Attached files
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the quarter ended September 30,
2009
|
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
Incorporation
or organization)
|
(IRS
Employer
Identification
No.)
|
|||
5430
LBJ Freeway, Suite 1740,
Three
Lincoln Centre, Dallas, Texas
|
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 Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes S No
£
Whether
the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files).* Yes___ No ____
* The
registrant has not yet been phased into the interactive data
requirements.
Whether
the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company(as defined in Rule 12b-2 of
the Act). Large accelerated filer £ Accelerated
filer S Non-accelerated
filer £
Smaller reporting company £.
Whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes £ No S
Whether
the registrant has filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes
S No
£.
Number of
shares of common stock outstanding on November 5, 2009:
12,101,932
- 1
-
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
INDEX
Part
I. FINANCIAL
INFORMATION
|
Page
|
Item
1. Financial
Statements
|
|
Condensed
Consolidated Balance Sheets –
December 31, 2008; September 30, 2009(unaudited)
|
3
|
Condensed
Consolidated Statements of Operations (unaudited) -
Three
months and nine months ended September 30, 2008 and 2009
|
5
|
Condensed
Consolidated Statements of Cash Flows (unaudited) –
Nine
months ended September 30, 2008 and 2009
|
6
|
Condensed
Consolidated Statement of Stockholders' Equity
and
Comprehensive Income (unaudited) -
Nine
months ended September 30, 2009
|
7
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
8
|
Item
2. Management's
Discussion and Analysis of Financial
Condition and Results
of Operations
|
18
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
|
31
|
Item
4. Controls and
Procedures
|
31
|
PART
II. OTHER
INFORMATION
|
|
Item
1. Legal
Proceedings
|
33
|
Item
1A. Risk Factors
|
33
|
Item
6. Exhibits
|
33
|
Items
2, 3, 4 and 5 of Part II are omitted because there is no information to
report.
|
- 2
-
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
December
31,
|
September
30,
|
|||||||
ASSETS
|
2008
|
2009
|
||||||
(unaudited)
|
||||||||
Current
assets:
|
||||||||
Accounts
receivable, net
|
$ | 26,612 | $ | 50,681 | ||||
Inventories
|
70,858 | 58,068 | ||||||
Deferred
income taxes
|
14,373 | 14,373 | ||||||
Income
taxes receivable
|
- | 2,052 | ||||||
Prepaid
expenses and other
|
2,724 | 2,848 | ||||||
Total
current assets
|
114,567 | 128,022 | ||||||
Property,
plant and equipment:
|
||||||||
Land
|
1,468 | 1,468 | ||||||
Buildings
and improvements
|
59,598 | 60,850 | ||||||
Machinery
and equipment
|
317,573 | 323,788 | ||||||
Construction
in progress
|
9,421 | 5,751 | ||||||
388,060 | 391,857 | |||||||
Less
accumulated depreciation
|
298,073 | 305,703 | ||||||
Net
property, plant and equipment
|
89,987 | 86,154 | ||||||
Other
assets:
|
||||||||
Restricted
investments
|
2,277 | 250 | ||||||
Pension
asset
|
41,651 | 51,790 | ||||||
Other,
net
|
1,251 | 1,105 | ||||||
Total
other assets
|
45,179 | 53,145 | ||||||
Total
assets
|
$ | 249,733 | $ | 267,321 | ||||
- 3
-
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In
thousands)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
December 31,
|
September 30,
|
||||||
2008
|
2009
|
|||||||
(unaudited)
|
||||||||
Current
liabilities:
|
||||||||
Notes
payable and current maturities of long-term
debt
|
$ | 18,848 | $ | 39,726 | ||||
Accounts
payable
|
7,776 | 11,316 | ||||||
Accrued
OPEB cost
|
1,372 | 1,372 | ||||||
Income
taxes payable
|
1,116 | - | ||||||
Other
accrued liabilities
|
29,569 | 17,202 | ||||||
Total
current liabilities
|
58,681 | 69,616 | ||||||
Noncurrent
liabilities:
|
||||||||
Long-term
debt
|
12,782 | 6,588 | ||||||
Accrued
pension cost
|
1,319 | 969 | ||||||
Accrued
OPEB cost
|
42,560 | 43,657 | ||||||
Deferred
income taxes
|
8,284 | 15,602 | ||||||
Other
accrued liabilities
|
6,463 | 2,906 | ||||||
Total
noncurrent liabilities
|
71,408 | 69,722 | ||||||
Stockholders'
equity:
|
||||||||
Common
stock
|
125 | 125 | ||||||
Additional
paid-in capital
|
100,111 | 100,111 | ||||||
Accumulated
other comprehensive loss
|
(160,415 | ) | (154,570 | ) | ||||
Retained
earnings
|
180,619 | 183,113 | ||||||
Treasury
stock
|
(796 | ) | (796 | ) | ||||
Total
stockholders' equity
|
119,644 | 127,983 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 249,733 | $ | 267,321 | ||||
Commitments
and contingencies (Note 5)
See
accompanying Notes to Condensed Consolidated Financial
Statements.
- 4
-
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Net
sales
|
$ | 183,209 | $ | 100,363 | $ | 495,375 | $ | 231,349 | ||||||||
Cost
of goods sold
|
(156,867 | ) | (85,452 | ) | (440,170 | ) | (212,998 | ) | ||||||||
Gross
margin
|
26,342 | 14,911 | 55,205 | 18,351 | ||||||||||||
Other
operating income (expense):
|
||||||||||||||||
Selling
expense
|
(2,575 | ) | (1,498 | ) | (6,338 | ) | (4,776 | ) | ||||||||
General
and administrative expense
|
(5,187 | ) | (3,678 | ) | (12,850 | ) | (7,539 | ) | ||||||||
Defined
benefit pension credit (expense)
|
18,467 | (1,515 | ) | 55,401 | (4,543 | ) | ||||||||||
Other
postretirement benefit credit
|
2,006 | 1,042 | 6,542 | 3,562 | ||||||||||||
Total
other operating income (expense)
|
12,711 | (5,649 | ) | 42,755 | (13,296 | ) | ||||||||||
Operating
income
|
39,053 | 9,262 | 97,960 | 5,055 | ||||||||||||
Nonoperating
income (expense):
|
||||||||||||||||
Interest
expense
|
(879 | ) | (474 | ) | (3,124 | ) | (1,214 | ) | ||||||||
Other
income, net
|
306 | 42 | 604 | 144 | ||||||||||||
Total
nonoperating expense
|
(573 | ) | (432 | ) | (2,520 | ) | (1,070 | ) | ||||||||
Income
before income taxes
|
38,480 | 8,830 | 95,440 | 3,985 | ||||||||||||
Income
tax expense
|
(14,505 | ) | (2,962 | ) | (35,936 | ) | (1,491 | ) | ||||||||
Net
income
|
$ | 23,975 | $ | 5,868 | $ | 59,504 | $ | 2,494 | ||||||||
Basic
and diluted income per share
|
$ | 1.98 | $ | 0.48 | $ | 5.25 | $ | 0.21 | ||||||||
Basic
and diluted weighted average shares outstanding
|
12,102 | 12,102 | 11,336 | 12,102 | ||||||||||||
See
accompanying Notes to Condensed Consolidated Financial
Statements.
- 5
-
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
Nine
months ended
September 30,
|
||||||||
2008
|
2009
|
|||||||
(unaudited)
|
||||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 59,504 | $ | 2,494 | ||||
Depreciation
and amortization
|
11,432 | 10,399 | ||||||
Deferred
income taxes
|
33,242 | 3,794 | ||||||
Defined
benefit pension expense (credit)
|
(55,401 | ) | 4,543 | |||||
OPEB
credit
|
(6,542 | ) | (3,562 | ) | ||||
OPEB
payments
|
(2,024 | ) | (1,005 | ) | ||||
Bad
debt expense
|
56 | 3,258 | ||||||
Inventory
impairment
|
- | 1,495 | ||||||
Other,
net
|
639 | 346 | ||||||
Change
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(27,962 | ) | (27,327 | ) | ||||
Inventories
|
(20,636 | ) | 11,295 | |||||
Accounts
payable
|
2,619 | 3,540 | ||||||
Accrued
environmental costs
|
(505 | ) | (4,285 | ) | ||||
Accrued
liabilities
|
14,849 | (11,639 | ) | |||||
Income
taxes
|
(197 | ) | (3,168 | ) | ||||
Other,
net
|
(1,013 | ) | (108 | ) | ||||
Net
cash provided by (used in) operating activities
|
8,061 | (9,930 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures
|
(7,776 | ) | (6,799 | ) | ||||
Restricted
investments, net
|
(21 | ) | 2,027 | |||||
Other,
net
|
436 | 72 | ||||||
Net
cash used in investing activities
|
(7,361 | ) | (4,700 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Issuance
of common stock
|
24,713 | - | ||||||
Revolving
credit facility, net
|
(10,172 | ) | 28,323 | |||||
Principal
payments on other notes payable and long-term
debt
|
(15,089 | ) | (13,670 | ) | ||||
Deferred
financing costs paid
|
(152 | ) | (23 | ) | ||||
Net
cash provided by (used in) financing activities
|
(700 | ) | 14,630 | |||||
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
|
$ | 2,825 | $ | 903 | ||||
Income
taxes, net
|
2,891 | 865 | ||||||
See
accompanying Notes to Condensed Consolidated Financial
Statements.
