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EX-31.1 - KEYSTONE CONSOLIDATED INDUSTRIES, INC. - 10-Q THIRD QUARTER FOR PERIOD ENDING 09-30-2009 EXHIBIT 31.1 - KEYSTONE CONSOLIDATED INDUSTRIES INCkci10q3rdqrt09302009exh31_1.htm
EX-32.1 - KEYSTONE CONSOLIDATED INDUSTRIES, INC. - 10-Q THIRD QUARTER FOR PERIOD ENDING 09-30-2009 EXHIBIT 32.1 - KEYSTONE CONSOLIDATED INDUSTRIES INCkci10q3rdqrt09302009exh32_1.htm
EX-31.2 - KEYSTONE CONSOLIDATED INDUSTRIES, INC. - 10-Q THIRD QUARTER FOR PERIOD ENDING 09-30-2009 EXHIBIT 31.2 - KEYSTONE CONSOLIDATED INDUSTRIES INCkci10q3rdqrt09302009exh31_2.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarter ended September 30, 2009
                                                                    Commission file number  1-3919
 
Keystone Consolidated Industries, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
37-0364250
(State or other jurisdiction of
Incorporation or organization)
 
(IRS Employer
Identification No.)
     
5430 LBJ Freeway, Suite 1740,
Three Lincoln Centre, Dallas, Texas
 
75240-2697
(Address of principal executive offices)
 
(Zip Code)
     
Registrant’s telephone number, including area code:
(972) 458-0028
   
Indicate by check mark:

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

Whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).* Yes___   No ____
 
    *   The registrant has not yet been phased into the interactive data requirements.
 
Whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company(as defined in Rule 12b-2 of the Act). Large accelerated filer  £ Accelerated filer S  Non-accelerated filer £ Smaller reporting company £.

Whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £ No S

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

Number of shares of common stock outstanding on November 5, 2009: 12,101,932

 
- 1 -

 

KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

INDEX
Part I.    FINANCIAL INFORMATION
 Page 
   
Item 1.    Financial Statements
 
   
Condensed Consolidated Balance Sheets –
          December 31, 2008; September 30, 2009(unaudited)
3
   
Condensed Consolidated Statements of Operations (unaudited) -
  Three months and nine months ended September 30, 2008 and 2009
5
   
Condensed Consolidated Statements of Cash Flows (unaudited) –
  Nine months ended September 30, 2008 and 2009
6
   
Condensed Consolidated Statement of Stockholders' Equity
  and Comprehensive Income (unaudited) -  
  Nine months ended September 30, 2009
7
   
Notes to Condensed Consolidated Financial Statements (unaudited)
8
   
Item 2.    Management's Discussion and Analysis of Financial
  Condition and Results of Operations
18
   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
31
   
Item 4.    Controls and Procedures
31
   
PART II.   OTHER INFORMATION
 
   
Item 1.    Legal Proceedings
33
   
Item 1A.         Risk Factors
33
   
Item 6.    Exhibits
33
   
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.
 





 
- 2 -

 

KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

   
December 31,
   
September 30,
 
ASSETS
 
 2008
   
2009
 
         
(unaudited)
 
             
Current assets:
           
  Accounts receivable, net
  $ 26,612     $ 50,681  
  Inventories
    70,858       58,068  
  Deferred income taxes
    14,373       14,373  
  Income taxes receivable
    -       2,052  
  Prepaid expenses and other
    2,724       2,848  
                 
    Total current assets
    114,567       128,022  
                 
Property, plant and equipment:
               
  Land
    1,468       1,468  
  Buildings and improvements
    59,598       60,850  
  Machinery and equipment
    317,573       323,788  
  Construction in progress
    9,421       5,751  
      388,060       391,857  
  Less accumulated depreciation
    298,073       305,703  
                 
    Net property, plant and equipment
    89,987       86,154  
                 
Other assets:
               
  Restricted investments
    2,277       250  
  Pension asset
    41,651       51,790  
  Other, net
    1,251       1,105  
                 
    Total other assets
    45,179       53,145  
                 
                 
    Total assets
  $ 249,733     $ 267,321  
                 





 
- 3 -

 

KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)


LIABILITIES AND STOCKHOLDERS' EQUITY
 
December 31,
   
September 30,
 
   
2008 
   
2009
 
         
(unaudited)
 
             
Current liabilities:
           
  Notes payable and current maturities of long-term debt
  $ 18,848     $ 39,726  
  Accounts payable
    7,776       11,316  
  Accrued OPEB cost
    1,372       1,372  
  Income taxes payable
    1,116       -  
  Other accrued liabilities
    29,569       17,202  
                 
    Total current liabilities
    58,681       69,616  
                 
Noncurrent liabilities:
               
  Long-term debt
    12,782       6,588  
  Accrued pension cost
    1,319       969  
  Accrued OPEB cost
    42,560       43,657  
  Deferred income taxes
    8,284       15,602  
  Other accrued liabilities
    6,463       2,906  
                 
    Total noncurrent liabilities
    71,408       69,722  
                 
                 
Stockholders' equity:
               
  Common stock
    125       125  
  Additional paid-in capital
    100,111       100,111  
  Accumulated other comprehensive loss
    (160,415 )     (154,570 )
  Retained earnings
    180,619       183,113  
  Treasury stock
    (796 )     (796 )
                 
    Total stockholders' equity
    119,644       127,983  
                 
    Total liabilities and stockholders’ equity
  $ 249,733     $ 267,321  
                 


Commitments and contingencies (Note 5)




See accompanying Notes to Condensed Consolidated Financial Statements.
 
