Keystone Consolidated Industries (KYCN) 10-Q 2008 Q3 Quarterly report

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, 2008 Commission file number 1-39199

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 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

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 S  No £.

Number of shares of common stock outstanding on November 6, 2008: 12,101,932

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

INDEX

Part I. FINANCIAL INFORMATION	Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets –            December 31, 2007; September 30, 2008 (unaudited)	3
Condensed Consolidated Statements of Operations (unaudited) -      Three months and nine months ended September 30, 2007 and 2008	5
Condensed Consolidated Statements of Cash Flows (unaudited) –      Nine months ended September 30, 2007 and 2008	6
Condensed Consolidated Statement of Stockholders' Equity     and Comprehensive Income -  Nine months ended     September 30, 2008 (unaudited)	7
Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2. Management's Discussion and Analysis of Financial      Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
Item 4. Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	32
Item 1A.   Risk Factors	32
Item 6. Exhibits	32
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31,		September 30,
ASSETS	2007		2008
			(unaudited)
Current assets:
Accounts receivable, net	$	54,891	$	82,797
Inventories		53,551		74,187
Deferred income taxes		10,055		10,055
Prepaid expenses and other		2,465		2,978
Total current assets		120,962		170,017
Property, plant and equipment:
Land		1,272		1,236
Buildings and improvements		58,946		58,955
Machinery and equipment		315,874		314,780
Construction in progress		3,675		7,772
		379,767		382,743
Less accumulated depreciation		287,298		294,513
Net property, plant and equipment		92,469		88,230
Other assets:
Restricted investments		2,245		2,266
Pension asset		545,656		591,520
Other, net		1,691		1,868
Total other assets		549,592		595,654
Total assets	$	763,023	$	853,901

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

LIABILITIES AND STOCKHOLDERS' EQUITY	December 31,			September 30,
	2007			2008
				(unaudited)
Current liabilities:
Notes payable and current maturities of long-term debt	$	62,175		$	51,631
Accounts payable		14,078			16,697
Accrued OPEB cost		4,482			4,482
Other accrued liabilities		19,597			34,189
Total current liabilities		100,332			106,999
Noncurrent liabilities:
Long-term debt		29,402			14,687
Accrued OPEB cost		27,167			41,008
Deferred income taxes		194,728			215,956
Other accrued liabilities		6,700			6,271
Total noncurrent liabilities		257,997			277,922
Stockholders' equity:
Common stock $.01 par value; 11,000,000 shares authorized and 10,000,000 shares issued at December 31, 2007; 20,000,000 shares authorized and 12,500,000 shares issued at September 30, 2008		100			125
Additional paid-in capital		75,423			100,111
Accumulated other comprehensive income		215,462			195,531
Retained earnings		114,505			174,009
Treasury stock		(796	)		(796	)
Total stockholders' equity		404,694			468,980
Total liabilities and stockholders’ equity	$	763,023		$	853,901

Commitments and contingencies (Note 6)

See accompanying Notes to Condensed Consolidated Financial Statements.

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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,
	2007			2008			2007			2008
	(unaudited)
Net sales	$	103,358		$	183,209		$	339,121		$	495,375
Cost of goods sold		(96,923	)		(156,867	)		(319,651	)		(440,170	)
Gross margin		6,435			26,342			19,470			55,205
Other operating income (expense):
Selling expense		(1,601	)		(2,575	)		(5,032	)		(6,338	)
General and administrative expense		(3,532	)		(5,187	)		(10,253	)		(12,850	)
Defined benefit pension credit		20,379			18,467			61,136			55,401
Other postretirement benefit credit		2,201			2,006			6,602			6,542
Gain on legal settlement		-			-			5,400			-
Total other operating income		17,447			12,711			57,853			42,755
Operating income		23,882			39,053			77,323			97,960
Non operating income (expense):
Interest expense		(1,630	)		(879	)		(4,619	)		(3,124	)
Other income, net		447			435			999			835
Total non operating expense		(1,183	)		(444	)		(3,620	)		(2,289	)
Income before income taxes and reorganization items		22,699			38,609			73,703			95,671
Reorganization items:
Reorganization costs		(3	)		(129	)		(115	)		(231	)
Gain on cancellation of debt		9,031			-			9,031			-
Total reorganization items		9,028			(129	)		8,916			(231	)
Income before income taxes		31,727			38,480			82,619			95,440
Provision for income taxes		(11,921	)		(14,505	)		(31,108	)		(35,936	)
Net income	$	19,806		$	23,975		$	51,511		$	59,504
Basic and diluted income per share	$	1.98		$	1.98		$	5.15		$	5.25
Basic and diluted weighted average shares outstanding		10,000			12,102			10,000			11,336

See accompanying Notes to Condensed Consolidated Financial Statements.

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine months ended  September 30,
	2007			2008
	(unaudited)
Cash flows from operating activities:
Net income	$	51,511		$	59,504
Depreciation and amortization		11,591			11,432
Deferred income taxes		30,990			33,242
Defined benefit pension credit		(61,136	)		(55,401	)
OPEB credit		(6,602	)		(6,542	)
OPEB payments		(2,799	)		(2,024	)
Gain on cancellation of debt		(9,031	)		-
Payment to pre-petition creditors		(3,680	)		-
Other, net		808			695
Change in assets and liabilities (net of acquisition):
Accounts receivable		(14,124	)		(27,962	)
Inventories		3,727			(20,636	)
Accounts payable and accrued liabilities		(1,855	)		16,766
Other, net		(282	)		(1,013	)
Net cash provided by (used in) operating activities		(882	)		8,061
Cash flows from investing activities:
Capital expenditures		(13,204	)		(7,776	)
Acquisition of CaluMetals’ assets		(6,240	)		-
Restricted investments, net		3,809			(21	)
Other, net		781			436
Net cash used in investing activities		(14,854	)		(7,361	)
Cash flows from financing activities:
Issuance of common stock		-			24,713
Revolving credit facilities, net		28,066			(10,172	)
Other notes payable and long-term debt:
Additions		4,065			-
Principal payments		(16,173	)		(15,089	)
Deferred financing costs paid		(222	)		(152	)
Net cash provided by (used in) financing activities		15,736			(700	)
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	$	4,221		$	2,825
Income taxes, net		332			2,891
Non-cash issuance of debt for acquisition of CaluMetals’ assets		781			-

See accompanying Notes to Condensed Consolidated Financial Statements.

