-----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, CeDgw+9uoGK4MqYBtS2Cu6hgAalbvUB3nCSSoKYTR4/KqShhftkPD7DfnUn1VSYv EcR2pfmFA/pO7vz4cCuElA== 0000055604-02-000006.txt : 20021114 0000055604-02-000006.hdr.sgml : 20021114 20021114132334 ACCESSION NUMBER: 0000055604-02-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02823681 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 kci0902q.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 September 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 November 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 September 30, 2002 3-4 Consolidated Statements of Operations - Three months and nine months ended September 30, 2001 and 2002 5-6 Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and 2002 7 Consolidated Statement of Common Stockholders' Equity (Deficit) - Nine months ended September 30, 2002 8 Notes to Consolidated Financial Statements 9-21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22-30 Item 4. Controls and Procedures 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings 31 Item 6. Exhibits and Reports on Form 8-K 31 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, September 30, ASSETS 2001 2002 -------- -------- Current assets: Notes and accounts receivable .................. $ 29,411 $ 36,787 Inventories .................................... 40,912 45,419 Deferred income taxes .......................... 9,778 -- Prepaid expenses and other ..................... 3,211 3,304 -------- -------- Total current assets ........................ 83,312 85,510 -------- -------- Property, plant and equipment .................... 367,556 371,449 Less accumulated depreciation .................... 237,956 250,290 -------- -------- Net property, plant and equipment ........... 129,600 121,159 -------- -------- Other assets: Restricted investments ......................... 5,675 5,633 Prepaid pension cost ........................... 131,985 133,188 Deferred income taxes .......................... 11,844 -- Deferred financing costs ....................... 2,295 2,560 Goodwill ....................................... 752 752 Other .......................................... 1,437 1,274 -------- -------- Total other assets .......................... 153,988 143,407 -------- -------- $366,900 $350,076 ======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) December 31, September 30, 2001 2002 --------- --------- Current liabilities: Notes payable and current maturities of long-term debt ............................... $ 46,332 $ 35,272 Accounts payable ............................... 23,014 22,616 Payables to affiliates ......................... 633 1,197 Accrued OPEB cost .............................. 7,215 7,215 Accrued preferred stock dividends .............. -- 3,198 Other accrued liabilities ...................... 37,100 42,398 --------- --------- Total current liabilities .................. 114,294 111,896 --------- --------- Noncurrent liabilities: Long-term debt ................................. 100,123 63,639 Accrued OPEB cost .............................. 101,810 105,480 Negative goodwill .............................. 19,998 -- Other .......................................... 31,010 21,096 --------- --------- Total noncurrent liabilities ............... 252,941 190,215 --------- --------- Minority interest ................................ 1 167 --------- --------- Redeemable Series A preferred stock .............. -- 2,112 --------- --------- Common stockholders' equity (deficit): Common stock ................................... 10,792 10,798 Additional paid-in capital ..................... 53,071 49,873 Accumulated deficit ............................ (64,187) (14,973) Treasury stock, at cost ........................ (12) (12) --------- --------- Total stockholders' equity (deficit) ....... (336) 45,686 --------- --------- $ 366,900 $ 350,076 ========= =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 2001 2002 2001 2002 ---- ---- ---- ---- Revenues and other income: Net sales ........................ $ 82,329 $ 79,445 $ 246,386 $ 259,601 Gain on early extinguishment of debt ............................ -- -- -- 54,739 Interest ......................... 42 22 166 63 Other, net ....................... 58 (12) 553 25 --------- --------- --------- --------- 82,429 79,455 247,105 314,428 --------- --------- --------- --------- Costs and expenses: Cost of goods sold ............... 75,693 75,111 232,511 235,723 Selling .......................... 1,513 1,666 4,788 5,240 General and administrative ....... 4,674 6,353 12,491 19,080 Overfunded defined benefit pension expense (credit) ................ (750) 297 (2,250) (1,203) Interest ......................... 3,605 937 10,952 4,584 --------- --------- --------- --------- 84,735 84,364 258,492 263,424 --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle ......... (2,306) (4,909) (11,387) 51,004 Income tax expense (benefit) ....... (952) -- (4,864) 21,622 Minority interest in after-tax earnings (losses) ................ (104) (108) 61 166 --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle ......................... (1,250) (4,801) (6,584) 29,216 Cumulative effect of change in accounting principle .............. -- -- -- 19,998 --------- --------- --------- --------- Net income (loss) ............... (1,250) (4,801) (6,584) 49,214 Dividends on preferred stock ....... -- 1,485 -- 3,198 --------- --------- --------- --------- Net income (loss) available for common shares ..................... $ (1,250) $ (6,286) $ (6,584) $ 46,016 ========= ========= ========= =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (In thousands, except per share data)
