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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 June 30, 2011   Commission file number 1-3919

Keystone Consolidated Industries, Inc.

 

(Exact name of Registrant as specified in its charter)

 

Delaware      37-0364250

(State or other jurisdiction of

Incorporation or organization)

    

(IRS Employer

Identification No.)

5430 LBJ Freeway, Suite 1740,

Three Lincoln Centre, Dallas, Texas

     75240-2697
(Address of principal executive offices)      (Zip Code)

 

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

Indicate by check mark:

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

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

Whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company(as defined in Rule 12b-2 of the Act). Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

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

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

Number of shares of common stock outstanding on August 12, 2011: 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, 2010; June 30, 2011 (unaudited)

     3   
 

Condensed Consolidated Statements of Income (unaudited) - Three months and six months ended June 30, 2010 and 2011

     5   
 

Condensed Consolidated Statements of Cash Flows (unaudited) – Six months ended June 30, 2010 and 2011

     6   
 

Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income -  Six months ended June 30, 2011 (unaudited)

     7   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     8   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     27   
Item 4.  

Controls and Procedures

     27   
PART II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     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,      June 30,  
ASSETS    2010      2011  
            (unaudited)  

Current assets:

     

Accounts receivable, net

   $ 46,765       $ 70,524   

Inventories

     45,944         65,160   

Deferred income taxes

     17,501         17,501   

Income taxes receivable

     2,029         —     

Prepaid expenses and other

     1,474         1,326   
  

 

 

    

 

 

 

Total current assets

     113,713         154,511   
  

 

 

    

 

 

 

Property, plant and equipment:

     

Land

     1,468         1,468   

Buildings and improvements

     63,375         64,509   

Machinery and equipment

     338,071         341,227   

Construction in progress

     4,628         5,655   
  

 

 

    

 

 

 
     407,542         412,859   

Less accumulated depreciation

     319,533         324,877   
  

 

 

    

 

 

 

Net property, plant and equipment

     88,009         87,982   
  

 

 

    

 

 

 

Other assets:

     

Pension asset

     153,962         169,216   

Other, net

     1,533         1,491   
  

 

 

    

 

 

 

Total other assets

     155,495         170,707   
  

 

 

    

 

 

 

Total assets

   $ 357,217       $ 413,200   
  

 

 

    

 

 

 

 

- 3 -


Table of Contents

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

 

     December 31,     June 30,  
     2010     2011  
           (unaudited)  
LIABILITIES AND STOCKHOLDERS’ EQUITY             

Current liabilities:

    

Current maturities of long-term debt

   $ 27,744      $ 48,334   

Accounts payable

     6,694        12,287   

Accrued OPEB cost

     1,279        1,279   

Other accrued liabilities

     22,901        25,769   
  

 

 

   

 

 

 

Total current liabilities

     58,618        87,669   
  

 

 

   

 

 

 

Noncurrent liabilities:

    

Long-term debt

     937        959   

Accrued OPEB cost

     45,247        45,804   

Deferred income taxes

     58,830        67,989   

Other accrued liabilities

     1,849        1,646   
  

 

 

   

 

 

 

Total noncurrent liabilities

     106,863        116,398   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock

     125        121   

Additional paid-in capital

     100,111        98,863   

Accumulated other comprehensive loss

     (97,307     (96,133

Retained earnings

     189,603        206,282   

Treasury stock

     (796     -   
  

 

 

   

 

 

 

Total stockholders’ equity

     191,736        209,133   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 357,217      $ 413,200   
  

 

 

   

 

 

 

Commitments and contingencies (Note 6)

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 4 -


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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     (unaudited)  
     2010     2011     2010     2011  

Net sales

   $ 134,970      $ 155,955      $ 234,713      $ 290,118   

Cost of goods sold

     (120,246     (140,920     (209,484     (262,114
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     14,724        15,035        25,229        28,004   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other operating income (expense):

        

Selling expense

     (1,792     (1,983     (3,501     (3,798

General and administrative expense

     (4,006     (4,260     (7,881     (7,724

Defined benefit pension credit

     1,209        4,750        2,421        9,500   

Other postretirement benefit credit

     1,345        1,299        2,687        2,599   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating income (expense)

     (3,244     (194     (6,274     577   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     11,480        14,841        18,955        28,581   
  

 

 

   

 

 

   

 

 

   

 

 

 

Nonoperating income (expense):

        