- 6
-
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME
Nine
months ended September 30, 2009
(In
thousands)
Common
|
Additional
paid-in
|
Accumulated
other
comprehensive income (loss)
|
Retained
|
Treasury
|
Comprehensive
|
|||||||||||||||||||||||||||
stock
|
capital
|
Pensions
|
OPEB
|
earnings
|
stock
|
Total
|
income (loss)
|
|||||||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||||||||||
Balance
– December 31, 2008
|
$ | 125 | $ | 100,111 | $ | (193,258 | ) | $ | 32,843 | $ | 180,619 | $ | (796 | ) | $ | 119,644 | ||||||||||||||||
Net
income
|
- | - | - | - | 2,494 | - | 2,494 | $ | 2,494 | |||||||||||||||||||||||
Amortization
of prior service cost (credit), net of tax
|
- | - | 576 | (7,566 | ) | - | - | (6,990 | ) | (6,990 | ) | |||||||||||||||||||||
Amortization
of actuarial losses,
net of tax
|
- | - | 8,802 | 4,033 | - | - | 12,835 | 12,835 | ||||||||||||||||||||||||
Balance
– September 30, 2009
|
$ | 125 | $ | 100,111 | $ | (183,880 | ) | $ | 29,310 | $ | 183,113 | $ | (796 | ) | $ | 127,983 | ||||||||||||||||
Comprehensive
income
|
$ | 8,339 |
See
accompanying Notes to Condensed Consolidated Financial
Statements.
- 7
-
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
(unaudited)
Note
1 – Organization and basis of presentation:
The
unaudited Condensed Consolidated Financial Statements contained in this
Quarterly Report have been prepared on the same basis as the audited
Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended December 31, 2008 that we filed with the Securities and Exchange
Commission (“SEC”) on March 12, 2009 (the “2008 Annual Report”). In
our opinion, we have made all necessary adjustments (which include only normal
recurring adjustments) in order to state fairly, in all material respects, our
consolidated financial position, results of operations and cash flows as of the
dates and for the periods presented. Certain reclassifications have
been made to conform the prior year’s Condensed Consolidated Financial
Statements to the current year’s classifications. As compared to the
2008 Annual Report, we have omitted certain information and footnote disclosures
from this Quarterly Report that are normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”). Our results of operations for the
interim period ended September 30, 2009 may not be indicative of our operating
results for the full year. The Condensed Consolidated Financial
Statements contained in this Quarterly Report should be read in conjunction with
the 2008 Consolidated Financial Statements contained in the 2008 Annual
Report.
At
September 30, 2009, Contran Corporation (“Contran”) owned approximately 62% of
our outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons (for which Mr. Simmons
is the sole trustee) or is held directly by Mr. Simmons or other persons or
companies related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to
control Contran and us.
Unless
otherwise indicated, references in this report to “we”, “us” or “our” refer to
Keystone Consolidated Industries, Inc. (“KCI”) and its subsidiaries, taken as a
whole.
Note
2 – Business segment information:
Our
operating segments are organized by our manufacturing facilities and include
three reportable segments:
·
|
Keystone
Steel & Wire (“KSW”), located in Peoria, Illinois, operates an
electric arc furnace mini-mill and manufactures and sells billets, wire
rod, coiled rebar, industrial wire and fabricated wire products to
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer
markets;
|
·
|
Engineered
Wire Products, Inc. (“EWP”), located in Upper Sandusky, Ohio, manufactures
and sells wire mesh in both roll and sheet form that is utilized in
concrete construction products including pipe, pre-cast boxes and
applications for use in roadways, buildings and bridges;
and
|
- 8
-
·
|
Keystone-Calumet,
Inc. (“Calumet”), located in Chicago Heights, Illinois, manufactures and
sells merchant and special bar quality products and special sections in
carbon and alloy steel grades for use in agricultural, cold drawn,
construction, industrial chain, service centers and transportation
applications as well as in the production of a wide variety of products by
original equipment manufacturers.
|
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||
Net
sales:
|
||||||||||||||||
KSW
|
$ | 179,591 | $ | 92,746 | $ | 483,760 | $ | 213,829 | ||||||||
EWP
|
19,457 | 12,782 | 53,636 | 31,506 | ||||||||||||
Calumet
|
4,927 | 2,841 | 13,632 | 7,197 | ||||||||||||
Elimination
of intersegment sales
|
(20,766 | ) | (8,006 | ) | (55,653 | ) | (21,183 | ) | ||||||||
Total
net sales
|
$ | 183,209 | $ | 100,363 | $ | 495,375 | $ | 231,349 | ||||||||
Operating
income (loss):
|
||||||||||||||||
KSW
|
$ | 18,577 | $ | 8,629 | $ | 37,877 | $ | 7,944 | ||||||||
EWP
|
3,372 | 887 | 8,038 | 801 | ||||||||||||
Calumet
|
(874 | ) | (187 | ) | (1,716 | ) | (3,378 | ) | ||||||||
Pension
credit (expense)
|
18,467 | (1,515 | ) | 55,401 | (4,543 | ) | ||||||||||
OPEB
credit
|
2,006 | 1,042 | 6,542 | 3,562 | ||||||||||||
Other(1)
|
(2,495 | ) | 406 | (8,182 | ) | 669 | ||||||||||
Total
operating income
|
39,053 | 9,262 | 97,960 | $ | 5,055 | |||||||||||
Nonoperating
income (expense):
|
||||||||||||||||
Interest
expense
|
(879 | ) | (474 | ) | (3,124 | ) | (1,214 | ) | ||||||||
Other
income, net
|
306 | 42 | 604 | 144 | ||||||||||||
Income
before income taxes
|
$ | 38,480 | $ | 8,830 | $ | 95,440 | $ | 3,985 |
(1)
Other items primarily consist of the elimination of intercompany profit or loss
on ending inventory balances and general corporate expenses.
On a
quarterly basis, we estimate our LIFO reserve balances that would be required at
the end of the year based on projections of year-end inventory quantities and
costs. During the year, we record a pro-rated, year-to-date change in
our LIFO reserve balances from the prior year-end based on these
projections. At the end of each year, we calculate our LIFO reserve
balances based on actual year-end inventory quantities and
costs. During the third quarter and first nine months of 2009, we
significantly decreased KSW’s and EWP’s LIFO inventory reserve balances
primarily because estimated raw material costs and inventory levels for December
2009 were substantially lower than actual December 2008 raw material costs and
inventory levels. Changes in LIFO reserves are reflected in cost of
goods sold. The changes in KSW’s and EWP’s LIFO inventory reserve
balances for the third quarter and first nine months of 2008 and 2009 are
presented in the table below.
- 9
-
Increase (decrease) in LIFO
reserve
|
||||||||||||||||
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||
KSW
|
$ | (1,516 | ) | $ | (2,318 | ) | $ | 3,335 | $ | (9,055 | ) | |||||
EWP
|
(123 | ) | (1,217 | ) | 1,171 | (4,434 | ) | |||||||||
Total
|
$ | (1,639 | ) | $ | (3,535 | ) | $ | 4,506 | $ | (13,489 | ) |
During
the first quarter of 2009, Calumet determined it was probable it would not
recover the cost of certain inventory items in future selling prices and
recognized a $1.5 million impairment charge to reduce these inventory items to
their estimated net realizable values. This impairment charge is
included in Calumet’s cost of goods sold.
On July
2, 2009, the Illinois Environmental Protection Agency (the “IEPA”) approved the
completion of the soil portion of the remediation plan of certain waste
management units at KSW which resulted in a $4.2 million decrease (recorded as a
credit to general administrative expense) in KSW’s environmental reserves during
the second quarter of 2009. See Note 5.
During
the third quarter and first nine months of 2009, KSW recorded bad debt expense
of $.7 million and $3.2 million, respectively, primarily due to a Chapter 11
filing by one of their customers. Bad debt expense is included in
general and administrative expense.
Note
3 – Inventories, net:
December
31,
|
September
30,
|
|||||||
2008
|
2009
|
|||||||
(In
thousands)
|
||||||||
Raw
materials
|
$ | 9,635 | $ | 5,601 | ||||
Work
in process
|
6,657 | 6,093 | ||||||
Billets
|
10,191 | 9,684 | ||||||
Wire
rod
|
24,225 | 13,785 | ||||||
Other
finished products
|
33,646 | 22,020 | ||||||
Supplies
|
20,938 | 21,830 | ||||||
Inventory
at FIFO
|
105,292 | 79,013 | ||||||
Less
LIFO reserve
|
34,434 | 20,945 | ||||||
Total
|
$ | 70,858 | $ | 58,068 | ||||
We
believe our LIFO reserve represents the excess of replacement or current cost
over the stated LIFO value of our inventories.
As
discussed in Note 2, estimated inventory costs and quantities for December 2009
are substantially lower than actual inventory costs and quantities at December
2008. Although the estimated reduction in inventory quantities has
resulted in a partial liquidation of LIFO inventory during 2009, the impact of
the liquidation was not significant to reported cost of sales for the third
quarter and first nine months of 2009. See Note 2.
- 10
-
Note
4 - Notes payable and long-term debt:
December
31,
|
September
30,
|
|||||||
2008
|
2009
|
|||||||
(In
thousands)
|
||||||||
Wachovia
revolving credit facility
|
$ | 3,264 | $ | 31,587 | ||||
8%
Notes
|
9,108 | - | ||||||
Term
loans:
|
||||||||
Wachovia
|
10,953 | 6,953 | ||||||
County
|
7,441 | 6,882 | ||||||
Other
|
864 | 892 | ||||||
Total
debt
|
31,630 | 46,314 | ||||||
Less
current maturities
|
18,848 | 39,726 | ||||||
Total
long-term debt
|
$ | 12,782 | $ | 6,588 |
During
the first quarter of 2009, we made the final payment on our 8%
Notes.
