Attached files
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
S ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - For the fiscal year
ended December
31, 2009
Commission
file number 1-3919
Keystone
Consolidated Industries, Inc.
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(Exact
name of Registrant as specified in its
charter)
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Delaware
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37-0364250
|
|
(State
or other jurisdiction of
Incorporation
or organization)
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(IRS
Employer
Identification
No.)
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5430
LBJ Freeway, Suite 1740,
Three
Lincoln Centre, Dallas, Texas
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75240-2697
|
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
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(972) 458-0028
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Securities
registered pursuant to Section 12(b) of the Act:
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None.
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Securities
registered pursuant to Section 12(g) of the Act:
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Title of each class
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Common
Stock, $.01 par value
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Indicate
by check mark:
If the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes £ No
S
If the
Registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes £ No
S
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 and
(2) has been subject to such filing requirements for the past 90 days. Yes S No
£
If
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. S
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 £ Non-accelerated
filer S
Smaller reporting company £
Whether
the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes £ No S
The
aggregate market value of the 4.6 million shares of voting stock held by
nonaffiliates of the Registrant, as of June 30, 2009 (the last business day of
the Registrant’s most-recently completed second fiscal quarter), was
approximately $12.9 million.
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
£
As of
March 11, 2010, 12,101,932 shares of common stock were outstanding.
Documents incorporated by
reference
The
information required by Part III is incorporated by reference from the
Registrant’s definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
- 2
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PART
I
This Annual Report contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Annual Report on
Form 10-K 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 1 – "Business", Item 1A – "Risk Factors", Item 3 – "Legal Proceedings", Item 7 – "Management’s Discussion and
Analysis of Financial Condition and Results of Operations" and Item 7A – "Quantitative and Qualitative
Disclosures About Market Risk" 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 Annual
Report and those described from time to time in our other filings with the
Securities and Exchange Commission (“SEC”) including, but not limited to, the
following:
·
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Future
supply and demand for our products (including cyclicality
thereof),
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·
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Customer
inventory levels,
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·
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Changes
in raw material and other operating costs (such as ferrous scrap and
energy),
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·
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The
possibility of labor disruptions,
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·
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General
global economic and political
conditions,
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·
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Competitive
products (including low-priced imports) and substitute
products,
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·
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Customer
and competitor strategies,
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·
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The
impact of pricing and production
decisions,
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·
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Environmental
matters (such as those requiring emission and discharge limits for
existing and new facilities),
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·
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Government
regulations and possible changes
thereof,
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·
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Significant
increases in the cost of providing medical coverage to
employees,
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·
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The
ultimate resolution of pending
litigation,
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·
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International
trade policies of the United States and certain foreign
countries,
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·
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Operating
interruptions (including, but not limited to, labor disputes, fires,
explosions, unscheduled or unplanned downtime, supply disruptions and
transportation interruptions),
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·
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Our
ability to renew or refinance credit
facilities,
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·
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The
ability of our customers to obtain adequate credit,
and
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·
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Any
possible future litigation.
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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.
- 3
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ITEM
1. BUSINESS.
Keystone
Consolidated Industries, Inc. (“KCI”) is a leading domestic producer of steel
fabricated wire products, industrial wire and wire rod. We also
manufacture wire mesh, coiled rebar, steel bar and other
products. 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 billet 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.
Our
operating segments are organized by our manufacturing facilities and include
three reportable segments:
·
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Keystone
Steel & Wire (“KSW”), located in Peoria, Illinois, operates an
electric arc furnace mini-mill and manufactures and sells wire rod, coiled
rebar, industrial wire, fabricated wire and other products to
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer
markets;
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·
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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
|
·
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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.
|
For
additional information about our segments see “Part II – Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
Note 5 to our Consolidated Financial Statements.
We are
the successor to Keystone Steel & Wire Company, which was founded in
1889. At December 31, 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
KCI and its subsidiaries, taken as a whole.
- 4
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Manufacturing
Overview
Our
manufacturing operations consist of an electric arc furnace mini-mill, a rod
mill, a wire mill and three steel product fabrication facilities as outlined in
our segment discussion above. The manufacturing process commences at
KSW where ferrous scrap is loaded into an electric arc furnace, converted into
molten steel and then transferred to a ladle refining furnace where chemistries
and temperatures are monitored and adjusted to specifications prior to
casting. The molten steel is transferred from the ladle refining
furnace into a six-strand continuous casting machine which produces five-inch
square strands, referred to as billets, that are cut to predetermined
lengths. These billets are then either transferred to the adjoining
rod mill, shipped to Calumet for the production of steel bars or sometimes sold
to third party customers.
Upon
entering the rod mill, the billets are brought to rolling temperature in a
reheat furnace and are fed through the rolling mill, where they are rolled into
either wire rod or coiled rebar in a variety of diameters, surface
characteristics and specifications. After rolling, the wire rod or rebar is
coiled and cooled. After cooling, the coiled wire rod or rebar passes
through inspection stations for metallurgical, surface and diameter
checks. Finished coils are compacted and tied. Coiled
rebar is shipped to customers and wire rod is either further processed into
industrial wire, wire mesh and fabricated wire products at our wire mill and
wire product fabrication facilities at KSW or EWP, or shipped to wire rod
customers.
While we
do not maintain a significant "shelf" inventory of finished wire rod, we
generally have on hand approximately a one-month supply of industrial wire, wire
mesh, coiled rebar,
fabricated wire products and steel bars inventory which enables us to fill
customer orders and respond to shifts in product demand.
Raw
Materials and Energy
The
primary raw material used in our operations is ferrous scrap. Our
steel mill is located close to numerous sources of high density automobile,
industrial and railroad ferrous scrap, all of which are currently
available. We believe we are one of the largest recyclers of ferrous
scrap in Illinois. The purchase of ferrous scrap is highly
competitive and its price volatility is influenced by periodic shortages, export
activity, freight costs, weather and other conditions beyond our
control. The cost of ferrous scrap can fluctuate significantly and
product selling prices cannot always be adjusted, especially in the short-term,
to recover the costs of increases in ferrous scrap prices. We have
not entered into any hedging programs or long-term contracts for the purchase or
supply of ferrous scrap; therefore, we are subject to the price fluctuation of
ferrous scrap.
Our
manufacturing processes consume large amounts of energy in the form of
electricity and natural gas. Electricity in Illinois is not
regulated. We have an electric service agreement for KSW’s facility
whereby, on a daily basis, we are required to notify the utility provider of the
amount of electricity we expect to consume on the next day. The price we pay for
electricity is determined when we provide such notification based on the
forecasted hourly energy market rate for the next day. Any difference
between our forecasted consumption and actual consumption is settled based on
the actual hourly market rate. However, to allow us to avoid pricing
fluctuations, the contract allows us to purchase blocks of power in the forward
markets at our discretion at prices negotiated at the time of
purchase. Under this agreement, our power was uninterruptible until
the agreement was amended in June 2008 to allow interruption. The
amendment stipulates a maximum interruption period of 16 hours per occurrence
and a maximum number of interruption events of three times per
month. Additionally, we will be compensated for each interruption
based on market rates and the difference between our forecasted and actual
consumption for the interruption period. We did not suffer any
interruptions to our power during 2008 or 2009.
- 5
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Employment
As of
December 31, 2009, we employed 1,000 people, some of whom are covered under
collective bargaining agreements, as follows:
·
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686
are represented by the Independent Steel Workers’ Alliance (the “ISWA”) at
KSW under an agreement expiring in May 2012;
and
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·
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63
are represented by Local Union #40, an Affiliate to the International
Brotherhood of Teamsters' Chauffeurs Warehousemen and Helpers of America
(the “AFL-CIO”), at EWP under an agreement expiring in November
2010.
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We
believe our labor relations are good.
Products,
Markets and Distribution
The
following table sets forth certain information with respect to our product mix
in each of the last three years.
Year Ended December 31,
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||||||||||||||||||||||||
2007
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2008
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2009
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||||||||||||||||||||||
Product
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Percent
of
Tons
Shipped
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Percent
of
Sales
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Percent
of
Tons
Shipped
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Percent
of
Sales
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Percent
of
Tons
Shipped
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Percent
of
Sales
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||||||||||||||||||
Wire
rod
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61.0 | % | 48.5 | % | 58.5 | % | 48.8 | % | 60.8 | % | 46.0 | % | ||||||||||||
Fabricated
wire products
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16.0 | 25.2 | 14.7 | 21.3 | 15.6 | 28.2 | ||||||||||||||||||
Wire
mesh
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9.0 | 11.7 | 9.2 | 11.3 | 9.7 | 11.7 | ||||||||||||||||||
Industrial
wire
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10.1 | 11.2 | 10.4 | 12.1 | 8.2 | 9.6 | ||||||||||||||||||
Bar
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1.3 | 1.3 | 3.1 | 3.0 | 3.2 | 3.3 | ||||||||||||||||||
Coiled
rebar
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2.4 | 1.9 | 2.6 | 2.3 | 1.2 | 0.8 | ||||||||||||||||||
Other
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0.2 | 0.2 | 1.5 | 1.2 | 1.3 | 0.4 | ||||||||||||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||
Wire Rod. We
produce primarily low carbon steel wire rod and some higher carbon steel wire
rod at KSW’s rod mill. Low carbon steel wire rod, with carbon content
of up to 0.38%, is more easily shaped and formed than higher carbon wire rod and
is suitable for a variety of applications where ease of forming/manipulation is
a consideration. During 2009, we used approximately 34% of the wire
rod we manufactured to produce our industrial wire, wire mesh and fabricated
wire products. The remainder of our wire rod production was sold
directly to producers of construction products, fabricated wire products and
industrial wire, including products similar to those we
manufacture.
Fabricated Wire
Products. KSW is one of the leading U.S. manufacturers of
agricultural fencing, barbed wire, stockade panels and a variety of woven wire,
fabric and netting for agricultural and industrial applications. We
sell these products to agricultural, industrial, consumer do-it-yourself and
other end-user markets, which we believe are less cyclical than many steel
consuming end-use markets such as the automotive, construction, appliance and
machinery manufacturing industries. We serve these markets through
distributors, agricultural retailers, building supply centers and consumer
do-it-yourself chains such as Tractor Supply Co. and Lowe's Companies,
Inc. We believe our ability to service these customers with a wide
range of fabricated wire products through multiple distribution locations
provides a competitive advantage in accessing these growing and less cyclical
markets. As part of
our marketing strategy, we design merchandise packaging and supportive product
literature for marketing many of these products to the retail consumer
market.
- 6
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KSW also
manufactures products for residential and commercial construction, including
rebar ty wire and stucco netting. The primary customers for these
products are construction contractors and building materials manufacturers and
distributors.
We
believe our fabricated wire products are less susceptible to selling price
changes caused by the cyclical nature of the steel business than industrial
wire, coiled rebar or wire rod because the commodity-priced raw materials used
in these products, such as ferrous scrap, represent a lower percentage of the
total cost of these value-added products.
Wire mesh. EWP
manufactures a wide variety of wire mesh rolls and sheets used to form wire
reinforcement in concrete construction projects such as pipe, precast boxes and
other applications, including use in roadways, buildings and
bridges. Our wire mesh customers include pipe manufacturers, culvert
manufacturers, rebar fabricators and steel reinforcing
distributors. Like our fabricated wire products, we believe our wire
mesh products are also less susceptible to selling price changes caused by the
cyclical nature of the steel business than industrial wire, coiled rebar or wire
rod because the commodity-priced raw materials used in these products, such as
ferrous scrap, represent a lower percentage of the total cost of such
value-added products when compared to wire rod or other less value-added
products. EWP’s primary raw material is wire rod and KSW provides the
majority of EWP’s wire rod requirements.
Industrial
Wire. KSW is one of the largest manufacturers of industrial
wire in the United States. We produce custom-drawn industrial wire in
a variety of gauges, finishes and packages for further consumption by our
fabricated wire products operations or for sale to industrial fabrication and
original equipment manufacturer customers, who are generally not our
competitors. Our industrial wire is used by customers in the
production of a broad range of finished goods, including nails, coat hangers,
barbecue grills, air conditioners, tools, containers, refrigerators and other
appliances.
Bar. Calumet
manufactures merchant and special bar quality products and special sections in
carbon and alloy steel grades, offering a broad range of value-added products
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. Calumet’s
product line consists primarily of angles, flats, channels, rounds, squares and
other related products. Calumet’s primary raw material is billet and KSW
provides the majority of Calumet’s billet requirements.
Coiled Rebar. We
produce several sizes of coiled rebar at KSW’s rod mill. The coils
are typically used by fabricators who will process the material as straightened
and cut-to-length bars or fabricated shapes for specific reinforcement
applications such as building and road construction.
Trademarks
Many of
our fencing and related fabricated wire products are marketed under our RED BRAND® label, a widely
recognized brand name in the agricultural fencing and construction marketplaces
for more than 80 years. RED BRAND® sales represented
approximately 77% of our fabricated wire products net sales in
2009. We also maintain other trademarks for various products that are
promoted in their respective markets.
- 7
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Customers
Our
customers are primarily located in the Midwestern, Southwestern and Southeastern
regions of the United States. Our customers vary considerably by
product. We believe our ability to offer a broad range of products
represents a competitive advantage in servicing the diverse needs of our
customers.
Our
segments are not dependent upon a single customer or a few customers, and the
loss of any one, or a few, would not have a material adverse effect on our
segments’ business. The percentage of each of our segments’ external
sales related to their ten largest external customers and the one external
customer at each of our segments that accounted for more than 10% of that
segment’s external sales during 2009 is set forth in the following
table:
KSW
|
EWP
|
Calumet
|
|||
%
of segments’ sales
|
|||||
Ten
largest customers
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61%
|
54%
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56%
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||
Customer
> 10%
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11%
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11%
|
10%
|
Seasonality
Historically,
we have experienced greater sales and profits during the second and third
quarters of each year due to the seasonality of sales in principal fabricated
wire products and wire mesh markets, including the agricultural and construction
markets.
Backlog
Our
backlog of unfilled, cancelable steel products purchase orders, for delivery
generally within three months, approximated $23.4 million and $25.9 million at
December 31, 2008 and 2009, respectively. We do not believe backlog
is a significant factor in our business, and we expect all of the backlog at
December 31, 2009 will be shipped during 2010.
Industry
and Competition
The
fabricated wire products, wire mesh, industrial wire, bar, coiled rebar and wire
rod businesses in the United States are highly competitive and are comprised
primarily of several large mini-mill wire rod producers, many small independent
wire companies and a few large diversified wire producers. We also
face significant foreign competition. Lower wage rates, less
regulatory requirements and other costs in foreign countries sometimes result in
market prices that significantly reduce and sometimes eliminate the
profitability of certain products.
We
believe we are well positioned to compete effectively due to:
·
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the
breadth of our fabricated wire products, wire mesh, industrial wire and
bar offerings;
|
·
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our
ability to service diverse geographic and product markets;
and
|
·
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the
relatively low cost of our internal supply of billet and wire
rod.
|
We
believe our facilities are well located to serve the Midwestern, Southwestern
and Southeastern regions of the United States. Close proximity to our
customer base provides us with certain advantages over foreign and certain
domestic competition including reduced shipping costs, improved customer service
and shortened delivery times.
- 8
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Wire Rod. Since
wire rod is a commodity steel product, we believe the wire rod market is more
competitive than the fabricated wire products and industrial wire markets, and
price is the primary competitive factor. Among our principal domestic
competitors in these markets are Gerdau Ameristeel and Rocky Mountain
Steel. We also face significant foreign competition. The domestic
steel industry continues to experience consolidation. During the last
ten years, we and the majority of our major domestic competitors have either
filed for protection under Federal bankruptcy laws and discontinued operations,
were acquired, or reduced or completely shut-down operations. We
believe these shut-downs or production curtailments represent a significant
decrease in estimated domestic annual capacity. However, worldwide
overcapacity in the steel industry continues to exist and although imports of
wire rod were lower in 2008 and 2009 than in 2007, imports of wire rod have
become much more substantial in recent years.
Fabricated Wire Products and
Industrial Wire. Our principal competitors in the fabricated
wire products and industrial wire markets are Leggett & Platt, Deacero,
Oklahoma Steel and Wire and Davis Wire. Competition in the fabricated
wire products and industrial wire markets is based on a variety of factors,
including distribution channels, price, delivery performance, product quality,
service and brand name preference. Our RED BRAND® label has been a
widely recognized brand name in the agricultural fencing and construction
marketplaces for more than 80 years. Additionally, we believe higher
transportation costs and the lack of local distribution centers tend to limit
foreign producers' penetration into our principal fabricated wire products and
industrial wire markets, but we do not know if this will continue to be the
case.
Wire mesh. Our
principal competitors in our wire mesh markets are Insteel Wire Products and Ivy
Steel & Wire. We also face competition from smaller regional
manufacturers and wholesalers of wire mesh products. We believe EWP’s superior
products and renowned customer service distinguish EWP from its
competitors. In addition, we believe our vertical integration
enhances EWP’s ability to compete more effectively in the market as EWP can rely
on a more stable supply of wire rod. Competitors of EWP have at times
faced raw material shortages that have negatively impacted their daily
production capability and delivery reliability.
Bar. Our principal
competitors for our bar business include Gerdau Ameristeel, Nucor and Alton
Steel. The primary competitive factors are delivered price and the breadth of
product within the production capability of the mill. Throughout 2009
and continuing into 2010, Calumet has been conducting trials for many different
customer-specific products which has resulted in new customers and increased
sales volume. Calumet’s mill location in Chicago Heights, Illinois is
well suited to serve the bar market in the upper Midwest.
Coiled Rebar. The
principal competitors for our assortment of coiled rebar products include Gerdau
Ameristeel, Rocky Mountain Steel and Nucor Connecticut. The primary
competitive factors of the coiled rebar business are delivered price, coil size
and product quality. Due to our location, we believe we can
effectively serve customers in the Midwestern region of the United
States.
Environmental
Matters
Our
production facilities are affected by a variety of environmental laws and
regulations, including laws governing the discharge of water pollutants and air
contaminants, the generation, containment, transportation, storage, treatment
and disposal of solid wastes and hazardous substances and the handling of toxic
substances, including certain substances used in, or generated by, our
manufacturing operations. Many of these laws and regulations require
permits to operate the facilities to which they pertain. Denial,
revocation, suspension or expiration of such permits could impair the ability of
the affected facility to continue operations.
- 9
-
We record
liabilities related to environmental issues when information becomes available
and is sufficient to support a reasonable estimate of a range of probable
loss. If we are unable to determine that a single amount in an
estimated range is more likely, the minimum amount of the range is
recorded. We do not discount costs of future expenditures for
environmental remediation obligations to their present value due to the
uncertain timeframe of payout. Recoveries of environmental
remediation costs from other parties are recorded as assets when their receipt
is deemed probable.
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 us decreasing our accrued
environmental costs by $4.2 million. We believe the upper end of the
range of reasonably possible costs to us for the remaining sites where we have
been named a defendant is approximately $2.0 million, including the $.7 million
accrued as of December 31, 2009.
We
believe our current operating facilities are in material compliance with all
presently applicable federal, state and local laws regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment. Environmental legislation and regulations change rapidly
and we may be subject to increasingly stringent environmental standards in the
future.
Information
in Note 10 to our Consolidated Financial Statements is incorporated herein by
reference.
Acquisition,
Restructuring and Other Activities
We
routinely compare our liquidity requirements against our estimated future cash
flows. As a result of this process, we have in the past and may in
the future seek to raise additional capital, refinance or restructure
indebtedness, consider the sale of interests in subsidiaries, business units or
other assets, or take a combination of such steps or other steps, to increase
liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related
companies. From time to time, we and related entities also evaluate
the restructuring of ownership interests among our subsidiaries and related
companies and expect to continue this activity in the future and may in
connection with such activities, consider issuing additional equity securities
and increasing our indebtedness.
Amendment
of Financial Covenants Included in Credit Facility
We
anticipated we would be out of compliance with certain financial covenants as of
September 30, 2009 and, as such, amended our primary credit facility on October
2, 2009 (retroactive to September 30, 2009) to, among other things, waive
particular financial covenants until December 31, 2009 and modify a specific
financial covenant during 2010. Prior to the amendment of our primary
credit agreement, interest rates on our credit facility ranged from prime to
prime plus 0.5% or LIBOR plus 2.0% to LIBOR plus 2.75%. As amended,
our revolving credit facility bears interest at prime plus 1% or LIBOR plus
2.75% and interest rates on our credit facility’s term loan bears interest at
prime plus 1.25% or LIBOR plus 3%.
- 10
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We were
in compliance with the amended covenants 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.
Issuance
of Common Stock
On March
24, 2008 we issued 2.5 million shares of our common stock pursuant to a
subscription rights offering to our stockholders of record as of January 28,
2008 at a price of $10.00 per share (the “Offering”). The Offering
expired on March 17, 2008, and upon closing we received $25.0 million in
proceeds. We incurred approximately $.3 million of expenses related
to the Offering. We used the net proceeds to reduce indebtedness
under our revolving credit facility, which in turn created additional
availability under that facility that can be used for general corporate
purposes, including scheduled debt payments, capital expenditures, potential
acquisitions or the liquidity needs of our current operations.