Interest expense

     (622     (328     (1,065     (603

Other income, net

     83        425        147        548   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense)

     (539     97        (918     (55
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     10,941        14,938        18,037        28,526   

Provision for income taxes

     (4,192     (5,942     (6,913     (11,847
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,749      $ 8,996      $ 11,124      $ 16,679   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted income per share

   $ 0.56      $ 0.74      $ 0.92      $ 1.38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted weighted average shares outstanding

     12,102        12,102        12,102        12,102   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 5 -


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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Six months ended
June 30,
 
     2010     2011  
     (unaudited)  

Cash flows from operating activities:

    

Net income

   $ 11,124      $ 16,679   

Depreciation and amortization

     6,546        5,682   

Deferred income taxes

     3,912        8,389   

Defined benefit pension credit

     (2,421     (9,500

OPEB credit

     (2,687     (2,599

OPEB payments

     (467     (653

Other, net

     285        68   

Change in assets and liabilities:

    

Accounts receivable

     (17,261     (23,701

Inventories

     (29,471     (19,216

Accounts payable

     5,954        5,593   

Accrued liabilities

     4,126        2,547   

Income taxes

     (489     2,147   

Other, net

     1,133        (302
  

 

 

   

 

 

 

Net cash used in operating activities

     (19,716     (14,866
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (3,341     (5,778

Other, net

     36        61   
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,305     (5,717
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Revolving credit facility, net

     26,307        20,591   

Principal payments on other notes payable and long-term debt

     (3,271     (2

Deferred financing costs paid

     (15     (6
  

 

 

   

 

 

 

Net cash provided by financing activities

     23,021        20,583   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     0        0   

Cash and cash equivalents, beginning of period

     0        0   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 0      $ 0   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Cash paid for:

    

Interest, net of amount capitalized

   $ 899      $ 542   

Income taxes, net

     3,490        1,765   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 6 -


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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

Six months ended June 30, 2011

(In thousands)

 

   

Common

stock

   

Additional

paid-in

capital

   

Accumulated other

comprehensive

income (loss)

   

Retained

earnings

   

Treasury

stock

   

Total

   

Comprehensive

income

       

Pensions

   

OPEB

         
    (unaudited)      

Balance – December 31, 2010

    $125        $100,111      $ (116,745   $ 19,438      $ 189,603      $ (796   $ 191,736         

Net income

                                16,679               16,679          $16,679     

Retirement of treasury stock

    (4     (1,248                          796        (456      

Amortization of actuarial losses

                  3,103        2,582                      5,685          5,685     

Amortization of prior service cost (credit)

                  372        (4,883                   (4,511       (4,511  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Balance – June 30, 2011

    $121        $98,863      $ (113,270   $ 17,137      $ 206,282      $      $ 209,133         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Comprehensive income

                    $17,853     
                 

 

 

   

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 7 -


Table of Contents

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

Note 1 – Organization and basis of presentation:

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

At June 30, 2011, Contran Corporation (“Contran”) owned approximately 75% 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 – Proposed Subscription Rights Offering:

In May 2011, we filed a preliminary registration statement on Form S-1 with the SEC in connection with a proposed distribution of non-transferable subscription rights to our common stockholders to purchase an aggregate of up to 3,025,483 shares of our common stock. Following the SEC declaring the registration statement effective under the Securities Act of 1933, as amended, we plan to distribute one subscription right for each share of common stock held on a record date to be determined. Each whole subscription right would entitle the record holder of common stock to purchase 0.25 shares of our common stock at a per-share subscription price to be determined by our board of directors.

We would not issue any fractional shares of common stock in the subscription rights offering, and holders would only be entitled to purchase a whole number of shares of common stock, rounded down to the nearest whole share a holder would otherwise be entitled to purchase. Subscribers who exercise their rights in full would be entitled to over-subscribe for additional shares, subject to certain limitations, to the extent shares are available.

 

- 8 -


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Assuming the subscription rights offering is completed, we intend to use all of the net proceeds from the sale of the common stock pursuant to the subscription rights offering to declare and pay a special one-time dividend to all of the holders of our common stock on a record date to be determined shortly after completion of the subscription rights offering. See Note 5.

Contran has indicated to us that it would purchase all of the shares of common stock to which it is entitled in the subscription rights offering pursuant to its subscription rights, and subject to the availability of shares, Contran would exercise its over-subscription privilege to the fullest extent possible. Consequently, even if no stockholders other than Contran exercise their subscription rights, the subscription rights offering would nonetheless be fully subscribed.