- 4 -

 

KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

   
Three months ended
  September 30,
   
Nine months ended
September 30,
 
   
2008
   
2009
   
2008 
   
2009
 
   
(unaudited)
 
                         
Net sales
  $ 183,209     $ 100,363     $ 495,375     $ 231,349  
Cost of goods sold
    (156,867 )     (85,452 )     (440,170 )     (212,998 )
                                 
  Gross margin
    26,342       14,911       55,205       18,351  
                                 
Other operating income (expense):
                               
  Selling expense
    (2,575 )     (1,498 )     (6,338 )     (4,776 )
  General and administrative expense
    (5,187 )     (3,678 )     (12,850 )     (7,539 )
  Defined benefit pension credit (expense)
    18,467       (1,515 )     55,401       (4,543 )
  Other postretirement benefit credit
    2,006       1,042       6,542       3,562  
                                 
    Total other operating income (expense)
    12,711       (5,649 )     42,755       (13,296 )
                                 
Operating income
    39,053       9,262       97,960       5,055  
                                 
Nonoperating income (expense):
                               
  Interest expense
    (879 )     (474 )     (3,124 )     (1,214 )
  Other income, net
    306       42       604       144  
                                 
    Total nonoperating expense
    (573 )     (432 )     (2,520 )     (1,070 )
                                 
  Income before income taxes
    38,480       8,830       95,440       3,985  
                                 
Income tax expense
    (14,505 )     (2,962 )     (35,936 )     (1,491 )
                                 
  Net income
  $ 23,975     $ 5,868     $ 59,504     $ 2,494  
                                 
Basic and diluted income per share
  $ 1.98     $ 0.48     $ 5.25     $ 0.21  
                                 
Basic and diluted weighted average shares outstanding
     12,102       12,102       11,336       12,102  
                                 


See accompanying Notes to Condensed Consolidated Financial Statements.
 
- 5 -

 

KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

   
Nine months ended
 September 30,
 
   
2008
   
2009
 
   
(unaudited)
 
             
Cash flows from operating activities:
           
  Net income
  $ 59,504     $ 2,494  
  Depreciation and amortization
    11,432       10,399  
  Deferred income taxes
    33,242       3,794  
  Defined benefit pension expense (credit)
    (55,401 )     4,543  
  OPEB credit
    (6,542 )     (3,562 )
  OPEB payments
    (2,024 )     (1,005 )
  Bad debt expense
    56       3,258  
  Inventory impairment
    -       1,495  
  Other, net
    639       346  
  Change in assets and liabilities:
               
    Accounts receivable
    (27,962 )     (27,327 )
    Inventories
    (20,636 )     11,295  
    Accounts payable
    2,619       3,540  
    Accrued environmental costs
    (505 )     (4,285 )
    Accrued liabilities
    14,849       (11,639 )
    Income taxes
    (197 )     (3,168 )
    Other, net
    (1,013 )     (108 )
                 
      Net cash provided by (used in) operating activities
    8,061       (9,930 )
                 
Cash flows from investing activities:
               
  Capital expenditures
    (7,776 )     (6,799 )
  Restricted investments, net
    (21 )     2,027  
  Other, net
    436       72  
                 
      Net cash used in investing activities
    (7,361 )     (4,700 )
                 
Cash flows from financing activities:
               
  Issuance of common stock
    24,713       -  
  Revolving credit facility, net
    (10,172 )     28,323  
  Principal payments on other notes payable and long-term debt
    (15,089 )     (13,670 )
  Deferred financing costs paid
    (152 )     (23 )
                 
      Net cash provided by (used in) financing activities
    (700 )     14,630  
                 
Net change in cash and cash equivalents
               
                 
Cash and cash equivalents, beginning of period
    -       -  
                 
Cash and cash equivalents, end of period
  $ -     $ -  
                 
Supplemental disclosures:
  Cash paid for:
               
    Interest, net of amount capitalized
  $ 2,825     $ 903  
    Income taxes, net
    2,891       865  
                 

See accompanying Notes to Condensed Consolidated Financial Statements.
 
- 6 -

 

KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Nine months ended September 30, 2009
(In thousands)



   
Common
   
Additional
paid-in
   
Accumulated other
comprehensive income (loss)
   
Retained
   
Treasury
         
Comprehensive
 
   
stock
   
capital
   
Pensions
   
OPEB
   
earnings
   
stock
   
Total
   
income (loss)
 
   
(unaudited)
 
                                                 
Balance – December 31, 2008
  $ 125     $ 100,111     $ (193,258 )   $ 32,843     $ 180,619     $ (796 )   $ 119,644        
                                                               
Net income
    -       -       -       -       2,494       -       2,494     $ 2,494  
                                                                 
Amortization of prior service cost (credit), net of tax
    -       -       576       (7,566 )     -       -       (6,990 )     (6,990 )
                                                                 
Amortization of actuarial losses, net of tax
    -       -       8,802       4,033       -       -       12,835       12,835  
                                                                 
Balance – September 30, 2009
  $ 125     $ 100,111     $ (183,880 )   $ 29,310     $ 183,113     $ (796 )   $ 127,983          
                                                                 
  Comprehensive income
                                                          $ 8,339  

See accompanying Notes to Condensed Consolidated Financial Statements.
 
- 7 -

 

KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(unaudited)

Note 1 – Organization and basis of presentation:

The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 that we filed with the Securities and Exchange Commission (“SEC”) on March 12, 2009 (the “2008 Annual Report”).  In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented.  Certain reclassifications have been made to conform the prior year’s Condensed Consolidated Financial Statements to the current year’s classifications.  As compared to the 2008 Annual Report, we have omitted certain information and footnote disclosures from this Quarterly Report that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Our results of operations for the interim period ended September 30, 2009 may not be indicative of our operating results for the full year.  The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with the 2008 Consolidated Financial Statements contained in the 2008 Annual Report.

At September 30, 2009, Contran Corporation (“Contran”) owned approximately 62% of our outstanding common stock.  Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons (for which Mr. Simmons is the sole trustee) or is held directly by Mr. Simmons or other persons or companies related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control Contran and us.