Our
agreement with Wachovia includes financial performance covenants which require a
trailing twelve-month Earnings Before Interest, Taxes, Depreciation,
Amortization and Restructuring (“EBITDAR”), as defined in the agreement, of at
least $17 million (measured quarterly) and a fixed charge coverage ratio, as
defined in the agreement, of at least 1.0 (measured monthly) for the previous
twelve-month period. We generated EBITDAR of $9.8 million and a fixed
charge coverage ratio of 1.2 for the twelve-month period ended September 30,
2009.
On October 2, 2009 we entered into the
Third Amendment to our Wachovia Credit Facility agreement. The
amendment, among other things, waived the EBITDAR covenant for the quarter ended
September 30, 2009; waived the fixed charge coverage ratio covenant for the
months of September, October and November of 2009; decreased the fixed charge
coverage ratio requirement to 0.9 for the months ending December 31, 2009,
January 31, 2010 and February 28, 2010; added unfinanced capital expenditures to
the definition of fixed charges; increased minimum excess availability by $5.0
million from September 30, 2009 to March 31, 2010; increased interest rates on
the revolver to prime plus 1% or LIBOR plus 2.75% and increased interest rates
on the term loan to prime plus 1.25% or LIBOR plus 3%. We paid Wachovia $100,000
for the amendment.
EBITDAR
for the three quarters ended September 30, 2009 totals $15.6
million. As such, we must achieve a total EBITDAR of $1.4 million
during the fourth quarter of 2009 to be in compliance with our EBITDAR covenant
as of December 31, 2009. Additionally, based on current forecasts of
interest expense, tax payments and capital expenditures, if we achieve EBITDAR
of $1.4 million during the fourth quarter of 2009, we will be in compliance with
our fixed charge coverage ratio covenant as of December 31,
2009. We believe we will be able to comply with the
covenant restrictions, as amended, through the maturity of the facility in
August 2010; however if future operating results differ materially from our
predictions we may be unable to maintain compliance.
The
Wachovia Credit Facility matures in August 2010 and is collateralized by
substantially all of our operating assets. Failure to comply with the covenants
contained in the facility could result in the acceleration of any outstanding
balance under the facility prior to their stated maturity
date. Additionally, the lenders participating in the facility can
restrict our ability to incur additional secured indebtedness and can declare a
default under the credit facility in the event of, among other things, a
material adverse change in our business.
- 11
-
Note
5 – Environmental matters and other commitments and contingencies:
We have
been named as a defendant for certain environmental sites pursuant to laws in
governmental and private actions associated with environmental matters,
including waste disposal sites and facilities currently or previously owned,
operated or used by us. These proceedings seek cleanup costs, damages
for personal injury or property damage and/or damages for injury to natural
resources. Certain of these proceedings involve claims for
substantial amounts.
On a
quarterly basis, we evaluate the potential range of our liability at sites where
we have been named a defendant by analyzing and estimating the range of
reasonably possible costs to us. Such costs include, among other
things, expenditures for remedial site investigations, monitoring, managing,
studies, certain legal fees, clean-up, removal and remediation. The
extent of our liability cannot be determined until site investigation studies
are completed. At September 30, 2009, the upper end of the range of
reasonably possible costs to us for sites where we have been named a defendant
is approximately $2.3 million, including our recorded accrual of $.8
million. Our cost estimates have not been discounted to present value
due to the uncertainty of the timing of the pay out. It is possible
our actual costs could differ materially from the amounts we have accrued or the
upper end of the range for the sites where we have been named a
defendant. Our ultimate liability may be affected by a number of
factors, including the imposition of more stringent standards or requirements
under environmental laws or regulations, new developments or changes in remedial
alternatives and costs or a determination that we are potentially responsible
for the release of hazardous substances at other sites. Although we
believe our comprehensive general liability insurance policies provide
indemnification for certain costs that we incur with respect to our
environmental remediation obligations, we do not currently have receivables
recorded for any such recoveries.
The exact
time frame over which we make payments with respect to our accrued environmental
costs is unknown and is dependent upon, among other things, the timing of the
actual remediation process, which in part depends on factors outside our
control. At each balance sheet date, we make an estimate of the
amount of our accrued environmental costs that will be paid out over the
subsequent twelve months, and we classify such amount as a current
liability. We classify the remainder of the accrued environmental
costs as noncurrent liabilities. See Note 6.
More
detailed descriptions of certain legal proceedings relating to environmental
matters are set forth below. A summary of activity in our
environmental accruals for the nine months ended September 30, 2009 is as
follows:
Nine
months ended
September 30, 2009
|
||||
(In
thousands)
|
||||
Balance
at December 31, 2008
|
$ | 5,125 | ||
Net
reduction in accrued environmental cost credited
to general and administrative expense
|
(3,978 | ) | ||
Payments
|
(307 | ) | ||
Balance
at September 30, 2009
|
$ | 840 |
- 12
-
Since
September 1992, we have been involved in the closure of inactive waste
management units (the “WMUs”) at KSW’s Peoria, Illinois facility pursuant to a
Consent Order (the “Consent Order”) and a closure plan approved by the
IEPA. The closure involved a six-phase remediation plan, with each
phase requiring separate final approval from the IEPA. On July 2, 2009, we
received final approval from the IEPA for the completion of the soil portion of
the plan for all of the WMUs. The amount of remediation we were ultimately
required to undertake pursuant to such approval was not as extensive as we had
previously estimated, and accordingly we reduced our accrual for this matter by
$4.2 million during the second quarter of 2009. The groundwater
portion of three of the WMUs remains open at this time and is anticipated to be
closed after a specified period of “clean” semi-annual monitoring
results. We currently expect the remaining groundwater monitoring
portion to cost $65,000. Additionally, the Consent Order requires KSW
to pay a penalty fee of $75,000 to cover all past notice of violations with the
State of Illinois. As such, we have $140,000 accrued for this matter
at September 30, 2009.
As part
of the Consent Order, we established a trust fund (the “Trust Fund”) in which
monies were deposited to create a cash reserve for the corrective action work
and for the potential of third party claims. Through a modification
of the Consent Order in 2005, we were then permitted to withdraw funds from the
Trust Fund as we incurred costs related to the remediation. In
connection with the IEPA’s approval of the soil portion of the WMUs, the IEPA
released approximately $2.0 million of the escrowed funds to us during the third
quarter of 2009. The Trust Fund balance of $250,000 at September 30,
2009 is expected to fund the remaining groundwater portion of the WMUs and the
$75,000 penalty fee discussed above. Because we are uncertain as to
the timing of the completion of the remaining groundwater portion of the WMUs,
the Trust Fund is included in restricted investments classified as other
noncurrent assets on our Condensed Consolidated Balance Sheets.
In
February 2000, we received formal notice of the United States Environmental
Protection Agency’s (“U.S. EPA”) intent to issue a unilateral administrative
order to us pursuant to Section 3008(h) of the Resource Conservation and
Recovery Act ("RCRA"). The draft order enclosed with this notice
would require us to: (1) investigate the nature and extent of hazardous
constituents present at and released from five alleged solid WMUs at KSW’s
Peoria, Illinois facility; (2) investigate hazardous constituent releases from
"any other past or present locations at KSW’s Peoria, Illinois facility where
past waste treatment, storage or disposal may pose an unacceptable risk to human
health and the environment"; (3) complete by September 30, 2001 an
"environmental indicators report" demonstrating the containment of hazardous
substances that could pose a risk to "human receptors" and further demonstrating
that we "have stabilized the migration of contaminated groundwater at or from
the facility”; (4) submit by January 30, 2002 proposed "final corrective
measures necessary to protect human health and the environment from all current
and future unacceptable risks of releases of hazardous waste or hazardous
constituents at or from KSW’s Peoria, Illinois facility”; and (5) complete by
September 30, 2001 the closure of the sites discussed in the preceding paragraph
now undergoing RCRA closure under the supervision of the IEPA. During
the fourth quarter of 2000, we entered into a modified Administrative Order on
Consent (the “AOC”) that required us to conduct investigation and cleanup
activities at certain solid waste management units at KSW’s Peoria, Illinois
facility. On July 31, 2006, we submitted a Corrective Measures
Completion Report (“CMCR”) to the U.S. EPA. Based on the remedial
activities conducted at the site, the U.S. EPA required us to conduct several
quarters of post-remediation groundwater monitoring. Following the
groundwater monitoring, we submitted a final summary on June 30, 2008 and again
on December 19, 2008 requesting closure of the AOC. We are awaiting a response
relative to this matter from the U.S. EPA.
- 13
-
Prior to
one of our subsidiaries’ 1996 acquisition of DeSoto, Inc. (“DeSoto”), DeSoto was
notified by the Texas Natural Resource Conservation Commission (now called the
Texas Commission on Environmental Quality or “TCEQ”) that there were certain
deficiencies in prior reports to the TCEQ relative to one of DeSoto’s
non-operating facilities located in Gainesville, Texas. During 1999,
that subsidiary entered into the TCEQ's Voluntary Cleanup
Program. Remediation activities at this site are expected to continue
for another four to five years and total future remediation costs are presently
estimated to be between $.6 million and $2.0 million. During the
first nine months of 2008 and 2009, we paid approximately $.4 million and $.2
million respectively, in connection with remediation efforts at this
site.