There is no assurance that the registration statement will be declared effective, or that we would commence the subscription rights offering (as outlined above or otherwise). Also, assuming we commence the subscription rights offering, there is no assurance that it would be completed, since we intend to reserve the right to cancel or terminate the subscription rights offering at any time before the expiration of the subscription rights offering and for any reason.

Note 3 – Business segment information:

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

 

   

Keystone Steel & Wire (“KSW”), located in Peoria, Illinois, operates an electric arc furnace mini-mill, rod mill, industrial wire mill and wire product fabrication facilities and manufactures and sells wire rod, coiled rebar, industrial wire, fabricated wire and other products to agricultural, industrial, construction, commercial, original equipment manufacturers and retail consumer markets;

 

   

Engineered Wire Products, Inc. (“EWP”), located in Upper Sandusky, Ohio, manufactures and sells wire mesh in both roll and sheet form that is utilized as reinforcement in concrete construction products including pipe, pre-cast boxes and applications for use in roadways, buildings and bridges; and

 

   

Keystone-Calumet, Inc. (“Calumet”), located in Chicago Heights, Illinois, manufactures and sells merchant and special bar quality 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.

 

- 9 -


Table of Contents
     Three months ended
June 30,
    Six months  ended
June 30,
 
     (In thousands)     (In thousands)  
    

2010

   

2011

   

2010

   

2011

 

Net sales:

        

KSW

     $130,892        $149,682        $233,382        $285,019   

EWP

     12,991        17,368        20,367        28,410   

Calumet

     5,735        9,515        9,986        15,912   

Elimination of intersegment sales

     (14,648     (20,610     (29,022     (39,223
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     $134,970        $155,955        $234,713        $290,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

        

KSW

     $    8,533        $    8,745        $  15,518        $  17,555   

EWP

     873        903        510        685   

Calumet

     499        336        646        436   

Pension credit

     1,209        4,750        2,421        9,500   

OPEB credit

     1,345        1,299        2,687        2,599   

Other(1)

     (979     (1,192     (2,827     (2,194
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     11,480        14,841        18,955        28,581   

Non operating income (expense):

        

Interest expense

     (622     (328     (1,065     (603

Other income, net

     83        425        147        548   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     $  10,941        $  14,938        $  18,037        $  28,526   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

     Increase (decrease) in LIFO reserve  
    

Three months ended

      June 30,      

    

Six months ended

      June 30,      

 
     2010     2011      2010     2011  
     (In thousands)  

KSW

     $  (328     $   732         $ (22     $   863   

EWP

     63        453         157        782   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     $  (265     $1,185         $135        $1,645   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

- 10 -


Table of Contents

Note 4 – Inventories, net:

 

     December 31,      June 30,  
     2010      2011  
     (In thousands)  

Raw materials

   $ 3,957       $ 5,302   

Billet

     5,832         6,687   

Wire rod

     7,042         19,430   

Work in process

     5,030         6,610   

Finished products

     22,821         30,089   

Supplies

     25,919         23,344   
  

 

 

    

 

 

 

Inventory at FIFO

     70,601         91,462   

Less LIFO reserve

     24,657         26,302   
  

 

 

    

 

 

 

Total

   $ 45,944       $ 65,160   
  

 

 

    

 

 

 

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

Note 5 – Debt:

 

     December 31,      June 30,  
     2010      2011  
     (In thousands)  

Wells Fargo revolving credit facility

   $ 27,740       $ 48,331   

Other

     941         962   
  

 

 

    

 

 

 

Total debt

     28,681         49,293   

Less current maturities

     27,744         48,334   
  

 

 

    

 

 

 

Total long-term debt

   $ 937       $ 959   
  

 

 

    

 

 

 

In May 2011, we amended the terms of our revolving credit facility to exclude cash dividends we pay, to the extent funded with proceeds we receive from the issuance of our equity securities (such as the possible special one-time cash dividend discussed in Note 2), from the definition of fixed charges for purposes of certain financial covenants contained in the credit facility.

Note 6 – Environmental matters and other commitments and contingencies:

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

On a quarterly basis, we evaluate the potential range of our liability at sites where we have been named a defendant by analyzing and estimating the range of reasonably possible costs to us. At June 30, 2011, the upper end of the range of reasonably possible costs to us for sites where we have been named a defendant is approximately $2.1 million, including our recorded accrual of $.6 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 7.

