Table of Contents

 

 

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, 2012		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 14, 2012: 12,101,932

 

 

 

---

Table of Contents

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

INDEX

 

				Page
Part I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets – December 31, 2011; September 30, 2012 (unaudited)			3
		Condensed Consolidated Statements of Income (unaudited) - Three months and nine months ended September 30, 2011 and 2012			5
		Condensed Consolidated Statements of Comprehensive Income (unaudited) – Three months and nine months ended September 30, 2011 and 2012			6
		Condensed Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2011 and 2012			7
		Condensed Consolidated Statement of Stockholders’ Equity (unaudited) -  Nine months ended September 30, 2012			8
		Notes to Condensed Consolidated Financial Statements (unaudited)			9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			26
Item 4.		Controls and Procedures			27
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 6.		Exhibits			28

Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

 

- 2 -

---

Table of Contents

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		December 31, 2011				September 30, 2012
						(unaudited)
ASSETS
Current assets:
Accounts receivable, net		$	58,976			$	58,329
Inventories			88,567				97,717
Deferred income taxes			12,194				12,194
Prepaid expenses and other			2,033				2,351
Total current assets			161,770				170,591
Property, plant and equipment:
Land			1,468				1,468
Buildings and improvements			64,959				65,193
Machinery and equipment			348,789				326,587
Construction in progress			5,607				4,879
			420,823				398,127
Less accumulated depreciation			327,820				305,391
Net property, plant and equipment			93,003				92,736
Other assets:
Pension asset			71,719				91,830
Other, net			1,455				1,394
Total other assets			73,174				93,224
Total assets		$	327,947			$	356,551

 

- 3 -

---

Table of Contents

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

 

		December 31, 2011				September 30, 2012
						(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	33,631			$	26,430
Accounts payable			14,334				16,263
Accrued OPEB cost			1,220				1,220
Income taxes payable to Contran			3,769				1,906
Income taxes payable to tax authorities			713				601
Other accrued liabilities			29,361				30,869
Total current liabilities			83,028				77,289
Noncurrent liabilities:
Long-term debt			983				1,019
Accrued pension cost			21,664				21,854
Accrued OPEB cost			50,470				51,148
Deferred income taxes			17,783				26,146
Other			1,891				2,219
Total noncurrent liabilities			92,791				102,386
Stockholders’ equity:
Common stock			121				121
Additional paid-in capital			99,024				99,024
Accumulated other comprehensive loss			(182,093	)			(176,912	)
Retained earnings			235,076				254,643
Total stockholders’ equity			152,128				176,876
Total liabilities and stockholders’ equity		$	327,947			$	356,551

Commitments and contingencies (Note 5)

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 4 -

---

Table of Contents

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)
		2011				2012				2011				2012
Net sales		$	140,973			$	133,072			$	431,091			$	439,112
Cost of goods sold			(129,700	)			(122,980	)			(390,169	)			(396,377	)
Gross margin			11,273				10,092				40,922				42,735
Other operating income (expense):
Selling expense			(1,775	)			(1,457	)			(5,573	)			(5,749	)
General and administrative expense			(3,881	)			(2,942	)			(11,605	)			(13,665	)
Defined benefit pension credit			4,750				1,346				14,250				5,143
Other postretirement benefit credit			1,299				1,403				3,898				4,557
Total other operating income (expense)			393				(1,650	)			970				(9,714	)
Operating income			11,666				8,442				41,892				33,021
Nonoperating income (expense):
Interest expense			(319	)			(274	)			(922	)			(967	)
Other income (expense), net			113				(141	)			661				(488	)
Total nonoperating income (expense)			(206	)			(415	)			(261	)			(1,455	)
Income before income taxes			11,460				8,027				41,631				31,566
Provision for income taxes			(4,544	)			(3,046	)			(17,033	)			(11,999	)
Net income		$	6,916			$	4,981			$	24,598			$	19,567
Basic and diluted income per share		$	0.57			$	0.41			$	2.03			$	1.62
Basic and diluted weighted average shares outstanding			12,102				12,102				12,102				12,102