In
connection with the Offering, in January 2008 we amended our Certificate of
Incorporation to increase the number of authorized shares of our common stock
from 11 million shares to 20 million shares.
Acquisition
and Amendment of Credit Facility
During
the first quarter of 2007 we formed Keystone-Calumet, Inc., which acquired
substantially all of the real estate, equipment and inventory of CaluMetals,
Inc. In connection with this acquisition, we also completed an
amendment to our credit facility during the first quarter of 2007, increasing
the total committed facility amount from $80.0 million to $100.0 million, in
part to finance the CaluMetals acquisition.
Restructuring
Previously,
Keystone Wire Products, Inc. (“KWP”), located in Sherman, Texas, manufactured
and sold industrial wire and fabricated wire products. Approximately
60% of KWP’s sales were to KSW in 2006 and substantially all of KWP’s sales in
2007 were to KSW. During the third quarter of 2006, in an effort to
reduce costs, we relocated KWP’s industrial wire manufacturing operations to
KSW. During the third quarter of 2007, in further efforts to reduce
costs, we discontinued all remaining manufacturing operations at
KWP. The majority of KWP’s wire products production equipment was
transferred to KSW or sold. The former KWP facility is now operated
solely as a KSW distribution center. There have been no changes in
our customer base as a result of this decision, as shipments that are
distributed through the former KWP location are now recognized as KSW
sales. KWP is now considered part of our KSW segment, and for
comparability purposes we have combined KWP’s prior segment results with KSW’s
segment results.
We will
continue to analyze the profitability of our operations and make operating
decisions accordingly.
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 attributed the need to reorganize to weaknesses in product
selling prices over the preceding several years, unprecedented increases in
ferrous scrap costs 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.
- 11
-
We
emerged from bankruptcy protection on August 31, 2005. Significant
provisions of our plan of reorganization included greater employee participation
in healthcare costs and an agreement (the “1114 Agreement”) with certain
retirees that replaced their medical and prescription drug coverage with fixed
monthly cash payments.
During
2007, the final pending claims of the bankruptcy were settled or fully
adjudicated. However, at that time, an amendment to the 1114
Agreement was in negotiation. Upon finalization of the amendment to the 1114
Agreement in 2008, we sought final closure of our bankruptcy case and on
September 11, 2008, the United States Bankruptcy Court for the Eastern District
of Wisconsin issued our final decree. See Note 4 to our Consolidated
Financial Statements.
Availability
of Company Reports Filed with the SEC
Our
fiscal year is 52 or 53 weeks and ends on the last Sunday in
December. We furnish our stockholders with annual reports containing
audited financial statements. In addition, we file annual, quarterly
and current reports, proxy and information statements and other information with
the SEC. We also make our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments thereto,
available free of charge through our website at www.keystoneconsolidated.com as
soon as reasonably practical after they have been filed with the
SEC. We also provide to anyone, without charge, copies of such
documents upon written request. Requests should be directed to the
attention of the Corporate Secretary at our address on the cover page of this
Form 10-K.
The
general public may read and copy any materials we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. We are an electronic
filer. The SEC maintains an Internet website at www.sec.gov that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC, including
us.
ITEM
1A. RISK FACTORS.
Listed
below are certain risk factors associated with our businesses. In
addition to the potential effect of these risk factors discussed below, any risk
factor which could result in reduced earnings or operating losses, or reduced
liquidity, could in turn adversely affect our ability to service our liabilities
or adversely affect the quoted market prices for our publicly-traded
securities.
Our leverage may impair our financial
condition or limit our ability to operate our businesses.
We fund
our operations primarily through cash from operations and borrowings on our
revolving credit facility. Our 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
the credit facility. The amount of available borrowings under our
revolving credit facility is based on formula-determined amounts of trade
receivables and inventories.
Our
revolving credit facility contains covenants requiring us to maintain certain
financial ratios. We were in compliance with the financial covenants
at December 31, 2009 and we believe we will be able to comply with the covenant
restrictions through the maturity of the facility; 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
balances 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 other existing
liquidity resources (which could include funds provided by our
affiliates).
- 12
-
Our
revolving credit facility expires in August 2010. We believe we will
be able to obtain sufficient financing for our operations upon expiration of the
credit facility through renewal of the existing facility or a new facility with
a new group of lenders. However, there is no assurance that such
financing can be obtained, or if obtained that it would not be on terms that
would result in higher costs to us (such as a higher interest rate on
outstanding borrowings). If we were unable to obtain such financing,
our liquidity could be negatively affected.
Our
dependence on borrowing availability from our revolving credit facility could
have important consequences to our stockholders and creditors,
including:
·
|
making
it more difficult for us to satisfy our obligations with respect to our
liabilities;
|
·
|
increasing
our vulnerability to adverse general economic and industry
conditions;
|
·
|
requiring
a portion of our cash flow from operations be used for the payment of
interest on our debt, therefore reducing our ability to use our cash flow
to fund working capital, capital expenditures, acquisitions and general
corporate requirements;
|
·
|
limiting
our ability to obtain additional financing to fund future working capital,
capital expenditures, acquisitions and general corporate
requirements;
|
·
|
limiting
our flexibility in planning for, or reacting to, changes in our business,
regulatory requirements and the industry in which we operate;
and
|
Demand
for, and prices of, certain of our products are cyclical and we are currently
operating in depressed market conditions, which may result in reduced earnings
or operating losses.
A
significant portion of our revenues are attributable to sales of products into
the agricultural and construction industries. These two industries
themselves are cyclical and changes in those industries’ economic conditions can
significantly impact our earnings and operating cash
flows. Additionally, the current world-wide economic downturn has
depressed sales volumes, and we are unable to predict with a high degree of
certainty when demand will return to the levels experienced prior to the fourth
quarter of 2008. Our operating results and our business and financial
condition could be adversely affected by, among other things, economic
conditions, availability of credit to fund agricultural and construction
projects, short and long-term weather patterns, interest rates and embargos
placed by foreign countries on U.S. agricultural products.
- 13
-
We sell the majority of our products
in mature and highly competitive industries and face price pressures in the
markets in which we operate, which may result in reduced earnings or operating
losses.
The
markets in which we operate our businesses are highly
competitive. Competition is based on a number of factors, such as
price, product quality, delivery times and service. Some of our
competitors may be able to drive down prices for our products because the
competitors’ costs are lower than our costs. In addition, some of our
competitors’ financial, technological and other resources may be greater than
our resources, and such competitors may be better able to withstand negative
changes in market conditions. Our competitors may be able to respond
more quickly than we can to new or emerging technologies and changes in customer
requirements. Further, consolidation of our competitors or customers
in any of the industries in which we compete may result in reduced demand for
our products. In addition, in some of our businesses new competitors
could emerge by modifying their existing production facilities so they could
manufacture products that compete with our products. The occurrence
of any of these events could result in reduced earnings or operating
losses.
Many of EWP’s products are ultimately
used in infrastructure projects by local, state or federal
governments.
Such
projects are impacted by the availability of governmental funding for such
projects. A decline in the availability of governmental funds for
such projects could ultimately result in a decline in demand or selling prices
of EWP’s products. Such a decline could result in reduced earnings or
operating losses.
Wire rod continues to be imported
into the U.S. Global producers of wire rod are able to import their
products into the U.S. with minimal tariffs and duties.
Many of
these global wire rod producers are able to produce wire rod at costs lower than
we incur in our production. As such, these wire rod imports are often
able to be priced at lower levels than similar products manufactured by
us. In addition, we believe certain foreign governments subsidize
their local wire rod producers. These events can adversely impact our
shipment levels and pricing decisions and, as such, could result in reduced
earnings or operating losses.
Higher costs or limited availability
of ferrous scrap may decrease our liquidity.
The cost
of ferrous scrap, our primary raw material, can fluctuate significantly and
product selling prices cannot always be adjusted, especially in the short-term,
to recover the costs of increases in ferrous scrap
prices. Additionally, should our local ferrous scrap suppliers not be
able to meet their contractual obligations, we may incur higher costs for
ferrous scrap.
Negative global economic conditions
increase the risk that we could suffer unrecoverable losses on our customers'
accounts receivable which would adversely affect our financial
results.
We extend
credit and payment terms to some of our customers. Although we have an ongoing
process of evaluating our customers' financial condition, we could suffer
significant losses if a customer fails and is unable to pay us. A significant
loss of an accounts receivable would have a negative impact on our financial
results.
- 14
-
Climate
change legislation could negatively impact our financial results or limit our
ability to operate our businesses.
We
believe all of our production facilities are in substantial compliance with
applicable environmental laws. Proposed legislation is being considered to
limit green house gases through various means, including emissions permits
and/or energy taxes. Our production facilities consume large amounts
of energy, including electricity and natural gas. To date the permit
system in effect has not had a material adverse effect on our financial
results. However, if green house gas legislation were to be enacted, it
could negatively impact our future results from operations through increased
costs of production, particularly as it relates to our energy requirements. If
such increased costs of production were to materialize, we may be unable to pass
price increases on to our customers to compensate for increased production
costs, which may decrease our liquidity, operating income and results of
operations.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES.
Our
principal executive offices are located in approximately 3,200 square feet of
leased space at 5430 LBJ Freeway, Suite 1740, Dallas, Texas
75240-2697.
Our
production facilities utilize approximately 2.3 million square feet for
manufacturing, approximately 85% of which is located at our Peoria, Illinois
facility.
The
following table sets forth the location, size and general product types produced
for each of our manufacturing facilities, as of December 31, 2009, all of which
are owned by us:
Facility
Name
|
Location
|
Approximate
Size
(Square Feet)
|
Primary Products Produced
for External
Sales
|
|||
Keystone
Steel & Wire
|
Peoria,
IL
|
1,951,000 |
Fabricated
wire products, industrial wire and wire rod
|
|||
Engineered
Wire Products
|
Upper
Sandusky, OH
|
126,000 |
Wire
mesh
|
|||
Keystone-Calumet
|
Chicago
Heights, IL
|
216,000 |
Steel
bar
|
|||
2,293,000 |
We
believe all of our facilities are adequately maintained and are satisfactory for
their intended purposes.
ITEM
3. LEGAL PROCEEDINGS.
We are
also involved in various legal proceedings. Information required by
this Item is included in Notes 4, 10 and 11 to our Consolidated Financial
Statements, which information is incorporated herein by reference.
ITEM
4. RESERVED.
- 15
-
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our
common stock trades on the OTC Bulletin Board (Symbol: KYCN). As of
March 4, 2010, we had approximately 1,354 holders of record of our common stock
at a closing price of $4.12. The following table sets forth the high
and low closing per share sales prices for our common stock for the periods
indicated:
High
|
Low
|
|||||||
Year
ended December 31, 2008
|
||||||||
First
quarter
|
$ | 16.98 | $ | 9.35 | ||||
Second
quarter
|
$ | 12.45 | $ | 9.00 | ||||
Third
quarter
|
$ | 15.51 | $ | 10.35 | ||||
Fourth
quarter
|
$ | 10.50 | $ | 5.01 | ||||
Year
ended December 31, 2009
|
||||||||
First
quarter
|
$ | 6.25 | $ | 2.80 | ||||
Second
quarter
|
$ | 3.32 | $ | 2.25 | ||||
Third
quarter
|
$ | 4.11 | $ | 2.70 | ||||
Fourth
quarter
|
$ | 5.05 | $ | 3.50 | ||||
First
quarter 2010 through March 4, 2010
|
$ | 4.70 | $ | 4.00 |
We have
not paid cash dividends on our common stock since 1977 and currently we retain
all earnings to fund working capital requirements, capital expenditures and
scheduled debt repayments. Although our primary credit facility
currently restricts our ability to pay dividends, including a prohibition
against the payment of cash dividends on our common stock without lender
consent, depending on our financial position, we may at some time in the future
decide it is in our best interest to pay cash dividends on our common
stock. Such a decision would be subject to negotiating an amendment
to our primary credit facility.
Performance Graph - Set forth
below is a line graph comparing the change in our cumulative total stockholder
return on our common stock against the cumulative total return of the S&P
500 Index, the S&P 500 Steel Index and a self-selected peer group for the
period from June 23, 2006 (the first date on which our common stock began public
trading following our emergence from Chapter 11 bankruptcy protection) through
December 31, 2009. The graph shows the value at December 31 of each
year assuming an original investment of $100 at June 23, 2006.
- 16
-
Our
self-selected peer group includes competitors whose principal operations closely
align with ours for which meaningful stockholder return information is
available:
·
|
Gerdau
Ameristeel Corporation – owns and operates mini-mills that produces wire
rod, rebar, bar, shapes, beams and special sections with downstream
operations including rebar fabrication and epoxy coating, railroad spike
operations, cold drawn plants, super light beam processing and the
production of elevator guide rails, grinding balls, wire mesh, and wire
drawing.
|
·
|
Nucor
Corporation – owns and operates steel mills that produce hot-rolled steel
(angles, rounds, flats, channels, sheet, wide-flange beams, pilings,
billets, blooms, beam blanks and plate) and cold-rolled steel. Downstream
operations produce steel joists and joist girders, steel deck, fabricated
concrete reinforcing steel, cold finished steel, steel fasteners, metal
building systems, light gauge steel framing, steel grating and expanded
metal, and wire and wire mesh.
|
·
|
Insteel
Industries – a wire mesh and PC strand
producer.
|
June
23,
|
December
31,
|
|||||||||||||||||||
2006
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||
Keystone
common stock
|
$ | 100 | $ | 750 | $ | 725 | $ | 300 | $ | 200 | ||||||||||
S&P
500 Index
|
100 | 115 | 121 | 76 | 97 | |||||||||||||||
S&P
500 Steel Index
|
100 | 117 | 142 | 69 | 88 | |||||||||||||||
Peer
Group
|
100 | 107 | 128 | 91 | 100 |
- 17
-
ITEM
6. SELECTED FINANCIAL DATA.
The
following selected consolidated financial data should be read in conjunction
with our Consolidated Financial Statements and Item 7. "Management's Discussion
and Analysis Of Financial Condition And Results Of Operations."
Years ended December 31,
|
||||||||||||||||||||
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||
(In
thousands, except per share and per ton amounts)
|
||||||||||||||||||||
Statement
of Operations Data:
|
||||||||||||||||||||
Net
sales
|
$ | 367,545 | $ | 440,540 | $ | 451,178 | $ | 562,693 | $ | 322,347 | ||||||||||
Operating
income
|
20,193 | 79,750 | 97,972 | 110,493 | 3,209 | |||||||||||||||
Defined
benefit pension credit (expense)
|
11,710 | 55,978 | 80,443 | 73,923 | (5,887 | ) | ||||||||||||||
OPEB
credit (expense)
|
(8,885 | ) | 8,297 | 8,526 | 8,474 | 4,748 | ||||||||||||||
Operating
income before pension and OPEB
(1)
|
17,368 | 15,475 | 9,003 | 28,096 | 4,348 | |||||||||||||||
Gain
on cancellation of debt
|
32,510 | - | 10,074 | - | - | |||||||||||||||
Gain
on legal settlement
|
- | - | 5,400 | - | - | |||||||||||||||
Reorganization
costs
|
(10,308 | ) | (679 | ) | (190 | ) | (225 | ) | - | |||||||||||
Provision
for income taxes
|
(430 | ) | (17,055 | ) | (37,619 | ) | (40,014 | ) | (2,292 | ) | ||||||||||
Net
income
|
$ | 39,232 | $ | 57,732 | $ | 64,765 | $ | 66,114 | $ | 241 | ||||||||||
Basic
income per share
|
$ | 4.12 | $ | 5.77 | $ | 6.48 | $ | 5.73 | $ | 0.02 | ||||||||||
Diluted
income per share
|
$ | 1.88 | $ | 5.77 | $ | 6.48 | $ | 5.73 | $ | 0.02 | ||||||||||
Weighted
average common and common equivalent shares outstanding (2):
|
||||||||||||||||||||
Basic
|
10,046 | 10,000 | 10,000 | 11,533 | 12,102 | |||||||||||||||
Diluted
|
22,029 | 10,000 | 10,000 | 11,533 | 12,102 | |||||||||||||||
Other
Operating Data:
|
||||||||||||||||||||
Shipments
(000 tons):
|
||||||||||||||||||||
Wire
rod
|
236 | 349 | 395 | 343 | 257 | |||||||||||||||
Fabricated
wire products
|
101 | 112 | 103 | 86 | 66 | |||||||||||||||
Wire
mesh
|
71 | 67 | 58 | 54 | 41 | |||||||||||||||
Industrial
wire
|
72 | 75 | 66 | 61 | 34 | |||||||||||||||
Bar
|
- | - | 9 | 18 | 13 | |||||||||||||||
Coiled
rebar
|
- | 1 | 15 | 15 | 5 | |||||||||||||||
Other
|
46 | 71 | 2 | 9 | 6 | |||||||||||||||
Total
|
526 | 675 | 648 | 586 | 422 | |||||||||||||||
Per-ton
selling prices:
|
||||||||||||||||||||
Wire
rod
|
$ | 503 | $ | 500 | $ | 548 | $ | 797 | $ | 575 | ||||||||||
Fabricated
wire products
|
1,090 | 1,037 | 1,089 | 1,380 | 1,373 | |||||||||||||||
Wire
mesh
|
881 | 870 | 896 | 1,168 | 916 | |||||||||||||||
Industrial
wire
|
731 | 726 | 763 | 1,103 | 897 | |||||||||||||||
Bar
|
- | - | 663 | 946 | 782 | |||||||||||||||
Coiled
rebar
|
- | 529 | 563 | 841 | 540 | |||||||||||||||
All
products in total
|
696 | 645 | 690 | 955 | 760 | |||||||||||||||
Average
per-ton ferrous scrap cost of goods sold
|
$ | 226 | $ | 210 | $ | 235 | $ | 363 | $ | 264 | ||||||||||
Increase
(decrease) in LIFO reserve and cost of goods sold (3)
|
$ | (12,003 | ) | $ | 3,367 | $ | 5,713 | $ | 10,142 | $ | (15,200 | ) | ||||||||
Other
Financial Data:
|
||||||||||||||||||||
Capital
expenditures
|
$ | 9,772 | $ | 18,739 | $ | 16,602 | $ | 13,298 | $ | 9,000 | ||||||||||
Depreciation
and amortization
|
15,745 | 15,222 | 15,434 | 15,164 | $ | 13,584 | ||||||||||||||
- 18
-
As of December
31,
|
||||||||||||||||||||
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Working
capital
|
$ | 36,373 | $ | 31,776 | $ | 20,630 | $ | 55,886 | $ | 49,063 | ||||||||||
Property,
plant and equipment, net
|
86,773 | 88,695 | 92,469 | 89,987 | 85,169 | |||||||||||||||
Total
assets
(4)
|
358,364 | 763,936 | 763,023 | 249,733 | 265,084 | |||||||||||||||
Total
debt
|
99,895 | 76,448 | 91,577 | 31,630 | 25,370 | |||||||||||||||
Stockholders’
equity (2)
(4)
|
67,531 | 403,662 | 404,694 | 119,644 | 147,770 |
(1)
|
Because
pension and other postretirement benefit (“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.
|
Years ended December 31,
|
||||||||||||||||||||
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Operating
income as reported
|
$ | 20,193 | $ | 79,750 | $ | 97,972 | $ | 110,493 | $ | 3,209 | ||||||||||
Defined
benefit pension expense (credit)
|
(11,710 | ) | (55,978 | ) | (80,443 | ) | (73,923 | ) | 5,887 | |||||||||||
OPEB
expense (credit)
|
8,885 | (8,297 | ) | (8,526 | ) | (8,474 | ) | (4,748 | ) | |||||||||||
Operating
income before pension/OPEB
|
$ | 17,368 | $ | 15,475 | $ | 9,003 | $ | 28,096 | $ | 4,348 |
(2)
|
All
of our outstanding common and preferred stock at August 31, 2005 was
cancelled in connection with our emergence from Chapter 11 on August 31,
2005, and at that time, we issued 10 million shares of a new issue of
common stock. On March 24, 2008 we issued 2.5 million shares of
our common stock and received net proceeds of $24.7 million pursuant to a
subscription rights offering.
|
(3)
|
We
use the last-in-first-out (“LIFO”) method to determine the cost of the
majority of our productive inventories. Changes in LIFO
reserves are reflected in cost of goods
sold.
|
(4)
|
We
adopted Accounting Standard Codification (“ASC”) Topic 715 effective
December 31, 2006, and, as a result, amounts reported as of December 31,
2006 and subsequent periods include the funded status of our pension
plans.
|
- 19
-
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS
OF OPERATIONS
Business
Overview
We are a
leading domestic producer of steel fabricated wire products, industrial wire and
wire rod. We also manufacture wire mesh, coiled rebar, steel bar and
other products. 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 billet 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 billet and wire rod as compared to bar manufacturers and wire
fabricators that purchase billet 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 half 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 just-in-time order philosophies. 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
operated our facilities on substantially reduced production schedules during the
first half of 2009, 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 second half of 2009 as the
economy began to recover slightly and the increase in shipment volumes resulted
in increased production levels. Based on current expectations that
the economy will continue to recover at a modest pace, we believe 2010 shipment
volumes will be higher than 2009 shipment volumes. However, our
customers have continued the just-in-time order philosophies discussed above and
we adapted 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
second half of 2009 and we announced and implemented price increases on selected
products. We currently believe we will be able to maintain positive
overall margins on our products throughout 2010.
