Keystone Consolidated Industries (KYCN) 10-Q 2010 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, 2010 Commission file number 1-3919

Keystone Consolidated Industries, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	37-0364250
(State or other jurisdiction of Incorporation or organization)	(IRS Employer Identification No.)

5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, Texas	75240-2697
(Address of principal executive offices)	(Zip Code)

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

Indicate by check mark:

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

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

* The registrant has not yet been phased into the interactive data requirements.

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

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

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

Number of shares of common stock outstanding on November 3, 2010: 12,101,932

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

INDEX

INDEX

Part I.	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – December 31, 2009; September 30, 2010 (unaudited)	3
	Condensed Consolidated Statements of Operations (unaudited) - Three months and nine months ended September 30, 2009 and 2010	5
	Condensed Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 30, 2009 and 2010	6
	Condensed Consolidated Statement of Stockholders' Equity           and Comprehensive Income (unaudited) -   Nine months ended September 30, 2010	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	28
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 6.	Exhibits	30
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

- 2 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31,		September 30,
ASSETS	2009		2010
			(unaudited)
Current assets:
Accounts receivable, net	$	41,231	$	52,584
Inventories		41,225		67,657
Deferred income taxes		4,434		4,434
Income taxes receivable		4,206		765
Prepaid expenses and other		2,626		2,884
Total current assets		93,722		128,324
Property, plant and equipment:
Land		1,468		1,468
Buildings and improvements		61,207		62,224
Machinery and equipment		328,497		330,665
Construction in progress		2,583		4,852
		393,755		399,209
Less accumulated depreciation		308,586		316,682
Net property, plant and equipment		85,169		82,527
Other assets:
Pension asset		84,806		100,354
Other, net		1,387		1,551
Total other assets		86,193		101,905
Total assets	$	265,084	$	312,756

- 3 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

LIABILITIES AND STOCKHOLDERS' EQUITY	December 31,			September 30,
	2009			2010
				(unaudited)
Current liabilities:
Notes payable and current maturities of long-term debt	$	19,396		$	36,270
Accounts payable		5,577			8,426
Accrued OPEB cost		1,357			1,357
Other accrued liabilities		18,329			22,573
Total current liabilities		44,659			68,626
Noncurrent liabilities:
Long-term debt		5,974			5,356
Accrued OPEB cost		44,244			45,180
Deferred income taxes		19,569			26,910
Other accrued liabilities		2,868			1,782
Total noncurrent liabilities		72,655			79,228
Stockholders' equity:
Common stock		125			125
Additional paid-in capital		100,111			100,111
Accumulated other comprehensive loss		(132,530	)		(128,841	)
Retained earnings		180,860			194,303
Treasury stock		(796	)		(796	)
Total stockholders' equity		147,770			164,902
Total liabilities and stockholders’ equity	$	265,084		$	312,756

Commitments and contingencies (Note 5)

See accompanying Notes to Condensed Consolidated Financial Statements.

- 4 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three months ended  September 30,						Nine months ended  September 30,
	2009			2010			2009			2010
	(unaudited)
Net sales	$	100,363		$	113,608		$	231,349		$	348,321
Cost of goods sold		(85,452	)		(108,100	)		(212,998	)		(317,584	)
Gross margin		14,911			5,508			18,351			30,737
Other operating income (expense):
Selling expense		(1,498	)		(1,448	)		(4,776	)		(4,949	)
General and administrative expense		(3,678	)		(2,434	)		(7,539	)		(10,315	)
Defined benefit pension credit (expense)		(1,515	)		1,211			(4,543	)		3,632
Other postretirement benefit credit		1,042			1,342			3,562			4,029
Total other operating expense		(5,649	)		(1,329	)		(13,296	)		(7,603	)
Operating income		9,262			4,179			5,055			23,134
Nonoperating income (expense):
Interest expense		(474	)		(502	)		(1,214	)		(1,567	)
Other income, net		42			125			144			272
Total nonoperating expense		(432	)		(377	)		(1,070	)		(1,295	)
Income before income taxes		8,830			3,802			3,985			21,839
Income tax expense		(2,962	)		(1,483	)		(1,491	)		(8,396	)
Net income	$	5,868		$	2,319		$	2,494		$	13,443
Basic and diluted income per share	$	0.48		$	0.19		$	0.21		$	1.11
Basic and diluted weighted average shares outstanding		12,102			12,102			12,102			12,102

See accompanying Notes to Condensed Consolidated Financial Statements.