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 5 -

---

Table of Contents

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

		Three months ended September 30,								Nine months ended September 30,
		2011				2012				2011				2012
		(unaudited)
Net income		$	6,916			$	4,981			$	24,598			$	19,567
Other comprehensive income (loss), net of tax:
Defined benefit pension plans:
Amortization of prior service cost			186				186				558				558
Amortization of net actuarial losses			1,584				3,001				4,687				8,366
Other postretirement benefit plans:
Amortization of prior service credit			(2,440	)			(2,440	)			(7,323	)			(7,323	)
Amortization of net actuarial losses			1,290				1,262				3,872				3,580
Total other comprehensive income, net			620				2,009				1,794				5,181
Comprehensive income		$	7,536			$	6,990			$	26,392			$	24,748

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 6 -

---

Table of Contents

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Nine months ended September 30,
		2011				2012
		(unaudited)
Cash flows from operating activities:
Net income		$	24,598			$	19,567
Depreciation and amortization			8,350				8,442
Deferred income taxes			10,870				4,965
Defined benefit pension credit			(14,250	)			(5,143	)
OPEB credit			(3,898	)			(4,557	)
OPEB payments			(820	)			(964	)
Other, net			118				819
Change in assets and liabilities:
Accounts receivable			(19,839	)			613
Inventories			(26,290	)			(9,150	)
Accounts payable and accrued liabilities			13,975				3,765
Income taxes payable to Contran			—				(1,863	)
Income taxes payable to tax authorities			2,349				(112	)
Other, net			(1,464	)			(310	)
Net cash provided by (used in) operating activities			(6,301	)			16,072
Cash flows from investing activities:
Capital expenditures			(9,492	)			(10,024	)
Other, net			85				43
Net cash used in investing activities			(9,407	)			(9,981	)
Cash flows from financing activities:
Revolving credit facility, net			15,487				(7,200	)
Other, net			221				1,109
Net cash provided by (used in) financing activities			15,708				(6,091	)
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		$	824			$	870
Income taxes, net			4,203				9,011

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 7 -

---

Table of Contents

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine months ended September 30, 2012

 

		Common stock				Additional paid-in capital				Accumulated other comprehensive income (loss)								Retained Earnings				Total
										Pensions				OPEB
		(unaudited)
Balance – December 31, 2011		$	121			$	99,024			$	(192,552	)		$	10,459			$	235,076			$	152,128
Net income			—				—				—				—				19,567				19,567
Other comprehensive income (loss), net			—				—				8,924				(3,743	)			—				5,181
Balance – September 30, 2012		$	121			$	99,024			$	(183,628	)		$	6,716			$	254,643			$	176,876

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 8 -

---

Table of Contents

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(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, 2011 that we filed with the Securities and Exchange Commission (“SEC”) on March 15, 2012 (the “2011 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. At the end of 2011, we changed our method of accounting for productive inventories at Keystone Steel & Wire (“KSW”) and Engineered Wire Products, Inc. (“EWP”) from last-in first-out (“LIFO”) to first-in first out (“FIFO”) at KSW and average cost at EWP. Accordingly, our results of operations and cash flows for the interim periods ended September 30, 2011 have been restated in this Quarterly Report to reflect this change in accounting. As compared to the 2011 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, 2012 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 2011 Consolidated Financial Statements contained in the 2011 Annual Report.

At September 30, 2012, Contran Corporation (“Contran”) owned approximately 88% of our outstanding common stock. Substantially all of Contran’s outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons (for which Mr. Simmons is the sole trustee) or is held directly by Mr. Simmons or other persons or companies related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control Contran and us.

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

Note 2 – Business segment information:

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

 

•

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;

 

•

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

 

- 9 -

---

Table of Contents

•

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.