Three months ended Nine months ended September 30, September 30, ----------------- ------------------ 2001 2002 2001 2002 ---- ---- ---- ---- Basic earnings (loss) per share available for common shares: Income (loss) before cumulative effect of change in accounting principle .................... $ (.12) $ (.63) $ (.65) $ 2.58 Cumulative effect of change in accounting principle ......... -- -- -- 1.99 ---------- ---------- ---------- ---------- Net income (loss) ........... $ (.12) $ (.63) $ (.65) $ 4.57 ========== ========== ========== ========== Basic shares outstanding ........ 10,062 10,068 10,062 10,067 ========== ========== ========== ========== Diluted earnings (loss) per share available for common shares: Income (loss) before cumulative effect of change in accounting principle .................... $ (.12) $ (.63) $ (.65) $ 1.46 Cumulative effect of change in accounting principle ......... -- -- -- 1.00 ---------- ---------- ---------- ---------- Net income (loss) ........... $ (.12) $ (.63) $ (.65) $ 2.46 ========== ========== ========== ========== Diluted shares outstanding ...... 10,062 10,068 10,062 19,967 ========== ========== ========== ==========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine months ended September 30, 2001 2002 ---- ---- Cash flows from operating activities: Net income (loss) .................................... $ (6,584) $ 49,214 Depreciation and amortization ........................ 12,771 13,105 Amortization of deferred financing costs ............. 359 498 Deferred income taxes ................................ (4,977) 21,622 Non-cash OPEB expense (payments in excess of expense) (497) 3,670 Gain on early extinguishment of debt ................. -- (54,739) Cumulative effect of change in accounting principle .. -- (19,998) Other, net ........................................... 288 250 Change in assets and liabilities: Notes and accounts receivable ...................... (14,934) (8,499) Inventories ........................................ 10,873 (4,507) Prepaid pension cost ............................... (2,250) (1,203) Accounts payable ................................... 3,116 166 Other, net ......................................... (5) 5,468 -------- -------- Net cash provided (used) by operating activities . (1,840) 5,047 -------- -------- Cash flows from investing activities: Capital expenditures ................................. (2,532) (4,803) Proceeds from sale of business unit .................. 757 -- Collection of notes receivable ....................... 730 1,127 Other, net ........................................... 61 166 -------- -------- Net cash used by investing activities ............ (984) (3,510) -------- -------- Cash flows from financing activities: Revolving credit facilities, net ..................... 3,256 (13,106) Other notes payable and long-term debt: Additions .......................................... 15 15,066 Principal payments ................................. (425) (1,025) Deferred financing costs paid ........................ (22) (2,472) -------- -------- Net cash provided (used) by financing activities . 2,824 (1,537) -------- -------- 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 ................ $ 8,133 $ 2,739 Income taxes ....................................... (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) Nine months ended September 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 ................. -- -- 49,214 -- 49,214 Issuance of common stock ... 6 -- -- -- 6 Preferred stock dividends .. -- (3,198) -- -- (3,198) ------- -------- -------- ---- -------- Balance - September 30, 2002 $10,798 $ 49,873 $(14,973) $(12) $ 45,686 ======= ======== ======== ==== ========
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 September 30, 2002 and the consolidated statements of operations and cash flows for the interim periods ended September 30, 2001 and 2002, and the consolidated statement of stockholders' equity (deficit) for the interim period ended September 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 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 September 30, 2002, Contran Corporation ("Contran") and other entities related to Mr. Harold C. Simmons, beneficially owned approximately 50% of the outstanding common stock 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. In October 2002, Contran purchased 54,956 shares of the 59,399 shares of the Company's Redeemable Series A Preferred Stock. See Note 4. On or after March 15, 2003, each share of Series A Preferred Stock will entitle the holder to 250 votes on any matter brought before Keystone common shareholders, voting together with the Keystone common stockholders as a single class. Assuming Keystone's outstanding voting securities and Contran's and Mr. Simmons' current beneficial ownership of such securities remain the same, after March 15, 2003, Contran and other entities related to Mr. Simmons, will control approximately 75% of the combined voting power of the Company's voting securities. Note 2 - Inventories: Inventories are stated at the lower of cost or market. At both December 31, 2001 and September 30, 2002, the last-in, first-out ("LIFO") method was used to determine the cost of approximately 74% of total inventories and the first-in, first-out or average cost methods were used to determine the cost of other inventories.