- 20
-
On July
2, 2009, the IEPA approved the completion of the soil portion of the remediation
plan of certain waste management units (“WMUs”) at our Peoria, Illinois facility
which resulted in us decreasing our accrued environmental costs by $4.2 million
during 2009. We believe the upper end of the range of reasonably
possible costs to us for sites where we have been named a defendant is
approximately $2.0 million, including the $.7 million accrued as of December 31,
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. See Note 10 to our Consolidated Financial Statements
for discussions of our environmental liabilities.
Despite
the poor business conditions during 2009, we were profitable and we managed our
liquidity well by balancing production schedules with product demand, managing
costs and maintaining selling price discipline despite continuous market
pressure to sell below our costs. Considering that principal payments
due on our outstanding indebtedness in 2010 are about one-half of those paid in
2009, and availability under our revolving credit facility as of December 31,
2009 is similar to availability at December 31, 2008, we currently believe our
cash flows from operating activities combined with availability under our
revolving credit facility will be sufficient to enable us to meet our cash flow
needs during 2010.
As
discussed above, our credit facility expires in August 2010. Due to
our historical cash flows from operations, our ability to remain profitable
throughout the negative economic conditions of 2009 and our relatively low debt
position as of December 31, 2009, we believe we will be able to obtain
sufficient financing for our operations upon expiration of the credit facility
through renewal of the existing facility or a new facility with a new group of
lenders. If we are unable to obtain such financing, we believe we
would have other sources of liquidity to meet our requirements, which could
include funds provided by our affiliates.
As
discussed in Note 7 to our Consolidated Financial Statements, we anticipated we
would be out of compliance with certain financial covenants as of September 30,
2009 and, as such, amended our primary credit facility on October 2, 2009
(retroactive to September 30, 2009) to waive particular financial covenants
until December 31, 2009 and modify a specific financial covenant during
2010. We were in compliance with the amended covenants at December
31, 2009 and we believe we will be able to comply with the covenant
restrictions, as amended, through the maturity of the facility; 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 balances 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 believe we would have
other sources of liquidity to meet our requirements, which could include funds
provided by our affiliates.
Results
of Operations
Our
profitability is primarily dependent on sales volume, per-ton selling prices,
per-ton ferrous scrap cost and energy costs.
- 21
-
Operating
income before pension and OPEB for 2009 was significantly worse than 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;
|
·
|
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
$2.7 million impairment charge to reduce certain inventories to net
realizable value during 2009 as compared to a $1.2 million impairment
charge during 2008;
|
·
|
increased
bad debt expense during 2009 of $2.9 million 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
workers compensation expense;
|
·
|
decreased
employee incentive compensation accruals during 2009 resulting from lower
profitability;
|
·
|
decreases
in our LIFO reserve and cost of goods sold during 2009 of $15.2 million as
compared to a $10.1 million increase in our LIFO reserve and cost of goods
sold during 2008 as discussed in Note 5 to our Consolidated Financial
Statements; and
|
·
|
a
$4.2 million credit to general and administrative expense during 2009
related to the release of accrued environmental costs for certain inactive
waste management units as discussed
above.
|
Operating
income before pension and OPEB for 2008 was significantly higher than 2007
primarily due to the net effects of the following factors:
·
|
higher
per-ton product selling prices resulting from price increases we
implemented to offset our increased costs for ferrous scrap throughout the
year, as well as increased demand for domestic wire rod and industrial
wire during the first three quarters of 2008 due to lower quantities of
import product available for sale and higher prices for import products as
well as the weak U.S. dollar;
|
·
|
decreased
costs for zinc during 2008;
|
·
|
cost
savings of $1.7 million resulting from a reduction-in-force during the
first quarter of 2008;
|
·
|
income
of $.9 million related to obtaining an excise tax exemption in 2008 on
2007 electricity costs;
|
·
|
lower
shipment volumes for the majority of our products as customers held orders
during the fourth quarter of 2008 due to negative economic
conditions;
|
·
|
increased
costs for ferrous scrap and energy during
2008;
|
·
|
a
$1.2 million impairment charge during the fourth quarter of 2008 to reduce
certain inventories to net realizable
value;
|
·
|
increased
employee incentive compensation accruals as a result of increased
profitability during 2008;
|
·
|
increased
costs for workers compensation and personal injury claims under our
general liability insurance in 2008;
and
|
·
|
a
legal settlement with a former insurance carrier of $5.4 million during
2007.
|
- 22
-
Segment
Operating Results
Our
operating segments are organized by our manufacturing facilities and include
three reportable segments:
·
|
KSW,
located in Peoria, Illinois, operates an electric arc furnace mini-mill
and manufactures and sells wire rod, industrial wire, coiled rebar,
fabricated wire and other products to agricultural, industrial,
construction, commercial, original equipment manufacturers and retail
consumer markets;
|
·
|
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
|
·
|
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.
|
- 23
-
Our
consolidated net sales, cost of goods sold, operating costs and operating income
before pension and OPEB by segment are set forth in the following
table:
KSW
|
EWP
|
Calumet
|
Other(1)
|
Total
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
For
the year ended December 31, 2007:
|
||||||||||||||||||||
Net
sales
|
$ | 426,652 | $ | 52,509 | $ | 5,659 | $ | (33,642 | ) | $ | 451,178 | |||||||||
Cost
of goods sold
|
(413,556 | ) | (41,189 | ) | (6,651 | ) | 33,488 | (427,908 | ) | |||||||||||
Gross
margin (loss)
|
13,096 | 11,320 | (992 | ) | (154 | ) | 23,270 | |||||||||||||
Selling
and
administrative
expense
|
(14,026 | ) | (3,618 | ) | (399 | ) | (1,624 | ) | (19,667 | ) | ||||||||||
Gain
on legal settlement
|
- | - | - | 5,400 | 5,400 | |||||||||||||||
Operating
income (loss) before pension/OPEB
|
$ | (930 | ) | $ | 7,702 | $ | (1,391 | ) | $ | 3,622 | $ | 9,003 | ||||||||
For
the year ended December 31, 2008:
|
||||||||||||||||||||
Net
sales
|
$ | 542,106 | $ | 63,433 | $ | 17,165 | $ | (60,011 | ) | $ | 562,693 | |||||||||
Cost
of goods sold
|
(494,776 | ) | (54,676 | ) | (18,981 | ) | 57,236 | (511,197 | ) | |||||||||||
Gross
margin (loss)
|
47,330 | 8,757 | (1,816 | ) | (2,775 | ) | 51,496 | |||||||||||||
Selling
and
administrative
expense
|
(15,156 | ) | (3,419 | ) | (1,113 | ) | (3,712 | ) | (23,400 | ) | ||||||||||
Operating
income (loss) before pension/OPEB
|
$ | 32,174 | $ | 5,338 | $ | (2,929 | ) | $ | (6,487 | ) | $ | 28,096 | ||||||||
For
the year ended December 31, 2009:
|
||||||||||||||||||||
Net
sales
|
$ | 298,219 | $ | 37,575 | $ | 11,127 | $ | (24,574 | ) | $ | 322,347 | |||||||||
Cost
of goods sold
|
(279,380 | ) | (33,572 | ) | (14,350 | ) | 27,515 | (299,787 | ) | |||||||||||
Gross
margin (loss)
|
18,839 | 4,003 | (3,223 | ) | 2,941 | 22,560 | ||||||||||||||
Selling
and
administrative
expense
|
(12,863 | ) | (2,598 | ) | (480 | ) | (2,271 | ) | (18,212 | ) | ||||||||||
Operating
income (loss) before pension/OPEB
|
$ | 5,976 | $ | 1,405 | $ | (3,703 | ) | $ | 670 | $ | 4,348 | |||||||||
(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.
- 24
-
Keystone
Steel & Wire
2007
|
%
of
sales
|
2008
|
%
of
sales
|
2009
|
%
of
sales
|
|||||||||||||||||||
($
in thousands)
|
||||||||||||||||||||||||
Net
sales
|
$ | 426,652 | 100.0 | % | $ | 542,106 | 100.0 | % | $ | 298,219 | 100.0 | % | ||||||||||||
Cost
of goods sold
|
(413,556 | ) | (96.9 | ) | (494,776 | ) | (91.3 | ) | (279,380 | ) | (93.7 | ) | ||||||||||||
Gross
margin
|
13,096 | 3.1 | 47,330 | 8.7 | 18,839 | 6.3 | ||||||||||||||||||
Selling
and administrative
|
(14,026 | ) | (3.3 | ) | (15,156 | ) | (2.8 | ) | (12,863 | ) | (4.3 | ) | ||||||||||||
Operating
income (loss) before pension/OPEB
|
$ | (930 | ) | (0.2 | )% | $ | 32,174 | 5.9 | % | $ | 5,976 | 2.0 | % | |||||||||||
The
primary drivers of sales, cost of goods sold and the resulting gross margin are
as follows:
2007
|
2008
|
2009
|
||||||||||
Sales
volume (000 tons):
|
||||||||||||
Wire
rod
|
448 | 398 | 291 | |||||||||
Fabricated
wire products
|
103 | 86 | 66 | |||||||||
Industrial
wire
|
66 | 61 | 34 | |||||||||
Coiled
rebar
|
15 | 15 | 5 | |||||||||
Other
|
16 | 35 | 16 | |||||||||
Total
|
648 | 595 | 412 | |||||||||
Per-ton
selling prices:
|
||||||||||||
Wire
rod
|
$ | 545 | $ | 797 | $ | 575 | ||||||
Fabricated
wire products
|
1,089 | 1,380 | 1,373 | |||||||||
Industrial
wire
|
763 | 1,103 | 897 | |||||||||
Coiled
rebar
|
563 | 841 | 540 | |||||||||
All
products
|
653 | 906 | 720 | |||||||||
Average
per-ton ferrous scrap cost of goods sold
|
$ | 235 | $ | 363 | $ | 264 | ||||||
Increase
(decrease) in LIFO reserve and cost of goods sold
|
$ | 6,928 | $ | 6,588 | $ | (9,125 | ) | |||||
Average
electricity cost per kilowatt hour
|
$ | 0.05 | $ | 0.05 | $ | 0.03 | ||||||
Kilowatt
hours consumed (000 hours)
|
505,115 | 485,446 | 341,392 | |||||||||
Average
natural gas cost per therm
|
$ | 0.76 | $ | 0.95 | $ | 0.50 | ||||||
Natural
gas therms consumed (000 therms)
|
21,007 | 19,380 | 14,115 |
Sales
volume decreased from 2008 to 2009 as the negative economic conditions that
began late in 2008 continued throughout 2009.
- 25
-
Total
sales volume decreased from 2007 to 2008 as our customers limited orders during
the fourth quarter of 2008 due to the negative economic
conditions. Fourth quarter 2008 shipment volumes of approximately
59,000 tons decreased 63% from fourth quarter 2007 shipment volumes of
approximately 161,000 tons.
However,
shipment volumes for the first nine months of 2008 were approximately 10% higher
than the same period of 2007 primarily due to the net effects of the following
factors:
·
|
higher
shipment volumes of industrial wire due to increased domestic demand as a
result of higher prices for import products as well as the weak U.S.
dollar;
|
·
|
higher
shipment volumes of coiled rebar due to acceptance of our product in the
market with a larger number of customers than in
2007;
|
·
|
higher
shipment volumes of wire rod due to lower quantities of import product
available for sale and higher prices for import products as well as the
weak U.S. dollar; and
|
·
|
lower
shipment volumes of fabricated wire products as a result of customer
resistance to our price increases.
|
As
discussed above, ferrous scrap market prices have generally declined since
August 2008, which resulted in market pressure to decrease our selling prices
during 2009. The higher per-ton selling prices during 2008 as
compared to 2007 were due primarily to price increases we implemented in
response to significantly higher ferrous scrap costs as well as increased market
demand for domestic wire rod and industrial wire. Ferrous scrap is
KSW’s primary raw material.
KSW’s
operating income before pension and OPEB for 2009 as compared to 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;
|
·
|
increased
variable costs of production as idle production facilities were difficult
to re-start given cold winter temperatures during the first quarter of
2009;
|
·
|
increased
bad debt expense of $2.9 million primarily due to the Chapter 11
proceedings of one of KSW’s
customers;
|
·
|
decreased
employee incentive compensation accruals during 2009 as discussed
above;
|
·
|
decreased
workers compensation expense; and
|
·
|
a
$4.2 million credit related to the release of accrued environmental costs
during 2009 as discussed above.
|
KSW’s
operating income before pension and OPEB for 2008 as compared to 2007 was also
impacted by:
·
|
a
34% decline in zinc costs;
|
·
|
cost
savings of approximately $2.5 million resulting from KSW’s
reduction-in-force during the first quarter of 2008 partially offset by
the related $.8 million severance
expense;
|
·
|
income
of approximately $.9 million related to KSW obtaining an excise tax
exemption in 2008 on 2007 electricity
costs;
|
·
|
increased
employee incentive compensation accruals as a result of increased
profitability; and
|
·
|
increased
costs for workers compensation and personal injury claims under our
general liability insurance in
2008.
|
- 26
-
Engineered
Wire Products, Inc.
2007
|
%
of
sales
|
2008
|
%
of
sales
|
2009
|
%
of
sales
|
|||||||||||||||||||
($
in thousands)
|
||||||||||||||||||||||||
Net
sales
|
$ | 52,509 | 100.0 | % | $ | 63,433 | 100.0 | % | $ | 37,575 | 100.0 | % | ||||||||||||
Cost
of goods sold
|
(41,189 | ) | (78.4 | ) | (54,676 | ) | (86.2 | ) | (33,572 | ) | (89.4 | ) | ||||||||||||
Gross
margin
|
11,320 | 21.6 | 8,757 | 13.8 | 4,003 | 10.6 | ||||||||||||||||||
Selling
and administrative
|
(3,618 | ) | (6.9 | ) | (3,419 | ) | (5.4 | ) | (2,598 | ) | (6.9 | ) | ||||||||||||
Operating
income before pension/OPEB
|
$ | 7,702 | 14.7 | % | $ | 5,338 | 8.4 | % | $ | 1,405 | 3.7 | % | ||||||||||||
The
primary drivers of sales, cost of goods sold and the resulting gross margin are
as follows:
2007
|
2008
|
2009
|
||||||||||
Sales
volume (000 tons)-
|
||||||||||||
Wire
mesh
|
58 | 54 | 41 | |||||||||
Per-ton
selling prices -
|
||||||||||||
Wire
mesh
|
$ | 896 | $ | 1,168 | $ | 916 | ||||||
Average
per-ton wire rod cost of goods sold
|
$ | 510 | $ | 713 | $ | 710 | ||||||
Increase
(decrease) in LIFO reserve and cost of goods sold
|
$ | (1,215 | ) | $ | 3,554 | $ | (6,075 | ) |
Sales
volume decreased from 2008 to 2009 as the negative economic conditions that
began late in 2008 continued throughout 2009. Sales volume decreased
from 2007 to 2008 as our customers limited orders during the fourth quarter of
2008 due to the negative economic conditions.
Wire rod
market prices have generally declined since August 2008, which resulted in
market pressure to decrease our selling prices during 2009. The
higher per-ton selling prices during 2008 as compared to 2007 were due primarily
to price increases we implemented in response to significantly higher wire rod
costs. Wire rod is EWP’s primary raw material.
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 wire rod costs
included in the products EWP sold during 2009 were similar to the wire rod costs
included in the products EWP sold during 2008; converse to wire rod market
prices discussed above.
EWP’s
operating performance during 2009 as compared to 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;
|
·
|
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; and
|
·
|
decreased
employee incentive compensation accruals during 2009 as discussed
above.
|
- 27
-
Keystone-Calumet,
Inc.
2007
|
%
of
sales
|
2008
|
%
of
sales
|
2009
|
%
of
sales
|
|||||||||||||||||||
($
in thousands)
|
||||||||||||||||||||||||
Net
sales
|
$ | 5,659 | 100.0 | % | $ | 17,165 | 100.0 | % | $ | 11,127 | 100.0 | % | ||||||||||||
Cost
of goods sold
|
(6,651 | ) | (117.5 | ) | (18,981 | ) | (110.6 | ) | (14,350 | ) | (129.0 | ) | ||||||||||||
Gross
margin (loss)
|
(992 | ) | (17.5 | ) | (1,816 | ) | (10.6 | ) | (3,223 | ) | (29.0 | ) | ||||||||||||
Selling
and administrative
|
(399 | ) | (7.1 | ) | (1,113 | ) | (6.5 | ) | (480 | ) | (4.3 | ) | ||||||||||||
Operating
loss before pension/OPEB
|
$ | (1,391 | ) | (24.6 | )% | $ | (2,929 | ) | (17.1 | )% | $ | (3,703 | ) | (33.3 | )% |
The
primary drivers of sales, cost of goods sold and the resulting gross margin are
as follows:
2007
|
2008
|
2009
|
||||||||||
Sales
volume (000 tons) - Bar
|
9 | 18 | 13 | |||||||||
Per-ton
selling prices - Bar
|
$ | 663 | $ | 946 | $ | 782 | ||||||
Average
per-ton billet cost of goods sold
|
$ | 408 | $ | 549 | $ | 447 |
Sales
volume decreased from 2008 to 2009 as the negative economic conditions that
began late in 2008 continued throughout 2009. Shipment volumes in
2008 were higher than in 2007 as Calumet regained some of its former market
share and obtained recurring monthly orders. Additionally, the
acquisition of Calumet was in late March 2007 which results in three additional
months of operations in 2008.
Throughout
2009 and continuing into 2010, Calumet has been conducting trials for many
different customer-specific products and has enhanced its sales
force. Both of these developments are contributing to new customers
and increased sales volume which is key to this segment becoming
profitable. We believe increased sales volume would allow Calumet to
achieve certain economies of scale and profitability.
During
the fourth quarter of 2008 and throughout 2009, Calumet determined it would not
be able to recover the cost of certain inventory items in future selling prices
and recognized impairment charges of $1.2 million and $2.7 million,
respectively, to reduce the inventory to its net realizable
value. During the third quarter of 2007, we decided to discontinue
producing a certain bar product. Accordingly, Calumet recognized a
$.2 million impairment charge on related storeroom inventory
items. These impairment charges are included in cost of goods
sold.
The
higher selling and administrative expenses during 2008 as compared to 2007 and
2009 were primarily due to higher bonus accruals, severance expense and
relocation expenses.
- 28
-
Calumet’s
operating performance during 2009 as compared to 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;
|
·
|
increased
variable costs of production as idle production facilities were difficult
to re-start given cold winter temperatures during the first quarter of
2009; and
|
·
|
decreased
cost of electricity and natural
gas.
|
Pension
Expense and Credits
During
2009, we recorded a defined benefit pension expense of $5.9
million. During 2008 and 2007, we recorded a defined benefit pension
credit of $73.9 million and $80.4 million, respectively. The
fluctuations in the pension expense or credit were primarily the result of
decreases in our plans’ assets of $510 million during 2008 and $19.5 million
during 2007. These decreases impact the subsequent year’s defined
benefit pension expense or credit by (i) lowering the expected return on plan
assets as the plan assets multiplied by the assumed long-term rate of return is
lower than the prior year and (ii) decreasing the amortization of unrealized net
gains or increasing the amortization of unrealized net losses as any differences
between the expected return on plan assets and the actual return on plan assets
are deferred and amortized into income over future periods.
As our
plans’ assets increased by approximately $58 million during 2009, we currently
expect to record a defined benefit pension credit of $4.9 million during 2010.
See Note 9 to our Consolidated Financial Statements.
OPEB
Credits
We
recorded an OPEB credit of $4.7 million during 2009 and an OPEB credit of $8.5
million in each of 2007 and 2008. The decrease in the OPEB credit
during 2009 was primarily due to an amendment of one of our OPEB plans late in
2008 which, among other things, significantly increased fixed monthly
benefits. We currently expect to record a $5.5 million OPEB credit
during 2010. See Note 9 to our Consolidated Financial
Statements.
Interest
Expense
Interest
expense during 2007, 2008 and 2009 as well as the primary drivers of interest
expense are presented in the following table.
2007
|
2008
|
2009
|
||||||||||
($
in thousands)
|
||||||||||||
Interest
expense
|
$ | 6,073 | $ | 3,798 | $ | 1,725 | ||||||
Average
debt balance
|
$ | 95,483 | $ | 68,169 | $ | 35,129 | ||||||
Weighted
average interest rate
|
6.2 | % | 5.0 | % | 4.1 | % |
The
decrease in the average debt balance during 2009 was primarily due to a lower
balance on our revolving credit facility as a result of substantially reduced
production schedules throughout 2009 and an exceptionally low balance on our
revolving credit facility at the end of 2008.
