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, 2006
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 458-0028
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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 X No
--- ---
Whether the Registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated
filer Accelerated filer Non-accelerated filer X .
--- ---
Whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No X .
--- ---
Indicate by check mark 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 X No .
--- ---
Number of shares of common stock outstanding at August 8, 2006: 10,000,000
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2005;
June 30, 2006 (unaudited) 3
Condensed Consolidated Statements of Operations -
Three months and six months ended
June 30, 2005 and 2006 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2005 and 2006 (unaudited) 6
Condensed Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2006 (unaudited) 7
Notes to Condensed Consolidated Financial Statements
(unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 34
Item 1A. Risk Factors. 34
Item 6. Exhibits. 34
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, June 30,
ASSETS 2005 2006
--------- ---------
(unaudited)
Current assets:
Accounts receivable, net $ 46,199 $ 57,980
Inventories, net 69,691 58,170
Restricted investments 1,040 1,057
Deferred income taxes - 15,417
Prepaid expenses and other 2,760 1,892
--------- ---------
Total current assets 119,690 134,516
--------- ---------
Property, plant and equipment:
Land 1,193 1,193
Buildings and improvements 54,189 54,780
Machinery and equipment 310,446 310,419
Construction in progress 3,949 8,214
--------- ---------
369,777 374,606
Less accumulated depreciation 283,004 289,479
--------- ---------
Net property, plant and equipment 86,773 85,127
--------- ---------
Other assets:
Restricted investments 4,758 7,097
Prepaid pension cost 145,152 169,478
Deferred financing costs 902 782
Goodwill 752 752
Other 337 308
--------- ---------
Total other assets 151,901 178,417
--------- ---------
Total assets $ 358,364 $ 398,060
========= =========
- 3 -
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
2005 2006
---------- ----------
(unaudited)
Current liabilities:
Notes payable and current maturities of
long-term debt $ 41,640 $ 56,245
Accounts payable 9,797 10,584
Accrued OPEB cost 4,256 4,256
Other accrued liabilities 27,624 23,110
--------- ---------
Total current liabilities 83,317 94,195
--------- ---------
Noncurrent liabilities:
Long-term debt 58,255 35,785
Accrued OPEB cost 133,208 127,011
Deferred income taxes - 18,647
Other 5,577 5,893
--------- ---------
Total noncurrent liabilities 197,040 187,336
--------- ---------
Liabilities subject to compromise 10,476 14,239
--------- ---------
Stockholders' equity:
Common stock 100 100
Additional paid-in capital 75,423 75,423
Retained earnings (accumulated deficit) (7,992) 26,767
--------- ---------
Total stockholders' equity 67,531 102,290
--------- ---------
Total liabilities and stockholders'
equity $ 358,364 $ 398,060
========= =========
Commitments and contingencies (Notes 10 and 11).
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 Six months ended
June 30, June 30,
------------------------ -----------------------
2005 2006 2005 2006
---- ---- ---- ----
(unaudited) (unaudited)
Net sales $ 88,992 $129,095 $178,529 $248,210
Cost of goods sold 87,034 119,808 171,516 223,897
-------- -------- -------- --------
Gross margin 1,958 9,287 7,013 24,313
-------- -------- -------- --------
Selling expense 1,582 1,672 3,017 3,448
General and administrative
expense 2,706 2,869 5,410 5,598
Defined benefit pension credit (3,224) (12,165) (6,449) (24,326)
-------- -------- -------- --------
Total operating costs 1,064 (7,624) 1,978 (15,280)
-------- -------- -------- --------
Operating income 894 16,911 5,035 39,593
-------- -------- -------- --------
Nonoperating income (expense):
Corporate income (expense) (895) 996 (2,191) 1,482
Interest expense (919) (1,337) (1,776) (2,539)
Interest income 47 90 82 92
Other income, net 16 267 104 267
-------- -------- -------- --------
Total nonoperating income
(expense) (1,751) 16 (3,781) (698)
-------- -------- -------- --------
Income (loss) before
income taxes and
reorganization costs (857) 16,927 1,254 38,895
Reorganization costs 2,687 186 5,981 336
-------- -------- -------- --------
Income (loss) before income
taxes (3,544) 16,741 (4,727) 38,559
Provision for income taxes 115 3,711 208 3,800
-------- -------- -------- --------
Net income (loss) $ (3,659) $ 13,030 $ (4,935) $ 34,759
======== ======== ======== ========
Basic and diluted income (loss)
per share $ (.36) $ 1.30 $ ( .49) $ 3.48
======== ======== ======== ========
Basic and diluted shares
outstanding 10,068 10,000 10,068 10,000
======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2005 and 2006
(In thousands)
2005 2006
------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss) $(4,935) $ 34,759
Depreciation and amortization 7,889 7,699
Amortization of deferred financing costs 347 135
Deferred income taxes - 3,230
Non-cash defined benefit pension credit (6,449) (24,326)
OPEB expense (credit) 8,734 (4,200)
OPEB payments (2,973) (1,999)
Reorganization costs accrued 5,981 337
Reorganization costs paid (5,176) (3,397)
Other, net 116 286
Change in assets and liabilities:
Accounts receivable (9,948) (11,903)
Inventories 2,731 11,521
Accounts payable (2,693) 729
Other, net (2,517) 3,543
--------- --------
Net cash provided by (used in) operating
activities (8,893) 16,414
--------- --------
Cash flows from investing activities:
Capital expenditures (4,551) (6,194)
Restricted investments, net (296) (2,356)
Other, net 243 17
--------- --------
Net cash used in investing activities (4,604) (8,533)
--------- --------
Cash flows from financing activities:
Revolving credit facilities, net 14,784 (5,427)
Other notes payable and long-term debt:
Additions 47 306
Principal payments (1,319) (2,745)
Deferred financing costs paid (15) (15)
--------- --------
Net cash provided by (used in)
financing activities 13,497 (7,881)
--------- --------
Net change in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
--------- --------
Cash and cash equivalents, end of period $ - $ -
========= ========
Supplemental disclosures - cash paid for:
Interest, net of amount capitalized $ 1,440 $ 2,139
Income taxes, net 673 343
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2006
(In thousands)
Retained
Additional earnings
Common paid-in (accumulated
stock capital deficit) Total
------- --------- ---------- ---------
(unaudited)
Balance - December 31, 2005 $100 $75,423 $ (7,992) $ 67,531
Net income - - 34,759 34,759
Balance - June 30, 2006 $100 $75,423 $ 26,767 $102,290
See accompanying Notes to Condensed Consolidated Financial Statements.
- 7 -
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(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 in our Annual Report on Form 10-K for the year
ended December 31, 2005 that we filed with the Securities and Exchange
Commission ("SEC") on March 31, 2006 (the "2005 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 Consolidated Financial Statements to the current year's
classifications. We have condensed the Consolidated Balance Sheet at December
31, 2005 contained in this Quarterly Report as compared to our audited
Consolidated Financial Statements at that date, and we have omitted certain
information and footnote disclosures (including those related to the
Consolidated Balance Sheet at December 31, 2005) 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 periods ended June 30, 2006 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 our 2005
Consolidated Financial Statements contained in our 2005 Annual Report.
Contran Corporation beneficially owns 51% of our outstanding common stock
at June 30, 2006. 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.
Net income (loss) per share is based upon the weighted average number of
common shares outstanding during the periods. Options to purchase our common
stock that were outstanding during the first and second quarters of 2005 were
omitted from the calculation of diluted earnings per share because they were
anti-dilutive. We had no other dilutive securities outstanding during the first
and second quarters of 2005 and 2006.
Unless otherwise indicated, references in this report to "we", "us" or
"our" refer to Keystone Consolidated Industries, Inc. and its subsidiaries,
taken as a whole.
Note 2 - Bankruptcy:
On February 26, 2004, we and five of our direct and indirect subsidiaries
filed for voluntary protection under Chapter 11 of the Federal Bankruptcy Code.
We filed our petitions in the U.S. Bankruptcy Court for the Eastern District of
Wisconsin in Milwaukee (the "Court"). We attributed the need to reorganize to
weaknesses in product selling prices over the preceding several years,
unprecedented increases in ferrous scrap costs, our primary raw material, and
significant liquidity needs to service retiree medical costs. These problems
substantially limited our liquidity and undermined our ability to obtain
sufficient debt or equity capital to operate as a going concern.