- 5 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine months ended   September 30,
	2009			2010
	(unaudited)
Cash flows from operating activities:
Net income	$	2,494		$	13,443
Depreciation and amortization		10,399			9,119
Deferred income taxes		3,794			5,058
Defined benefit pension expense (credit)		4,543			(3,632	)
OPEB credit		(3,562	)		(4,029	)
OPEB payments		(1,005	)		(978	)
Bad debt expense		3,258			52
Inventory impairment		2,702			172
Other, net		346			(142	)
Change in assets and liabilities:
Accounts receivable		(27,327	)		(11,356	)
Inventories		10,088			(26,343	)
Accounts payable		3,540			2,849
Accrued environmental costs		(4,285	)		(113	)
Accrued liabilities		(11,639	)		3,271
Income taxes		(3,168	)		3,441
Other, net		(108	)		(258	)
Net cash used in operating activities		(9,930	)		(9,446	)
Cash flows from investing activities:
Capital expenditures		(6,799	)		(6,512	)
Restricted investments, net		2,027			(2	)
Other, net		72			108
Net cash used in investing activities		(4,700	)		(6,406	)
Cash flows from financing activities:
Revolving credit facility, net		28,323			22,448
Principal payments on other notes payable and long-term debt		(13,670	)		(6,225	)
Deferred financing costs paid		(23	)		(371	)
Net cash provided by financing activities		14,630			15,852
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	$	903		$	1,224
Income taxes paid (refunded), net		865			(103	)

See accompanying Notes to Condensed Consolidated Financial Statements.

- 6 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

AND COMPREHENSIVE INCOME

Nine months ended September 30, 2010

(In thousands)

	Common		Additional paid-in		Accumulated other comprehensive income (loss)						Retained		Treasury						Comprehensive
	stock		capital		Pensions			OPEB			earnings		stock			Total			income (loss)
	(unaudited)
Balance – December 31, 2009	$	125	$	100,111	$	(158,401	)	$	25,871		$	180,860	$	(796	)	$	147,770
Net income		-		-		-			-			13,443		-			13,443		$	13,443
Amortization of prior service cost     (credit)		-		-		560			(7,351	)		-		-			(6,791	)		(6,791	)
Amortization of actuarial losses		-		-		6,801			3,679			-		-			10,480			10,480
Balance – September 30, 2010	$	125	$	100,111	$	(151,040	)	$	22,199		$	194,303	$	(796	)	$	164,902
Comprehensive income																			$	17,132

See accompanying Notes to Condensed Consolidated Financial Statements.

- 7 -

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(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, 2009 that we filed with the Securities and Exchange Commission (“SEC”) on March 11, 2010 (the “2009 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 clas sifications.  As compared to the 2009 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, 2010 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 2009 Consolidated Financial Statements contained in the 2009 Annual Report.

At September 30, 2010, Contran Corporation (“Contran”) owned approximately 62% of our outstanding common stock.  Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons (for which Mr. Simmons is the sole trustee) or is held directly by Mr. Simmons or other persons or companies related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control Contran and us.

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

Note 2 – Business segment information:

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

·   Keystone Steel & Wire (“KSW”), located in Peoria, Illinois, operates an electric arc furnace mini-mill and manufactures and sells 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 in concrete construction products including pipe, pre-cast boxes and applications for use in roadways, buildings and bridges; and

- 8 -

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

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

	Three months ended  September 30,						Nine months ended  September 30,
	2009			2010			2009			2010
	(In thousands)
Net sales:
KSW	$	92,746		$	104,664		$	213,829		$	338,046
EWP		12,782			12,085			31,506			32,452
Calumet		2,841			6,329			7,197			16,315
Elimination of intersegment sales		(8,006	)		(9,470	)		(21,183	)		(38,492	)
Total net sales	$	100,363		$	113,608		$	231,349		$	348,321
Operating income (loss):
KSW	$	8,629		$	2,654		$	7,944		$	18,172
EWP		887			(412	)		801			98
Calumet		(187	)		(196	)		(3,378	)		450
Pension credit (expense)		(1,515	)		1,211			(4,543	)		3,632
OPEB credit		1,042			1,342			3,562			4,029
Other(1)		406			(420	)		669			(3,247	)
Total operating income		9,262			4,179			5,055			23,134
Nonoperating income (expense):
Interest expense		(474	)		(502	)		(1,214	)		(1,567	)
Other income, net		42			125			144			272
Income before income taxes	$	8,830		$	3,802		$	3,985		$	21,839

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

During the third quarter and first nine months of 2009, Calumet determined it was probable it would not recover the cost of certain inventory items in future selling prices and recognized impairment charges of $357,000 and $2.7 million, respectively, to reduce these inventory items to their estimated net realizable values.  During 2010, most of Calumet’s product lines were profitable, resulting in only nominal impairment charges in 2010.  These impairment charges are included in Calumet’s cost of goods sold.

