-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MyzTNYy6E34PWfCFIJwi0t8F6UBHgjVvdpVeOlQEze+xOq0WhEAGtp0d73TDDCdy t4gnuNxo/TC0a2flOvrO7Q== 0000055604-02-000005.txt : 20020814 0000055604-02-000005.hdr.sgml : 20020814 20020814111814 ACCESSION NUMBER: 0000055604-02-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE CONSOLIDATED INDUSTRIES INC CENTRAL INDEX KEY: 0000055604 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 370364250 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03919 FILM NUMBER: 02732530 BUSINESS ADDRESS: STREET 1: 5430 LBJ FWY STE 1740 STREET 2: THREE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144580028 MAIL ADDRESS: STREET 1: 5430 LBJ FWY STE 1740 STREET 2: THREE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE STEEL & WIRE CO DATE OF NAME CHANGE: 19710506 10-Q 1 kci0602q.txt 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, 2002 Commission file number 1-3919 Keystone Consolidated Industries, Inc. (Exact name of registrant as specified in its charter) Delaware 37-0364250 (State or other jurisdiction of I.R.S. Employer incorporation or organization)Identification No.) 5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, TX 75240-2697 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 458-0028 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- Number of shares of common stock outstanding at August 14, 2002: 10,068,450 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 31, 2001 and June 30, 2002 3-4 Consolidated Statements of Operations - Three months and six months ended June 30, 2001 and 2002 5-6 Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and 2002 7 Consolidated Statement of Common Stockholders' Equity (Deficit) - Six months ended June 30, 2002 8 Notes to Consolidated Financial Statements 9-20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21-28 PART II. OTHER INFORMATION Item 1. Legal Proceedings 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 6. Exhibits and Reports on Form 8-K 29 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, June 30, ASSETS 2001 2002 -------- ------- Current assets: Notes and accounts receivable .................. $ 29,411 $ 43,693 Inventories .................................... 40,912 37,805 Deferred income taxes .......................... 9,778 -- Prepaid expenses and other ..................... 3,211 2,343 -------- -------- Total current assets ........................ 83,312 83,841 -------- -------- Property, plant and equipment .................... 367,556 370,115 Less accumulated depreciation .................... 237,956 246,229 -------- -------- Net property, plant and equipment ........... 129,600 123,886 -------- -------- Other assets: Restricted investments ......................... 5,675 5,777 Prepaid pension cost ........................... 131,985 133,485 Deferred income taxes .......................... 11,844 -- Deferred financing costs ....................... 2,295 2,717 Goodwill ....................................... 752 752 Other .......................................... 1,437 1,292 -------- -------- Total other assets .......................... 153,988 144,023 -------- -------- $366,900 $351,750 ======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) December 31, June 30, 2001 2002 -------- ------- Current liabilities: Notes payable and current maturities of long-term debt ............................... $ 46,332 $ 32,399 Accounts payable ............................... 23,014 23,079 Payables to affiliates ......................... 633 946 Accrued OPEB cost .............................. 7,215 7,215 Accrued preferred stock dividends .............. -- 1,713 Other accrued liabilities ...................... 37,100 42,101 --------- --------- Total current liabilities .................. 114,294 107,453 --------- --------- Noncurrent liabilities: Long-term debt ................................. 100,123 64,364 Accrued OPEB cost .............................. 101,810 104,002 Negative goodwill .............................. 19,998 -- Other .......................................... 31,010 21,573 --------- --------- Total noncurrent liabilities ............... 252,941 189,939 --------- --------- Minority interest ................................ 1 274 --------- --------- Redeemable Series A preferred stock .............. -- 2,112 --------- --------- Common stockholders' equity (deficit): Common stock ................................... 10,792 10,798 Additional paid-in capital ..................... 53,071 51,358 Accumulated deficit ............................ (64,187) (10,172) Treasury stock, at cost ........................ (12) (12) --------- --------- Total stockholders' equity (deficit) ....... (336) 51,972 --------- --------- $ 366,900 $ 351,750 ========= =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three months ended Six months ended June 30, June 30, --------------------- ------------------------ 2001 2002 2001 2002 ---- ---- ---- ---- Revenues and other income: Net sales ........................ $ 86,294 $ 94,244 $ 164,057 $ 180,156 Gain on early extinguishment of debt ............................ -- -- -- 54,739 Interest ......................... 53 21 124 41 Other, net ....................... 418 36 495 37 -------- --------- --------- --------- 86,765 94,301 164,676 234,973 -------- --------- --------- --------- Costs and expenses: Cost of goods sold ............... 80,461 83,433 156,818 160,612 Selling .......................... 1,668 1,735 3,275 3,574 General and administrative ....... 4,531 6,812 7,817 12,727 Overfunded defined benefit pension credit .......................... (750) (750) (1,500) (1,500) Interest ......................... 3,601 953 7,347 3,647 -------- --------- --------- --------- 89,511 92,183 173,757 179,060 -------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle ......... (2,746) 2,118 (9,081) 55,913 Income tax expense (benefit) ....... (1,276) -- (3,912) 21,622 Minority interest in after-tax earnings ......................... 158 114 165 274 -------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle ......................... (1,628) 2,004 (5,334) 34,017 Cumulative effect of change in accounting principle .............. -- -- -- 19,998 -------- --------- --------- --------- Net income (loss) ............... (1,628) 2,004 (5,334) 54,015 Dividends on preferred stock ....... -- 1,713 -- 1,713 -------- --------- --------- --------- Net income (loss) available for common shares ..................... $ (1,628) $ 291 $ (5,334) $ 52,302 ======== ========= ========= =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (In thousands, except per share data)
Three months ended Six months ended June 30, June 30, ------------------------- ---------------------- 2001 2002 2001 2002 ---- ---- ---- ---- Basic earnings (loss) per share available for common shares: Income (loss) before cumulative effect of change in accounting principle .................... $ (.16) $ .03 $ (.53) $ 3.21 Cumulative effect of change in accounting principle ......... -- -- -- 1.99 ---------- ---------- ---------- ---------- Net income (loss) ........... $ (.16) $ .03 $ (.53) $ 5.20 ========== ========== ========== ========== Basic shares Outstanding .................... 10,062 10,068 10,062 10,066 ========== ========== ========== ========== Diluted earnings (loss) per share available for common shares: Income (loss) before cumulative effect of change in accounting principle .................... $ (.16) $ .03 $ (.53) $ 1.94 Cumulative effect of change in accounting principle ......... -- -- -- 1.14 ---------- ---------- ---------- ---------- Net income (loss) ........... $ (.16) $ .03 $ (.53) $ 3.08 ========== ========== ========== ========== Diluted shares outstanding ...... 10,062 10,068 10,062 17,491 ========== ========== ========== ==========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six months ended June 30, 2001 2002 ---- ---- Cash flows from operating activities: Net income (loss) .................................... $ (5,334) $ 54,015 Depreciation and amortization ........................ 