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

Note 2 – Business segment information:

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

·  
Keystone Steel & Wire (“KSW”), located in Peoria, Illinois, operates an electric arc furnace mini-mill and manufactures and sells billets, wire rod, coiled rebar, industrial wire and fabricated wire products to agricultural, industrial, construction, commercial, original equipment manufacturers and retail consumer markets;
·  
Engineered Wire Products, Inc. (“EWP”), located in Upper Sandusky, Ohio, manufactures and sells wire mesh in both roll and sheet form that is utilized in concrete construction products including pipe, pre-cast boxes and applications for use in roadways, buildings and bridges; and

 
- 8 -

 

·  
Keystone-Calumet, Inc. (“Calumet”), located in Chicago Heights, Illinois, manufactures and sells merchant and special bar quality products and special sections in carbon and alloy steel grades for use in agricultural, cold drawn, construction, industrial chain, service centers and transportation applications as well as in the production of a wide variety of products by original equipment manufacturers.

   
Three months ended
 September 30,
   
Nine months ended
  September 30,
 
   
2008
   
2009
   
2008
   
2009
 
   
(In thousands)
   
(In thousands)
 
                         
Net sales:
                       
  KSW
  $ 179,591     $ 92,746     $ 483,760     $ 213,829  
  EWP
    19,457       12,782       53,636       31,506  
  Calumet
    4,927       2,841       13,632       7,197  
  Elimination of intersegment sales
    (20,766 )     (8,006 )     (55,653 )     (21,183 )
                                 
     Total net sales
  $ 183,209     $ 100,363     $ 495,375     $ 231,349  
                                 
Operating income (loss):
                               
  KSW
  $ 18,577     $ 8,629     $ 37,877     $ 7,944  
  EWP
    3,372       887       8,038       801  
  Calumet
    (874 )     (187 )     (1,716 )     (3,378 )
  Pension credit (expense)
    18,467       (1,515 )     55,401       (4,543 )
  OPEB credit
    2,006       1,042       6,542       3,562  
  Other(1)
    (2,495 )     406       (8,182 )     669  
                                 
     Total operating income
    39,053       9,262       97,960     $ 5,055  
                                 
Nonoperating income (expense):
                               
  Interest expense
    (879 )     (474 )     (3,124 )     (1,214 )
  Other income, net
    306       42       604       144  
                                 
  Income before income taxes
  $ 38,480     $ 8,830     $ 95,440     $ 3,985  

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

On a quarterly basis, we estimate our LIFO reserve balances that would be required at the end of the year based on projections of year-end inventory quantities and costs.  During the year, we record a pro-rated, year-to-date change in our LIFO reserve balances from the prior year-end based on these projections.  At the end of each year, we calculate our LIFO reserve balances based on actual year-end inventory quantities and costs.  During the third quarter and first nine months of 2009, we significantly decreased KSW’s and EWP’s LIFO inventory reserve balances primarily because estimated raw material costs and inventory levels for December 2009 were substantially lower than actual December 2008 raw material costs and inventory levels.  Changes in LIFO reserves are reflected in cost of goods sold.  The changes in KSW’s and EWP’s LIFO inventory reserve balances for the third quarter and first nine months of 2008 and 2009 are presented in the table below.

 
- 9 -

 


   
Increase (decrease) in LIFO reserve
 
   
Three months ended
   September 30,
   
Nine months ended
 September 30,
 
   
2008
   
2009
   
2008
   
2009
 
   
(In thousands)
   
(In thousands)
 
             
KSW
  $ (1,516 )   $ (2,318 )   $ 3,335     $ (9,055 )
                                 
EWP
    (123 )     (1,217 )     1,171       (4,434 )
                                 
Total
  $ (1,639 )   $ (3,535 )   $ 4,506     $ (13,489 )

During the first quarter of 2009, Calumet determined it was probable it would not recover the cost of certain inventory items in future selling prices and recognized a $1.5 million impairment charge to reduce these inventory items to their estimated net realizable values.  This impairment charge is included in Calumet’s cost of goods sold.

On July 2, 2009, the Illinois Environmental Protection Agency (the “IEPA”) approved the completion of the soil portion of the remediation plan of certain waste management units at KSW which resulted in a $4.2 million decrease (recorded as a credit to general administrative expense) in KSW’s environmental reserves during the second quarter of 2009.  See Note 5.

During the third quarter and first nine months of 2009, KSW recorded bad debt expense of $.7 million and $3.2 million, respectively, primarily due to a Chapter 11 filing by one of their customers.  Bad debt expense is included in general and administrative expense.


Note 3 – Inventories, net:

   
December 31,
   
September 30,
 
   
 2008 
   
2009
 
   
(In thousands)
 
             
  Raw materials
  $ 9,635     $ 5,601  
  Work in process
    6,657       6,093  
  Billets
    10,191       9,684  
  Wire rod
    24,225       13,785  
  Other finished products
    33,646       22,020  
  Supplies
    20,938       21,830  
                 
    Inventory at FIFO
    105,292       79,013  
    Less LIFO reserve
    34,434       20,945  
                 
      Total
  $ 70,858     $ 58,068  
                 

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

As discussed in Note 2, estimated inventory costs and quantities for December 2009 are substantially lower than actual inventory costs and quantities at December 2008.  Although the estimated reduction in inventory quantities has resulted in a partial liquidation of LIFO inventory during 2009, the impact of the liquidation was not significant to reported cost of sales for the third quarter and first nine months of 2009.  See Note 2.  

 
- 10 -

 

Note 4 - Notes payable and long-term debt:


   
December 31,
   
September 30,
 
   
 2008 
   
2009
 
   
(In thousands)
 
             
Wachovia revolving credit facility
  $ 3,264     $ 31,587  
8% Notes
    9,108       -  
Term loans:
               
  Wachovia
    10,953       6,953  
  County
    7,441       6,882  
Other
    864       892  
                 
    Total debt
    31,630       46,314  
    Less current maturities
    18,848       39,726  
                 
    Total long-term debt
  $ 12,782     $ 6,588  

During the first quarter of 2009, we made the final payment on our 8% Notes.