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

AND COMPREHENSIVE INCOME

Nine months ended September 30, 2008

(In thousands)

 

	Common		Additional paid-in		Accumulated other  comprehensive income						Retained		Treasury						Comprehensive
	stock		capital		Pensions			OPEB			earnings		stock			Total			income
	(unaudited)
Balance – December 31, 2007	$	100	$	75,423	$	164,763		$	50,699		$	114,505	$	(796	)	$	404,694
Net income		-		-		-			-			59,504		-			59,504		$	59,504
Issuance of common stock, net of issuance costs		25		24,688		-			-			-		-			24,713			-
Actuarial gain arising from interim remeasurement, net of tax		-		-		-			4,857			-		-			4,857			4,857
Plan amendment, net of tax		-		-		-			(15,205	)		-		-			(15,205	)		(15,205	)
Amortization of actuarial    (gains) losses, net of tax		-		-		(5,046	)		2,913			-		-			(2,133	)		(2,133	)
Amortization of prior service cost     (credit), net of tax		-		-		575			(8,025	)		-		-			(7,450	)		(7,450	)
Balance – September 30, 2008	$	125	$	100,111	$	160,292		$	35,239		$	174,009	$	(796	)	$	468,980
Comprehensive income																			$	39,573

See accompanying Notes to Condensed Consolidated Financial Statements.

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(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, 2007 that we filed with the Securities and Exchange Commission (“SEC”) on March 14, 2008 (the “2007 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 2007 Annual Report, we have omitted certain information and footnote disclosures from this Quarterly Report that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Our results of operations for the interim periods ended September 30, 2008 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 2007 Consolidated Financial Statements contained in the 2007 Annual Report.

At September 30, 2008, Contran Corporation owns approximately 57% 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 – Issuance of common stock:

On March 24, 2008 we issued 2.5 million shares of our common stock pursuant to a subscription rights offering to our stockholders of record as of January 28, 2008 at a price of $10.00 per share (the “Offering”).  The Offering expired on March 17, 2008, and upon closing we received $25.0 million in proceeds.  We incurred approximately $287,000 of expenses related to the Offering.  We used the net offering proceeds to reduce indebtedness under our revolving credit facility, which in turn created additional availability under that facility that can be used for general corporate purposes, including scheduled debt payments, capital expenditures, potential acquisitions or the liquidity needs of our current operations.

In connection with the Offering, in January 2008 we amended our Certificate of Incorporation to increase the number of authorized shares of our common stock from 11 million shares to 20 million shares.

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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 and manufactures and sells billets, wire rod, industrial wire, coiled rebar and fabricated wire products to agricultural, industrial, construction, commercial, original equipment manufacturers and retail consumer markets;

·   Engineered Wire Products (“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 (“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.  We acquired the assets of Calumet’s operations on March 23, 2007.

	Three months ended  September 30,						Nine months ended September 30,
	2007			2008			2007			2008
	(In thousands)
Net sales:
KSW	$	96,592		$	179,591		$	323,377		$	483,760
EWP		14,806			19,457			40,876			53,636
Calumet		1,646			4,927			2,961			13,632
Elimination of intersegment sales		(9,686	)		(20,766	)		(28,093	)		(55,653	)
Total net sales	$	103,358		$	183,209		$	339,121		$	495,375
Operating income (loss):
KSW	$	577		$	18,577		$	3,578		$	37,877
EWP		2,292			3,372			5,787			8,038
Calumet		(799	)		(874	)		(1,348	)		(1,716	)
Pension credit	��	20,379			18,467			61,136			55,401
OPEB credit		2,201			2,006			6,602			6,542
Gain on legal settlement		-			-			5,400			-
Other(1)		(768	)		(2,495	)		(3,832	)		(8,182	)
Total operating income		23,882			39,053			77,323			97,960
Non operating income (expense):
Interest expense		(1,630	)		(879	)		(4,619	)		(3,124	)
Other income (expense), net		447			435			999			835
Reorganization costs		(3	)		(129	)		(115	)		(231	)
Gain on cancellation of debt		9,031			-			9,031			-
Income before income taxes	$	31,727		$	38,480		$	82,619		$	95,440

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

During the first quarter of 2008, we reduced salaried headcount at KSW, which is expected to result in annual cost savings of $2.5 million.  We incurred severance expense of approximately $800,000 as a result of this reduction-in-force.

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Note 4 – Inventories, net:

	December 31,		September 30,
	2007		2008
	(In thousands)
Raw materials	$	6,954	$	7,139
Billets		8,158		9,743
Wire rod		12,897		22,635
Work in process		5,079		7,461
Finished products		24,855		33,183
Supplies		19,900		22,824
Inventory at FIFO		77,843		102,985
Less LIFO reserve		24,292		28,798
Total	$	53,551	$	74,187

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

Note 5 - Notes payable and long-term debt:

	December 31,		September 30,
	2007		2008
	(In thousands)
Wachovia revolving credit facility	$	46,261	$	36,089
8% Notes		17,160		9,108
UC Note		2,501		-
Term loans:
Wachovia		16,286		12,286
County		8,499		7,980
Other		870		855
Total debt		91,577		66,318
Less current maturities		62,175		51,631
Total long-term debt	$	29,402	$	14,687

Note 6 – Environmental matters and other commitments and contingencies:

We have been named as a defendant for certain 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, certain of which are on the United States Environmental Protection Agency’s (the “U.S. EPA”) Superfund National Priorities List or similar state lists.  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.