- 29
-
The
decrease in the average debt balance from 2007 to 2008 was primarily due to
decreased borrowings on our revolving credit facility as a result of increased
profitability in 2008 and proceeds from a $25 million subscription rights
offering in March of 2008 which were used to reduce indebtedness under our
revolving credit facility.
The
decreases in the overall weighted average interest rate from 2008 to 2009 and
from 2007 to 2008 were primarily due to decreases in LIBOR and the prime
rate. Prior to the amendment of our primary credit agreement in
October 2009 (as discussed above and in Note 7 to our 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 bears interest at prime plus 1% or LIBOR plus 2.75%
and interest rates on our credit facility’s term loan bears interest at prime
plus 1.25% or LIBOR plus 3%.
Gain
on Legal Settlement
During
2007, we received a $5.4 million legal settlement from one of our former
insurance carriers. See Note 11 to our Consolidated Financial
Statements.
Gain
on Cancellation of Debt
During
2007, we recorded gains on cancellation of debt as a result of our bankruptcy
proceedings. See Note 4 to our Consolidated Financial
Statements.
Provision
for Income Taxes
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 8 to our
Consolidated Financial Statements.
LIQUIDITY
AND CAPITAL RESOURCES
Historical
Cash Flows
Operating
Activities
During
2009, net cash provided by operations totaled $13.3 million as compared to net
cash provided by operations of $48.3 million during 2008. The $35.0
million decline in operating cash flows was primarily due to the net effects
of:
·
|
lower
operating income before pension/OPEB during 2009 of $23.7
million;
|
·
|
lower
OPEB payments during 2009 of $1.1 million as a result of amendments to one
of our OPEB plans and one of our pension plans to create supplemental
pension benefits in lieu of us paying certain OPEB benefits throughout
2009;
|
·
|
higher
net cash used as a result of relative changes in our accounts receivable
in 2009 of $46.0 million primarily due to an abnormally low accounts
receivable balance at December 31, 2008 as a result of customers limiting
orders during the fourth quarter of 2008 (Days Sales Outstanding (“DSO”)
was 17 and 47 at December 31, 2008 and 2009,
respectively);
|
·
|
higher
net cash provided by relative changes in our inventory in 2009 of $45.4
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 (Days of
Sales in Inventory (“DSI”) was 51 and 50 at December 31, 2008 and 2009,
respectively);
|
·
|
lower
net cash used due to relative changes in our accounts payable of $4.1
million in 2009 as a result of increased cost management efforts during
2009;
|
·
|
higher
net cash used as a result of relative changes in our accrued liabilities
of $20.3 million in 2009 as 2008 employee incentive compensation paid in
the first quarter of 2009 was significantly higher than 2007 employee
incentive compensation paid in the first quarter of
2008;
|
·
|
lower
interest payments during 2009 of $2.1 million;
and
|
·
|
lower
tax payments during 2009 of $1.9 million due to decreased
profitability.
|
- 30
-
During
2008, net cash provided by operations totaled $48.3 million as compared to net
cash provided by operations of $2.6 million during 2007. The $45.7
million improvement in operating cash flows was due primarily to the net effects
of:
·
|
higher
operating income before pension/OPEB in 2008 of approximately $19.1
million;
|
·
|
lower
OPEB payments of $1.3 million in 2008 as a result of amendments to one of
our OPEB plans and one of our pension plans to create supplemental pension
benefits in lieu of us paying certain OPEB benefits during the last half
of 2008;
|
·
|
final
payments of $4.3 million in 2007 to certain of our pre-petition creditors
from our 2004 bankruptcy;
|
·
|
higher
net cash provided by relative changes in our accounts receivable in 2008
of $51.7 million primarily due to an abnormally low accounts receivable
balance at December 31, 2008 as a result of customers limiting orders
during the fourth quarter of 2008 as discussed above compared to an
abnormally high accounts receivable balance at December 31, 2007 due to
abnormally high demand at the end of 2007 (DSO was 44 and 17 at December
31, 2007 and 2008, respectively);
|
·
|
higher
net cash used due to relative changes in our inventory in 2008 of $28.8
million primarily due to increased costs of ferrous scrap and energy as
well as higher levels of inventory as customers limited orders during the
fourth quarter of 2008 as discussed above (DSI was 46 and 51 at December
31, 2007 and 2008, respectively);
|
·
|
higher
net cash used due to relative changes in our accounts payable in 2008 of
$10.4 million as a result of purchasing significantly less ferrous scrap
and energy at the end of 2008 as we substantially lowered production
levels due to the rapid decline in product demand during the fourth
quarter of 2008;
|
·
|
higher
net cash provided by relative changes in our accrued liabilities of $7.1
million in 2008 due in part to higher accruals for employee incentive
compensation and workers compensation in
2008;
|
·
|
lower
interest payments during 2008 of $2.1 million;
and
|
·
|
higher
cash paid for income taxes in 2008 of $2.7 million due to increased
profitability.
|
- 31
-
Investing
Activities
During
2007, 2008 and 2009, we had capital expenditures of approximately $16.6 million,
$13.3 million and $9.0 million, respectively. Capital expenditures
for 2009 were lower than 2008 capital expenditures as we limited all
non-critical capital projects during 2009 due to the economic
conditions. The decrease in capital expenditures from 2007 to 2008
was primarily related to the completion of a plant expansion at EWP during
2007.
During
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. During 2007, we made final distributions to our pre-petition
unsecured creditors. In connection with this distribution, $4.0
million of restricted funds were released to us. These funds were
used to reduce our indebtedness under our revolving credit
facility.
Financing
Activities
On March
24, 2008 we received $25.0 million from the issuance of 2.5 million shares of
our common stock pursuant to a subscription rights offering. We
incurred approximately $.3 million of expenses related to the
offering. We used the net proceeds to reduce indebtedness under our
revolving credit facility, which in turn created additional availability under
that facility.
As a
result of decreased profitability and the payment of 2008’s employee incentive
compensation during the first quarter of 2009, we increased our borrowings on
our revolving credit facilities by $9.3 million during 2009. As a
result of increased profitability and the subscription rights offering proceeds,
we reduced our indebtedness under our revolving credit facility by $43.0 million
during 2008 as compared to increased borrowings on our credit facilities during
2007 of $28.5 million.
During
2007, we drew an additional $4.0 million on our Wachovia Term Loans in
connection with the CaluMetals acquisition.
Future
Cash Requirements
Capital
Expenditures
Capital
expenditures for 2010 are expected to be approximately $10 million and are
primarily related to upgrades of production equipment which are not critical to
our operations. We expect to fund capital expenditures using cash
flows from operations and borrowing availability under credit
facilities.
- 32
-
Summary
of Debt and Other Contractual Commitments
As more
fully described in Notes 7 and 11 to our Consolidated Financial Statements, we
are a party to various debt, lease and other agreements which contractually and
unconditionally commit us to pay certain amounts in the future. The
following table summarizes such contractual commitments that are unconditional
both in terms of timing and amount by the type and date of payment:
Payment due date
|
||||||||||||||||||||
Contractual
commitment
|
2010
|
2011/2012 | 2013/2014 |
2015
and after
|
Total
|
|||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Indebtedness:
|
||||||||||||||||||||
Principal
|
$ | 19,396 | $ | 2,745 | $ | 3,437 | $ | - | $ | 25,578 | ||||||||||
Interest
|
885 | 595 | 163 | - | 1,643 | |||||||||||||||
Operating
leases
|
479 | 660 | - | - | 1,139 | |||||||||||||||
Product
supply agreements
|
1,200 | 1,500 | - | - | 2,700 | |||||||||||||||
Total
|
$ | 21,960 | $ | 5,500 | $ | 3,600 | $ | - | $ | 31,060 |
The
timing and amounts shown in the above table related to indebtedness (both
principal and interest), operating leases and product supply agreements are
based upon the contractual payment amount and the contractual payment or
maturity date for such commitments.
The above
table does not reflect any amounts that we might pay to fund our defined benefit
pension plans and OPEB plans, as the timing and amount of any such future
fundings are unknown and dependent on, among other things, the future
performance of defined benefit pension plan assets, interest rate assumptions
and actual future census data.
Off-balance
Sheet Financing
We do not
have any off-balance sheet financing agreements other than the operating leases
included in the table above. See Note 11 to our Consolidated
Financial Statements.
Environmental
Obligations
At
December 31, 2009, our financial statements reflected accrued liabilities of $.7
million for estimated remediation costs for those environmental matters which we
believe are probable and reasonably estimable; $.4 million of which we believe
will be paid during 2010. Although we have established an accrual for
estimated future required environmental remediation costs, we do not know the
ultimate cost of remedial measures that might eventually be required by
environmental authorities or that additional environmental hazards, requiring
further remedial expenditures, might not be asserted by such authorities or
private parties. Accordingly, the costs of remedial measures may
exceed the amounts accrued. The upper end of the range of reasonably
possible costs to us for sites where we have been named a defendant is
approximately $2.0 million, including the $.7 million currently
accrued. See Note 10 to our Consolidated Financial Statements for
discussions of our environmental liabilities.
- 33
-
Pension
and Other Postretirement Obligations
We were
not required to make any cash contributions for defined benefit pension plan
fundings during 2007, 2008 or 2009 and we do not expect to be required to make
contributions to our defined benefit pension plans during
2010. However, we contributed $3.8 million, $2.5 million and $1.3
million to our other postretirement benefit plans during 2007, 2008 and 2009,
respectively, and we expect to contribute $1.4 million during
2010. The decline in contributions to our other postretirement
benefit plans has been the result of amendments to one of our OPEB plans and one
of our pension plans to create supplemental pension benefits in lieu of certain
OPEB benefit payments for August 2008 through December 2008, all of 2009 and all
of 2010. We have the ability to decide whether or not to exercise
such rights on a year-by-year basis. Future variances from assumed
actuarial rates, including the rate of return on plan assets, may result in
increases or decreases to pension and other postretirement benefit funding
requirements in future periods.
Working
Capital and Borrowing Availability
December 31,
|
||||||||
2008
|
2009
|
|||||||
(In
thousands)
|
||||||||
Working
capital
|
$ | 55,886 | $ | 49,063 | ||||
Outstanding
balance under revolving credit facility
|
3,264 | 12,546 | ||||||
Additional
borrowing availability
|
46,500 | 38,637 |
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.
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 December 31,
2009).
As
discussed above, we anticipated we would be out of compliance with certain
financial covenants set forth in our primary credit facility as of September 30,
2009 and, as such, amended that credit facility on October 2, 2009 (retroactive
to September 30, 2009) to, among other things, waive particular financial
covenants until December 31, 2009 and modify a specific financial covenant
during 2010. Additionally, our current credit facility expires in
August 2010. See the “Recent Developments” section of “Results of
Operations” above for further discussion.
Liquidity
Outlook
See the
“Recent Developments”
section of “Results of Operations” above.
RELATED
PARTY TRANSACTIONS
As
further discussed in Note 14 to our Consolidated Financial Statements, we are
party to certain transactions with related parties. It is our policy to engage
in transactions with related parties on terms no less favorable than could be
obtained from unrelated parties.
- 34
-
RECENT
ACCOUNTING PRONOUNCEMENTS
See Note
15 to our Consolidated Financial Statements for the projected impact of recent
accounting pronouncements on our financial position and results of
operations.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
accompanying "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is based upon our Consolidated Financial Statements,
which have been prepared in accordance with GAAP. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported amount
of revenues and expenses during the reported period. On an on-going
basis, we evaluate our estimates. We base our estimates on historical
experience and on various other assumptions we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts
under different assumptions or conditions.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our Consolidated Financial
Statements.
Impairment of long-lived
assets. We recognize an impairment charge associated with our
long-lived assets, primarily property and equipment, whenever we determine that
recovery of such long-lived asset is not probable. Such determination
is made in accordance with the applicable GAAP requirements associated with the
long-lived asset, and is based upon, among other things, estimates of the amount
of future net cash flows to be generated by the long-lived asset and estimates
of the current fair value of the asset. Adverse changes in such
estimates of future net cash flows or estimates of fair value could result in an
inability to recover the carrying value of the long-lived asset, thereby
possibly requiring an impairment charge to be recognized in the
future.
We assess
property and equipment for impairment only when circumstances as specified in
ASC 360-10-35, Property,
Plant, and Equipment, indicate an impairment may exist. During
2009, as a result of continued operating losses, property and equipment of our
Calumet segment was evaluated for impairment as of December 31,
2009. Our impairment analysis is based on estimated future
undiscounted cash flows of Calumet’s operations assuming Calumet is able to
increase its sales volume in order to achieve certain economies of
scale. This analysis indicated no impairment was present at December
31, 2009. Considerable management judgment is necessary to estimate
future sales volume and the associated economies of
scale. Assumptions used in our impairment evaluations are consistent
with our internal projections and operating plans. However, if our future cash
flows from operations less capital expenditures were to drop significantly below
our current expectations (approximately 32%), we may conclude an impairment is
present. At December 31, 2009 Calumet’s property and equipment had a
carrying value of $5.2 million.
No other long-lived assets were tested
for impairment during 2009 because there were no circumstances to indicate an
impairment may exist.
- 35
-
Income taxes. We
record a valuation allowance to reduce our gross deferred income tax assets to
the amount believed to be realized under the more-likely-than-not recognition
criteria. While we have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation
allowance, it is possible in the future we may change our estimate of the amount
of the deferred income tax assets that would more-likely-than-not be realized in
the future, resulting in an adjustment to the deferred income tax asset
valuation allowance that would either increase or decrease, as applicable,
reported net income or loss in the period such change in estimate was
made. We believe the realization of our gross deferred income tax
assets (including our net operating loss and credit carryforwards) meet the
more-likely-than-not realizability test at December 31, 2009.
We record
a reserve for uncertain tax positions in accordance with ASC Topic 740, Income Taxes, for each tax
position where we believe it is more-likely-than-not our position will not
prevail with the applicable tax authorities.
Contingencies. We
record accruals for environmental, legal and other contingencies when estimated
future expenditures associated with such contingencies become probable, and the
amounts can be reasonably estimated. However, new information may
become available, or circumstances (such as applicable laws and regulations) may
change, thereby resulting in an increase or decrease in the amount required to
be accrued for such matters (and therefore a decrease or increase in reported
net income in the period of such change).
Assumptions on defined benefit
pension plans. Under
defined benefit pension plan accounting, we recognize defined benefit pension
plan expense or credit and pension assets or liabilities based on certain
actuarial assumptions, principally the assumed discount rate, the assumed
long-term rate of return on plan assets and the assumed increase in future
compensation levels. We recognize the full funded status of our
defined benefit pension plans as either an asset (for overfunded plans) or a
liability (for underfunded plans) in our Consolidated Balance
Sheet. Both of our defined benefit pension plans were overfunded at
December 31, 2009 for financial reporting purposes.
The
discount rates we utilize for determining defined benefit pension expense or
credit and the related pension obligations are based, in part, on current
interest rates earned on long-term bonds that receive one of the two highest
ratings given by recognized rating agencies. In addition, we receive
advice about appropriate discount rates from our third-party actuaries, who may
in some cases utilize their own market indices. The discount rates
are adjusted as of each valuation date (December 31st) to reflect then-current
interest rates on such long-term bonds. Such discount rates are used
to determine the actuarial present value of the pension obligations as of
December 31st of that year, and such discount rates are also used to determine
the interest component of defined benefit pension expense or credit for the
following year.
We used
the following discount rates for our defined benefit pension plans during the
last three years:
Discount
rates used
for:
|
||
Obligations
at
December
31, 2007 and expense in
2008
|
Obligations
at
December
31, 2008 and expense in
2009
|
Obligations
at
December
31, 2009 and expense in
2010
|
6.3%
|
6.2%
|
5.6%
|
- 36
-
The
assumed long-term rate of return on plan assets represents the estimated average
rate of earnings expected to be earned on the funds invested or to be invested
in the plans’ assets provided to fund the benefit payments inherent in the
projected benefit obligations. Unlike the discount rate, which is
adjusted each year based on changes in current long-term interest rates, the
assumed long-term rate of return on plan assets will not necessarily change
based upon the actual, short-term performance of the plan assets in any given
year. Defined benefit pension expense or credit each year is based
upon the assumed long-term rate of return on plan assets for the plan and the
actual fair value of the plan assets as of the beginning of the
year.
Substantially
all of our plans’ assets are invested in the Combined Master Retirement Trust
(“CMRT”), a collective investment trust sponsored by Contran, to permit the
collective investment by certain master trusts that fund certain employee
benefit plans sponsored by Contran and certain of its affiliates. Mr.
Harold C. Simmons is the sole trustee of the CMRT. The CMRT's
investment committee, of which Mr. Simmons is a member, actively manages the
investments of the CMRT. The trustee and investment committee
periodically change the asset mix of the CMRT based upon, among other things,
advice they receive from third-party advisors and their expectations as to what
asset mix will generate the greatest overall return. The CMRT’s
long-term investment objective is to provide a rate of return exceeding a
composite of broad market equity and fixed income indices (including the S&P
500 and certain Russell indices) utilizing both third-party investment managers
as well as investments directed by Mr. Simmons. During the 21-year
history of the CMRT through December 31, 2009, the average annual rate of return
of the CMRT has been 14.2%. At December 31, 2009 approximately 65% of
the CMRT assets were invested in domestic equity securities with the majority of
these being publically traded securities; approximately 5% were invested in
publicly traded international equity securities; approximately 21% were invested
in publicly traded fixed income securities; approximately 8% were invested in
various privately managed limited partnerships and the remainder was invested in
real estate and cash and cash equivalents.
We
regularly review our actual asset allocation for our defined benefit pension
plans, and will periodically rebalance the investments in the plans to more
accurately reflect the targeted allocation when considered
appropriate.
For 2007,
2008 and 2009, the assumed long-term rate of return utilized for plan assets
invested in the CMRT was 10%. We currently expect to utilize the same long-term
rate of return on plan assets assumption in 2010. In determining the
appropriateness of such long-term rate of return assumption, we considered the
historical rate of return for the CMRT, the current and projected asset mix of
the CMRT, the investment objectives of the CMRT’s managers and the advice of our
third-party actuaries.
To the
extent the defined benefit pension plans’ particular pension benefit formula
calculates the pension benefit in whole or in part based upon future
compensation levels, the projected benefit obligations and the pension expense
will be based in part upon expected increases in future compensation
levels. For pension benefits that are so calculated, we generally
base the assumed expected increase in future compensation levels upon our
average historical experience and managements’ intentions regarding future
compensation increases, which generally approximates average long-term inflation
rates.
Assumed
discount rates and rates of return on plan assets are re-evaluated annually.
Different assumptions could result in the recognition of materially different
expense amounts over different periods of times and materially different asset
and liability amounts in our Consolidated Financial Statements. A
reduction in the assumed discount rate generally results in an actuarial loss,
as the actuarially-determined present value of estimated future benefit payments
will increase. Conversely, an increase in the assumed discount rate
generally results in an actuarial gain. In addition, an actual return
on plan assets for a given year that is greater than the assumed return on plan
assets results in an actuarial gain, while an actual return on plan assets that
is less than the assumed return results in an actuarial loss. Other
actual outcomes that differ from previous assumptions, such as individuals
living longer or shorter than assumed in mortality tables that are also used to
determine the actuarially-determined present value of estimated future benefit
payments, changes in such mortality tables themselves or plan amendments, will
also result in actuarial losses or gains. Under GAAP, all of such
actuarial gains and losses are not recognized in earnings currently, but instead
are deferred and amortized into income over future periods based upon the
expected average remaining service life of the active plan participants (for
plans for which benefits are still being earned by active employees) or the
average remaining life expectancy of the inactive participants (for plans for
which benefits are not still being earned by active employees). However,
any actuarial gains generated in future periods would reduce the negative
amortization effect of any cumulative unamortized actuarial losses, while any
actuarial losses generated in future periods would reduce the favorable
amortization effect of any cumulative unamortized actuarial gains.
- 37
-
Defined
benefit pension expense or credit and the amounts recognized as pension assets
or liabilities are based upon the actuarial assumptions discussed
above. We believe all of the actuarial assumptions used are
reasonable and appropriate. We recognized a consolidated defined
benefit pension plan credit of $80.4 million in 2007 and $73.9 million in
2008. Primarily as a result of a $510 million decrease in plan assets
due to investment market performance during 2008 we recognized a consolidated
defined benefit pension plan expense of $5.9 million in 2009. A
decrease in plan assets impacts the subsequent year’s defined benefit pension
expense or credit by (i) lowering the expected return on plan assets as the plan
assets multiplied by the assumed long-term rate of return is lower than the
prior year and (ii) decreasing the amortization of unrealized net gains or
increasing the amortization of unrealized net losses as any differences between
the expected return on plan assets and the actual return on plan assets are
deferred and amortized into income over future periods. The amount of
funding requirements for our defined benefit pension plans is based upon
applicable regulations, and will generally differ from pension expense or credit
recognized under GAAP. No contributions were required to be made to
our defined benefit pension plans during the past three years.