8,599 8,931 Amortization of deferred financing costs ............. 239 334 Deferred income taxes ................................ (3,976) 21,622 Non-cash OPEB expense ................................ (424) 2,192 Gain on early extinguishment of debt ................. -- (54,739) Cumulative effect of change in accounting principle .. -- (19,998) Other, net ........................................... 278 124 Change in assets and liabilities: Notes and accounts receivable ...................... (20,773) (15,369) Inventories ........................................ 8,121 3,107 Prepaid pension cost ............................... (1,500) (1,500) Accounts payable ................................... 7,691 378 Other, net ......................................... (230) 6,452 -------- -------- Net cash provided (used) by operating activities . (7,309) 5,549 -------- -------- Cash flows from investing activities: Capital expenditures ................................. (1,535) (3,271) Proceeds from sale of business unit .................. 757 -- Collection of notes receivable ....................... 726 1,127 Other, net ........................................... 165 273 -------- -------- Net cash provided (used) by investing activities . 113 (1,871) -------- -------- Cash flows from financing activities: Revolving credit facilities, net ..................... 7,636 (15,980) Other notes payable and long-term debt: Additions .......................................... -- 15,066 Principal payments ................................. (425) (299) Deferred financing costs paid ...................... (15) (2,465) -------- -------- Net cash provided (used) by financing activities . 7,196 (3,678) -------- -------- 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 ................ $ 7,117 $ 1,835 Income taxes (refund received) ..................... (158) 108 Note received in connection with sale of business unit ....................................... $ 440 $ --
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY (DEFICIT) Six months ended June 30, 2002 (In thousands)
Additional Common paid-in Accumulated Treasury Stock capital deficit stock Total Balance - December 31, 2001 $10,792 $ 53,071 $(64,187) $ (12) $ (336) Net income ................ -- -- 54,015 -- 54,015 Issuance of common stock .. 6 -- -- -- 6 Preferred stock dividends . -- (1,713) -- -- (1,713) ------- -------- -------- ------- -------- Balance - June 30, 2002 ... $10,798 $ 51,358 $(10,172) $ (12) $ 51,972 ======= ======== ======== ======= ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and basis of presentation: The consolidated balance sheet of Keystone Consolidated Industries, Inc. ("Keystone" or the "Company") at December 31, 2001 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at June 30, 2002 and the consolidated statements of operations and cash flows for the interim periods ended June 30, 2001 and 2002, and the consolidated statement of common stockholders' equity (deficit) for the interim period ended June 30, 2002, 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 accounting principles generally accepted in the United States of America 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, 2001 (the "Annual Report"). At June 30, 2002, Contran Corporation ("Contran") and other entities related to Mr. Harold C. Simmons, beneficially owned approximately 50% of the Company. Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Mr. Simmons, of which Mr. Simmons is sole trustee. Keystone may be deemed to be controlled by Contran and Mr. Simmons. Note 2 - Inventories: Inventories are stated at the lower of cost or market. At December 31, 2001 and June 30, 2002, the last-in, first-out ("LIFO") method was used to determine the cost of approximately 74% and 71% respectively, of total inventories and the first-in, first-out or average cost methods were used to determine the cost of other inventories.
December 31, June 30, 2001 2002 -------- ------- (In thousands) Steel and wire products: Raw materials .................................... $ 9,818 $ 7,963 Work in process .................................. 9,912 9,383 Finished goods ................................... 16,132 14,803 Supplies ......................................... 13,446 13,852 ------- ------- 49,308 46,001 Less LIFO reserve ................................ 10,768 10,768 ------- ------- 38,540 35,233 Lawn and garden products - finished goods .......... 2,372 2,572 ------- ------- $40,912 $37,805 ======= =======
Note 3 - Notes payable and long-term debt:
December 31, June 30, 2001 2002 -------- ------- (In thousands) Revolving credit facilities: Keystone .................................. $ 40,823 $26,197 EWP ....................................... 3,225 2,541 Garden Zone ............................... 1,738 1,068 8% Notes .................................... -- 29,304 6% Notes .................................... -- 16,031 9 5/8% Notes ................................ 100,000 6,150 Keystone Term Loan .......................... -- 4,791 County Term Loan ............................ -- 10,000 Other ....................................... 669 681 -------- ------- 146,455 96,763 Less current maturities ................... 46,332 32,399 -------- ------- $100,123 $64,364 ======== =======
During March 2002, Keystone completed an exchange offer (the "Exchange Offer") with respect to its 9 5/8% Notes pursuant to which, among other things, holders of $93.9 million principal amount of the 9 5/8% Notes exchanged their 9 5/8% Notes (along with accrued interest of approximately $10.1 million through the date of exchange, including $2.1 million which accrued during the first quarter of 2002) for various forms of consideration, including newly-issued debt and equity securities of the Company, as described below, and such 9 5/8% Notes were retired: o $79.2 million principal amount of 9 5/8% Notes were exchanged for (i) $19.8 million principal amount of 8% Subordinated Secured Notes due 2009 (the "8% Notes") and (ii) 59,399 shares of the Company's Series A 10% Convertible Pay-In-Kind Preferred Stock, o $14.5 million principal amount of 9 5/8% Notes were exchanged for $14.5 million principal amount of 6% Subordinated Unsecured Notes due 2011 (the "6% Notes"), and o $175,000 principal amount of 9 5/8% Notes were exchanged for $36,000 in cash and 6,481 shares of Keystone common stock. As a result of the Exchange Offer, the collateral previously securing the 9 5/8% Notes was released, and the 9 5/8% Note indenture was amended to eliminate substantially all covenants related to the 9 5/8% Notes, including all financial-related covenants. The 8% Notes bear simple interest at 8% per annum, one-half of which will be paid in cash on a semi-annual basis and one-half will be deferred and be paid together with the principal in three installments, one-third in each of March 2007, 2008 and 2009. The 8% Notes are collateralized by a second-priority lien on substantially all of the existing fixed and intangible assets of the Company and its subsidiaries (excluding EWP and Garden Zone LLC ("Garden Zone")), other than the real property and other fixed assets comprising Keystone's steel mill in Peoria, Illinois, on which there is a third-priority lien. Keystone may redeem the 8% Notes, at its option, in whole or in part at any time with no prepayment penalty. The 8% Notes are subordinated to all existing senior indebtedness of Keystone, including, without limitation, the revolving credit facilities of Keystone, EWP and Garden Zone, the Keystone Term Loan (as defined below) and, to the extent of the Company's steel mill in Peoria, Illinois, the County Term Loan (as defined below). The 8% Notes rank senior to any expressly subordinated indebtedness of Keystone, including the 6% Notes. The 6% Notes bear simple interest at 6% per annum, of which one-fourth will be paid in cash on a semi-annual basis and three-fourths will accrue and be paid together with the principal in four installments, one-fourth in each of March 2009, 2010, 2011 and May 2011. Keystone may redeem the 6% Notes, at its option, in whole or in part at any time