-----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, ClaVcnN8PIeHb8yYc0SMqN5AlZQd9UZhURB5FT1kpQY+nTBgjAIP00mIQNOEXRQn SauItdMAFx+btdACJmqbWA== 0000055604-99-000007.txt : 19990813 0000055604-99-000007.hdr.sgml : 19990813 ACCESSION NUMBER: 0000055604-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 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: SEC FILE NUMBER: 001-03919 FILM NUMBER: 99684837 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 KEYSTONE CONSOLIDATED INDUSTRIES, INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period June 30, 1999 Commission file number 1-3919 Keystone Consolidated Industries, Inc. (Exact name of registrant as specified in its charter) Delaware 37-0364250 (State or other jurisdiction of I.R.S. Employer incorporation or organization) Identification No.) 5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, TX 75240-2697 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 458-0028 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Number of shares of common stock outstanding at August 9, 1999: 9,926,531 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 31, 1998 and June 30, 1999 3-4 Consolidated Statements of Income - Three months and six months ended June 30, 1998 and 1999 5 Consolidated Statements of Cash Flows - Six months ended June 30, 1998 and 1999 6 Consolidated Statement of Stockholders' Equity - Six months ended June 30, 1999 7 Notes to Consolidated Financial Statements 8-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 21 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, June 30, ASSETS 1998 1999 Current assets: Notes and accounts receivable $ 36,786 $46,380 Inventories 52,239 51,124 Deferred income taxes 18,985 16,389 Prepaid expenses and other 3,916 3,897 Total current assets 111,926 117,790 Property, plant and equipment 354,682 354,590 Less accumulated depreciation 198,582 200,803 Net property, plant and equipment 156,100 153,787 Other assets: Restricted investments 8,624 8,912 Prepaid pension cost 120,516 124,516 Deferred financing costs 3,493 3,263 Goodwill 1,115 1,059 Other 4,083 4,030 Total other assets 137,831 141,780 $405,857 $413,357
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30, 1998 1999 Current liabilities: Notes payable and current maturities of long-term debt $ 29,912 $ 37,051 Accounts payable 34,002 32,931 Accrued OPEB cost 10,000 10,000 Other accrued liabilities 37,457 38,529 Total current liabilities 111,371 118,511 Noncurrent liabilities: Long-term debt 101,852 101,274 Accrued OPEB cost 99,047 98,735 Deferred income taxes 6,162 5,432 Negative goodwill 24,065 23,387 Other 10,283 9,986 Total noncurrent liabilities 241,409 238,814 Minority interest - 102 Stockholders' equity: Common stock 10,569 10,656 Additional paid-in capital 51,763 52,398 Accumulated deficit (9,243) (7,112) Treasury stock, at cost (12) (12) Total stockholders' equity 53,077 55,930 $405,857 $413,357
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Three months ended Six months ended June 30, June 30, 1998 1999 1998 1999 Revenues and other income: Net sales $105,919 $105,924 $202,023 $197,641 Interest 95 107 321 189 Other, net 315 192 428 313 106,329 106,223 202,772 198,143 Costs and expenses: Cost of goods sold 95,837 93,484 184,010 177,147 Selling 1,556 2,107 3,075 3,910 General and administrative 3,292 5,104 6,758 11,185 Overfunded defined benefit pension credit (2,308) (1,500) (4,616) (4,000) Interest 2,286 3,529 4,879 7,045 100,663 102,724 194,106 195,287 Income before income taxes 5,666 3,499 8,666 2,856 Provision for income taxes 1,598 918 2,396 623 Minority interest in after-tax earnings - 102 - 102 Net income 4,068 2,479 6,270 2,131 Dividends on preferred stock 70 - 140 - Net income available for common shares $ 3,998 $ 2,479 $ 6,130 $ 2,131 Net income per share available for common shares: Basic $ .43 $ .25 $ .66 $ .21 Diluted $ .42 $ .25 $ .64 $ .21 Weighted average common and common equivalent shares outstanding: Basic 9,358 9,927 9,338 9,882 Diluted 9,579 9,927 9,552 9,882
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 1998 and 1999 (In thousands)