Due to a
$58 million increase in our plans’ assets during 2009, we currently expect to
record a defined benefit pension credit during 2010 of $4.9 million and we
expect that no cash contributions to our pension plans will be required during
2010. If we had lowered the assumed discount rate by 25 basis points
as of December 31, 2009, our projected and accumulated benefit obligations would
have increased by approximately $9.5 million and $9.3 million, respectively at
that date, and the defined benefit pension credit would be expected to decrease
by approximately $.5 million during 2010. Similarly, if we lowered
the assumed long-term rate of return on plan assets by 25 basis points, the
defined benefit pension credit would be expected to decrease by approximately
$1.1 million during 2010.
Assumptions on other postretirement
benefit plans. Under accounting for
other postretirement employee benefits, OPEB expense or credits and accrued OPEB
costs are based on certain actuarial assumptions, principally the assumed
discount rate. We recognize the full unfunded status of our OPEB
plans as a liability.
- 38
-
The
assumed discount rates we utilize for determining OPEB expense and the related
accrued OPEB obligations are generally based on the same discount rates we
utilize for our defined benefit pension plans and are re-evaluated annually. We
believe all of the actuarial assumptions used are reasonable and
appropriate. Changes in discount rates or other actual outcomes that
differ from previous assumptions have the same accounting implications as
discussed in “Assumptions on
defined benefit pension plans” above. Our OPEB plans do not
provide for medical benefits to participants. Accordingly, changes in
the healthcare cost trend rate do not impact our future OPEB expense or
obligations.
We
recognized a consolidated OPEB credit of $8.5 million in each of 2007 and 2008
and primarily as a result of an amendment to one of our OPEB plans late in 2008,
which significantly increased fixed monthly benefits, we recorded a much lower
OPEB credit during 2009 of $4.7 million. We currently expect to
record a $5.5 million OPEB credit during 2010. If we had lowered the
assumed discount rate by 25 basis points for all of our OPEB plans as of
December 31, 2009, our aggregate accumulated OPEB obligations would have
increased by approximately $1.2 million at that date, and our OPEB credit would
be expected to decrease by $33,000 during 2010.
Similar
to defined benefit pension benefits, the amount of required contributions for
our OPEB plans will differ from the expense or credit recognized for financial
reporting purposes. We contributed $3.8 million, $2.5 million and
$1.3 million to our other postretirement benefit plans during 2007, 2008 and
2009, respectively, and we expect to contribute $1.4 million during
2010. The decline in contributions to our other postretirement
benefit plans has been the result of amendments to one of our OPEB plans and one
of our pension plans to create supplemental pension benefits in lieu of certain
OPEB benefit payments for August 2008 through December 2008, all of 2009 and all
of 2010. We have the ability to decide whether or not to exercise
such rights on a year-by-year basis. See Note 9 to our Consolidated
Financial Statements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Our
exposure to market risk relates primarily to changes in interest rates on our
debt obligations and the volatility of ferrous scrap costs, our primary raw
material.
Interest Rates. At
December 31, 2009, approximately 28% of our debt was comprised of fixed rate
instruments, which minimize earnings volatility related to interest
expense. We do not currently participate in interest rate-related
derivative financial instruments.
The table
below presents principal amounts and related weighted-average interest rates by
maturity date for our debt obligations.
Contracted Maturity
Date
|
Estimated
Fair
Value
|
|||||||||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
Total
|
December 31, 2009
|
||||||||||||||||||||||
Fixed-rate
debt -
|
||||||||||||||||||||||||||||
Principal
amount
|
$ | 1,230 | $ | 1,324 | $ | 1,421 | $ | 1,529 | $ | 1,908 | $ | 7,412 | $ | 6,680 | ||||||||||||||
Weighted-average
interest
rate
|
7.5 | % | 7.5 | % | 7.5 | % | 7.5 | % | 3.2 | % | 6.4 | % | ||||||||||||||||
Variable-rate
debt-
|
||||||||||||||||||||||||||||
Principal
amount
|
$ | 18,166 | $ | - | $ | - | $ | - | $ | - | $ | 18,166 | $ | 18,166 | ||||||||||||||
Weighted-average
interest
rate
|
4.0 | % | - | % | - | % | - | % | - | % | 4.0 | % |
- 39
-
At
December 31, 2008, our fixed rate indebtedness aggregated $17.7 million (fair
value - $16.3 million) with a weighted-average interest rate of
3.2%. The decrease in our fixed rate indebtedness during 2009 and the
increase in the related weighted-average interest rate was primarily due to the
final payment on our 8% Notes during the first quarter of 2009. Under
GAAP, the 8% Notes were recorded at their aggregate undiscounted future cash
flows (both principal and interest), and thereafter both principal and interest
payments were accounted for as a reduction of the carrying amount of the
debt. Therefore, we did not recognize any interest expense on the 8%
Notes.
At
December 31, 2008, our variable rate indebtedness aggregated $14.2 million,
which approximated fair value, with a weighted-average interest rate of
5.1%. The increase in our variable rate indebtedness during 2009 was
due to increased borrowings on our revolving credit facility as a result of
decreased profitability in 2009. The decrease in the weighted-average
interest rate of our variable rate indebtedness during 2009 was due to a lower
prime rate in 2009. Prior to the amendment of our primary credit
agreement in October 2009 (as discussed above and in Note 7 to our 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 bears interest at prime plus 1% or LIBOR
plus 2.75% and interest rates on our credit facility’s term loan bears interest
at prime plus 1.25% or LIBOR plus 3%.
Ferrous scrap
costs. The purchase of ferrous scrap is highly competitive and
its price volatility is influenced by periodic shortages, export activity,
freight costs, weather, and other conditions beyond our control. The
cost of ferrous scrap can fluctuate significantly. We manage ferrous
scrap cost volatility primarily by adjusting our product selling prices to
recover the costs of anticipated increases in ferrous scrap prices. We generally
do not have long-term supply agreements for our ferrous scrap requirements
because we believe the risk of unavailability is low. We do not
engage in commodity hedging programs.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
information called for by this Item is contained in a separate section of this
Annual Report. See “Index of Consolidated Financial Statements” (page
F-1).
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
9A. 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 Exchange Act Rule 13a-15(e), 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 (the “Act”), is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information 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 December 31,
2009. Based upon their evaluation, these executive officers have
concluded that our disclosure controls and procedures were effective as of
December 31, 2009.
- 40
-
Internal
Control Over Financial Reporting
We also
maintain internal control over financial reporting. The term
“internal control over financial reporting,” as defined by Exchange Act Rule
13a-15(f), 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 Consolidated Financial
Statements.
|
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to report on internal control
over financial reporting in this Annual Report on Form 10-K for the year ended
December 31, 2009. Our independent registered public accounting firm,
while not required to, has audited our internal control over financial reporting
as of December 31, 2009.
Changes
in Internal Control Over Financial Reporting
There has
been no change to our internal control over financial reporting during the
quarter ended December 31, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Management’s Report on Internal
Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Our evaluation of the effectiveness of our
internal control over financial reporting is based upon the criteria established
in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (commonly referred to as the “COSO”
framework). Based on our evaluation under that framework, we have
concluded that our internal control over financial reporting was effective as of
December 31, 2009.
- 41
-
Certifications
Our chief
executive officer and chief financial officer are required to, among other
things, quarterly file certifications with the SEC regarding the quality of our
public disclosures, as required by Section 302 of the Sarbanes-Oxley Act of
2002. We have filed the certifications for the quarter ended December
31, 2009 as exhibits 31.1 and 31.2 to this Annual Report on Form
10-K.
ITEM
9B. OTHER INFORMATION.
Not
applicable.
- 42
-
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
The
information required by this Item is incorporated by reference to our definitive
Proxy Statement we will file with the SEC pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this report (the “Keystone
Proxy Statement”).
ITEM
11. EXECUTIVE COMPENSATION.
The
information required by this Item is incorporated by reference to the Keystone
Proxy Statement.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The
information required by this Item is incorporated by reference to the Keystone
Proxy Statement.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
The
information required by this Item is incorporated by reference to the Keystone
Proxy Statement. See also Note 14 to our Consolidated Financial
Statements.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The
information required by this Item is incorporated by reference to the Keystone
Proxy Statement.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) and
(c) Financial
Statements and Schedules
The
Registrant
Our
Consolidated Financial Statements listed on the accompanying Index of
Consolidated Financial Statements (see page F-1) are filed as part of this
Annual Report. All financial statement schedules have been omitted
either because they are not applicable or required, or the information that
would be required to be included is disclosed in the notes to our Consolidated
Financial Statements.
(b) Exhibits
Included
as exhibits are the items listed in the Exhibit Index. We have
retained a signed original of any of these exhibits that contain signatures, and
we will provide such exhibit to the Commission or its staff upon request. We
will furnish a copy of any of the exhibits listed below upon request and payment
of $4.00 per exhibit to cover our costs of furnishing the
exhibits. Such requests should be directed to the attention of our
Corporate Secretary at our corporate offices located at 5430 LBJ Freeway, Suite
1740, Dallas, Texas 75240. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, we will furnish to the Commission upon request any instrument
defining the rights of holders of long-term debt issues and other agreements
related to indebtedness which do not exceed 10% of our consolidated total assets
as of December 31, 2009.
- 43
-
Exhibit
No.
|
Exhibit Item
|
3.1
|
Amended
and Restated Certificate of Incorporation of the Registrant dated January
18, 2008, as filed with the Secretary of State of
Delaware. (Incorporated by reference to Exhibit 99.1 to the
Registrant's Report on Form 8-K dated January 18, 2008).
|
3.2
|
Amended
and Restated Bylaws of the Registrant dated August 31,
2005. (Incorporated by reference to Exhibit 3.6 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2003).
|
4.1
|
Loan
Agreement dated as of March 13, 2002 between Registrant and the County of
Peoria, Illinois. (Incorporated by reference to Exhibit 4.17 to
the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
|
4.2
|
Subordinate
Security Agreement dated as of March 13, 2002 made by Registrant in favor
of the County of Peoria, Illinois. (Incorporated by reference
to Exhibit 4.18 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001).
|
4.3
|
First
Amendment to Loan dated as of April 4, 2007 by and between the Registrant
and the County of Peoria, Illinois. (Incorporated by reference to Exhibit
4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2007).
|
4.4
|
Second
Amendment to Loan dated as of May 22, 2007 by and between the Registrant
and the County of Peoria, Illinois. (Incorporated by reference to Exhibit
4.1 to the Registrant’s Report on Form 8-K dated May 24,
2007).
|
4.5
|
Loan
and Security Agreement dated August 31, 2005 by and between the Registrant
and Wachovia Capital Finance Corporation
(Central). (Incorporated by reference to Exhibit 4.51 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2003).
|
4.6
|
First
Amendment to Loan and Security Agreement dated as of June 30, 2006 by and
between the Registrant and Wachovia Capital Finance Corporation (Central).
(Incorporated by reference to Exhibit 4.7 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2006).
|
4.7
|
Amendment
No. 2 to Loan and Security Agreement dated as of March 23, 2007 by and
between the Registrant and Wachovia Capital Finance Corporation (Central).
(Incorporated by reference to Exhibit 4.8 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2006).
|
4.8
|
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).
|
- 44
-
Exhibit
No.
|
Exhibit Item
|
10.1
|
Agreement
Regarding Shared Insurance between Registrant, CompX International Inc.,
Contran Corporation, Kronos Worldwide, Inc., NL Industries, Inc., Titanium
Metals Corp. and Valhi, Inc. dated as of October 30,
2003. (Incorporated by reference to Exhibit 10.1 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2003).
|
10.2
|
The
Combined Master Retirement Trust between Contran Corporation and Harold C.
Simmons as amended and restated effective September 30, 2005.
(Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2006).
|
10.3
|
Keystone
Consolidated Industries, Inc. Master Retirement Trust I between the
Registrant and U.S. Bank National Association as amended and restated
effective January 1, 2006. (Incorporated by reference to Exhibit 10.3 to
the Registrant’s Annual Report on Form 10-K for the year ended December
31, 2006).
|
10.4
|
Keystone
Consolidated Industries, Inc. Master Retirement Trust II between the
Registrant and U.S. Bank National Association as amended and restated
effective January 1, 2006. (Incorporated by reference to Exhibit 10.4 to
the Registrant’s Annual Report on Form 10-K for the year ended December
31, 2006).
|
10.5*
|
Form
of Deferred Compensation Agreement between the Registrant and certain
executive officers. (Incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q (File No. 1-3919) for
the quarter ended March 31, 1999).
|
10.6
|
Intercorporate
Services Agreement dated as of January 1, 2007 by and between Registrant
and Contran Corporation. (Incorporated by reference to Exhibit
10.6 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2007).
|
14.1
|
Amended
Code of Business Conduct and Ethics dated August 14, 2007 (Incorporated by
reference to Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2007).
|
21.1**
|
Subsidiaries
of the Company
|
31.1**
|
Certification
|
31.2**
|
Certification
|
32.1**
|
Certification
|
*Management
contract, compensatory plan or agreement.
**Filed
herein.
- 45
-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned and dated March 11, 2010, thereunto duly
authorized.
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
(Registrant)
/s/ GLENN
R.
SIMMONS
Glenn
R. Simmons
Chairman
of the Board
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below and dated as of March 11, 2010 by the following
persons on behalf of the registrant and in the capacities
indicated:
/s/ GLENN
R.
SIMMONS
Glenn
R. Simmons
Chairman
of the Board
|
/s/
STEVEN L.
WATSON
Steven
L. Watson
Director
|
/s/ THOMAS E.
BARRY
Thomas
E. Barry
Director
|
/s/
DONALD P.
ZIMA
Donald
P. Zima
Director
|
/s/ DAVID
L.
CHEEK
David
L. Cheek
President
and Chief Executive
Officer
|
/s/ BERT E.
DOWNING,
JR.
Bert
E. Downing, Jr.
Vice
President, Chief Financial
Officer, Corporate
Controller
and
Treasurer (Principal
Accounting
and Financial
Officer)
|
- 46
-
KEYSTONE
CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
ANNUAL
REPORT ON FORM 10-K
Items
8, 15(a) and 15(c)
Index
of Consolidated Financial Statements
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets –
December
31, 2008 and 2009
|
F-4
|
Consolidated
Statements of Operations -
Years
ended December 31, 2007, 2008 and 2009
|
F-6
|
Consolidated
Statements of Comprehensive Income (Loss) -
Years
ended December 31, 2007, 2008 and 2009
|
F-7
|
Consolidated
Statements of Stockholders' Equity -
Years
ended December 31, 2007, 2008 and 2009
|
F-8
|
Consolidated
Statements of Cash Flows –
Years
ended December 31, 2007, 2008 and 2009
|
F-9
|
Notes
to Consolidated Financial Statements
|
F-11
|
We
omitted Schedules I, II, III and IV because they are not applicable or the
required amounts are either not material or are presented in the Notes to
the Consolidated Financial Statements.
|
F -
1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Stockholders and Board of Directors of Keystone Consolidated Industries,
Inc.:
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of comprehensive income, of changes in
equity and of cash flows present fairly, in all material respects, the financial
position of Keystone Consolidated Industries, Inc. and its subsidiaries at
December 31, 2008 and 2009 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting under Item 9A. Our responsibility is to
express opinions on these financial statements and on the Company's internal
control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
F -
2
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Dallas,
Texas
March 11,
2010
F -
3
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
December 31,
|
||||||||
ASSETS
|
2008
|
2009
|
||||||
Current
assets:
|
||||||||
Accounts
receivable, net of allowances of
$165 and $2,897
|
$ | 26,612 | $ | 41,231 | ||||
Inventories
|
70,858 | 41,225 | ||||||
Deferred
income taxes
|
14,373 | 4,434 | ||||||
Income
taxes receivable
|
- | 4,206 | ||||||
Prepaid
expenses and other
|
2,724 | 2,626 | ||||||
Total
current assets
|
114,567 | 93,722 | ||||||
Property,
plant and equipment:
|
||||||||
Land
|
1,468 | 1,468 | ||||||
Buildings
and improvements
|
59,598 | 61,207 | ||||||
Machinery
and equipment
|
317,573 | 328,497 | ||||||
Construction
in progress
|
9,421 | 2,583 | ||||||
388,060 | 393,755 | |||||||
Less
accumulated depreciation
|
298,073 | 308,586 | ||||||
Net
property, plant and equipment
|
89,987 | 85,169 | ||||||
Other
assets:
|
||||||||
Restricted
investments
|
2,277 | 249 | ||||||
Pension
asset
|
41,651 | 84,806 | ||||||
Other,
net
|
1,251 | 1,138 | ||||||
Total
other assets
|
45,179 | 86,193 | ||||||
Total
assets
|
$ | 249,733 | $ | 265,084 | ||||
F -
4
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(In
thousands, except share data)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
December 31,
|
|||||||
2008
|
2009
|
|||||||
Current
liabilities:
|
||||||||
Notes
payable and current maturities of long-term
debt
|
$ | 18,848 | $ | 19,396 | ||||
Accounts
payable
|
7,776 | 5,577 | ||||||
Accrued
OPEB cost
|
1,372 | 1,357 | ||||||
Income
taxes payable
|
1,116 | - | ||||||
Other
accrued liabilities
|
29,569 | 18,329 | ||||||
Total
current liabilities
|
58,681 | 44,659 | ||||||
Noncurrent
liabilities:
|
||||||||
Long-term
debt
|
12,782 | 5,974 | ||||||
Accrued
pension cost
|
1,319 | - | ||||||
Accrued
OPEB cost
|
42,560 | 44,244 | ||||||
Deferred
income taxes
|
8,284 | 19,569 | ||||||
Other
|
6,463 | 2,868 | ||||||
Total
noncurrent liabilities
|
71,408 | 72,655 | ||||||
Stockholders'
equity:
|
||||||||
Common
stock $.01 par value; 20,000,000 shares authorized, 12,500,000 shares
issued and 12,101,932 shares outstanding at December 31, 2008 and
2009
|
125 | 125 | ||||||
Additional
paid-in capital
|
100,111 | 100,111 | ||||||
Accumulated
other comprehensive loss
|
(160,415 | ) | (132,530 | ) | ||||
Retained
earnings
|
180,619 | 180,860 | ||||||
Treasury
stock, at cost – 398,068 shares
|
(796 | ) | (796 | ) | ||||
Total
stockholders' equity
|
119,644 | 147,770 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 249,733 | $ | 265,084 | ||||
Commitments
and contingencies (Notes 10 and 11).
See
accompanying Notes to Consolidated Financial
Statements.
F -
5
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
Years Ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Net
sales
|
$ | 451,178 | $ | 562,693 | $ | 322,347 | ||||||
Cost
of goods sold
|
(427,908 | ) | (511,197 | ) | (299,787 | ) | ||||||
Gross
margin
|
23,270 | 51,496 | 22,560 | |||||||||
Other
operating income (expense):
|
||||||||||||
Selling
expense
|
(6,682 | ) | (7,227 | ) | (6,343 | ) | ||||||
General
and administrative expense
|
(12,985 | ) | (16,173 | ) | (11,869 | ) | ||||||
Defined
benefit pension credit (expense)
|
80,443 | 73,923 | (5,887 | ) | ||||||||
Other
postretirement benefit credit
|
8,526 | 8,474 | 4,748 | |||||||||
Gain
on legal settlement
|
5,400 | - | - | |||||||||
Total
other operating income (expense)
|
74,702 | 58,997 | (19,351 | ) | ||||||||
Operating
income
|
97,972 | 110,493 | 3,209 | |||||||||
Nonoperating
income (expense):
|
||||||||||||
Interest
expense
|
(6,073 | ) | (3,798 | ) | (1,725 | ) | ||||||
Other,
net
|
601 | (342 | ) | 1,049 | ||||||||
Total
nonoperating expense
|
(5,472 | ) | (4,140 | ) | (676 | ) | ||||||
Income
before income taxes and reorganization items
|
92,500 | 106,353 | 2,533 | |||||||||
Reorganization
items:
|
||||||||||||
Reorganization
costs
|
(190 | ) | (225 | ) | - | |||||||
Gain
on cancellation of debt
|
10,074 | - | - | |||||||||
Total
reorganization items
|
9,884 | (225 | ) | - | ||||||||
Income
before income taxes
|
102,384 | 106,128 | 2,533 | |||||||||
Provision
for income taxes
|
(37,619 | ) | (40,014 | ) | (2,292 | ) | ||||||
Net
income
|
$ | 64,765 | $ | 66,114 | $ | 241 | ||||||
Basic
and diluted income per share
|
$ | 6.48 | $ | 5.73 | $ | 0.02 | ||||||
Basic
and diluted weighted average shares outstanding
|
10,000 | 11,533 | 12,102 |
See
accompanying Notes to Consolidated Financial
Statements.