with no prepayment penalty. The 6% Notes are subordinated to all existing and future senior or secured indebtedness of the Company, including, without limitation, the revolving credit facilities of Keystone, EWP and Garden Zone, the Keystone Term Loan (as defined below), the County Term Loan (as defined below), the 8% Notes and any other future indebtedness of the Company which is not expressly subordinated to the 6% Notes. Keystone accounted for the 9 5/8% Notes retired in the Exchange Offer in accordance with SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. In accordance with SFAS No. 15: o The 6,481 shares of Keystone common stock were recorded at their aggregate fair value at issuance of $7,000 based on the quoted market price for Keystone common stock on the date of exchange, o The 59,399 shares of Series A preferred stock were recorded at their aggregate estimated fair value at issuance of $2.1 million, o The 8% Notes were recorded at their aggregate undiscounted future cash flows (both principal and interest) of $29.3 million, and thereafter both principal and interest payments will be accounted for as a reduction of the carrying amount of the debt, and no interest expense will be recognized, and o The 6% Notes were recorded at the $16.0 million carrying amount of the associated 9 5/8% Notes (both principal and interest), and future interest expense on such debt will be recognized on the effective interest method at a rate of 3.8%. As a result, for financial reporting purposes the Company reported a $54.7 million pre-tax gain ($33.1 million net of income taxes) in the first quarter of 2002 related to the exchange of the 9 5/8% Notes. Because of differences between the income tax treatment and the financial reporting treatment of the exchange, the Company reported $65.8 million of income for federal income tax purposes resulting from the exchange. However, all of the taxable income generated from the exchange was offset by utilization of the Company's net operating loss carryforwards, and no cash income tax payments were required to be paid as a result of the exchange. As part of its efforts to restructure the 9 5/8% Notes, in April 2002 Keystone received a new $10 million term loan from the County of Peoria, Illinois (the "County Term Loan"), and a new $5 million term loan (the "Keystone Term Loan") from the same lender providing the Keystone revolving credit facility. The County Term Loan does not bear interest, requires no amortization of principal and is due in 2007. The Keystone Term Loan bears interest at prime plus .5% or LIBOR plus 2.5% at the Company's option, with principal payments amortized over a four-year period and due in March 2005. The County Term Loan is collateralized by a second priority lien on the real property and other fixed assets comprising Keystone's steel mill in Peoria, Illinois. The Keystone Term Loan is collateralized by a first-priority lien on all of the fixed assets of the Company and its subsidiaries, other than EWP and Garden Zone. Proceeds from the Keystone Term Loan and County Term Loan were used by Keystone to reduce the outstanding balance of Keystone's revolving credit facility. During April 2002, the Company also extended Keystone's revolving credit facility through March 2005 under substantially the same terms as the existing facility. In June 2002, the EWP Revolver was extended through June 2004 and in July 2002, the Garden Zone Revolver was extended through April 2003, both under the same terms as the existing facilities. In addition, a wholly-owned subsidiary of Contran has agreed to loan the Company up to an aggregate of $6 million under the terms of a revolving credit facility that matures on December 31, 2002. This facility is collateralized by the common stock of EWP owned by Keystone. Through August 14, 2002, the Company has not borrowed any amounts under such facility. Note 4 - Redeemable Series A preferred stock: In connection with the Exchange Offer, Keystone issued 59,399 shares of Series A 10% Cumulative Convertible Pay-In-Kind Preferred Stock (the "Series A Preferred Stock"). The Series A Preferred Stock has a stated value of $1,000 per share and has a liquidation preference of $1,000 per share plus accrued and unpaid dividends. The Series A Preferred Stock has an annual dividend commencing in December 2002 of $100 per share, and such dividends may be paid in cash or, at the Company's option, in whole or in part in new Series A Preferred Stock based on their stated value. The amount of dividends accrued at June 30, 2002 ($1.7 million) has been determined based on the assumption such dividends will be paid in cash rather than in the form of additional shares of Series A Preferred Stock. After March 2003, the Series A Preferred Stock may be converted into shares of Keystone common stock at the exchange rate of $4.00 per share, and holders of the Series A Preferred Stock will be entitled to vote on any matter brought before Keystone shareholders on an as-converted basis, voting together with Keystone common shareholders as a single class. The Company may redeem the Series A Preferred Stock at any time, in whole or in part, at a redemption price of $1,000 per share plus accrued and unpaid dividends. In addition, in the event of certain sales of the Company's assets outside the ordinary course of business, the Company will be required to offer to purchase a specified portion of the Series A Preferred Stock, at a purchase price of $1,000 per share plus accrued and unpaid dividends, based upon the proceeds to the Company from such asset sale. Otherwise, holders of the Series A Preferred Stock have no mandatory redemption rights. The Company does not currently believe it is probable that holders of the Series A Preferred Stock will be able to require the Company to purchase any of their stock, and accordingly the Company is not accreting the Series A Preferred Stock up to its redemption value. Note 5 - Income taxes: At June 30, 2002, the Company expects that its long-term profitability should ultimately be sufficient to enable it to realize full benefit of its future tax attributes. However, considering all factors believed to be relevant, including the Company's recent operating results, its expected future near-term productivity rates; cost of raw materials, electricity, labor and employee benefits, environmental remediation, and retiree medical coverage; interest rates; product mix; sales volumes and selling prices; and the fact that accrued OPEB expenses will become deductible over an extended period of time and require the Company to generate significant amounts of future taxable income, the Company believes the gross deferred tax assets may not currently meet the "more-likely-than-not" realizability test. As such, during the fourth quarter of 2001, the Company provided a deferred tax asset valuation allowance of approximately $14.5 million. The resulting net deferred tax asset of approximately $21.6 million at December 31, 2001 approximated the tax expense for financial reporting purposes which was recorded during the first quarter of 2002 related to the cancellation of indebtedness income resulting from the Exchange Offer. As a result of the deferred tax asset valuation allowance, the Company does not anticipate recognizing a tax benefit associated with its expected pre-tax losses during 2002 will be appropriate. Accordingly, during the first six months of 2002, the Company decreased the deferred tax asset valuation allowance by approximately $400,000. Keystone will continue to review the recoverability of its deferred tax assets, and based on such periodic reviews, Keystone could recognize a change in the valuation allowance related to its deferred tax assets in the future. Summarized below are (i) the differences between the income tax provision (benefit) and the amounts that would be expected by applying the U.S. federal statutory income tax rate of 35% to the income (loss) before income taxes and cumulative effect of change in accounting principle, and (ii) the components of the income tax provision (benefit).
