10-Q/A 1 kci03qa.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A-1 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2003 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 _____ ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Number of shares of common stock outstanding at May 15, 2003: 10,068,450 Introductory Note Keystone Consolidated Industries, Inc. ("Keystone") filed its Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 with the Securities and Exchange Commission on May 20, 2003. This amendment is being filed to clarify certain information contained in footnote 4 to Keystone's consolidated financial statements for the quarter ended March 31, 2003 and corresponding information contained in Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. This Amendment is being filed solely to clarify those disclosures referenced above. For the convenience of the reader, Keystone is re-filing the entire Quarterly Report as clarified. No other modifications have been made to the Quarterly Report except as described above. KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 31, 2002 and March 31, 2003 3 Consolidated Statements of Operations - Three months ended March 31, 2002 and 2003 5 Consolidated Statements of Cash Flows - Three months ended March 31, 2002 and 2003 7 Consolidated Statement of Stockholders' Deficit - Three months ended March 31, 2003 8 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 6. Exhibits and Reports on Form 8-K 24 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, March 31, ASSETS 2002 2003 ---- ---- Current assets: Notes and accounts receivable .................. $ 22,578 $ 37,174 Inventories .................................... 50,089 53,429 Prepaid expenses and other ..................... 893 2,602 -------- -------- Total current assets ........................ 73,560 93,205 -------- -------- Property, plant and equipment .................... 373,833 374,362 Less accumulated depreciation .................... 253,849 258,031 -------- -------- Net property, plant and equipment ........... 119,984 116,331 -------- -------- Other assets: Restricted investments ......................... 5,730 5,698 Unrecognized net pension obligation ............ 11,852 11,852 Deferred financing costs ....................... 2,319 2,141 Goodwill ....................................... 752 752 Other .......................................... 1,298 1,234 -------- -------- Total other assets .......................... 21,951 21,677 -------- -------- $215,495 $231,213 ======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
LIABILITIES AND STOCKHOLDERS' DEFICIT December 31, March 31, 2002 2003 ------------ --------- Current liabilities: Notes payable and current maturities of long-term debt ............................... $ 33,935 $ 76,511 Accounts payable ............................... 23,696 33,508 Accounts payable to affiliates ................. 1,448 1,706 Accrued OPEB cost .............................. 11,372 11,385 Accrued preferred stock dividends .............. 4,683 6,168 Other accrued liabilities ...................... 40,216 41,036 --------- --------- Total current liabilities .................. 115,350 170,314 --------- --------- Noncurrent liabilities: Long-term debt ................................. 63,306 32,254 Accrued OPEB cost .............................. 102,717 103,953 Accrued pension costs .......................... 48,571 50,271 Other .......................................... 20,337 19,669 --------- --------- Total noncurrent liabilities ............... 234,931 206,147 --------- --------- Minority interest ................................ 2 31 --------- --------- Redeemable Series A preferred stock .............. 2,112 2,112 --------- --------- Stockholders' deficit: Common stock ................................... 10,798 10,798 Additional paid-in capital ..................... 48,388 46,903 Accumulated other comprehensive loss - pension liabilities ........................... (170,307) (170,307) Accumulated deficit ............................ (25,767) (34,773) Treasury stock, at cost ........................ (12) (12) --------- --------- Total stockholders' deficit ................ (136,900) (147,391) --------- --------- $ 215,495 $ 231,213 ========= =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended March 31, 2002 and 2003 (In thousands, except per share data)
2002 2003 ---- ---- Revenues and other income: Net sales ........................................... $ 85,912 $ 77,100 Gain on early extinguishment of debt ................ 54,739 -- Interest ............................................ 20 15 Other, net .......................................... 1 15 --------- -------- 140,672 77,130 Costs and expenses: Cost of goods sold .................................. 77,179 75,662 Selling ............................................. 1,839 2,229 General and administrative .......................... 5,915 5,524 Defined benefit pension expense (credit) ............ (750) 1,700 Interest ............................................ 2,694 992 --------- -------- 86,877 86,107 Income (loss) before income taxes and cumulative effect of change in accounting principle ...................................... 53,795 (8,977) Provision for income taxes ............................ 21,622 -- Minority interest in after-tax earnings ............... 160 29 --------- -------- Income (loss) before cumulative effect of change in accounting principle ................... 32,013 (9,006) Cumulative effect of change in accounting principle ... 19,998 -- --------- -------- Net income (loss) ................................. 52,011 (9,006) Dividends on preferred stock .......................... -- 1,485 --------- -------- Net income (loss) available for common shares ..... $ 52,011 $(10,491) ========= ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) Three months ended March 31, 2002 and 2003 (In thousands, except per share data)