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 2009 and 2010 periods are presented in the table below.

- 9 -

	Increase (decrease) in LIFO reserve
	Three months ended  September 30,					Nine months ended  September 30,
	2009			2010		2009			2010
	(In thousands)
KSW	$	(2,318	)	$	1,910	$	(9,055	)	$	1,888
EWP		(1,217	)		313		(4,434	)		470
Total	$	(3,535	)	$	2,223	$	(13,489	)	$	2,358

During the third quarter of 2010, 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.  During the third quarter and first nine months of 2009, we significantly decreased KSW’s and EWP’s LIFO inventory reserve balances primarily because estimated raw material costs and inventory levels for December 2009 were substantially lower than actual December 2008 raw material costs and inventory levels.

During the third quarter and first nine months of 2009, KSW recorded bad debt expense of $728,000 and $3.2 million, respectively, primarily due to a Chapter 11 filing by one of its customers.  Bad debt expense is included in general and administrative expense.

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

Note 3 – Inventories, net:

	December 31,		September 30,
	2009		2010
	(In thousands)
Raw materials	$	3,222	$	4,449
Billet		4,917		8,400
Wire rod		5,282		19,427
Work in process		4,645		6,566
Finished product		19,747		25,096
Supplies		22,646		25,311
Inventory at FIFO		60,459		89,249
Less LIFO reserve		19,234		21,592
Total	$	41,225	$	67,657

We believe our LIFO reserve represents the excess of replacement or current cost over the stated LIFO value of our inventories.  See also Note 2.

- 10 -

Note 4 - Notes payable and long-term debt:

	December 31,		September 30,
	2009		2010
	(In thousands)
Wells Fargo revolving credit facility	$	12,546	$	34,994
Term loans:
Wells Fargo		5,620		-
County		6,302		5,701
Other		902		931
Total debt		25,370		41,626
Less current maturities		19,396		36,270
Total long-term debt	$	5,974	$	5,356

On August 17, 2010 we amended our credit facility with Wells Fargo (the “Amendment”).  Among other things, the Amendment:

·   lowered the maximum credit under the facility from $100 million to $70 million (which we believe will be sufficient to finance our existing operations),

·   lowered the facility’s interest rate to prime plus a margin ranging from 0.25% to 0.5% (for prime-based borrowings) or LIBOR plus a margin ranging from 2.00% to 2.25% (for Eurodollar-based borrowings),

·   removed performance covenants unless excess availability is less than $10 million, at which point, we are required only to maintain a fixed charge coverage ratio of 1.0,

·   allows for unrestricted distribution of dividends and repurchases of company stock if excess availability is greater than $10 million,

·   extended the term of the facility to August 17, 2015, and

·   substantially reduced monthly service, line of credit and unused line fees.

In connection with the Amendment, we retired the remaining balance of our term loan with Wells Fargo, which was funded with borrowings under our revolving credit facility.

We paid Wells Fargo $371,000 of diligence, commitment and closing fees in connection with the Amendment.

Note 5 – Environmental matters and other commitments and contingencies:

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

On a quarterly basis, we evaluate the potential range of our liability at sites where we have been named a defendant by analyzing and estimating the range of reasonably possible costs to us.  At September 30, 2010, the upper end of the range of reasonably possible costs to us for sites where we have been named a defendant is approximately $2.0 million, including our recorded accrual of $642,000.  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 liabiliti es. See Note 6.

- 11 -

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 $400,000 and $1.7 million.

In February 2009, we received a Notice of Violation from the U.S. EPA regarding alleged air permit issues at KSW.  The U.S. EPA alleges KSW (i) is exceeding its sulfur dioxide emission limits set forth in its permits, (ii) failed to apply for a permit that would be issued under the U.S. Clean Air Act and the Illinois Environmental Protection Act in connection with the installation of certain 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 quart er 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.  There has been no subsequent communication with the U.S. EPA to date.  As we have not received any further communications regarding this matter, we cannot estimate any potential costs to us to resolve this matter 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.

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.

Please refer to our 2009 Annual Report for a discussion of certain other legal proceedings to which we are a party.

- 12 -

Note 6 - Other accrued liabilities:

	December 31,		September 30,
	2009		2010
	(In thousands)
Current:
Employee benefits	$	10,456	$	14,208
Self insurance		4,431		4,882
Environmental		430		417
Other		3,012		3,066
Total	$	18,329	$	22,573
Noncurrent:
Workers compensation payments	$	2,315	$	1,297
Environmental		300		225
Other		253		260
Total	$	2,868	$	1,782

Note 7 – Employee benefit plans:

We currently expect to record a defined benefit pension credit of $4.9 million during 2010 and we anticipate no cash contributions to our defined benefit pension plans will be required during 2010.  The components of our net periodic defined benefit pension expense (credit) for the third quarter and first nine months of 2009 and 2010 are presented in the table below.