F -
6
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In
thousands)
Years ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Net
income
|
$ | 64,765 | $ | 66,114 | $ | 241 | ||||||
Other
comprehensive income (loss), net of tax:
|
||||||||||||
Defined
benefit pension plans
|
(57,439 | ) | (358,021 | ) | 34,857 | |||||||
Other
postretirement benefit plans
|
(5,498 | ) | (17,856 | ) | (6,972 | ) | ||||||
Total
other comprehensive income (loss), net
|
(62,937 | ) | (375,877 | ) | 27,885 | |||||||
Comprehensive
income (loss)
|
$ | 1,828 | $ | (309,763 | ) | $ | 28,126 | |||||
Accumulated
other comprehensive income (loss), net of tax:
|
||||||||||||
Defined
benefit pension plans:
|
||||||||||||
Balance at beginning of year
|
$ | 222,202 | $ | 164,763 | $ | (193,258 | ) | |||||
Other
comprehensive income (loss):
|
||||||||||||
Plan
amendment
|
(48 | ) | (23 | ) | - | |||||||
Net
actuarial gain (loss) arising during year
|
(48,651 | ) | (352,019 | ) | 21,611 | |||||||
Amortization
of prior service cost
|
767 | 767 | 805 | |||||||||
Amortization
of net actuarial losses (gains)
|
(9,507 | ) | (6,746 | ) | 12,441 | |||||||
Balance
at end of year
|
$ | 164,763 | $ | (193,258 | ) | $ | (158,401 | ) | ||||
Defined
OPEB plans:
|
||||||||||||
Balance
at beginning of year
|
$ | 56,197 | $ | 50,699 | $ | 32,843 | ||||||
Other comprehensive income (loss):
|
||||||||||||
Plan
amendment
|
- | (14,232 | ) | (49 | ) | |||||||
Net
actuarial gain (loss) arising during year
|
1,129 | 3,326 | (2,032 | ) | ||||||||
Amortization
of prior service credit
|
(11,009 | ) | (10,802 | ) | (10,473 | ) | ||||||
Amortization
of net actuarial losses
|
4,382 | 3,852 | 5,582 | |||||||||
Balance
at end of year
|
$ | 50,699 | $ | 32,843 | $ | 25,871 | ||||||
Total
accumulated other comprehensive income (loss):
|
||||||||||||
Balance
at beginning of year
|
$ | 278,399 | $ | 215,462 | $ | (160,415 | ) | |||||
Other
comprehensive income (loss)
|
(62,937 | ) | (375,877 | ) | 27,885 | |||||||
Balance
at end of year
|
$ | 215,462 | $ | (160,415 | ) | $ | (132,530 | ) |
See
accompanying Notes to Consolidated Financial
Statements.
F -
7
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
Years
ended December 31, 2007, 2008 and 2009
(In
thousands)
Common stock
|
Additional
|
Accumulated
other
comprehensive
income (loss)
|
||||||||||||||||||||||||||||||
Shares
oustanding
|
Amount
|
paid-in
capital
|
Pensions
|
OPEB
|
Retained
earnings
|
Treasury
stock
|
Total
|
|||||||||||||||||||||||||
Balance
– December 31, 2006
|
10,000 | $ | 100 | $ | 75,423 | $ | 222,202 | $ | 56,197 | $ | 49,740 | $ | - | $ | 403,662 | |||||||||||||||||
Net
income
|
- | - | - | - | - | 64,765 | - | 64,765 | ||||||||||||||||||||||||
Treasury
stock acquired
|
(398 | ) | - | - | - | - | - | (796 | ) | (796 | ) | |||||||||||||||||||||
Other
comprehensive loss, net
|
- | - | - | (57,439 | ) | (5,498 | ) | - | - | (62,937 | ) | |||||||||||||||||||||
Balance
– December 31, 2007
|
9,602 | 100 | 75,423 | 164,763 | 50,699 | 114,505 | (796 | ) | 404,694 | |||||||||||||||||||||||
Net
income
|
- | - | - | - | - | 66,114 | - | 66,114 | ||||||||||||||||||||||||
Issuance
of common stock, net of issuance costs
|
2,500 | 25 | 24,688 | - | - | - | - | 24,713 | ||||||||||||||||||||||||
Other
comprehensive loss, net
|
- | - | - | (358,021 | ) | (17,856 | ) | - | - | (375,877 | ) | |||||||||||||||||||||
Balance
– December 31, 2008
|
12,102 | 125 | 100,111 | (193,258 | ) | 32,843 | 180,619 | (796 | ) | 119,644 | ||||||||||||||||||||||
Net
income
|
- | - | - | - | - | 241 | - | 241 | ||||||||||||||||||||||||
Other
comprehensive income (loss), net
|
- | - | - | 34,857 | (6,972 | ) | - | - | 27,885 | |||||||||||||||||||||||
Balance
– December 31, 2009
|
12,102 | $ | 125 | $ | 100,111 | $ | (158,401 | ) | $ | 25,871 | $ | 180,860 | $ | (796 | ) | $ | 147,770 |
See
accompanying Notes to Consolidated Financial Statements.
F -
8
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
Years ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 64,765 | $ | 66,114 | $ | 241 | ||||||
Depreciation
and amortization
|
15,434 | 15,164 | 13,584 | |||||||||
Deferred
income taxes
|
37,474 | 35,821 | 6,512 | |||||||||
Defined
benefit pension expense (credit)
|
(80,443 | ) | (73,923 | ) | 5,887 | |||||||
OPEB
credit
|
(8,526 | ) | (8,474 | ) | (4,748 | ) | ||||||
OPEB
payments
|
(3,800 | ) | (2,458 | ) | (1,347 | ) | ||||||
Bad
debt expense
|
28 | 16 | 2,935 | |||||||||
Impairment
of inventory
|
240 | 1,165 | 2,690 | |||||||||
Gain
on cancellation of debt
|
(10,074 | ) | - | - | ||||||||
Payment
to pre-petition creditors
|
(4,312 | ) | - | - | ||||||||
Reorganization
costs accrued
|
190 | 225 | - | |||||||||
Reorganization
costs paid
|
(164 | ) | (266 | ) | - | |||||||
Other,
net
|
881 | 544 | 384 | |||||||||
Change
in assets and liabilities (net of acquisition):
|
||||||||||||
Accounts
receivable
|
(23,261 | ) | 28,449 | (17,516 | ) | |||||||
Inventories
|
10,311 | (18,472 | ) | 26,943 | ||||||||
Accounts
payable
|
4,131 | (6,302 | ) | (2,199 | ) | |||||||
Accrued
environmental costs
|
(3,288 | ) | (157 | ) | (4,395 | ) | ||||||
Accrued
liabilities
|
2,743 | 9,871 | (10,440 | ) | ||||||||
Income
taxes
|
(201 | ) | 1,178 | (5,322 | ) | |||||||
Other,
net
|
477 | (197 | ) | 114 | ||||||||
Net
cash provided by operating activities
|
2,605 | 48,298 | 13,323 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
(16,602 | ) | (13,298 | ) | (9,000 | ) | ||||||
Acquisition
of CaluMetals’ assets
|
(6,240 | ) | - | - | ||||||||
Restricted
investments, net
|
4,901 | (32 | ) | 2,028 | ||||||||
Other,
net
|
1,159 | 437 | 81 | |||||||||
Net
cash used in investing activities
|
(16,782 | ) | (12,893 | ) | (6,891 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Issuance
of common stock
|
- | 24,713 | - | |||||||||
Revolving
credit facility, net
|
28,526 | (42,997 | ) | 9,282 | ||||||||
Other
notes payable and long-term debt:
|
||||||||||||
Additions
|
4,065 | - | - | |||||||||
Principal
payments
|
(18,025 | ) | (16,962 | ) | (15,584 | ) | ||||||
Deferred
financing costs paid
|
(389 | ) | (159 | ) | (130 | ) | ||||||
Net
cash provided by (used in) financing activities
|
14,177 | (35,405 | ) | (6,432 | ) | |||||||
F -
9
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(In
thousands)
Years ended December
31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Cash
and cash equivalents:
|
||||||||||||
Net
change from operations, investing and
financing activities
|
- | - | - | |||||||||
Balance
at beginning of year
|
- | - | - | |||||||||
Balance
at end of year
|
$ | - | $ | - | $ | - | ||||||
Supplemental
disclosures:
|
||||||||||||
Cash
paid for:
|
||||||||||||
Interest,
net of amounts capitalized
|
$ | 5,681 | $ | 3,581 | $ | 1,462 | ||||||
Income
taxes, net
|
347 | 3,015 | 1,106 | |||||||||
Non-cash
issuance of debt for acquisition of CaluMetals’
assets
|
781 | - | - |
See
accompanying Notes to Consolidated Financial
Statements.
F -
10
KEYSTONE
CONSOLIDATED INDUSTRIES, INC.
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
Note
1 – Summary of significant accounting policies:
Nature of our business. Keystone
Consolidated Industries, Inc. (“KCI” or “Keystone”) (OTCBB: KYCN) is a leading domestic
producer of steel fabricated wire products, industrial wire and wire
rod. We also manufacture wire mesh, coiled rebar, steel bar and other
products. 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 billet produced in our steel
mini-mill.
Organization. We are majority
owned by Contran Corporation (“Contran”), which owned approximately 62% of our
outstanding common stock at December 31, 2009. 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 related companies to Mr. Simmons. Consequently, Mr. Simmons may be deemed to
control Contran and us.
Basis of
Presentation. Our Consolidated Financial Statements include
the accounts of Keystone and our majority-owned subsidiaries. All
material intercompany accounts and balances have been
eliminated. Certain prior year amounts have been reclassified to
conform with the current year presentation.
Our
fiscal year is either 52 or 53 weeks and ends on the last Sunday in
December. 2007, 2008 and 2009 were each 52-week years.
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.
Management's
Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
(“GAAP”) requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amount of
revenues and expenses during the reporting period. Actual results may
differ from previously estimated amounts under different assumptions or
conditions.
Accounts
receivable. We provide an allowance for doubtful accounts for
known and estimated potential losses arising from our sales to customers based
on a periodic review of these accounts.
Inventories and cost of
sales. We state inventories at lower of cost or market net of
allowance for obsolete and slow-moving inventories. For financial reporting
purposes the last-in, first-out ("LIFO") method was used to determine the cost
of the productive inventories held at our Keystone Steel & Wire segment and
our Engineered Wire Products segment, while the first-in, first-out (“FIFO”) or
average cost methods were used to determine the productive inventories held at
our Keystone-Calumet segment and the cost of supplies inventories held at all
our facilities. Inventories include the costs for raw materials, the cost to
manufacture the raw materials into finished goods and
overhead. Depending on the inventory’s stage of completion, our
manufacturing costs can include the costs of packing and finishing, utilities,
maintenance and depreciation, shipping and handling, and salaries and benefits
associated with our manufacturing process. We allocate fixed
manufacturing overhead based on normal production
capacity. Unallocated overhead costs resulting from periods with
abnormally low production levels are charged to expense as
incurred. As inventory is sold to third parties, we recognize the
cost of sales in the same period the sale occurs. We periodically
review our inventory for estimated obsolescence or instances when inventory is
no longer marketable for its intended use, and we record any write-down equal to
the difference between the cost of inventory and its estimated net realizable
value based on assumptions about alternative uses, market conditions and other
factors.
F -
11
Property, plant and equipment and
depreciation expense. Property, plant and equipment are stated
at cost. Depreciation for financial reporting purposes is computed
using principally the straight-line method over the estimated useful lives of 10
to 30 years for buildings and improvements and three to 15 years for machinery
and equipment. Accelerated depreciation methods are used for income
tax purposes, as permitted. Depreciation expense for financial
reporting purposes was $15.4 million, $15.2 million and $13.6 million during
2007, 2008 and 2009, respectively. Upon sale or retirement of an
asset, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is recognized in income currently.
We
expense expenditures for maintenance, repairs and minor renewals as incurred,
including planned major maintenance. We capitalize expenditures for
major improvements. We capitalize interest costs related to major
long-term capital projects and renewals as a component of construction
costs. We did not capitalize any material interest costs in 2007,
2008 or 2009.
We
perform impairment tests when events or changes in circumstances indicate the
carrying value of our property, plant and equipment may not be
recoverable. We consider all relevant factors. We perform
the impairment test by comparing the estimated future undiscounted cash flows
associated with the asset to the asset's net carrying value to determine if an
impairment exists.
Long-term debt and deferred
financing costs. We state long-term debt net of any
unamortized original issue premium or discount. We classify
amortization of deferred financing costs and any premium or discount associated
with the issuance of indebtedness in interest expense, and compute such
amortization by the interest method over the term of the applicable
issue.
Pension plans and other
postretirement benefits. Accounting and funding policies for
our pension plans and other postretirement benefits are described in Note
9.
Environmental
liabilities. We record liabilities related to environmental
remediation when estimated future expenditures are probable and reasonably
estimable. If we are unable to determine that a single amount in an
estimated range of probable future expenditures is more likely, we record the
minimum amount of the range. Such accruals are adjusted as further
information becomes available or circumstances change. We do not
discount costs of future expenditures for environmental remediation obligations
to their present value due to the uncertain timeframe of payout. We
record recoveries of environmental remediation costs from other parties as
assets when their receipt is deemed probable. We did not have any
such assets recorded at December 31, 2008 or 2009. See Note
10.
Income
taxes. Deferred income tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the income tax and financial reporting carrying amounts of assets and
liabilities. We periodically evaluate our deferred tax assets and
adjust any related valuation allowance based on the estimate of the amount of
such deferred tax assets which we believe does not meet the more-likely-than-not
recognition criteria.
F -
12
We record
a reserve for uncertain tax positions for tax positions where we believe it is
more-likely-than-not our position will not prevail with the applicable tax
authorities. See Note 15.
Net sales. If
shipping terms of products shipped are FOB shipping point, we recognize the
sales when products are shipped because title and other risks and rewards of
ownership have passed to the customer. If shipping terms are FOB
destination point, we recognize the sales when the product is received by the
customer. We include amounts charged to customers for shipping and
handling in net sales. Our sales are stated net of volume rebates and
discounts for price and early payment.
Selling, general and administrative
expenses. Selling,
general and administrative expenses include costs related to marketing, sales,
distribution, environmental costs and administrative functions such as
accounting, treasury and finance, and includes costs for salaries and benefits,
travel and entertainment, promotional materials and professional
fees. Advertising costs, expensed as incurred, were $1.2 million,
$1.3 million and $1.1 million in 2007, 2008 and 2009, respectively.
Note
2 – Issuance of common stock:
On March
24, 2008 we issued 2.5 million shares of our common stock pursuant to a
subscription rights offering to our stockholders of record as of January 28,
2008 at a price of $10.00 per share (the “Offering”). The Offering
expired on March 17, 2008, and upon closing we received $25.0 million in
proceeds. We incurred approximately $.3 million of expenses related
to the Offering. We used the net offering proceeds to reduce
indebtedness under our revolving credit facility, which in turn created
additional availability under that facility that can be used for general
corporate purposes, including scheduled debt payments, capital expenditures,
potential acquisitions or the liquidity needs of our current
operations.
In
connection with the Offering, in January 2008 we amended our Certificate of
Incorporation to increase the number of authorized shares of our common stock
from 11 million shares to 20 million shares.
Note
3 – Acquisition:
On March
23, 2007, our newly-formed, wholly-owned subsidiary, Keystone-Calumet, Inc.
(“Calumet”) acquired substantially all of the operating land, buildings and
equipment of CaluMetals, Inc. for $3.5 million cash and a $1.1 million
non-interest bearing, unsecured note. The total consideration for the
acquired assets was less than fair value, accordingly the total consideration
for the land, buildings and equipment was allocated based on relative appraised
values. We also acquired inventory for a cash payment of $2.7
million, which approximated fair value. We financed the cash payments
of this acquisition through our existing revolving credit facility and term
loans. Upon acquisition, we formed a new segment, Keystone-Calumet,
which includes Calumet’s results of operations from the date of
acquisition.
Note
4 – Gain on cancellation of debt:
During
2007, the final pending claims related to our 2004 bankruptcy were settled and
fully adjudicated. As a result, we distributed approximately $4.3
million in cash to our pre-petition unsecured creditors. As a result
of the final distributions, we recognized an approximate $9.0 million gain on
cancellation of debt for the excess of the $13.3 million we had recognized for
such allowed claims over the $4.3 million distribution of cash.
F -
13
Additionally,
as a result of the settlement and adjudication of the final pending claims, the
trustee of the trust for our pre-petition unsecured creditors other than Contran
finalized the distribution of shares of our common stock that had been held in
the trust on behalf of such pre-petition unsecured creditors. Two of
our wholly-owned subsidiaries had claims against KCI in the bankruptcy which
were in the pool of allowed claims of pre-petition unsecured creditors other
than Contran, and as a result these subsidiaries received an aggregate of
approximately 398,000 shares of our own stock as part of the bankruptcy
distribution. We have recorded the 398,000 shares of stock received
by our subsidiaries as treasury stock in our Consolidated Financial
Statements. These subsidiaries were also entitled to their pro-rata
portion of the unsecured creditors note. As a result of these
transactions we recorded an additional gain on cancellation of debt of
approximately $1 million during 2007.
At the
time of the final settlement and adjudication of the final pending claims, an
amendment to the 1114 Agreement (the agreement with certain retirees that
replaced their medical and prescription drug coverage with fixed monthly cash
payments) was in negotiation. Upon finalization of the amendment to the 1114
Agreement in 2008, we sought final closure of our bankruptcy case and on
September 11, 2008, the United States Bankruptcy Court for the Eastern District
of Wisconsin issued our final decree.
Note
5 – Business segment information:
Our
operating segments are defined as components of consolidated operations about
which separate financial information is available that is regularly evaluated by
our chief operating decision maker in determining how to allocate resources and
in assessing performance. Our chief operating decision maker is our
President and Chief Executive Officer. Each operating segment is
separately managed, and each operating segment represents a strategic business
unit offering different products.
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 wire rod, coiled
rebar, industrial wire, fabricated wire and other 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. See Note
3.
|
F -
14
At the
end of each year, we calculate our LIFO reserve balances based on actual
year-end inventory quantities and costs. During 2009, KSW and EWP
significantly decreased their LIFO inventory reserve balances primarily because
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 2007, 2008 and 2009 are presented in the table below.
Increase (decrease) in LIFO
reserve
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
(In
thousands)
|
||||||||||||
KSW
|
$ | 6,928 | $ | 6,588 | $ | (9,125 | ) | |||||
EWP
|
(1,215 | ) | 3,554 | (6,075 | ) | |||||||
Total
|
$ | 5,713 | $ | 10,142 | $ | (15,200 | ) |
During
the first quarter of 2008, we reduced salaried headcount at KSW which resulted
in annual cost savings of $2.5 million. We incurred severance expense
of approximately $.8 million as a result of this
reduction-in-force.
During
the fourth quarter of 2008, KSW recorded additional income of $.9 million
related to obtaining an excise tax exemption in 2008 on 2007 electricity
costs.
During
the fourth quarter of 2008 and throughout 2009, Calumet determined it would not
be able to recover the cost of certain inventory items in future selling prices
and recognized impairment charges of $1.2 million and $2.7 million,
respectively, to reduce the inventory to its net realizable
value. These impairment charges are included in 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
2009. See Note 10.
During
2009, KSW recorded bad debt expense of $2.9 million primarily due to a Chapter
11 filing by one of their customers. Bad debt expense is included in
general and administrative expense.
The
accounting policies of our segments are the same as those described in the
summary of significant accounting policies except that no defined benefit
pension or OPEB expense or credits are recognized and the elimination of
intercompany profit or loss on ending inventory balances is not allocated to
each segment. Sales between reportable segments are generally
recorded at prices that approximate market prices to third-party
customers.
F -
15
Years ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
(In
thousands)
|
||||||||||||
Net
sales:
|
||||||||||||
KSW
|
$ | 426,652 | $ | 542,106 | $ | 298,219 | ||||||
EWP
|
52,509 | 63,433 | 37,575 | |||||||||
Calumet
|
5,659 | 17,165 | 11,127 | |||||||||
Elimination
of intersegment sales
|
(33,642 | ) | (60,011 | ) | (24,574 | ) | ||||||
Total
net sales
|
$ | 451,178 | $ | 562,693 | $ | 322,347 | ||||||
Operating
income (loss):
|
||||||||||||
KSW
|
$ | (930 | ) | $ | 32,174 | $ | 5,976 | |||||
EWP
|
7,702 | 5,338 | 1,405 | |||||||||
Calumet
|
(1,391 | ) | (2,929 | ) | (3,703 | ) | ||||||
Defined
benefit pension credit (expense)
|
80,443 | 73,923 | (5,887 | ) | ||||||||
OPEB
credit
|
8,526 | 8,474 | 4,748 | |||||||||
Gain
on legal settlement
|
5,400 | - | - | |||||||||
Other(1)
|
(1,778 | ) | (6,487 | ) | 670 | |||||||
Total
operating income
|
97,972 | 110,493 | 3,209 | |||||||||
Nonoperating
income (expense):
|
||||||||||||
Interest
expense
|
(6,073 | ) | (3,798 | ) | (1,725 | ) | ||||||
Other,
net
|
601 | (342 | ) | 1,049 | ||||||||
Reorganization
costs
|
(190 | ) | (225 | ) | - | |||||||
Gain
on cancellation of debt
|
10,074 | - | - | |||||||||
Income
before income taxes
|
$ | 102,384 | $ | 106,128 | $ | 2,533 |
(1)Other
items primarily consist of the elimination of intercompany profit or loss on
ending inventory balances and general corporate expenses.