1998 1999 Cash flows from operating activities: Net income $ 6,270 $ 2,131 Depreciation and amortization 9,775 11,865 Amortization of deferred financing costs 252 260 Deferred income taxes 1,876 1,865 Other, net 79 (2,572) Change in assets and liabilities: Accounts receivable (11,857) (7,862) Inventories 4,692 275 Prepaid pension cost (4,616) (4,000) Accounts payable 3,449 249 Other, net (3,343) 1,779 Net cash provided by operating activities 6,577 3,990 Cash flows from investing activities: Capital expenditures (27,311) (10,498) Other, net (746) (53) Net cash used by investing activities (28,057) (10,551) Cash flows from financing activities: Revolving credit facilities, net (318) 7,124 Other notes payable and long-term debt: Additions 3 210 Principal payments (769) (773) Common stock issued 82 - Preferred stock dividend payments (140) - Net cash provided (used) by financing activitie (1,142) 6,561 Net change in cash and cash equivalents (22,622) - Cash and cash equivalents, beginning of period 22,622 - Cash and cash equivalents, end of period $ - $ - Supplemental disclosures: Cash paid for: Interest, net of amount capitalized $ 5,166 $ 6,808 Income taxes (refund received) 133 (651) Common stock contributed to employee benefit plan $ 616 $ 722
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Six months ended June 30, 1999 (In thousands)
Additional Common paid-in Accumulated Treasury Stock capital deficit stock Total Balance - December 31, 1998 $10,569 $51,763 $(9,243) $ (12) $53,077 Net income - - 2,131 - 2,131 Issuance of common stock 87 635 - - 722 Balance - June 30, 1999 $10,656 $52,398 $(7,112) $ (12) $55,930
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and basis of presentation: The consolidated balance sheet at December 31, 1998 has been condensed from the audited consolidated financial statements of Keystone Consolidated Industries, Inc. ("Keystone" or the "Company") at that date. The consolidated balance sheet at June 30, 1999 and the consolidated statements of income and cash flows for the interim periods ended June 30, 1998 and 1999, and the consolidated statement of stockholders' equity for the interim period ended June 30, 1999, have each been prepared by the Company, without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. However, it should be understood that accounting measurements at interim dates may be less precise than at year end. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. Certain information normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "Annual Report"). At June 30, 1999, Contran Corporation ("Contran") and other entities related to Mr. Harold C. Simmons own approximately 49% of the Company. Substantially all of Contran's outstanding voting stock is held either by trusts established for the benefit of certain children and grandchildren of Mr. Simmons, of which Mr. Simmons is sole trustee, or by Mr. Simmons directly. The Company may be deemed to be controlled by Contran and Mr. Simmons. Note 2 - Joint ventures: In January 1999, Keystone and two unrelated parties formed Garden Zone LLC ("Garden Zone"), a joint venture to supply wire, wood and plastic products to the consumer lawn and garden markets. Keystone owns 51% of the joint venture and, as such, Keystone's consolidated financial statements at June 30, 1999 include the accounts of Garden Zone. Neither Keystone or the other owners contributed any capital or other assets to the Garden Zone joint venture, but Keystone did guarantee Garden Zone's new $4 million revolving credit agreement. See Note 5. Garden Zone commenced operations in February 1999 and through June 30, 1999 earned $208,000, of which $106,000 accrued to Keystone for financial reporting purposes. In July 1999, Keystone formed a joint venture with Alter Peoria, Inc., an unrelated entity, to operate a scrap recycling operation at Keystone's facility in Peoria, Illinois. The joint venture is known as Alter Recycling Company, L.L.C. and Keystone's 50% interest is owned through one of Keystone's wholly- owned subsidiaries, Sherman Wire Company (formerly DeSoto, Inc.). Upon formation, Keystone contributed the property and equipment of its current Peoria scrap facility (June 30, 1999 net book value of approximately $335,000) to the joint venture. Keystone does not currently anticipate it will be required to make any other contributions to fund or operate this joint venture. Note 3 - Disposition: In January 1999, Keystone's wholly-owned subsidiary, DeSoto, Inc. ("DeSoto") sold its household cleaning products division. DeSoto did not record any gain or loss as a result of this sale. Subsequent to the sale, DeSoto changed its name to Sherman Wire Company. Note 4 - Inventories: Inventories are stated at the lower of cost or market. At December 31, 1998 and June 30, 1999, the last-in, first-out ("LIFO") method was used to determine the cost of approximately three-fourths of total inventories and the first-in, first-out or average cost methods were used to determine the cost of other inventories.