Six months ended June 30, 2001 2002 ---- ---- (In thousands) Expected tax provision (benefit), at statutory rate .... $ (3,178) $ 19,570 U. S. state income taxes, net .......................... (170) 2,471 Amortization of goodwill and negative goodwill ......... (215) -- Deferred tax asset valuation allowance ................. -- (428) Other, net ............................................. (349) 9 -------- -------- Income tax provision (benefit) ......................... $ (3,912) $ 21,622 ======== ======== Comprehensive provision (benefit) for income taxes: Currently refundable: U.S. federal ....................................... $ (20) $ (18) U.S. state ......................................... 84 18 -------- -------- Net currently refundable ......................... 64 -- Deferred income taxes, net ........................... (3,976) 21,622 -------- -------- $ (3,912) $ 21,622 ======== ========
Note 6 - Other accrued liabilities:
December 31, June 30, 2001 2002 ------ ------ (In thousands) Current: Employee benefits .............................. $11,168 $12,398 Self insurance ................................. 8,906 9,095 Environmental .................................. 8,068 7,991 Deferred vendor payments ....................... 2,488 3,304 Legal and professional ......................... 887 1,459 Disposition of former facilities ............... 530 638 Interest ....................................... 1,287 433 Other .......................................... 3,766 6,783 ------- ------- $37,100 $42,101 ======= ======= Noncurrent: Deferred vendor payments ....................... $13,648 $11,838 Environmental .................................. 7,508 7,472 Workers compensation payments .................. 1,762 1,890 Interest ....................................... 7,735 -- Other .......................................... 357 373 ------- ------- $31,010 $21,573 ======= =======
During the first quarter of 2002, two of the Company's major vendors, representing approximately $16.1 million of trade payables, agreed to be paid over a five-year period ending in March 2007 with no interest. The repayment of a portion of such deferred vendor payments could be accelerated if the Company achieves specified levels of future earnings. 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 7 - 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 (a 51% owned subsidiary). Keystone is also engaged in a scrap recycling joint venture through its 50% interest in Alter Recycling Company, L.L.C. ("ARC"), an unconsolidated equity affiliate.
Three months ended Six months ended June 30, June 30, --------------------- ---------------------- 2001 2002 2001 2002 ---- ---- ---- ---- (In thousands) Revenues: Steel and wire products ........ $ 82,401 $ 90,892 $ 157,714 $ 172,901 Lawn and garden products ....... 3,893 3,794 6,691 8,134 -------- --------- --------- --------- 86,294 94,686 164,405 181,035 Elimination of intersegment revenues ..................... -- (442) (348) (879) -------- --------- --------- --------- $ 86,294 $ 94,244 $ 164,057 $ 180,156 ======== ========= ========= ========= Income (loss) before income taxes and cumulative effect of change in accounting principle: Operating profit (loss): Steel and wire products ...... $ 712 $ 4,069 $ (2,695) $ 5,939 Lawn and garden products ..... 386 248 464 604 -------- --------- --------- --------- 1,098 4,317 (2,231) 6,543 General corporate items: Interest income ............ 53 21 124 41 General income (expense), net ............ (296) (1,267) 373 (1,763) Gain on early extinguishment of debt ................... -- -- -- 54,739 Interest expense ............. (3,601) (953) (7,347) (3,647) -------- --------- --------- --------- $ (2,746) $ 2,118 $ (9,081) $ 55,913 ======== ========= ========= =========
Note 8 - Contingencies: At June 30, 2002, the Company's financial statements reflected accrued liabilities of $15.5 million for estimated remedial costs arising from environmental issues. There is no assurance regarding the ultimate cost of remedial measures that might eventually be required by environmental authorities or that additional environmental hazards, requiring further remedial expenditures, might not be asserted by such authorities or private parties. Accordingly, the ultimate costs of remedial measures may exceed the amounts currently accrued. For additional information related to commitments and contingencies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Annual Report. Note 9 - Accounting principles newly adopted in 2002: Goodwill. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill, including goodwill arising from the difference between the cost of an investment accounted for by the equity method and the amount of the underlying equity in net assets of such equity method investee ("equity method goodwill"), is not amortized on a periodic basis. Goodwill (other than equity method goodwill) is subject to an impairment test to be performed at least on an annual basis, and impairment reviews may result in future periodic write-downs charged to earnings. Equity method goodwill is not tested for impairment in accordance with SFAS No. 142; rather, the overall carrying amount of an equity method investee will continue to be reviewed for impairment in accordance with existing GAAP. There is currently no equity method goodwill associated with any of the Company's equity method investees. Under the transition provisions of SFAS No. 142, all goodwill existing as of June 30, 2001 ceased to be periodically amortized as of January 1, 2002. Also, in connection with the adoption of SFAS No. 142, negative goodwill of approximately $20.0 million recorded at December 31, 2001 was eliminated as a cumulative effect of change in accounting principle as of January 1, 2002. The Company has assigned its goodwill to the reporting unit (as that term is defined in SFAS No. 142) consisting of Engineered Wire Products, Inc. ("EWP"). Under SFAS No. 142, such goodwill is deemed to not be impaired if the estimated fair value of EWP exceeds the net carrying value of EWP, including the allocated goodwill. If the fair value of EWP is less than the carrying value, then a goodwill impairment loss is recognized equal to the excess, if any, of the net carrying value of the reporting unit goodwill over its implied fair value (up to a maximum impairment equal to the carrying of goodwill). The implied fair value of EWP goodwill is the amount equal to the excess of the estimated fair value of EWP over the amount that would be allocated to the tangible and intangible net assets of EWP (including unrecognized intangible assets) as if such reporting unit had been acquired in a purchase business combination accounted for in accordance with SFAS No. 141. The Company will use appropriate valuation techniques, such as discounted cash flows, to estimate the fair value of EWP. The Company has completed its initial, transitional goodwill impairment analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairment was deemed to exist. In accordance with requirements of SFAS No. 142, the Company will review goodwill for impairment during the third quarter of each year starting in 2002. Goodwill will also be reviewed for impairment at other times during each year when events or changes in circumstances indicate an impairment might be present. As shown in the following table, the Company would have reported a net loss of $1.9 million, or $.19 per basic share, for the 2001 second quarter and a net loss of $5.9 million, or $.59 per basic share, during the six months ended June 30, 2001, if the goodwill and negative goodwill amortization included in the Company's net loss, as reported, had not been recognized.