	Three months ended  September 30,						Nine months ended  September 30,
	2009			2010			2009			2010
	(In thousands)
Service cost	$	814		$	832		$	2,441		$	2,496
Interest cost		5,411			4,936			16,231			14,809
Expected return on plan assets		(9,721	)		(10,951	)		(29,161	)		(32,853	)
Amortization of accumulated other comprehensive income:
Prior service cost		308			302			924			907
Actuarial losses		4,703			3,670			14,108			11,009
Total expense (credit)	$	1,515		$	(1,211	)	$	4,543		$	(3,632	)

We currently expect our 2010 other postretirement benefit (“OPEB”) credit will be $5.5 million.  As allowed under one of our amended benefit plans, we exercised our right to create supplemental pension benefits in lieu of certain 2010 benefit payments due under that OPEB plan.  As such, we anticipate contributing an aggregate of $1.4 million to our OPEB plans during 2010. The components of our net periodic credit related to OPEB for the third quarter and first nine months of 2009 and 2010 are presented in the table below.

- 13 -

	Three months ended  September 30,						Nine months ended  September 30,
	2009			2010			2009			2010
	(In thousands)
Service cost	$	19		$	27		$	67		$	82
Interest cost		690			611			2,034			1,831
Amortization of accumulated other comprehensive income:
Prior service credit		(4,040	)		(3,966	)		(12,128	)		(11,898	)
Actuarial losses		2,289			1,986			6,465			5,956
Total credit	$	(1,042	)	$	(1,342	)	$	(3,562	)	$	(4,029	)

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 projected benefit obligations, 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 8 – Income taxes:

	Nine months ended
	September 30,
	2009		2010
	(In thousands)
Expected income tax expense, at statutory rate	$	1,395	$	7,645
U.S. state income tax expense, net		74		715
Other, net		22		36
Income tax expense	$	1,491	$	8,396

Tax authorities are examining certain of our U.S. tax returns and may propose tax deficiencies, including penalties and interest.  We cannot guarantee any adjustments, if proposed, will be resolved in our favor due to the inherent uncertainties involved in settlement initiatives and court and tax proceedings.  We believe the ultimate disposition of such tax examinations should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

- 14 -

Note 9 – Financial instruments:

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

	December 31,  2009				September 30,  2010
	Carrying amount		Fair value		Carrying amount		Fair value
	(In thousands)
Restricted cash equivalents (included in other noncurrent assets)	$	249	$	249	$	251	$	251
Accounts receivable, net		41,231		41,231		52,584		52,584
Accounts payable		5,577		5,577		8,426		8,426
Debt (excluding capitalized leases):
Variable-rate debt		18,166		18,166		34,994		34,994
Fixed-rate debt		7,195		6,680		6,626		6,329

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 contracted 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.

- 15 -

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.  0;Although we believe the expectations reflected in forward-looking statements are reasonable, we do not know if these expectations will be correct.  Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. While it is not possible to identify all factors, we continue to face many risks and uncertainties.  Among the factors that could cause our actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the Securities and Exchange Commission including, but not limited to, the following:

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

·   Customer inventory levels,

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

·   The possibility of labor disruptions,

·   General global economic and political conditions,

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

·   Customer and competitor strategies,

·   The impact of pricing and production decisions,

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

·   Government regulations and possible changes thereof,

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

·   The ultimate resolution of pending litigation, 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),

·   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 2009 Annual Report, including, without limitation, the section referenced above.

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

- 16 -

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 billets and wire rod as compared to bar manufacturers and wire fabricators that purchase billet and wire rod in the open market. 0; 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

Our profitability declined in the third quarter of 2010 as compared to the third quarter of 2009 as the favorable impact of higher overall average selling prices was more than offset by an increase in our ferrous scrap costs. Further, due to competitive pressures and a seasonal decline in demand for most of our products at the end of the third quarter, we have not been able to implement selling price increases sufficient to restore profitability over increased raw material costs.  We anticipate operating on reduced production schedules during the fourth quarter due to our annual maintenance outages and decreased demand.  Considering these factors, we do not expect profitability to improve during the fourth quarter.