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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 liability cannot be determined until site investigation studies are completed.  At September 30, 2008 we have accrued $4.8 million for the costs of the sites that we believe are probable and reasonably estimable.  The upper end of the range of reasonably possible costs to us for sites where we have been named a defendant is approximately $6.5 million, including the current accrual.  Our estimate of such costs has 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 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 such recoveries and, other than certain previously-reported settlements with respect to certain of our former insurance carriers, we have not recognized any material insurance 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 12 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.

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, 2008 is as follows:

	Nine months ended September 30, 2008
	(In thousands)
Balance at December 31, 2007	$	5,282
Payments		(505	)
Balance at September 30, 2008	$	4,777

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We are currently involved in the closure of inactive waste management units (“WMUs”) at KSW’s Illinois facility pursuant to a Consent Order (the “Consent Order”) and an approved closure plan by the Illinois Environmental Protection Agency (the “IEPA”) in September 1992 (“the Closure Plan”).  The original Closure Plan has been modified and the IEPA has approved a risk based closure based on the Illinois Tiered Approach to Cleanup Objectives (“TACO”).  We recorded an estimated liability for remediation of the impoundments and waste piles based on a six-phase remediation plan. We adjusted the recorded liability for each phase as actual remediation costs became known.  We have completed the soil remediation required by the Closure Plan (as amended).  The final portion of the soil remediation documentation was submitted to the IEPA on July 1, 2008.  As a result, we currently anticipate the IEPA will issue us a letter stating the soil portion of all the WMUs are closed.  The groundwater closure portion of three of the WMUs remains open at this time and is anticipated to be closed after a specified period of “clean” quarterly monitoring results.

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 and beginning in January 2007, we were no longer required to make quarterly deposits into the Trust Fund.  The modified Consent Order also established a penalty fee of $75,000 to cover any prior violations with the State of Illinois.  At December 31, 2007 and September 30, 2008, the Trust Fund had a balance of $2.2 million and $2.3 million, respectively, which were included in restricted investments classified as other noncurrent assets on our Condensed Consolidated Balance Sheets.

In February 2000, we received formal notice of the U.S. EPA's 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 Illinois facility; (2) investigate hazardous constituent releases from "any other past or present locations at KSW’s 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 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”) which required us to conduct investigation and cleanup activities at certain solid waste management units at KSW’s Illinois facility.  On July 31, 2006, we submitted a Corrective Measures Completion Report (“CMCR”).  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 requesting closure of the AOC. We are awaiting a response from the U.S. EPA.

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In December 2005, we received a Notice of Violation from the U.S. EPA regarding air permit issues at KSW’s Illinois facility.  The U.S. EPA alleges we failed to perform stack testing and conduct a review of best available emission control technology in connection with the implementation of plant construction modifications made pursuant to a 2001 air construction permit issued under the Clean Air Act and the Illinois Environmental Protection Act.  During January 2006, we reached a preliminary agreement with the U.S. EPA on a plan for addressing the U.S. EPA’s concerns without referring the matter for any enforcement action.  The agreement was conditional upon meeting certain results of emissions testing.  We have submitted the results of our emissions testing and we are awaiting additional review by the U.S. EPA.

Prior to one of our subsidiaries’ 1996 acquisition of DeSoto, Inc. (“DeSoto”), DeSoto was notified by the Texas Natural Resource Conservation Commission (the "TNRCC") that there were certain deficiencies in prior reports to the TNRCC relative to one of DeSoto’s non-operating facilities located in Gainesville, Texas.  During 1999, that subsidiary entered into the TNRCC's Voluntary Cleanup Program.  Remediation costs are presently estimated to be between $.2 million and $2.0 million.  Remediation activities at this site are currently on-going and are expected to continue for another five to seven years.  During the first nine months of 2007 and 2008, we paid approximately $.1 million and $.4 million, respectively, in connection with remediation efforts at this site.

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 7 - Other accrued liabilities:

	December 31,		September 30,
	2007		2008
	(In thousands)
Current:
Employee benefits	$	10,881	$	24,518
Self insurance		3,755		5,718
Environmental		217		212
Other		4,744		3,741
Total	$	19,597	$	34,189
Noncurrent:
Environmental	$	5,065	$	4,565
Workers compensation payments		1,494		1,557
Other		141		149
Total	$	6,700	$	6,271

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Note 8 – Employee benefit plans:

During 2004, we entered into an agreement (the “1114 Agreement”) with certain retirees that replaced their medical and prescription drug coverage with fixed monthly cash payments.  The 1114 Agreement also provided for supplemental monthly cash payments to these retirees for a particular year if, in the prior year, we achieved certain levels of free cash flow, as defined in the 1114 Agreement.  On August 29, 2008, the 1114 Agreement was amended to, among other things, eliminate the ability of the retirees to receive supplemental monthly cash payments in exchange for increased fixed monthly cash payments.  As a result of the amendment to the 1114 Agreement and in accordance with GAAP, we remeasured our other postretirement benefits (“OPEB”) obligation at August 29, 2008 using a discount rate of 6.9% (we used a discount rate of 6.3% at December 31, 2007).  We recorded the increased OPEB obligation as accumulated other comprehensive income, net of tax, that will be amortized over the remaining life expectancy of the affected retirees.

The amendment also provided for a one-time, lump-sum, supplemental payment that aggregated $.4 million in settlement of a dispute regarding the free cash flow calculation for 2005, which impacted the supplemental monthly payments for 2006.  We recorded the expense associated with this settlement as a reduction of our OPEB credit for the third quarter of 2008.

Additionally, under the terms of the amended 1114 Agreement, we are now permitted, but not required, to create supplemental benefits under one of our defined benefit pension plans in lieu of us paying the benefits granted by the 1114 Agreement.  Our ability to create supplemental pension benefits in lieu of us making payments under the 1114 Agreement can be made on a year-by-year basis.  Subsequent to entering into the amended 1114 Agreement, we also amended the terms of one of our defined benefit pension plans to provide for such supplemental pension benefits in lieu of the payments that would have been due under the amended 1114 Agreement for the months of June through December of 2008.  As a result of creating this supplemental pension benefit, our accumulated OPEB benefit obligation was reduced, and our accumulated defined benefit pension obligation was increased, by approximately $2.4 million.  For financial reporting purposes, this results in a reduction in our accrued OPEB cost by $2.4 million and a reduction of our pension asset by the same amount. As a result, we now anticipate contributing only $2.5 million of cash to our OPEB plans during 2008.