2002 2003 ---- ---- Basic earnings (loss) per share available for common shares: Income (loss) before cumulative effect of change in accounting principle ............................. $ 3.18 $ (1.04) Cumulative effect of change in accounting principle 1.99 -- ---------- ---------- Net income (loss) ............................... $ 5.17 $ (1.04) ========== ========== Basic shares outstanding ............................ 10,064 10,068 ========== ========== Diluted earnings (loss) per share available for common shares: Income (loss) before cumulative effect of change in accounting principle ................... $ 3.00 $ (1.04) Cumulative effect of change in accounting principle 1.87 -- ---------- ---------- Net income (loss) ............................. $ 4.87 $ (1.04) ========== ========== Diluted shares outstanding .......................... 10,683 10,068 ========== ==========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2002 and 2003 (In thousands)
2002 2003 ---- ---- Cash flows from operating activities: Net income (loss) .................................... $ 52,011 $ (9,006) Depreciation and amortization ........................ 4,466 4,253 Amortization of deferred financing costs ............. 166 186 Deferred income taxes ................................ 21,622 -- Non-cash defined benefit pension expense (credit) .... (750) 1,700 Non-cash OPEB expense ................................ 1,119 1,249 Gain on early extinguishment of debt ................. (54,739) -- Cumulative effect of change in accounting principle .. (19,998) -- Other, net ........................................... 71 97 Change in assets and liabilities: Notes and accounts receivable ...................... (14,332) (14,699) Inventories ........................................ 4,004 (3,340) Accounts payable ................................... 1,642 10,070 Other, net ......................................... 4,409 (1,513) -------- -------- Net cash used by operating activities ............ (309) (11,003) -------- -------- Cash flows from investing activities: Capital expenditures ................................. (1,288) (617) Collection of notes receivable ....................... 1,127 75 Other, net ........................................... 160 29 -------- -------- Net cash used by investing activities ............ (1) (513) -------- -------- Cash flows from financing activities: Revolving credit facilities, net ..................... 504 12,220 Other notes payable and long-term debt: Additions .......................................... 38 32 Principal payments ................................. (71) (728) Deferred financing costs paid ...................... (161) (8) -------- -------- Net cash provided by financing activities ........ 310 11,516 -------- -------- 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 ................ $ 1,341 $ 899 Income taxes ....................................... 69 --
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT Three months ended March 31, 2003 (In thousands)
Accumulated other comprehensive Additional loss - Common paid-in pension Accumulated Treasury stock capital liabilities deficit stock Total Balance - December 31, 2002 $10,798 $ 48,388 $(170,307) $(25,767) $(12) $(136,900) Net loss .................. -- -- -- (9,006) -- (9,006) Preferred stock dividends . -- (1,485) -- -- -- (1,485) ------- -------- --------- -------- ---- --------- Balance - March 31, 2003 .. $10,798 $ 46,903 $(170,307) $(34,773) $(12) $(147,391) ======= ======== ========= ======== ==== =========
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, 2002 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at March 31, 2003 and the consolidated statements of operations and cash flows for the interim periods ended March 31, 2002 and 2003, and the consolidated statement of stockholders' deficit for the interim period ended March 31, 2003, have each been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the United States of America ("GAAP"). 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 GAAP has been condensed or omitted, and certain prior year amounts have been reclassified to conform to the current year presentation. 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, 2002 (the "Annual Report"). At March 31, 2003, 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. At March 31, 2003, Contran also owned 54,956 shares of the 59,399 shares of the Company's outstanding Redeemable Series A Preferred Stock. Effective March 15, 2003, each share of Series A Preferred Stock is convertible, at the option of the holder, into 250 shares of the Company's common stock (equivalent to a $4.00 per share exchange rate). Employee stock options. As disclosed in the Annual Report, Keystone accounts for stock-based employee compensation in accordance with Accounting Principles Board Opinion ("APBO") No. 25, Accounting for Stock Issued to Employees, and its various interpretations. Under APBO No. 25, no compensation cost is generally recognized for fixed stock options in which the exercise price is equal to or greater than the market price on the grant date. Compensation cost related to stock options recognized by the Company in accordance with APBO No. 25 was not significant during the first three months of 2002 or 2003. The following table presents what the Company's consolidated net income (loss) available for common shares, and related per share amounts, would have been if Keystone would have elected to account for its stock-based employee compensation related to stock options in accordance with the fair value-based recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all awards granted subsequent to January 1, 1995.