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,
		(In thousands)
		2011				2012				2011				2012
Net sales:
KSW		$	133,328			$	122,268			$	418,347			$	420,409
EWP			16,492				18,929				44,902				48,653
Calumet			7,132				6,359				23,044				21,948
Elimination of intersegment sales			(15,979	)			(14,484	)			(55,202	)			(51,898	)
Total net sales		$	140,973			$	133,072			$	431,091			$	439,112
Operating income (loss):
KSW		$	6,006			$	5,617			$	24,424			$	25,283
EWP			583				1,192				2,050				2,603
Calumet			(464	)			(1,651	)			(28	)			(2,248	)
Pension credit			4,750				1,346				14,250				5,143
OPEB credit			1,299				1,403				3,898				4,557
Other(1)			(508	)			535				(2,702	)			(2,317	)
Total operating income			11,666				8,442				41,892				33,021
Non operating income (expense):
Interest expense			(319	)			(274	)			(922	)			(967	)
Other income (expense), net			113				(141	)			661				(488	)
Income before income taxes		$	11,460			$	8,027			$	41,631			$	31,566

 

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

 

- 10 -

---

Table of Contents

Note 3 – Inventories, net:

 

		December 31, 2011				September 30, 2012
		(In thousands)
Raw materials		$	6,995			$	6,340
Billet			12,702				6,978
Wire rod			7,155				18,261
Work in process			6,771				6,824
Finished products			29,228				31,087
Supplies			25,716				28,227
Total		$	88,567			$	97,717

Note 4 – Debt:

 

		December 31, 2011				September 30, 2012
		(In thousands)
Wells Fargo revolving credit facility		$	33,630			$	26,430
Other			984				1,019
Total debt			34,614				27,449
Less current maturities			33,631				26,430
Total long-term debt		$	983			$	1,019

The average interest rate on the revolving credit facility was 2.7% at September 30, 2012 and the average interest rate for the first nine months of 2012 was 2.7%.

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. Additionally, KSW’s facilities are subject to regulatory oversight and enforcement activities. These activities may identify compliance violations which may result in penalties. 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, 2012, 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 $.3 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.

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

 

- 11 -

---

Table of Contents

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 $30,000. 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 second 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 the 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 and February 2012 to discuss both the February 2009 NOV and the July 2011 NOV/FOV. In April 2012, the DOJ informed us that while a formal complaint has been internally approved, it will not be filed if an acceptable settlement can be reached. To date, a formal complaint from the DOJ has not been issued. In May 2012, we volunteered to undertake a model ventilation study and install a continuous emissions monitoring system and we will communicate with both the EPA and DOJ as information is obtained from these projects. KSW has not yet agreed to any additional response actions in connection with the February 2009 NOV or the July 2011 NOV. 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.

 

- 12 -

---

Table of Contents

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, 2011				September 30, 2012
		(In thousands)
Current:
Employee benefits		$	16,549			$	19,267
Self insurance			6,686				5,965
Environmental			240				165
Other			5,886				5,472
Total		$	29,361			$	30,869
Noncurrent:
Workers compensation payments		$	1,243			$	1,503
Environmental			165				140
Other			483				576
Total		$	1,891			$	2,219

Note 7 – Employee benefit plans:

The components of our net periodic defined benefit pension credit for the third quarter and first nine months of 2011 and 2012 are presented in the table below.

 

		Three months ended September 30,								Nine months ended September 30,
		2011				2012				2011				2012
		(In thousands)
Service cost		$	931			$	1,110			$	2,793			$	3,445
Interest cost			4,752				4,477				14,256				13,248
Expected return on plan assets			(13,365	)			(12,210	)			(39,985	)			(36,614	)
Amortization of prior service cost			308				308				924				924
Amortization of actuarial losses			2,624				4,969				7,762				13,854
Total credit		$	(4,750	)		$	(1,346	)		$	(14,250	)		$	(5,143	)

 

- 13 -

---

Table of Contents

The components of our net periodic credit related to other postretirement benefits for the third quarter and first nine months of 2011 and 2012 are presented in the table below.