A summary of the activity in our accrued OPEB cost for the nine months ended September 30, 2008 is as follows:

	Nine months ended September 30, 2008
	(In thousands)
Balance at December 31, 2007	$	31,649
Service cost		74
Interest cost		1,193
Actuarial gain arising from interim remeasurement		(7,784	)
Plan amendment		24,755
Benefits paid		(2,024	)
2008 benefits extinguished by increased pension benefits		(2,373	)
Balance at September 30, 2008	$	45,490

- 14 - -

We currently expect our 2008 OPEB credit will approximate $9.0 million. The components of our net periodic credit related to OPEB for the third quarter and first nine months of 2007 and 2008 are presented in the table below.

	Three months ended  September 30,						Nine months ended  September 30,
	2007			2008			2007			2008
	(In thousands)
Service cost	$	60		$	(31	)	$	181		$	74
Interest cost		480			267			1,440			1,193
Amortization of accumulated other comprehensive income:
Prior service credit		(4,411	)		(4,039	)		(13,233	)		(12,862	)
Actuarial losses		1,670			1,413			5,010			4,669
Settlement of 2006 1114 Agreement benefits		-			384			-			384
Total	$	(2,201	)	$	(2,006	)	$	(6,602	)	$	(6,542	)

We currently expect our 2008 defined benefit pension credit will approximate $74.0 million and due to the overfunded status of our pension plans, we anticipate that no cash contributions will be required during 2008.  The components of our net periodic defined benefit pension credit for the third quarter and first nine months of 2007 and 2008 are presented in the table below.

	Three months ended  September 30,						Nine months ended  September 30,
	2007			2008			2007			2008
	(In thousands)
Service cost	$	969		$	860		$	2,907		$	2,582
Interest cost		5,267			5,578			15,801			16,735
Expected return on plan assets		(23,013	)		(22,518	)		(69,038	)		(67,553	)
Amortization of accumulated other comprehensive income:
Prior service cost		306			308			918			922
Actuarial gains		(3,908	)		(2,695	)		(11,724	)		(8,087	)
Total	$	(20,379	)	$	(18,467	)	$	(61,136	)	$	(55,401	)

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, defined benefit expense and credits and funding requirements in future periods.  We use a December 31 measurement date for our defined benefit pension and OPEB plans.  Given the current uncertainty of the U.S. and global economy, our pension plans’ assets may be significantly lower at December 31, 2008, as compared to December 31, 2007.

- 15 - -

Note 9 – Provision for income taxes:

	Nine months ended
	September 30,
	2007		2008
	(In thousands)
Expected tax provision, at statutory rate	$	28,917	$	33,405
U.S. state income taxes, net		2,174		2,441
Other, net		17		90
Provision for income taxes	$	31,108	$	35,936

Note 10 – Recent accounting pronouncements:

Fair Value Measurements– In September 2006, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 157, Fair Value Measurements, which became effective for us on January 1, 2008.  SFAS No. 157 generally provides a consistent, single fair value definition and measurement techniques for GAAP pronouncements.  SFAS No. 157 also establishes a fair value hierarchy for different measurement techniques based on the objective nature of the inputs in various valuation methods.  In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157, which delays the provisions of SFAS No. 157 until January 1, 2009 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  Beginning with our first quarter 2008 filing, all of our fair value measurements are in compliance with SFAS No. 157, except for such non-financial assets and liabilities for which we will be required to be in compliance with SFAS No. 157 prospectively beginning in the first quarter of 2009.  The adoption of this standard did not have a material effect on our Consolidated Financial Statements.

Fair Value Option - In the first quarter of 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  SFAS No. 159 permits companies to choose, at specified election dates, to measure eligible items at fair value, with unrealized gains and losses included in the determination of net income.  The decision to elect the fair value option is generally applied on an instrument-by-instrument basis, is irrevocable unless a new election date occurs, and is applied to the entire instrument and not only to specified risks or cash flows or a portion of the instrument.  Items eligible for the fair value option include recognized financial assets and liabilities, other than an investment in a consolidated subsidiary, defined benefit pension plans, OPEB plans, leases and financial instruments classified in equity.  An investment accounted for by the equity method is an eligible item.  The specified election dates include the date the company first recognizes the eligible item, the date the company enters into an eligible commitment, the date an investment first becomes eligible to be accounted for by the equity method and the date SFAS No. 159 first becomes effective for the company.  SFAS No. 159 became effective for us on January 1, 2008.  We did not elect to measure any eligible items at fair value in accordance with this new standard either at the date we adopted the new standard or subsequently during the first nine months of 2008; therefore the adoption of this standard did not have a material effect on our Consolidated Financial Statements.

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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),

·   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,

·   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 and transportation interruptions),

·   Our ability to renew or refinance credit facilities,

·   Any possible future litigation, and

·   Other risks and uncertainties as discussed in this Quarterly Report and the 2007 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.

- 17 - -

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 fabricated wire products, wire mesh, coiled rebar, industrial wire and steel bar from billets and wire rod 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 quarter of 2008, we reduced salaried headcount at our largest manufacturing facility, which is expected to result in annual cost savings of $2.5 million.  We incurred severance expense of approximately $800,000 as a result of this reduction-in-force.

On March 24, 2008 we received $25.0 million from the issuance of 2.5 million shares of our common stock pursuant to a subscription rights offering.  We incurred approximately $287,000 of expenses related to the issuance.  See Note 2 to our Condensed Consolidated Financial Statements.  We used the net offering proceeds to reduce indebtedness under our revolving credit facility, which in turn created additional availability under that facility that can be used for general corporate purposes, including scheduled debt payments, capital expenditures, potential acquisitions or the liquidity needs of our current operations.