Three months ended Six months ended June 30, June 30, ------------------ --------------- 2001 2002 2001 2002 ---- ---- ---- ---- (In thousands, except per share data) Income (loss) available for common shares ............. $ (1,628) $ 291 $ (5,334) $ 52,302 Adjustments: Goodwill amortization .................. -- -- 31 63 Negative goodwill amortization (339) -- (678) -- ---------- ---------- ---------- ---------- Adjusted income (loss) before cumulative effect of change in accounting principle $ (1,936) $ 291 $ (5,949) $ 52,302 ========== ========== ========== ========== Basic earnings (loss) per share available for common shares before cumulative effect of change in accounting principle as reported $ (.16) $ .03 $ (.53) $ 3.21 Adjustments: Goodwill amortization .................. -- -- -- .01 Negative goodwill amortization (.03) -- (.07) -- ---------- ---------- ---------- ---------- Adjusted basic earnings (loss) per share available for common shares before cumulative effect of change in accounting principle ... $ (.19) $ .03 $ (.59) $ 3.21 ========== ========== ========== ========== Diluted earnings (loss) per share available for common shares before cumulative effect of change in accounting principle as reported ........ $ (.16) $ .03 $ (.53) $ 1.94 Adjustments: Goodwill amortization .................. -- -- -- .01 Negative goodwill amortization (.03) -- (.07) -- ---------- ---------- ---------- ---------- Adjusted diluted earnings (loss) per share available for common shares before cumulative effect of change in accounting principle ............. $ (.19) $ .03 $ (.59) $ 1.94 ========== ========== ========== ==========
Three months ended Six months ended June 30, June 30, ------------------ ------------------ 2001 2002 2001 2002 ---- ---- ---- ---- (In thousands, except per share data) Net income (loss) as reported ....... $ (1,628) $ 2,004 $ (5,334) $ 54,015 Adjustments: Goodwill amortization ............. -- 31 63 -- Negative goodwill amortization .... -- (339) (678) -- Cumulative effect of change in accounting principle -- -- -- (19,998) ---------- ---------- ---------- ---------- Adjusted net income (loss) $ (1,936) $ 2,004 $ (5,949) $ 34,017 ========== ========== ========== ========== Basic earnings (loss) per share available for common shares as reported ........................... $ (.16) $ .03 $ (.53) $ 5.20 Adjustments: Goodwill amortization ............. -- -- .01 -- Negative goodwill amortization .... (.03) -- (.07) -- Cumulative effect of change in accounting principle ............. -- -- -- (1.99) ---------- ---------- ---------- ---------- Adjusted basic earnings (loss) per share available for common shares .................. $ (.19) .03 $ (.59) $ 3.21 ========== ========== ========== ========== Diluted earnings (loss) per share available for common shares as reported ........................... $ (.16) $ .03 (.53) 3.09 Adjustments: Goodwill amortization ............. -- -- .01 -- Negative goodwill amortization .... (.03) -- (.07) -- Cumulative effect of change in accounting principle ............. -- -- -- (1.15) ---------- ---------- ---------- ---------- Adjusted diluted earnings (loss) per share available for common shares .................. $ (.19) .03 $ (.59) $ 1.94 ========== ========== ========== ==========
Impairment of long-lived assets. The Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing GAAP with respect to the recognition and measurement of long-lived asset impairment contained in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS No. 144 provides new guidance intended to address certain implementation issues associated with SFAS No. 121, including expanded guidance with respect to appropriate cash flows to be used to determine whether recognition of any long-lived asset impairment is required, and if required how to measure the amount of the impairment. SFAS No. 144 also requires that any net assets to be disposed of by sale to be reported at the lower of carrying value or fair value less cost to sell, and expands the reporting of discontinued operations to include any component of an entity with operations and cash flows that can be clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 did not have a significant effect on the Company as of January 1, 2002. Gain or loss on early extinguishment of debt. The Company adopted SFAS No. 145 effective April 1, 2002. SFAS No. 145, among other things, eliminated the prior requirement that all gains and losses from the early extinguishment of debt be classified as an extraordinary item. Upon adoption of SFAS No. 145, gains and losses from the early extinguishment of debt are now classified as an extraordinary item only if they meet the "unusual and infrequent" criteria contained in Accounting Principles Bulletin ("APBO") No. 30. In addition, upon adoption of SFAS No. 145, all gains and losses from the early extinguishment of debt that had been classified as an extraordinary item are to be reassessed to determine if they would have met the "unusual and infrequent" criteria of APBO No. 30; any such gain or loss that would not have met the APBO No. 30 criteria are retroactively reclassified and reported as a component of income before extraordinary item. The Company has concluded that its 2002 first quarter $54.7 million pre-tax extraordinary gain ($33.1 million, or $3.29 per basic share, net of income taxes) discussed in Note 3 would not have met the APBO No. 30 criteria for classification as an extraordinary item, and accordingly such gain has been retroactively reclassified and is now reported as a component of income before extraordinary item. Note 10 - Earnings per share: Net income (loss) per share is based upon the weighted average number of common shares and dilutive securities. A reconciliation of the numerators and denominators used in the calculations of basic and diluted earnings per share computations of income (loss) before cumulative effect of change in accounting principle is presented below. The effect of the assumed conversion of the Series A Convertible Preferred Stock was antidilutive in the three months ended June 30, 2002 period. The dilutive effect of the assumed conversion of the Series A Preferred Stock in the six month ended June 30, 2002 period is calculated from its issuance in March 2002. Keystone stock options were omitted from the calculation because they were antidilutive in all periods presented.