December 31, June 30, 1998 1999 (In thousands) Raw materials: Steel and wire products $17,400 $16,884 Household cleaning products 650 - 18,050 16,884 Work in process - Steel and wire products 8,642 5,591 Finished products: Steel and wire products 12,797 16,115 Lawn and garden products - 2,162 Household cleaning products 249 - 13,046 18,277 Supplies: Steel and wire products 16,894 14,706 56,632 55,458 Less LIFO reserve: Steel and wire products 4,334 4,334 Household cleaning products 59 - 4,393 4,334 $52,239 $51,124
Note 5 - Notes payable and long-term debt:
December 31, June 30, 1998 1999 (In thousands) 9 5/8% Senior Secured Notes, due August 2007 $100,000 $100,000 Commercial credit agreements: Revolving credit facilities: Keystone 24,580 27,922 EWP 4,000 4,542 Garden Zone - 3,240 Term loan - EWP 1,020 729 Other 2,164 1,892 131,764 138,325 Less current maturities 29,912 37,051 $101,852 $101,274
Note 6 - Income taxes: Summarized below are the differences between the provision for income taxes and the amounts that would be expected using the U.S. federal statutory income tax rate of 35%.
Six months ended June 30, 1998 1999 (In thousands) Expected tax expense, at statutory rate $3,033 $1,000 U. S. state income taxes, net 198 316 Amortization of goodwill (218) (217) Other, net (617) (476) Provision for income taxes $2,396 $ 623
Note 7 - Other accrued liabilities:
December 31, June 30, 1998 1999 (In thousands) Current: Employee benefits $11,560 $10,714 Environmental 7,165 8,662 Self insurance 6,950 6,689 Interest 4,054 4,048 Disposition of former facilities 1,452 1,227 Legal and professional 795 914 Other 5,481 6,275 $37,457 $38,529 Noncurrent: Environmental $ 8,175 $ 8,296 Other 2,108 1,690 $10,283 $ 9,986
Note 8 - Operations: During 1998, the Company's operations were 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 manufacture and sale of household cleaning products. Beginning in 1999, Keystone is also engaged in the distribution of wire, plastic and wood lawn and garden products to retailers through Garden Zone. Garden Zone's identifiable segment assets at June 30, 1999 were approximately $4.8 million. In January 1999, Keystone sold its household cleaning products division. See Note 3. At December 31, 1998, identifiable segment assets related to the household cleaning products division amounted to approximately $2.3 million.
Six months ended June 30, 1998 1999 (In thousands) Revenues: Steel and wire products $195,500 $189,831 Lawn and garden products - 10,319 Household cleaning products 6,523 - 202,023 200,150 Elimination of intersegment revenues - (2,509) $202,023 $197,641 Income before income taxes: Operating profit: Steel and wire products $ 11,823 $ 10,163 Lawn and garden products - 296 Household cleaning products 44 - 11,867 10,459 General corporate items: Interest income 321 189 General income (expense), net 1,357 (747) Interest expense (4,879) (7,045) $ 8,666 $ 2,856
Note 9 - Contingencies: At June 30, 1999, the Company's financial statements reflected accrued liabilities of $17.0 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Keystone Consolidated Industries, Inc. ("Keystone" or the "Company") is a leading manufacturer of fabricated wire products, industrial wire and carbon steel rod for the agricultural, industrial, construction, original equipment manufacturer and retail consumer markets. Historically, the Company has experienced greater sales and profits during the first half of the year due to the seasonality of sales in principal wire products markets, including the agricultural and construction markets. Beginning in January 1999, Keystone is also engaged in the distribution of wire, plastic and wood lawn and garden products to retailers through its 51%- owned subsidiary Garden Zone LLC ("Garden Zone"), a joint venture between Keystone and two unrelated parties. See Note 2 to the Consolidated Financial Statements. Prior to January 1999, Keystone was also engaged in the manufacture and distribution of household cleaning products through its wholly-owned subsidiary DeSoto, Inc. ("DeSoto"). In January 1999, DeSoto sold its household cleaning products division and changed its name to Sherman Wire Company. See Note 3 to the Consolidated Financial Statements. The statements in this Quarterly Report on Form 10-Q relating to matters that are not historical facts including, but not limited to, statements found in this "Management's Discussion And Analysis Of Financial Condition And Results Of Operations," are forward looking statements that represent management's 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," "anticipates," "expected" or comparable terminology, or by discussions of strategies or trends. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, it cannot give assurances 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. 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, cost of raw materials, future supply and demand for the Company's products (including cyclicality thereof), general economic conditions, competitive products and substitute products, customer and competitor strategies, the impact of pricing and production decisions, environmental matters, government regulations and possible changes therein, the ultimate resolution of pending litigation, successful implementation of the Company's capital improvements plan and possible disruptions of normal business activity from Year 2000 issues. Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. The Company disclaims any intention or obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. The following table sets forth the Company's steel and wire products production and sales volume data for the periods indicated.