In April 2008, we paid the entire outstanding balance of our UC Note of $2.1 million, although $718,000 was not due until 2009.

During the third quarter of 2008, the 1114 Agreement (the agreement with certain retirees that replaced their medical and prescription drug coverage with fixed monthly cash payments) was amended to, among other things, increase fixed monthly benefits, which resulted in a significant increase in our other postretirement benefit (“OPEB”) obligation.  Also under the terms of the amendment, we are now permitted, but not required, to create supplemental pension benefits under one of our defined benefit pension plans in lieu of us paying the benefits granted by the 1114 agreement.  Our ability to create supplemental pension benefits in lieu of us making payments under the 1114 Agreement can be made on a year-by-year basis.  Subsequent to entering into the amended 1114 Agreement, we also amended the terms of one of our defined benefit pension plans to provide for such supplemental pension benefits in lieu of the payments that would have been due under the amended 1114 Agreement for the months of June through December of 2008.  As a result, one of our pension plans will fund approximately $2.4 million of our 2008 OPEB obligation.  See Note 8 to our Condensed Consolidated Financial Statements.

As previously reported, our plan of reorganization went effective on August 31, 2005.  Before our bankruptcy could be completely closed, all claims had to be dismissed, settled or fully adjudicated, and the final dismissal, settlement or adjudication of all claims did not occur until the third quarter of 2007.  However, at that time, the amendment to the 1114 Agreement was in negotiation. Upon finalization of the amendment to the 1114 Agreement, we sought final closure of our bankruptcy case and on September 11, 2008, the United States Bankruptcy Court for the Eastern District of Wisconsin issued our final decree.

- 18 - -

We experienced an unprecedented 90% increase in the cost of ferrous scrap, our primary raw material, from December 2007 to August 2008 as well as significant increases in utility costs.  We were able to recover these higher costs through increases in our product selling prices.  Ferrous scrap costs declined from August to September 2008, and we anticipate significant decreases in ferrous scrap costs and more intense foreign competition on sales price for the remainder of 2008.  This could result in lower selling prices for the majority of our products.  Customer orders are beginning to decrease as customers anticipate future price reductions.  However, we currently believe we will be able to maintain sufficient overall margins on our products throughout the remainder of 2008.

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.

	Three months ended  September 30,						Nine months ended  September 30,
	2007			2008			2007			2008
	(In thousands)
Operating income as reported	$	23,882		$	39,053		$	77,323		$	97,960
Defined benefit pension credit		(20,379	)		(18,467	)		(61,136	)		(55,401	)
OPEB credit		(2,201	)		(2,006	)		(6,602	)		(6,542	)
Operating income before pension and OPEB	$	1,302		$	18,580		$	9,585		$	36,017

Operating income before pension and OPEB for the third quarter and first nine months of 2008 was significantly higher than the same periods of 2007 primarily due to the net effects of the following factors:

·   higher per-ton product selling prices resulting from price increases we implemented to offset our increased costs for ferrous scrap, as well as increased demand for domestic wire rod and industrial wire as discussed below;

·   higher shipment volumes primarily due to lower quantities of import product available for sale and higher prices for import products as well as the weak U.S. dollar;

·   decreased costs for zinc during 2008;

·   cost savings resulting from a reduction-in-force during the first quarter of 2008;

·   increased costs for ferrous scrap and energy during 2008;

·   higher costs in 2008 for certain excise taxes as a result of the expiration of certain exemptions for which we previously qualified;

·   increased employee incentive compensation accruals as a result of increased profitability;

·   increased costs for workers compensation and personal injury claims under our general liability insurance in 2008; and

·   a legal settlement with a former insurance carrier of $5.4 million recorded during the second quarter of 2007.

- 19 - -

Our consolidated sales volume and average per-ton selling prices for the third quarter and first nine months of 2007 and 2008 are as follows:

	Three months ended  September 30,				Nine months ended  September 30,
	2007		2008		2007		2008
Sales volume (000 tons):
Fabricated wire products		20		20		85		76
Wire mesh		16		14		45		47
Industrial wire		14		17		52		53
Coiled rebar		3		7		11		14
Bar		3		4		4		14
Wire rod		91		95		282		310
Billets		-		8		1		9
Total		147		165		480		523
Average per-ton selling prices:
Fabricated wire products	$	1,109	$	1,578	$	1,082	$	1,356
Wire mesh		912		1,348		901		1,151
Industrial wire		785		1,302		758		1,083
Coiled rebar		584		921		561		844
Bar		621		1,147		664		933
Wire rod		555		965		546		795
Billets		-		852		132		793
All products		695		1,106		699		943

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, industrial wire, coiled rebar and fabricated wire products to agricultural, industrial, construction, commercial, original equipment manufacturers and retail consumer markets;

·   Engineered Wire Products (“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.

- 20 - -

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

	KSW			EWP			Calumet			Other(1)			Total
	(In thousands)
Three months ended September 30, 2007:
Net sales	$	96,592		$	14,806		$	1,646		$	(9,686	)	$	103,358
Cost of goods sold		(92,560	)		(11,551	)		(2,330	)		9,518			(96,923	)
Gross margin (loss)		4,032			3,255			(684	)		(168	)		6,435
Selling and administrative expense		(3,455	)		(963	)		(115	)		(600	)		(5,133	)
Operating income (loss) before pension/OPEB	$	577		$	2,292		$	(799	)	$	(768	)	$	1,302
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		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

Nine months ended September 30, 2007:
Net sales	$	323,377		$	40,876		$	2,961		$	(28,093	)	$	339,121
Cost of goods sold		(309,093	)		(32,319	)		(4,007	)		25,768			(319,651	)
Gross margin (loss)		14,284			8,557			(1,046	)		(2,325	)		19,470
Selling and administrative expense		(10,706	)		(2,770	)		(302	)		(1,507	)		(15,285	)
Gain on legal settlement		-			-			-			5,400			5,400
Operating income (loss) before pension/OPEB	$	3,578		$	5,787		$	(1,348	)	$	1,568		$	9,585
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

(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.