In
February 2009, we received a Notice of Violation from the U.S. EPA regarding
alleged air permit issues at KSW. The U.S. EPA alleges KSW (i) is
exceeding its sulfur dioxide emission limits set forth in its permits, (ii)
failed to apply for a permit that would be issued under the U.S. Clean Air Act
and the Illinois Environmental Protection Act in connection with the
installation of certain pieces of equipment in its melt shop, and (iii) failed
to monitor pH readings of an air scrubber in the wire galvanizing area of the
plant. We disagree with the U.S. EPA’s assertions, and we are in
discussions with the U.S. EPA regarding a plan for addressing their
concerns. We can make no assurance these discussions will be
successful or that we can avoid any enforcement action or resulting fines from
these alleged violations.
Other
current litigation
We are
engaged in legal proceedings incidental to our normal business activities. In
our opinion, none of such proceedings is material in relation to our
consolidated financial position, results of operations or
liquidity.
Note
6 - Other accrued liabilities:
December
31,
|
September
30,
|
|||||||
2008
|
2009
|
|||||||
(In
thousands)
|
||||||||
Current:
|
||||||||
Employee
benefits
|
$ | 19,656 | $ | 9,301 | ||||
Self
insurance
|
5,936 | 4,491 | ||||||
Environmental
|
455 | 400 | ||||||
Other
|
3,522 | 3,010 | ||||||
Total
|
$ | 29,569 | $ | 17,202 | ||||
Noncurrent:
|
||||||||
Workers
compensation payments
|
$ | 1,621 | $ | 2,273 | ||||
Environmental
|
4,670 | 440 | ||||||
Other
|
172 | 193 | ||||||
Total
|
$ | 6,463 | $ | 2,906 |
- 14
-
Note
7 – Employee benefit plans:
We
currently expect to record a defined benefit pension expense of $5.9 million
during 2009 and we anticipate that no cash contributions will be required during
2009. The components of our net periodic defined benefit pension
expense (credit) for the third quarter and first nine months of 2008 and 2009
are presented in the table below.
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Service
cost
|
$ | 860 | $ | 814 | $ | 2,582 | $ | 2,441 | ||||||||
Interest
cost
|
5,578 | 5,411 | 16,735 | 16,231 | ||||||||||||
Expected
return on plan assets
|
(22,518 | ) | (9,721 | ) | (67,553 | ) | (29,161 | ) | ||||||||
Amortization
of accumulated other comprehensive income:
|
||||||||||||||||
Prior
service cost
|
308 | 308 | 922 | 924 | ||||||||||||
Actuarial
losses (gains)
|
(2,695 | ) | 4,703 | (8,087 | ) | 14,108 | ||||||||||
Total
expense (credit)
|
$ | (18,467 | ) | $ | 1,515 | $ | (55,401 | ) | $ | 4,543 |
We
currently expect our 2009 OPEB credit will be $4.7 million. As
allowed under certain of our amended benefit plans, we exercised our right to
create supplemental pension benefits in lieu of certain 2009 benefit payments
due under one of our OPEB plans. As such, we anticipate contributing
an aggregate of only $1.3 million to our OPEB plans during 2009. The components
of our net periodic credit related to OPEB for the third quarter and first nine
months of 2008 and 2009 are presented in the table below.
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Service
cost
|
$ | (31 | ) | $ | 19 | $ | 74 | $ | 67 | |||||||
Interest
cost
|
267 | 690 | 1,193 | 2,034 | ||||||||||||
Amortization
of accumulated other
comprehensive
income:
|
||||||||||||||||
Prior
service credit
|
(4,039 | ) | (4,040 | ) | (12,862 | ) | (12,128 | ) | ||||||||
Actuarial
losses
|
1,413 | 2,289 | 4,669 | 6,465 | ||||||||||||
Settlement
of 2006 1114 Agreement benefits
|
384 | - | 384 | - | ||||||||||||
Total
credit
|
$ | (2,006 | ) | $ | (1,042 | ) | $ | (6,542 | ) | $ | (3,562 | ) |
Future
variances from assumed actuarial rates, including the rate of return on our
defined benefit pension plans’ assets, as well as changes in the discount rate
used to determine the projected benefit obligation, may result in increases or
decreases to pension and postretirement benefit assets and liabilities, pension
expense or credits, OPEB expense or credits and pension and OPEB funding
requirements in future periods.
- 15
-
Note
8 – Income taxes:
Nine
months ended
|
||||||||
September 30,
|
||||||||
2008
|
2009
|
|||||||
(In
thousands)
|
||||||||
Expected
income tax expense, at statutory rate
|
$ | 33,405 | $ | 1,395 | ||||
U.S.
state income tax expense, net
|
2,441 | 74 | ||||||
Other,
net
|
90 | 22 | ||||||
Income
tax expense
|
$ | 35,936 | $ | 1,491 |
Note
9 – Financial instruments:
The
following table presents the carrying value and estimated fair value of our
financial instruments:
December
31,
2008
|
September
30,
2009
|
|||||||||||||||
Carrying
amount
|
Fair
value
|
Carrying
amount
|
Fair
value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Restricted
cash equivalents
|
$ | 2,277 | $ | 2,277 | $ | 250 | $ | 250 | ||||||||
Accounts
receivable, net
|
26,612 | 26,612 | 50,681 | 50,681 | ||||||||||||
Accounts
payable
|
7,776 | 7,776 | 11,316 | 11,316 | ||||||||||||
Long-term
debt:
|
||||||||||||||||
Variable-rate
debt
|
14,217 | 14,217 | 38,540 | 38,540 | ||||||||||||
Fixed-rate
debt
|
17,413 | 14,161 | 7,774 | 7,117 | ||||||||||||
Due to
their nature, the carrying amounts of our restricted cash equivalents and
variable rate indebtedness are considered equivalent to fair
value. Additionally, due to their near-term maturities, the carrying
amounts of accounts receivable and accounts payable are considered equivalent to
fair value. The fair value of our fixed-rate indebtedness was based on the
net present value of our remaining debt payments at an interest rate
commensurate with our variable-rate debt which represents Level 3 inputs as
defined in Accounting Standards Codification (“ASC”) Topic
820-10-35.
Note
10 – Recent accounting pronouncements:
Fair Value Disclosures - In
April 2009, the Financial Accounting Standards Board (the “FASB”) issued FASB
Staff Position (“FSP”) FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, which is now included with ASC Topic
825-10 Financial
Instruments. This FSP requires us to disclose the fair value
of all financial instruments for which it is practicable to estimate the value,
whether recognized or not recognized in the statement of financial position, as
required by Statement of Financial Accounting Standards (“SFAS”) No. 107, Disclosures about Fair Value of Financial
Instruments for interim as well as annual periods. Prior to
the adoption of the FSP, we were only required to disclose this information
annually. This FSP became effective for us in the second quarter of
2009 and did not have an effect on our Condensed Consolidated Financial
Statements. The disclosures required by the FSP are included in Note
9 to our Condensed Consolidated Financial Statements.
- 16
-
Benefit Plan Asset Disclosures
- During the fourth quarter of 2008, the FASB issued FSP SFAS 132 (R)-1,
Employers’ Disclosures about
Postretirement Benefit Plan Assets, which is now included with ASC Topic
715-20 Defined Benefit Plans. This statement amends SFAS No. 87, 88
and 106 to require expanded disclosures about employers’ pension plan
assets. FSP 132 (R)-1 will be effective for us beginning with our
2009 annual report, and we will provide the expanded disclosures about our
pension plan assets at that time.
Subsequent Events – In May
2009, the FASB issued SFAS No. 165, Subsequent Events, which is
now included with ASC Topic 855-10 Subsequent
Events. SFAS No. 165 establishes general standards of
accounting for, and disclosure of, events that occur after the balance sheet
date but before financial statements are issued, which are referred to as
subsequent events. The statement clarifies existing guidance on subsequent
events including a requirement that a public entity should evaluate subsequent
events through the issue date of the financial statements, the determination of
when the effects of subsequent events should be recognized in the financial
statement and disclosures regarding all subsequent events. SFAS No.
165 also requires a public entity to disclose the date through which an entity
has evaluated subsequent events; we have evaluated for subsequent events through
November 5, 2009 which is the date this report was filed with the
SEC. SFAS No. 165 became effective for us in the third quarter of
2009 and its adoption did not have a material effect on our Condensed
Consolidated Financial Statements.
- 17
-
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
This
report contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Statements in this
Quarterly Report on Form 10-Q that are not historical in nature are
forward-looking and are not statements of fact. Some statements found
in this report including, but not limited to, statements found in Item 2 -
"Management’s Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that represent our beliefs and
assumptions based on currently available information. In some cases
you can identify these forward-looking statements 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 we believe the expectations reflected in
forward-looking statements are reasonable, we do not know if these expectations
will be correct. Forward-looking statements by their nature involve
substantial risks and uncertainties that could significantly impact expected
results. Actual future results could differ materially from those predicted.