 

		Three months ended September 30,								Nine months ended September 30,
		2011				2012				2011				2012
		(In thousands)
Service cost		$	31			$	37			$	95			$	116
Interest cost			576				512				1,723				1,526
Amortization of prior service credit			(4,043	)			(4,043	)			(12,128	)			(12,128	)
Amortization of actuarial losses			2,137				2,091				6,412				5,929
Total credit		$	(1,299	)		$	(1,403	)		$	(3,898	)		$	(4,557	)

Note 8 – Income taxes:

 

		Nine months ended September 30,
		2011				2012
		(In thousands)
Expected income tax expense, at statutory rate		$	14,571			$	11,048
U.S. state income tax expense, net			2,436				1,430
Other, net			26				(479	)
Income tax expense		$	17,033			$	11,999

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.

We file income tax returns in various U.S. federal, state and local jurisdictions. Our income tax returns prior to 2009 are generally considered closed to examination by applicable tax authorities.

Note 9 – Financial instruments:

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

 

		December 31, 2011								September 30, 2012
		Carrying amount				Fair value				Carrying amount				Fair value
		(In thousands)
Accounts receivable, net		$	58,976			$	58,976			$	58,329			$	58,329
Accounts payable			14,334				14,334				16,263				16,263
Debt:
Variable-rate debt			33,630				33,630				26,430				26,430
Fixed-rate debt			984				1,029				1,019				1,052

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 variable rate indebtedness is deemed to approximate book

 

- 14 -

---

Table of Contents

value and is a Level 2 input as defined by ASC Topic 820-10-35. 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 substantially all of the carrying value of our fixed-rate debt at December 31, 2011 and September 30, 2012 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 10 – Recent Accounting Pronouncements:

In September 2011 the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-05, Presentation of Comprehensive Income. ASU 2011-05 eliminates the option of presenting comprehensive income as a component of the Consolidated Statement of Stockholders’ Equity and instead requires comprehensive income to 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. In accordance with ASU 2011-05, we now present our comprehensive income in a separate Condensed Consolidated Statement of Comprehensive Income. Additionally, ASU 2011-05 would have required us to present on the face of our financial statements the effect of reclassifications out of accumulative other comprehensive income on the components of net income and other comprehensive income. However, in December 2011 the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers the effectiveness for the requirement to present on the face of our financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. Adoption of ASU 2011-05, as amended by ASU 2011-12, did not have a material effect on our Condensed Consolidated Financial Statements.

In December 2011, the FASB issued ASU 2011-11 Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. This standard will be effective for annual and interim periods beginning with our first quarter 2013 report. We do not believe the adoption of this standard will have a material effect on our Consolidated Financial Statements.

 

- 15 -

---

Table of Contents

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 thereof,

 

•

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

 

•

The ultimate resolution of pending litigation and U.S. EPA investigations,

 

•

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 2011 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.

 

- 16 -

---

Table of Contents

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

Ferrous scrap market prices decreased during the third quarter of 2012. We believe current customer expectations that scrap prices will continue to fall combined with an increase in imports at low prices will result in weakened wire rod demand for the fourth quarter of 2012. However, we expect strong shipment volumes of fabricated wire products during the fourth quarter of 2012 as customers begin to build inventories for the spring season.

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.

 

		Three months ended September 30,								Nine months ended September 30,
		2011				2012				2011				2012
		(In thousands)								(In thousands)
Operating income as reported		$	11,666			$	8,442			$	41,892			$	33,021
Defined benefit pension credit			(4,750	)			(1,346	)			(14,250	)			(5,143	)
OPEB credit			(1,299	)			(1,403	)			(3,898	)			(4,557	)
Operating income before pension and OPEB		$	5,617			$	5,693			$	23,744			$	23,321

 

- 17 -

---

Table of Contents

Operating income before pension and OPEB for the third quarter of 2012 approximated prior year as a lower selling price margin over ferrous scrap costs and increased costs associated with refining operations at Keystone-Calumet, Inc. (“Calumet”) were offset by lower utility costs, better yield at Keystone Steel & Wire (“KSW”), lower insurance costs and lower accrued incentive compensation expense.