- 8 -
Under Chapter 11 proceedings, actions by creditors to collect pre-petition
claims in existence at the filing date are stayed, absent specific authorization
from the Court to pay such claims, while we manage the business as a
debtor-in-possession. We received approval from the Court to pay certain of our
pre-petition claims.
We filed a plan of reorganization on October 4, 2004 and amended that plan
on May 26, 2005, June 21, 2005 and June 27, 2005. Our amended plan of
reorganization was accepted by the impacted constituencies and confirmed by the
Court on August 10, 2005. We emerged from bankruptcy protection on August 31,
2005. Significant provisions of our amended plan of reorganization included,
among other things:
o Assumption of the previously negotiated amendment to the collective
bargaining agreement with the Independent Steel Workers Alliance (the
"ISWA"), our largest labor union, that related primarily to greater
employee participation in healthcare costs;
o Assumption of the previously negotiated agreements reached with
certain retiree groups that will provide relief by permanently
reducing healthcare related payments to these retiree groups;
o Our obligations due to pre-petition secured lenders other than our
Debtor-In-Possession ("DIP") lenders were reinstated in full;
o All shares of our common and preferred stock outstanding at the
petition date (February 26, 2004) were cancelled;
o Pre-petition unsecured creditors with allowed claims against us will
receive, on a pro rata basis, in the aggregate, $5.2 million in cash,
a $4.8 million secured promissory note and 49% of our new common
stock;
o Certain operating assets and existing operations of Sherman Wire
Company ("SWC"), one of our pre-petition wholly-owned subsidiaries,
were sold at fair market value (fair market value and book value both
approximated $2.0 million) to us, which were then used to form and
operate a newly created wholly-owned subsidiary of ours named Keystone
Wire Products Inc. ("KWP");
o SWC was also reorganized and the proceeds of the operating asset sale
to us, liquidation of SWC's remaining real estate assets (book value
approximately $1.6 million), and other funds will be distributed, on a
pro rata basis, to SWC's pre-petition unsecured creditors as their
claims are finally adjudicated;
o SWC's pre-petition wholly-owned non-operating subsidiaries, J.L.
Prescott Company, and DeSoto Environmental Management, Inc. as well as
Sherman Wire of Caldwell, Inc., a wholly-owned subsidiary of ours,
will ultimately be liquidated and the pre-petition unsecured creditors
with allowed claims against these entities will receive their pro-rata
share of the respective entity's net liquidation proceeds;
o Pre-petition unsecured creditors with allowed claims against FV Steel
& Wire Company, another one of our wholly-owned subsidiaries, will
receive cash in an amount equal to their allowed claims;
o One of our DIP lenders, EWP Financial, LLC (an affiliate of Contran)
converted $5.0 million of its DIP credit facility, certain of its
pre-petition unsecured claims and all of its administrative claims
against us into 51% of our new common stock; and
o Our Board of Directors now consists of seven individuals, two were
designated by Contran and two were designated by the Official
Committee of Unsecured Creditors (the "OCUC"). The remaining three
directors qualify as independent directors (two of the independent
directors were appointed by Contran with the OCUC's consent and one
was appointed by the OCUC with Contran's consent).
- 9 -
In general, as a result of our Chapter 11 reorganization and discharge, any
future government or third-party private actions against us arising from our
alleged pre-petition responsibility for hazardous contamination at any non-owned
sites have been barred. However, our Chapter 11 discharge does not affect our
liability for hazardous contamination of property that we owned as of the
petition date, therefore any associated clean up costs related to owned sites
remains our responsibility.
As discussed above, the proceeds generated by SWC's asset sale to us, the
funds generated from the liquidation of SWC's remaining real estate assets and
other funds available to SWC (including the $4.0 million proceeds from a
settlement agreement received in the second quarter of 2006, as discussed in
Notes 6 and 11) will ultimately be distributed, on a pro-rata basis, to SWC's
pre-petition unsecured creditors when all of their claims are finally
adjudicated. The total amount that will ultimately be distributed to SWC's
pre-petition unsecured creditors will be limited to the lesser of (i) the total
of the claims granted by the Court and (ii) the total funds available to be
distributed. At June 30, 2006, substantially all of SWC's pre-petition claims
have been finally adjudicated, and the Court has either discharged or allowed
these claims, including certain environmental claims filed against SWC in its
Chapter 11 proceedings. However, one major claim related to an environmental
site continues to be litigated, and therefore this claim has not been finally
adjudicated. When this remaining pre-petition claim is finally adjudicated, SWC
will be able to (i) liquidate SWC's remaining real estate and (ii) determine the
total SWC pre-petition claims to be distributed and consequently be able to
distribute the appropriate amounts to individual pre-petition unsecured
creditors of SWC. Because all of the claims of SWC's pre-petition unsecured
creditors have not yet been finally adjudicated, all of SWC's liabilities are
still classified as liabilities subject to compromise on our June 30, 2006
Condensed Consolidated Balance Sheet, and they will continue to be so classified
until all of the pre-petition claims are finally adjudicated. Recorded
environmental liabilities related to non-owned SWC sites and an owned SWC site
aggregate $8.6 million at June 30, 2006. Additionally, any other pre-petition
litigation claims against SWC continue to be stayed until all of the claims are
finally adjudicated. See Note 10.
Note 3 - Business Segment Information:
Our operating segments are organized along our manufacturing facilities and
include three reportable segments:
o Keystone Steel and Wire ("KSW") which manufacturers and sells wire
rod, wire and wire products for agricultural, industrial,
construction, commercial, original equipment manufacturers and retail
consumer markets,
o Engineered Wire Products ("EWP") which manufacturers and sells welded
wire reinforcement 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
o Keystone Wire Products ("KWP") which manufacturers and sells wire and
wire products for agricultural, industrial, construction, commercial,
original equipment manufacturers and retail consumer markets.
In connection with our emergence from Chapter 11 on August 31, 2005,
certain operating assets and existing operations of Sherman were sold at fair
market value to us, we then used these assets to form and operate KWP. As such,
operating results of this segment prior to our emergence from Chapter 11 were
operating results of Sherman. Operating results of this segment after our
- 10 -
emergence from Chapter 11, were operating results of KWP. In accordance with our
plan of reorganization, the remaining assets of SWC will eventually be
liquidated.
Three months ended Six months ended
June 30, June 30,
----------------------- -------------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands)
Net sales:
KSW $ 81,887 $118,805 $171,081 $236,485
EWP 17,755 18,115 29,806 30,733
Sherman/KWP 4,113 4,883 9,166 9,805
Elimination of intersegment sales:
KSW (11,866) (9,314) (25,186) (21,904)
EWP - - - -
Sherman/KWP (2,897) (3,394) (6,338) (6,909)
-------- -------- -------- --------
Total net sales $ 88,992 $129,095 $178,529 $248,210
======== ======== ======== ========
Operating income (loss):
KSW $ (9,119) $ 455 $(10,571) $ 8,654
EWP 2,992 3,546 4,631 4,419
Sherman/KWP (381) 98 (550) 34
Allocation differences(1) 7,402 12,812 11,525 26,486
-------- -------- -------- --------
Total operating income 894 16,911 5,035 39,593
Nonoperating income (expense):
Corporate income (expense) (895) 996 (2,191) 1,482
Interest expense (919) (1,337) (1,776) (2,539)
Interest income 47 90 82 92
Other income, net 16 267 104 267
-------- -------- -------- --------
Income (loss) before income taxes
and reorganization costs $ (857) $ 16,927 $ 1,254 $ 38,895
======== ======== ======== ========
(1)Allocation differences are (i) the difference between the defined
benefit pension credit and postretirement benefit expense or credit allocated to
the operating segments and the actual expense or credit included in the
determination of operating profit or loss, (ii) the elimination of intercompany
profit or loss on ending inventory balances and (iii) LIFO inventory reserve
adjustments.