December 31, September 30, 2001 2002 ------- -------- (In thousands) Steel and wire products: Raw materials .................................... $ 9,818 $ 8,214 Work in process .................................. 9,912 14,293 Finished goods ................................... 16,132 16,133 Supplies ......................................... 13,446 14,607 ------- ------- 49,308 53,247 Less LIFO reserve ................................ 10,768 10,768 ------- ------- 38,540 42,479 Lawn and garden products - finished goods .......... 2,372 2,940 ------- ------- $40,912 $45,419 ======= =======
Note 3 - Notes payable and long-term debt:
December 31, September 30, 2001 2002 -------- ------- (In thousands) Revolving credit facilities: Keystone .................................. $ 40,823 $29,412 EWP ....................................... 3,225 2,205 Garden Zone ............................... 1,738 1,063 8% Notes .................................... -- 28,908 6% Notes .................................... -- 16,031 9 5/8% Notes ................................ 100,000 6,150 Keystone Term Loan .......................... -- 4,479 County Term Loan ............................ -- 10,000 Other ....................................... 669 663 -------- ------- 146,455 98,911 Less current maturities ................... 46,332 35,272 -------- ------- $100,123 $63,639 ======== =======
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 prior 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 November 14, 2002, the Company has not borrowed any amounts under such facility. In October 2002, Contran purchased $18.3 million of the total $19.8 million principal amount of maturity of the 8% Notes. As such, approximately $26.6 million of the recorded $28.9 million liability for the 8% Notes as of September 30, 2002 is payable to Contran subsequent to October 2002. 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 September 30, 2002 ($3.2 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, each share of Series A Preferred Stock may be converted into 250 shares of Keystone common stock at the exchange rate of $4.00 per share based on the stated value of each Series A 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 September 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 nine months of 2002, the Company increased the deferred tax asset valuation allowance by approximately $1.4 million. 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).
Nine months ended September 30, -------------------- 2001 2002 ---- ---- (In thousands) Expected tax provision (benefit), at statutory rate .... $ (3,985) $ 17,851 U. S. state income taxes, net .......................... (126) 2,315 Amortization of goodwill and negative goodwill ......... (323) -- Deferred tax asset valuation allowance ................. -- 1,429 Other, net ............................................. (430) 27 -------- -------- Income tax provision (benefit) ......................... $ (4,864) $ 21,622 -------- -------- Comprehensive provision (benefit) for income taxes: Currently payable: U.S. federal ....................................... $ (30) $ (28) U.S. state ......................................... 143 28 Net currently payable ............................ 113 -- -------- -------- Deferred income taxes, net ........................... (4,977) 21,622 -------- -------- $ (4,864) $ 21,622 ======== ========
Note 6 - Other accrued liabilities:
December 31, September 30, 2001 2002 ----------- ------------- (In thousands) Current: Employee benefits .............................. $11,168 $13,999 Self insurance ................................. 8,906 9,471 Environmental .................................. 8,068 8,171 Deferred vendor payments ....................... 2,488 3,305 Legal and professional ......................... 887 860 Disposition of former facilities ............... 530 638 Interest ....................................... 1,287 127 Other .......................................... 3,766 5,827 ------- ------- $37,100 $42,398 ======= ======= Noncurrent: Deferred vendor payments ....................... $13,648 $11,051 Environmental .................................. 7,508 7,312 Workers compensation payments .................. 1,762 2,155 Interest ....................................... 7,735 198 Other .......................................... 357 380 ------- ------- $31,010 $21,096 ======= =======
