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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarter ended September 30, 2011		Commission file number 1-3919

Keystone Consolidated Industries, Inc.

 

(Exact name of Registrant as specified in its charter)

 

Delaware				37-0364250
(State or other jurisdiction of Incorporation or organization)				(IRS Employer Identification No.)
5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, Texas				75240-2697
(Address of principal executive offices)				(Zip Code)

 

Registrant’s telephone number, including area code:				(972) 458-0028

Indicate by check mark:

Whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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  x    Smaller reporting company  ¨.

Whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨.

Number of shares of common stock outstanding on November 9, 2011: 12,101,932

 

 

 

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

INDEX

 

				Page
Part I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets – December 31, 2010; September 30, 2011 (unaudited)			3
		Condensed Consolidated Statements of Income (unaudited) – Three months and nine months ended September 30, 2010 and 2011			5
		Condensed Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2010 and 2011			6
		Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income –  Nine months ended September 30, 2011 (unaudited)			7
		Notes to Condensed Consolidated Financial Statements (unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			29
Item 1A.		Risk Factors			29
Item 6.		Exhibits			29
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

 

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		December 31,				September 30,
ASSETS		2010				2011
						(unaudited)
Current assets:
Accounts receivable, net		$	46,765			$	66,663
Inventories			45,944				68,160
Deferred income taxes			17,501				17,501
Income taxes receivable			2,029				—
Prepaid expenses and other			1,474				2,397
Total current assets			113,713				154,721
Property, plant and equipment:
Land			1,468				1,468
Buildings and improvements			63,375				64,712
Machinery and equipment			338,071				345,205
Construction in progress			4,628				4,512
			407,542				415,897
Less accumulated depreciation			319,533				326,911
Net property, plant and equipment			88,009				88,986
Other assets:
Pension asset			153,962				176,898
Other, net			1,533				1,473
Total other assets			155,495				178,371
Total assets		$	357,217			$	422,078

 

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

 

		December 31,				September 30,
		2010				2011
						(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	27,744			$	43,229
Accounts payable			6,694				13,914
Accrued OPEB cost			1,279				1,279
Other accrued liabilities			22,901				29,866
Total current liabilities			58,618				88,288
Noncurrent liabilities:
Long-term debt			937				971
Accrued OPEB cost			45,247				46,244
Deferred income taxes			58,830				69,286
Other accrued liabilities			1,849				1,959
Total noncurrent liabilities			106,863				118,460
Stockholders’ equity:
Common stock			125				121
Additional paid-in capital			100,111				99,004
Accumulated other comprehensive loss			(97,307	)			(95,513	)
Retained earnings			189,603				211,718
Treasury stock			(796	)			-
Total stockholders’ equity			191,736				215,330
Total liabilities and stockholders’ equity		$	357,217			$	422,078

Commitments and contingencies (Note 5)

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

		Three months ended September 30,								Nine months ended September 30,
		(unaudited)
		2010				2011				2010				2011
Net sales		$	113,608			$	140,973			$	348,321			$	431,091
Cost of goods sold			(108,100	)			(132,129	)			(317,584	)			(394,243	)
Gross margin			5,508				8,844				30,737				36,848
Other operating income (expense):
Selling expense			(1,448	)			(1,775	)			(4,949	)			(5,573	)
General and administrative expense			(2,434	)			(3,881	)			(10,315	)			(11,605	)
Defined benefit pension credit			1,211				4,750				3,632				14,250
Other postretirement benefit credit			1,342				1,299				4,029				3,898
Total other operating income (expense)			(1,329	)			393				(7,603	)			970
Operating income			4,179				9,237				23,134				37,818
Nonoperating income (expense):
Interest expense			(502	)			(319	)			(1,567	)			(922	)
Other income, net			125				113				272				661
Total nonoperating expense			(377	)			(206	)			(1,295	)			(261	)
Income before income taxes			3,802				9,031				21,839				37,557
Provision for income taxes			(1,483	)			(3,595	)			(8,396	)			(15,442	)
Net income		$	2,319			$	5,436			$	13,443			$	22,115
Basic and diluted income per share		$	0.19			$	0.45			$	1.11			$	1.83
Basic and diluted weighted average shares outstanding			12,102				12,102				12,102				12,102

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Nine months ended September 30,
		2010				2011
		(unaudited)
Cash flows from operating activities:
Net income		$	13,443			$	22,115
Depreciation and amortization			9,119				8,350
Deferred income taxes			5,058				9,279
Defined benefit pension credit			(3,632	)			(14,250	)
OPEB credit			(4,029	)			(3,898	)
OPEB payments			(978	)			(820	)
Other, net			82				118
Change in assets and liabilities:
Accounts receivable			(11,356	)			(19,839	)
Inventories			(26,343	)			(22,216	)
Accounts payable			2,849				7,220
Accrued liabilities			3,271				6,755
Income taxes			3,441				2,349
Other, net			(371	)			(1,464	)
Net cash used in operating activities			(9,446	)			(6,301	)
Cash flows from investing activities:
Capital expenditures			(6,512	)			(9,492	)
Other, net			106				85
Net cash used in investing activities			(6,406	)			(9,407	)
Cash flows from financing activities:
Revolving credit facility, net			22,448				15,487
Principal payments on other notes payable and long-term debt			(6,225	)			(3	)
Deferred financing costs paid			(371	)			(9	)
Transactions with stockholders			–				233
Net cash provided by financing activities			15,852				15,708
Net change in cash and cash equivalents			–				–
Cash and cash equivalents, beginning of period			–				–
Cash and cash equivalents, end of period		$	–			$	–
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized		$	1,224			$	824
Income taxes paid (refunded), net			(103	)			4,203