On August 17, 2010 we amended our credit facility with Wells Fargo (the “Amendment”).  See Note 4 to our Condensed Consolidated Financial Statements.  Among other things, the Amendment:

·   lowered the maximum credit under the facility from $100 million to $70 million (which we believe will be sufficient to finance our existing operations),

·   lowered the facility’s interest rate,

·   removed performance covenants unless excess availability is less than $10 million, at which point, we are required only to maintain a fixed charge coverage ratio of 1.0,

·   allows for unrestricted distribution of dividends and repurchases of company stock if excess availability is greater than $10 million,

·   extended the term of the facility to August 17, 2015, and

·   substantially reduced monthly service, line of credit and unused line fees.

In connection with the Amendment, we retired the remaining balance of our term loan with Wells Fargo, which was funded with borrowings under our revolving credit facility.

We paid Wells Fargo $371,000 of diligence, commitment and closing fees in connection with the Amendment.

- 17 -

Results of Operations

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

	Three months ended  September 30,						Nine months ended  September 30,
	2009			2010			2009			2010
	(In thousands)
Operating income as reported	$	9,262		$	4,179		$	5,055		$	23,134
Defined benefit pension expense (credit)		1,515			(1,211	)		4,543			(3,632	)
OPEB credit		(1,042	)		(1,342	)		(3,562	)		(4,029	)
Operating income before pension and OPEB	$	9,735		$	1,626		$	6,036		$	15,473

Operating income before pension and OPEB for the third quarter of 2010 decreased significantly as compared to the third quarter of 2009 primarily due to a decrease in the margin between selling prices and consumed scrap costs as discussed above.

Operating performance before pension and OPEB for the first nine months of 2010 was significantly better than the same period of 2009 primarily due to substantially higher shipment volumes and production levels during the first half of 2010.  During the first half of 2009, economic conditions resulted in a sharp reduction of customer orders and we operated on an extremely reduced production schedule, which resulted in a much higher percentage of fixed costs being included in cost of goods sold as these costs could not be capitalized into inventory.

- 18 -

Our consolidated sales volume and average per-ton selling prices for the third quarter and first nine months of 2009 and 2010 are as follows:

	Three months ended    September 30,				Nine months ended    September 30,
	2009		2010		2009		2010
Sales volume (000 tons):
Wire rod		100		105		158		293
Fabricated wire products		14		11		54		57
Industrial wire		9		13		25		40
Wire mesh		15		14		34		37
Bar		4		6		9		17
Coiled rebar		2		3		4		6
Other		2		4		4		10
Total		146		156		288		460
Average per-ton selling prices:
Wire rod	$	564	$	624	$	574	$	617
Fabricated wire products		1,344		1,281		1,393		1,297
Industrial wire		827		931		914		915
Wire mesh		874		891		928		880
Bar		772		903		796		892
Coiled rebar		541		606		543		621
All products		686		723		801		751

Other items affecting the comparability of our operating performance before pension and OPEB include:

·   increased utility costs at our largest manufacturing facility during 2010;

·   impairment charges to reduce certain inventories to net realizable value of $357,000 and $2.7 million during the third quarter and first nine months of 2009, respectively, as compared to nominal impairment charges during the third quarter and first nine months of 2010;

·   bad debt expense of $728,000 and $3.2 million during the third quarter and first nine months of 2009, respectively, primarily due to the Chapter 11 proceedings of one of our customers as compared to nominal amounts during both of the 2010 periods;

·   lower incentive compensation expense during the third quarter of 2010 due to decreased profitability but higher incentive compensation expense during the first nine months of 2010 due to increased profitability during the first half of 2010;

·   significant decreases in our LIFO reserve and cost of goods sold during the third quarter and first nine months of 2009 as compared to increases in our LIFO reserve and cost of goods sold during the third quarter and first nine months of 2010 as discussed in Note 2 to our Condensed Consolidated Financial Statements; and

·   a $4.2 million credit to general and administrative expense during 2009 related to the release of accrued environmental costs for certain inactive waste management units.

- 19 -

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 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 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.

- 20 -

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

	KSW			EWP			Calumet			Other(1)			Total
	(In thousands)
Three months ended September 30, 2009:
Net sales	$	92,746		$	12,782		$	2,841		$	(8,006	)	$	100,363
Cost of goods sold		(80,143	)		(11,287	)		(2,861	)		8,839			(85,452	)
Gross margin (loss)		12,603			1,495			(20	)		833			14,911
Selling and administrative expense		(3,974	)		(608	)		(167	)		(427	)		(5,176	)
Operating income (loss) before pension/OPEB	$	8,629		$	887		$	(187	)	$	406		$	9,735
Three months ended September 30, 2010:
Net sales	$	104,664		$	12,085		$	6,329		$	(9,470	)	$	113,608
Cost of goods sold		(99,431	)		(11,956	)		(6,360	)		9,647			(108,100	)
Gross margin (loss)		5,233			129			(31	)		177			5,508
Selling and administrative expense		(2,579	)		(541	)		(165	)		(597	)		(3,882	)
Operating income (loss) before pension/OPEB	$	2,654		$	(412	)	$	(196	)	$	(420	)	$	1,626