Three months ended March 31, 2002 2003 ---- ---- (In thousands except per share amounts) Net income (loss) available for common shares as reported ................................... $ 52,011 $ (10,491) Adjustments, net of applicable income tax effects: Stock-based employee compensation expense under APBO No. 25 ................... -- -- Stock-based employee compensation expense under SFAS No. 123 .................. (54) (23) ---------- ---------- Pro forma net income (loss) available for common shares ............................. $ 51,957 $ (10,514) ========== ========== Basic net income (loss) available for common shares per share: As reported ................................... $ 5.17 $ (1.04) Pro forma ..................................... $ 5.16 $ (1.04) Diluted net income (loss) available for common shares per share: As reported ................................... $ 4.87 $ (1.04) Pro forma ..................................... $ 4.86 $ (1.04)
Note 2 - Business segment information: 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. 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 March 31, 2002 2003 ---- ---- (In thousands) Revenues: Steel and wire products ........................ $ 82,009 $ 72,389 Lawn and garden products ....................... 4,340 5,487 -------- -------- 86,349 77,876 Elimination of intersegment revenues ........... (437) (776) -------- -------- $ 85,912 $ 77,100 ======== ========
Three months ended March 31, 2002 2003 ---- ---- (In thousands) Income (loss) before income taxes and cumulative effect of change in accounting principle: Operating profit (loss): Steel and wire products ....................... $ 1,870 $(6,809) Lawn and garden products ...................... 356 88 -------- ------- 2,226 (6,721) General corporate items: Interest income ............................... 20 15 General expenses .............................. (496) (1,279) Gain on early extinguishment of debt .......... 54,739 -- Interest expense ................................ (2,694) (992) -------- ------- $ 53,795 $(8,977) ======== =======
Note 3 - Inventories: Inventories are stated at the lower of cost or market. At December 31, 2002 and March 31, 2003, the last-in, first-out ("LIFO") method was used to determine the cost of approximately 77% and 78%, 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, March 31, 2002 2003 ---- ---- (In thousands) Steel and wire products: Raw materials .................................... $ 8,825 $ 7,621 Work in process .................................. 14,920 14,033 Finished goods ................................... 21,178 25,764 Supplies ......................................... 14,710 14,392 ------- ------- 59,633 61,810 Less LIFO reserve ................................ 13,352 13,352 ------- ------- 46,281 48,458 Lawn and garden products - finished goods .......... 3,808 4,971 ------- ------- $50,089 $53,429 ======= =======
Note 4 - Notes payable and long-term debt:
December 31, March 31, 2002 2003 ---- ---- (In thousands) Revolving credit facilities: Keystone ................................. $ 28,328 $ 36,278 EWP ...................................... 1,362 3,900 Garden Zone .............................. 1,650 3,382 8% Notes ................................... 28,908 28,512 6% Notes ................................... 16,031 16,031 9 5/8% Notes ............................... 6,150 6,150 Keystone Term Loan ......................... 4,167 3,854 County Term Loan ........................... 10,000 10,000 Other ...................................... 645 658 -------- -------- 97,241 108,765 Less current maturities .................. 33,935 76,511 -------- -------- $ 63,306 $ 32,254 ======== ========
At March 31, 2003, Keystone was not in compliance with certain financial covenants included in its primary revolving credit facility (the "Keystone Revolver"). Under the terms of the Keystone Revolver, failure to comply with these covenants is considered an event of default and gives the lender the right to accelerate the maturity of both the Keystone Revolver and the Keystone Term Loan. As such, the Keystone Term Loan was classified as a current liability at March 31, 2003. The Company is currently negotiating with the Keystone Revolver and Keystone Term Loan lender to obtain waivers of such financial covenants or otherwise amend the respective loan agreements to cure the