Three months ended Six months ended 1998 1999 1998 1999 (In thousands of tons) Production volume: Billets: Produced 190 174 361 328 Purchased - 2 - 30 Rod 179 174 351 346 Sales volume: Fabricated wire products 95 96 172 181 Industrial wire 45 40 87 78 Steel rod 55 57 119 111 195 193 378 370
The following table sets forth the components of the Company's net sales for the periods indicated.
Three months ended Six months ended June 30, June 30, 1998 1999 1998 1999 (In millions) Steel and wire products: Fabricated wire products $ 64.4 $65.8 $116.9 $124.6 Industrial wire 21.4 18.3 41.9 35.9 Rod 16.3 15.4 36.0 28.6 Other .4 .5 .7 .7 102.5 100.0 195.5 189.8 Lawn and garden products - 5.9 - 7.8 Household cleaning products 3.4 - 6.5 - $105.9 $105.9 $202.0 $197.6
The following table sets forth selected operating data of the Company as a percentage of net sales for the periods indicated.
Three months ended Six months ended June 30, 1998 1999 1997 1998 Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 90.5 88.3 91.1 89.6 Gross profit 9.5 11.7 8.9 10.4 Selling expense 1.5 2.0 1.5 2.0 General and administrative expense 3.1 4.8 3.3 5.7 Overfunded defined benefit pension credit (2.2) (1.4) (2.3) (2.0) Income before income taxes 5.3% 3.3% 4.3% 1.5% Provision for income taxes 1.5 .9 1.2 .3 Minority interest in after-tax earnings - .1 - .1 Net income 3.8% 2.3% 3.1% 1.1%
Billet production declined in the second quarter and first six months of 1999 as compared to the same periods in 1998. As a result of this decline in billet production, the Company purchased billets which enabled the Company's rod production during the 1999 periods to decline only slightly from the 1998 production levels. Net sales of $105.9 million in the 1999 second quarter approximated the 1998 second quarter as net sales from the Company's lawn and garden products segment formed during the 1999 first quarter offset lower overall sales volumes and selling prices related to the Company's steel and wire products segment and the absence of revenues from the Company's household cleaning products segment sold in January 1999. Fabricated wire products and carbon steel rod sales volume increased 1% and 3%, respectively, while industrial wire sales volume declined 11%. Per ton selling prices of fabricated wire products increased 2%, while carbon steel rod and industrial wire selling prices decreased 9% and 4%, respectively. Overall steel and wire product selling prices declined 1% during the 1999 second quarter as compared to the 1998 second quarter. During the first half of 1999, net sales decreased 2% to $197.6 million from $202.0 million in the first half of 1998. Fabricated wire products shipments increased 5% while industrial wire and carbon steel rod shipments declined 10% and 7%, respectively, compared with 1998 levels. Per-ton selling prices of carbon steel rod and industrial wire declined 15% and 5%, respectively, while fabricated wire products per-ton selling prices increased 1%. Overall steel and wire product selling prices declined 1% during the first half of 1999 as compared to the same period in 1998. The 1999 second quarter gross margin percentage of 11.7% was higher than the 9.5% recorded during the comparable period in 1998 as lower costs for scrap steel, the Company's primary raw material, were partially offset by the effect of the lower sales volume and selling prices, and higher production costs associated with the start-up of new equipment installed at the Company's steel mini-mill located in Peoria, Illinois. The Company believes it has identified the start-up problems and expects to have these problems resolved and the equipment performing at the desired levels by the start of the 2000 first quarter. However, Keystone believes those problems will continue to adversely impact earnings throughout the second half of 1999. Keystone's scrap costs decreased 30% during the 1999 second quarter as compared to the same period a year ago. During the 1999 second quarter, the Company purchased 224,000 tons of scrap at an average price of $88 per ton as compared to 1998 second quarter purchases of 196,000 tons at an average price of $125 per ton. In addition, the Company recorded a $498,000 benefit during the 1999 second quarter as a result of a favorable legal settlement with an electrode vendor related to alleged price fixing. For the first six months of 1999, Keystone's gross margin percentage increased to 10.4% from 8.9% during the 1998 period. This increase was due primarily to lower costs for scrap steel and the favorable vendor settlement partially offset by the effect of lower sales volume and selling prices, higher production costs associated with the new equipment start-up problems and purchased billet costs. During the first six months of 1999, the Company purchased 336,000 tons of scrap at an average price of $85 per ton as compared to 1998 purchases of 371,000 tons at an average price of $125 per ton, a 32% price decline. The Company purchased 