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 Nine months ended September 30, September 30, ----------------- ------------------ 2001 2002 2001 2002 ---- ---- ---- ---- (In thousands) Revenues: Steel and wire products ......... $ 81,427 $ 78,255 $ 239,141 $ 251,156 Lawn and garden products ........ 1,007 1,347 7,698 9,481 -------- --------- --------- --------- 82,434 79,602 246,839 260,637 Elimination of intersegment revenues ...................... (105) (157) (453) (1,036) -------- --------- --------- --------- $ 82,329 $ 79,445 $ 246,386 $ 259,601 ======== ========= ========= ========= Income (loss) before income taxes and cumulative effect of change in accounting principle: Operating profit (loss): Steel and wire products ....... $ 2,054 $ (3,476) $ (641) $ 2,463 Lawn and garden products ...... (163) (200) 301 404 -------- --------- --------- --------- 1,891 (3,676) (340) 2,867 General corporate items: Interest income ............. 42 22 166 63 General expense, net ........ (634) (318) (261) (2,081) Gain on early extinguishment of debt .................... -- -- -- 54,739 Interest expense .............. (3,605) (937) (10,952) (4,584) -------- --------- --------- --------- $ (2,306) $ (4,909) $ (11,387) $ 51,004 ======== ========= ========= =========
Note 8 - Contingencies: At September 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. At December 31, 2001, the Company's defined benefit pension plan's (the "Plan") assets exceeded the Plan's accumulated benefit obligation and as such, was considered over-funded for financial reporting purposes. Due to an expected significant decline in the value of the Plan's assets during 2002 and based on expected interest rates at the end of 2002, it is likely the Plan's accumulated benefit obligation at December 31, 2002 will exceed the Plan's assets. If the Plan's accumulated benefit obligation exceeds the Plan's assets at December 31, 2002, SFAS No. 87, Employers' Accounting for Pensions, provides that the Company would be required to record an additional minimum liability that is at least equal to the amount by which the Plan's accumulated benefit obligation exceeds the Plan's assets, eliminate any recorded prepaid pension cost, record an intangible asset equal to the amount of any unrecognized prior service cost and charge a separate component of stockholders' equity for the difference. If required to be recorded, the charge to stockholders' equity at December 31, 2002, is expected to approximate at least $123 million. 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. In accordance with requirements of SFAS No. 142, the Company reviews 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. Based on the Company's 2002 third quarter review, no impairment of goodwill was deemed to exist at September 30, 2002. As shown in the following table, the Company would have reported a net loss of $1.6 million, or $.15 per basic share, for the 2001 third quarter and a net loss of $7.5 million, or $.74 per basic share, during the nine months ended September 30, 2001, if the goodwill and negative goodwill amortization included in the Company's net loss, as reported, had not been recognized. The per share amounts shown in the following tables reflect the dilutive effect of the assumed conversion of the Series A Convertible Preferred Stock. See Note 10.
Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 2001 2002 2001 2002 ---- ---- ---- ---- (In thousands, except per share data) Income (loss) before cumulative effect of change in accounting principle as reported $ (1,250) $ (4,801) $ (6,584) $ 29,216 Adjustments: Goodwill amortization ...................... 31 -- 94 -- Negative goodwill amortization ............. (338) -- (1,016) -- ---------- ---------- ---------- ---------- Adjusted income (loss) before cumulative effect of change in accounting principle .................... $ (1,557) $ (4,801) $ (7,506) $ 29,216 ========== ========== ========== ========== Basic earnings (loss) per share available for common shares before cumulative effect of change in accounting principle as reported ......... $ (.12) $ (.63) $ (.65) $ 2.58 Adjustments: Goodwill amortization ...................... -- -- .01 -- Negative goodwill amortization ............. (.03) -- (.10) -- ---------- ---------- ---------- ---------- Adjusted basic earnings (loss) per share available for common shares before cumulative effect of change in accounting principle .................... $ (.15) $ (.63) $ (.74) $ 2.58 ========== ========== ========== ========== Diluted earnings (loss) per share available for common shares before cumulative effect of change in accounting principle as reported ......... $ (.12) $ (.63) $ (.65) $ 1.46 Adjustments: Goodwill amortization ...................... -- -- .01 -- Negative goodwill amortization ............. (.03) -- (.10) -- ---------- ---------- ---------- ---------- Adjusted diluted earnings (loss) per share available for common shares before cumulative effect of change in accounting principle .................... $ (.15) $ (.63) $ (.74) $ 1.46 ========== ========== ========== ==========
Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 2001 2002 2001 2002 ---- ---- ---- ---- (In thousands, except per share data) Net income (loss) as reported ....... $ (1,250) $ (4,801) $ (6,584) $ 49,214 Adjustments: Goodwill amortization ............. 31 -- 94 -- Negative goodwill amortization .... (338) -- (1,016) -- Cumulative effect of change in accounting principle ............. -- -- -- (19,998) ---------- ---------- ---------- ---------- Adjusted net income (loss) ...... $ (1,557) $ (4,801) $ (7,506) $ 29,216 ========== ========== ========== ========== Basic earnings (loss) per share available for common shares as reported ........................... $ (.12) $ (.63) (.65) $ 4.75 Adjustments: Goodwill amortization ............. -- -- .01 -- Negative goodwill amortization .... (.03) -- (.10) -- Cumulative effect of change in accounting principle ............. -- -- -- (1.99) ---------- ---------- ---------- ---------- Adjusted basic earnings (loss) per share available for common shares .................. $ (.15) (.63) $ (.74) $ 2.58 ========== ========== ========== ========== Diluted earnings (loss) per share available for common shares as reported ........................... $ (.12) $ (.63) $ (.65) $ 2.46 Adjustments: Goodwill amortization -- -- .01 -- Negative goodwill amortization .... (.03) -- (.10) -- ---------- ---------- ---------- ---------- Cumulative effect of change in accounting principle ............. -- -- -- (1.00) ---------- ---------- ---------- ---------- Adjusted diluted earnings (loss) per share available for common shares .................. $ (.15) (.63) $ (.74) $ 1.46 ========== ========== ========== ==========
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 September 30, 2002 period. The dilutive effect of the assumed conversion of the Series A Preferred Stock in the nine month ended September 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 Nine months ended September 30, September 30, ------------------ --------------- 2001 2002 2001 2002 ---- ---- ---- ---- (In thousands) Numerator: Net income (loss) before cumulative effect of change in accounting principle ....................... $ (1,250) $ (4,801) $ (6,584) $ 29,216 Less Series A Preferred Stock Dividends ....................... -- (1,485) -- (3,198) -------- -------- -------- -------- Basic net income (loss) before cumulative effect of change in accounting principle ............ (1,250) (6,286) (6,584) 26,018 Series A Preferred Stock dividends -- -- -- 3,198 -------- -------- -------- -------- Diluted net income (loss) before cumulative effect of change in accounting principle ............ $ (1,250) $ (6,286) $ (6,584) $ 29,216 ======== ======== ======== ======== Denominator: Average common shares outstanding 10,062 10,068 10,062 10,067 Dilutive effect of Preferred Stock Series A ........................ -- -- -- 9,900 -------- -------- -------- -------- Diluted shares ................... 10,062 10,068 10,062 19,967 ======== ======== ======== ========
Note 11 - Accounting principles 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. ITEM 2. 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 wire 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 steel and wire products production, sales volume and pricing data for the periods indicated.
Three months ended Nine months ended September 30, September 30, ------------------- ---------------- 2001 2002 2001 2002 ---- ---- ---- ---- Production volume (000 tons): Billets ............................... 190 202 542 586 Wire rod .............................. 174 182 509 556 Sales volume(000 tons): Fabricated wire products .............. 72 71 225 230 Industrial wire ....................... 22 24 75 76 Wire rod .............................. 97 75 230 236 ---- ---- ---- ---- 191 170 530 542 ==== ==== ==== ==== Per-ton selling prices: Fabricated wire products ............. $636 $642 $651 $655 Industrial wire ...................... $422 $425 $425 $423 Wire rod ............................. $270 $299 $261 $284 All steel and wire products .......... $425 $460 $449 $461
The following table sets forth the components of the Company's net sales for the periods indicated.
Three months ended Nine months ended September 30, September 30, ------------------- ------------------ 2001 2002 2001 2002 ---- ---- ---- ---- (In millions) Steel and wire products: Fabricated wire products .......... $ 45.5 $ 45.5 $146.3 $150.9 Industrial wire ................... 9.3 10.1 31.9 32.2 Wire rod .......................... 26.3 22.4 60.0 67.1 Other ............................. .3 .3 1.0 1.0 ------ ------ ------ ------ 81.4 78.3 239.2 251.2 Lawn and garden products ............ .9 1.1 7.2 8.4 ------ ------ ------ ------ $ 82.3 $ 79.4 $246.4 $259.6 ====== ====== ====== ======
The following table sets forth selected operating data of the Company as a percentage of net sales for the periods indicated.
Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 2001 2002 2001 2002 ---- ---- ---- ---- Net sales ........................... 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold .................. 91.9 94.5 94.4 90.8 ------- ------- ------- ------- Gross profit ........................ 8.1 % 5.5 % 5.6 % 9.2 % ======= ======= ======= ======= Selling expense ..................... 1.8 % 2.1 % 1.9 % 2.0 % General and administrative expense .. 5.7 % 8.0 % 5.1 % 7.3 % Overfunded defined benefit pension expense (credit) ................... (.9)% .4 % (.9)% (.5)% Gain on early extinguishment of debt -- -- -- 21.1 Income (loss) before income taxes and cumulative effect of change in accounting principle ............ (2.8)% (6.2)% (4.6)% 19.7 % Income tax provision (benefit) ...... (1.2) -- (1.9) 8.3 Minority interest in after-tax earnings (losses) ................. .1 (.2) -- .1 ------- ------- ------- ------- Net income (loss) before cumulative effect of change in accounting principle .......................... (1.5)% (6.0)% (2.7)% 11.3 % ======= ======= ======= =======
Net sales of $79.4 million in the 2002 third quarter were down 4% from $82.3 million during the same period in 2001. This decline in sales was due primarily to an 11% decline in shipments of the Company's steel and wire products partially offset by a $35 per-ton increase in overall steel and wire product selling prices. Shipments of wire rod declined 23% during the 2002 third quarter as compared to the 2001 third quarter while per-ton selling prices increased 11%. Industrial wire shipments increased 9% while per-ton selling prices increased 1%. Fabricated wire products shipments during the 2002 third quarter declined 1% as compared to the 2001 third quarter while per-ton selling prices increased 1%. Management believes the decline in shipment volume of wire rod during the 2002 third quarter was due to large volumes of import product and softening demand. 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, rod imports have filled the production shortfall caused by former competitors leaving the marketplace and as such, Keystone has still been unable to achieve levels of per-ton selling prices that Keystone realized in the late 1990's. Net sales of $259.6 million in the first nine months of 2002 were up 5% from $246.4 million in the first nine months of 2001. This increase in sales was primarily due to a 2% increase in shipments of Keystone's steel and wire products, a $1.2 million increase in Garden Zone's sales and a $12 per-ton increase in selling prices of the Company's steel and wire products during the first nine months of 2002. Garden Zone's sales during the first nine months of 2002 amounted to $8.4 million as compared to $7.2 million during the same period in 2001. Wire rod shipments during the first nine months of 2002 increased 3% over the first nine months of 2001 while per-ton selling prices increased 9%. Industrial wire shipments increased 1% while per-ton selling prices declined 1%. Fabricated wire products shipments during the first nine months of 2002 increased 2% as compared to the first nine months of 2001 while per-ton selling prices increased 1%. Management believes the increase in shipment volume during the first nine months of 2002 was due to abnormally low shipment volume during the first six months of 2001 as compared to the first six months of 2002 partially offset by the lower shipping volume of wire rod during the third quarter of 2002. The shipment volume during the first six months of 2002 was consistent with those levels in years prior to 2001. Billet production during the third quarter of 2002 increased 12,000 tons or 6% to 202,000 tons from 190,000 tons during the third quarter of 2001. The primary reason for the higher billet production level during the 2002 third quarter was improved performance from Keystone's steel mill. Keystone did not purchase any billets during the third quarters of either 2001 or 2002. Wire rod production during the third quarter of 2002 increased to 182,000 tons as compared to production of 174,000 tons in the 2001 third quarter, primarily as a result of the higher billet production during the 2002 third quarter. Increased billet production during each of the first three quarters of 2002 as compared to the first three quarters of 2001 resulted in billet production during the first nine months of 2002 increasing 44,000 tons to 586,000 tons from 542,000 tons during the first nine months of 2001. Keystone did not purchase any billets during the first nine months of either 2001 or 2002. Increased wire rod production during the first and third quarters of 2002 as compared to the 2001 periods resulted in an increase of 47,000 tons of wire rod produced during the first nine months of 2002 to 556,000 tons from 509,000 tons during the first nine months of 2001. The lower wire rod production during the first nine months of 2001 was due primarily to intentional production curtailments during the first quarter of 2001 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 third quarter declined to $4.3 million from $6.6 million in the 2001 third quarter as the Company's gross margin declined from 8.1% in the 2001 period to 5.5% in the 2002 third quarter. This decline in gross margin was due primarily to higher costs for scrap steel, Keystone's primary raw material and a favorable $1.7 million settlement recorded in the third quarter of 2001 with a utility provider