Note 4 - Inventories, net:
December 31, June 30,
2005 2006
------------ ---------
(In thousands)
Raw materials $ 10,914 $ 13,746
Work in process 29,550 20,482
Finished goods 28,018 22,941
Supplies 16,421 18,464
-------- --------
Inventory at FIFO 84,903 75,633
Less LIFO reserve (15,212) (17,463)
-------- --------
Total $ 69,691 $ 58,170
======== ========
- 11 -
Note 5 - Other accrued liabilities:
December 31, June 30,
2005 2006
----------- -------------
(In thousands)
Current:
Employee benefits $12,085 $11,710
Self insurance 4,455 3,778
Environmental 3,000 1,067
Pre-petition unsecured creditor settlement 1,061 1,061
Income taxes 939 807
Legal and professional 247 343
Reorganization costs 3,057 -
Other 2,780 4,344
------- -------
Total $27,624 $23,110
Noncurrent:
Environmental $ 3,921 $ 3,921
Workers compensation payments 1,595 1,918
Other 61 54
------- -------
Total $ 5,577 $ 5,893
======= =======
Note 6 - Liabilities subject to compromise:
December 31, June 30,
2005 2006
----------- ----------
(In thousands)
Environmental $ 8,491 $ 8,589
Unearned income - 4,000
Accounts payable 850 789
Disposition of former facilities 684 572
Legal and professional 244 100
Other 207 189
-------- -------
Total $10,476 $14,239
======== =======
During the second quarter of 2006, SWC received $4.0 million from a former
insurer under a Court approved settlement agreement. Under the terms of that
settlement agreement, the insurer withdrew certain claims it had filed against
SWC in SWC's bankruptcy proceedings, in exchange for which SWC released that
insurer from their liability to insure SWC for environmental coverage. SWC
currently anticipates a significant portion of the ultimate payment of its
pre-petition unsecured liabilities discussed in Note 2 will be funded with this
$4.0 million. The settlement agreement limits SWC's use of the proceeds to
payment of SWC's pre-petition unsecured claims. Accordingly, we have classified
the $4.0 million we received as a noncurrent asset included in restricted
investments because such funds will be used to settle a liability we have
classified as noncurrent at June 30, 2006. Because of this restriction, we have
also classified the $4.0 million as unearned income within liabilities subject
to compromise on our June 30, 2006 Condensed Consolidated Financial Statements.
- 12 -
Note 7 - Notes payable and long-term debt:
December 31, June 30,
2005 2006
--------- -------------
(In thousands)
Wachovia revolving credit facility $36,174 $30,747
8% Notes 26,532 26,136
UC Note 4,997 5,303
Term loans:
Wachovia 21,980 19,685
County 10,000 10,000
Other 212 159
------- -------
Total debt 99,895 92,030
Less current maturities 41,640 56,245
------- -------
Total long-term debt $58,255 $35,785
======= =======
Note 8 - Employee benefit plans:
Defined benefit plans - The components of net periodic defined benefit
pension credit are presented in the table below.
Three months ended Six months ended
June 30, June 30,
--------------------- -----------------------
2005 2006 2005 2006
---- ---- ------ ------
(In thousands)
Service cost $ 938 $ 959 $ 1,875 $ 1,918
Interest cost 5,434 5,106 10,868 10,212
Expected return on plan assets (10,732) (16,863) (21,467) (33,726)
Amortization of unrecognized:
Prior service cost 221 227 441 454
Actuarial losses 915 (1,594) 1,834 (3,184)
-------- -------- -------- --------
Total $ (3,224) $(12,165) $ (6,449) $(24,326)
======== ======== ======== ========
We do not expect to make cash contributions to our defined benefit pension
plan during 2006.
Postretirement benefits other than pensions ("OPEB") - The components of
net periodic OPEB expense (credit) are presented in the table below.
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands)
Service cost $ 740 $ 63 $ 1,480 $ 126
Interest cost 3,026 495 6,052 990
Amortization of unrecognized:
Prior service cost (86) (84) (172) (168)
Prior service cost due to
plan amendments (710) (4,243) (1,420) (8,486)
Actuarial losses 1,397 1,669 2,794 3,338
------ ------- ------- -------
Total $4,367 $(2,100) $ 8,734 $(4,200)
====== ======= ======= =======
- 13 -
We anticipate making $4.3 million of cash contributions to our
postretirement benefit plans during 2006.
Note 9 - Provision for income taxes:
Six months ended
June 30,
----------------------------
2005 2006
---- ----
(In thousands)
Expected tax (benefit) provision, at statutory rate $(1,654) $13,496
U. S. state income taxes, net 102 1,335
Deferred tax asset valuation allowance (56) (10,675)
Capitalized reorganization costs 1,804 118
Other, net 12 (474)
------- -------
Provision for income taxes $ 208 $ 3,800
======= =======
Comprehensive provision for income taxes:
Currently payable:
U.S. federal $ 86 $ 237
U.S. state 122 333
------- -------
Net currently payable 208 570
Deferred income taxes, net - 3,230
------- -------
$ 208 $ 3,800
======= =======
Our emergence from Chapter 11 on August 31, 2005 did not result in an
ownership change within the meaning of Section 382 of the Internal Revenue Code.
Prior to June 30, 2006, considering all factors believed to be relevant, we
believed our gross deferred tax assets did not meet the "more-likely-than-not"
realizability test. As such, we had provided a deferred tax asset valuation
allowance to offset our net deferred income tax asset (before valuation
allowance) of approximately $10.7 million at December 31, 2005. During the first
six months of 2006, we recorded taxable income in excess of our available net
operating loss caryforwards. As such, the valuation allowance related to those
deferred tax assets was completely reversed during the first six months of 2006.
After such reversal, we have a net deferred income tax liability at June 30,
2006. Due in part to our continued profitability, we believe the realization of
our remaining gross deferred income tax assets (including an alternative minimum
tax credit carryforward) meet the "more-likely-than-not" realizability test.
Note 10 - Environmental matters:
As a result of our Chapter 11 filings on February 26, 2004, litigation
relating to pre-petition environmental claims against the filing companies was
stayed. Upon emergence from Chapter 11 on August 31, 2005, environmental
liabilities related to our non-owned sites ($900,000) were discharged in
connection with our Chapter 11 proceedings. However, the pre-petition litigation
claims against SWC continue to be stayed while these claims are adjudicated. We
have recorded environmental liabilities related to non-owned SWC sites of $7.8
million and an owned SWC site of $830,000. In general, as a result of our
Chapter 11 reorganization and discharge when we exited bankruptcy in August
2005, any future government or third-party private actions against us arising
from our alleged pre-petition responsibility for hazardous contamination at
environmental sites that we do not own have been barred. Our Chapter 11
discharge does not affect our liability for hazardous contamination of property
that was owned by us as of the petition date therefore, any associated clean up
costs remains our responsibility.
- 14 -
As discussed above, the proceeds generated by SWC's asset sale to us, the
funds generated from the liquidation of SWC's remaining real estate assets and
other funds available to SWC (including the $4.0 million proceeds from a
settlement agreement received in the second quarter of 2006, as discussed in
Notes 6 and 11) will ultimately be distributed, on a pro-rata basis, to SWC's
pre-petition unsecured creditors when all of their claims are finally
adjudicated. The total amount that will ultimately be distributed to SWC's
pre-petition unsecured creditors will be limited to the lesser of (i) the total
of the claims granted by the Court and (ii) the total funds available to be
distributed. At June 30, 2006, substantially all of SWC's pre-petition claims
have been finally adjudicated, other than one major claim related to an
environmental site. When this remaining pre-petition claim is finally
adjudicated, SWC will be able to (i) liquidate SWC's remaining real estate and
(ii) determine the total SWC pre-petition claims to be distributed and
consequently be able to distribute the appropriate amounts to individual
pre-petition unsecured creditors of SWC. Because all of the claims of SWC's
pre-petition unsecured creditors have not yet been finally adjudicated, all of
SWC's liabilities are still classified as liabilities subject to compromise on
our June 30, 2006 Condensed Consolidated Balance Sheet, and they will continue
to be so classified until all of the pre-petition claims are finally
adjudicated.
We have been named as a defendant, potentially responsible party ("PRP"),
or both, pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") or similar state laws in approximately 14 governmental
and private actions associated with environmental matters, including waste
disposal sites and facilities currently or previously owned, operated or used by
us, certain of which are on the United States Environmental Protection Agency's
(the "U.S. EPA") Superfund National Priorities List or similar state lists.
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. Although we may be jointly
and severally liable for such costs, in most cases, we are only one of a number
of PRPs who may also be jointly and severally liable.