30,000 tons of billets during the first half of 1999 at an average price of $185 per ton as compared to none in the first half of 1998. Selling expenses increased to $2.1 million in the second quarter of 1999 from $1.6 million in the 1998 second quarter and increased to $3.9 million in the first half of 1999 from $3.1 million in the first half of 1998, primarily as a result of the higher selling expenses associated with the Company's lawn and garden products segment. General and administrative expenses increased to $5.1 million during the second quarter of 1999 as compared to $3.3 million during the second quarter of 1998 primarily due to higher general insurance charges in the 1999 second quarter as well as higher administrative expenses associated with the Company's lawn and garden products segment and an unfavorable legal settlement. During the first half of 1999, general and administrative expenses amounted to $11.2 million as compared to $6.8 million during the first half of 1998 primarily due to higher general insurance expense, higher costs associated with the start-up of the Company's lawn and garden products segment, unfavorable legal settlements and higher environmental charges. In addition, the 1998 first six months included a legal fee reimbursement of $380,000. Interest expense in the second quarter of 1999 was higher than the second quarter of 1998 due principally to higher average borrowing levels partially offset by lower interest rates. Average borrowings by the Company under its revolving credit facilities, EWP term loan and Senior Secured Notes approximated $143.6 million in the second quarter of 1999 as compared to $105.3 million in the second quarter of 1998. During the second quarter of 1999, the average interest rate paid by the Company was 9.1% per annum as compared to 9.6% per annum in the second quarter of 1998. Interest expense in the first half of 1999 was also higher than the first half of 1998 due principally to higher borrowing levels also partially offset by lower interest rates. Average borrowings by the Company under its revolving credit facilities, EWP term loan and Senior Secured Notes approximated $142.9 million in the first half of 1999 as compared to $105.8 million in the first half of 1998. During the first half of 1999, the average interest rate paid by the Company was 9.3% per annum as compared to 9.6% per annum in the first half of 1998. 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 6 to the Consolidated Financial Statements. As a result of the items discussed above, net income during the second quarter of 1999 declined to $2.5 million from $ 4.1 million in the second quarter of 1998, and net income during the first half of 1999 declined to $2.1 million from $6.3 million in the first half of 1998. 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 facility during the first quarter of each year. At June 30, 1999 the Company had negative working capital of $721,000, including $1.4 million of notes payable and current maturities of long-term debt as well as the outstanding borrowings under the Company's revolving credit facilities of $35.7 million. The amount of available borrowings under these credit facilities is based on formula-determined amounts of trade receivables and inventories, less the amount of outstanding letters of credit. Under the terms of the indenture related to the Company's 9 5/8% Senior Secured Notes, Keystone's ability to borrow in excess of $25 million under its $55 million revolving credit facility is dependent upon maintenance of a consolidated cash flow ratio (as defined) for the most recently completed four fiscal quarters of at least 2.5 to 1. At June 30, 1999, unused credit available for borrowing under Keystone's $55 million revolving credit facility, which expires December 31, 1999, EWP's $6 million revolving credit facility, which expires June 30, 2000, and Garden Zone's $4 million revolving credit facility which expires December 11, 1999 were $26.0 million, $1.5 million and $.5 million, respectively. However, the terms of the indenture prohibit Keystone from borrowing in excess of an additional $14.5 million, in the aggregate, during the third quarter of 1999. Keystone's $55 million revolving credit facility 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. During the first half of 1999, the Company's operating activities provided approximately $4.0 million of cash compared to $6.6 million in the first half of 1998 principally due to lower earnings in the 1999 period. During 1997, the Company commenced a $75 million capital improvement plan to upgrade certain of its plant and equipment and eliminate production capacity bottlenecks in order to reduce costs and improve production efficiency. Keystone substantially completed the capital improvement plan during 1998. As such, capital expenditures in the first half of 1999 were considerably less than capital expenditures during the 1998 first half. During the first half of 