- 21 - -

Keystone Steel & Wire

	Three months ended September 30,
	2007			% of sales			2008			% of sales
	($ in thousands)
Net sales	$	96,592			100.0	%	$	179,591			100.0	%
Cost of goods sold		(92,560	)		(95.8	)		(155,877	)		(86.8	)
Gross margin		4,032			4.2			23,714			13.2
Selling and administrative expense		(3,455	)		(3.6	)		(5,137	)		(2.9	)
Operating income before pension and OPEB	$	577			0.6	%	$	18,577			10.3	%

	Nine months ended September 30,
	2007			% of sales			2008			% of sales
	($ in thousands)
Net sales	$	323,377			100.0	%	$	483,760			100.0	%
Cost of goods sold		(309,093	)		(95.6	)		(433,400	)		(89.6	)
Gross margin		14,284			4.4			50,360			10.4
Selling and administrative expense		(10,706	)		(3.3	)		(12,483	)		(2.6	)
Operating income before pension and OPEB	$	3,578			1.1	%	$	37,877			7.8	%

- 22 - -

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

	Three months ended  September 30,				Nine months ended  September 30,
	2007		2008		2007		2008
Sales volume (000 tons):
Fabricated wire products		20		20		85		76
Industrial wire		14		17		52		53
Coiled rebar		3		7		11		14
Wire rod		106		112		327		366
Billets		3		14		10		28
Total sales		146		170		485		537
Average per-ton selling prices:
Fabricated wire products	$	1,109	$	1,578	$	1,082	$	1,356
Industrial wire		785		1,302		758		1,083
Coiled rebar		584		921		561		844
Wire rod		551		963		542		796
Billets		430		778		452		674
All products		649		1,053		658		898
Average per-ton ferrous scrap purchase cost	$	233	$	450	$	237	$	385
Average electricity cost per kilowatt hour(1)	$	0.04	$	0.06	$	0.05	$	0.06
Average natural gas cost per therm(1)	$	0.76	$	1.04	$	0.77	$	1.00

(1) Generally, we use 45 million kilowatt hours of electricity and 2 million therms of natural gas per month.

Total sales volume for the third quarter and first nine months of 2008 was higher than the same periods of 2007 primarily due to the net effects of the following factors:

·   higher shipment volumes of industrial wire due to increased domestic demand as a result of higher prices for import products as well as the weak U.S. dollar;

·   higher shipment volumes of coiled rebar due to acceptance of our product in the market with a larger number of customers than in 2007;

·   higher shipment volumes of wire rod due to lower quantities of import product available for sale and higher prices for import products as well as the weak U.S. dollar;

·   higher shipment volumes of billets primarily due to increased demand from Calumet and a non-recurring 5,000 ton sale to a new customer during the third quarter of 2008; and

·   lower shipment volumes of fabricated wire products year-to-date as a result of customer resistance to our price increases.

The higher overall average per-ton selling prices during the third quarter and first nine months of 2008 as compared to the same periods of 2007 were primarily due to increased costs for ferrous scrap as well as increased market demand for domestic wire rod and industrial wire.

- 23 - -

KSW’s operating income before pension and OPEB for the third quarter and first nine months of 2008 as compared to the same periods of 2007 was also impacted by:

·   decreased costs for zinc of 39% and 34% during the third quarter and first nine months of 2008, respectively;

·   cost savings of approximately $500,000 and $350,000 during the third quarter and first nine months of 2008, respectively, resulting from KSW’s reduction-in-force during the first quarter of 2008 (cost savings during the first nine months of 2008 were partially offset by the related $800,000 severance expense);

·   higher costs in 2008 for certain excise taxes as a result of the expiration of certain exemptions for which we previously qualified;

·   increased employee incentive compensation accruals as a result of increased profitability; and

·   increased costs for workers compensation and personal injury claims under our general liability insurance in 2008.

Engineered Wire Products

	Three months ended September 30,
	2007			% of sales			2008			% of sales
	($ in thousands)
Net sales	$	14,806			100.0	%	$	19,457			100.0	%
Cost of goods sold		(11,551	)		(78.0	)		(14,902	)		(76.6	)
Gross margin		3,255			22.0			4,555			23.4
Selling and administrative expense		(963	)		(6.5	)		(1,183	)		(6.1	)
Operating income before pension and OPEB	$	2,292			15.5	%	$	3,372			17.3	%

	Nine months ended September 30,
	2007			% of sales			2008			% of sales
	($ in thousands)
Net sales	$	40,876			100.0	%	$	53,636			100.0	%
Cost of goods sold		(32,319	)		(79.1	)		(42,433	)		(79.1	)
Gross margin		8,557			20.9			11,203			20.9
Selling and administrative expense		(2,770	)		(6.7	)		(3,165	)		(5.9	)
Operating income before pension and OPEB	$	5,787			14.2	%	$	8,038			15.0	%

- 24 - -

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

	Three months ended  September 30,				Nine months ended  September 30,
	2007		2008		2007		2008
Sales volume (000 tons) –  Wire mesh		16		14		45		47
Average per-ton selling prices –  Wire mesh	$	912	$	1,348	$	901	$	1,151
Average per-ton wire rod purchase cost	$	560	$	980	$	543	$	830

The higher shipment volumes of wire mesh during the first nine months of 2008 as well as the lower shipment volumes of wire mesh during the third quarter of 2008 were primarily due to customers purchasing more product during the first half of 2008 in advance of anticipated future price increases.

The higher average per-ton selling prices for the third quarter and first nine months of 2008 as compared to the same periods of 2007 were primarily due to higher cost for wire rod, as EWP’s selling prices are influenced in part by the cost of wire rod.  EWP sources substantially all of its wire rod requirements from KSW at prices that we believe approximate open market prices.