On a quarterly basis, we evaluate the potential range of our liability at
sites where we have been named as a PRP or defendant by analyzing and estimating
the range of reasonably possible costs to us. Such costs include, among other
things, expenditures for remedial investigations, monitoring, managing, studies,
certain legal fees, clean-up, removal and remediation. We believe we have
provided adequate accruals ($13.6 million at June 30, 2006, $8.6 million of
which is reflected in liabilities subject to compromise on our June 30, 2006
balance sheet) for these matters at 10 sites for which we believe our liability
is probable and reasonably estimable, but 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, the allocation of such costs among
PRPs, the solvency of other PRPs or a determination that we are potentially
responsible for the release of hazardous substances at other sites, any of which
could result in expenditures in excess of amounts currently estimated by us to
be required for such matters. With respect to other PRPs and the fact that we
may be jointly and severally liable for the total remediation cost at certain
sites, we could ultimately be liable for amounts in excess of our accruals due
to, among other things, reallocation of costs among PRPs or the insolvency of
one or more PRPs. In addition, the actual timeframe for payments by us for these
matters may be substantially in the future.
- 15 -
The upper end of the range of reasonably possible costs to us for sites for
which it is possible to estimate costs (14 sites) is approximately $14.3
million. Our estimate of such liabilities has not been discounted to present
value, and other than certain previously-reported settlements with respect to
certain of our former insurance carriers, we have not recognized any material
insurance recoveries. No assurance can be given that actual costs will not
exceed accrued amounts or the upper end of the range for sites for which
estimates have been made, and no assurance can be given that costs will not be
incurred with respect to the four sites as to which no estimate of liability can
presently be made because the respective investigations are in early stages. The
extent of CERCLA liability cannot be determined until the Remedial
Investigation/Feasibility Study ("RI/FS") is complete, the U.S. EPA issues a
Record of Decision ("ROD") and costs are allocated among PRPs. The extent of
liability under analogous state cleanup statutes and for common law equivalents
is subject to similar uncertainties.
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 which will be paid out over the
subsequent 12 months, and we classify such amount as a current liability. The
remainder of the accrued environmental costs are classified as a noncurrent
liability.
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 six months ended June 30, 2006 is as follows:
Six months ended
June 30,
----------------
(In thousands)
Balance at December 31, 2005 $15,412
Expense -
Payments (1,944)
Reclassification 109
-------
Balance at June 30, 2006 $13,577
=======
Amounts classified as:
Current accrued environmental cost $ 1,067
Noncurrent accrued environmental cost 3,921
Liabilities subject to compromise 8,589
-------
$13,577
=======
All of the recorded environmental liability included in liabilities subject
to compromise on our June 30, 2006 balance sheet relates to sites involving SWC
or one of its predecessors. SWC's environmental liabilities continue to be
negotiated and adjudicated subsequent to its emergence from Chapter 11 on August
31, 2005. See Notes 2 and 6.
Owned sites (no longer subject to compromise at June 30, 2006).
We are currently involved in the closure of inactive waste disposal units
at our Peoria facility pursuant to a closure plan approved by the Illinois
Environmental Protection Agency ("IEPA") in September 1992. The original closure
plan provides for the in-place treatment of seven hazardous waste surface
impoundments and two waste piles to be disposed of as special wastes. We
recorded an estimated liability for remediation of the impoundments and waste
piles based on a six-phase remediation plan. We adjust the recorded liability
- 16 -
for each Phase as actual remediation costs become known. During 1995, we began
remediation of Phases II and III and completed these Phases, as well as Phase IV
during 1996. During 1998 and 1999 we did not have any significant remediation
efforts relative to Phases V and VI. During 2000, we began preliminary efforts
relative to Phase V. Pursuant to agreements with the IEPA and Illinois Attorney
General's office ("IAG"), we are depositing $75,000 per quarter into a trust
fund. Prior to 2005, we were required to continue these quarterly deposits and
could not withdraw funds from the trust fund until the fund balance exceeded the
sum of the estimated remaining remediation costs plus $2 million. During 2005,
this agreement was modified such that the IEPA and IAG now permit us to withdraw
funds from the trust fund as the site is remediated. However, the requirement
for us to make quarterly deposits of $75,000 into the trust fund remains until
such time as the site is completely remediated. During the first half of 2006,
we paid approximately $1.9 million in remediation costs for this site and
received approximately $1.9 million in funds from the trust fund. At December
31, 2005 and June 30, 2006, the trust fund had a balance of $4.5 million and
$2.8 million, respectively, which were included in other noncurrent assets.
In February 2000, we received a notice from the United States Environmental
Protection Agency ("U.S. EPA") giving formal notice of the U.S. EPA's 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 waste
management units at our Peoria facility; (2) investigate hazardous constituent
releases from "any other past or present locations at our Peoria facility where
past waste treatment, storage or disposal may pose an unacceptable risk to human
health and the environment"; (3) complete by June 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 our Peoria facility; and (5) complete by June 30, 2001 the closure of
the sites discussed in the preceding paragraph now undergoing RCRA closure under
the supervision of the IEPA. We have complied with deadlines in the draft order.
During the fourth quarter of 2000, we entered into a modified Administrative
Order on Consent, which may require us to conduct cleanup activities at certain
solid waste management units at our Peoria facility depending on the results of
soil and groundwater sampling and risk assessment to be conducted by us during
future periods pursuant to the order.
In March 2000, the IAG filed and served a seven-count complaint against us
for alleged violations of the Illinois Environmental Protection Act, 415 ILCS
5/31, and regulations implementing RCRA at our Peoria facility. The complaint
alleges that we violated RCRA in failing to prevent spills of an alleged
hazardous waste on four separate occasions during the period from June 1995
through January 1999. The complaint also alleges that we illegally "stored",
"disposed of" and manifested the same allegedly hazardous waste on some or all
of those occasions. In addition, the complaint alleges these hazardous waste
spills resulted in groundwater pollution in violation of the Illinois
Environmental Protection Act. The complaint further alleges that we improperly
disposed of hazardous waste on two occasions at a landfill not permitted to
receive such wastes. The complaint seeks the maximum statutory penalties allowed
which ranges up to $50,000 for each violation and additional amounts up to
$25,000 for each day of violation. We have answered the complaint and
proceedings in the case have been stayed pending the outcome of settlement
negotiations between us and the IAG's office.
In December 2005, we received a Notice of Violation from the U.S. EPA
regarding air permit issues at our Peoria, Illinois facility. The U.S. EPA
- 17 -
alleges that we failed to perform stack testing and conduct a review of best
available emission control technology in connection with the implementation of
plant construction modifications made pursuant to a 2001 air permit issued under
the Clean Air Act and the Illinois Environmental Protection Act. During January
2006, we reached a preliminary agreement with the U.S. EPA on a plan for
addressing the U.S. EPA's concerns without referring the matter for any
enforcement action.
SWC-related sites still subject to compromise at June 30, 2006.
Prior to SWC's acquisition of DeSoto, Inc. ("DeSoto"), DeSoto was notified
by U.S. EPA that it is one of approximately 50 PRPs at the Chemical Recyclers,
Inc. site in Wylie, Texas. In January 1999, DeSoto changed its name to SWC.
Under a consent order with the U.S. EPA, the PRP group has performed a removal
action and an investigation of soil and groundwater contamination. Such
investigation revealed certain environmental contamination. It is anticipated
that the U.S. EPA will order further remedial action, the exact extent of which
is not currently known. Any further liability of SWC related to this site was
discharged in the Chapter 11 proceedings.
In 1984, U.S. EPA filed suit against DeSoto by amending a complaint against
Midwest Solvent Recovery, Inc. et al ("Midco"). DeSoto was a defendant based
upon alleged shipments to an industrial waste recycling storage and disposal
operation site located in Gary, Indiana. The amended complaint sought relief
under CERCLA to force the defendants to clean up the site, pay non-compliance
penalties and reimburse the government for past clean up costs. In June 1992,
DeSoto settled its portion of the case by entering into a partial consent
decree, and all but one of the eight remaining primary defendants and 93 third
party defendants entered into a main consent decree. Under the terms of the
partial consent decree, DeSoto agreed to pay its pro rata share (13.47%) of all
costs under the main consent decree. In addition to certain amounts included in
the trust fund discussed below, SWC also has certain funds available in other
trust funds due it under the partial consent decree. These credits can be used
by SWC (with certain limitations) to fund its future liabilities under the
partial consent decree. The U.S. EPA was granted a $1.1 million claim in the
Chapter 11 proceedings. Any further liability of SWC related to this site was
discharged in the Chapter 11 proceedings.