Nine months ended September 30, 2009:
Net sales	$	213,829		$	31,506		$	7,197		$	(21,183	)	$	231,349
Cost of goods sold		(197,668	)		(28,696	)		(10,191	)		23,557			(212,998	)
Gross margin (loss)		16,161			2,810			(2,994	)		2,374			18,351
Selling and administrative expense		(8,217	)		(2,009	)		(384	)		(1,705	)		(12,315	)
Operating income (loss) before pension/OPEB	$	7,944		$	801		$	(3,378	)	$	669		$	6,036
Nine months ended September 30, 2010:
Net sales	$	338,046		$	32,452		$	16,315		$	(38,492	)	$	348,321
Cost of goods sold		(309,426	)		(30,713	)		(15,345	)		37,900			(317,584	)
Gross margin		28,620			1,739			970			(592	)		30,737
Selling and administrative expense		(10,448	)		(1,641	)		(520	)		(2,655	)		(15,264	)
Operating income before pension/OPEB	$	18,172		$	98		$	450		$	(3,247	)	$	15,473

 (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,
	2009			% of sales			2010			% of sales
	($ in thousands)
Net sales	$	92,746			100.0	%	$	104,664			100.0	%
Cost of goods sold		(80,143	)		(86.4	)		(99,431	)		(95.0	)
Gross margin		12,603			13.6			5,233			5.0
Selling and administrative expense		(3,974	)		(4.3	)		(2,579	)		(2.5	)
Operating income before pension/OPEB	$	8,629			9.3	%	$	2,654			2.5	%

	Nine months ended September 30,
	2009			% of sales			2010			% of sales
	($ in thousands)
Net sales	$	213,829			100.0	%	$	338,046			100.0	%
Cost of goods sold		(197,668	)		(92.4	)		(309,426	)		(91.5	)
Gross margin		16,161			7.6			28,620			8.5
Selling and administrative expense		(8,217	)		(3.9	)		(10,448	)		(3.1	)
Operating income before pension/OPEB	$	7,944			3.7	%	$	18,172			5.4	%

- 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,
	2009			2010		2009			2010
Sales volume (000 tons):
Wire rod		113			113		190			335
Fabricated wire products		14			11		54			57
Industrial wire		9			13		25			40
Billet		5			11		8			34
Coiled rebar		2			3		4			6
Total		143			151		281			472
Average per-ton selling prices:
Wire rod	$	561		$	628	$	575		$	619
Fabricated wire products		1,344			1,281		1,393			1,297
Industrial wire		827			931		914			915
Billet		328			440		368			442
Coiled rebar		541			606		543			621
All products		647			689		756			712
Average per-ton ferrous scrap cost of goods sold	$	230		$	307	$	267		$	290
Increase (decrease) in LIFO reserve and cost of goods sold	$	(2,318	)	$	1,910	$	(9,055	)	$	1,888
Average electricity cost per kilowatt hour	$	0.03		$	0.04	$	0.03		$	0.04
Kilowatt hours consumed (000 hrs)		122,148			120,698		253,896			388,053
Average natural gas cost per therm	$	0.38		$	0.49	$	0.52		$	0.52
Natural gas therms consumed (000 therms)		3,766			3,664		10,431			14,226

The comparability of KSW’s third quarter operating performance was also impacted by a $1.2 million credit related to a revision in the estimate of previously accrued employee incentive compensation during the third quarter of 2010 due to decreased profitability as compared to a $1.0 million increase in accrued employee incentive compensation during the third quarter of 2009 due to increased profitability.

KSW’s operating performance during the first nine months of 2009 was also impacted by:

·   substantially reduced production volumes which resulted in a higher percentage of fixed costs included in cost of goods sold (fixed costs as a percentage of sales were 12.8% during the first nine months of 2009 as compared to 8.5% during the first nine months of 2010);

·   increased variable costs of production as idle production facilities were difficult to re-start given cold winter temperatures;

·   an increase in KSW’s allowance for bad debt of $728,000 and $3.2 million, respectively, primarily due to the Chapter 11 proceedings of one of KSW’s customers;

·   lower employee incentive compensation accruals during the first nine months of 2009 due to decreased profitability; and

·   a $4.2 million credit related to the release of accrued environmental costs as discussed above.

- 23 -

Engineered Wire Products, Inc.