 

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It is possible our actual costs could differ materially from the amounts we have accrued or the upper end of the estimated range for the sites where we have been named a defendant. Our ultimate liability may be affected by a number of factors, including the imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes in remedial alternatives and costs or a determination that we are potentially responsible for the release of hazardous substances at other sites. Although we believe our comprehensive general liability insurance policies provide indemnification for certain costs that we incur with respect to our environmental remediation obligations, we do not currently have receivables recorded for any such recoveries.

Prior to one of our subsidiaries’ 1996 acquisition of DeSoto, Inc. (“DeSoto”), DeSoto was notified by the Texas Natural Resource Conservation Commission (now called the Texas Commission on Environmental Quality or “TCEQ”) that there were certain deficiencies in prior reports to the TCEQ relative to one of DeSoto’s non-operating facilities located in Gainesville, Texas. During 1999, that subsidiary entered into the TCEQ’s Voluntary Cleanup Program as it relates to that facility. Remediation activities at this site are expected to continue for another two to three years and total future remediation costs are presently estimated to be between $.3 million and $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 regarding our perspective on the matter to the DOJ and we are awaiting their response. 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. While we continue to dispute some of the U.S. EPA’s underlying assertions about the alleged violations, we have already undertaken corrective actions to address others and have worked diligently in the past year to reach a resolution of the matter.

In July 2011, we received a Notice and Finding of Violation (“NOV/FOV”) from the U.S. EPA alleging that 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. KSW disputes this finding and is availing itself of its right to meet and conference with the U.S. EPA during the third quarter of 2011.

We have not agreed upon any additional response actions in connection with the February 2009 NOV or the recently issued July 2011 NOV/FOV. Therefore, we cannot estimate any potential costs to us to resolve these matters and we can make no assurance our efforts will be successful or that we can avoid any enforcement action or resulting fines from these alleged violations.

 

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Other current litigation

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

Note 7 – Other accrued liabilities:

 

     December 31,      June 30,  
     2010      2011  
     (In thousands)  

Current:

     

Employee benefits

   $ 12,679       $ 14,631   

Self insurance

     4,935         5,886   

Environmental

     472         385   

Other

     4,815         4,867   
  

 

 

    

 

 

 

Total

   $ 22,901       $ 25,769   
  

 

 

    

 

 

 

Noncurrent:

     

Workers compensation payments

   $ 1,242       $ 1,070   

Environmental

     265         180   

Other

     342         396   
  

 

 

    

 

 

 

Total

   $ 1,849       $ 1,646   
  

 

 

    

 

 

 

Note 8 – Retirement of treasury stock:

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

Note 9 – Employee benefit plans:

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010     2011     2010     2011  
     (In thousands)  

Service cost

   $ 832      $ 931      $ 1,664      $ 1,862   

Interest cost

     4,937        4,752        9,873        9,504   

Expected return on plan assets

     (10,951     (13,310     (21,902     (26,620

Amortization of accumulated other comprehensive income:

        

Prior service cost

     303        308        605        616   

Actuarial losses

     3,670        2,569        7,339        5,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total credit

   $ (1,209   $ (4,750 )    $ (2,421   $ (9,500 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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We currently expect our 2011 other postretirement benefit (“OPEB”) credit will be $5.2 million. As allowed under certain of our benefit plans, we exercised our right to create supplemental pension benefits in lieu of certain 2011 benefit payments due under one of our OPEB plans. As such, we anticipate contributing an aggregate of $1.3 million to our OPEB plans during 2011. 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 2011, our expected OPEB contributions would be approximately $2.9 million higher. The components of our net periodic credit related to OPEB for the second quarter and first six months of 2010 and 2011 are presented in the table below.

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010     2011     2010     2011  
     (In thousands)  

Service cost

   $ 27      $ 33      $ 55      $ 64   

Interest cost

     609        573        1,220        1,147   

Amortization of accumulated other

comprehensive income:

        

Prior service credit

     (3,966     (4,043     (7,932     (8,085

Actuarial losses

     1,985        2,138        3,970        4,275   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total credit

   $ (1,345   $ (1,299 )    $ (2,687   $ (2,599 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

Note 10 – Income taxes:

 

     Six months ended  
     June 30,  
     2010      2011  
     (In thousands)  

Expected income tax expense, at statutory rate

   $ 6,313       $ 9,984   

U.S. state income tax expense, net

     574         1,848   

Other, net

     26         15   
  

 

 

    

 

 

 

Income tax expense

   $ 6,913       $ 11,847   
  

 

 

    

 

 

 

Our provision for income taxes in the first half 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.