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

Nine months ended September 30, 2011

(In thousands)

 

		Common stock				Additional paid-in capital				Accumulated other comprehensive income (loss)								Retained earnings				Treasury stock				Total						Comprehensive income
										Pensions				OPEB
		(unaudited)
Balance – December 31, 2010			$125				$100,111			$	(116,745	)		$	19,438			$	189,603			$	(796	)		$	191,736
Net income			–				–				–				–				22,115				–				22,115						$22,115
Retirement of treasury stock			(4	)			(1,248	)			–				–				–				796				(456	)					–
Amortization of actuarial losses			–				–				4,687				3,872				–				–				8,559						8,559
Amortization of prior service cost (credit)			–				–				558				(7,323	)			–				–				(6,765	)					(6,765	)
Other, net			–				141				–				–				–				–				141						–
Balance – September 30, 2011			$121				$99,004			$	(111,500	)		$	15,987			$	211,718			$	–			$	215,330
Comprehensive income																																	$23,909

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(unaudited)

Note 1 – Organization and basis of presentation:

The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 that we filed with the Securities and Exchange Commission (“SEC”) on March 17, 2011 (the “2010 Annual Report”). In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. Certain reclassifications have been made to conform the prior year’s Condensed Consolidated Financial Statements to the current year’s classifications. As compared to the 2010 Annual Report, we have omitted certain information and footnote disclosures from this Quarterly Report that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our results of operations for the interim periods ended September 30, 2011 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with the 2010 Consolidated Financial Statements contained in the 2010 Annual Report.

At September 30, 2011, Contran Corporation (“Contran”) owned approximately 88% of our outstanding common stock including shares Contran acquired from another stockholder in August 2011. See Notes 7 and 9. Substantially all of Contran’s outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons (for which Mr. Simmons is the sole trustee) or is held directly by Mr. Simmons or other persons or companies related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control Contran and us.

Unless otherwise indicated, references in this report to “we”, “us” or “our” refer to Keystone Consolidated Industries, Inc. (“KCI”) and its subsidiaries, taken as a whole.

Note 2 – Business segment information:

Our operating segments are organized by our manufacturing facilities and include three reportable segments:

 

—

Keystone Steel & Wire (“KSW”), located in Peoria, Illinois, operates an electric arc furnace mini-mill, rod mill, industrial wire mill and wire product fabrication facilities 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 as reinforcement 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

 

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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.

We are vertically integrated, converting substantially all of our products from billets produced in KSW’s steel mini-mill. Calumet’s primary raw material is billet and EWP’s primary raw material is wire rod. Both Calumet and EWP source the majority of their primary raw material requirements from KSW.

 

		Three months ended September 30,								Nine months  ended September 30,
		2010				2011				2010				2011
		(In thousands)
Net sales:
KSW			$104,664				$133,328				$338,046				$418,347
EWP			12,085				16,492				32,452				44,902
Calumet			6,329				7,132				16,315				23,044
Elimination of intersegment sales			(9,470	)			(15,979	)			(38,492	)			(55,202	)
Total net sales			$113,608				$140,973				$348,321				$431,091
Operating income:
KSW			$    2,654				$    4,119				$  18,172				$  21,674
EWP			(412	)			41				98				726
Calumet			(196	)			(464	)			450				(28	)
Pension credit			1,211				4,750				3,632				14,250
OPEB credit			1,342				1,299				4,029				3,898
Other(1)			(420	)			(508	)			(3,247	)			(2,702	)
Total operating income			4,179				9,237				23,134				37,818
Non operating income (expense):
Interest expense			(502	)			(319	)			(1,567	)			(922	)
Other income, net			125				113				272				661
Income before income taxes			$    3,802				$    9,031				$  21,839				$  37,557

⁽¹⁾ Other items primarily consist of the elimination of intercompany profit or loss on ending inventory balances and general corporate expenses.

On a quarterly basis, we estimate our LIFO reserve balances that would be required at the end of the year based on projections of year-end inventory quantities and costs, and we record a pro-rated, year-to-date change in our LIFO reserve balances from the prior year-end based on these projections. Changes in LIFO reserves are reflected in cost of goods sold. The changes in our LIFO inventory reserve balances for the 2010 and 2011 periods are presented in the table below.

 

 

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During the third quarter of 2011, we increased KSW’s and EWP’s LIFO inventory reserve balances primarily due to an increase in our estimated raw material costs expected to be in inventory as of the end of the year.

Note 3 – Inventories, net:

 

		December 31,				September 30,
		2010				2011
		(In thousands)
Raw materials		$	3,957			$	5,275
Billet			5,832				8,771
Wire rod			7,042				18,725
Work in process			5,030				7,375
Finished products			22,821				32,860
Supplies			25,919				23,885
Inventory at FIFO			70,601				96,891
Less LIFO reserve			24,657				28,731
Total		$	45,944			$	68,160

We believe our LIFO reserve represents the excess of replacement or current cost over the stated LIFO value of our inventories.

