 1999 third quarter. Keystone's higher billet production enabled rod
production during the third quarter of 2000 to increase to 185,000 tons as
compared to production of 173,000 tons in the 1999 third quarter. This level of
rod production was the highest for a third quarter in over 10 years.
As a result of high levels of production during the first and third
quarters of 2000, both billet and rod production during the first nine months of
2000 increased as compared to the first nine months of 1999. Billet production
in the first nine months of 2000 increased 26,000 tons from production in the
first nine months of 1999 and rod production in the first nine months of 2000
increased 14,000 tons from production in the first nine months of 1999.
Net sales of $82.8 million in the 2000 third quarter were up 4% from
$79.7 million during the same period in 1999. This increase in sales was due
primarily to an 11% increase in shipments of the Company's steel and wire
products partially offset by a 5% decline in overall per-ton product selling
prices. In addition, Garden Zone's sales during the 2000 third quarter were down
$1.1 million from the 1999 third quarter to $1.0 million primarily due to lower
shipments to a major customer. Shipments of carbon steel rod increased 23%
during the 2000 third quarter as compared to the 1999 third quarter while
per-ton selling prices increased 3%. Industrial wire shipments declined 7% while
per-ton selling prices declined 4%. Fabricated wire products shipments during
the 2000 third quarter increased 9% as compared to the 1999 third quarter while
per-ton selling prices declined 5%.
Net sales of $274.6 million in the first nine months of 2000 were down
1% from $277.4 million in the first nine months of 1999. This decline in sales
was primarily due to a 5% decline in per-ton selling prices of the Company's
steel and wire products partially offset by a 5% increase in shipments. In
addition, Garden Zone's sales during the first nine months of 2000 were down
$4.1 million from the same period in 1999 to $5.8 million primarily due to the
lower shipments to the major customer. Carbon steel rod shipments increased 21%
during the first nine months of 2000 compared to the 1999 nine month period
while per-ton selling prices increased 4%. Industrial wire shipments declined 8%
while per-ton selling prices declined 3%. Fabricated wire products shipments
during the first nine months of 2000 increased 1% as compared to the first nine
months of 1999 while per-ton selling prices declined 3%.
Gross profit during the 2000 third quarter increased to $3.9 million
from $3.5 million in the 1999 third quarter as the Company's gross margin
increased from 4.4% in the 1999 period to 4.8% in the 2000 third quarter. This
increase in gross margin was due primarily to lower charges for electricity and
purchased billet costs partially offset by the lower overall per-ton selling
price of the Company's products and higher charges for natural gas. Keystone's
cost for scrap steel, the Company's primary raw material during the 2000 third
quarter was relatively constant with the 1999 third quarter cost. During the
2000 third quarter, the Company purchased 141,000 tons of scrap at an average
price of $94 per ton as compared to 1999 third quarter purchases of 206,000 tons
at an average price of $95 per ton. During the 2000 third quarter, Keystone did
not purchase any billets as compared to purchases of 12,000 tons in the 1999
third quarter at an average price of $190 per ton.
Gross profit during the first nine months of 2000 declined to $14.3
million from $24.0 million in the first nine months of 1999 as the Company's
gross margin declined from 8.7% in the 1999 period to 5.2% in the first nine
months of 2000. This decrease in gross margin was 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 nine months of 2000, the
Company purchased 531,000 tons of scrap at an average price of $104 per ton as
compared to 1999 purchases of 542,000 tons at an average price of $89 per ton.
During the first nine months of 2000, Keystone purchased 8,000 tons of billets
at an average price of $215 per ton, as compared to 42,000 tons in the first
nine months of 1999 at an average price of $196 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 $1.5 million during the third quarter of 2000 and
$5.0 million during the first nine months of 2000 were both lower than the same
periods in 1999, but were relatively constant as a percentage of sales.
General and administrative expenses were approximately $4.4 million
during both the third quarter of 2000 and the third quarter of 1999. During the
first nine months of 2000, general and administrative expenses amounted to $13.7
million as compared to $15.6 million during the first nine months of 1999,
primarily due to the higher costs associated with the start-up of Garden Zone
and unfavorable legal settlements during the first six months of the 1999
period.
The overfunded defined benefit pension credit in the third quarter of
2000 was $1.3 million as compared to expense of $185,000 in the third quarter of
1999, and the overfunded benefit pension credit declined to $2.7 million during
the first nine months of 2000 from $3.8 million during the same period in 1999.
The 1999 third quarter pension expense of $185,000 was due primarily to a
reduction in the estimated pension credit for the full year of 1999 as a result
of the increased pension benefits included in the Company's new labor contract
with the Peoria facility's union entered into during 1999. Excluding a
curtailment loss discussed below, Keystone currently anticipates the total 2000
overfunded defined benefit pension credit will approximate $3.7 million as
compared to a total credit in 1999 of $5.6 million. During the fourth quarter of
2000, in its effort to reduce fixed costs, Keystone offered an early retirement
package with enhanced pension benefits to a group of salaried employees. If the
entire group accepts the package, the Company will record a non-cash pension
charge in the 2000 fourth quarter of approximately $3.6 million related to such
retirement package. However, if the entire group accepts the package, fixed
labor costs would be reduced by more than $3.5 million per year beginning in
January 2001.