Our agreement with Wachovia includes financial performance covenants which require a trailing twelve-month Earnings Before Interest, Taxes, Depreciation, Amortization and Restructuring (“EBITDAR”), as defined in the agreement, of at least $17 million (measured quarterly) and a fixed charge coverage ratio, as defined in the agreement, of at least 1.0 (measured monthly) for the previous twelve-month period.  We generated EBITDAR of $9.8 million and a fixed charge coverage ratio of 1.2 for the twelve-month period ended September 30, 2009.

On October 2, 2009 we entered into the Third Amendment to our Wachovia Credit Facility agreement.  The amendment, among other things, waived the EBITDAR covenant for the quarter ended September 30, 2009; waived the fixed charge coverage ratio covenant for the months of September, October and November of 2009; decreased the fixed charge coverage ratio requirement to 0.9 for the months ending December 31, 2009, January 31, 2010 and February 28, 2010; added unfinanced capital expenditures to the definition of fixed charges; increased minimum excess availability by $5.0 million from September 30, 2009 to March 31, 2010; increased interest rates on the revolver to prime plus 1% or LIBOR plus 2.75% and increased interest rates on the term loan to prime plus 1.25% or LIBOR plus 3%. We paid Wachovia $100,000 for the amendment.

EBITDAR for the three quarters ended September 30, 2009 totals $15.6 million.  As such, we must achieve a total EBITDAR of $1.4 million during the fourth quarter of 2009 to be in compliance with our EBITDAR covenant as of December 31, 2009.  Additionally, based on current forecasts of interest expense, tax payments and capital expenditures, if we achieve EBITDAR of $1.4 million during the fourth quarter of 2009, we will be in compliance with our fixed charge coverage ratio covenant as of December 31, 2009.     We believe we will be able to comply with the covenant restrictions, as amended, through the maturity of the facility in August 2010; however if future operating results differ materially from our predictions we may be unable to maintain compliance.
 
The Wachovia Credit Facility matures in August 2010 and is collateralized by substantially all of our operating assets. Failure to comply with the covenants contained in the facility could result in the acceleration of any outstanding balance under the facility prior to their stated maturity date.  Additionally, the lenders participating in the facility can restrict our ability to incur additional secured indebtedness and can declare a default under the credit facility in the event of, among other things, a material adverse change in our business.
 
 
- 11 -


 
Note 5 – Environmental matters and other commitments and contingencies:

We have been named as a defendant for certain environmental sites pursuant to laws in governmental and private actions associated with environmental matters, including waste disposal sites and facilities currently or previously owned, operated or used by us.  These proceedings seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources.  Certain of these proceedings involve claims for substantial amounts.

On a quarterly basis, we evaluate the potential range of our liability at sites where we have been named a defendant by analyzing and estimating the range of reasonably possible costs to us.  Such costs include, among other things, expenditures for remedial site investigations, monitoring, managing, studies, certain legal fees, clean-up, removal and remediation.  The extent of our liability cannot be determined until site investigation studies are completed.  At September 30, 2009, the upper end of the range of reasonably possible costs to us for sites where we have been named a defendant is approximately $2.3 million, including our recorded accrual of $.8 million.  Our cost estimates have not been discounted to present value due to the uncertainty of the timing of the pay out.  It is possible our actual costs could differ materially from the amounts we have accrued or the upper end of the range for the sites where we have been named a defendant.  Our ultimate liability may be affected by a number of factors, including the imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes in remedial alternatives and costs or a determination that we are potentially responsible for the release of hazardous substances at other sites.  Although we believe our comprehensive general liability insurance policies provide indemnification for certain costs that we incur with respect to our environmental remediation obligations, we do not currently have receivables recorded for any such recoveries.

The exact time frame over which we make payments with respect to our accrued environmental costs is unknown and is dependent upon, among other things, the timing of the actual remediation process, which in part depends on factors outside our control.  At each balance sheet date, we make an estimate of the amount of our accrued environmental costs that will be paid out over the subsequent twelve months, and we classify such amount as a current liability.  We classify the remainder of the accrued environmental costs as noncurrent liabilities. See Note 6.

More detailed descriptions of certain legal proceedings relating to environmental matters are set forth below.  A summary of activity in our environmental accruals for the nine months ended September 30, 2009 is as follows:

   
Nine months ended
September 30, 2009
 
   
(In thousands)
 
       
Balance at December 31, 2008
  $ 5,125  
Net reduction in accrued environmental cost credited to general and administrative expense
    (3,978 )
Payments
    (307 )
         
Balance at September 30, 2009
  $ 840  
 
 

 
- 12 -

 
Since September 1992, we have been involved in the closure of inactive waste management units (the “WMUs”) at KSW’s Peoria, Illinois facility pursuant to a Consent Order (the “Consent Order”) and a closure plan approved by the IEPA.  The closure involved a six-phase remediation plan, with each phase requiring separate final approval from the IEPA. On July 2, 2009, we received final approval from the IEPA for the completion of the soil portion of the plan for all of the WMUs. The amount of remediation we were ultimately required to undertake pursuant to such approval was not as extensive as we had previously estimated, and accordingly we reduced our accrual for this matter by $4.2 million during the second quarter of 2009.  The groundwater portion of three of the WMUs remains open at this time and is anticipated to be closed after a specified period of “clean” semi-annual monitoring results.  We currently expect the remaining groundwater monitoring portion to cost $65,000.  Additionally, the Consent Order requires KSW to pay a penalty fee of $75,000 to cover all past notice of violations with the State of Illinois.  As such, we have $140,000 accrued for this matter at September 30, 2009.