While it is not possible to identify all factors, we continue to face many risks
and uncertainties. Among the factors that could cause our actual
future results to differ materially from those described herein are the risks
and uncertainties discussed in this Quarterly Report and those described from
time to time in our other filings with the Securities and Exchange Commission
including, but not limited to, the following:
·
|
Future
supply and demand for our products (including cyclicality
thereof),
|
·
|
Customer
inventory levels,
|
·
|
Changes
in raw material and other operating costs (such as ferrous scrap and
energy),
|
·
|
The
possibility of labor disruptions,
|
·
|
General
global economic and political
conditions,
|
·
|
Competitive
products (including low-priced imports) and substitute
products,
|
·
|
Customer
and competitor strategies,
|
·
|
The
impact of pricing and production
decisions,
|
·
|
Environmental
matters (such as those requiring emission and discharge limits for
existing and new facilities),
|
·
|
Government
regulations and possible changes
thereof,
|
·
|
Significant
increases in the cost of providing medical coverage to
employees,
|
·
|
The
ultimate resolution of pending
litigation,
|
·
|
International
trade policies of the United States and certain foreign
countries,
|
·
|
Operating
interruptions (including, but not limited to, labor disputes, fires,
explosions, unscheduled or unplanned downtime, supply disruptions and
transportation interruptions),
|
·
|
Our
ability to renew or refinance credit
facilities,
|
·
|
The
ability of our customers to obtain adequate
credit,
|
·
|
Any
possible future litigation, and
|
·
|
Other
risks and uncertainties as discussed in this Quarterly Report and the 2008
Annual Report, including, without limitation, the section referenced
above.
|
Should
one or more of these risks materialize, if the consequences worsen, or if the
underlying assumptions prove incorrect, actual results could differ materially
from those forecasted or expected. We disclaim any intention or
obligation to update or revise any forward-looking statement whether as a result
of changes in information, future events or otherwise.
- 18
-
RESULTS
OF OPERATIONS
Business
Overview
We are a
leading domestic manufacturer of steel fabricated wire products, industrial
wire, billets and wire rod. We also manufacture wire mesh, coiled
rebar and steel bar. Our products are used in the agricultural,
industrial, cold drawn, construction, transportation, original equipment
manufacturer and retail consumer markets. We are vertically
integrated, converting substantially all of our products from billets produced
in our steel mini-mill. Historically, our vertical integration has
allowed us to benefit from the higher and more stable margins associated with
fabricated wire products and wire mesh as compared to wire rod, as well as from
lower costs of billets and wire rod as compared to bar manufacturers and wire
fabricators that purchase billets and wire rod in the open
market. Moreover, we believe our downstream fabricated wire products,
wire mesh, coiled rebar and industrial wire businesses are better insulated from
the effects of wire rod imports as compared to non-integrated wire rod
producers.
Recent
Developments
During
the first five months of 2009, the economic conditions resulted in customers
cancelling or postponing certain projects due to an inability to secure
financing in the current credit markets and choosing to conserve cash by
liquidating their inventories and instituting a just-in-time order
philosophy. In addition, while we experienced an unprecedented 90%
increase in the cost of ferrous scrap from December 2007 to August 2008, a
significant decline in ferrous scrap costs since that time resulted in customers
limiting orders as they believed lower ferrous scrap prices would result in
lower selling prices in the near future. Given this sharply reduced
market demand, we have operated our facilities on substantially reduced
production schedules, which resulted in a much higher percentage of fixed costs
included in cost of goods sold as these costs could not be capitalized into
inventory. Our customers’ just-in-time order philosophies have
resulted in additional costs due to frequent mill changes as customers are
ordering much smaller quantities of our many different
products. Additionally, we experienced equipment break-downs and
start-up issues as idle production facilities were difficult to re-start given
the cold winter temperatures during the first quarter of
2009. However, we believe our reduced production schedules allowed us
to somewhat temper the adverse impact of the business downturn on our
liquidity.
Shipment
volumes and customer orders increased during the third quarter of
2009. Average weekly shipments for September 2009 were the highest
since August 2008 and our backlog as of August 31, 2009 and September 30, 2009
was the highest and second highest, respectively, since September 30,
2008. We believe the increase in customer orders is primarily due to
extremely low customer inventory levels and the closing of certain competitor
mills as opposed to a meaningful increase in demand. We expect
customer orders to decrease during the fourth quarter of 2009 as the typical
construction season ends. The increase in shipment volumes resulted
in increased production levels during the third quarter of
2009. However, our customers have continued the just-in-time order
philosophy discussed above and we have changed our production and inventory
strategies accordingly.
One of
the key drivers of our profitability is the margin between ferrous scrap costs
and our selling prices. As discussed above, ferrous scrap market
prices have generally declined since August 2008, which resulted in market
pressure to decrease our selling prices during the first half of
2009. Ferrous scrap market prices increased slightly during the third
quarter of 2009 and we announced price increases on selected
products. However, the sharp reduction in demand in the fall of 2008
resulted in high levels of inventory in the market which continue to put
pressure on our margins. Although we expect ferrous scrap market
prices to decrease during the fourth quarter of 2009 resulting in additional
downward price pressure, we believe we will be able to generate a positive
margin between overall selling prices and variable inventory costs throughout
the remainder of 2009.
- 19
-
We
currently believe our cash flows from operating activities combined with
availability under our existing revolving credit facility will be sufficient to
enable us to meet our cash flow needs for the next twelve months. As
discussed in Note 4 to our Condensed Consolidated Financial Statements, we were
out of compliance with a certain financial covenant as of September 30, 2009 and
our primary credit facility was amended on October 2, 2009 to waive certain
financial covenants until December 31, 2009. Current forecasts
indicate we will be in compliance with our financial covenants at December 31,
2009, however if future operating results differ materially from our predictions
we may be unable to maintain compliance. The credit facility is
collateralized by substantially all of our operating assets and failure to
comply with the covenants contained in the credit facility could result in the
acceleration of any outstanding balance under the facility prior to their stated
maturity date. Additionally, the lenders participating in the credit
facility can restrict our ability to incur additional secured indebtedness and
can declare a default under the credit facility in the event of, among other
things, a material adverse change in our business. In the event of an
uncured default of our primary credit facility agreement, we would seek to
refinance the facility with a new group of lenders or, if required, we will use
our existing liquidity resources (which could include funds provided by our
affiliates). If we were unable to secure sufficient debt or equity
financing, we would not be able to fund our operations.
On July
2, 2009, the Illinois Environmental Protection Agency (the “IEPA”) approved the
completion of the soil portion of the remediation plan of certain waste
management units at our Peoria, Illinois facility which resulted in us
decreasing our accrued environmental costs by $4.2 million during the third
quarter of 2009. We believe the upper end of the range of reasonably
possible costs to us for sites where we have been named a defendant or
potentially responsible party is approximately $2.3 million, including the $.8
million accrued as of September 30, 2009. In connection with the
IEPA’s approval of the soil portion of the WMUs, the IEPA released approximately
$2.0 million of escrowed funds to us during the third quarter of
2009. See Note 5 to our Condensed Consolidated Financial
Statements for discussions of our environmental liabilities.
Results
of Operations
Our
profitability is primarily dependent on sales volume, per-ton selling prices,
per-ton ferrous scrap cost and energy costs. Additionally, because
pension and OPEB expense or credits are unrelated to the operating activities of
our businesses, we measure and evaluate the performance of our businesses using
operating income before pension and OPEB credit or expense. As such,
we believe the presentation of operating income before pension and OPEB credit
or expense provides more useful information to investors. Operating
income before pension and OPEB credit or expense is a non-GAAP measure of
profitability that is not in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and it should not be
considered in isolation or as a substitute for a measure prepared in accordance
with GAAP. A reconciliation of operating income as reported to
operating income adjusted for pension and OPEB expense or credit is set forth in
the following table.
- 20
-
Three
months ended
September 30,
|
Nine
months ended
September
30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Operating
income as reported
|
$ | 39,053 | $ | 9,262 | $ | 97,960 | $ | 5,055 | ||||||||
Defined
benefit pension expense (credit)
|
(18,467 | ) | 1,515 | (55,401 | ) | 4,543 | ||||||||||
OPEB
credit
|
(2,006 | ) | (1,042 | ) | (6,542 | ) | (3,562 | ) | ||||||||
Operating
income before pension and OPEB
|
$ | 18,580 | $ | 9,735 | $ | 36,017 | $ | 6,036 |
Operating
performance before pension and OPEB for the third quarter and first nine months
of 2009 was significantly worse than the same periods of 2008 primarily due to
the net effects of the following factors:
·
|
lower
shipment volumes as discussed
above;
|
·
|
lower
selling prices as discussed above;
|
·
|
reduced
production volumes as discussed above, which resulted in a higher
percentage of fixed costs included in cost of goods
sold;
|
·
|
increased
variable costs of production due to frequent mill changes as customers are
managing their inventory by ordering much smaller quantities of our many
different products as discussed
above;
|
·
|
increased
bad debt expense during the third quarter and first nine months of 2009 of
$.7 million and $3.2 million, respectively, primarily due to the Chapter
11 proceedings of one of our
customers;
|
·
|
decreased
cost of ferrous scrap;
|
·
|
decreased
cost of electricity and natural
gas;
|
·
|
decreased
employee incentive compensation accruals during 2009 resulting from lower
profitability; and
|
·
|
decreases
in our LIFO reserve and cost of goods sold during the third quarter and
first nine months of 2009 of $3.5 million and $13.5 million, respectively
as compared to only a $1.6 million decrease in our LIFO reserve and cost
of goods sold during the third quarter of 2008 and a $4.5 million increase
in our LIFO reserve and cost of goods sold during the first nine months of
2008 as discussed in Note 2 to our Condensed Consolidated Financial
Statements.