In December 1991, DeSoto and approximately 600 other PRPs were named in a
complaint alleging DeSoto and the PRPs generated wastes that were disposed of at
a Pennsauken, New Jersey municipal landfill. The plaintiffs in the complaint
were ordered by a court to show in what manner the defendants were connected to
the site. The plaintiffs provided an alleged nexus indicating garbage and
construction materials from DeSoto's former Pennsauken facility were disposed of
at the site and such waste allegedly contained hazardous material to which
DeSoto objected. The claim was dismissed without prejudice in August 1993. In
1996, DeSoto received an amended complaint containing the same allegations. The
plaintiffs were granted a $750,000 claim in the Chapter 11 proceedings. Any
further liability of SWC related to this site was discharged in the Chapter 11
proceedings.
SWC has received notification from the TNRCC stating that DeSoto is a PRP
at the Material Recovery Enterprises Site near Ovalo, Texas, with approximately
3% of the total liability. The matter has been tendered to the Valspar
Corporation ("Valspar") pursuant to a 1990 agreement whereby Valspar purchased
certain assets of DeSoto. Valspar has been handling the matter under reservation
of rights. At the request of Valspar, SWC has signed a participation agreement
which would require SWC to pay no less than 3% of the remediation costs. Valspar
continues to pay for legal fees in this matter and has reimbursed SWC for all
assessments. The TNRCC was granted a $15,000 claim in the Chapter 11
proceedings. Any further liability of SWC related to this site was discharged in
the Chapter 11 proceedings.
- 18 -
In 1995, DeSoto was notified by the Texas Natural Resource Conservation
Commission ("TNRCC") that there were certain deficiencies in prior reports to
TNRCC relative to one of its non-operating facilities located in Gainesville,
Texas. During 1999, SWC entered into TNRCC's Voluntary Cleanup Program.
Remediation costs are presently estimated to be between $830,000 and $2.0
million. Investigation activities are on-going including additional soil and
groundwater sampling.
In addition to the sites discussed above, SWC is allegedly involved at
various other sites and in related toxic tort lawsuits which it does not
currently expect to incur significant liability. Pre-petition claims against SWC
continue to be negotiated and adjudicated subsequent to its emergence from
Chapter 11 on August 31, 2005.
Note 11 - Other commitments and contingencies:
Current litigation
Pre-petition claims against SWC continue to be negotiated and adjudicated
subsequent to its emergence from Chapter 11 on August 31, 2005.
In July 2001, SWC received a letter from a law firm advising them that
Sears Roebuck & Co. ("Sears") had been named as a defendant in a lead paint
personal injury case. Sears claimed contractual indemnity against SWC and
demanded that SWC defend and indemnify Sears with regard to any losses or
damages Sears may sustain in the case. Sears was named as an additional insured
on insurance policies, in which DeSoto (now SWC), the manufacturer of the paint,
was the named insured. Additional demands were made by Sears in 2002 with regard
to additional lead paint cases. DeSoto's insurance carriers were notified of the
action and asked to indemnify SWC with respect to the complaint. SWC has not
indemnified Sears and is unaware if the insurers have agreed to indemnify Sears.
In May 2002, SWC was notified by an insurance company of a declaratory
complaint filed in Cook County Illinois by Sears against the insurance company
and a second insurance company (collectively the "Insurance Companies") relative
to a certain lead paint personal injury litigation against Sears. It is our
understanding that the declaratory complaint has since been amended to include
all lead paint cases where Sears has been named as a defendant as a result of
paint sold by Sears that was manufactured by DeSoto. Sears was allegedly named
as an additional insured on insurance policies issued by the Insurance
Companies, in which DeSoto, the manufacturer of the paint, was the named
insured. Sears has demanded indemnification from the Insurance Companies. One of
the Insurance Companies has demanded indemnification and defense from SWC. SWC
believes the request for indemnification is invalid. However, such Insurance
Company has refused to accept SWC's response and has demanded that SWC
participate in mediation in accordance with the terms of a prior settlement
agreement. SWC may be sued by the Insurance Companies and, as a result, could be
held responsible for all costs incurred by the Insurance Companies in defending
Sears and paying for any claims against Sears as well as for the cost of any
litigation against SWC. The total amount of these lead paint litigation related
costs and claims could be significant. However, we do not have a liability
recorded with respect to these matters because the liability that may result, if
any, cannot be reasonably estimated at this time.
On March 1, 2006, Sears filed a notice with the Bankruptcy Court indicating
it is consenting to the Allstate Settlement described below and will withdraw
its claims with prejudice with respect to this matter on the date the Bankruptcy
Court's order approving the Allstate Settlement becomes final and
non-appeasable. The Chapter 11 proceedings bar any future claims against SWC
with respect to this matter.
- 19 -
On March 27, 2006, the Bankruptcy Court approved a settlement agreement
with one of DeSoto's former insurers, Allstate Insurance Company ("AIC") and
Northbrook Property and Casualty Insurance Company ("NP&CIC"), whereby SWC
entered into a policy buy-back arrangement with the insurers and the insurers
agree to withdraw their claims for retrospective premiums under the policies in
SWC's bankruptcy with prejudice after the Bankruptcy Court's order approving the
agreement becomes final and non-appealable (which occurred during the 2006
second quarter). As a result of this agreement, SWC received approximately $4.0
million from the insurers in exchange for a release of the insurers from the
policies. The $4.0 million may be used by SWC to satisfy its pre-petition
allowed unsecured claims, including environmental related claims against SWC in
its bankruptcy proceedings. Any portion of the $4.0 million not used to satisfy
SWC's allowed unsecured claims will revert back to the bankruptcy estate of SWC
and be distributed in accordance with its plan of reorganization. The settlement
agreement does not apply to any worker's compensation policies that AIC or
NP&CIC underwrote for SWC. The settlement agreement also does not apply to
Sears, but Sears is barred from bringing a claim against SWC's bankruptcy
estate.
We are also engaged in various 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 12 - Recent Accounting Pronouncements:
Inventory costs. Statement of Financial Accounting Standards ("SFAS") No.
151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, became effective
for us for inventory costs incurred on or after January 1, 2006. SFAS No. 151
requires that allocation of fixed production overhead costs to inventory be
based on normal capacity of the production facilities, as defined by SFAS No.
151. SFAS No. 151 also clarifies the accounting for abnormal amounts of idle
facility expense, freight handling costs and wasted material, requiring those
items be recognized as current-period charges. Our existing production cost
policies complied with the requirements of SFAS No. 151, therefore the adoption
of SFAS No. 151 did not affect our Consolidated Financial Statements.
Stock options. On January 1, 2006, SFAS No. 123R, Share-Based Payment,
became effective for us. SFAS No. 123R, among other things, requires the cost of
employee compensation paid with equity instruments to be measured based on the
grant-date fair value. That cost is then recognized over the vesting period.
Because we did not have any outstanding awards or options at January 1, 2006,
the adoption of SFAS No. 123R did not affect our Consolidated Financial
Statements. If we or our subsidiaries grant a significant number of equity
awards in the future, the amount of equity compensation expense in our
Consolidated Financial Statements could be material.
Uncertain tax positions. In the second quarter of 2006 the Financial
Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48,
Accounting for Uncertain Tax Positions, which will become effective for us on
January 1, 2007. FIN No. 48 clarifies when and how much of a benefit we can
recognize in our Consolidated Financial Statements for certain positions taken
in our income tax returns under SFAS No. 109, Accounting for Income Taxes, and
enhances the disclosure requirements for our income tax policies and reserves.
Among other things, FIN No. 48 will prohibit us from recognizing the benefit of
a tax position unless we believe it is more-likely-than-not our position will
prevail with the applicable tax authorities and limits the amount of the benefit
to the largest amount for which we believe the likelihood of realization is
greater than 50%. FIN No. 48 also requires companies to accrue penalties and
interest on the difference between tax positions taken on their tax returns and
the amount of benefit recognized for financial reporting purposes under the new
standard. Our current income tax accounting policies comply with this aspect of
the new standard. We will also be required to reclassify any reserves we have
- 20 -
for uncertain tax positions from deferred income tax liabilities, where they are
currently recognized, to a separate current or noncurrent liability, depending
on the nature of the tax position. We are currently evaluating the impact of FIN
No. 48 on our Consolidated Financial Statements.
- 21 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Business Overview
We are a leading manufacturer of steel fabricated wire products, welded
wire reinforcement, nails, coiled rebar, industrial wire and wire rod for the
agricultural, industrial, construction, original equipment manufacturer and
retail consumer markets. Historically, we have 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. We are also engaged in the operation of a ferrous scrap recycling
facility. The operations of this ferrous scrap recycling facility were
insignificant when compared to our consolidated operations. As such, the results
of its operations are not separately addressed in the discussion that follows.