defaults. There can be no assurance Keystone will be successful in obtaining such waivers or amendments and if Keystone is unsuccessful there is no assurance the Company would have the liquidity or other financial resources sufficient to repay the applicable indebtedness if such indebtedness is accelerated. The indenture governing Keystone's 8% Notes provides the holders of such Notes with the right to accelerate the maturity of the Notes in the event of a default by Keystone which results in the acceleration of the maturity of any of the Company's other secured debt. As such, the 8% Notes were also classified as a current liability at March 31, 2003. As previously reported, 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 June 30, 2003. This facility is collateralized by the common stock of a wholly-owned subsidiary of the Company. Through May 15, 2003, the Company has not borrowed any amounts under such facility. Note 5 - Income taxes: At March 31, 2003, the Company expects that its long-term profitability should ultimately be sufficient to enable it to realize full benefit of its future tax attributes in part due to the long-term nature of its net operating loss carryforwards. 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 its gross deferred tax assets do not currently meet the "more-likely-than-not" realizability test. As such, at December 31, 2002, the Company has provided a deferred tax asset valuation allowance of approximately $86.5 million. 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 2003 will be appropriate. Accordingly, during the first quarter of 2003, the Company increased the deferred tax asset valuation allowance by $3.4 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 loss before income taxes, extraordinary item and cumulative effect of change in accounting principle and (ii) the components of the income tax provision (benefit).
Three months ended March 31, 2002 2003 ---- ---- (In thousands) Expected tax provision (benefit), at statutory rate ... $ 18,828 $(3,142) U. S. state income taxes (benefit), net ............... 2,429 (260) Deferred tax asset valuation allowance ................ 361 3,396 Other, net ............................................ 4 6 -------- ------- Income tax provision .................................. $ 21,622 $ -- ======== ======= Comprehensive provision (benefit) for income taxes: Currently refundable: U.S. federal ...................................... $ (8) $ (8) U.S. state ........................................ 8 8 -------- ------- Net currently refundable ........................ -- -- Deferred income taxes, net .......................... 21,622 -- -------- ------- $ 21,622 $ -- ======== ======= Comprehensive provision (benefit) for income taxes allocable to: Income (loss) before cumulative effect of change in accounting principle ......... $ 21,622 $ -- Cumulative effect of change in accounting principle ........................................ -- -- -------- ------- $ 21,622 $ -- ======== =======
Note 6 - Other accrued liabilities:
December 31, March 31, 2002 2003 ------------ --------- (In thousands) Current: Employee benefits .............................. $11,455 $11,892 Self insurance ................................. 10,336 10,507 Environmental .................................. 8,103 8,062 Deferred vendor payments ....................... 3,338 3,338 Legal and professional ......................... 1,176 1,022 Disposition of former facilities ............... 659 644 Interest ....................................... 318 124 Other .......................................... 4,831 5,447 ------- ------- $40,216 $41,036 ======= ======= Noncurrent: Deferred vendor payments ....................... $10,252 $ 9,587 Environmental .................................. 7,087 6,918 Workers compensation payments .................. 2,309 2,376 Interest ....................................... 298 399 Other .......................................... 391 389 ------- ------- $20,337 $19,669 ======= =======
Note 7 - Contingencies: At March 31, 2003, the Company's financial statements reflected accrued liabilities of $15.0 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 8 - 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 March 31, 2003 period. Keystone stock options were omitted from the calculation because they were antidilutive in all periods presented.
