<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 0-2115
KEYSTONE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1058689
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 WEST GULF BANK DRIVE, HOUSTON, TEXAS 77040
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 466-1176
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ______
---
As of October 31, 1996 the number of shares of common stock outstanding was
35,587,944 excluding 358,126 treasury shares.
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1
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PART I
FINANCIAL INFORMATION
KEYSTONE INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $163.3 $147.3 $501.1 $437.6
------ ------ ------ ------
Cost and Expenses:
Cost of sales 99.8 88.2 312.1 262.8
Selling, general and administrative 44.2 39.4 130.9 120.6
Severance-related costs - - - 8.5
Plant closure and related costs - - - 2.9
Interest expense, net 1.8 1.3 5.5 3.8
Other (income) expense, net 1.5 .1 4.8 (1.2)
------ ------ ------ ------
Income before Income Taxes 16.0 18.3 47.8 40.2
Provision for Income Taxes 5.9 6.7 17.7 14.8
------ ------ ------ ------
Net Income $ 10.1 $ 11.6 $ 30.1 $ 25.4
------ ------ ------ ------
Weighted Average Outstanding
and Equivalent Shares 35.5 35.4 35.5 35.4
------ ------ ------ ------
Earnings Per Share $ .29 $ .33 $ .85 $ .72
------ ------ ------ ------
Cash Dividends Per Share $ .185 $ .185 $ .555 $ .555
------ ------ ------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
KEYSTONE INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
====== ======
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 24.8 $ 12.9
Receivables 157.6 160.6
Inventories 152.0 168.0
Prepayments and other 5.8 6.1
------ ------
340.2 347.6
------ ------
Property, Plant and Equipment 349.6 335.1
Less - Accumulated Depreciation 198.9 184.9
------ ------
150.7 150.2
------ ------
Other Assets 55.1 58.8
------ ------
$546.0 $556.6
====== ======
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current maturities and short-term bank borrowings $ 21.1 $ 30.9
Accounts payable and accrued liabilities 125.5 136.0
Income taxes payable 9.2 6.5
------ ------
155.8 173.4
------ ------
Long-Term Liabilities:
Long-term debt 76.8 79.5
Deferred income taxes .2 2.7
Other long-term liabilities 19.3 18.1
------ ------
96.3 100.3
------ ------
Shareholders' Investment:
Common stock $1.00 par value, 50 million shares authorized 35.9 35.9
Additional paid-in capital 113.6 112.4
Retained earnings 151.4 140.6
Treasury stock, at cost (6.1) (7.0)
Unamortized restricted stock grant expense (3.9) (3.7)
Foreign currency translation adjustments 3.0 4.7
------ ------
293.9 282.9
------ ------
$546.0 $556.6
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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KEYSTONE INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(AMOUNTS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------
SEPTEMBER 30,
-------------------
1996 1995
--------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 30.1 $ 25.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 18.4 17.3
Amortization 5.1 4.2
(Decrease) increase in deferred taxes (1.6) 3.4
Gain on sale of interest in former subsidiary - (4.6)
Gain on sale of property, plant and equipment, net (.1) (.7)
Decrease (increase) in receivables 3.0 (17.8)
Increase in prepayments and other assets (1.8) (2.3)
Decrease (increase) in inventories 15.7 (7.1)
(Decrease) increase in accounts payable and other liabilities (11.6) 1.0
Increase in income taxes payable 2.6 2.0
------ ------
Net Cash Provided by Operating Activities 59.8 20.8
------ ------
Cash Flows From Investing Activities:
Proceeds from sale of investment in former subsidiary - 4.8
Purchases of property, plant and equipment (20.2) (14.4)
Proceeds from sale of property, plant and equipment 1.1 2.7
------ ------
Net Cash Used by Investing Activities (19.1) (6.9)
------ ------
Cash Flows From Financing Activities:
Decrease in short-term borrowings (9.4) (.6)
Payments of long-term debt (2.9) (4.0)
Proceeds from long-term borrowings 1.8 1.8
Cash dividends paid (19.7) (19.6)
Proceeds from stock plans and other 1.5 2.1
------ ------
Net Cash Used by Financing Activities (28.7) (20.3)
------ ------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (.1) .2
------ ------
Increase (Decrease) in Cash and Cash Equivalents 11.9 (6.2)
------ ------
Cash and Cash Equivalents at Beginning of Period 12.9 18.7
------ ------
Cash and Cash Equivalents at End of Period $ 24.8 $ 12.5
------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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KEYSTONE INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(AMOUNTS IN MILLIONS)
(UNAUDITED)
SEPTEMBER 30, 1996 AND 1995
---------------------------
(1) BASIS FOR PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures, including significant accounting policies normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted. All adjustments which are, in the
opinion of management, necessary to present a fair statement of the results of
the interim periods have been included. It is suggested these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest Form 10-K.