Our operating segments are organized by our manufacturing facilities and
include three reportable segments:
o Keystone Steel and Wire ("KSW") which manufacturers and sells wire
rod, industrial wire, nails, coiled rebar and fabricated wire products
for agricultural, industrial, construction, commercial, original
equipment manufacturers and retail consumer markets,
o Engineered Wire Products ("EWP") which manufacturers and sells welded
wire reinforcement 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
o Keystone Wire Products ("KWP") which manufacturers and sells
industrial wire and fabricated wire products for agricultural,
industrial, construction, commercial, original equipment manufacturers
and retail consumer markets.
In connection with our emergence from Chapter 11 on August 31, 2005,
certain operating assets and existing operations of Sherman were sold at fair
market value to us, we then used these assets to form and operate KWP. As such,
operating results of this segment prior to our emergence from Chapter 11 were
operating results of Sherman. Operating results of this segment after our
emergence from Chapter 11, were operating results of KWP. In accordance with our
plan of reorganization, the remaining assets of SWC will eventually be
liquidated.
Our profitability is primarily dependent on sales volume, per-ton selling
prices, per-ton ferrous scrap cost, and energy costs.
We reported net income of $13.0 million in the second quarter of 2006 as
compared to a net loss of $3.7 million in the second quarter of 2005. We
reported net income of $34.8 million in the first six months of 2006 as compared
to a net loss of $4.9 million during the first six months of 2005. The increase
in earnings from 2005 to 2006 was due to the net effects of increased shipment
volumes, lower costs for ferrous scrap, postretirement benefits and
reorganization costs as well as a significantly higher defined benefit pension
credit all partially offset by lower per-ton selling prices and an increased
provision for income taxes. As discussed in Note 2 to the Condensed Consolidated
Financial Statements, we were operating under the protection of our Chapter 11
bankruptcy filing during the first and second quarters of 2005.
- 22 -
Our consolidated net sales, cost of goods sold and gross margin by
operating segment are set forth in the following table.
Allocation
Sherman/ differences/
KSW EWP KWP eliminations(1) Total
------ ------- -------- --------------- ---------
(In thousands)
Three months ended June 30, 2005:
Net sales $ 81,887 $17,755 $4,113 $(14,763) $ 88,992
Cost of goods sold 87,958 13,753 4,310 (18,987) 87,034
-------- ------- ------ -------- --------
Gross margin $ (6,071) $ 4,002 $ (197) $ 4,224 $ 1,958
======== ======= ====== ======== ========
Three months ended June 30, 2006:
Net sales $118,805 $18,115 $4,883 $(12,708) $129,095
Cost of goods sold 113,404 13,414 4,634 (11,644) 119,808
-------- ------- ------ -------- --------
Gross margin $ 5,401 $ 4,701 $ 249 $ (1,064) $ 9,287
======== ======= ====== ======== ========
Six months ended June 30, 2005:
Net sales $171,081 $29,806 $9,166 $(31,524) $178,529
Cost of goods sold 175,737 23,148 9,333 (36,702) 171,516
-------- ------- ------ -------- --------
Gross margin $ (4,656) $ 6,658 $ (167) $ 5,178 $ 7,013
======== ======= ====== ======== ========
Six months ended June 30, 2006:
Net sales $236,485 $30,733 $9,805 $(28,813) $248,210
Cost of goods sold 221,222 24,144 9,446 (30,915) 223,897
-------- ------- ------ -------- --------
Gross margin $ 15,263 $ 6,589 $ 359 $ 2,102 $ 24,313
======== ======= ====== ======== ========
(1)Allocation differences are (i) the difference between the defined
benefit pension credit allocated to the operating segments and the actual credit
included in the determination of operating profit or loss, (ii) the elimination
of intercompany profit or loss on ending inventory balances and (iii) LIFO
inventory reserve adjustments. See Note 8 to the Condensed Consolidated
Financial Statements for the amount of our defined benefit pension credit
included in our consolidated results.
- 23 -
Our consolidated sales volume and per-ton selling prices for the second
quarter and first six months of 2005 and 2006 are as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2005 2006 2005 2006
---- ---- ----- -----
Sales volume (000 tons):
Fabricated wire products 28 33 60 67
Welded wire reinforcement 20 21 33 36
Nails 3 6 8 11
Industrial wire 15 21 31 39
Coiled rebar - (1) - (1)
Wire rod 45 103 88 206
Billets 3 17 5 27
--- --- --- ---
Total 114 201 225 386
=== === === ===
(1) - Less than 1,000 tons
Per-ton selling prices:
Fabricated wire products $1,111 $1,050 $1,110 $1,039
Welded wire reinforcement 894 845 907 858
Nails 811 710 791 704
Industrial wire 758 707 763 712
Coiled rebar - 548 - 548
Wire rod 543 490 555 490
Billets 355 378 313 366
All products 773 638 785 639
The higher shipment volume during the 2006 periods was due to increased
market demand, competitor production problems as well as an abnormally low
shipment volume during the 2005 periods, in part due to our customers' concerns
about our financial stability while we were operating under Chapter 11
protection. The lower per-ton selling prices during the 2006 periods were due
primarily to significantly lower ferrous scrap costs, as the price we sell our
products is influenced in part by the market cost of ferrous scrap.
As a result of our strengthened financial position due to our emergence
from Chapter 11, we believe we have been able to recapture in 2006 a portion of
the market that we lost during the last two years. We believe a portion of this
market was lost due to customer concerns about our financial stability. As a
result, we expect 2006 shipment volumes to be higher than 2005 shipment volumes.
However, due to anticipated market pressures and lower projected ferrous scrap
costs, we believe 2006 overall per-ton selling prices will be lower than 2005
selling prices. Energy costs are expected to remain relatively flat in 2006.
Additionally, we anticipate a higher defined benefit pension credit and lower
postretirement benefit and reorganization costs in 2006. As a result, we expect
to report pre-tax income and positive cash flows from operating activities in
2006. In addition, as a result of the reversal of our deferred income tax
valuation allowance during the second quarter of 2006, we believe our provision
for income taxes during the remainder of 2006 will significantly exceed the
corresponding provision for income taxes in the same periods of the prior year.
We currently anticipate recording a provision for income taxes during the
remainder of the year that will approximate the statutory rate.
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. Statements are found in this report including, but
not limited to, statements found in Item 2 - "Management's Discussion and
- 24 -
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 SEC including, but not limited to, the following:
o Future supply and demand for our products (including cyclicality
thereof),
o Customer inventory levels,
o Changes in raw material and other operating costs (such as ferrous
scrap and energy)
o The possibility of labor disruptions,
o General global economic and political conditions,
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o The possibility of labor disruptions,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government regulations and possible changes therein,
o Significant increases in the cost of providing medical coverage to
employees and retirees,
o The ultimate resolution of pending litigation,
o International trade policies of the United States and certain foreign
countries,
o Operating interruptions (including, but not limited to, labor
disputes, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o Our ability to renew or refinance credit facilities,
o Any possible future litigation, and
o Other risks and uncertainties as discussed in this Quarterly Report
and the 2005 Annual Report, including, without limitation, the section
referenced above.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. We
disclaim any intention or obligation to update or revise any forward-looking
statement whether as a result of new information, future events or otherwise.