|
Operating profit for the first nine
months of 2009 as compared to the first nine months of 2008 was also impacted
by:
·
|
increased
variable costs of production as idle production facilities were difficult
to re-start given cold winter temperatures during the first quarter of
2009;
|
·
|
a
$1.5 million impairment charge to reduce certain inventories to net
realizable value during the first quarter of
2009;
|
·
|
decreased
workers compensation accruals; and
|
·
|
a
$4.2 million credit to general and administrative expense during the
second quarter of 2009 related to the release of accrued environmental
costs for certain inactive waste management units as discussed
above.
|
- 21
-
Our
consolidated sales volume and average per-ton selling prices for the third
quarter and first nine months of 2008 and 2009 are as follows:
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Sales
volume (000 tons):
|
||||||||||||||||
Fabricated
wire products
|
20 | 14 | 76 | 54 | ||||||||||||
Industrial
wire
|
17 | 9 | 53 | 25 | ||||||||||||
Coiled
rebar
|
7 | 2 | 14 | 4 | ||||||||||||
Wire
rod
|
95 | 100 | 310 | 158 | ||||||||||||
Billets
|
8 | 2 | 9 | 4 | ||||||||||||
Wire
mesh
|
14 | 15 | 47 | 34 | ||||||||||||
Bar
|
4 | 4 | 14 | 9 | ||||||||||||
Total
|
165 | 146 | 523 | 288 | ||||||||||||
Average
per-ton selling prices:
|
||||||||||||||||
Fabricated
wire products
|
$ | 1,578 | $ | 1,344 | $ | 1,356 | $ | 1,393 | ||||||||
Industrial
wire
|
1,302 | 827 | 1,083 | 914 | ||||||||||||
Coiled
rebar
|
921 | 541 | 844 | 543 | ||||||||||||
Wire
rod
|
965 | 564 | 795 | 574 | ||||||||||||
Billets
|
852 | 203 | 793 | 193 | ||||||||||||
Wire
mesh
|
1,348 | 874 | 1,151 | 928 | ||||||||||||
Bar
|
1,147 | 772 | 933 | 796 | ||||||||||||
All
products
|
1,106 | 686 | 943 | 801 |
Segment
Operating Results:
Our
operating segments are organized by our manufacturing facilities and include
three reportable segments:
·
|
Keystone
Steel & Wire (“KSW”), located in Peoria, Illinois, operates an
electric arc furnace mini-mill and manufactures and sells billets, wire
rod, coiled rebar, industrial wire and fabricated wire products to
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer
markets;
|
·
|
Engineered
Wire Products, Inc. (“EWP”), located in Upper Sandusky, Ohio, manufactures
and sells wire mesh in both roll and sheet form that is utilized in
concrete construction products including pipe, pre-cast boxes and
applications for use in roadways, buildings and bridges;
and
|
·
|
Keystone-Calumet,
Inc. (“Calumet”), located in Chicago Heights, Illinois, manufactures and
sells merchant and special bar quality products and special sections in
carbon and alloy steel grades for use in agricultural, cold drawn,
construction, industrial chain, service centers and transportation
applications as well as in the production of a wide variety of products by
original equipment manufacturers.
|
- 22
-
Our
consolidated net sales, cost of goods sold, operating costs and operating
performance before pension and OPEB credit or expense by segment are set forth
in the following table:
KSW
|
EWP
|
Calumet
|
Other(1)
|
Total
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Three
months ended September 30, 2008:
|
||||||||||||||||||||
Net
sales
|
$ | 179,591 | $ | 19,457 | $ | 4,927 | $ | (20,766 | ) | $ | 183,209 | |||||||||
Cost
of goods sold
|
(155,877 | ) | (14,902 | ) | (5,363 | ) | 19,275 | (156,867 | ) | |||||||||||
Gross
margin (loss)
|
23,714 | 4,555 | (436 | ) | (1,491 | ) | 26,342 | |||||||||||||
Selling
and administrative expense
|
(5,137 | ) | (1,183 | ) | (438 | ) | (1,004 | ) | (7,762 | ) | ||||||||||
Operating
income (loss) before
pension/OPEB
|
$ | 18,577 | $ | 3,372 | $ | (874 | ) | $ | (2,495 | ) | $ | 18,580 | ||||||||
Three
months ended September 30, 2009:
|
||||||||||||||||||||
Net
sales
|
$ | 92,746 | $ | 12,782 | $ | 2,841 | $ | (8,006 | ) | $ | 100,363 | |||||||||
Cost
of goods sold
|
(80,143 | ) | (11,287 | ) | (2,861 | ) | 8,839 | (85,452 | ) | |||||||||||
Gross
margin (loss)
|
12,603 | 1,495 | (20 | ) | 833 | 14,911 | ||||||||||||||
Selling
and administrative
expense
|
(3,974 | ) | (608 | ) | (167 | ) | (427 | ) | (5,176 | ) | ||||||||||
Operating
income (loss) before
pension/OPEB
|
$ | 8,629 | $ | 887 | $ | (187 | ) | $ | 406 | $ | 9,735 |
Nine
months ended September 30, 2008:
|
||||||||||||||||||||
Net
sales
|
$ | 483,760 | $ | 53,636 | $ | 13,632 | $ | (55,653 | ) | $ | 495,375 | |||||||||
Cost
of goods sold
|
(433,400 | ) | (42,433 | ) | (14,477 | ) | 50,140 | (440,170 | ) | |||||||||||
Gross
margin (loss)
|
50,360 | 11,203 | (845 | ) | (5,513 | ) | 55,205 | |||||||||||||
Selling
and administrative expense
|
(12,483 | ) | (3,165 | ) | (871 | ) | (2,669 | ) | (19,188 | ) | ||||||||||
Operating
income (loss) before
pension/OPEB
|
$ | 37,877 | $ | 8,038 | $ | (1,716 | ) | $ | (8,182 | ) | $ | 36,017 | ||||||||
Nine
months ended September 30, 2009:
|
||||||||||||||||||||
Net
sales
|
$ | 213,829 | $ | 31,506 | $ | 7,197 | $ | (21,183 | ) | $ | 231,349 | |||||||||
Cost
of goods sold
|
(197,668 | ) | (28,696 | ) | (10,191 | ) | 23,557 | (212,998 | ) | |||||||||||
Gross
margin (loss)
|
16,161 | 2,810 | (2,994 | ) | 2,374 | 18,351 | ||||||||||||||
Selling
and administrative
expense
|
(8,217 | ) | (2,009 | ) | (384 | ) | (1,705 | ) | (12,315 | ) | ||||||||||
Operating
income (loss) before
pension/OPEB
|
$ | 7,944 | $ | 801 | $ | (3,378 | ) | $ | 669 | $ | 6,036 |
(1)
Other items primarily consist of the elimination of intercompany sales, the
elimination of intercompany profit or loss on ending inventory balances and
general corporate expenses.
- 23
-
Keystone
Steel & Wire
Three months ended September
30,
|
||||||||||||||||
2008
|
%
of
sales
|
2009
|
%
of
sales
|
|||||||||||||
($
in thousands)
|
||||||||||||||||
Net
sales
|
$ | 179,591 | 100.0 | % | $ | 92,746 | 100.0 | % | ||||||||
Cost
of goods sold
|
(155,877 | ) | (86.8 | ) | (80,143 | ) | (86.4 | ) | ||||||||
Gross
margin
|
23,714 | 13.2 | 12,603 | 13.6 | ||||||||||||
Selling
and administrative expense
|
(5,137 | ) | (2.9 | ) | (3,974 | ) | (4.3 | ) | ||||||||
Operating
income before pension/OPEB
|
$ | 18,577 | 10.3 | % | $ | 8,629 | 9.3 | % |
Nine months ended September
30,
|
||||||||||||||||
2008
|
%
of
sales
|
2009
|
%
of
sales
|
|||||||||||||
($
in thousands)
|
||||||||||||||||
Net
sales
|
$ | 483,760 | 100.0 | % | $ | 213,829 | 100.0 | % | ||||||||
Cost
of goods sold
|
(433,400 | ) | (89.6 | ) | (197,668 | ) | (92.4 | ) | ||||||||
Gross
margin
|
50,360 | 10.4 | 16,161 | 7.6 | ||||||||||||
Selling
and administrative expense
|
(12,483 | ) | (2.6 | ) | (8,217 | ) | (3.9 | ) | ||||||||
Operating
income before pension/OPEB
|
$ | 37,877 | 7.8 | % | $ | 7,944 | 3.7 | % |
- 24
-
The
primary drivers of KSW’s sales, cost of goods sold and the resulting gross
margin are as follows:
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Sales
volume (000 tons):
|
||||||||||||||||
Fabricated
wire products
|
20 | 14 | 76 | 54 | ||||||||||||
Industrial
wire
|
17 | 9 | 53 | 25 | ||||||||||||
Coiled
rebar
|
7 | 2 | 14 | 4 | ||||||||||||
Wire
rod
|
112 | 113 | 366 | 190 | ||||||||||||
Billets
|
14 | 5 | 28 | 8 | ||||||||||||
Total
|
170 | 143 | 537 | 281 | ||||||||||||
Average
per-ton selling prices:
|
||||||||||||||||
Fabricated
wire products
|
$ | 1,578 | $ | 1,344 | $ | 1,356 | $ | 1,393 | ||||||||
Industrial
wire
|
1,302 | 827 | 1,083 | 914 | ||||||||||||
Coiled
rebar
|
921 | 541 | 844 | 543 | ||||||||||||
Wire
rod
|
963 | 561 | 796 | 575 | ||||||||||||
Billets
|
778 | 328 | 674 | 368 | ||||||||||||
All
products
|
1,053 | 647 | 898 | 756 | ||||||||||||
Average
per-ton ferrous scrap
cost
|
$ | 449 | $ | 254 | $ | 361 | $ | 269 | ||||||||
Average
electricity cost
per kilowatt hour
|
$ | 0.06 | $ | 0.03 | $ | 0.06 | $ | 0.03 | ||||||||
Kilowatt
hours consumed (000 hrs)
|
141,109 | 122,148 | 418,840 | 253,896 | ||||||||||||
Average
natural gas cost
per therm
|
$ | 1.04 | $ | 0.38 | $ | 1.00 | $ | 0.52 | ||||||||
Natural
gas therms consumed (000
therms)
|
4,456 | 3,766 | 16,272 | 10,431 |
KSW’s
operating performance during the third quarter and first nine months of 2009 as
compared to the same periods in 2008 was also impacted by the
following:
·
|
reduced
production volumes as discussed above, which resulted in a higher
percentage of fixed costs included in cost of goods
sold;
|
·
|
increased
variable costs of production due to frequent mill changes as customers are
managing their inventory by ordering much smaller quantities of our many
different product lines as discussed
above;
|
·
|
increased
bad debt expense during the third quarter and first nine months of 2009 of
$.7 million and $3.2 million, respectively, primarily due to the Chapter
11 proceedings of one of KSW’s
customers;
|
·
|
decreased
employee incentive compensation accruals during 2009 as discussed above;
and
|
·
|
decreases
in KSW’s LIFO reserve and cost of goods sold during 2009 as discussed in
Note 2 to our Condensed Consolidated Financial
Statements.