Three months ended Six months ended June 30, June 30, ---------------- ---------------- 2001 2002 2001 2002 ---- ---- ---- ---- (In thousands) Numerator: Net income (loss) before cumulative effect of change in accounting principle ......................... $ (1,628) $ 2,004 $ (5,334) $ 34,017 Less Series A Preferred Stock Dividends ......................... -- (1,713) -- (1,713) -------- -------- -------- -------- Basic net income (loss) before cumulative effect of change in accounting principle .............. (1,628) 291 (5,334) 32,304 Series A Preferred Stock dividends -- -- 1,713 -------- -------- -------- -------- Diluted net income (loss) before cumulative effect of change in accounting principle .............. $ (1,628) $ 291 $ (5,334) $ 34,017 ======== ======== ======== ======== Denominator: Average common shares outstanding .. 10,062 10,068 10,062 10,066 Dilutive effect of Preferred Stock Series A .......................... -- -- -- 7,425 -------- -------- -------- -------- Diluted shares ..................... 10,062 10,068 10,062 17,491 ======== ======== ======== ========
Note 11 - Accounting principle not yet adopted: The Company will adopt SFAS No. 143, Accounting for Asset Retirement Obligations, no later than January 1, 2003. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation covered under the scope of SFAS No. 143 would be recognized in the period in which the liability is incurred, with an offsetting increase in the carrying amount of the related long-lived asset. Over time, the liability would be accreted to its present value, and the capitalized cost would be depreciated over the useful life of the related asset. Upon settlement of the liability, an entity would either settle the obligation for its recorded amount or incur a gain or loss upon settlement. The Company is still studying this standard to determine, among other things, whether it has any asset retirement obligations which are covered under the scope of SFAS No. 143, and the effect, if any, to the Company of adopting SFAS No. 143 has not yet been determined. The Company will adopt SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal activities initiated on or after the date of adoption. Under SFAS No. 146, costs associated with exit activities, as defined, that are covered by the scope of SFAS No. 146 will be recognized and measured initially at fair value, generally in the period in which the liability is incurred. Costs covered by the scope of SFAS No. 146 include termination benefits provided to employees, costs to consolidate facilities or relocate employees, and costs to terminate contracts (other than a capital lease). Under existing GAAP, a liability for such an exit cost is recognized at the date an exit plan is adopted, which may or may not be the date at which the liability has been incurred. 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 Garden Zone and in scrap recycling through ARC. As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions that 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", "could", "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, any significant increases in the cost of providing medical coverage to employees and retirees, 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. Keystone 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 Keystone's billet and wire rod production, scrap costs sales volume and pricing data for the periods indicated. The per-ton selling prices shown reflect the average price of all grades of all products sold to all customers in each product category.
Three months ended Six months ended June 30, June 30, -------------- --------------- 2001 2002 2001 2002 ---- ---- ---- ---- (Tons in thousands) Production volume (tons): Billets ............................... 189 209 352 384 Wire rod .............................. 186 192 336 374 Average per-ton scrap purchase cost ......................... $ 85 $ 93 $ 87 $ 88 Sales volume(tons): Fabricated wire products .............. 82 85 153 159 Industrial wire ....................... 27 28 54 52 Wire rod .............................. 68 80 132 162 ---- ---- ---- ---- 177 193 339 373 ==== ==== ==== ==== Per-ton selling prices: Fabricated wire products ............. $646 $660 $657 $661 Industrial wire ...................... $421 $420 $426 $421 Wire rod ............................. $257 $286 $254 $277 All steel and wire products .......... $463 $469 $463 $461
The following table sets forth the components of the Company's net sales for the periods indicated.
Three months ended Six months ended June 30, June 30, ---------------- ---------------- 2001 2002 2001 2002 ---- ---- ---- ---- (In millions) Steel and wire products: Fabricated wire products .......... $ 53.3 $ 56.0 $100.8 $105.4 Industrial wire ................... 11.2 11.5 22.6 22.1 Wire rod .......................... 17.5 23.0 33.7 44.8 Other ............................. .5 .4 .7 .6 ------ ------ ------ ------ 82.5 90.9 157.8 172.9 Lawn and garden products ............ 3.8 3.3 6.3 7.3 ------ ------ ------ ------ $ 86.3 $ 94.2 $164.1 $180.2 ====== ====== ====== ======
The following table sets forth selected operating data of the Company as a percentage of net sales for the periods indicated.
Three months ended Six months ended June 30, June 30, 2001 2002 2001 2002 ---- ---- ---- ---- Net sales .......................... 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold ................. 93.2 88.5 95.6 89.2 ------- ------- ------- ------- Gross profit ....................... 6.8 % 11.5 % 4.4 % 10.8 % ======= ======= ======= ======= Selling expense .................... 1.9 % 1.8 % 2.0 % 2.0 % General and administrative expense . 5.2 % 7.2 % 4.8 % 7.1 % Overfunded defined benefit pension Credit ............................ (.9)% (.8)% (.9)% (.8)% Gain on early extinguishment of Debt .............................. - % - % - % (30.4)% Income (loss) before income taxes and cumulative effect of change in accounting principle .............. (3.2)% 2.2 % (5.5)% 31.0 % Income tax provision (benefit) ..... (1.5) -- (2.3) 12.0 % Minority interest in after-tax Earnings ......................... .2 .1 .1 .1 ------- ------- ------- ------- Net income (loss) before cumulative effect of change in accounting principle ......................... (1.9)% 2.1 % (3.3)% 18.9 % ======= ======= ======= =======
Net sales of $94.2 million in the 2002 second quarter were up 9% from $86.3 million during the same period in 2001. This increase in sales was due primarily to a 9% increase in shipments of the Company's steel and wire products combined with a $6 per-ton increase in overall steel and wire product selling prices, partially offset by a decline in Garden Zone's sales. Garden Zone's sales during the 2002 second quarter declined $500,000 from the 2001 second quarter to $3.3 million. Shipments of wire rod increased 18% during the 2002 second quarter as compared to the 2001 second quarter while per-ton selling prices increased 11%. Industrial wire shipments increased 4% while per-ton selling prices remained relatively constant. Fabricated wire products shipments during the 2002 second quarter increased 3% as compared to the 2001 second quarter while per-ton selling prices increased 2%. Management believes the increase in shipment volume during the 2002 second quarter was due to abnormally low shipment volume in the 2001 second quarter resulting from high levels of imported steel and wire products. The 2002 second quarter shipment volume was consistent with those levels in years prior to 2001. Although high levels of imported steel and wire products continues, these import levels have been somewhat mitigated by former competitors of the Company exiting the marketplace. However, despite this decline in competition, Keystone has still been unable to achieve historic levels of per-ton selling prices. Net sales of $180.2 million in the first six months of 2002 were up 10% from $164.1 million in the first six months of 2001. This increase in sales was primarily due to a 10% increase in shipments of Keystone's steel and wire products and a $900,000 increase in Garden Zone's sales partially offset by a $2 per-ton decline in selling prices of the Company's steel and wire products during the first six months of 2002. Garden Zone's sales during the first six months of 2002 amounted to $7.3 million as compared to $6.3 million during the same period in 2001. Wire rod shipments during the first six months of 2002 increased 22% over the first six months of 2001 while per-ton selling prices increased 9%. Industrial wire shipments declined 1% while per-ton selling prices declined 1%. Fabricated wire products shipments during the first six months of 2002 increased 4% as compared to the first six months of 2001 while per-ton selling prices increased 1%. Despite increases in per-ton selling prices of wire rod and fabricated wire products, overall per-ton selling prices declined as a result of a change in the product mix between the