Three months ended March 31, 2002 2003 ---- ---- Numerator: Net income (loss) before cumulative effect of change in accounting principle $32,013 $ (9,006) Less Series A Preferred Stock dividends - (1,485) ------- -------- Basic and diluted net income (loss) before cumulative effect of change in accounting principle $32,013 $(10,491) ======= ======== Denominator: Average common shares outstanding 10,064 10,068 Dilutive effect of Series A Preferred Stock 619 - ------- -------- Diluted shares 10,683 10,068 ======= ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Keystone believes it is a leading manufacturer of steel 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/A-1 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 belief 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; o Future supply and demand for the Company's products (including cyclicality thereof), o Customer inventory levels, o Changes in raw material and other operating costs (such as ferrous scrap and energy), o General economic conditions, o Competitive products and substitute products, o Change in customer and competitor strategies, o The impact of pricing and production decisions, o The possibility of labor disruptions, o Environmental matters (such as those requiring emission and discharge standards for existing and new facilities), o Government regulations and possible changes therein, o Significant increases in the cost of providing medical coverage to employees and retirees, o The ultimate resolution of pending litigation, o International trade policies of the United States and certain foreign countries, o Any possible future litigation, and o 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 production, ferrous scrap costs, sales volume and pricing data for the periods indicated:
Three months ended March 31, 2002 2003 ---- ---- (Tons in thousands) Production volume (tons): Billets ................................................ 175 171 Wire rod ............................................... 182 166 Average per-ton ferrous scrap purchase cost .............. $ 82 $106 Sales volume (tons): Fabricated wire products ............................... 75 67 Industrial wire ........................................ 25 24 Wire rod ............................................... 81 64 Billets ................................................ -- 3 ---- ---- 181 158 ==== ==== Per-ton selling prices: Fabricated wire products ............................... $662 $654 Industrial wire ........................................ 423 418 Wire rod ............................................... 269 280 Billets ................................................ -- 145 All steel and wire products ............................ 452 457
The following table sets forth the components of the Company's net sales for the periods indicated.
Three months ended March 31, (In millions) 2002 2003 ---- ---- Steel and wire products: Fabricated wire products ..................... $49.4 $43.8 Industrial wire .............................. 10.6 10.1 Wire rod ..................................... 21.8 17.8 Billets ...................................... -- .4 Other ........................................ .2 .3 ----- ----- 82.0 72.4 Lawn and garden products ....................... 3.9 4.7 ----- ----- $85.9 $77.1 ===== =====
The following table sets forth selected operating data of Keystone as a percentage of net sales for the periods indicated.
Three months ended March 31, 2002 2003 ---- ---- Net sales 100.0 % 100.0 % Cost of goods sold 89.8 98.1 ----- ----- Gross profit 10.2 % 1.9 % ===== ===== Selling expense 2.1 % 2.9 % General and administrative expense 6.9 % 7.2 % Pension expense (credit) (.9)% 2.1 % Gain on early extinguishment of debt 63.7 % - % Income (loss) before income taxes and cumulative effect of change in accounting principle 62.6 % (11.7)% Provision for income taxes 25.2 - Minority interest in after-tax earnings .1 - ----- ----- Net income (loss) before cumulative effect of change in accounting principle 37.3 % (11.7)% ===== =====
Net sales of $77.1 million in the 2003 first quarter were down 10% from $85.9 million during the same period in 2002. The decline in sales was due to a 13% decline in shipments of the Company's steel and wire products partially offset by a 1% overall increase in steel and wire product per-ton selling prices and a 21% increase in Garden Zone's sales. Shipments of wire rod decreased 21% while per-ton selling prices of wire rod increased 4%. Industrial wire shipments during 2003 declined 4% from the 2002 quarter while per-ton selling prices declined 1%. Fabricated wire product shipments declined 11% during the 2003 first quarter as compared to the 2002 first quarter while per-ton selling prices declined 1%. In addition, during the first quarter of 2003, Keystone sold 3,000 tons of billets as compared to none sold during the 2002 first quarter. The higher per-ton selling price of the Company's steel and wire products during the 2003 first quarter favorably impacted total net sales by $800,000. Management believes the decline in shipment volume of steel and wire products during the 2003 first quarter was due to large volumes of import product and softening demand due in part to prolonged winter weather throughout most of the United States and uncertainties regarding military action in the Middle East. Although high levels of imported wire rod continues, these import levels have been somewhat mitigated by former competitors of the Company exiting the marketplace. However, despite this decline in domestic production capacity, rod imports have filled the resulting production shortfall and as such, per-ton selling prices continue to be