 

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Note 11 – Financial instruments:

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

 

     December 31,
2010
     June 30,
2011
 
     Carrying
amount
     Fair
value
     Carrying
amount
     Fair
value
 
     (In thousands)  

Restricted cash equivalents

   $ 250       $ 250       $ 249       $ 249   

Accounts receivable, net

     46,765         46,765         70,524         70,524   

Accounts payable

     6,694         6,694         12,287         12,287   

Debt:

           

Variable-rate debt

     27,740         27,740         48,331         48,331   

Fixed-rate debt

     941         1,019         962         1,029   

Due to their nature, the carrying amounts of our restricted cash equivalents and variable rate indebtedness are considered equivalent to fair value. Additionally, due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. The fair value of our fixed-rate indebtedness was based on the net present value of our remaining debt payments at an interest rate commensurate with our variable-rate debt which represents Level 3 inputs as defined in ASC Topic 820-10-35. Note that 99% of the carrying value of our fixed-rate debt at December 31, 2010 and June 30, 2011 relates to a $1.1 million non-interest bearing note. Because it is non-interest bearing, we have calculated an imputed interest rate on the note and carry the note at a value discounted for such interest.

Note 12 – Recent Accounting Pronouncements:

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

In June 2011 the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 will eliminate the option of presenting comprehensive income as a component of the Consolidated Statement of Equity and will instead require comprehensive income be presented as a component of the Consolidated Statement of Income or in a separate Consolidated Statement of Comprehensive Income immediately following the Consolidated Statement of Income. This standard will be effective for our first quarter 2012 report. Upon adoption of ASU 2011-05, we intend to present our comprehensive income in a separate Consolidated Statement of Comprehensive Income.

 

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

 

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

 

   

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

 

   

Customer inventory levels,

 

   

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

 

   

Availability of raw materials,

 

   

The possibility of labor disruptions,

 

   

General global economic and political conditions,

 

   

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

 

   

Customer and competitor strategies,

 

   

The impact of pricing and production decisions,

 

   

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

 

   

Government regulations and possible changes therein,

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Our ability to renew or refinance credit facilities,

 

   

The ability of our customers to obtain adequate credit,

 

   

Any possible future litigation, and

 

   

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

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

 

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RESULTS OF OPERATIONS

Business Overview

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

Recent Developments

We implemented selling price increases on certain products throughout the first half of 2011 as ferrous scrap market prices continued to escalate. We currently believe we will be able to maintain positive overall margins on our products throughout 2011.

Customer orders were strong at the end of the second quarter of 2011 and based on current expectations that the economy will continue to recover at a modest pace, we believe 2011 shipment volumes will exceed 2010 shipment volumes.

On May 19, 2011, we filed a preliminary registration statement on Form S-1 with the SEC in connection with a proposed distribution of non-transferable subscription rights to our common stockholders. See Notes 2 and 5 to our Condensed Consolidated Financial Statements.

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.

 

- 17 -


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     Three months ended
June 30,
    Six months ended
June 30,
 
     2010     2011     2010     2011  
     (In thousands)     (In thousands)  

Operating income as reported

   $ 11,480      $ 14,841      $ 18,955      $ 28,581   

Defined benefit pension credit

     (1,209     (4,750     (2,421     (9,500

OPEB credit

     (1,345     (1,299     (2,687     (2,599
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension and OPEB

   $ 8,926      $ 8,792      $ 13,847      $ 16,482   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension and OPEB for the second quarter of 2011 approximated prior year as a slightly higher margin between selling prices and raw material costs was offset by increased costs of production due to outages related to malfunctioning equipment and unfavorable LIFO adjustments (see Note 3 to our Condensed Consolidated Financial Statements).

Operating income before pension and OPEB for the first half of 2011 was better than the first half of 2010 due to first quarter 2011 results. The first quarter of 2011 was characterized by increased shipment volumes and a slightly higher margin between selling prices and raw material costs, partially offset by increased costs of production due to frequent mill changes to meet customer orders as well as production outages related to the installation of new equipment.