|
- 25
-
KSW’s
operating profit for the first nine months of 2009 as compared to the first nine
months of 2008 was also impacted by:
·
|
increased
variable costs of production as idle production facilities were difficult
to re-start given cold winter temperatures during the first quarter of
2009;
|
·
|
decreased
workers compensation accruals; and
|
·
|
a
$4.2 million credit related to the release of accrued environmental costs
during the second quarter of 2009 as discussed
above.
|
Engineered
Wire Products, Inc.
Three months ended September
30,
|
||||||||||||||||
2008
|
%
of
sales
|
2009
|
%
of
sales
|
|||||||||||||
($
in thousands)
|
||||||||||||||||
Net
sales
|
$ | 19,457 | 100.0 | % | $ | 12,782 | 100.0 | % | ||||||||
Cost
of goods sold
|
(14,902 | ) | (76.6 | ) | (11,287 | ) | (88.3 | ) | ||||||||
Gross margin
|
4,555 | 23.4 | 1,495 | 11.7 | ||||||||||||
Selling
and administrative expense
|
(1,183 | ) | (6.1 | ) | (608 | ) | (4.8 | ) | ||||||||
Operating
income before pension/OPEB
|
$ | 3,372 | 17.3 | % | $ | 887 | 6.9 | % |
Nine months ended September
30,
|
||||||||||||||||
2008
|
%
of
sales
|
2009
|
%
of
Sales
|
|||||||||||||
($
in thousands)
|
||||||||||||||||
Net
sales
|
$ | 53,636 | 100.0 | % | $ | 31,506 | 100.0 | % | ||||||||
Cost
of goods sold
|
(42,433 | ) | (79.1 | ) | (28,696 | ) | (91.1 | ) | ||||||||
Gross margin
|
11,203 | 20.9 | 2,810 | 8.9 | ||||||||||||
Selling
and administrative expense
|
(3,165 | ) | (5.9 | ) | (2,009 | ) | (6.4 | ) | ||||||||
Operating
income before pension/OPEB
|
$ | 8,038 | 15.0 | % | $ | 801 | 2.5 | % |
The
primary drivers of EWP’s sales, cost of goods sold and the resulting gross
margin are as follows:
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Sales
volume (000 tons) – Wire
mesh
|
14 | 15 | 47 | 34 | ||||||||||||
Average
per-ton selling prices – Wire mesh
|
$ | 1,348 | $ | 874 | $ | 1,151 | $ | 928 | ||||||||
Average
per-ton wire rod cost
|
$ | 824 | $ | 660 | $ | 690 | $ | 748 |
Due to a
wire rod market that had increased to unprecedented price levels during the
second and third quarters of 2008 and due to low shipment volumes during the
fourth quarter of 2008 and the first quarter of 2009, the products EWP sold
during the first six months of 2009 were produced with significantly higher wire
rod costs than the products EWP sold during the same period of
2008. The wire rod costs included in EWP’s inventory as of June 30,
2009 approximated current wire rod market prices such that the wire rod cost
presented above for the third quarters of 2008 and 2009 are more representative
of rod market conditions during those periods.
- 26
-
EWP’s
operating performance during the third quarter and first nine months of 2009 as
compared to the same periods during 2008 was also impacted by the
following:
·
|
increased
variable costs of production due to frequent mill changes as customers are
managing their inventory by ordering much smaller quantities of our
different products as discussed
above;
|
·
|
significantly
higher percentage of fixed costs included in cost of goods sold during the
first quarter of 2009 due to substantially reduced production volumes as
discussed above;
|
·
|
decreased
employee incentive compensation accruals during 2009 resulting from lower
profitability; and
|
·
|
decreases
in EWP’s LIFO reserve and cost of goods sold during 2009 as discussed in
Note 2 to our Condensed Consolidated Financial
Statements.
|
Keystone
– Calumet, Inc.
Three months ended September
30,
|
||||||||||||||||
2008
|
%
of
sales
|
2009
|
%
of
sales
|
|||||||||||||
($
in thousands)
|
||||||||||||||||
Net
sales
|
$ | 4,927 | 100.0 | % | $ | 2,841 | 100.0 | % | ||||||||
Cost
of goods sold
|
(5,363 | ) | (108.8 | ) | (2,861 | ) | (100.7 | ) | ||||||||
Gross
margin (loss)
|
(436 | ) | (8.8 | ) | (20 | ) | (0.7 | ) | ||||||||
Selling
and administrative expense
|
(438 | ) | (8.9 | ) | (167 | ) | (5.9 | ) | ||||||||
Operating
loss before pension/OPEB
|
$ | (874 | ) | (17.7 | )% | $ | (187 | ) | (6.6 | ) |
Nine months ended September
30,
|
||||||||||||||||
2008
|
%
of
sales
|
2009
|
%
of
sales
|
|||||||||||||
($
in thousands)
|
||||||||||||||||
Net
sales
|
$ | 13,632 | 100.0 | % | $ | 7,197 | 100.0 | % | ||||||||
Cost
of goods sold
|
(14,477 | ) | (106.2 | ) | (10,191 | ) | (141.6 | ) | ||||||||
Gross
margin (loss)
|
(845 | ) | (6.2 | ) | (2,994 | ) | (41.6 | ) | ||||||||
Selling
and administrative expense
|
(871 | ) | (6.4 | ) | (384 | ) | (5.3 | ) | ||||||||
Operating
loss before pension/OPEB
|
$ | (1,716 | ) | (12.6 | )% | $ | (3,378 | ) | (46.9 | ) |
The
primary drivers of Calumet’s sales, cost of goods sold and the resulting gross
margin (loss) are as follows:
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Sales
volume (000 tons) - Bar
|
4 | 4 | 14 | 9 | ||||||||||||
Average
per-ton selling prices - Bar
|
$ | 1,147 | $ | 772 | $ | 933 | $ | 796 | ||||||||
Average
per-ton billet cost
|
$ | 521 | $ | 403 | $ | 544 | $ | 454 |
- 27
-
Calumet’s
operating performance during the third quarter and first nine months of 2009 as
compared to the same periods during 2008 was also impacted by the
following:
·
|
reduced
production volumes as discussed above, which resulted in a higher
percentage of fixed costs included in cost of goods
sold;
|
·
|
increased
variable costs of production due to frequent mill changes as customers are
managing their inventory by ordering much smaller quantities of Calumet’s
many different product lines;
|
·
|
decreased
cost of electricity and natural gas;
and
|
·
|
decreased
employee incentive compensation accruals during
2009.
|
Calumet’s
operating profit for the first nine months of 2009 as compared to the first nine
months of 2008 was also impacted by:
·
|
a
$1.5 million impairment charge during the first quarter of 2009 as Calumet
determined it was probable it would not be able to recover the cost of
certain inventory items (those produced when scrap prices were
substantially higher) in future selling prices;
and
|
·
|
increased
variable costs of production as idle production facilities were difficult
to re-start given cold winter temperatures during the first quarter of
2009.
|
Pension
Expense and Other Postretirement Benefit Credit
Primarily
due to a $510 million decrease in our pension plans’ assets during 2008, we
expect to record pension expense of $5.9 million during 2009 as compared to the
$73.9 million defined benefit pension credit recorded during
2008. Accordingly, we recorded defined benefit pension expense of
$1.5 million and $4.5 million during the third quarter and first nine months of
2009, respectively, as compared to the $18.5 million and $55.4 million defined
benefit pension credit recorded during the third quarter and first nine months
of 2008, respectively.