Operating income before pension and OPEB for the first nine months of 2012 approximated prior year as increased costs associated with refining operations at Calumet and higher accrued incentive compensation expense was offset by lower utility costs and better yield at KSW.

Our consolidated sales volume and average per-ton selling prices for the third quarter and first nine months of 2011 and 2012 are as follows:

 

		Three months ended September 30,								Nine months ended September 30,
		2011				2012				2011				2012
Sales volume(000 tons):
Wire rod			103				101				302				304
Fabricated wire products			15				17				61				71
Industrial wire			15				17				47				52
Wire mesh			16				18				43				44
Bar			6				5				21				19
Coiled rebar			4				2				9				4
Total			159				160				483				494
Average per-ton selling prices:
Wire rod		$	756			$	667			$	740			$	716
Fabricated wire products			1,309				1,289				1,335				1,315
Industrial wire			1,026				971				1,007				1,004
Wire mesh			1,023				1,024				998				1,046
Bar			1,058				1,025				1,024				1,064
Coiled rebar			748				680				741				709
All products			872				817				877				875

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, 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

 

•

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.

 

- 18 -

---

Table of Contents

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, 2011
Net sales		$	133,328			$	16,492			$	7,132			$	(15,979	)		$	140,973
Cost of goods sold			(123,573	)			(14,993	)			(7,383	)			16,249				(129,700	)
Gross margin			9,755				1,499				(251	)			270				11,273
Selling and administrative expense			(3,749	)			(916	)			(213	)			(778	)			(5,656	)
Operating income (loss) before pension/OPEB		$	6,006			$	583			$	(464	)		$	(508	)		$	5,617
Three months ended September 30, 2012
Net sales		$	122,268			$	18,929			$	6,359			$	(14,484	)		$	133,072
Cost of goods sold			(113,406	)			(17,121	)			(7,762	)			15,309				(122,980	)
Gross margin			8,862				1,808				(1,403	)			825				10,092
Selling and administrative expense			(3,245	)			(616	)			(248	)			(290	)			(4,399	)
Operating income (loss) before pension/OPEB		$	5,617			$	1,192			$	(1,651	)		$	535			$	5,693
Nine months ended September 30, 2011:
Net sales		$	418,347			$	44,902			$	23,044			$	(55,202	)		$	431,091
Cost of goods sold			(381,808	)			(40,841	)			(22,467	)			54,947				(390,169	)
Gross margin			36,539				4,061				577				(255	)			40,922
Selling and administrative expense			(12,115	)			(2,011	)			(605	)			(2,447	)			(17,178	)
Operating income (loss) before pension/OPEB		$	24,424			$	2,050			$	(28	)		$	(2,702	)		$	23,744
Nine months ended September 30, 2012:
Net sales		$	420,409			$	48,653			$	21,948			$	(51,898	)		$	439,112
Cost of goods sold			(381,077	)			(44,174	)			(23,230	)			52,104				(396,377	)
Gross margin			39,332				4,479				(1,282	)			206				42,735
Selling and administrative expense			(14,049	)			(1,876	)			(966	)			(2,523	)			(19,414	)
Operating income (loss) before pension/OPEB		$	25,283			$	2,603			$	(2,248	)		$	(2,317	)		$	23,321

 

(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.