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2010      2011      2010      2011  

Sales volume(000 tons):

           

Wire rod

     108         107         189         200   

Fabricated wire products

     23         21         45         46   

Industrial wire

     15         15         27         31   

Wire mesh

     15         17         23         28   

Bar

     6         8         11         14   

Coiled rebar

     2         4         3         5   

Other

     4         3         6         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     173         175         304         330   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average per-ton selling prices:

           

Wire rod

   $ 629       $ 754       $ 614       $ 732   

Fabricated wire products

     1,315         1,359         1,301         1,344   

Industrial wire

     927         1,036         907         998   

Wire mesh

     884         1,015         874         984   

Bar

     906         1,028         886         1,009   

Coiled rebar

     641         737         636         734   

All products

     773         882         765         869   

 

- 18 -


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Segment Operating Results:

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

 

   

Keystone Steel & Wire (“KSW”), located in Peoria, Illinois, operates an electric arc furnace mini-mill, rod mill, industrial wire mill and wire product fabrication facilities and manufactures and sells wire rod, coiled rebar, industrial wire, fabricated wire and other products to agricultural, industrial, construction, commercial, original equipment manufacturers and retail consumer markets;

 

   

Engineered Wire Products, Inc. (“EWP”), located in Upper Sandusky, Ohio, manufactures and sells wire mesh in both roll and sheet form that is utilized as reinforcement in concrete construction products including pipe, pre-cast boxes and applications for use in roadways, buildings and bridges; and

 

   

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

 

- 19 -


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

 

     KSW     EWP     Calumet     Other(1)     Total  
     (In thousands)  

Three months ended June 30, 2010

  

       

Net sales

   $ 130,892      $ 12,991      $ 5,735      $ (14,648   $ 134,970   

Cost of goods sold

     (118,228     (11,585     (5,087     14,654        (120,246
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     12,664        1,406        648        6        14,724   

Selling and administrative expense

     (4,131     (533     (149     (985     (5,798
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

before pension/OPEB

   $ 8,533      $ 873      $ 499      $ (979   $ 8,926   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2011

  

       

Net sales

   $ 149,682      $ 17,368      $ 9,515      $ (20,610   $ 155,955   

Cost of goods sold

     (136,216     (15,949     (8,975     20,220        (140,920
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     13,466        1,419        540        (390     15,035   

Selling and administrative expense

     (4,721     (516     (204     (802     (6,243
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension/OPEB

   $ 8,745      $ 903      $ 336      $ (1,192   $ 8,792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2010:

          

Net sales

   $ 233,382      $ 20,367      $ 9,986      $ (29,022   $ 234,713   

Cost of goods sold

     (209,995     (18,757     (8,985     28,253        (209,484
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     23,387        1,610        1,001        (769     25,229   

Selling and administrative expense

     (7,869     (1,100     (355     (2,058     (11,382
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension/OPEB

   $ 15,518      $ 510      $ 646      $ (2,827   $ 13,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2011:

          

Net sales

   $ 285,019      $ 28,410      $ 15,912      $ (39,223   $ 290,118   

Cost of goods sold

     (259,098     (26,630     (15,084     38,698        (262,114
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     25,921        1,780        828        (525     28,004   

Selling and administrative expense

     (8,366     (1,095     (392     (1,669     (11,522
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension/OPEB

   $ 17,555      $ 685      $ 436      $ (2,194   $ 16,482   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

Keystone Steel & Wire

 

     Three months ended June 30,  
     2010     % of
sales
    2011     % of
sales
 
     ($ in thousands)  

Net sales

   $ 130,892        100.0   $ 149,682        100.0

Cost of goods sold

     (118,228     (90.3     (136,216     (91.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     12,664        9.7        13,466        9.0   

Selling and administrative expense

     (4,131     (3.2     (4,721     (3.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension/OPEB

   $ 8,533        6.5   $ 8,745        5.8
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six months ended June 30,  
     2010     % of
sales
    2011     % of
sales
 
     ($ in thousands)  

Net sales

   $ 233,382        100.0   $ 285,019        100.0

Cost of goods sold

     (209,995     (90.0     (259,098     (90.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     23,387        10.0        25,921        9.1   

Selling and administrative expense

     (7,869     (3.4     (8,366     (2.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension/OPEB

   $ 15,518        6.6   $ 17,555        6.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

- 21 -


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
June 30,
     Six months ended
June 30,
 
     2010     2011      2010     2011  

Sales volume(000 tons):

         

Wire rod

     124        126         222        238   

Fabricated wire products

     23        21         45        46   

Industrial wire

     15        14         27        30   

Billet

     12        14         24        26   

Coiled rebar

     2        4         3        5   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     176        179         321        345   
  