As part of the Consent Order, we established a trust fund (the “Trust Fund”) in which monies were deposited to create a cash reserve for the corrective action work and for the potential of third party claims.  Through a modification of the Consent Order in 2005, we were then permitted to withdraw funds from the Trust Fund as we incurred costs related to the remediation.  In connection with the IEPA’s approval of the soil portion of the WMUs, the IEPA released approximately $2.0 million of the escrowed funds to us during the third quarter of 2009.  The Trust Fund balance of $250,000 at September 30, 2009 is expected to fund the remaining groundwater portion of the WMUs and the $75,000 penalty fee discussed above.  Because we are uncertain as to the timing of the completion of the remaining groundwater portion of the WMUs, the Trust Fund is included in restricted investments classified as other noncurrent assets on our Condensed Consolidated Balance Sheets.

In February 2000, we received formal notice of the United States Environmental Protection Agency’s (“U.S. EPA”) intent to issue a unilateral administrative order to us pursuant to Section 3008(h) of the Resource Conservation and Recovery Act ("RCRA").  The draft order enclosed with this notice would require us to: (1) investigate the nature and extent of hazardous constituents present at and released from five alleged solid WMUs at KSW’s Peoria, Illinois facility; (2) investigate hazardous constituent releases from "any other past or present locations at KSW’s Peoria, Illinois facility where past waste treatment, storage or disposal may pose an unacceptable risk to human health and the environment"; (3) complete by September 30, 2001 an "environmental indicators report" demonstrating the containment of hazardous substances that could pose a risk to "human receptors" and further demonstrating that we "have stabilized the migration of contaminated groundwater at or from the facility”; (4) submit by January 30, 2002 proposed "final corrective measures necessary to protect human health and the environment from all current and future unacceptable risks of releases of hazardous waste or hazardous constituents at or from KSW’s Peoria, Illinois facility”; and (5) complete by September 30, 2001 the closure of the sites discussed in the preceding paragraph now undergoing RCRA closure under the supervision of the IEPA.  During the fourth quarter of 2000, we entered into a modified Administrative Order on Consent (the “AOC”) that required us to conduct investigation and cleanup activities at certain solid waste management units at KSW’s Peoria, Illinois facility.  On July 31, 2006, we submitted a Corrective Measures Completion Report (“CMCR”) to the U.S. EPA.  Based on the remedial activities conducted at the site, the U.S. EPA required us to conduct several quarters of post-remediation groundwater monitoring.  Following the groundwater monitoring, we submitted a final summary on June 30, 2008 and again on December 19, 2008 requesting closure of the AOC. We are awaiting a response relative to this matter from the U.S. EPA.
 
 
- 13 -


 
Prior to one of our subsidiaries’ 1996 acquisition of DeSoto, Inc. (“DeSoto”), DeSoto was notified by the Texas Natural Resource Conservation Commission (now called the Texas Commission on Environmental Quality or “TCEQ”) that there were certain deficiencies in prior reports to the TCEQ relative to one of DeSoto’s non-operating facilities located in Gainesville, Texas.  During 1999, that subsidiary entered into the TCEQ's Voluntary Cleanup Program.  Remediation activities at this site are expected to continue for another four to five years and total future remediation costs are presently estimated to be between $.6 million and $2.0 million.  During the first nine months of 2008 and 2009, we paid approximately $.4 million and $.2 million respectively, in connection with remediation efforts at this site.

In February 2009, we received a Notice of Violation from the U.S. EPA regarding alleged air permit issues at KSW.  The U.S. EPA alleges KSW (i) is exceeding its sulfur dioxide emission limits set forth in its permits, (ii) failed to apply for a permit that would be issued under the U.S. Clean Air Act and the Illinois Environmental Protection Act in connection with the installation of certain pieces of equipment in its melt shop, and (iii) failed to monitor pH readings of an air scrubber in the wire galvanizing area of the plant.  We disagree with the U.S. EPA’s assertions, and we are in discussions with the U.S. EPA regarding a plan for addressing their concerns.  We can make no assurance these discussions will be successful or that we can avoid any enforcement action or resulting fines from these alleged violations.

Other current litigation

We are engaged in legal proceedings incidental to our normal business activities. In our opinion, none of such proceedings is material in relation to our consolidated financial position, results of operations or liquidity.

Note 6 - Other accrued liabilities:

   
December 31,
   
September 30,
 
   
 2008
   
2009
 
   
(In thousands)
 
Current:
           
  Employee benefits
  $ 19,656     $ 9,301  
  Self insurance
    5,936       4,491  
  Environmental
    455       400  
  Other
    3,522       3,010  
                 
Total
  $ 29,569     $ 17,202  
                 
Noncurrent:
               
  Workers compensation payments
  $ 1,621     $ 2,273  
  Environmental
    4,670       440  
  Other
    172       193  
                 
Total
  $ 6,463     $ 2,906  


 
- 14 -

 

Note 7 – Employee benefit plans:

We currently expect to record a defined benefit pension expense of $5.9 million during 2009 and we anticipate that no cash contributions will be required during 2009.  The components of our net periodic defined benefit pension expense (credit) for the third quarter and first nine months of 2008 and 2009 are presented in the table below.

   
Three months ended
  September 30,
   
Nine months ended
 September 30,
 
   
2008
   
2009
   
2008
   
2009
 
   
(In thousands)
 
                                 
Service cost
  $ 860     $ 814     $ 2,582     $ 2,441  
Interest cost
    5,578       5,411       16,735       16,231  
Expected return on plan assets
    (22,518 )     (9,721 )     (67,553 )     (29,161 )
Amortization of accumulated other comprehensive income:
                               
    Prior service cost
    308       308       922       924  
    Actuarial losses (gains)
    (2,695 )     4,703       (8,087 )     14,108  
                                 
Total expense (credit)
  $ (18,467 )   $ 1,515     $ (55,401 )   $ 4,543  

We currently expect our 2009 OPEB credit will be $4.7 million.  As allowed under certain of our amended benefit plans, we exercised our right to create supplemental pension benefits in lieu of certain 2009 benefit payments due under one of our OPEB plans.  As such, we anticipate contributing an aggregate of only $1.3 million to our OPEB plans during 2009. The components of our net periodic credit related to OPEB for the third quarter and first nine months of 2008 and 2009 are presented in the table below.