 

- 19 -

---

Table of Contents

Keystone Steel & Wire

 

		Three months ended September 30,
		2011				% of sales				2012				% of sales
		($ in thousands)
Net sales		$	133,328				100.0	%		$	122,268				100.0	%
Cost of goods sold			(123,573	)			(92.7	)			(113,406	)			(92.8	)
Gross margin			9,755				7.3				8,862				7.2
Selling and administrative expense			(3,749	)			(2.8	)			(3,245	)			(2.6	)
Operating income before pension/OPEB		$	6,006				4.5	%		$	5,617				4.6	%

 

		Nine months ended September 30,
		2011				% of sales				2012				% of sales
		($ in thousands)
Net sales		$	418,347				100.0	%		$	420,409				100.0	%
Cost of goods sold			(381,808	)			(91.3	)			(381,077	)			(90.7	)
Gross margin			36,539				8.7				39,332				9.3
Selling and administrative expense			(12,115	)			(2.9	)			(14,049	)			(3.3	)
Operating income before pension/OPEB		$	24,424				5.8	%		$	25,283				6.0	%

 

- 20 -

---

Table of Contents

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,
		2011				2012				2011				2012
Sales volume(000 tons):
Wire rod			117				117				355				357
Fabricated wire products			15				17				61				71
Industrial wire			14				16				45				49
Billet			12				9				38				33
Coiled rebar			4				2				9				4
Total			162				161				508				514
Average per-ton selling prices:
Wire rod		$	752			$	664			$	737			$	714
Fabricated wire products			1,309				1,289				1,335				1,315
Industrial wire			1,035				976				1,016				1,009
Billet			549				518				538				528
Coiled rebar			748				680				741				709
All products			814				752				819				814
Average per-ton ferrous scrap cost in cost of goods sold		$	382			$	348			$	369			$	371
Average electricity cost per kilowatt hour		$	0.04			$	0.03			$	0.04			$	0.03
Kilowatt hours consumed (000 hrs)			130,664				127,874				409,605				405,020
Average natural gas cost per therm		$	0.46			$	0.32			$	0.48			$	0.32
Natural gas therms consumed (000 therms)			3,873				3,849				14,192				13,792

KSW’s operating performance during the third quarter and first nine months of 2012 was also positively impacted by improved yield as a result of scrap mix management.

KSW’s selling and administrative expense was higher during the first nine months of 2012 as compared to the first nine months of 2011 primarily due to increased accrued incentive compensation expense.

 

- 21 -

---

Table of Contents

Engineered Wire Products, Inc.

 

		Three months ended September 30,
		2011				% of sales				2012				% of sales
		($ in thousands)
Net sales		$	16,492				100.0	%		$	18,929				100.0	%
Cost of goods sold			(14,993	)			(90.9	)			(17,121	)			(90.4	)
Gross margin			1,499				9.1				1,808				9.6
Selling and administrative expense			(916	)			(5.6	)			(616	)			(3.3	)
Operating income before pension/OPEB		$	583				3.5	%		$	1,192				6.3	%

 

		Nine months ended September 30,
		2011				% of sales				2012				% of sales
		($ in thousands)
Net sales		$	44,902				100.0	%		$	48,653				100.0	%
Cost of goods sold			(40,841	)			(91.0	)			(44,174	)			(90.8	)
Gross margin			4,061				9.0				4,479				9.2
Selling and administrative expense			(2,011	)			(4.5	)			(1,876	)			(3.9	)
Operating income before pension/OPEB		$	2,050				4.5	%		$	2,603				5.3	%

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,
		2011				2012				2011				2012
Sales volume (000 tons):
Wire mesh			16				18				43				44
Industrial wire			1				1				2				2
Total			17				19				45				46
Average per-ton selling prices:
Wire mesh		$	1,023			$	1,024			$	998			$	1,046
Industrial wire			875				884				846				898
All products			1,015				1,017				990				1,039
Average per-ton wire rod cost in cost of goods sold		$	726			$	718			$	705			$	730

EWP’s operating performance during the third quarter and first nine months of 2012 was also negatively impacted by lower productivity due to smaller order quantities.

EWP’s selling and administrative expense was lower during the third quarter and first nine months of 2012 as compared to the same periods of 2011 primarily due to decreased insurance costs, partially offset by increased accrued incentive compensation expense.

 

- 22 -

---

Table of Contents

Keystone – Calumet, Inc.