1999, the Company made capital expenditures of approximately $10.5 million as compared to $27.3 million in the 1998 first half. Capital expenditures for 1999 are currently estimated to be approximately $20 million and are related primarily to upgrades and debottlenecking of production equipment. These capital expenditures will be funded using borrowing availability under the Company's revolving credit facilities. At June 30, 1999, the Company's financial statements reflected accrued liabilities of $17.0 million for estimated remediation costs arising from environmental issues. There is no assurance regarding the ultimate cost of remedial measures that might eventually be required by environmental authorities or that additional environmental hazards, requiring further remedial expenditures, might not be asserted by such authorities or private parties. Accordingly, the costs of remedial measures may exceed the amounts accrued. The Company incurs significant ongoing costs for plant and equipment and substantial employee medical benefits for both current and retired employees. As such, the Company is vulnerable to business downturns and increases in costs, and accordingly, routinely compares its liquidity requirements and capital needs against its estimated future operating cash flows. As a result of this process, the Company has in the past, and may in the future, reduce controllable costs, modify product mix, acquire and dispose of businesses, restructure certain indebtedness, and raise additional equity capital. The Company will continue to evaluate the need for similar actions or other measures in the future in order to meet its obligations. The Company also routinely evaluates acquisitions of interests in, or combinations with, companies related to the Company's current businesses. The Company intends to consider such acquisition activities in the future and, in connection with this activity, may consider issuing additional equity securities or increasing the indebtedness of the Company. However, the Company's ability to incur new debt in the future will be limited by the terms of the indenture related to the 9 5/8% Senior Secured Notes. Approximately 1,700 of the Company's employees in Peoria, Illinois are represented by the Independent Steel Workers Alliance ("ISWA"). In May 1999, ISWA membership ratified a new three year agreement with the Company that provides for, among other things, increased wages and pension benefits for the membership. Management believes the cash flows from operations together with the funds available under the Company's revolving credit facilities will provide sufficient funds to fund the anticipated needs of its operations and planned capital improvements for the year ending December 31, 1999. This belief is based upon management's assessment of various financial and operational factors, including, but not limited to, assumptions relating to product shipments, product mix and selling prices, production schedules, productivity rates, raw materials, electricity, labor, employee benefits and other fixed and variable costs, interest rates, repayments of long-term debt, capital expenditures and available borrowings under the Company's revolving credit facilities. However, liabilities under environmental laws and regulations with respect to the clean- up and disposal of wastes, or any significant increases in the cost of providing medical coverage to active and retired employees could have a material adverse effect on the future liquidity, financial condition and results of operations of the Company. Additionally, significant declines in the Company's end user markets or market share, the inability to maintain satisfactory billet and rod production levels, or other unanticipated costs, if significant, could result in a need for funds greater than the Company currently has available. Year 2000 Issue As a result of certain computer programs being written using two digits rather than four to define the applicable year, any of the Company's computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The Company has substantially completed taking an inventory of its information systems to determine the modifications to existing software and new software required to mitigate any Year 2000 Issues. The Company's evaluation includes information systems infrastructure, financial and administrative systems, process control and manufacturing operating systems as well as significant vendors and customers. Because the majority of Keystone's significant information systems have recently been installed or updated, many of the Company's systems and related software are already year 2000 compliant. Keystone is utilizing both internal and external sources to reprogram or replace and test its software and/or hardware with imbedded chips and the Company expects to have its evaluation completed by the end of the third quarter of 1999 and required modifications completed prior to December 31, 1999. Although the