- 25 -
Segment Operating Results:
Keystone Steel & Wire
Three months ended June 30,
---------------------------------------------------------
% of % of
2005 sales 2006 sales
--------- ----- ------ -----
($ in thousands)
Net sales $ 81,887 100.0% $118,805 100.0%
Cost of goods sold 87,958 107.4 113,404 95.5
-------- ----- -------- -----
Gross margin $ (6,071) (7.4)% $ 5,401 4.5%
======== ===== ======== =====
Six months ended June 30,
---------------------------------------------------------
% of % of
2005 sales 2006 sales
--------- ----- ------ -----
($ in thousands)
Net sales $171,081 100.0% $236,485 100.0%
Cost of goods sold 175,737 102.7 221,222 93.5
-------- ----- -------- -----
Gross margin $ (4,656) (2.7)% $ 15,263 6.5%
======== ===== ======== =====
The primary drivers of sales, cost of goods sold, and the resulting gross
margin are as follows:
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
Sales volume(000 tons):
Fabricated wire products 28 32 60 66
Nails 3 6 8 11
Industrial wire 14 19 28 36
Coiled rebar - (1) - (1)
Wire rod 68 123 136 253
Billets 3 17 5 27
------ ------- ------ -------
Total sales 116 197 237 393
====== ======= ====== =======
(1) - Less than 1,000 tons
Per-ton selling prices:
Fabricated wire products $1,112 $ 1,050 $1,111 $ 1,039
Nails 811 710 791 704
Industrial wire 759 707 766 714
Coiled rebar - 548 - 548
Wire rod 531 485 540 484
Billets 355 378 313 366
All products 700 597 715 596
Average per-ton ferrous
scrap purchase cost $ 228 $ 210 $ 242 $ 208
Average electricity
cost per kilowatt hour $ 0.04 $ 0.04 $ 0.04 $ 0.04
Average natural gas
cost per therm $ 0.73 $ 0.69 $ 0.70 $ 0.84
Postretirement benefit expense
(credit) included in cost of goods
sold ($000s) $3,934 $(1,441) $7,868 $(2,882)
- 26 -
KSW believes the higher shipment volume during the 2006 periods was due to
increased market demand and competitor production problems as well as an
abnormally low shipment volume during the 2005 periods, in part due to our
customers' concerns about our financial stability while we were operating under
Chapter 11 protection. KSW believes the lower per-ton selling prices during the
2006 periods were due primarily to significantly lower ferrous scrap costs, as
the price we sell our products is influenced in part by the market cost of
ferrous scrap. The postretirement benefit credit in the 2006 periods as compared
to expense in the 2005 periods is a result of the 1114 Agreement that was
entered into in connection with our emergence from Chapter 11 in August 2005.
Engineered Wire Products
Three months ended June 30,
------------------------------------------------------
% of % of
2005 sales 2006 sales
--------- ---------- ------ --------
($ in thousands)
Net sales $17,755 100.0% $ 18,115 100.0%
Cost of goods sold 13,753 77.5 13,414 74.0
------- ----- -------- -----
Gross margin $ 4,002 22.5% $ 4,701 26.0%
======= ===== ======== =====
Six months ended June 30,
------------------------------------------------------
% of % of
2005 sales 2006 sales
--------- ---------- ------ --------
($ in thousands)
Net sales $29,806 100.0% $ 30,733 100.0%
Cost of goods sold 23,148 77.7 24,144 78.6
------- ----- -------- -----
Gross margin $ 6,658 22.3% $ 6,589 21.4%
======= ===== ======== =====
The primary drivers of sales, cost of goods sold, and the resulting gross
margin are as follows:
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
Sales volume (000 tons) -
Welded wire reinforcement 20 21 33 36
Per-ton selling prices -
Welded wire reinforcement $894 $845 $907 $858
Average per-ton wire rod
purchase cost $549 $498 $556 $495
The lower per-ton selling prices during the 2006 periods as well as the
increase in gross margin for the second quarter of 2006 as compared to the
second quarter of 2005 were due primarily to significantly lower cost for wire
rod, EWP's primary raw material. EWP sources substantially all of its wire rod
requirements from KSW at prices that approximate market.
- 27 -
Sherman/KWP
Three months ended June 30,
------------------------------------------------------
% of sales % of
2005 2006 sales
------- -------- ------- -----
($ in thousands)
Net sales $4,113 100.0% $4,883 100.0%
Cost of goods sold 4,310 104.8 4,634 95.0
------ ----- ------ -----
Gross margin $ (197) (4.8)% $ 249 5.0%
====== ===== ====== =====
Six months ended June 30,
------------------------------------------------------
% of % of
2005 sales 2006 sales
------- -------- ------- -----
($ in thousands)
Net sales $9,166 100.0% $9,805 100.0%
Cost of goods sold 9,333 101.8 9,446 96.3
------ ----- ------ -----
Gross margin $ (167) (1.8)% $ 359 3.7%
====== ===== ====== =====
The primary drivers of sales, cost of goods sold, and the resulting gross
margin are as follows:
Three months ended Six months ended
June 30, June 30,
-------------------- -----------------------
2005 2006 2005 2006
---- ---- ------ --------
Sales volume(000 tons):
Fabricated wire products 3 3 6 7
Industrial wire 2 2 4 4
------ ----- ----- ------
Total sales 5 5 10 11
------ ----- ----- ------
Per-ton selling prices:
Fabricated wire products $1,042 $1,001 $1,037 $1,013
Industrial wire 745 700 742 684
Average per-ton wire rod
purchase cost $ 477 $ 443 $ 476 $ 437
The improvement in the gross margin for the 2006 periods is primarily due
to significantly lower cost for wire rod, KWP's primary raw material. KWP
sources substantially all of its wire rod requirements from KSW at prices that
approximate market.
Selling Expense, Pension and Postretirement Benefit Credits, Interest
Expense, Provision for Income Taxes, and General Corporate Items
Selling expense during the second quarter and first six months of 2006 of
$1.7 million and $3.4 million, respectively, increased slightly from selling
expense during the same periods in 2005 of $1.6 million and $3.0 million,
respectively, primarily due to increased advertising expenses.
General and administrative expense during the second quarter and first six
months of 2006 of $2.9 million and $5.6 million, respectively, increased
slightly from general and administrative expense during the same periods in 2005
of $2.7 million and $5.4 million, respectively, primarily due to increased
salaries.
- 28 -
During the second quarter and first six months of 2006, we recorded a
defined benefit pension credit of $12.2 million and $24.3 million, respectively,
as compared to recording a defined benefit pension credit in the same periods
during 2005 of $3.2 million and $6.4 million, respectively. The increased
pension credit during the 2006 periods was a result of a $277 million increase
in plan assets from the end of 2004 to the end of 2005. In addition, we were not
required to make any cash contributions to the defined benefit pension plan
during either 2006 or 2005. We currently expect to record a defined benefit
pension credit of $49.6 million during 2006 and that no plan contributions will
be required during 2006. However, future variances from assumed actuarial rates,
including the rate of return on pension plan assets, may result in increases or
decreases in pension expense or credit and future funding requirements.
During the second quarter and first six months of 2006, we recorded general
corporate income of $996,000 and $1.5 million, respectively, as compared to
recording general corporate expense during the same periods in 2005 of $895,000
and $2.2 million, respectively. The reduction in general corporate expenses is
primarily due to lower general insurance expense, franchise taxes and retiree
medical costs during the 2006 periods as compared to the 2005 periods. As a
result of the 1114 Agreement that was entered into in connection with our
emergence from Chapter 11 in August 2005, postretirement benefit expense during
periods subsequent to that date is substantially less than in periods prior to
that date. During the second quarter and first six months of 2006, we recorded a
postretirement benefit credit of approximately $2.1 million and $4.2 million,
respectively, (of which $605,000 and $1.2 million, respectively, was included in
general corporate expenses) as compared to a $4.4 million and $8.7 million
postretirement benefit expense recorded in the second quarter and first six
months of 2005, respectively, (of which $451,000 and $902,000, respectively, was
included in general corporate expenses).
During the second quarter and first six months of 2006, we incurred
$186,000 and $336,000, respectively of legal and professional fees relative to
our Chapter 11 proceedings and the associated reorganization activities
including post emergence activities related to closing the Chapter 11 cases and
liquidation of certain pre-petition subsidiaries. During the second quarter and
first six months of 2005, we incurred $2.7 million and $6.0 million,
respectively, of legal and professional fees relative to these same activities.
Interest expense during the second quarter and first six months of 2006 of
$1.3 million and $2.5 million, respectively, increased significantly from
interest expense during the same periods in 2005 of $919,000 and $1.8 million,
respectively. The primary drivers of interest expense are as follows:
Three months ended Six months ended
June 30, June 30,
------------------------ -----------------------
2005 2006 2005 2006
-------- ------- ------- -------
($ in thousands)
Average debt balance $85,702 $98,093 $81,143 $96,683
Weighted average interest rates 3.6% 5.3% 3.3% 5.1%
The overall weighted average interest rates during the 2005 periods were
impacted by the fact that we discontinued accruing interest on pre-petition
unsecured debt upon filing for Chapter 11 on February 2, 2004.
A tabular reconciliation of the difference between the U.S. federal
statutory income tax rate and our effective income tax rates is included in Note
9 to the Condensed Consolidated Financial Statements. During 2005 and prior to
the second quarter of 2006, considering all factors believed to be relevant, we
- 29 -
believed our gross deferred tax assets did not meet the "more-likely-than-not"
realizability test. As such, we had provided a deferred tax asset valuation
allowance to offset our net deferred income tax asset (before valuation
allowance) of approximately $10.7 million at December 31, 2005. Primarily as a
result of the deferred tax asset valuation allowance, our provisions for income
taxes during those periods were not significant. However, during the first six
months of 2006, we recorded taxable income in excess of our available net
operating loss carryforwards. As such, the valuation allowance related to those
deferred tax assets was completely reversed during the first six months of 2006.