Note 4 – Debt:

 

		December 31,				September 30,
		2010				2011
		(In thousands)
Wells Fargo revolving credit facility		$	27,740			$	43,227
Other			941				973
Total debt			28,681				44,200
Less current maturities			27,744				43,229
Total long-term debt		$	937			$	971

Note 5 – Environmental matters and other commitments and contingencies:

We have been named as a defendant for certain environmental sites pursuant to governmental laws and private actions, 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. At September 30, 2011, 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 $0.4 million. Our cost estimates have not been discounted to present value due to the uncertainty of the timing of the pay out. At each balance sheet date, we make an estimate of the amount of our accrued environmental costs that will be paid out over the subsequent twelve months, and we classify such amount as a current liability. We classify the remainder of the accrued environmental costs as noncurrent liabilities. See Note 6.

 

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It is possible our actual costs could differ materially from the amounts we have accrued or the upper end of the estimated 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.

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 as it relates to that facility. We are currently pursuing a Municipal Setting Designation (“MSD”) for this site which would eliminate the need for long-term groundwater remediation and monitoring. We estimate the cost of future remediation under an MSD at approximately $.2 million. If we are not successful in obtaining an MSD, remediation activities at this site would likely continue for another two to three years and could cost as much as $1.7 million.

In February 2009, we received a Notice of Violation (“NOV”) from the United States Environmental Protection Agency (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 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 were in discussions with the U.S. EPA throughout 2009. On December 31, 2009, we were notified the case had been referred to the Department of Justice (the “DOJ”) for review and follow-up. During the first quarter of 2010, we submitted letters to the DOJ regarding our perspective on the matter. During the third quarter of 2010, the U.S. EPA requested additional information regarding the alleged permit issues and we submitted such information in May 2010.

In July 2011, we received a Notice and Finding of Violation (“NOV/FOV”) from the U.S. EPA alleging KSW failed to properly control air emissions and install a baghouse in accordance with terms and conditions of its Prevention of Significant Deterioration (“PSD”) construction permit issued on June 1, 2000.

While we continue to dispute certain of the U.S. EPA’s underlying assertions about these alleged violations contained in the February 2009 NOV and the July 2011 NOV/FOV, we have already undertaken corrective actions to address others and have worked diligently to reach resolution of the matters. KSW met with EPA Region V and the DOJ during August 2011 to discuss both the February 2009 NOV and the July 2011 NOV/FOV. To date, a formal complaint from the DOJ has not been issued. Settlement discussions cannot proceed until a formal complaint has been filed by the DOJ. Therefore, we cannot estimate any potential costs to us to resolve these matters and 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.

 

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Other current litigation

From time-to-time, we are involved in various environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our operations. In certain cases, we have insurance coverage for these items. We currently believe the disposition of all claims and disputes, individually or in the aggregate, should not have a material adverse effect on our consolidated financial position, results of operations or liquidity beyond the accruals we have already provided.

Note 6 – Other accrued liabilities:

 

		December 31,				September 30,
		2010				2011
		(In thousands)
Current:
Employee benefits		$	12,679			$	17,109
Self insurance			4,935				6,960
Environmental			472				255
Income taxes payable to tax authorities			–				320
Income taxes payable to Contran			–				158
Other			4,815				5,064
Total		$	22,901			$	29,866
Noncurrent:
Workers compensation payments		$	1,242			$	1,393
Environmental			265				170
Other			342				396
Total		$	1,849			$	1,959

Note 7 – Stockholders’ Equity:

During the first quarter of 2011, we retired 398,068 shares of our treasury stock and allocated its aggregate $796,000 cost to common stock at par value and additional-paid-in-capital. In addition, certain of these shares had previously been held by one of our subsidiaries prior to their cancellation, and we incurred an income tax charge of $456,000 (also allocated to additional paid-in capital) when such shares were transferred to Keystone immediately prior to their cancellation.

In May 2011, we filed a preliminary registration statement on Form S-1 with the SEC in connection with a proposed distribution of non-transferable subscription rights to our common stockholders. The proposed offering contemplated participation by Contran as a subscribing party to the fullest extent possible. The commencement of and Contran’s participation in the proposed offering was subject to, among other things, Contran and us reaching agreement on the terms of the proposed offering. Prior to reaching such agreement, Contran purchased an additional 1.55 million shares of our common stock from a third-party stockholder in a private transaction, increasing its ownership interest in us to approximately 88%. As a result of such purchase, Contran indicated to us it no longer intended to subscribe for our shares in connection with the proposed offering. Thus, we cancelled the offering. See also Note 9.

 

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In settlement of any alleged short-swing profit derived from the sale of our stock by the third-party stockholder to Contran, as calculated pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, the third-party stockholder remitted approximately $106,000 to us during the third quarter of 2011. Additionally, in accordance with an agreement between Contran and us regarding the proposed stock rights offering, Contran reimbursed us for certain costs of the offering amounting to $127,000. We recorded both of these transactions, net of related income taxes, as a capital contribution, increasing our additional paid-in capital.

Note 8 – Employee benefit plans:

We currently expect to record a defined benefit pension credit of $19.0 million during 2011 and we anticipate no cash contributions to our defined benefit pension plans will be required during 2011. The components of our net periodic defined benefit pension credit for the third quarter and first nine months of 2010 and 2011 are presented in the table below.