first six months of 2001 and 2002. Management believes the increase in shipment volume during the first six months of 2002 was also due to abnormally low shipment volume during the first six months of 2001. The shipment volume during the first six months of 2002 was consistent with those levels in years prior to 2001. Billet production during the second quarter of 2002 increased 20,000 tons or 10% to 209,000 tons from 189,000 tons during the second quarter of 2001. The primary reason for the higher production levels during the 2002 second quarter was improved performance from Keystone's steel mill. Keystone did not purchase any billets during the second quarter of either 2001 and 2002. Wire rod production during the second quarter of 2002 increased to 192,000 tons as compared to production of 186,000 tons in the 2001 second quarter, primarily as a result of the higher billet production during the 2002 second quarter. The increased billet production during the first and second quarters of 2002 as compared to the first two quarters of 2001 resulted in billet production during the first six months of 2002 increasing 32,000 tons to 384,000 tons from 352,000 tons during the first six months of 2001. Keystone did not purchase any billets during the first six months of either 2001 or 2002. Increased wire rod production during the first quarter of 2002 as compared to the 2001 first quarter resulted in an increase of 38,000 tons of wire rod produced during the first six months of 2002 to 374,000 tons from 336,000 tons during the first six months of 2001. The low wire rod production during the first quarter of 2001 was due primarily to intentional production curtailments designed to avoid using high cost natural gas and to allow billet inventories to build in anticipation of planned outages for repair and maintenance projects in the steel mill during that quarter. Gross profit during the 2002 second quarter increased to $10.8 million from $5.8 million in the 2001 second quarter as the Company's gross margin increased from 6.8% in the 2001 period to 11.5% in the 2002 second quarter. This increase in gross margin was due primarily to the higher per-ton steel and wire product selling prices, increased production efficiencies in the Company's steel mill and lower natural gas costs partially offset by higher costs for scrap steel, Keystone's primary raw material, and electricity. The higher selling prices and lower gas costs during the 2002 second quarter favorably impacted gross profit by $1.2 million and $800,000, respectively, whereas higher scrap and electricity costs negatively impacted gross profit by $1.8 million and $1.7 million, respectively. In addition, during the 2002 second quarter, Keystone received $400,000 of insurance proceeds from business interruption policies related to incidents in prior years as compared to none received during the 2001 second quarter. Gross profit during the first six months of 2002 increased to $19.5 million from $7.2 million in the first six months of 2001 as the Company's gross margin increased from 4.4% in the 2001 period to 10.8% in the first six months of 2002. This increase in gross margin was due primarily to increased production efficiencies in the Company's steel mill and lower natural gas costs partially offset by the lower steel and wire product selling prices and higher costs for electricity and scrap steel. The lower natural gas costs during the first half of 2002 favorably impacted gross profit by $3.8 million, whereas higher electricity and scrap costs negatively impacted gross profit by $3.4 million and $400,000, respectively. The lower selling prices adversely impacted gross profit during the first six months of 2002 by approximately $900,000. In addition, during the first six months of 2002, Keystone received $800,000 of insurance proceeds from business interruption policies related to incidents in prior years as compared to $1.6 million received during the first six months of 2001. During the first six months of 2001, Keystone experienced certain production outages that adversely impacted gross profit by approximately $800,000. Keystone did not experience any such production outages during the first six months of 2002. Selling expense was $1.7 million during the second quarter of both 2002 and 2001. Selling expense of $3.6 million during the first six months of 2002 was approximately $300,000 higher than the same period in 2001, but was constant as a percentage of sales. General and administrative expense increased to $6.8 million during the second quarter of 2002 as compared to $4.5 million during the second quarter of 2001 primarily due to higher legal and professional and OPEB expenses in the second quarter of 2002 partially offset by an unfavorable legal settlement of $500,000 during the second quarter of 2001. General and administrative expense increased from $7.8 million during the first half of 2001 to $12.7 million during the first half of 2002, primarily due to higher legal and professional and OPEB expenses in the first half of 2002 as well as a $650,000 reimbursement of legal fees received during the first half of 2001 all partially offset by the unfavorable legal settlement during the first half of 2001. The higher legal and professional expenses during the first half of 2002 were primarily related to the Exchange Offer described below. The overfunded defined benefit pension credit in the second quarter of both 2001 and 2002 was $750,000 and during the first six months of both 2001 and 2002 was $1.5 million. Keystone currently anticipates the total 2002 overfunded defined benefit pension credit will approximate $3.0 million as compared to a total credit in 2001 of $5.5 million. Interest expense in the second quarter of 2002 was lower than the second quarter of 2001 due principally to lower debt levels and interest rates. Average borrowings by Keystone approximated $97.1 million in the second quarter of 2002 as compared to $152.2 million in the second quarter of 2001. During the second quarter of 2002, Keystone's weighted-average interest rate was 3.0% per annum as compared to 8.9% per annum in the second quarter of 2001. Interest expense in the first half of 2002 was also lower than the first half of 2001 due principally to lower debt levels and interest rates. Average borrowings by Keystone approximated $116.5 million in the first half of 2002 as compared to $151.1 million in the first half of 2001. During the first half of 2002, Keystone's weighted-average interest rate was 5.8% per annum as compared to 9.2% per annum in the first half of 2001. The principal reasons for the difference between the U.S. federal statutory income tax rate and the Company's effective income tax rates are explained in Note 5 to the Consolidated Financial Statements. At June 30, 2002, the Company had recorded a deferred tax asset valuation allowance of $14.1 million resulting in no net deferred tax assets. Keystone periodically reviews the recoverability of its deferred tax assets to determine whether such assets meet the "more-likely-than-not" recognition criteria. The Company will continue to review the recoverability of its deferred tax assets, and based on such periodic reviews, Keystone could recognize a change in the recorded valuation allowance related to its deferred tax assets in the future. As a result of the deferred tax asset valuation allowance, other than the tax provision recorded in connection with the Exchange Offer described below, the Company does not anticipate recording a tax benefit associated with its expected pre-tax losses during 2002 will be appropriate. In the first quarter of 2002, the Company completed an exchange offer related to its 9 5/8% Notes whereby 94% of the holders of the 9 5/8% Notes, exchanged their notes for either a discounted cash amount and common stock, new preferred equity and subordinated secured debt securities, or subordinated unsecured debt securities (the "Exchange Offer"). As a result of the Exchange Offer, for financial reporting purposes the Company reported a $54.7 million pre-tax gain ($33.1 million net of income taxes). See Note 3 to Consolidated Financial Statements. During the 2002 first quarter, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. As a result of adopting SFAS No. 142, negative goodwill of approximately $20.0 million recorded at January 1, 2002 was eliminated as a cumulative effect of change in accounting principle at that date. See Note 9 to Consolidated Financial Statements. As a result of the items discussed above, Keystone recorded net income during the second quarter of 2002 of $2.0 million as compared to a net loss of $1.6 million in the second quarter of 2001, and net income during the first half of 2002 of $54.0 million as compared to a net loss in the first half of 2000 of $5.3 million. Outlook for 2002 Management currently believes, despite the current level of rod imports, capacity utilization and shipment volumes in 2002 will only be slightly higher than 2001 levels and average per-ton selling prices for the 2002 year will approximate those of the fourth quarter of 2001. In addition, management currently anticipates the effect of higher energy and OPEB costs, a lower pension credit, offset in part by lower interest costs, will result in Keystone recording a loss before income taxes (exclusive of non-recurring effects of the Exchange Offer) for calendar 2002, although the pre-tax loss is expected to significantly decline in 2002 as compared to the 2001 level. Accounting principle not yet adopted See Note 10 to the Consolidated Financial Statements. 