Substantially
all of our assets are located in the United States. Segment assets are comprised
of all assets attributable to each reportable operating
segment. Corporate assets consist principally of the pension asset,
restricted investments, deferred tax assets and corporate property, plant and
equipment.
December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
(In
thousands)
|
||||||||||||
Total
assets:
|
||||||||||||
KSW
|
$ | 164,182 | $ | 150,021 | $ | 136,634 | ||||||
EWP
|
24,189 | 24,758 | 19,495 | |||||||||
Calumet
|
11,641 | 15,793 | 11,940 | |||||||||
Corporate
|
563,011 | 59,161 | 97,015 | |||||||||
Total
|
$ | 763,023 | $ | 249,733 | $ | 265,084 | ||||||
F -
16
Years ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
(In
thousands)
|
||||||||||||
Depreciation
and amortization:
|
||||||||||||
KSW
|
$ | 13,618 | $ | 12,754 | $ | 11,362 | ||||||
EWP
|
1,477 | 1,913 | 1,674 | |||||||||
Calumet
|
181 | 375 | 435 | |||||||||
Corporate
|
158 | 122 | 113 | |||||||||
Total
|
$ | 15,434 | $ | 15,164 | $ | 13,584 | ||||||
Capital
expenditures:
|
||||||||||||
KSW
|
$ | 9,027 | $ | 11,516 | $ | 8,094 | ||||||
EWP
|
6,807 | 845 | 375 | |||||||||
Calumet
|
588 | 915 | 531 | |||||||||
Corporate
|
180 | 22 | - | |||||||||
Total
|
$ | 16,602 | $ | 13,298 | $ | 9,000 | ||||||
Most of
our products are distributed in the Midwestern, Southwestern and Southeastern
regions of the United States. Information concerning geographic concentration of
net sales based on location of customer is as follows:
Years ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
(In
thousands)
|
||||||||||||
United
States
|
$ | 444,518 | $ | 550,928 | $ | 319,390 | ||||||
Canada
|
5,145 | 7,992 | 2,169 | |||||||||
Mexico
|
- | 2,338 | - | |||||||||
Other
|
1,515 | 1,435 | 788 | |||||||||
Total
|
$ | 451,178 | $ | 562,693 | $ | 322,347 |
Note
6 – Inventories, net:
December 31,
|
||||||||
2008
|
2009
|
|||||||
(In
thousands)
|
||||||||
Raw
materials
|
$ | 9,635 | $ | 3,222 | ||||
Billet
|
6,657 | 4,917 | ||||||
Wire
rod
|
10,191 | 5,282 | ||||||
Work
in process
|
24,225 | 4,645 | ||||||
Finished
product
|
33,646 | 19,747 | ||||||
Supplies
|
20,938 | 22,646 | ||||||
Inventory
at FIFO
|
105,292 | 60,459 | ||||||
Less
LIFO reserve
|
34,434 | 19,234 | ||||||
Total
|
$ | 70,858 | $ | 41,225 | ||||
We
believe our LIFO reserve represents the excess of replacement or current cost
over the stated LIFO value of our inventories.
F -
17
As
discussed in Note 5, inventory costs and quantities for December 2009 are
substantially lower than inventory costs and quantities at December 2008.
Although the reduction in inventory quantities resulted in a partial liquidation
of LIFO inventory during 2009, the impact of the liquidation was not significant
to reported cost of sales. See Note 5.
Note
7 - Notes payable and long-term debt:
December 31,
|
||||||||
2008
|
2009
|
|||||||
(In
thousands)
|
||||||||
Wachovia
revolving credit facility
|
$ | 3,264 | $ | 12,546 | ||||
8%
Notes
|
9,108 | - | ||||||
Term
loans:
|
||||||||
Wachovia
|
10,953 | 5,620 | ||||||
County
|
7,441 | 6,302 | ||||||
Other
|
864 | 902 | ||||||
Total
debt
|
31,630 | 25,370 | ||||||
Less
current maturities
|
18,848 | 19,396 | ||||||
Total
long-term debt
|
$ | 12,782 | $ | 5,974 |
Wachovia
Facility. Prior to 2007, we obtained an $80 million secured
credit facility from Wachovia Capital Financial Corporation (Central) (the
“Wachovia Facility”). During the first quarter of 2007, the Wachovia
Facility was amended, increasing the total committed facility amount from $80.0
million to $100.0 million, in part to finance the CaluMetals
acquisition. The Wachovia Facility includes a term loan in the amount
of up to $25.0 million, subject to a borrowing base calculation based on the
market value of our real property and equipment. To the extent there
is sufficient borrowing base, the term loan portion of the Wachovia Facility can
be reloaded in the amount of $10.0 million. The portion of the credit
facility in excess of the term loan balance and outstanding letters of credit is
available as a revolving credit facility subject to a borrowing base calculation
based on eligible receivables and inventory balances. At December 31,
2009, letters of credit for $5.5 million were outstanding and unused credit
available for borrowing under the Wachovia Facility was $38.6
million.
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 anticipated we would be out of
compliance with these financial covenants as of September 30,
2009. As such, on October 2, 2009 we entered into the Third Amendment
to our Wachovia Facility agreement (retroactive to September 30,
2009). 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 from $5.0 million to $10.0 million for the
period 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%.
|
F -
18
Prior to
the amendment, interest rates on the Wachovia Facility ranged from prime to
prime plus 0.5% or LIBOR plus 2.0% to LIBOR plus 2.75%.
We were
in compliance with the amended covenants 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 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.
The
Wachovia Facility requires our daily net cash receipts to be used to reduce the
outstanding borrowings, which results in us maintaining zero cash balances so
long as there is an outstanding balance under this
facility. Accordingly, any outstanding balances under the revolving
credit portion of the Wachovia Facility are always classified as a current
liability, regardless of the maturity date of the facility. We are also required
to pay down annually the term loan portion of the facility in the amount of 25%
of excess cash flow, as defined in the agreement, subject to a $2.0 million
annual and a $5.0 million aggregate limit. Otherwise, the principal
portion of the term notes is amortized over either 60 or 84 months, depending on
the underlying collateral. Our agreement with Wachovia also prohibits
the payment of cash dividends on our common stock.
We paid
the lender approximately $.4 million of diligence, commitment and closing fees
upon commencement of this facility. We paid $.2 million in connection
with the amendment during the first quarter of 2007 and we paid $.1 million in
connection with the October 2009 amendment. We amortize these fees
over the life of the facility.
8% Notes. During
the first quarter of 2009, we made the final payment on our 8%
Notes. Under GAAP, the 8% Notes were recorded at their aggregate
undiscounted future cash flows (both principal and interest), and thereafter
both principal and interest payments were accounted for as a reduction of the
carrying amount of the debt. Therefore, we did not recognize any
interest expense on the 8% Notes.
County Term
Loan. Prior to 2007, we received a $10 million term loan from
the County of Peoria, Illinois (the “County Term Loan”). Proceeds
from the County Term Loan were used to reduce the outstanding balance of our
revolving credit facility.
The
County Term Loan did not bear interest until it was amended in May of
2007. The amendment reduced the $10.0 million principal payment that
would otherwise have been due on June 1, 2007 to $1.0 million and required that
the remaining $9.0 million principal amount bear interest at a rate of 7.5% per
annum. Principal and interest will be paid in semi-annual
installments of $.8 million through June 1, 2014. All other
significant terms and conditions of the County Term Loan remain
unchanged.
F -
19
The
County Term Loan is collateralized by a second priority lien on the real
property and other fixed assets comprising KSW’s steel mill in Peoria,
Illinois.
Aggregate maturities of long-term
debt at December 31, 2009. Our Wachovia Facility expires in
August 2010. Due to our historical cash flows from operations, our
ability to remain profitable throughout the negative economic conditions of 2009
and our relatively low debt position as of December 31, 2009, we believe we will
be able to obtain sufficient financing for our operations upon expiration of the
credit facility through renewal of the existing facility or a new facility with
a new group of lenders. If we are unable to obtain such financing, we
believe we would have other sources of liquidity to meet our requirements, which
could include funds provided by our affiliates. If we are unable to
secure sufficient debt or equity financing, we may not be able to fund our
operations. The aggregate future maturities of notes payable and
long-term debt at December 31, 2009 are shown in the following
table.
Year ending December 31,
|
Amount
|
|||
(In
thousands)
|
||||
2010
|
$ | 19,396 | ||
2011
|
1,324 | |||
2012
|
1,421 | |||
2013
|
1,529 | |||
2014
|
1,908 | |||
Total
|
$ | 25,578 |
Note
8 - Income taxes:
Summarized
below are (i) the differences between the provision for income taxes and the
amounts that would be expected using the U. S. federal statutory income tax rate
of 35%, and (ii) the components of the comprehensive provision for income
taxes.
Years ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
(In
thousands)
|
||||||||||||
Expected
tax provision, at statutory rate
|
$ | 35,835 | $ | 37,146 | $ | 888 | ||||||
U.S.
state income taxes, net
|
2,444 | 2,842 | 1,399 | |||||||||
Other,
net
|
(660 | ) | 26 | 5 | ||||||||
Provision
for income taxes
|
$ | 37,619 | $ | 40,014 | $ | 2,292 | ||||||
Provision
for income taxes:
|
||||||||||||
Currently
payable (refundable):
|
||||||||||||
U.S.
federal
|
$ | (45 | ) | $ | 3,453 | (4,246 | ) | |||||
U.S.
state
|
190 | 740 | 26 | |||||||||
Net
currently payable (refundable)
|
145 | 4,193 | (4,220 | ) | ||||||||
Deferred
income taxes, net
|
37,474 | 35,821 | 6,512 | |||||||||
Provision
for income taxes
|
$ | 37,619 | $ | 40,014 | $ | 2,292 | ||||||
Comprehensive
provision for income
taxes
allocable to:
|
||||||||||||
Net
income
|
$ | 37,619 | $ | 40,014 | $ | 2,292 | ||||||
Other
comprehensive income (loss):
|
||||||||||||
Pension
plans
|
(34,626 | ) | (215,824 | ) | 18,505 | |||||||
OPEB
plans
|
(3,315 | ) | (10,761 | ) | (3,793 | ) | ||||||
$ | (322 | ) | $ | (186,571 | ) | $ | 17,004 |
F -
20
The
components of the net deferred tax asset/(liability) are summarized
below.
December 31,
|
||||||||||||||||
2008
|
2009
|
|||||||||||||||
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Tax
effect of temporary differences relating to:
|
||||||||||||||||
Inventories
|
$ | 6,806 | $ | - | $ | 1,361 | $ | - | ||||||||
Property
and equipment
|
- | (12,819 | ) | - | (13,842 | ) | ||||||||||
Pension
asset
|
- | (15,169 | ) | - | (32,413 | ) | ||||||||||
Accrued
OPEB cost
|
16,398 | - | 17,415 | - | ||||||||||||
Accrued
liabilities
|
8,809 | - | 5,266 | - | ||||||||||||
Other
deductible differences
|
1,264 | - | 1,415 | - | ||||||||||||
Net
operating loss and credit carryforwards
|
800 | - | 5,663 | - | ||||||||||||
Gross
deferred tax assets / (liabilities)
|
34,077 | (27,988 | ) | 31,120 | (46,255 | ) | ||||||||||
Reclassification,
principally netting by tax jurisdiction
|
(19,704 | ) | 19,704 | (26,686 | ) | 26,686 | ||||||||||
Net
deferred tax asset / (liability)
|
14,373 | (8,284 | ) | 4,434 | (19,569 | ) | ||||||||||
Less
current deferred tax asset
|
14,373 | - | (4,434 | ) | - | |||||||||||
Noncurrent
deferred tax liability
|
$ | - | $ | (8,284 | ) | $ | - | $ | (19,569 | ) |
Our
provision for income taxes in 2009 includes a $1.4 million non-cash charge for
state deferred income taxes due to an increase in our effective state income tax
rate, primarily attributable to a change in our apportionment
factors.
We
believe the realization of our gross deferred income tax assets (including our
net operating loss and credit carryforwards) meet the more-likely-than-not
realizability test at December 31, 2009.
At
December 31, 2009, for U.S federal income tax purposes we had (i) approximately
$.7 million of alternative minimum tax credit carryforwards that have no
expiration date; (ii) federal net operating loss carryforwards of approximately
$11.5 million that expire in 2029; and (iii) various state net operating loss
carryforwards expiring between 2021 and 2029.
Note
9 - Pensions and other postretirement benefits:
We
sponsor several pension plans and postretirement benefit (“OPEB”) plans for
certain active employees and certain retirees. The benefits under our
defined benefit plans are based upon years of service and employee
compensation.
Changes
in accounting for defined benefit pension and OPEB plans
Beginning
with our December 31, 2009 filing we are adopting the fair value recognition
provisions of ASC Topic 715 which require us to use the fair value framework
established in ASC Topic 820 and we are providing the expanded disclosures as
required.
Amendments
The 1114
Agreement replaced certain retirees’ medical and prescription drug coverage with
fixed monthly cash payments and provided for supplemental monthly cash payments
to these retirees for a particular year if, in the prior year, we achieved
specified levels of free cash flow, as defined in the 1114
Agreement. On August 29, 2008, the 1114 Agreement was amended to,
among other things, eliminate the ability of the retirees to receive these
supplemental monthly cash payments in exchange for increased fixed monthly cash
payments. As a result of the amendment to the 1114 Agreement, and in
accordance with GAAP, we remeasured our OPEB obligation at the date of the 1114
Agreement amendment (using a discount rate of 6.9%), and we recorded the
increased OPEB obligation as accumulated other comprehensive income, net of tax,
which will be amortized over the remaining life expectancy of the affected
retirees.
F -
21
The
amendment also provided for a one-time, lump-sum, supplemental payment that
aggregated $.4 million in settlement of a dispute regarding the free cash flow
calculation for 2005, which impacted the supplemental monthly payments for
2006. We recorded the expense associated with this settlement as a
reduction of our 2008 OPEB credit.
Additionally,
under the terms of the amended 1114 Agreement, we are now permitted, but not
required, to create supplemental benefits under one of our defined benefit
pension plans in lieu of us paying the benefits granted by the amended 1114
Agreement. We have the ability to decide whether or not to exercise
such right on a year-by-year basis. We exercised that right at the
end of 2008 in regards to benefits payable for the months of June through
December of 2008 (approximately $2.3 million) and for 2009 (approximately $3.1
million). We exercised that right again at the end of 2009 in regards
to benefits payable during 2010 (approximately $3.0 million). As a
result of creating this supplemental pension benefit, our accumulated OPEB
benefit obligation was reduced, and our accumulated defined benefit pension
obligation was increased, by an aggregate of approximately $5.4 million during
2008 and $3.0 million during 2009.
Employer
Contributions and Plan Benefit Payments
Our
funding policy is to contribute annually the minimum amount required under ERISA
regulations plus additional amounts as we deem appropriate. We do not
anticipate being required to fund any contributions to our defined benefit
pension plans during 2010. We anticipate contributing approximately
$1.4 million to our OPEB plans during 2010. Benefit payments to plan
participants, which reflect expected future service, as appropriate, are
expected to be the equivalent of:
Pension
Benefits
|
Other
Benefits
|
|||||||
(In
thousands)
|
||||||||
2010
(1)
|
$ | 31,360 | $ | 1,357 | ||||
2011
|
28,281 | 4,263 | ||||||
2012
|
28,172 | 4,171 | ||||||
2013
|
28,161 | 4,071 | ||||||
2014
|
27,837 | 3,969 | ||||||
Next
5 years
|
134,260 | 18,374 |
(1)
|
Pension
benefits in 2010 include the supplemental pension benefits created in lieu
of the payments that would have been due under the amended 1114 Agreement,
which are excluded from the other benefit
payments.
|
F -
22
Funded
Status
We use a
December 31st measurement date for our defined benefit pension and OPEB
plans. The following tables provide the funded status of our plans
and a reconciliation of the changes in our plans' projected benefit obligations
and fair value of assets for the years ended December 31, 2008 and
2009:
Pension Benefits
|
Other Benefits
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Change
in projected benefit obligations
("PBO"):
|
||||||||||||||||
Balance
at beginning of the year
|
$ | 369,020 | $ | 364,278 | $ | 31,649 | $ | 43,932 | ||||||||
Service
cost
|
3,130 | 3,080 | 128 | 91 | ||||||||||||
Interest
cost
|
22,568 | 21,417 | 2,119 | 2,712 | ||||||||||||
Plan
amendment
|
37 | - | 23,228 | 76 | ||||||||||||
Actuarial
losses (gains)
|
(5,576 | ) | 16,623 | (5,332 | ) | 3,138 | ||||||||||
Benefits
paid
|
(30,303 | ) | (31,062 | ) | (2,458 | ) | (1,347 | ) | ||||||||
1114
Agreement benefits extinguished by increased pension
benefits
|
5,402 | 3,001 | (5,402 | ) | (3,001 | ) | ||||||||||
Balance at end of the
year
|
$ | 364,278 | $ | 377,337 | $ | 43,932 | $ | 45,601 | ||||||||
Change
in plan assets:
|
||||||||||||||||
Fair
value at beginning of the year
|
$ | 914,676 | $ | 404,610 | $ | - | $ | - | ||||||||
Actual
return on plan assets
|
(479,763 | ) | 88,595 | - | - | |||||||||||
Employer
contributions
|
- | - | 2,458 | 1,347 | ||||||||||||
Benefits
paid
|
(30,303 | ) | (31,062 | ) | (2,458 | ) | (1,347 | ) | ||||||||
Fair value at end of the
year
|
$ | 404,610 | $ | 462,143 | $ | - | $ | - | ||||||||
Funded
status
|
$ | 40,332 | $ | 84,806 | $ | (43,932 | ) | $ | (45,601 | ) | ||||||
Amounts
recognized in the Consolidated Balance Sheets:
|
||||||||||||||||
Pension
asset
|
$ | 41,651 | $ | 84,806 | $ | - | $ | - | ||||||||
Noncurrent
accrued pension costs
|
(1,319 | ) | - | - | - | |||||||||||
Accrued
OPEB costs:
|
||||||||||||||||
Current
|
- | - | (1,372 | ) | (1,357 | ) | ||||||||||
Noncurrent
|
- | - | (42,560 | ) | (44,244 | ) | ||||||||||
$ | 40,332 | $ | 84,806 | (43,932 | ) | (45,601 | ) | |||||||||
Accumulated
other comprehensive income:
|
||||||||||||||||
Prior service cost
(credit)
|
11,361 | 10,129 | (148,921 | ) | (132,674 | ) | ||||||||||
Actuarial
losses
|
298,400 | 246,270 | 96,279 | 90,797 | ||||||||||||
309,761 | 256,399 | (52,642 | ) | (41,877 | ) | |||||||||||
Total
|
$ | 350,093 | $ | 341,205 | $ | (96,574 | ) | $ | (87,478 | ) | ||||||
Accumulated
benefit obligations (“ABO”) of pension plans
|
$ | 359,780 | $ | 372,610 | ||||||||||||
Pension
plan for which the accumulated benefit obligation exceeds plan
assets:
|
||||||||||||||||
Projected
benefit obligation
|
$ | 100,525 | $ | - | ||||||||||||
Accumulated
benefit obligation
|
96,026 | - | ||||||||||||||
Fair
value of plan assets
|
99,206 | - | ||||||||||||||
F -
23
The
amounts shown in the table above for unamortized actuarial gains and losses and
prior service credits and costs at December 31, 2008 and 2009 have not been
recognized as components of our periodic defined benefit cost as of those
dates. These amounts will be recognized as components of our periodic
defined benefit cost in future years. These amounts, net of deferred
income taxes, are recognized in our accumulated other comprehensive income
(loss) at December 31, 2008 and 2009. We expect approximately $15.0
million and $1.2 million of the unamortized actuarial losses and prior service
cost, respectively, will be recognized as components of our periodic defined
benefit pension credit in 2010 and that $8.1 million and $16.2 million of the
unamortized actuarial losses and prior service credits, respectively, will be
recognized as components of our OPEB credit in 2010. The table below
details the changes in other comprehensive income (loss) for the years ended
December 31, 2008 and 2009.
Pension Benefits
|
Other Benefits
|
|||||||||||||||||||||||
2007
|
2008
|
2009
|
2007
|
2008
|
2009
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Changes
in plan assets and benefit obligations recognized in other comprehensive
income:
|
||||||||||||||||||||||||
Plan
amendment
|
$ | (78 | ) | $ | (37 | ) | $ | - | $ | - | $ | (22,812 | ) | $ | (76 | ) | ||||||||
Net
actuarial gain (loss) arising during the year
|
(77,978 | ) | (564,224 | ) | 33,085 | 1,809 | 5,332 | (3,138 | ) | |||||||||||||||
Amortization
of unrecognized:
|
||||||||||||||||||||||||
Prior service cost
(credit)
|
1,229 | 1,229 | 1,232 | (17,646 | ) | (17,313 | ) | (16,170 | ) | |||||||||||||||
Net
actuarial losses (gains)
|
(15,238 | ) | (10,813 | ) | 19,045 | 7,024 | 6,176 | 8,619 | ||||||||||||||||
Total
|
$ | (92,065 | ) | $ | (573,845 | ) | $ | 53,362 | $ | (8,813 | ) | $ | (28,617 | ) | $ | (10,765 | ) |
Net
periodic defined benefit cost or credit
The
components of our net periodic defined benefit cost or credits are presented in
the table below. During 2007, 2008 and 2009, the amounts shown below
for the amortization of actuarial gains and losses and prior service credits and
costs, net of deferred income taxes, were recognized as components of our
accumulated other comprehensive income at December 31, 2006, 2007 and 2008,
respectively.