 

		Three months ended September 30,								Nine months ended September 30,
		2010				2011				2010				2011
		(In thousands)
Service cost		$	832			$	931			$	2,496			$	2,793
Interest cost			4,936				4,752				14,809				14,256
Expected return on plan assets			(10,951	)			(13,365	)			(32,853	)			(39,985	)
Amortization of accumulated other comprehensive income:
Prior service cost			302				308				907				924
Actuarial losses			3,670				2,624				11,009				7,762
Total credit		$	(1,211	)		$	(4,750	)		$	(3,632	)		$	(14,250	)

We currently expect our 2011 other postretirement benefit (“OPEB”) credit will be $5.2 million. As allowed under certain of our benefit plans, we exercised our right to create supplemental pension benefits in lieu of certain 2011 benefit payments due under one of our OPEB plans. As such, we anticipate contributing an aggregate of only $1.3 million to our OPEB plans during 2011. If we had not exercised such rights for 2011, our expected OPEB contributions would be approximately $2.9 million higher. We have the ability to decide whether or not to exercise such rights on a year-by-year basis. The components of our net periodic credit related to OPEB for the third quarter and first nine months of 2010 and 2011 are presented in the table below.

 

		Three months ended September 30,								Nine months ended September 30,
		2010				2011				2010				2011
		(In thousands)
Service cost		$	27			$	31			$	82			$	95
Interest cost			611				576				1,831				1,723
Amortization of accumulated other comprehensive income:
Prior service credit			(3,966	)			(4,043	)			(11,898	)			(12,128	)
Actuarial losses			1,986				2,137				5,956				6,412
Total credit		$	(1,342	)		$	(1,299	)		$	(4,029	)		$	(3,898	)

Future variances from assumed actuarial rates, including the rate of return on our defined benefit pension plans’ assets, as well as changes in the discount rate used to determine the projected benefit obligation, may result in increases or decreases to pension and postretirement benefit assets and liabilities, pension expense or credits, OPEB expense or credits and pension and OPEB funding requirements in future periods.

 

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Note 9 – Income taxes:

 

		Nine months ended
		September 30,
		2010				2011
		(In thousands)
Expected income tax expense, at statutory rate		$	7,645			$	13,145
U.S. state income tax expense, net			715				2,272
Other, net			36				25
Income tax expense		$	8,396			$	15,442

Our provision for income taxes in the first nine months of 2011 includes a $.7 million non-cash charge for state deferred income taxes. The non-cash charge is related to an increase in our effective state income tax rate primarily as a result of an increase in the tax rate of the State of Illinois.

In August 2011, we became a member of Contran’s consolidated U.S. federal income tax group (the “Contran Tax Group”) pursuant to Contran’s purchase of additional shares of our common stock discussed in Note 7 which resulted in Contran’s ownership interest increasing to more than 80%. We also file consolidated income tax returns with Contran in various U.S. state jurisdictions. As a member of the Contran Tax Group, we are now a party to a tax sharing agreement with Contran which provides that, beginning in August 2011, we compute our tax provision for U.S. income taxes on a separate-company basis using the tax elections made by Contran. Pursuant to the tax sharing agreement, we make payments to or receive payments from Contran in amounts we would have paid to or received from the U.S. Internal Revenue Service or the applicable state tax authority had we not been a member of the Contran Tax Group for all periods after August 2011.

Under applicable law, we, as well as every other member of the Contran Tax Group, are each jointly and severally liable for the aggregate federal income tax liability of Contran and the other companies included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group. Contran has agreed, however, to indemnify us for any liability for income taxes of the Contran Tax Group in excess of our tax liability previously computed and paid by us in accordance with the tax allocation policy discussed above.

Note 10 – Financial instruments:

The following table presents the carrying value and estimated fair value of our financial instruments:

 

		December 31, 2010								September 30, 2011
		Carrying amount				Fair value				Carrying amount				Fair value
		(In thousands)
Restricted cash equivalents		$	250			$	250			$	249			$	249
Accounts receivable, net			46,765				46,765				66,663				66,663
Accounts payable			6,694				6,694				13,914				13,914
Debt:
Variable-rate debt			27,740				27,740				43,227				43,227
Fixed-rate debt			941				1,019				973				1,030

 

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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 that 99% of the carrying value of our fixed-rate debt at December 31, 2010 and September 30, 2011 relates to a $1.1 million non-interest bearing note. Because it is non-interest bearing, we have calculated an imputed interest rate on the note and carry the note at a value discounted for such interest.

Note 11 – Recent Accounting Pronouncements:

In May 2011 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 contains technical adjustments and clarifications to more closely align the U.S. GAAP and International Financial Reporting Standards (“IFRS”) for fair value and will be effective for our first quarter 2012 report. We do not believe the adoption of this standard will have a material affect on our Condensed Consolidated Financial Statements.

In June 2011 the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 will eliminate the option of presenting comprehensive income as a component of the Consolidated Statement of Equity and will instead require comprehensive income be presented as a component of the Consolidated Statement of Income or in a separate Consolidated Statement of Comprehensive Income immediately following the Consolidated Statement of Income. Additionally, ASU 2011-05 will require us to present on the face of our financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income where the components of net income and other comprehensive income are presented. This standard will be effective for our first quarter 2012 report. Upon adoption of ASU 2011-05, we intend to present our comprehensive income in a separate Consolidated Statement of Comprehensive Income.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in this Quarterly Report on Form 10-Q that are not historical in nature are forward-looking and are not statements of fact. Some statements found in this report including, but not limited to, statements found in Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements that represent our beliefs and assumptions based on currently available information. In some cases you can identify these forward-looking statements by the use of words such as “believes,” “intends,” “may,” “should,” “could,” “anticipates,” “expected” or comparable terminology, or by discussions of strategies or trends. Although we believe the expectations reflected in forward-looking statements are reasonable, we do not know if these expectations will be correct. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. While it is not possible to identify all factors, we continue to face many risks and uncertainties. Among the factors that could cause our actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the Securities and Exchange Commission including, but not limited to, the following:

 

•

Future supply and demand for our products (including cyclicality thereof),

 

•

Customer inventory levels,

 

•

Changes in raw material and other operating costs (such as ferrous scrap and energy),

 

•

Availability of raw materials,

 

•

The possibility of labor disruptions,

 

•

General global economic and political conditions,

 

•

Competitive products (including low-priced imports) and substitute products,

 

•

Customer and competitor strategies,

 

•

The impact of pricing and production decisions,

 

•

Environmental matters (such as those requiring emission and discharge standards for existing and new facilities),

 

•

Government regulations and possible changes therein,

 

•

Significant increases in the cost of providing medical coverage to employees,

 

•

The ultimate resolution of pending litigation, U.S. EPA investigations and audits conducted by the Internal Revenue Service,

 

•

International trade policies of the United States and certain foreign countries,

 

•

Operating interruptions (including, but not limited to, labor disputes, fires, explosions, unscheduled or unplanned downtime, supply disruptions and transportation interruptions),

 

•

Our ability to renew or refinance credit facilities,

 

•

The ability of our customers to obtain adequate credit,

 

•

Any possible future litigation, and

 

•

Other risks and uncertainties as discussed in this Quarterly Report and the 2010 Annual Report, including, without limitation, the section referenced above.

Should one or more of these risks materialize, if the consequences worsen, or if the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.

 

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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 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 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

We implemented selling price increases throughout the first nine months of 2011 as ferrous scrap market prices continued to escalate. Although we are experiencing some pricing pressure from competitors on certain products, we currently believe we will be able to maintain positive overall margins on our products throughout 2011.

Although we are experiencing the historical seasonal decline in customer demand as we move into the fourth quarter, customer orders for most of our products were strong from a seasonal perspective and combined with our current expectations the economy will continue to recover at a modest pace, we currently believe 2011 shipment volumes will exceed 2010 shipment volumes.

Results of Operations

Our profitability is primarily dependent on sales volume, selling prices, ferrous scrap costs and energy costs. Additionally, because pension and OPEB expense or credits are unrelated to the operating activities of our businesses, we measure and evaluate the performance of our businesses using operating income before pension and OPEB credit or expense. As such, we believe the presentation of operating income before pension and OPEB credit or expense provides more useful information to investors. Operating income before pension and OPEB credit or expense is a non-GAAP measure of profitability that is not in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and it should not be considered in isolation or as a substitute for a measure prepared in accordance with GAAP. A reconciliation of operating income as reported to operating income adjusted for pension and OPEB expense or credit is set forth in the following table.

 

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		Three months ended September 30,								Nine months ended September 30,
		2010				2011				2010				2011
		(In thousands)
Operating income as reported		$	4,179			$	9,237			$	23,134			$	37,818
Defined benefit pension credit			(1,211	)			(4,750	)			(3,632	)			(14,250	)
OPEB credit			(1,342	)			(1,299	)			(4,029	)			(3,898	)
Operating income before pension and OPEB		$	1,626			$	3,188			$	15,473			$	19,670

Operating income before pension and OPEB for the third quarter and first nine months of 2011 exceeded prior year primarily due to the net effects of the following factors:

 

•

increased shipment volumes,

 

•

a higher margin between selling prices and raw material costs,

 

•

increased costs of production due to outages related to malfunctioning equipment and frequent mill changes to meet customer orders,

 

•

higher self insurance costs,

 

•

an unfavorable year-to-date LIFO adjustment (see Note 2 to our Condensed Consolidated Financial Statements), and

 

•

increased accrued incentive compensation expense due to better profitability.

Our consolidated sales volume and average per-ton selling prices for the third quarter and first nine months of 2010 and 2011 are as follows:

 

		Three months ended September 30,								Nine months ended September 30,
		2010				2011				2010				2011
Sales volume (000 tons):
Wire rod			105				103				293				302
Fabricated wire products			11				15				57				61
Industrial wire			13				15				40				47
Wire mesh			14				16				37				43
Bar			6				6				17				21
Coiled rebar			3				4				6				9
Other			4				3				10				9
Total			156				162				460				492
Average per-ton selling prices:
Wire rod		$	624			$	756			$	617			$	740
Fabricated wire products			1,281				1,309				1,297				1,335
Industrial wire			931				1,026				915				1,007
Wire mesh			891				1,023				880				998
Bar			903				1,058				892				1,024
Coiled rebar			606				748				621				741
All products			723				862				751				867

 

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Segment Operating Results:

Our operating segments are organized by our manufacturing facilities and include three reportable segments:

 

•

Keystone Steel & Wire (“KSW”), located in Peoria, Illinois, operates an electric arc furnace mini-mill, rod mill, industrial wire mill and wire product fabrication facilities 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 as reinforcement 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.