Company expects its critical systems to be compliant by December 31, 1999, there is no assurance these results will be achieved. However, the impact of a failure of any of the Company's information systems would be mitigated to the extent that other alternate processes, including manual processes, were able to meet processing requirements. Presently, Keystone expects alternate procedures would be able to meet the Company's processing needs. In addition, excluding recent equipment additions that are year 2000 compliant, a significant portion of Keystone's plant and equipment is aged and doesn't include imbedded chip technology susceptible to Year 2000 Issues. Keystone relies on third parties for raw materials, utilities, transportation and other key services. In addition, the Company is dependent upon its customers for cash flow. The Company has initiated formal communications with its suppliers and customers to determine the extent to which the Company is vulnerable to those third parties' failure to eliminate their own Year 2000 Issues. Notwithstanding the Company's efforts, the ability of the Company to affect the Year 2000 Issues preparedness of such customers and suppliers is limited. Keystone presently expects to complete these third party communications during the 1999 third quarter and will at that time begin developing contingency plans for potential non-compliance by these third parties. Year 2000 Issues that adversely impact these third parties could also affect the operations of the Company. There can be no assurance the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Because the Company has not completed the evaluation of its Year 2000 Issue, it is not able to quantify the costs that may be incurred in order to eliminate any Year 2000 Issues. The total costs that will be incurred by Keystone in connection with resolving its Year 2000 Issues will be impacted by the Company's ability to successfully identify its Year 2000 Issues, the level of effort required to remediate the issue and the ability of third parties to successfully address their own Year 2000 Issues. Total costs incurred to date relative to the remediation of the Company's Year 2000 Issues have been expensed as incurred and have not been material. Although not anticipated, the most reasonably likely worst-case scenario of failure by the Company or its key suppliers or customers to become year 2000 compliant would be short-term slowdown or cessation of manufacturing operations at one or more facilities and a short-term inability on the part of the Company to process orders and billings in a timely manner, and to deliver product to customers. The costs of the project and the date on which the Company plans to complete its year 2000 assessment and remediation are based on management's estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ significantly from those plans. Specific factors that might cause differences from management's estimates include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct relevant computer codes, and similar uncertainties. Management believes the Company is devoting the necessary resources to identify and resolve significant Year 2000 Issues in a timely manner. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Reference is made to disclosure provided under the caption "Current litigation" in Note 15 to the Consolidated Financial Statements included in the Annual Report. ITEM 4. Submission of Matters to a Vote of Security Holders On May 6, 1999, the annual meeting of the stockholders of Keystone was held for the purpose of voting to elect two directors for terms of three years. Results of voting at the annual meeting are detailed below (9,837,495 common shares were entitled to vote at the meeting).
For Withheld Total Directors: Glenn R. Simmons 6,958,608 7,350 6,965,958 J. Walter Tucker, Jr. 6,958,777 7,181 6,965,958
ITEM 6. Exhibits and Reports on Form 8-K (a) The following exhibit is included herein: 27.1 Financial Data Schedule for the six month period ended June 30, 1999. (b) Reports on Form 8-K filed during the quarter ended June 30, 1999: None. S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Keystone Consolidated Industries, Inc. (Registrant) Date: August 12, 1999 By /s/Harold M. Curdy Harold M. Curdy Vice President - Finance/Treasurer (Principal Financial Officer) Date: August 12, 1999 By /s/Bert E. Downing, Jr. Bert E. Downing, Jr. Corporate Controller (Principal Accounting Officer) EX-27 2
5 The schedule contains summary financial information extracted from Keystone consolidated Industries, Inc.'s consolidated financial statements for the six months ended June 30, 1999 and is qualified in its entirety by reference to such. 1,000 6-MOS DEC-31-1999 JUN-30-1999 0 0 48,887 2,507 51,124 117,790 354,590 200,803 413,357 118,511 101,274 0 0 10,656 45,274 413,357 197,641 197,641 177,147 177,147 11,095 0 7,045 2,856 623 2,131 0 0 0 2,131 .21 .21
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