 

		Three months ended September 30,
		2011				% of sales				2012				% of sales
		($ in thousands)
Net sales		$	7,132				100.0	%		$	6,359				100.0	%
Cost of goods sold			(7,383	)			(103.5	)			(7,762	)			(122.1	)
Gross margin			(251	)			(3.5	)			(1,403	)			(22.1	)
Selling and administrative expense			(213	)			(3.0	)			(248	)			(3.9	)
Operating loss before pension/OPEB		$	(464	)			(6.5	)%		$	(1,651	)			(26.0	)%

 

		Nine months ended September 30,
		2011				% of sales				2012				% of sales
		($ in thousands)
Net sales		$	23,044				100.0	%		$	21,948				100.0	%
Cost of goods sold			(22,467	)			(97.5	)			(23,230	)			(105.8	)
Gross margin			577				2.5				(1,282	)			(5.8	)
Selling and administrative expense			(605	)			(2.6	)			(966	)			(4.4	)
Operating loss before pension/OPEB		$	(28	)			(0.1	)%		$	(2,248	)			(10.2	)%

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,
		2011				2012				2011				2012
Sales volume(000 tons) - Bar			6				5				21				19
Average per-ton selling prices - Bar		$	1,058			$	1,025			$	1,024			$	1,064
Average per-ton billet cost in cost of goods sold		$	627			$	600			$	577			$	602

During the first quarter of 2011, Calumet installed certain new equipment. Throughout 2011 and the first nine months of 2012, Calumet experienced significant production delays associated with equipment malfunctions including performance problems related to the new equipment. Due to the related production outages, Calumet struggled to meet customer order deadlines on a consistent basis, resulting in lower than expected sales volume. During the third quarter of 2012, certain customers began placing orders with other suppliers. Third quarter and year-to-date sales volume decreased 7.6% and 8.6%, respectively, as compared to the same periods in 2011.

Fixed costs as a percentage of sales were 12.6% during the third quarter of 2012 as compared to 8.8% during the third quarter of 2011. Calumet has contracted with an engineering firm to design and implement specific production procedures to remedy Calumet’s recurring production issues. In connection with the new production design, Calumet replaced certain of their rolling related inventory items and incurred charges amounting to $151,000 (2.4% of third quarter 2012 sales) during the third quarter of 2012 related to the pre-existing rolling related inventory items.

 

- 23 -

---

Table of Contents

During the fourth quarter of 2012 Calumet has begun experiencing improved productivity. As Calumet’s labor force gains experience with these improved procedures and designs, we believe the mill will operate more efficiently, thereby allowing more consistent on-time delivery of customer orders as well as reduction of future conversion costs.

During the first nine months of 2012, certain Calumet management employees were terminated resulting in severance and related costs of $396,000.

Pension Credit

Primarily due to a $45 million decrease in our pension plans’ assets as well as a 101 basis point reduction in the applicable discount rate during 2011, we currently expect to record a defined benefit pension credit of $6.9 million during 2012 as compared to the $24.4 million defined benefit pension credit we recorded during 2011. Accordingly, during the third quarter and first nine months of 2012 we recorded a defined benefit pension credit of $1.3 million and $5.1 million, respectively, as compared to the $4.8 million and $14.3 million credit recorded during the third quarter and first nine months of 2011, respectively.

Corporate Selling and Administrative Expense

Corporate selling and administrative expenses were lower during the third quarter of 2012 as compared to the third quarter of 2011 primarily due to decreased insurance and legal costs.