   
Three months ended
 September 30,
   
Nine months ended
 September 30,
 
   
2008
   
2009
   
2008
   
2009
 
   
(In thousands)
 
                                 
Service cost
  $ (31 )   $ 19     $ 74     $ 67  
Interest cost
    267       690       1,193       2,034  
Amortization of accumulated other
  comprehensive income:
                               
    Prior service credit
    (4,039 )     (4,040 )     (12,862 )     (12,128 )
    Actuarial losses
    1,413       2,289       4,669       6,465  
Settlement of 2006 1114 Agreement benefits
     384       -        384       -  
Total credit
  $ (2,006 )   $ (1,042 )   $ (6,542 )   $ (3,562 )

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


 
- 15 -

 

Note 8 – Income taxes:

   
Nine months ended
 
   
September 30,
 
   
2008
   
2009
 
   
(In thousands)
 
       
             
Expected income tax expense, at statutory rate
  $ 33,405     $ 1,395  
U.S. state income tax expense, net
    2,441       74  
Other, net
    90       22  
                 
Income tax expense
  $ 35,936     $ 1,491  

Note 9 – Financial instruments:

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

   
December 31,
 2008
   
September 30,
 2009
 
   
Carrying
 amount
   
Fair
value
   
Carrying
 amount
   
Fair
value
 
   
(In thousands)
 
                         
Restricted cash equivalents
  $ 2,277     $ 2,277     $ 250     $ 250  
Accounts receivable, net
    26,612       26,612       50,681       50,681  
Accounts payable
    7,776       7,776       11,316       11,316  
                                 
Long-term debt:
                               
  Variable-rate debt
    14,217       14,217       38,540       38,540  
  Fixed-rate debt
    17,413       14,161       7,774       7,117  
                                 

Due to their nature, the carrying amounts of our restricted cash equivalents and variable rate indebtedness are considered equivalent to fair value.  Additionally, due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.  The fair value of our fixed-rate indebtedness was based on the net present value of our remaining debt payments at an interest rate commensurate with our variable-rate debt which represents Level 3 inputs as defined in Accounting Standards Codification (“ASC”) Topic 820-10-35.
 
 
Note 10 – Recent accounting pronouncements:

Fair Value Disclosures - In April 2009, the Financial Accounting Standards Board (the “FASB”) issued FASB Staff Position (“FSP”) FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which is now included with ASC Topic 825-10 Financial Instruments.  This FSP requires us to disclose the fair value of all financial instruments for which it is practicable to estimate the value, whether recognized or not recognized in the statement of financial position, as required by Statement of Financial Accounting Standards (“SFAS”) No. 107, Disclosures about Fair Value of Financial Instruments for interim as well as annual periods.  Prior to the adoption of the FSP, we were only required to disclose this information annually.  This FSP became effective for us in the second quarter of 2009 and did not have an effect on our Condensed Consolidated Financial Statements.  The disclosures required by the FSP are included in Note 9 to our Condensed Consolidated Financial Statements.
 
 

 
- 16 -

 
Benefit Plan Asset Disclosures - During the fourth quarter of 2008, the FASB issued FSP SFAS 132 (R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which is now included with ASC Topic 715-20 Defined Benefit Plans.  This statement amends SFAS No. 87, 88 and 106 to require expanded disclosures about employers’ pension plan assets.  FSP 132 (R)-1 will be effective for us beginning with our 2009 annual report, and we will provide the expanded disclosures about our pension plan assets at that time.
 
Subsequent Events – In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which is now included with ASC Topic 855-10 Subsequent Events.  SFAS No. 165 establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued, which are referred to as subsequent events. The statement clarifies existing guidance on subsequent events including a requirement that a public entity should evaluate subsequent events through the issue date of the financial statements, the determination of when the effects of subsequent events should be recognized in the financial statement and disclosures regarding all subsequent events.  SFAS No. 165 also requires a public entity to disclose the date through which an entity has evaluated subsequent events; we have evaluated for subsequent events through November 5, 2009 which is the date this report was filed with the SEC.  SFAS No. 165 became effective for us in the third quarter of 2009 and its adoption did not have a material effect on our Condensed Consolidated Financial Statements.
 
 

 
- 17 -

 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                              

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

·  
Future supply and demand for our products (including cyclicality thereof),
·  
Customer inventory levels,
·  
Changes in raw material and other operating costs (such as ferrous scrap and energy),
·  
The possibility of labor disruptions,
·  
General global economic and political conditions,
·  
Competitive products (including low-priced imports) and substitute products,
·  
Customer and competitor strategies,
·  
The impact of pricing and production decisions,
·  
Environmental matters (such as those requiring emission and discharge limits for existing and new facilities),
·  
Government regulations and possible changes thereof,
·  
Significant increases in the cost of providing medical coverage to employees,
·  
The ultimate resolution of pending litigation,
·  
International trade policies of the United States and certain foreign countries,
·  
Operating interruptions (including, but not limited to, labor disputes, fires, explosions, unscheduled or unplanned downtime, supply disruptions and transportation interruptions),
·  
Our ability to renew or refinance credit facilities,
·  
The ability of our customers to obtain adequate credit,
·  
Any possible future litigation, and
·  
Other risks and uncertainties as discussed in this Quarterly Report and the 2008 Annual Report, including, without limitation, the section referenced above.