adversely impacted by the availability of high levels of imported wire rod. Billet production of 171,000 tons during the first quarter of 2003 declined 2% from 2002's first quarter production level of 175,000 tons. The decline in production was due primarily to intentional production curtailments as a result of weakening demand and excess inventory levels. Wire rod production declined 9% to 166,000 tons from 182,000 tons in the 2002 first quarter. The decline in rod production was due primarily to unplanned production outages to effect repairs to the Company's rod mill. Gross profit during the 2003 first quarter decreased to $2.7 million from $8.7 million in the 2002 first quarter as the Company's gross margin declined from 10.2% in the 2002 period to 1.9% in the 2003 first quarter. This decline in gross margin was due primarily to higher costs for ferrous scrap, Keystone's primary raw material, and energy costs partially offset by the higher overall per-ton selling price of the Company's steel and wire products. In addition, during the 2002 first quarter, the Company received $428,000 of insurance proceeds from business interruption policies related to incidents in prior years as compared to none received during the 2003 first quarter. The increase in ferrous scrap and energy costs between the 2002 and 2003 first quarters adversely impacted gross profit by $4.5 million and $2.6 million, respectively. Selling expenses in the 2003 first quarter of $2.2 million were, $400,000 higher than selling expenses in the first quarter of 2002 of $1.8 million. The primary reason for this increase was higher advertising expenses during the first quarter of 2003. General and administrative expenses during the 2003 first quarter declined $400,000 to $5.5 million from $5.9 million in the 2002 first quarter due primarily to higher legal and professional fees during the 2002 first quarter related to the Company's debt restructuring completed in March 2002. As a result of such debt restructuring, the Company recognized a $54.7 million pre-tax gain ($33.1 million net of tax) in the first quarter of 2002. During the first quarter of 2003, Keystone recorded defined benefit pension expense of $1.7 million as opposed to a $750,000 credit recorded in the first quarter of 2002. Keystone currently anticipates the total 2003 pension expense will approximate $6.8 million. The anticipated higher pension expense in 2003 is due primarily to a $50 million decline in plan assets during 2002 and the resulting lower expected return on plan assets component of defined benefit pension plan expense. However, the Company does not anticipate cash contributions for defined benefit pension plans will be required in 2003. Interest expense in the first quarter of 2003 was lower than the first quarter of 2002 due principally to lower debt levels and lower interest rates. The lower debt levels and interest rates were primarily a result of the March 2002 debt restructuring. Average borrowings by the Company approximated $104 million in the first quarter of 2003 as compared to $138 million in the first quarter of 2002. During the first quarter of 2003, the Company's weighted-average interest rate was 2.8% per annum as compared to 7.7% per annum in the first quarter of 2002. 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 March 31, 2003, the Company had recorded a deferred tax asset valuation allowance of $89.9 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, the Company does not anticipate recognizing a tax benefit associated with its expected pre-tax losses during the remainder of 2003 will be appropriate. Effective January 1, 2003, 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 December 31, 2001 was eliminated as a cumulative effect of change in accounting principle. As a result of the items discussed above, Keystone recorded a net loss during the first quarter of 2003 of $9.0 million as compared to recorded net income of $52.0 million in the first quarter of 2002. Outlook for 2003 Despite the current level of rod imports, management currently believes, capacity utilization and shipment volumes in 2003 will approximate 2002 levels. Although the 2003 first quarter average per-ton selling prices were slightly higher than the 2002 fourth quarter per-ton selling prices, management currently believes average per-ton selling prices for the year 2003 will approximate those of the fourth quarter of 2002. In addition, management currently believes these volumes and per-ton selling prices combined with anticipated continued higher energy costs and an $8.4 million increase in defined benefit pension expense will result in Keystone recording a loss before income taxes and cumulative effect of change in accounting principle for calendar 2003 in excess of the comparable amount in 2002 (exclusive of the $54.7 million gain in 2002 on early extinguishment of debt). However, despite anticipating recording an operating loss and a loss before income taxes in 2003, Keystone currently believes it will show positive cash flows from operating activities in 2003, in part because the increased defined benefit pension expense is non-cash in nature and no contribution to the Company's defined benefit pension plan is currently expected to be required during 2003. In addition, the Company does not currently anticipate that recognizing a tax benefit associated with its pre-tax losses during 2003 will be appropriate. 