Interest expense in the third quarter of 2000 was higher than the third
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 $153.9 million
in the third quarter of 2000 as compared to $144.2 million in the third quarter
of 1999. During the third quarter of 2000, the average interest rate paid by the
Company was 9.7% per annum as compared to 9.3% per annum in the third quarter of
1999.
Interest expense in the first nine months of 2000 was also higher than
the first nine months 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 $152.2
million in the first nine months of 2000 as compared to $143.3 million in the
first nine months of 1999. During the first nine months of 2000, the average
interest rate paid by the Company was 9.6% per annum as compared to 9.3% per
annum in the first nine months 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 third quarter of 2000 of $3.1 million as compared to a net loss
of $4.1 million in the third quarter of 1999, and a net loss during the first
nine months of 2000 of $8.4 million as compared to a net loss of $2.0 million in
the first nine months of 1999.
In addition to the early retirement package offered to salaried
employees, the Company is continuing to take action towards reducing fixed
costs. Keystone believes a combination of its early retirement package and a
restructuring of it work force will enable the Company to, by the end of 2000,
reduce its existing salaried employee headcount by 20% and existing hourly
employee headcount by 8%. Reductions in the Company's workforce other than from
the early retirement package will result in added expense and cash requirements
related to severance and other termination costs during the fourth quarter of
this year.
<PAGE>
Keystone believes it successfully achieved its April 1 rod selling
price increase during the third quarter of 2000, and that its markets remain
relatively stable. However, Keystone's customers have been lowering their
inventory levels during the third quarter of 2000 which has in turn put pricing
pressure on the Company's products. Keystone does not anticipate any relief in
this area during the fourth quarter, although the Company does not anticipate
further pricing declines during the fourth quarter. In addition, during October
2000, Keystone experienced an unplanned outage at its electric arc furnace. This
outage resulted in approximately 12 days lost production and repair costs of
approximately $1 million, although Keystone anticipates a portion of the loss
will be covered by insurance. As such, despite improving production levels,
declining fixed costs and scrap costs that the Company anticipates during
November will be at their lowest levels in over 10 years, as a result of the
continuing pricing pressures, the furnace outage, the possibility of the pension
curtailment loss and severance related charges, Keystone believes results of
operations during the fourth quarter of 2000 will not improve over the $5.5
million loss recorded during the fourth quarter of 1999.
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 September 30, 2000 the Company had negative working capital of $26.6
million, including $1.1 million of notes payable and current maturities of
long-term debt as well as outstanding borrowings under the Company's revolving
credit facilities of $52.7 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 September 30, 2000, unused credit available for
borrowing under Keystone's $60 million revolving credit facility, which expires
December 31, 2001 and EWP's $7 million revolving credit facility, which expires
June 30, 2002, were $8.5 million and $1.2 million, respectively. At September
30, 2000, there was no unused credit available for borrowing under Garden Zone's
$4 million revolving credit facility, which expires December 11, 2000. The terms
of the indenture will permit Keystone to borrow all of the unused credit
available under its revolving credit facilities during the fourth quarter of
2000. Keystone's $60 million revolving credit facility requires Keystone to use
daily cash receipts to reduce outstanding borrowings, which results in the
Company maintaining zero cash balances when there are balances outstanding under
this credit facility.
During the first nine months of 2000, the Company's operating
activities provided approximately $2.3 million of cash compared to a use of
approximately $10.0 million in cash in the first nine months of 1999 principally
due to the $10.6 million decline in inventories during the 2000 period as
opposed to a $10.9 million increase in inventories during the 1999 period
partially offset by lower earnings in the 2000 period.
During the first nine months of 2000, the Company made capital
expenditures of $9.7 million as compared to $12.4 million in the first nine
months of 1999. Capital expenditures for 2000 are currently estimated to be
approximately $12.0 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 September 30, 2000, the Company's financial statements reflected
accrued liabilities of $17.1 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.
In addition to the planned reductions in fixed costs discussed
previously, the Company is taking additional action towards improving its
liquidity. These actions include, but are not limited to, attempting to
negotiate an "over-advance" facility with its primary lender for a short period
of time, reducing inventory levels through more efficient production schedules
and a consignment program for 50,000 tons of scrap steel, offering enhanced cash
discounts to significant customers for prepayment of their purchase orders and
reducing capital expenditures. The Company is also considering the sale of
certain divisions or subsidiaries that are not necessary to achieve Keystone's
long-term business objectives. However, there can be no assurance the Company
will be successful in any of these or other efforts, or that if successful, they
will provide sufficient liquidity for the Company's operations during the next
year.
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.
<PAGE>
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 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibit is included herein:
27.1 Financial Data Schedule for the nine month period ended
September 30, 2000.
(b) Reports on Form 8-K filed during the quarter ended September 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: November 13, 2000 By /s/Bert E. Downing, Jr.
-------------------------------------
Bert E. Downing, Jr.
Vice President and Corporate Controller
(Principal Financial and Accounting
Officer)