 

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Our consolidated net sales, cost of goods sold, operating costs and operating performance before pension and OPEB credit by segment are set forth in the following table:

 

		KSW				EWP				Calumet				Other(1)				Total
		(In thousands)
Three months ended September 30, 2010:
Net sales		$	104,664			$	12,085			$	6,329			$	(9,470	)		$	113,608
Cost of goods sold			(99,431	)			(11,956	)			(6,360	)			9,647				(108,100	)
Gross margin			5,233				129				(31	)			177				5,508
Selling and administrative expense			(2,579	)			(541	)			(165	)			(597	)			(3,882	)
Operating income (loss) before pension/OPEB		$	2,654			$	(412	)		$	(196	)		$	(420	)		$	1,626
Three months ended September 30, 2011:
Net sales		$	133,328			$	16,492			$	7,132			$	(15,979	)		$	140,973
Cost of goods sold			(125,460	)			(15,535	)			(7,383	)			16,249				(132,129	)
Gross margin			7,868				957				(251	)			270				8,844
Selling and administrative expense			(3,749	)			(916	)			(213	)			(580	)			(5,656	)
Operating income (loss) before pension/OPEB		$	4,119			$	41			$	(464	)		$	(310	)		$	3,188
Nine months ended September 30, 2010:
Net sales		$	338,046			$	32,452			$	16,315			$	(38,492	)		$	348,321
Cost of goods sold			(309,426	)			(30,713	)			(15,345	)			37,900				(317,584	)
Gross margin			28,620				1,739				970				(592	)			30,737
Selling and administrative expense			(10,448	)			(1,641	)			(520	)			(2,655	)			(15,264	)
Operating income before pension/OPEB		$	18,172			$	98			$	450			$	(3,247	)		$	15,473
Nine months ended September 30, 2011:
Net sales		$	418,347			$	44,902			$	23,044			$	(55,202	)		$	431,091
Cost of goods sold			(384,558	)			(42,165	)			(22,467	)			54,947				(394,243	)
Gross margin			33,789				2,737				577				(255	)			36,848
Selling and administrative expense			(12,115	)			(2,011	)			(605	)			(2,249	)			(17,178	)
Operating income (loss) before pension/OPEB		$	21,674			$	726			$	(28	)		$	(2,504	)		$	19,670

⁽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.

 

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Keystone Steel & Wire

 

		Three months ended September 30,
		2010				% of sales				2011				% of sales
		($ in thousands)
Net sales		$	104,664				100.0	%		$	133,328				100.0	%
Cost of goods sold			(99,431	)			(95.0	)			(125,460	)			(94.1	)
Gross margin			5,233				5.0				7,868				5.9
Selling and administrative expense			(2,579	)			(2.5	)			(3,749	)			(2.8	)
Operating income before pension/OPEB		$	2,654				2.5	%		$	4,119				3.1	%

 

		Nine months ended September 30,
		2010				% of sales				2011				% of sales
		($ in thousands)
Net sales		$	338,046				100.0	%		$	418,347				100.0	%
Cost of goods sold			(309,426	)			(91.5	)			(384,558	)			(91.9	)
Gross margin			28,620				8.5				33,789				8.1
Selling and administrative expense			(10,448	)			(3.1	)			(12,115	)			(2.9	)
Operating income before pension/OPEB		$	18,172				5.4	%		$	21,674				5.2	%

 

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The primary drivers of KSW’s sales, cost of goods sold and the resulting gross margin are as follows:

 

		Three months ended September 30,								Nine months ended September 30,
		2010				2011				2010				2011
Sales volume(000 tons):
Wire rod			113				117				335				355
Fabricated wire products			11				15				57				61
Industrial wire			13				14				40				45
Billet			11				12				34				38
Coiled rebar			3				4				6				9
Total			151				162				472				508
Average per-ton selling prices:
Wire rod		$	628			$	752			$	619			$	737
Fabricated wire products			1,281				1,309				1,297				1,335
Industrial wire			931				1,035				915				1,016
Billet			440				549				442				538
Coiled rebar			606				748				621				741
All products			689				814				712				819
Average per-ton ferrous scrap cost of goods sold		$	306			$	383			$	290			$	369
Increase in LIFO reserve and cost of goods sold		$	1,910			$	1,887			$	1,888			$	2,750
Average electricity cost per kilowatt hour		$	0.04			$	0.04			$	0.04			$	0.04
Kilowatt hours consumed (000 hrs)			120,698				130,664				388,053				409,605
Average natural gas cost per therm		$	0.49			$	0.46			$	0.52			$	0.48
Natural gas therms consumed (000 therms)			3,664				3,873				14,226				14,192

KSW’s operating performance during the third quarter and first nine months of 2011 was also negatively impacted by increased costs of production due to outages related to malfunctioning equipment and frequent mill changes to meet customer orders as well as higher self insurance costs. KSW operated very efficiently during September 2011 due to repairs made during a planned minor maintenance outage at the beginning of September. KSW’s annual major maintenance outage will occur in October and should result in more reliable equipment functionality. Selling and administrative expenses during the third quarter and first half of 2011 were higher than the respective prior year periods primarily due to increased accrued incentive compensation expense as a result of higher profitability.

 

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Engineered Wire Products, Inc.