in connection with litigation over a 1999 fuel-adjustment surcharge billed to the Company by the utility, all partially offset by increased production efficiencies in the Company's steel mill. The higher costs for scrap steel adversely impacted gross profit by $4.7 million. Gross profit during the first nine months of 2002 increased to $23.9 million from $13.9 million in the first nine months of 2001 as the Company's gross margin increased from 5.6% in the 2001 period to 9.2% in the first nine months of 2002. This increase in gross margin was due primarily to the higher steel and wire per-ton product selling prices, increased shipment volume, a more favorable product mix and increased production efficiencies in the Company's steel mill, all partially offset by higher costs for scrap steel and the $1.7 million utility settlement received in the 2001 third quarter. The higher selling prices, increased shipment volumes and more favorable product mix combined to favorably impact gross profit by $2.6 million. The higher scrap steel costs adversely impacted gross profit by $4.8 million. In addition, during the first nine months of 2002, Keystone received $925,000 of insurance proceeds from business interruption policies related to incidents in prior years as compared to $1.6 million received during the first nine months of 2001. During the first nine 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 nine months of 2002. Selling expense was approximately $1.7 million during the third quarter of 2002 as compared to $1.5 million in the third quarter of 2001, but was relatively constant as a percentage of sales. Selling expense of $5.2 million during the first nine months of 2002 was approximately $500,000 higher than the same period in 2001, but was also relatively constant as a percentage of sales. General and administrative expense increased to $6.4 million during the third quarter of 2002 as compared to $4.7 million during the third quarter of 2001 primarily due to higher OPEB expense. General and administrative expense increased from $12.5 million during the first nine months 2002. The higher legal and professional expenses during the first nine months of 2002 were primarily related to the Exchange Offer described below. In addition, amortization of negative goodwill reduced general and administrative expenses during 2001 by $328,000 and $1.0 million during the third quarter and first nine months, respectively. As a result of adopting SFAS No. 142, there was no amortization of negative goodwill during the 2002 period. During the first two quarters of 2002, Keystone anticipated the total 2002 overfunded defined benefit pension credit would approximate $3.0 million and accordingly, recorded a $750,000 credit in each quarter. During the third quarter of 2002, Keystone determined the 2002 overfunded defined benefit pension credit would approximate only $1.6 million, and accordingly, recorded pension expense during the 2002 third quarter of $297,000. As such the net overfunded defined benefit pension credit recorded during the first nine months of 2002 amounted to $1.2 million as compared to $2.3 million recorded during the first nine months of 2001. The total overfunded defined benefit pension credit recorded during 2001 amounted to $5.5 million. Interest expense in the third quarter of 2002 was lower than the third quarter of 2001 due principally to lower debt levels and interest rates. Average borrowings by Keystone approximated $97.1 million in the third quarter of 2002 as compared to $149.5 million in the third quarter of 2001. During the third quarter of 2002, the Keystone's weighted-average interest rate was 2.9% per annum as compared to 8.5% per annum in the third quarter of 2001. Interest expense in the first nine months of 2002 was also lower than the first nine months of 2001 due principally to lower debt levels and interest rates. Average borrowings by Keystone approximated $110.5 million in the first nine months of 2002 as compared to $150.6 million in the first nine months of 2001. During the first nine months of 2002, the Keystone's weighted-average interest rate was 4.9% per annum as compared to 9.0% per annum in the first nine months 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 September 30, 2002, the Company had recorded a deferred tax asset valuation allowance of $15.9 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 a net loss during the third quarter of 2002 of $4.8 million as compared to a net loss of $1.3 million in the third quarter of 2001, and net income during the first nine-months of 2002 of $49.2 million as compared to a net loss in the first nine months of 2001 of $6.6 million. Outlook for 2002 Management currently believes, despite the current level of wire 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 raw material, energy and OPEB costs and 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. At December 31, 2001, the Company's defined benefit pension plan's (the "Plan") assets exceeded the Plan's accumulated benefit obligation and as such, was considered over-funded for financial reporting purposes. Due to an expected significant decline in the value of the Plan's assets during 2002 and based on expected interest rates at the end of 2002, it is likely the Plan's accumulated benefit obligation at December 31, 2002 will exceed the Plan's assets. If the Plan's accumulated benefit obligation exceeds the Plan's assets at December 31, 2002, SFAS No. 87, Employers' Accounting for Pensions, provides that the Company would be required to record an additional minimum liability that is at least equal to the amount by which the Plan's accumulated benefit obligation exceeds the Plan's assets, eliminate any recorded prepaid pension cost, record an intangible asset equal to the amount of any unrecognized prior service cost and charge a separate component of stockholders' equity for the difference. If required to be recorded, the charge to stockholders' equity at December 31, 2002, is expected to approximate at least $123 million. 