Operating income before pension and OPEB for the third quarter and first nine months of 2008 as compared to the same periods of 2007 was also impacted by increased employee incentive compensation accruals as a result of increased profitability.

- 25 - -

Calumet

	Three months ended September 30,
	2007			% of sales			2008			% of sales
	($ in thousands)
Net sales	$	1,646			100.0	%	$	4,927			100.0	%
Cost of goods sold		(2,330	)		(141.5	)		(5,363	)		(108.8	)
Gross margin (loss)		(684	)		(41.5	)		(436	)		(8.8	)
Selling and administrative expense		(115	)		(7.0	)		(438	)		(8.9	)
Operating loss before pension/OPEB	$	(799	)		(48.5	)%	$	(874	)		(17.7	)%

	Nine months ended September 30,
	2007			% of sales			2008			% of sales
	($ in thousands)
Net sales	$	2,961			100.0	%	$	13,632			100.0	%
Cost of goods sold		(4,007	)		(135.3	)		(14,477	)		(106.2	)
Gross margin (loss)		(1,046	)		(35.3	)		(845	)		(6.2	)
Selling and administrative expense		(302	)		(10.2	)		(871	)		(6.4	)
Operating loss before pension/OPEB	$	(1,348	)		(45.5	)%	$	(1,716	)		(12.6	)%

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

	Three months ended  September 30,				Nine months ended  September 30,
	2007		2008		2007		2008
Sales volume (000 tons) -  Bar		3		4		4		14
Average per-ton selling prices - Bar	$	621	$	1,147	$	664	$	933
Average per-ton billet purchase cost	$	399	$	521	$	439	$	544

We continue to re-establish Calumet’s mill as a reliable supplier of bar products to the markets it serves.  Prior to our acquisition, CaluMetals, Inc. had difficulty meeting customer deadlines due to various production issues including the lack of a steady supply of billets, the operation’s primary raw material.  Calumet now sources substantially all of its billet requirements from KSW at prices that we believe approximate open market prices.  KSW has sufficient capacity to supply Calumet’s billet needs and we have established an inventory of bar products to facilitate expedient deliveries to our customers.  Throughout 2008 shipment volumes have been higher than 2007 as Calumet regained some of its former market share and obtained recurring monthly orders.  We believe we will continue to regain customer confidence which should, in turn, lead to increased sales and profitability for this segment.

Shipment volumes during the third quarter of 2008 were impacted by a planned plant shutdown in August for modifications to Calumet’s reheat furnace and delays in customer orders in September as customers anticipate price reductions during the fourth quarter of 2008.

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The higher average per-ton selling prices for the third quarter and first nine months of 2008 as compared to the same periods of 2007 were due primarily to higher cost for billets, as Calumet’s selling prices are influenced in part by the cost of billets.

The higher selling and administrative expenses during the 2008 periods as compared to the 2007 periods were primarily due to increased employee incentive compensation accruals, severance expense recorded during the second quarter of 2008 and relocation expenses recorded during the third quarter of 2008.

Pension and Other Postretirement Benefit Credits

During the third quarter and first nine months of 2008, we recorded a defined benefit pension credit of $18.5 million and $55.4 million, respectively, as compared to recording a defined benefit pension credit in the same periods during 2007 of $20.4 million and $61.1 million, respectively.  The decrease in the pension credit in 2008 was primarily the result of the expected rate of return on plan assets, as our plans’ assets decreased by $19.5 million during 2007.  We currently expect our 2008 pension credit will approximate $74.0 million as compared to the 2007 credit of $80.4 million.

During the third quarter and first nine months of 2008, we recorded an OPEB credit of $2.0 million and $6.5 million, respectively, as compared to recording an OPEB credit in the same periods during 2007 of $2.2 million and $6.6 million, respectively.  As a result of the remeasurement discussed in Note 8 to our Condensed Consolidated Financial Statements, we currently expect our 2008 OPEB credit will approximate $9.0 million as compared to the 2007 credit of $8.5 million.

Interest Expense

Interest expense during the third quarter and first nine months of 2008 of $.9 million and $3.1 million, respectively, declined from the same periods in 2007 of $1.6 million and $4.6 million, respectively.  The primary drivers of interest expense are as follows:

	Three months ended  September 30,						Nine months ended  September 30,
	2007			2008			2007			2008
	($ in thousands)
Average debt balance	$	98,405		$	66,928		$	98,601		$	77,146
Weighted average interest rates		6.9	%		4.6	%		6.2	%		5.0	%

The decreases in the overall weighted average interest rates during the 2008 periods were primarily due to significant decreases in both the prime rate and our primary credit facility balances.  Interest rates on our primary credit facility generally range from the prime rate to the prime rate plus ..5%.

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LIQUIDITY AND CAPITAL RESOURCES

Working Capital and Borrowing Availability

	December 31,		September 30,
	2007		2008
	(In thousands)
Working capital	$	20,630	$	63,018
Outstanding balance under revolving credit facility		46,261		36,089
Additional borrowing availability		22,836		42,309

On March 24, 2008 we received $25.0 million from the issuance of 2.5 million shares of our common stock pursuant to a subscription rights offering.  We incurred approximately $.3 million of expenses related to the issuance.  We used the net proceeds to reduce indebtedness under our revolving credit facility, which in turn created additional availability under that facility.  The amount of available borrowings under our revolving credit facility is based on formula-determined amounts of trade receivables and inventories, less the amount of outstanding letters of credit ($5.5 million at September 30, 2008).  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.  Accordingly, any outstanding balances under this facility are always classified as a current liability regardless of the maturity date of the facility.

Our primary credit facility requires compliance with certain financial covenants related to performance measures.  We were in compliance with all such financial covenants at September 30, 2008.