 

 

   

 

 

    

 

 

   

 

 

 
         

Average per-ton selling prices:

         

Wire rod

   $ 630      $ 751       $ 614      $ 729   

Fabricated wire products

     1,315        1,359         1,301        1,344   

Industrial wire

     927        1,044         907        1,006   

Billet

     457        558         443        534   

Coiled rebar

     641        737         636        734   

All products

     734        830         723        821   

Average per-ton ferrous scrap cost of goods sold

   $ 318      $ 383       $ 283      $ 363   

Increase (decrease) in LIFO reserve and

cost of goods sold

   $ (328   $ 732       $ (22   $ 863   

Average electricity cost per kilowatt hour

   $ 0.04      $ 0.04       $ 0.04      $ 0.04   

Kilowatt hours consumed (000 hrs)

     138,913        140,918         267,355        278,941   

Average natural gas cost per therm

   $ 0.46      $ 0.51       $ 0.53      $ 0.48   

Natural gas therms consumed (000 therms)

     4,638        4,554         10,561        10,319   

KSW’s operating performance during the second quarter and first half of 2011 was also negatively impacted by increased variable costs of production due to outages related to malfunctioning equipment and frequent mill changes to meet customer orders.

 

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Engineered Wire Products, Inc.

 

     Three months ended June 30,  
     2010     % of
sales
    2011     % of
sales
 
     ($ in thousands)  

Net sales

   $ 12,991        100.0   $ 17,368        100.0

Cost of goods sold

     (11,585     (89.2     (15,949     (91.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     1,406        10.8        1,419        8.2   

Selling and administrative expense

     (533     (4.1     (516     (3.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension/OPEB

   $ 873        6.7   $ 903        5.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six months ended June 30,  
     2010     % of
sales
    2011     % of
sales
 
     ($ in thousands)  

Net sales

   $ 20,367        100.0   $ 28,410        100.0

Cost of goods sold

     (18,757     (92.1     (26,630     (93.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     1,610        7.9        1,780        6.3   

Selling and administrative expense

     (1,100     (5.4     (1,095     (3.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension/OPEB

   $ 510        2.5   $ 685        2.4
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2010      2011      2010      2011  

Sales volume (000 tons):

           

Wire mesh

     15         17         23         28   

Industrial wire

       -           1           -           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     15         18         23         29   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average per-ton selling prices:

           

Wire mesh

   $ 884       $ 1,015       $ 874       $ 984   

Industrial wire

     -         859         -         830   

All products

     884         1,009         874         976   

Average per-ton wire rod cost of goods sold

   $ 638       $ 707       $ 617       $ 694   

Increase in LIFO reserve and cost of goods sold

   $ 63       $ 453       $ 157       $ 782   

EWP’s operating performance during the second quarter of 2011 was also negatively impacted by increased maintenance costs primarily due to repairs and maintenance on aging equipment.

 

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Keystone – Calumet, Inc.

 

     Three months ended June 30,  
     2010     % of
sales
    2011     % of
sales
 
     ($ in thousands)  

Net sales

   $ 5,735        100.0   $ 9,515        100.0

Cost of goods sold

     (5,087     (88.7     (8,975     (94.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     648        11.3        540        5.7   

Selling and administrative expense

     (149     (2.6     (204     (2.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension/OPEB

   $ 499        8.7   $ 336        3.6
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six months ended June 30,  
     2010     % of
sales
    2011     % of
sales
 
     ($ in thousands)  

Net sales

   $ 9,986        100.0   $ 15,912        100.0

Cost of goods sold

     (8,985     (90.0     (15,084     (94.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     1,001        10.0        828        5.2   

Selling and administrative expense

     (355     (3.6     (392     (2.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before pension/OPEB

   $ 646        6.4   $ 436        2.7
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2010      2011      2010      2011  

Sales volume(000 tons) - Bar

     6         8         11         14   

Average per-ton selling prices - Bar

   $ 906       $ 1,028       $ 886       $ 1,009   

Average per-ton billet cost of goods sold

   $ 475       $ 598       $ 459       $ 555   

Calumet’s operating performance during the second quarter and first half of 2011 was also impacted by production outages due to old malfunctioning equipment as well as the installation of new equipment during the first quarter of 2011 which resulted in a higher percentage of fixed costs (fixed costs as a percentage of sales was approximately .5% higher in 2011 periods) included in cost of goods sold and higher conversion costs due to significant production delays associated with the performance of the new equipment throughout the first half of 2011. We expect most of the performance issues associated with both the old malfunctioning equipment and the new equipment will be resolved during the third quarter. We believe the new equipment will allow the mill to operate more efficiently, thereby reducing future conversion costs.