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

 
- 18 -

 

RESULTS OF OPERATIONS

Business Overview

We are a leading domestic manufacturer of steel fabricated wire products, industrial wire, billets and wire rod.  We also manufacture wire mesh, coiled rebar and steel bar.  Our products are used in the agricultural, industrial, cold drawn, construction, transportation, original equipment manufacturer and retail consumer markets.  We are vertically integrated, converting substantially all of our products from billets produced in our steel mini-mill.  Historically, our vertical integration has allowed us to benefit from the higher and more stable margins associated with fabricated wire products and wire mesh as compared to wire rod, as well as from lower costs of billets and wire rod as compared to bar manufacturers and wire fabricators that purchase billets and wire rod in the open market.  Moreover, we believe our downstream fabricated wire products, wire mesh, coiled rebar and industrial wire businesses are better insulated from the effects of wire rod imports as compared to non-integrated wire rod producers.

Recent Developments

During the first five months of 2009, the economic conditions resulted in customers cancelling or postponing certain projects due to an inability to secure financing in the current credit markets and choosing to conserve cash by liquidating their inventories and instituting a just-in-time order philosophy.  In addition, while we experienced an unprecedented 90% increase in the cost of ferrous scrap from December 2007 to August 2008, a significant decline in ferrous scrap costs since that time resulted in customers limiting orders as they believed lower ferrous scrap prices would result in lower selling prices in the near future. Given this sharply reduced market demand, we have operated our facilities on substantially reduced production schedules, which resulted in a much higher percentage of fixed costs included in cost of goods sold as these costs could not be capitalized into inventory.  Our customers’ just-in-time order philosophies have resulted in additional costs due to frequent mill changes as customers are ordering much smaller quantities of our many different products.  Additionally, we experienced equipment break-downs and start-up issues as idle production facilities were difficult to re-start given the cold winter temperatures during the first quarter of 2009.  However, we believe our reduced production schedules allowed us to somewhat temper the adverse impact of the business downturn on our liquidity.

Shipment volumes and customer orders increased during the third quarter of 2009.  Average weekly shipments for September 2009 were the highest since August 2008 and our backlog as of August 31, 2009 and September 30, 2009 was the highest and second highest, respectively, since September 30, 2008.  We believe the increase in customer orders is primarily due to extremely low customer inventory levels and the closing of certain competitor mills as opposed to a meaningful increase in demand.  We expect customer orders to decrease during the fourth quarter of 2009 as the typical construction season ends.  The increase in shipment volumes resulted in increased production levels during the third quarter of 2009.  However, our customers have continued the just-in-time order philosophy discussed above and we have changed our production and inventory strategies accordingly.

One of the key drivers of our profitability is the margin between ferrous scrap costs and our selling prices.  As discussed above, ferrous scrap market prices have generally declined since August 2008, which resulted in market pressure to decrease our selling prices during the first half of 2009.  Ferrous scrap market prices increased slightly during the third quarter of 2009 and we announced price increases on selected products.  However, the sharp reduction in demand in the fall of 2008 resulted in high levels of inventory in the market which continue to put pressure on our margins.  Although we expect ferrous scrap market prices to decrease during the fourth quarter of 2009 resulting in additional downward price pressure, we believe we will be able to generate a positive margin between overall selling prices and variable inventory costs throughout the remainder of 2009.
 

 
- 19 -

 
We currently believe our cash flows from operating activities combined with availability under our existing revolving credit facility will be sufficient to enable us to meet our cash flow needs for the next twelve months.  As discussed in Note 4 to our Condensed Consolidated Financial Statements, we were out of compliance with a certain financial covenant as of September 30, 2009 and our primary credit facility was amended on October 2, 2009 to waive certain financial covenants until December 31, 2009.  Current forecasts indicate we will be in compliance with our financial covenants at December 31, 2009, however if future operating results differ materially from our predictions we may be unable to maintain compliance.  The credit facility is collateralized by substantially all of our operating assets and failure to comply with the covenants contained in the credit facility could result in the acceleration of any outstanding balance under the facility prior to their stated maturity date.  Additionally, the lenders participating in the credit facility can restrict our ability to incur additional secured indebtedness and can declare a default under the credit facility in the event of, among other things, a material adverse change in our business.  In the event of an uncured default of our primary credit facility agreement, we would seek to refinance the facility with a new group of lenders or, if required, we will use our existing liquidity resources (which could include funds provided by our affiliates).  If we were unable to secure sufficient debt or equity financing, we would not be able to fund our operations.

On July 2, 2009, the Illinois Environmental Protection Agency (the “IEPA”) approved the completion of the soil portion of the remediation plan of certain waste management units at our Peoria, Illinois facility which resulted in us decreasing our accrued environmental costs by $4.2 million during the third quarter of 2009.  We believe the upper end of the range of reasonably possible costs to us for sites where we have been named a defendant or potentially responsible party is approximately $2.3 million, including the $.8 million accrued as of September 30, 2009.  In connection with the IEPA’s approval of the soil portion of the WMUs, the IEPA released approximately $2.0 million of escrowed funds to us during the third quarter of 2009.    See Note 5 to our Condensed Consolidated Financial Statements for discussions of our environmental liabilities.