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 Keystone's revolving credit facilities during the first quarter of each year. In addition, lower than normal sales volumes during the first quarter of 2003 resulted in higher than expected inventory levels and a corresponding increase in the Company's use of cash. In order to reduce the higher than normal inventory levels, during March 2003 and April 2003, Keystone curtailed production levels of certain products. At March 31, 2003 Keystone had negative working capital of $77.1 million, including $2.6 million of notes payable and current maturities of long-term debt, $30.3 million of long-term debt classified as current as a result of the Company's failure to comply with certain financial covenants in the Keystone Revolver as well as outstanding borrowings under the Company's revolving credit facilities of $43.6 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 March 31, 2003, unused credit available for borrowing under Keystone's $45 million revolving credit facility (the "Keystone Revolver"), which expires in March 2005, EWP's $7 million revolving credit facility, which expires in June 2004 (the "EWP Revolver") and Garden Zone's $4 million revolving credit facility, which expires in May 2003, the ("Garden Zone Revolver") were $6.5 million, $1.7 million, and $324,000, 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. Keystone currently intends to renew or replace the Garden Zone Revolver upon its maturity in May 2003. 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 June 30, 2003. Through May 15, 2003, the Company had not borrowed any amounts under such facility. During the first quarter of 2003, Keystone's operating activities used approximately $11.0 million of cash compared to $309,000 used in the first quarter of 2002, due primarily to lower earnings from operations and higher levels of inventories. During the first quarter of 2003, the Company made capital expenditures of approximately $617,000 as compared to $1.3 million in the 2002 first quarter. Capital expenditures for calendar year 2003 are currently estimated to be approximately $5.0 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 credit facilities. At March 31, 2003, the Company's financial statements reflected accrued liabilities of $15.0 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 approximately $20.6 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 March 31, 2003, 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 $89.9 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. The Company does not currently expect it will be appropriate to recognize a tax benefit with its expected pre-tax losses during 2003. 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. At March 31, 2003, Keystone was not in compliance with certain financial covenants included in the Keystone Revolver. Under the terms of the Keystone Revolver, failure to comply with these covenants is considered an event of default and gives the lender the right to accelerate the maturity of both the Keystone Revolver and the Keystone Term Loan. The Company is currently negotiating with the Keystone Revolver and Keystone Term Loan lender to obtain waivers of such financial covenants or otherwise amend the respective loan agreements to cure the defaults. There can be no assurance Keystone will be successful in obtaining such waivers or amendments, and if Keystone is unsuccessful, there is no assurance the Company would have the liquidity or other financial resources sufficient to repay the Keystone Revolver and the Keystone Term Loan if such indebtedness is accelerated. The indenture governing Keystone's 8% Notes provides the holders of such Notes with the right to accelerate the maturity of the Notes in the event of a default by Keystone which results in the acceleration of the maturity of any of the Company's other secured debt. 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, 2003. 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, as discussed above, and actual results could differ materially from those forecasted or expected and materially adversely effect 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 13 and 15 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 Executive Officer, and Bert E. Downing, Jr., the Company's Vice President, Chief Financial Officer, 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/A-1. 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. ITEM 1. Legal Proceedings Reference is made to disclosure provided under the caption "Current litigation" in Note 15 to the Consolidated Financial Statements included in the Annual Report. ITEM 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) The following exhibits are 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 March 31, 2003: 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: May 29, 2003 By /s/Bert E. Downing, Jr. ---------------------------------- Bert E. Downing, Jr. Vice President, Chief Financial Officer, Corporate Controller and Treasurer (Principal Financial and Accounting Officer) CERTIFICATIONS I, David L. Cheek, the President and Chief Executive Officer of Keystone Consolidated Industries, Inc. certify that: 1) I have reviewed this quarterly report on Form 10-Q/A-1 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) Theregistrant'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: May 29, 2003 /s/ David L. Cheek -------------------------- David L. Cheek President and Chief Executive Officer CERTIFICATIONS I, Bert E. Downing, Jr., the Vice President, Chief Financial Officer, Corporate Controller and Treasurer of Keystone Consolidated Industries, Inc. certify that: 1) I have reviewed this quarterly report on Form 10-Q/A-1 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: May 29, 2003 /s/ Bert E. Downing, Jr. -------------------------- Bert E. Downing, Jr. Vice President, Chief Financial Officer, Corporate Controller and Treasurer