 

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Pension Credit

Primarily due to an $86 million increase in our pension plans’ assets during 2010, we currently expect to record a defined benefit pension credit of $19.0 million during 2011 as compared to the $4.7 million credit we recorded during 2010. Accordingly, during the second quarter and first six months of 2011 we recorded a defined benefit pension credit of $4.8 million and $9.5 million, respectively, as compared to the $1.2 million and $2.4 million credit recorded during the second quarter and first six months of 2010, respectively.

Income Tax Expense

A tabular reconciliation of the difference between the U.S. Federal statutory income tax rate and our effective income tax rates is included in Note 10 to our Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Historical Cash Flows

Operating Activities

During the first six months of 2011, net cash used in operations totaled $14.9 million as compared to net cash used in operations of $19.7 million during the first six months of 2010. The $4.8 million decrease in cash used for operating activities was primarily due to the net effects of:

   

higher operating income before pension and OPEB during 2011 of $2.6 million;

   

higher net cash used as a result of relative changes in our accounts receivable in 2011 of $6.4 million primarily due to increased selling prices; and

   

less net cash used as a result of relative changes in our inventory in 2011 of $10.3 million due to lower inventory levels at June 30, 2011 caused by an increase in the rate at which we are selling inventory produced (Days Sales in Inventory was 61 and 45 at June 30, 2010 and June 30, 2011, respectively).

Investing Activities

We spent $5.8 million on capital expenditures during the first half of 2011 as compared to $3.3 million of capital expenditures during the first half of 2010. The increase in capital expenditures primarily relates to upgrades of production equipment at KSW and Calumet.

Financing Activities

We increased borrowings on our revolving credit facility during the first half of 2011 by $20.6 million as compared to increasing borrowings by $26.3 million during the first half of 2010. The decreased borrowings during 2011 were primarily due to the decreased usage of cash in operations as discussed above and significantly lower principal payments during 2011 as we no longer have significant debt other than our revolving credit facility, partially offset by increased capital expenditures.

 

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Future Cash Requirements

Capital Expenditures

We currently expect capital expenditures for the remainder of 2011 to be approximately $8 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 6 to the Condensed Consolidated Financial Statements for a description of certain legal proceedings.

Pension and Other Postretirement Obligations

We currently do not expect to be required to make contributions to our defined benefit pension plans during 2011. As allowed under certain of our benefit plans, we exercised our right to create supplemental pension benefits in lieu of certain 2011 benefit payments due under one of our OPEB plans. As such, we anticipate contributing an aggregate of $1.3 million to our OPEB plans during 2011. 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 2011, 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 2010 Annual Report.

Working Capital and Borrowing Availability

 

     December 31,      June 30,  
     2010      2011  
     (In thousands)  

Working capital

     $55,095       $ 66,842   

Outstanding balance under revolving credit facility

     27,740         48,331   

Additional borrowing availability

     38,779         17,432   

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 ($5.2 million at June 30, 2011). Our revolving credit facility requires us to maintain a minimum fixed charge coverage ratio, as defined in the agreement, of 1.0 if excess availability falls below $10.0 million. Current forecasts indicate we will be able to maintain excess availability of at least $10.0 million throughout 2011. However, as of June 30, 2011, our fixed charge coverage ratio was 0.99; as such we could only borrow $7.4 million of the availability disclosed above without violating the financial covenants of the facility.

 

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

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 12 to our Condensed Consolidated Financial Statements for the projected impact of recent accounting pronouncements on our financial position and results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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:

 

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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 June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings.

Reference is made to disclosure provided under the caption “Other current litigation” in Note 6 to our Condensed Consolidated Financial Statements.

 

ITEM 1A. Risk Factors.

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

 

ITEM 6. Exhibits.

 

(a)

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

 

  31.1

Certification.

 

  31.2

Certification.

 

  32.1

Certification.

 

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

 

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SIGNATURES

 

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

Keystone Consolidated Industries, Inc.

    (Registrant)

 

Date: August 12, 2011           BY:   /s/  Bert E. Downing, Jr.
          Bert E. Downing, Jr.
         

Vice President, Chief Financial Officer,

Corporate Controller and Treasurer

 

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