 

		Three months ended September 30,
		2010				% of sales				2011				% of sales
		($ in thousands)
Net sales		$	12,085				100.0	%		$	16,492				100.0	%
Cost of goods sold			(11,956	)			(98.9	)			(15,535	)			(94.2	)
Gross margin			129				1.1				957				5.8
Selling and administrative expense			(541	)			(4.5	)			(916	)			(5.6	)
Operating income (loss) before pension/OPEB		$	(412	)			(3.4	)%		$	41				0.2	%

 

		Nine months ended September 30,
		2010				% of sales				2011				% of sales
		($ in thousands)
Net sales		$	32,452				100.0	%		$	44,902				100.0	%
Cost of goods sold			(30,713	)			(94.6	)			(42,165	)			(93.9	)
Gross margin			1,739				5.4				2,737				6.1
Selling and administrative expense			(1,641	)			(5.1	)			(2,011	)			(4.5	)
Operating income before pension/OPEB		$	98				0.3	%		$	726				1.6	%

The primary drivers of EWP’s sales, cost of goods sold and the resulting gross margin are as follows:

 

		Three months ended September 30,								Nine months ended September 30,
		2010				2011				2010				2011
Sales volume (000 tons):
Wire mesh			14				16				37				43
Industrial wire			-				1				-				2
Total			14				17				37				45
Average per-ton selling prices:
Wire mesh		$	891			$	1,023			$	880			$	998
Industrial wire			-				875				-				846
All products			891				1,015				880				990
Average per-ton wire rod cost of goods sold		$	647			$	726			$	629			$	705
Increase in LIFO reserve and cost of goods sold		$	313			$	542			$	470			$	1,324

EWP’s operating performance during the third quarter of 2011 was also impacted by increased operating efficiency resulting in lower conversion costs as compared to the third quarter of 2010 while EWP’s operating performance during first half of 2011 was negatively impacted by increased maintenance costs primarily due to repairs and maintenance on aging equipment.

EWP’s selling and administrative expenses during the third quarter and year-to-date 2011 were higher than the same periods of the prior year primarily due to increased insurance costs.

 

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Keystone – Calumet, Inc.

 

		Three months ended September 30,
		2010				% of sales				2011				% of sales
		($ in thousands)
Net sales		$	6,329				100.0	%		$	7,132				100.0	%
Cost of goods sold			(6,360	)			(100.5	)			(7,383	)			(103.5	)
Gross margin			(31	)			(0.5	)			(251	)			(3.5	)
Selling and administrative expense			(165	)			(2.6	)			(213	)			(3.0	)
Operating loss before pension/OPEB		$	(196	)			(3.1	)%		$	(464	)			(6.5	)%

 

		Nine months ended September 30,
		2010				% of sales				2011				% of sales
		($ in thousands)
Net sales		$	16,315				100.0	%		$	23,044				100.0	%
Cost of goods sold			(15,345	)			(94.1	)			(22,467	)			(97.5	)
Gross margin			970				5.9				577				2.5
Selling and administrative expense			(520	)			(3.2	)			(605	)			(2.6	)
Operating income (loss) before pension/OPEB		$	450				2.7	%		$	(28	)			(0.1	)%

The primary drivers of sales, cost of goods sold and the resulting gross margin are as follows:

 

		Three months ended September 30,								Nine months ended September 30,
		2010				2011				2010				2011
Sales volume (000 tons) - Bar			6				6				17				21
Average per-ton selling prices - Bar		$	903			$	1,058			$	892			$	1,024
Average per-ton billet cost of goods sold		$	551			$	627			$	494			$	577

Calumet’s operating performance during the third quarter and first nine months of 2011 was also impacted by production outages due to malfunctioning equipment as well as the installation of new equipment during the first quarter of 2011 which resulted in a higher percentage of fixed costs (fixed costs as a percentage of sales was approximately 2.4% and 1.1% higher during the 2011 third quarter and year-to-date periods, respectively) included in cost of goods sold and higher conversion costs due to significant production delays associated with the performance of the new equipment throughout the first nine months of 2011. Due to the production outages, Calumet has struggled to meet customer order deadlines on a consistent basis, resulting in lower order levels. As of the end of the third quarter, Calumet believes significantly all of the performance issues associated with the new equipment have been resolved. As Calumet’s labor force gains experience working with the new equipment, we believe the mill will operate more efficiently, thereby allowing consistent on-time delivery of customer orders as well as reducing future conversion costs.

 

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Pension Credit

Primarily due to an $86 million increase in our pension plans’ assets during 2010, we currently expect to record a defined benefit pension credit of $19.0 million during 2011 as compared to the $4.7 million credit we recorded during 2010. Accordingly, during the third quarter and first nine months of 2011 we recorded a defined benefit pension credit of $4.8 million and $14.3 million, respectively, as compared to the $1.2 million and $3.6 million credit recorded during the third quarter and first nine months of 2010, respectively.

Income Tax Expense

A tabular reconciliation of the difference between the U.S. Federal statutory income tax rate and our effective income tax rates is included in Note 9 to our Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Historical Cash Flows

Operating Activities

During the first nine months of 2011, net cash used in operations totaled $6.3 million as compared to net cash used in operations of $9.4 million during the first nine months of 2010. The $3.1 million decrease in cash used for operating activities was primarily due to the net effects of:

•

higher operating income before pension and OPEB during 2011 of $4.2 million;

•

higher net cash used as a result of relative changes in our accounts receivable in 2011 of $8.5 million due to both increased shipment volume and selling prices;

•

less net cash used as a result of relative changes in our inventory in 2011 of $4.1 million due to a $1.7 million higher increase in our LIFO reserve during the first nine months of 2011 as compared to the first nine months of 2010 and a timing difference in purchases of certain manufacturing supplies;

•

higher net cash provided as a result of relative changes in our accounts payable in 2011 of $4.3 million due to more favorable payment terms on raw materials and utilities;

•

higher net cash provided as a result of relative changes in our accrued liabilities in 2011 of $3.3 million primarily due to increased self insurance reserves and increased accrued utilities due to delays in receiving invoices from our vendor; and

•

higher taxes paid during 2011 of $4.3 million primarily due to the timing of payments and refunds in 2010.