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

 
 
- 20 -

 


   
Three months ended
September 30,
   
Nine months ended
 September 30,
 
   
2008
   
2009
   
2008
   
2009
 
   
(In thousands)
 
                         
Operating income as reported
  $ 39,053     $ 9,262     $ 97,960     $ 5,055  
  Defined benefit pension expense (credit)
    (18,467 )     1,515       (55,401 )     4,543  
  OPEB credit
    (2,006 )     (1,042 )     (6,542 )     (3,562 )
Operating income before pension and OPEB
  $ 18,580     $ 9,735     $ 36,017     $ 6,036  

Operating performance before pension and OPEB for the third quarter and first nine months of 2009 was significantly worse than the same periods of 2008 primarily due to the net effects of the following factors:
·  
lower shipment volumes as discussed above;
·  
lower selling prices as discussed above;
·  
reduced production volumes as discussed above, which resulted in a higher percentage of fixed costs included in cost of goods sold;
·  
increased variable costs of production due to frequent mill changes as customers are managing their inventory by ordering much smaller quantities of our many different products as discussed above;
·  
increased bad debt expense during the third quarter and first nine months of 2009 of $.7 million and $3.2 million, respectively, primarily due to the Chapter 11 proceedings of one of our customers;
·  
decreased cost of ferrous scrap;
·  
decreased cost of electricity and natural gas;
·  
decreased employee incentive compensation accruals during 2009 resulting from lower profitability; and
·  
decreases in our LIFO reserve and cost of goods sold during the third quarter and first nine months of 2009 of $3.5 million and $13.5 million, respectively as compared to only a $1.6 million decrease in our LIFO reserve and cost of goods sold during the third quarter of 2008 and a $4.5 million increase in our LIFO reserve and cost of goods sold during the first nine months of 2008 as discussed in Note 2 to our Condensed Consolidated Financial Statements.

Operating profit for the first nine months of 2009 as compared to the first nine months of 2008 was also impacted by:
·  
increased variable costs of production as idle production facilities were difficult to re-start given cold winter temperatures during the first quarter of 2009;
·  
a $1.5 million impairment charge to reduce certain inventories to net realizable value during the first quarter of 2009;
·  
decreased workers compensation accruals; and
·  
a $4.2 million credit to general and administrative expense during the second quarter of 2009 related to the release of accrued environmental costs for certain inactive waste management units as discussed above.


 
- 21 -

 


Our consolidated sales volume and average per-ton selling prices for the third quarter and first nine months of 2008 and 2009 are as follows:

   
Three months ended
 September 30, 
   
Nine months ended
 September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Sales volume (000 tons):
                       
  Fabricated wire products
    20       14       76       54  
  Industrial wire
    17       9       53       25  
  Coiled rebar
    7       2       14       4  
  Wire rod
    95       100       310       158  
  Billets
    8       2       9       4  
  Wire mesh
    14       15       47       34  
  Bar
    4       4       14       9  
    Total
    165       146       523       288  
                                 
                                 
Average per-ton selling prices:
                               
  Fabricated wire products
  $ 1,578     $ 1,344     $ 1,356     $ 1,393  
  Industrial wire
    1,302       827       1,083       914  
  Coiled rebar
    921       541       844       543  
  Wire rod
    965       564       795       574  
  Billets
    852       203       793       193  
  Wire mesh
    1,348       874       1,151       928  
  Bar
    1,147       772       933       796  
  All products
    1,106       686       943       801  

Segment Operating Results:

Our operating segments are organized by our manufacturing facilities and include three reportable segments:
·  
Keystone Steel & Wire (“KSW”), located in Peoria, Illinois, operates an electric arc furnace mini-mill and manufactures and sells billets, wire rod, coiled rebar, industrial wire and fabricated wire products to agricultural, industrial, construction, commercial, original equipment manufacturers and retail consumer markets;
·  
Engineered Wire Products, Inc. (“EWP”), located in Upper Sandusky, Ohio, manufactures and sells wire mesh in both roll and sheet form that is utilized in concrete construction products including pipe, pre-cast boxes and applications for use in roadways, buildings and bridges; and
·  
Keystone-Calumet, Inc. (“Calumet”), located in Chicago Heights, Illinois, manufactures and sells merchant and special bar quality products and special sections in carbon and alloy steel grades for use in agricultural, cold drawn, construction, industrial chain, service centers and transportation applications as well as in the production of a wide variety of products by original equipment manufacturers.


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

   
KSW
   
EWP
   
Calumet
   
Other(1)
   
Total
 
   
(In thousands)
 
Three months ended September 30, 2008:
 
                               
 Net sales
  $ 179,591     $ 19,457     $ 4,927     $ (20,766 )   $ 183,209  
 Cost of goods sold
    (155,877 )     (14,902 )     (5,363 )     19,275       (156,867 )
   Gross margin (loss)
    23,714       4,555       (436 )     (1,491 )     26,342  
                                         
 Selling and  administrative expense
    (5,137 )     (1,183 )      (438 )     (1,004 )     (7,762 )
 Operating income (loss) before pension/OPEB
  $ 18,577     $ 3,372     $ (874 )   $ (2,495 )   $ 18,580  
                                         
Three months ended September 30, 2009:
 
   
 Net sales
  $ 92,746     $ 12,782     $ 2,841     $ (8,006 )   $ 100,363  
 Cost of goods sold
    (80,143 )     (11,287 )     (2,861 )     8,839       (85,452 )
   Gross margin (loss)
    12,603       1,495       (20 )     833       14,911  
                                         
 Selling and administrative expense
    (3,974 )     (608 )     (167 )     (427 )     (5,176 )
 Operating income (loss) before pension/OPEB
  $ 8,629     $ 887     $ (187 )   $ 406     $ 9,735  

Nine months ended September 30, 2008:
 
                               
 Net sales
  $ 483,760     $ 53,636     $ 13,632     $ (55,653 )   $ 495,375  
 Cost of goods sold
    (433,400 )     (42,433 )     (14,477 )     50,140       (440,170 )
   Gross margin (loss)
    50,360       11,203       (845 )     (5,513 )     55,205  
                                         
 Selling and  administrative expense
    (12,483 )     (3,165 )     (871 )     (2,669 )     (19,188 )
 Operating income (loss) before pension/OPEB
  $ 37,877     $ 8,038     $ (1,716 )   $ (8,182 )   $ 36,017  
                                         
Nine months ended September 30, 2009:
 
   
 Net sales
  $ 213,829     $ 31,506     $ 7,197     $ (21,183 )   $ 231,349  
 Cost of goods sold
    (197,668 )     (28,696 )     (10,191 )     23,557       (212,998 )
   Gross margin (loss)
    16,161       2,810