(2) ESTIMATES INVOLVED IN PREPARING THE CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------
The Company's interim financial statements are prepared in accordance with
the same accounting policies followed at year-end. Certain items in the
financial statements can be determined on an interim basis only by making
accounting estimates. The accuracy of such amounts is dependent upon facts that
will exist and procedures that will be accomplished by the Company later in the
year. Several of the significant accounting estimates related to the
accompanying interim financial statements are set forth below.
Inventories -
The Company performs physical counts of its inventories at various times
during the year. The amounts reflected as raw materials and parts, work-in-
process, and components, sub-assemblies and finished goods as of September 30,
1996 and 1995, and thereby the related amounts for cost of sales, have been
determined using the Company's normal accounting procedures. Past experience of
the Company indicates that no significant adjustment would be required had an
actual count of the inventories been taken.
The majority of the Company's domestic inventories (approximately 33% of
consolidated inventories at December 31, 1995) are priced at cost using the LIFO
(last-in, first-out) method. Since amounts for inventories under the LIFO
method are based upon computations determined at year-end, the inventory at
September 30, 1996, has been based on certain estimates of what quantities and
costs will be at December 31, 1996.
Inventories at September 30, 1996, and December 31, 1995, are comprised of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- ------------
<S> <C> <C>
Raw materials and parts $ 17.9 $ 23.9
Work-in-process 19.1 20.3
Components, sub-assemblies and finished goods 116.7 125.6
Less: LIFO Adjustment (1.7) (1.8)
------ ------
$152.0 $168.0
====== ======
</TABLE>
5
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Income Taxes -
The Company provides for income taxes for an interim period by making, at the
end of the interim period, an estimate of the effective tax rate expected to be
applicable for the full year, and applying that rate to the current year-to-date
income before taxes.
(3) FOREIGN CURRENCY TRANSLATION AND COMMITMENTS
--------------------------------------------
An analysis of changes in the foreign currency translation adjustments
included in Shareholders' Investment is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance as of December 31, 1995 $ 4.7
Currency translation adjustments (2.6)
Income tax adjustments .9
-----
Balance as of September 30, 1996 $ 3.0
-----
</TABLE>
From time to time, the Company enters into forward exchange contracts and
borrows in foreign currencies to mitigate the effect of exchange rate
fluctuations on its operations. These hedging techniques limit exchange rate
exposure and the resulting impact on the Company's reported margins.
At September 30, 1996, the Company has obligations of $15.9 under forward
exchange contracts primarily for Dutch guilders and British pounds at various
dates through the first quarter of 1997.
(4) EARNINGS PER SHARE
------------------
Earnings per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding. There is no
significant difference between earnings per share on a primary and a fully
diluted basis.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following table sets forth for the periods indicated (i) percentages
which certain items reflected in the accompanying consolidated statements of
income represent of total net sales of the Company and (ii) the percentage
increase or decrease of amounts of such items as compared to the corresponding
prior year period.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------- --------------
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
PERCENTAGE PERCENTAGE
OF NET SALES % OF NET SALES %
------------ INC. ------------- INC.