Investing Activities

We spent $9.5 million on capital expenditures during the first nine months of 2011 as compared to $6.5 million of capital expenditures during the first nine months of 2010. The increase in capital expenditures primarily relates to upgrades of production equipment at KSW and Calumet.

 

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Financing Activities

We increased borrowings on our revolving credit facility during the first nine months of 2011 by $15.5 million as compared to increasing borrowings by $22.4 million during the first nine months of 2010. The decreased borrowings during 2011 were primarily due to the decreased usage of cash in operations as discussed above and significantly lower principal payments during 2011 as we no longer have significant debt other than our revolving credit facility, partially offset by increased capital expenditures.

Future Cash Requirements

Capital Expenditures

We currently expect capital expenditures for the remainder of 2011 to be approximately $7.9 million, primarily related to upgrades of production equipment at KSW. We expect to fund capital expenditures using cash flows from operations and borrowing availability under our revolving credit facility.

Commitments and Contingencies

See Note 5 to the Condensed Consolidated Financial Statements for a description of certain legal proceedings.

Pension and Other Postretirement Obligations

We currently do not expect to be required to make contributions to our defined benefit pension plans during 2011. As allowed under certain of our benefit plans, we exercised our right to create supplemental pension benefits in lieu of certain 2011 benefit payments due under one of our OPEB plans. As such, we anticipate contributing an aggregate of only $1.3 million to our OPEB plans during 2011. If we had not exercised such rights for 2011, our expected OPEB contributions would be $2.9 million higher. 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 OPEB funding requirements in future periods.

Off-balance Sheet Financing Arrangements

We do not have any off-balance sheet financing agreements other than the operating leases discussed in our 2010 Annual Report.

Working Capital and Borrowing Availability

 

		December 31,				September 30,
		2010				2011
		(In thousands)
Working capital			$55,095			$	66,433
Outstanding balance under revolving credit facility			27,740				43,227
Additional borrowing availability			38,779				24,442

The revolving credit facility requires us to use our daily cash receipts to reduce outstanding borrowings, which results in us maintaining zero cash balances when there are balances outstanding under this credit facility.

 

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The amount of available borrowings under our revolving credit facility is based on formula-determined amounts of trade receivables and inventories, less the amount of outstanding letters of credit ($5.2 million at September 30, 2011). Our revolving credit facility requires us to maintain a minimum fixed charge coverage ratio, as defined in the agreement, of 1.0 if excess availability falls below $10.0 million. Current forecasts indicate we will be able to maintain excess availability of at least $10.0 million throughout 2011. However, as of September 30, 2011, our fixed charge coverage ratio was 0.93; as such we could only borrow $14.4 million of the availability disclosed above without violating the financial covenants of the facility.

Based upon our current expectations, we expect to have sufficient liquidity to meet our future short-term and long-term obligations.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 11 to our Condensed Consolidated Financial Statements for the projected impact of recent accounting pronouncements on our financial position and results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a discussion of our critical accounting policies, refer to Part I, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2010 Annual Report. There have been no changes in our critical accounting policies during the first nine months of 2011.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to the 2010 Annual Report for a discussion of the market risks associated with changes in interest rates and ferrous scrap costs that affect us. There have been no material changes in such market risks during the first nine months of 2011.

 

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures. The term “disclosure controls and procedures,” as defined by regulations of the SEC, means controls and other procedures that are designed to ensure information required to be disclosed in the reports we file or submit to the SEC under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure information we are required to disclose in the reports we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Each of David L. Cheek, our President and Chief Executive Officer, and Bert E. Downing, Jr., our Vice President, Chief Financial Officer, Corporate Controller and Treasurer, have evaluated the design and operating effectiveness of our disclosure controls and procedures as of September 30, 2011. Based upon their evaluation, these executive officers have concluded our disclosure controls and procedures were effective as of September 30, 2011.

 

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Internal Control Over Financial Reporting

We also maintain internal control over financial reporting. The term “internal control over financial reporting,” as defined by SEC regulations, means a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that:

 

•

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets,

•

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are made only in accordance with authorizations of our management and directors, and

•

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our Condensed Consolidated Financial Statements.

Changes in Internal Control Over Financial Reporting

There has been no change to our internal control over financial reporting during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.

OTHER INFORMATION

 

ITEM 1.

Legal Proceedings.

Reference is made to disclosure provided under the caption “Other current litigation” in Note 5 to our Condensed Consolidated Financial Statements.

 

ITEM 1A.

Risk Factors.

Reference is made to our 2010 Annual Report for a discussion of risk factors related to our businesses. There have been no material changes in such risk factors during the first nine months of 2011.

 

ITEM 6.

Exhibits.

 

(a)	We have retained a signed original of any exhibit listed below that contains signatures, and we will provide any such exhibit to the Commission or its staff upon request. The following exhibit is included herein:

 

31.1

Certification.

 

31.2

Certification.

 

32.1

Certification.

 

101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Keystone Consolidated Industries, Inc.

    (Registrant)

 

Date: November 9, 2011

By:

/s/  Bert E. Downing, Jr.

Bert E. Downing, Jr.

Vice President, Chief Financial Officer, Corporate Controller and Treasurer

 

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