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 September 30, 2002 Keystone had negative working capital of $26.4 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 $32.7 million. The amount of available borrowings under these revolving credit facilities is based on formula-determined amounts of trade receivables and inventories, less the amount of outstanding letters of credit. At September 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 were $13.4 million, $4.8 million and $1.6 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 November 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 nine months of 2002, the Company's operating activities provided approximately $5.0 million of cash compared to $1.8 million used by operations in the first nine months of 2001 principally due to changes in relative balances of accounts receivable and other liabilities. During the first nine months of 2002, Keystone made capital expenditures of $4.8 million as compared to $2.5 million in the first nine months of 2001. During 2001 and the first nine months 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 2002 are currently estimated to be approximately $8 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 Keystone's revolving credit facilities. At September 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 $21.7 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 September 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 $15.9 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. ITEM 4. CONTROLS AND PROCEDURES The Company maintains a system of disclosure controls and procedures. The term "disclosure controls and procedures," as defined by regulations of the Securities and Exchange Commission ("SEC"), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC under the Act is accumulated and communicated to the Company's management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions to be made regarding required disclosure. Each of David L. Cheek, the Company's President and Chief Operating Officer, and Bert E. Downing, Jr., the Company's Vice President, Corporate Controller and Treasurer, have evaluated the Company's disclosure controls and procedures as of a date within 90 days of the filing date of this Form 10-Q. Based upon their evaluation, these executive officers have concluded that the Company's disclosure controls and procedures are effective as of the date of such evaluation. The Company also maintains a system of internal controls. The term "internal controls," as defined by the American Institute of Certified Public Accountants' Codification of Statement on Auditing Standards, AU Section 319, means controls and other procedures designed to provide reasonable assurance regarding the achievement of objectives in the reliability of the Company's financial reporting, the effectiveness and efficiency of the Company's operations and the Company's compliance with applicable laws and regulations. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect such controls, subsequent to the date of their last evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 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 6. Exhibits and Reports on Form 8-K (a) The following exhibit is included herein: 99.1 ChiefExecutive 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 September 30, 2001: 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: November 14, 2002 By /s/Bert E. Downing, Jr. ------------------------------------- Bert E. Downing, Jr. Vice President, Corporate Controller and Treasurer (Principal Financial and Accounting Officer) CERTIFICATIONS I, David L. Cheek, the President and Chief Operating Officer of Keystone Consolidated Industries, Inc. certify that: 1) I have reviewed this quarterly report on Form 10-Q of Keystone Consolidated Industries, Inc.; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ David L. Cheek - -------------------------- David L. Cheek President and Chief Operating Officer (Chief Executive Officer) CERTIFICATIONS I, Bert E. Downing, Jr., the Vice President, Corporate Controller and Treasurer of Keystone Consolidated Industries, Inc. certify that: 1) I have reviewed this quarterly report on Form 10-Q of Keystone Consolidated Industries, Inc.; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Bert E. Downing, Jr. - -------------------------- Bert E. Downing, Jr. Vice President, Corporate Controller and Treasurer (Chief Financial Officer) EX-99.1 3 kciex991.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 September 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) November 14, 2002 EX-99.2 4 kciex992.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 September 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, Corporate Controller and Treasurer November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----