During
the third quarter of 2008, one of our OPEB plans was amended to, among other
things, significantly increase fixed monthly benefits. As a result,
we currently expect our 2009 OPEB credit will be $4.7 million as compared to the
$8.5 million OPEB credit recorded during 2008. Accordingly, we
recorded an OPEB credit of $1.0 million and $3.6 million during the third
quarter and first nine months of 2009, respectively, as compared to the $2.0
million and $6.5 million OPEB credit recorded during the third quarter and first
nine months of 2008, respectively.
Interest
Expense
Interest
expense during the third quarter and first nine months of 2008 and 2009 as well
as the primary drivers of interest expense are presented in the following
table.
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
($
in thousands)
|
||||||||||||||||
Interest
expense
|
$ | 879 | $ | 474 | $ | 3,124 | $ | 1,214 | ||||||||
Average
debt balance
|
$ | 66,928 | $ | 42,810 | $ | 77,146 | $ | 35,405 | ||||||||
Weighted
average interest rates
|
4.6 | % | 4.0 | % | 5.0 | % | 3.9 | % |
- 28
-
The
decrease in the average debt balance during 2009 was primarily due to a lower
balance on our revolving credit facility throughout 2009 as a result of
substantially reduced production schedules and an exceptionally low balance on
our revolving credit facility at the end of 2008. The decrease in the
overall weighted average interest rate during 2009 was primarily due to a
decrease in LIBOR and the prime rate. Prior to the amendment of our
primary credit agreement as discussed in Note 4 to our Condensed Consolidated
Financial Statements, interest rates on our variable-rate debt ranged from prime
to prime plus 0.5% or LIBOR plus 2.0% to LIBOR plus 2.75%. As
amended, our revolving credit facility will bear interest at prime plus 1% or
LIBOR plus 2.75% and interest rates on our credit facility’s term loan will bear
interest at prime plus 1.25% or LIBOR plus 3%.
LIQUIDITY
AND CAPITAL RESOURCES
Historical
Cash Flows
Operating
Activities
During the first nine months of 2009,
net cash used in operations totaled $9.9 million as compared to $8.1 million of
net cash provided by operations during the first nine months of
2008. The $18.0 million decline in operating cash flows was primarily
due to the net effects of:
·
|
lower
operating income before pension/OPEB during the first nine months of 2009
of $30.0 million;
|
·
|
lower
OPEB payments during 2009 of $1.0
million;
|
·
|
higher
net cash provided by relative changes in our inventory in 2009 of $31.9
million due to lower scrap and utility costs as well as a significant
reduction in inventory levels during 2009 as we adjusted production and
inventory strategies based on changes in customer order patterns during
the first nine months of 2009;
|
·
|
higher
net cash used as a result of relative changes in our accrued liabilities
of $26.5 million in 2009 primarily as a result of 2008 employee incentive
compensation paid in the first quarter of 2009 which was significantly
higher than 2007 employee incentive compensation paid in the first quarter
of 2008;
|
·
|
lower
interest payments during 2009 of $1.9 million;
and
|
·
|
lower
tax payments during 2009 of $2.0
million.
|
Investing
Activities
During
the third quarter of 2009, the IEPA released $2.0 million of restricted
investments to us in connection with the IEPA’s approval of the soil portion of
the WMUs. The funds were used to reduce our indebtedness under our
revolving credit facility.
Financing
Activities
We
increased borrowings on our revolving credit facility during the first nine
months of 2009 by $28.3 million as compared to a $10.2 million decline in
borrowings on our revolving credit facility during the first nine months of
2008. The $38.5 million increase in borrowings was primarily due
to:
·
|
decreased
profitability during 2009;
|
·
|
the
payment of 2008’s employee incentive compensation during the first quarter
of 2009 totaling $8.7 million as discussed above;
and
|
·
|
the
$25 million proceeds from our subscription rights offering during the
first quarter of 2008, which were used to reduce our indebtedness under
our revolving credit facility.
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Future
Cash Requirements
Capital
Expenditures
As a
result of the economic conditions during the first nine months of 2009, we
limited all non-critical capital projects. Currently, we expect to
spend approximately $2.4 million on capital expenditures for the remainder of
the year. We expect to fund these
capital expenditures using cash flows from operations and borrowing availability
under our existing credit facilities.
Contractual
Commitments
We made
the final payment, which amounted to $9.1 million, on our 8% Notes during the
first quarter of 2009. There have been no other material changes in
our contractual obligations since we filed our 2008 Annual Report, and we refer
you to the report for a complete description of these commitments.
Environmental
Obligations
On July
2, 2009, the IEPA approved the completion of the soil portion of the remediation
plan of certain waste management units at KSW which resulted in us decreasing
our accrued environmental costs by $4.2 million during the second quarter of
2009. We currently believe the upper end of the range of reasonably
possible costs to us for sites where we have been named a defendant or
potentially responsible party is approximately $2.3 million, including the $.8
million accrued as of September 30, 2009. See Note 5 to our Condensed
Consolidated Financial Statements for discussions of our environmental
liabilities.
Pension
and Other Postretirement Obligations
We
currently do not expect to be required to make contributions to our defined
benefit pension plans during 2009. As allowed under certain of our
amended benefit plans, we exercised our right to create supplemental pension
benefits in lieu of certain 2009 benefit payments due under one of our OPEB
plans. As such, we anticipate contributing an aggregate of only $1.3
million to our OPEB plans during 2009. Future variances from assumed actuarial
rates, including the rate of return on plan assets, may result in increases or
decreases to pension and OPEB funding requirements in future
periods.
Off-balance
Sheet Financing Arrangements
We do not
have any off-balance sheet financing agreements other than the operating leases
discussed in our 2008 Annual Report.
Working
Capital and Borrowing Availability
December
31,
|
September
30,
|
|||||||
2008
|
2009
|
|||||||
(In
thousands)
|
||||||||
Working
capital
|
$ | 55,886 | $ | 58,406 | ||||
Outstanding
balance of revolving credit facility
|
3,264 | 31,587 | ||||||
Additional
borrowing availability
|
46,500 | 22,527 |
The
revolving credit facility requires us to use our daily cash receipts to reduce
outstanding borrowings, which results in us maintaining zero cash balances when
there are balances outstanding under this credit facility.
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The
amount of available borrowings under our revolving credit facility is based on
formula-determined amounts of trade receivables and inventories, less the amount
of outstanding letters of credit ($5.5 million at September 30,
2009).
Liquidity
Outlook
See the
“Recent Developments”
section of “Results of
Operations” above.
RECENT
ACCOUNTING PRONOUNCEMENTS
See Note
10 to our Condensed Consolidated Financial Statements for the projected impact
of recent accounting pronouncements on our financial position and results of
operations.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
For a
discussion of our critical accounting policies, refer to Part I, Item 7 -
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in the 2008 Annual Report. There have been no changes in
our critical accounting policies during the first nine months of
2009.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Reference
is made to the 2008 Annual Report for a discussion of the market risks
associated with changes in interest rates and ferrous scrap costs that affect
us. There have been no material changes in such market risks during
the first nine months of 2009.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain a system of disclosure controls and procedures. The term
"disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports we file or submit to the SEC under the
Securities Exchange Act of 1934, as amended, 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 we are
required to disclose in the reports we file or submit to the SEC under the Act
is accumulated and communicated to our management, including our principal
executive officer and our principal financial officer, or persons performing
similar functions, as appropriate to allow timely decisions to be made regarding
required disclosure. Each of David L. Cheek, our President and Chief
Executive Officer, and Bert E. Downing, Jr., our Vice President, Chief Financial
Officer, Corporate Controller and Treasurer, have evaluated the design and
operating effectiveness of our disclosure controls and procedures as of
September 30, 2009. Based upon their evaluation, these executive
officers have concluded that our disclosure controls and procedures were
effective as of September 30, 2009.
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Internal
Control Over Financial Reporting
We also
maintain internal control over financial reporting. The term
“internal control over financial reporting,” as defined by SEC regulations,
means a process designed by, or under the supervision of, our principal
executive and principal financial officers, or persons performing similar
functions, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP, and includes those policies and procedures
that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect our transactions and dispositions of our
assets,
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are made only in accordance with authorizations
of our management and directors,
and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our Condensed Consolidated Financial
Statements.
|
Changes
in Internal Control Over Financial Reporting
There has
been no change to our internal control over financial reporting during the
quarter ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
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PART
II. OTHER INFORMATION
ITEM
1. Legal Proceedings.
Reference
is made to disclosure provided under the caption "Other current litigation" in
Note 5 to our Condensed Consolidated Financial Statements.
ITEM
1A. Risk Factors.
Reference
is made to our 2008 Annual Report for a discussion of risk factors related to
our businesses. There have been no material changes in such risk
factors during the first nine months of 2009.
ITEM
6. Exhibits.
(a)
|
We
have retained a signed original of any exhibit listed below that contains
signatures, and we will provide any such exhibit to the Commission or its
staff upon request. The following exhibit is included
herein:
|
|
4.1
|
Amendment
No. 3 to Loan and Security Agreement dated as of October 2, 2009 by and
between the Registrant and Wachovia Capital Finance Corporation
(Central). (Incorporated by reference to Exhibit 4.1 to the
Registrant’s Report on Form 8-K dated October 2,
2009).
|
|
31.1
|
Certification.
|
|
31.2
|
Certification.
|
|
32.1
|
Certification.
|
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Keystone Consolidated
Industries, Inc.
(Registrant)
Date: November
5, 2009
|
By/s/ Bert E. Downing,
Jr.
Bert
E. Downing, Jr.
Vice
President, Chief Financial Officer,
Corporate
Controller and Treasurer
|
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