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 8 to our Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Historical Cash Flows

Operating Activities

During the first nine months of 2012, net cash provided by operations totaled $16.1 million as compared to net cash used in operations of $6.3 million during the first nine months of 2011. The $22.4 million increase in cash provided by operating activities was primarily due to the net effects of:

 

•

cash provided as a result of relative changes in our accounts receivable in 2012 of only $613,000 as sales volume and selling prices during the third quarter of 2012 were comparable to the fourth quarter of 2011; compared to $19.8 million cash used as a result of relative changes in our accounts receivable in 2011 due to higher sales volume and selling prices during the third quarter of 2011 as compared to the fourth quarter of 2010,

 

•

less net cash used as a result of relative changes in our inventory in 2012 of $17.1 million primarily due to a significant increase in ferrous scrap costs during the first nine months of 2011 as compared to a decrease in ferrous scrap costs during the first nine months of 2012 as well as a smaller inventory build during 2012 because of higher inventory levels at the end of 2011 as compared to the end of 2010,

 

- 24 -

---

Table of Contents

•

less cash provided by relative changes in our accounts payable and accrued liabilities in 2012 of $10.2 million primarily due to decreased workers compensation accruals, gaining more favorable payment terms on raw materials and utilities during the first nine months of 2011 (payment terms on raw materials and utilities have remained constant since January 2011) and lower utility prices during the first nine months of 2012.

 

•

higher taxes paid during the first nine months of 2012 of $4.8 million due to the timing of our tax payments.

Investing Activities

Expenditures on capital projects during the first nine months of 2012 primarily related to upgrades of production equipment at KSW and amounted to $10.0 million as compared to $9.5 million of capital expenditures during the first nine months of 2011.

Financing Activities

We decreased borrowings on our revolving credit facility during the first nine months of 2012 by $7.2 million as compared to increasing borrowings by $15.5 million during the first nine months of 2011. The change in cash flow was primarily due to the $16.1 million cash provided by operations during 2012 as compared to $6.3 million used in operations during 2011.

Future Cash Requirements

Capital Expenditures

Capital expenditures for the fourth quarter of 2012 are currently expected to be approximately $6 million and are primarily related to upgrades of production equipment. 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 2012. As allowed under certain of our amended benefit plans, we exercised our right to create supplemental pension benefits in lieu of certain 2012 benefit payments due under one of our OPEB plans. As such, we anticipate contributing an aggregate of only $1.2 million to our OPEB plans during 2012. We have the ability to decide whether or not to exercise such rights on a year-by-year basis. If we had not exercised such rights for 2012, our expected OPEB contributions would be $2.9 million higher. 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 2011 Annual Report.

 

- 25 -

---

Table of Contents

Working Capital and Borrowing Availability

 

		December 31, 2011				September 30, 2012
		(In thousands)
Working capital		$	78,742			$	93,302
Outstanding balance under revolving credit facility			33,630				26,430
Additional borrowing availability			30,939				37,990

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 ($5.0 million at September 30, 2012). Our revolving credit facility requires us to maintain a minimum fixed charge coverage ratio, defined in the agreement as earnings before interest, taxes, depreciation, amortization, restructuring costs, pension and OPEB expense or credits, less OPEB payments, divided by the sum of interest expense, tax payments, principal payments on certain debt and certain capital expenditures, of 1.0 if excess availability falls below $10.0 million. At September 30, 2012 our fixed charge coverage ratio was 1.2 and, as disclosed above, excess availability was $38.0 million. Current forecasts indicate we will maintain excess availability of at least $10.0 million and a fixed charge coverage ratio of at least 1.0 throughout 2012.

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

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 10 to our Condensed Consolidated Financial Statements for the projected impact of recent accounting pronouncements on our financial position and results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a discussion of our critical accounting policies, refer to Part I, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2011 Annual Report. There have been no changes in our critical accounting policies during the first nine months of 2012.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to the 2011 Annual Report for a discussion of the market risks associated with changes in interest rates that affect us. There have been no material changes in such market risks during the first nine months of 2012.

 

- 26 -

---

Table of Contents

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 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, 2012. Based upon their evaluation, these executive officers have concluded our disclosure controls and procedures were effective as of September 30, 2012.

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, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

- 27 -

---

Table of Contents

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 2011 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 2012.

 

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

 

- 28 -

---

Table of Contents

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 14, 2012						By:/s/ Bert E. Downing, Jr.
						Bert E. Downing, Jr.
						Vice President, Chief Financial Officer,
						Corporate Controller and Treasurer

 

- 29 -