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, 2002 Keystone had negative working capital of $23.6 million, including $2.6 of notes payable and current maturities of long-term debt as well as outstanding borrowings under the Company's revolving credit facilities of $29.8 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. At June 30, 2002, unused credit available for borrowing under Keystone's $45 million revolving credit facility (the "Keystone Revolver"), which expires March 31, 2005, EWP's $7 million revolving credit facility, which expires June 30, 2004, (the "EWP Revolver") and Garden Zone's $4 million revolving credit facility, which expires April 2, 2003 (as amended in July 2002) were $16.6 million, $4.1 million and $2.3 million, respectively. The Keystone Revolver 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. A wholly-owned subsidiary of Contran has agreed to loan Keystone up to an aggregate of $6 million under the terms of a revolving credit facility that matures on December 31, 2002. Through August 14, 2002, the Company had not borrowed any amounts under such facility. In addition, in connection with the Exchange Offer, during the first quarter of 2002, two of the Company's major vendors agreed to a five-year non-interest bearing repayment of their past due balances which aggregated $16.1 million at the completion of the Exchange Offer. During the first half of 2002, the Company's operating activities provided approximately $5.5 million of cash compared to $7.3 million used in operations in the first half of 2001 due primarily to a greater decline in accounts receivable and a greater increase in accrued expenses. During the first half of 2002, Keystone made capital expenditures of $3.3 million as compared to $1.5 million in the first half of 2001. During 2001 and the first quarter of 2002, Keystone deferred capital expenditures, including maintenance items, due to liquidity constraints although many of these items cannot be deferred indefinitely. Capital expenditures for calendar year 2002 are currently estimated to be approximately $10 million and are related primarily to upgrades of production equipment. Keystone currently anticipates these capital expenditures will be funded using cash flows from operations together with borrowing availability under the Company's existing credit facilities. At June 30, 2002, the Company's financial statements reflected accrued liabilities of $15.5 million for estimated remediation costs for those environmental matters which Keystone believes are reasonably estimable. Although the Company has established an accrual for estimated future required environmental remediation costs, 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 believes it is not possible to estimate the range of costs for certain sites. The upper end of range of reasonably possible costs to Keystone for sites for which the Company believes it is possible to estimate costs is $21.5 million. The Company periodically reviews the recoverability of its deferred tax assets to determine whether such assets meet the "more-likely-than-not" recognition criteria. At June 30, 2002, the Company expects that its long-term profitability should ultimately be sufficient to enable it to realize full benefit of its future tax deductions. Although, considering all factors believed to be relevant, including the Company's recent operating results, its expected future near-term productivity rates; cost of raw materials, electricity, labor and employee benefits, environmental remediation, and retiree medical coverage; interest rates; product mix; sales volumes and selling prices and the fact that accrued OPEB expenses will become deductible over an extended period of time and require the Company to generate significant amounts of future taxable income, the Company believes the gross deferred tax assets may not currently meet the "more-likely-than-not" realizability test. As such, the Company has a deferred tax asset valuation allowance of approximately $14.1 million. The Company will continue to review the recoverability of its deferred tax assets, and based on such periodic reviews, the Company could change the valuation allowance related to its deferred tax assets in the future. Keystone incurs significant ongoing costs for plant and equipment and substantial employee medical benefits for both current and retired employees. As such, Keystone 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. In addition to planned reductions in fixed costs and announced increases in certain product selling prices, Keystone is taking additional action towards improving its liquidity. These actions include, but are not limited to, reducing inventory levels through more efficient production schedules and modifying coverages and participant contribution levels of medical plans for both employees and retirees. Keystone has also considered, and may in the future consider, the sale of certain divisions or subsidiaries that are not necessary to achieve the Company's long-term business objectives. However, there can be no assurance Keystone 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. Management currently believes cash flows from operations together with funds available under the Company's credit facilities will be sufficient to fund the anticipated needs of the Company's operations and capital improvements for the year ending December 31, 2002. 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 credit facilities. However, there are many factors that could cause actual future results to differ materially from management's current assessment. 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, any significant increases in the cost of providing medical coverage to active and retired employees, the ultimate resolution of pending litigation, 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. 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 and as a result, 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 wire 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. See Notes 12 and 14 to the Consolidated Financial Statements in the Annual Report. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Reference is made to disclosure provided under the caption "Current litigation" in Note 14 to the Consolidated Financial Statements included in the Annual Report. ITEM 4. Submission of Matters to a Vote of Security Holders On May 16, 2002, 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 (10,068,450 common shares were entitled to vote at the meeting).
For Withheld Total Director - Two-year term J. Walter Tucker, Jr ............. 9,157,749 102,186 9,259,935 Three-year term Glenn R. Simmons ................. 9,181,704 78,231 9,259,935 Steven L. Watson ................. 9,182,796 77,139 9,259,935
ITEM 6. Exhibits and Reports on Form 8-K (a) The following exhibit is included herein: 99.1 Chief Executive Officer's Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Chief Financial Officer's Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K filed during the quarter ended June 30, 2002: None. S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Keystone Consolidated Industries, Inc. -------------------------------------- (Registrant) Date: August 14, 2002 By /s/Bert E. Downing, Jr. ------------------------------------- Bert E. Downing, Jr. Vice President and Corporate Controller (Principal Financial and Accounting Officer) EX-99.1 3 kci0602ex991.txt Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Keystone Consolidated Industries, Inc. (the Company) on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David L. Cheek, President and Chief Operating Officer (Chief Executive Officer) of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ David L. Cheek David L. Cheek President and Chief Operating Officer (Chief Executive Officer) August 14, 2002 EX-99.2 4 kci0602ex992.txt Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Keystone Consolidated Industries, Inc. (the Company) on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Bert E. Downing, Jr., Vice President and Corporate Controller (Chief Financial Officer) of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Bert E. Downing, Jr. Bert E. Downing, Jr. Vice President and Corporate Controller (Chief Financial Officer) August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----