	Three months ended September 30,
	2009			% of sales			2010			% of sales
	($ in thousands)
Net sales	$	12,782			100.0	%	$	12,085			100.0	%
Cost of goods sold		(11,287	)		(88.3	)		(11,956	)		(98.9	)
Gross margin		1,495			11.7			129			1.1
Selling and administrative expense		(608	)		(4.8	)		(541	)		(4.5	)
Operating income (loss) before pension/OPEB	$	887			6.9	%	$	(412	)		(3.4	)%

	Nine months ended September 30,
	2009			% of sales			2010			% of sales
	($ in thousands)
Net sales	$	31,506			100.0	%	$	32,452			100.0	%
Cost of goods sold		(28,696	)		(91.1	)		(30,713	)		(94.6	)
Gross margin		2,810			8.9			1,739			5.4
Selling and administrative expense		(2,009	)		(6.4	)		(1,641	)		(5.1	)
Operating income before pension/OPEB	$	801			2.5	%	$	98			0.3	%

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

	Three months ended  September 30,					Nine months ended  September 30,
	2009			2010		2009			2010
Sales volume (000 tons) – Wire mesh		15			14		34			37
Average per-ton selling prices – Wire mesh	$	874		$	891	$	928		$	880
Average per-ton wire rod cost of goods sold	$	660		$	647	$	748		$	629
Increase (decrease) in LIFO reserve and cost of goods sold	$	(1,217	)	$	313	$	(4,434	)	$	470

EWP’s operating performance during the first nine months of 2010 as compared to the same period of 2009 was also impacted by lower payroll and benefit expenses during 2010 as a result of a reduction in personnel.

- 24 -

Keystone – Calumet, Inc.

	Three months ended September 30,
	2009			% of sales			2010			% of Sales
	($ in thousands)
Net sales	$	2,841			100.0	%	$	6,329			100.0	%
Cost of goods sold		(2,861	)		(100.7	)		(6,360	)		(100.5	)
Gross margin (loss)		(20	)		(0.7	)		(31	)		(0.5	)
Selling and administrative expense		(167	)		(5.9	)		(165	)		(2.6	)
Operating loss before pension/OPEB	$	(187	)		(6.6	)	$	(196	)		(3.1	)%

	Nine months ended September 30,
	2009			% of sales			2010			% of Sales
	($ in thousands)
Net sales	$	7,197			100.0	%	$	16,315			100.0	%
Cost of goods sold		(10,191	)		(141.6	)		(15,345	)		(94.1	)
Gross margin (loss)		(2,994	)		(41.6	)		970			5.9
Selling and administrative expense		(384	)		(5.3	)		(520	)		(3.2	)
Operating income (loss) before pension/OPEB	$	(3,378	)		(46.9	)	$	450			2.7	%

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

	Three months ended  September 30,				Nine months ended  September 30,
	2009		2010		2009		2010
Sales volume (000 tons) – Bar		4		6		9		17
Average per-ton selling prices – Bar	$	772	$	903	$	796	$	892
Average per-ton billet cost of goods sold	$	403	$	551	$	454	$	494

Throughout 2009 and continuing into 2010, Calumet has been conducting trials for many new products.  In addition, Calumet has expanded its sales force.  Both of these developments are contributing to new customers and increased sales volume.  We believe increased sales volume would allow Calumet to operate on a 24-hour basis and thereby achieve certain economies of scale which are key to this segment’s profitability.  However, Calumet has struggled to build the staffing levels needed for a 24-hour operation.  Calumet currently expects to reach adequate staffing levels for continual 24-hour operations by the first quarter of 2011.

Calumet’s operating performance during the third quarter and first nine months of 2010 as compared to the same periods of 2009 was also impacted by the following factors:

·   impairment charges of $357,000 and $2.7 million during the third quarter and first nine months of 2009, respectively, as Calumet determined it was probable they would not be able to recover the cost of certain inventory items in future selling prices, as compared to nominal impairment charges during the third quarter and first nine months of 2010; and

·   substantially reduced production volumes during the first half of 2009 which resulted in a much higher percentage of fixed costs included in cost of goods sold and increased variable costs of production as idle production facilities were difficult to re-start given cold winter temperatures.