Pension Benefits
|
Other Benefits
|
|||||||||||||||||||||||
2007
|
2008
|
2009
|
2007
|
2008
|
2009
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Service
cost
|
$ | 3,724 | $ | 3,130 | $ | 3,080 | $ | 204 | $ | 128 | $ | 91 | ||||||||||||
Interest
cost
|
21,893 | 22,568 | 21,417 | 1,892 | 2,119 | 2,712 | ||||||||||||||||||
Expected
return on plan assets
|
(92,051 | ) | (90,037 | ) | (38,887 | ) | - | - | - | |||||||||||||||
Amortization
of:
|
||||||||||||||||||||||||
Prior
service cost (credit)
|
1,229 | 1,229 | 1,232 | (17,646 | ) | (17,313 | ) | (16,170 | ) | |||||||||||||||
Net
actuarial losses (gains)
|
(15,238 | ) | (10,813 | ) | 19,045 | 7,024 | 6,176 | 8,619 | ||||||||||||||||
Settlement
of 2006 1114 Agreement benefits
|
- | - | - | - | 416 | - | ||||||||||||||||||
Total
benefit cost (credit)
|
$ | (80,443 | ) | $ | (73,923 | ) | $ | 5,887 | $ | (8,526 | ) | $ | (8,474 | ) | $ | (4,748 | ) |
Actuarial
assumptions
A summary
of our key actuarial assumptions used to determine the present value of benefit
obligations as of December 31, 2008 and 2009 are shown in the following
table:
Pension Benefits
|
Other Benefits
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Discount
rate
|
6.2 | % | 5.6 | % | 6.2 | % | 5.5 | % | ||||||||
Rate
of compensation increase
|
3.4 | % | 3.6 | % | - | - |
F -
24
A summary
of our key actuarial assumptions used to determine the net periodic pension and
other retiree benefit credit or expense during 2007, 2008 and 2009 are shown in
the following table:
Pension Benefits
|
Other Benefits
|
|||||||||||||||||||||||
2007
|
2008
|
2009
|
2007
|
2008
|
2009
|
|||||||||||||||||||
Discount
rate
|
5.8 | % | 6.3 | % | 6.2 | % | 5.8 | % | 6.5 | % | 6.2 | % | ||||||||||||
Expected
return on plan assets
|
10.0 | % | 10.0 | % | 10.0 | % | - | - | - | |||||||||||||||
Rate
of compensation increase
|
3.0 | % | 3.0 | % | 3.4 | % | - | - | - |
Variances
from actuarially assumed rates will result in increases or decreases in pension
assets, accumulated defined benefit obligations, net periodic defined benefit
credits or expense and funding requirements in future periods.
As noted
above, we are providing the expanded disclosures regarding our defined benefit
pension plan assets as of December 31, 2009, as required by the provisions of
ASC Topic 715. The transition provisions of this Topic required us to provide
these expanded disclosures on a prospective basis for the December 31, 2009 plan
assets only.
At
December 31, 2008 and 2009, substantially all of the assets attributable to our
U.S. plans were invested in the Combined Master Retirement Trust (“CMRT”), a
collective investment trust sponsored by Contran to permit the collective
investment by certain master trusts that fund certain employee benefits plans
sponsored by Contran and certain of its affiliates. The CMRT’s long-term
investment objective is to provide a rate of return exceeding a composite of
broad market equity and fixed income indices (including the S&P 500 and
certain Russell indicies) while utilizing both third-party investment managers
as well as investments directed by Mr. Simmons. Mr. Simmons is the
sole trustee of the CMRT. The trustee of the CMRT, along with the
CMRT's investment committee, of which Mr. Simmons is a member, actively manage
the investments of the CMRT. The CMRT trustee and investment
committee seek to maximize returns in order to meet the CMRT’s long-term
investment objective. The CMRT trustee and investment committee do
not maintain a specific target asset allocation in order to achieve their
objectives, but instead they periodically change the asset mix of the CMRT based
upon, among other things, advice they receive from third-party advisors and
their expectations regarding potential returns for various investment
alternatives and what asset mix will generate the greatest overall
return. During the history of the CMRT from its inception in 1988
through December 31, 2009, the average annual rate of return of the CMRT has
been 14.2%. For the years ended December 31, 2007, 2008 and 2009, the assumed
long-term rate of return for plan assets invested in the CMRT was
10%. In determining the appropriateness of the long-term rate of
return assumption, we primarily rely on the historical rates of return achieved
by the CMRT, although we consider other factors as well including, among other
things, the investment objectives of the CMRT's managers and their expectation
that such historical returns will in the future continue to be achieved over the
long-term.
At
December 31, 2009, the CMRT’s investments are valued using Level 1, Level 2 and
Level 3 inputs, as defined by ASC 820-10-35, with approximately 83% valued using
Level 1 inputs, 3% using Level 2 inputs and 14% using Level 3
inputs. The CMRT is not traded on any market. The CMRT
unit value is determined semi-monthly, and the plans have the ability to redeem
all or any portion of their investment in the CMRT at any time based on the most
recent semi-monthly valuation. However, the plans do not have the
right to individual assets held by the CMRT and the CMRT has the sole discretion
in determining how to meet any redemption request. For purposes of
our plan asset disclosure, we consider the investment in the CMRT as a Level 2
input because (i) the CMRT value is established semi-monthly and the plans have
the right to redeem their investment in the CMRT, in part or in whole, at any
time based on the most recent value and (ii) approximately 86% of the assets of
the CMRT are valued using either Level 1 or Level 2 inputs, as noted above,
which have observable inputs. The total fair value of all of the CMRT
assets was $535 million and $602 million at December 31, 2008 and 2009,
respectively. At December 31, 2009 approximately 65% of the CMRT assets were
invested in domestic equity securities with the majority of these being publicly
traded securities; approximately 5% were invested in publicly traded
international equity securities; approximately 21% were invested in publicly
traded fixed income securities; approximately 8% were invested in various
privately managed limited partnerships and the remainder was invested in real
estate and cash and cash equivalents.
F -
25
Defined
contribution pension plans
We also
maintain several defined contribution pension plans. Expense related
to these plans was $2.0 million in 2007, $2.1 million in 2008 and $2.0 million
in 2009.
Note
10 - Environmental matters:
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 December 31, 2009, the upper end of the range of
reasonably possible costs to us for sites where we have been named a defendant
is approximately $2.0 million, including our recorded accrual of $.7
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 12.
F -
26
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 three years ended December 31, 2009 is as
follows:
Years ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
(In
thousands)
|
||||||||||||
Balance
at beginning of period
|
$ | 13,252 | $ | 5,282 | $ | 5,125 | ||||||
Net
change in accrued environmental cost recorded
as general and administrative expense
|
- | 504 | (4,045 | ) | ||||||||
Payments,
net
|
(3,288 | ) | (661 | ) | (350 | ) | ||||||
Cancellation
of debt
|
(4,682 | ) | - | - | ||||||||
Balance
at end of period
|
$ | 5,282 | $ | 5,125 | $ | 730 |
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
estimated in prior years, and accordingly we reduced our accrual for this matter
by $4.2 million during 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
$50,000. 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 $125,000 accrued for this matter at
December 31, 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
2009. The Trust Fund balance of $249,000 at December 31, 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 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.
F -
27
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 two to three years and total future remediation costs are presently
estimated to be between $.5 million and $1.8 million. During 2007,
2008 and 2009, we paid approximately $.2 million, $.5 million and $.3 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 remained in
discussions with the U.S. EPA throughout 2009. On December 31, 2009,
we were notified that the case had been referred to the Department of Justice
(the “DOJ”) for review and follow-up. In January 2010, we submitted a
letter regarding our perspective on the matter to the DOJ and we are awaiting
their response. We can make no assurance our efforts will be
successful or that we can avoid any enforcement action or resulting fines from
these alleged violations.
Note
11 - Other commitments and contingencies:
Current
litigation
We are
engaged in various legal proceedings incidental to our normal business
activities. In our opinion, none of such proceedings are material in relation to
our consolidated financial position, results of operations or
liquidity.
Settled
litigation
We were
involved in a legal proceeding with one of our former insurance carriers
regarding the nature and extent of the carrier’s obligation to us under
insurance policies in effect from 1945 to 1985 with respect to environmental
remediation expenditures we previously made at certain sites. In July
2007, the carrier paid us $5.4 million for settlement of this
matter. This settlement is reflected as a gain on legal settlement on
our 2007 Consolidated Statement of Operations.
F -
28
Lease
commitments
At
December 31, 2009, we are obligated under certain operating leases through
2012. Future commitments under these leases are summarized
below.
Lease commitment
|
||||
(In
thousands)
|
||||
2010
|
$ | 479 | ||
2011
|
402 | |||
2012
|
258 | |||
Total
|
$ | 1,139 |
Product
supply agreement
In 1996,
we entered into a fifteen-year product supply agreement with a vendor whereby
the vendor constructed a plant at KSW’s Peoria, Illinois facility and,
subsequently provides us with all, subject to certain limitations, of our
gaseous oxygen and nitrogen needs until 2011. In addition to
specifying rates to be paid by us, including a minimum facility fee of
approximately $1.2 million per year, the supply agreement also specifies
provisions for adjustments to the rates and term of the supply agreement.
Purchases made pursuant to the supply agreement during 2007, 2008 and 2009
amounted to $3.2 million, $3.9 million and $3.1 million,
respectively.
Concentration
of credit risk
We
perform ongoing credit evaluations of our customers’ financial condition and,
generally, require no collateral from our customers.
During
2009, we did not have sales to any single customer that exceeded 10% of
consolidated sales. The percentage of each of our segments’ external
sales related to their ten largest external customers and the one external
customer at each of our segments that accounted for more than 10% of that
segment’s external sales during 2009 is set forth in the following
table:
KSW
|
EWP
|
Calumet
|
|||
%
of segments’ sales
|
|||||
Ten
largest customers
|
61%
|
54%
|
56%
|
||
Customer
> 10%
|
11%
|
11%
|
10%
|
F -
29
Note
12 - Other accrued liabilities:
December 31,
|
||||||||
2008
|
2009
|
|||||||
(In
thousands)
|
||||||||
Current:
|
||||||||
Employee
benefits
|
$ | 19,656 | $ | 10,456 | ||||
Self
insurance
|
5,936 | 4,431 | ||||||
Environmental
|
455 | 430 | ||||||
Other
|
3,522 | 3,012 | ||||||
Total
|
$ | 29,569 | $ | 18,329 | ||||
Noncurrent:
|
||||||||
Workers
compensation payments
|
$ | 1,621 | $ | 2,315 | ||||
Environmental
|
4,670 | 300 | ||||||
Other
|
172 | 253 | ||||||
Total
|
$ | 6,463 | $ | 2,868 |
Note
13 – Financial instruments:
The
following table presents the carrying value and estimated fair value of our
financial instruments:
December
31,
2008
|
December
31,
2009
|
|||||||||||||||
Carrying
amount
|
Fair
value
|
Carrying
amount
|
Fair
value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Restricted
cash equivalents
|
$ | 2,277 | $ | 2,277 | $ | 249 | $ | 249 | ||||||||
Accounts
receivable, net
|
26,612 | 26,612 | 41,231 | 41,231 | ||||||||||||
Accounts
payable
|
7,776 | 7,776 | 5,577 | 5,577 | ||||||||||||
Long-term
debt:
|
||||||||||||||||
Variable-rate
debt
|
14,217 | 14,217 | 18,166 | 18,166 | ||||||||||||
Fixed-rate
debt
|
17,413 | 16,305 | 7,204 | 6,680 | ||||||||||||
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 ASC Topic 820-10-35.
Note
14 - Related party transactions:
We may be
deemed to be controlled by Mr. Harold C. Simmons. See
Note 1. Corporations that may be deemed to be controlled by or
affiliated with Mr. Simmons sometimes engage in (a) intercorporate transactions
such as guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties, and (b) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related
party. We periodically consider, review and evaluate, and understand
that Contran and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives
then relevant, it is possible that we might be a party to one or more such
transactions in the future.
F -
30
Under the
terms of an intercorporate services agreement (the "ISA") entered into between
us and Contran, employees of Contran provide certain management, tax planning,
legal, financial and administrative services on a fee basis. Such
charges are based upon estimates of the time devoted by the employees of Contran
to our affairs and the compensation of such persons. Because of the
large number of companies affiliated with Contran, we believe we benefit from
cost savings and economies of scale gained by not having certain management,
legal, financial and administrative staffs duplicated at each entity, thus
allowing certain individuals to provide services to multiple companies but only
be compensated by one entity. During 2007, 2008 and 2009 the ISA fees
charged by Contran aggregated approximately $1.7 million, $1.8 million and $2.0
million, respectively.
Tall
Pines Insurance Company (“Tall Pines”) and EWI RE, Inc. (“EWI”) provide for or
broker certain insurance policies for Contran and certain of its subsidiaries
and affiliates, including us. Tall Pines is an indirect subsidiary of
Valhi, Inc., a majority-owned subsidiary of Contran. EWI is a
wholly-owned subsidiary of NL Industries, Inc., a publicly-held company which is
majority owned by Valhi, Inc. Consistent with insurance industry
practices, Tall Pines and EWI receive commissions from the insurance and
reinsurance underwriters and/or assess fees for the policies they provide or
broker. We paid Tall Pines and EWI $3.2 million in 2007, $3.8 million in 2008
and $4.0 million in 2009 for insurance, reinsurance premiums paid to third
parties and commissions. Tall Pines purchases reinsurance for
substantially all of the risks it underwrites. We expect these
relationships with Tall Pines and EWI will continue in 2010.
Contran
and certain of its subsidiaries and affiliates, including us, purchase certain
of our insurance policies as a group, with the costs of the jointly-owned
policies being apportioned among the participating companies. With
respect to certain of such policies, it is possible that unusually large losses
incurred by one or more insureds during a given policy period could leave the
other participating companies without adequate coverage under that policy for
the balance of the policy period. As a result, Contran and certain of
its subsidiaries and affiliates, including us, have entered into a loss sharing
agreement under which any uninsured loss is shared by those entities who have
submitted claims under the relevant policy. We believe the benefits
in the form of reduced premiums and broader coverage associated with the group
coverage for such policies justifies the risk associated with the potential for
any uninsured loss.
Prior to
2007, we formed Alter Recycling Company, LLC (“ARC”), a joint venture with Alter
Trading Corporation (“ATC”), to operate a ferrous scrap recycling operation at
KSW. We have a scrap supply agreement with ATC and we source the
majority of our ferrous scrap supply under this agreement. During
2007, 2008, and 2009, we purchased approximately $171.0 million, $268.9 million
and $105.5 million, respectively, of ferrous scrap from ATC and approximately
$.5 million, $.7 million and $.5 million, respectively, of ferrous scrap from
ARC.
F -
31
Note
15 – Recent Accounting Pronouncements:
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 became effective for us beginning with our 2009
annual report, and we have provided the expanded disclosures about our pension
plan assets in Note 9.
Subsequent Events – In May
2009, the FASB issued SFAS No. 165, Subsequent Events, which is
now included with ASC Topic 855 Subsequent Events,
which was
subsequently amended by Accounting Standards Updated (“ASU”)
2010-09. 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 statements and
disclosures regarding all subsequent events. SFAS No. 165 became
effective for us in the second quarter of 2009 and its adoption did not have a
material effect on our Consolidated Financial Statements.
Uncertain Tax
Positions. In the second quarter of 2006 the FASB issued FIN No. 48,
Accounting for Uncertain Tax
Positions, which is now included with ASC Topic Income Taxes, which we
adopted on January 1, 2007. FIN 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 109, Accounting for Income Taxes,
and enhances the disclosure requirements for our income tax policies and
reserves. Among other things, FIN 48 prohibits us from recognizing
the benefits 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 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. We are required to classify any
future reserves for uncertain tax positions in a separate current or noncurrent
liability, depending on the nature of the tax position. Our adoption
of FIN 48 had no impact on our consolidated financial position or results of
operations as we had no uncertain tax positions at January 1, 2007, December 31,
2007, December 31, 2008 or December 31, 2009.
We accrue
interest and penalties on uncertain tax positions as a component of our
provision for income taxes when required. We did not accrue any
interest and penalties during 2007, 2008 or 2009 and had no accrued interest or
penalties at December 31, 2008 or 2009 for uncertain tax
positions. Additionally, at December 31, 2008 and December 31, 2009
we had no accrual for uncertain tax positions.
We file
income tax returns in various U.S. federal, state and local
jurisdictions. Our income tax returns prior to 2006 are generally
considered closed to examination by applicable tax authorities.
F -
32
Note
16 - Quarterly financial data (unaudited):
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
|||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||
Year
ended December 31, 2008:
|
||||||||||||||||
Net
sales
|
$ | 134,139 | $ | 178,027 | $ | 183,209 | $ | 67,318 | ||||||||
Gross
profit (loss)
|
7,126 | 21,737 | 26,342 | (3,709 | ) | |||||||||||
Net
income
|
$ | 13,610 | $ | 21,919 | $ | 23,975 | $ | 6,610 | ||||||||
Basic
and diluted net income per share
|
$ | 1.39 | $ | 1.81 | $ | 1.98 | $ | 0.55 | ||||||||
Year
ended December 31, 2009:
|
||||||||||||||||
Net
sales
|
$ | 60,475 | $ | 70,511 | $ | 100,363 | $ | 90,998 | ||||||||
Gross
profit (loss)
|
(1,799 | ) | 5,239 | 14,911 | 4,209 | |||||||||||
Net
income (loss)
|
$ | (4,374 | ) | $ | 1,000 | $ | 5,868 | $ | (2,253 | ) | ||||||
Basic
and diluted net income (loss) per share
|
$ | (0.36 | ) | $ | 0.08 | $ | 0.48 | $ | (0.18 | ) | ||||||
We
experienced an unprecedented 90% increase in the cost of ferrous scrap from
December 2007 to August 2008 and we were able to recover these higher costs
through increases in our product selling prices. As such, during the
second and third quarters of 2008, we experienced an increased level of
profitability due to a greater margin between ferrous scrap costs, our primary
raw material, and our product selling prices.
During
the fourth quarter of 2008 and the first two quarters of 2009, the domestic and
international economic crises, the resulting adverse impact of the current
credit market on construction projects and a significant decline in ferrous
scrap costs from August 2008 resulted in customers choosing to conserve cash by
liquidating inventories and limiting orders. Given the sharply
reduced market demand, we operated our facilities on substantially reduced
production schedules, which resulted in a much higher percentage of fixed costs
included in cost of goods sold throughout 2009 as these costs could not be
capitalized into inventory.
On a
quarterly basis, we estimate the LIFO reserve balance that will be required at
the end of the year based on projections of year-end quantities and costs and we
record a pro-rated, year-to-date change in the LIFO reserve from the prior year
end. At the end of each year, we calculate the required LIFO reserve
balance based on actual year-end quantities and costs. Throughout
2008 and 2009 our quarterly results were impacted by significant LIFO
adjustments. Other items impacting the comparability of 2008 and 2009
quarterly results include:
·
|
a
2009 credit related to the release of accrued environmental costs for
certain inactive waste management units as discussed in Note
10;
|
·
|
impairment
charges to reduce Calumet’s inventory to its net realizable value;
and
|
·
|
income
related to KSW obtaining an excise tax exemption at the end of 2008 on
2007 and 2008 electricity costs.
|
These
items, net of tax and their impact on net income (loss) is presented in the
following table.
F -
33
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Year
ended December 31, 2008:
|
||||||||||||||||
Decrease
(increase) in LIFO reserve
|
$ | (579 | ) | $ | (3,255 | ) | $ | 1,023 | $ | (3,516 | ) | |||||
Impairment
of Calumet’s inventory
|
- | - | - | (720 | ) | |||||||||||
Excise
tax exemption
|
- | - | - | 1,343 | ||||||||||||
Total
impact on net income
|
$ | (579 | ) | $ | (3,255 | ) | $ | 1,023 | $ | (2,893 | ) | |||||
Year
ended December 31, 2009:
|
||||||||||||||||
Decrease
in LIFO reserve
|
$ | 2,799 | $ | 3,411 | $ | 2,205 | $ | 1,057 | ||||||||
Impairment
of Calumet’s inventory
|
(933 | ) | (452 | ) | (219 | ) | (74 | ) | ||||||||
Release
of environmental accruals
|
- | 2,604 | - | - | ||||||||||||
Total
impact on net income (loss)
|
$ | 1,866 | $ | 5,563 | $ | 1,986 | $ | 983 | ||||||||
|
F -
34