Historical Cash Flows

Operating Activities

During the first nine months of 2008, net cash provided by operations totaled $8.1 million as compared to net cash used in operations of $882,000 during the first nine months of 2007.  The $8.9 million improvement in operating cash flows was due primarily to the net effects of:

·   higher operating income before pension/OPEB in 2008 of $26.4 million;

·   higher net cash used due to relative changes in our accounts receivable in 2008 of $13.8 million primarily due to significant increases in our selling prices;

·   higher net cash used due to relative changes in our inventory in 2008 of $24.4 million primarily due to increased costs of ferrous scrap and energy as well as higher levels of inventory at EWP as customers delayed orders in anticipation of future price reductions;

·   higher net cash provided from relative changes in our accounts payable and accrued liabilities of $18.6 million in 2008 due in part to higher accruals for employee incentive compensation and workers compensation in 2008; and

·   final payment of $3.7 million in 2007 to certain of our pre-petition creditors from our 2004 bankruptcy.

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Investing Activities

During the first nine months of 2007 and 2008, we had capital expenditures of approximately $13.2 million and $7.8 million, respectively.  The decrease in capital expenditures in 2008 was primarily related to the plant expansion at EWP that was completed during the first two quarters of 2007.  We expect capital expenditures for 2008 to be approximately $12 million, primarily related to upgrades of our production equipment at KSW.  We expect to fund capital expenditures using cash flows from operations and borrowing availability under our existing credit facilities.

In connection with the final payment to certain of our pre-petition creditors in 2007, $4.0 million of restricted funds were released to us.

Financing Activities

On March 24, 2008 we received $25.0 million from the issuance of 2.5 million shares of our common stock pursuant to a subscription rights offering.  We incurred approximately $.3 million of expenses related to the issuance.  See Note 2 to our Condensed Consolidated Financial Statements.

Increased profitability and the subscription rights offering proceeds reduced our indebtedness under our revolving credit facility during the first nine months of 2008 as compared to increased borrowings on our revolving credit facility during the first nine months of 2007 as a result of seasonal working capital needs, the acquisition of CaluMetals’ assets, payments on the EWP expansion project and principal payments on our various credit facilities.

During the first nine months of 2008, we made principal payments of:

·   $8.1 million on our 8% Notes,

·   $4.0 million on our Wachovia Term Loans,

·   $2.5 million on our UC Note, and

·   $519,000 on our County Term Loan.

Commitments and Contingencies

There have been no material changes in our contractual obligations since we filed our 2007 Annual Report, and we refer you to the report for a complete description of these commitments.

Pension and Other Postretirement Obligations

We were not required to make any cash contributions to our defined benefit pension plans during 2007 and we do not expect to be required to make contributions to our defined benefit pension plans during 2008.  However, we contributed an aggregate of approximately $1.6 million to our OPEB plans during the months of January through May 2008.  As a result of the amendments to both our OPEB plans and one of our pension plans discussed in Note 8 to our Condensed Consolidated Financial Statements, we anticipate contributing an aggregate of only $.9 million to our OPEB plans during the months of June through December 2008, including $.5 million contributed during June through September.

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Income Taxes

Due to our increased profitability, we paid significantly higher cash income taxes during the first nine months of 2008 as compared to the first nine months of 2007 and we expect to pay significantly higher cash income taxes for the remainder of 2008.

Off-balance Sheet Financing Arrangements

We do not have any off-balance sheet financing agreements other than the operating leases discussed in our 2007 Annual Report.

Liquidity Outlook

We have required principal payments of $17.5 million on our various credit facilities during the remainder of 2008 and throughout 2009.  These principal payments are expected to be funded with cash from operations and borrowing availability under our existing credit facilities.  We anticipate significant decreases in ferrous scrap costs and more intense foreign competition on sales price for the remainder of 2008, which will likely result in lower market selling prices for our products.  We currently believe we will be able to maintain sufficient margins on our products throughout the remainder of 2008.  If we are unable to do so, our borrowing availability may be depleted, which consequently could limit our ability to withstand further downturns in our business.

During the first quarter of 2008, we reduced salaried headcount at KSW, which is expected to result in annual cost savings of $2.5 million.  We will continue to analyze the profitability of our operations and make operating decisions accordingly.

As a result of an amendment to the 1114 Agreement during the third quarter of 2008, we are now permitted, but not required, to create supplemental pension benefits to pay the 1114 Agreement obligations that we would otherwise have to contribute to our unfunded OPEB plans.  The ability to create supplemental pension benefits in lieu of us having to make the 1114 benefit payments otherwise payable can be made on a year-by-year basis.  We amended one of our pension plans to provide for such supplemental pension benefits from June to December of 2008, which will result in one of our pension plans funding approximately $2.4 million of our 2008 OPEB obligation.

We have in the past, and may in the future, seek to raise additional capital, incur additional debt, refinance or restructure existing indebtedness and repurchase existing indebtedness in the market or otherwise.  Overall, we believe our cash flows from operating activities combined with availability under our existing credit facilities will be sufficient to enable us to meet our cash flow needs for the next twelve months.

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 2007 Annual Report.  There have been no changes in our critical accounting policies during the first nine months of 2008.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Reference is made to the 2007 Annual Report for a discussion of the market risks associated with changes in interest rates that affect us.  There have been no material changes in such market risks during the first nine months of 2008.

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 that information required to be disclosed in the reports we file or submit to the SEC under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure.  Each of David L. Cheek, our President and Chief Executive Officer, and Bert E. Downing, Jr., our Vice President, Chief Financial Officer, Corporate Controller and Treasurer, have evaluated the design and operating effectiveness of our disclosure controls and procedures as of September 30, 2008.  Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures were effective as of September 30, 2008.

Internal Control Over Financial Reporting

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

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

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

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

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Changes in Internal Control Over Financial Reporting

There has been no change to our internal control over financial reporting during the quarter ended September 30, 2008 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 2007 Annual Report for a discussion of risk factors related to our businesses.  There have been no material changes in such risk factors during the first nine months of 2008.

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.

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SIGNATURES

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

Keystone Consolidated Industries, Inc.

(Registrant)

Date:  November 6, 2008   By/s/ Bert E. Downing, Jr. Bert E. Downing, Jr. Vice President, Chief Financial Officer, Corporate Controller and Treasurer

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