- 25 -

Pension Credit or Expense

Primarily due to a $58 million increase in our pension plans’ assets during 2009, we currently expect to record a defined benefit pension credit of $4.9 million during 2010 as compared to the $5.9 million defined benefit pension expense we recorded during 2009.  Accordingly, we recorded a defined benefit pension credit of $1.2 million and $3.6 million during the third quarter and first nine months of 2010, respectively, as compared to the $1.5 million and $4.5 million expense recorded during the third quarter and first nine months of 2009, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Historical Cash Flows

Operating Activities

During the first nine months of 2009 and 2010, net cash used in operations totaled $9.9 million and $9.4 million, respectively. The $.5 million decrease in cash used for operating activities was primarily due to the net effects of:

·   $9.4 million increase in operating income before pension and OPEB during 2010;

·   lower net cash used by relative changes in our accounts receivable of $16.0 million in 2010 primarily due to an abnormally low accounts receivable balance at December 31, 2008 as a result of customers limiting orders during the fourth quarter of 2008;

·   higher net cash used by relative changes in our inventory of $36.0 million in 2010 primarily due to substantially higher production levels during the first half of 2010 to meet increased demand as compared to extremely low production levels during the first half of 2009 as a result of a rapid decline in product demand (third quarter 2010 production levels were relatively consistent with those of the third quarter of 2009);

·   higher net cash provided by relative changes in our accrued liabilities of $14.9 million in 2010 as a result of the payment of 2008 employee incentive compensation during the first quarter of 2009 which was significantly higher than 2009 employee incentive compensation paid during the first quarter of 2010; and

·   income tax refund of $.1 million during the first nine months of 2010 compared to income tax payments of $.9 million during the first nine months of 2009.

Investing Activities

During the third quarter of 2009, the Illinois Environmental Protection Agency (“IEPA”) released $2.0 million of restricted investments to us in connection with the IEPA’s approval of the soil portion of certain inactive waste management units.  The funds were used to reduce our indebtedness under our revolving credit facility.

- 26 -

Financing Activities

We increased borrowings on our revolving credit facility during the first nine months of 2010 by $22.4 million as compared to increasing borrowings by $28.3 million during the first nine months of 2009.  The lower level of borrowings during 2010 were primarily due to the final payment on our 8% Notes of $9.1 million during the first nine months of 2009 partially offset by $1.6 million in additional payments on our term loan with Wells Fargo during the first nine months of 2010 as we paid the remaining balance of the loan in connection with an amendment to our Wells Fargo credit facility in August of 2010; both of these final payments were funded by borrowings on our revolving credit facility.

Future Cash Requirements

Capital Expenditures

Capital expenditures for 2010 are expected to be approximately $13 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

Payments due on our debt amount to $.6 million for the remainder of 2010.

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

Pension and Other Postretirement Obligations

We currently do not expect to be required to make contributions to our defined benefit pension plans during 2010.  As allowed under one of our amended benefit plans, we exercised our right to create supplemental pension benefits in lieu of certain 2010 benefit payments due under that OPEB plan.  As such, we anticipate contributing an aggregate of $1.4 million to our OPEB plans during 2010. 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 2009 Annual Report.

Working Capital and Borrowing Availability

	December 31,		September 30,
	2009		2010
	(In thousands)
Working capital	$	49,063	$	59,698
Outstanding balance of revolving credit facility		12,546		34,994
Additional borrowing availability		38,637		28,727

The revolving credit facility requires us to use our daily cash receipts to reduce outstanding borrowings, and as a result we maintain zero cash balances when there are balances outstanding under this credit facility.

- 27 -

The amount of available borrowings under our revolving credit facility is based on formula-determined amounts of trade receivables and inventories, less the amount of outstanding letters of credit ($5.2 million at September 30, 2010).  As of September 30, 2010, we are able to borrow all amounts of additional availability disclosed above without violating the financial covenants of the facility.

On August 17, 2010 we amended our credit facility.  See the “Recent Developments” section of “Results of Operations” above for further discussion.

RECENT ACCOUNTING PRONOUNCEMENTS

There have been no recent accounting pronouncements affecting our consolidated financial statements for the nine-month period ended September 30, 2010.

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 2009 Annual Report.  There have been no changes in our critical accounting policies during the first nine months of 2010.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to the 2009 Annual Report for a discussion of the market risks associated with changes in interest rates and ferrous scrap costs that affect us.  There have been no material changes in such market risks during the first nine months of 2010.

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, 2010.  Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures were effective as of September 30, 2010.

- 28 -

Internal Control Over Financial Reporting

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

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

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

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

Changes in Internal Control Over Financial Reporting

There has been no change to our internal control over financial reporting during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

- 29 -

PART II.  OTHER INFORMATION

ITEM 1. Legal Proceedings.

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

ITEM 1A. Risk Factors.

Reference is made to our 2009 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 2010.

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:

4.1 Amendment No. 4 to Loan and Security Agreement dated as of August 17, 2010 by and between the Registrant and Wells Fargo Capital Finance, LLC. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated August 17, 2010).

31.1 Certification.

31.2 Certification.

32.1 Certification.

- 30 -

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 3, 2010   By/s/ Bert E. Downing, Jr. Bert E. Downing, Jr. Vice President, Chief Financial Officer, Corporate Controller and Treasurer

- 31 -