1996 1995 (DEC.) 1996 1995 (DEC.)
----- ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 100.0 100.0 10.9 100.0 100.0 14.5
Cost and Expenses:
Cost of sales 61.1 59.9 13.2 62.3 60.1 18.8
Selling, general and administrative 27.1 26.8 12.2 26.1 27.6 8.5
Severance-related costs - - - - 1.9 *
Plant closure and related costs - - - - .7 *
Interest expense, net 1.1 .8 38.5 1.1 .8 44.7
Other (income) expense, net .9 - * 1.0 (.3) *
Income before Income Taxes 9.8 12.5 (12.6) 9.5 9.2 18.9
Provision for Income Taxes 3.6 4.7 (11.9) 3.5 3.4 19.6
Net Income 6.2 7.8 (12.9) 6.0 5.8 18.5
</TABLE>
* percentage not meaningful
7
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RESULTS OF OPERATIONS (AMOUNTS IN MILLIONS)
Net sales for the three and nine month periods ended September 30, 1996,
increased 10.9% and 14.5%, respectively, over the same periods of the prior
year. Shown below is an analysis of the change in net sales. Excluding the
effect of Gachot S.A. and Chemat GmbH, two affiliated companies acquired by
Keystone in the fourth quarter of 1995, net sales increased 5.1% and 8.6%,
respectively, compared to the three and nine month periods of 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------ -------------------
INC. (DEC.) IN NET SALES INC. (DEC.) IN NET SALES
$ % $ %
----- ----- ----- -----
<S> <C> <C> <C> <C>
Domestic:
Internal Increase (Decrease) $ 3.6 6.7 $(1.3) (.7)
----- -----
International:
Internal Growth 5.6 6.0 39.5 15.0
Exchange Rate Effect (1.8) (1.9) (.6) (.2)
----- -----
Total International 3.8 4.1 38.9 14.8
----- -----
Acquisitions 8.6 9.2 25.9 9.8
----- -----
Total Net Sales Increase $16.0 10.9 $63.5 14.5
===== =====
</TABLE>
For the three month period ended September 30, 1996, cost of sales as a
percentage of net sales increased to 61.1% from 59.9% a year ago. For the nine
months ended September 30, 1996, cost of sales as a percentage of sales
increased to 62.3% from 60.1% in 1995. These increases in the three and nine
month periods were primarily a result of increased costs incurred by Vanessa
operations in Italy to meet significant demand and shorten lead times, start-up
costs associated with establishing U.S. Vanessa manufacturing capability, an
increase in the mix of aggressively-priced project business in Europe, Japan,
China, and the U.S., and the addition of Gachot and Chemat activity at lower
gross margins than the Company reported in 1995. These increased costs were
partially offset by improvements in Yarway operations associated with the
divestiture of an underperforming product line and improvements related to 1996
cost reduction initiatives. In addition to the above, the nine month period
includes an increase related to the impact of the Japanese yen weakening against
currencies of Keystone entities supplying products to the Japanese market.
Selling, general and administrative expenses for the three and nine month
periods ended September 30, 1996, increased 12.2% and 8.5%, respectively,
compared to the same periods in 1995. The increase is primarily attributable to
the acquisition of Gachot and Chemat in the fourth quarter of 1995. Excluding
the effects of Gachot and Chemat, selling, general and administrative expenses
increased 5.8% and 2.0% for each of the three and nine month periods in 1996 as
compared to the same periods a year ago. These increases are primarily
attributable to increased employee costs, higher sales initiatives and system
implementation costs incurred to support growth in our Asia-Pacific operations.