After such reversal, we have a net deferred tax liability at June 30, 2006. Due
in part to our continued profitability, we believe the realization of our
remaining deferred tax assets (including an alternative minimum tax credit
carryforward) meet the "more-likely-than-not" realizability test. We currently
expect to report pre-tax income for financial reporting purposes for the
remainder of 2006 and as a result of the reversal of our deferred income tax
valuation allowance during the second quarter of 2006, we believe our provision
for income taxes during the remainder of 2006 will significantly exceed the
corresponding provision for income taxes in the same periods of the prior year.
We currently anticipate recording a provision for income taxes during the
remainder of the year that will approximate the statutory rate.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
At June 30, 2006, we had working capital of $40.3 million, including $25.5
million of notes payable and current maturities of long-term debt as well as
outstanding borrowings under our revolving credit facility of $30.7 million. 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. At June 30, 2006, unused credit available for
borrowing under our revolving credit facility was $27.8 million. The revolving
credit facility requires daily cash receipts be used to reduce outstanding
borrowings, which results in us maintaining zero cash balances when there are
balances outstanding under this credit facility. Accordingly, any outstanding
balances under this facility are always classified as a current liability
regardless of the maturity date of the facility.
Historical Cash Flows
During the first six months of 2006 net cash provided by operations totaled
$16.4 million as compared to net cash used in operations of $8.9 million during
the first six months of 2005. The improvement in operating cash flows during the
first six months of 2006 as compared to the first six months of 2005 was due
primarily to:
o Higher earnings in 2006,
o Lower levels of retiree medical payments and a lower level of
reorganization costs in 2006, and
o Relative changes in our inventory levels, which provided $11.5 million
of cash in 2006 as compared to $2.7 million in 2005.
The improvement in our cash provided by relative changes in our inventory
levels was due to weaker than anticipated sales during the 2005 period due in
part to our customers' concerns about our financial stability while we were
operating under Chapter 11 protection.
During the first six months of 2006, we made capital expenditures of
approximately $6.2 million primarily related to upgrades of production equipment
at KSW and a plant expansion at EWP. Capital expenditures for 2006 are expected
- 30 -
to be approximately $23.0 million and are related primarily to the EWP plant
expansion. Such capital expenditures are expected to be funded using cash flows
from operations and borrowing availability under our credit facilities.
As a result of increased profitability, we decreased our borrowings on our
revolving credit facilities by $5.4 million during the first six months of 2006
as compared to increasing our borrowings on our revolving credit facilities
during the first six months of 2005. During the first six months of 2006, we
made principal payments of $2.7 million on long-term debt as compared to
long-term debt principal payments of $1.3 million during the first six months of
2005 due to the fact the credit facilities we obtained in connection with our
emergence from Chapter 11 require larger principal payments than those required
while under Chapter 11 protection.
Environmental Obligations
At June 30, 2006, our financial statements reflected accrued liabilities of
$13.6 million ($8.6 million of which is included in liabilities subject to
compromise on our balance sheet) for estimated remediation costs for those
environmental matters which we believe are probable and reasonably estimable.
Although we have established an accrual for estimated future required
environmental remediation costs, there is no assurance regarding the ultimate
cost of remedial measures that might eventually be required by environmental
authorities or that additional environmental hazards, requiring further remedial
expenditures, might not be asserted by such authorities or private parties.
Accordingly, the costs of remedial measures may exceed the amounts accrued. We
believe it is not possible to estimate the range of costs for certain sites. The
upper end of the range of reasonably possible costs to us for sites for which we
believe it is possible to estimate costs is approximately $14.3 million,
including the $13.6 million currently accrued. See Notes 10 and 11 to the
Condensed Consolidated Financial Statements for discussions of our environmental
liabilities and current litigation.
Pension and Other Postretirement Obligations
We do not expect to make contributions to our defined benefit pension plan
during 2006. However, we anticipate $4.3 million of cash contributions to our
postretirement benefit plans. Future variances from assumed actuarial rates,
including the rate of return on plan assets, may result in increases or
decreases to pension and postretirement benefit expense or credit and funding
requirements in future periods.
Income Taxes
Prior to the second quarter of 2006, considering all factors believed to be
relevant, we believed our gross deferred tax assets did not meet the
"more-likely-than-not" realizability test. As such, we had provided a deferred
tax asset valuation allowance to offset our net deferred income tax asset
(before valuation allowance) of approximately $10.7 million at December 31,
2005. However, during the first six months of 2006, we recorded taxable income
in excess of our available net operating loss caryforwards. As such, the
valuation allowance related to those deferred tax assets was completely reversed
during the fist six months of 2006. After such reversal, we had a net deferred
tax liability at June 30, 2006. Due in part to our continued profitability, we
believe the realization of our remaining gross deferred income tax assets meet
the "more-likely-than-not" realizability test. We currently expect to report
pre-tax income for financial reporting purposes for the remainder of 2006 and as
a result of the utilization of our available net operating loss carryforwards
during the first six months of 2006, we will be required to pay significantly
higher cash income taxes in future periods with positive taxable income amounts.
- 31 -
Operating Costs
We incur significant ongoing costs for plant and equipment and substantial
employee benefits for both current and retired employees. As such, we are
vulnerable to business downturns and increases in costs, and accordingly,
routinely compare our liquidity requirements and capital needs against our
estimated future operating cash flows. We are also taking additional action
towards improving our liquidity. We have also considered, and may in the future
consider, the sale of certain divisions or subsidiaries that are not necessary
to achieve our long-term business objectives. However, there can be no assurance
we will be successful in any of these or other efforts, or that if successful,
they will provide sufficient liquidity for our operations during the next year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Reference is made to the 2005 Annual Report for a discussion of the market
risks associated with changes in interest rates that affect us. There have been
no material changes in such market risks since we filed the 2005 Annual Report.
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 Rule 13a-15(e) of the Securities and Exchange Act of
1934, as amended (the "Act"), means controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
we file or submit to the Securities and Exchange Commission (the "SEC") is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that 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 our
disclosure controls and procedures as of June 30, 2006. Based upon their
evaluation, these executive officers have concluded that our disclosure controls
and procedures were effective as of the date of such evaluation.
Internal Control Over Financial Reporting - We currently expect that
Section 404 of the Sarbanes-Oxley Act of 2002 will require us to annually
include a management report on internal control over financial reporting
starting with our Annual Report on Form 10-K for the year ended December 31,
2007. We will have to document, test and evaluate our internal control over
financial reporting, using a combination of internal and external resources. The
process of documenting, testing and evaluating our internal control over
- 32 -
financial reporting under the applicable guidelines is expected to be complex
and time consuming, and available internal and external resources necessary to
assist us in the documentation and testing required to comply with Section 404
could be limited. While we currently believe we will be able to dedicate the
appropriate resources, and that we will be able to fully comply with Section 404
in our Annual Report on Form 10-K for the year ended December 31, 2007 and be in
a position to conclude that our internal control over financial reporting is
effective as of December 31, 2007, because the applicable requirements are
complex and time consuming, and because currently unforeseen events or
circumstances beyond our control could arise, there can be no assurance that we
will ultimately be able to fully comply with Section 404 in our Annual Report on
Form 10-K for the year ended December 31, 2007 or whether we will be able to
conclude that our internal control over financial reporting is effective as of
December 31, 2007.
Changes in Internal Control Over Financial Reporting - There have been no
changes in our internal control over financial reporting during the quarter
ended June 30, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
- 33 -
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Reference is made to disclosure provided under the caption "Current
litigation" in Note 11 to the Consolidated Financial Statements.
ITEM 1A. Risk Factors.
Reference is made to the 2005 Annual Report for a discussion of risk
factors related to our businesses. There have been no material changes in such
risk factors since we filed the 2005 Annual Report.
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:
31.1 Chief Executive Officer's Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive and Chief Financial Officers' Certification
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
- 34 -
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 8, 2006 By /s/Bert E. Downing, Jr.
----------------------------------------
Bert E. Downing, Jr.
Vice President, Chief Financial
Officer, Corporate Controller
and Treasurer
(Principal Financial and Accounting
Officer)