During the first quarter of 1995, the Company recorded a charge of $8.5
before income taxes, or $.15 per share, and during the fourth quarter of 1995,
the Company recorded a charge of $14.4 before income taxes, or $.28 per share,
for restructuring and severance-related costs. The first quarter 1995 charge
represented severance costs in connection with a worldwide workforce reduction
of approximately 270 positions. This reduction was substantially completed by
the end of the second quarter of 1995. The fourth quarter 1995 charge related
to restructuring plans focused on further streamlining of operations and
divestiture of underperforming assets. These steps were originally expected to
result in the reduction of an additional 260 positions. Management currently
believes the ultimate reduction of positions in
8
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connection with these steps will be approximately 220, with 80 of these
positions related to business activities being divested and 140 associated with
ongoing operations.
The fourth quarter 1995 restructuring charge included severance and related
costs of $9.3, the write-down of certain assets totaling $2.7, and $2.4 of other
costs associated with divesting assets. The aggregate balance of the
restructuring-related liabilities as of September 30, 1996 was $8.0. The
majority of the liability related to the original charge should be paid or
settled during 1996. Management believes the Company's restructuring plans are
on track through September 1996 in terms of expected timing, charges against
reserves, annualized savings and impact on 1996 results.
The divestiture of underperforming assets associated with forth quarter 1995
restructuring includes a discontinued product line and several small businesses
with total annual sales of approximately $12.0. In connection with this
divestiture decision, the Company also recognized a charge of $8.2 before income
taxes, or $.16 per share, in the fourth quarter of 1995 relating to impairment
of certain long-lived assets held for sale as part of these divestitures.
The nine month period ended September 30, 1995, includes non-recurring
charges of $2.9 for the closure of a manufacturing facility in Indiana. These
charges include incremental costs incurred at the facilities to which operations
have been transferred.
Net interest expense, for the three and nine month periods ended September
30, 1996, increased compared to the same periods in 1995, primarily due to an
increase in debt associated with the Company's acquisition of Gachot and Chemat
in the fourth quarter of 1995.
Other (income) expense, net, generally represents amortization of intangible
assets and debt costs, as well as exchange gains and losses related to currency
fluctuations. The three and nine month periods ended September 30, 1996,
include $.3 and $.9, respectively, of amortization of the excess of purchase
price paid over net assets acquired for Gachot and Chemat. The three and nine
month periods ended September 30, 1996, also include $.2 and $.8, respectively,
of exchange losses compared to $1.1 and $.4 in the respective prior year
periods. The three and nine month periods ended September 30, 1995, included
non-recurring gains of $2.1 and $5.3 related to the disposition of certain
assets.
The Company's effective income tax rate was 37% for each of the three and
nine month periods ended September 30, 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES (AMOUNTS IN MILLIONS)
At September 30, 1996, the Company had working capital of $184.4 compared to
$174.2 at December 31, 1995. Management is not aware of any potential
impairments to the Company's liquidity and believes its internal and external
sources of cash will provide the necessary funds with which to meet its expected
capital requirements.
9
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None.
10
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SIGNATURES
----------
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 INTERNATIONAL, INC.
DATE: November 13, 1996 By: /s/ Francis S. Kalman
--------------------------
Francis S. Kalman
Senior Vice President and
Chief Financial Officer
By: /s/ J. Gordon Beittenmiller
--------------------------------
J. Gordon Beittenmiller
Corporate Controller
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 25
<SECURITIES> 0
<RECEIVABLES> 164
<ALLOWANCES> 7
<INVENTORY> 152
<CURRENT-ASSETS> 340
<PP&E> 350
<DEPRECIATION> 199
<TOTAL-ASSETS> 546
<CURRENT-LIABILITIES> 156
<BONDS> 0
0
36
<COMMON> 0
<OTHER-SE> 258
<TOTAL-LIABILITY-AND-EQUITY> 546
<SALES> 501
<TOTAL-REVENUES> 501
<CGS> 312
<TOTAL-COSTS> 443
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 48
<INCOME-TAX> 18
<INCOME-CONTINUING> 30
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
