Keystone Consolidated Industries (KYCN) 10-Q 2011 Q1 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 March 31, 2011 Commission file number 1-3919

Keystone Consolidated Industries, Inc.

(Exact name of Registrant as specified in its charter)

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

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

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

Indicate by check mark:

Whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes 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

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 May 13, 2011: 12,101,932

KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

INDEX

Part I.	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets –  December 31, 2010; March 31, 2011 (unaudited)	3
	Condensed Consolidated Statements of Income (unaudited) -  Three months ended March 31, 2010 and 2011	5
	Condensed Consolidated Statements of Cash Flows (unaudited) –   Three months ended March 31, 2010 and 2011	6
	Condensed Consolidated Statement of Stockholders' Equity and  Comprehensive Income (unaudited) -  Three months ended March 31, 2011	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial   Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 6.	Exhibits	24
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,		March 31,
ASSETS	2010		2011
			(unaudited)
Current assets:
Accounts receivable, net	$	46,765	$	61,624
Inventories		45,944		59,465
Deferred income taxes		17,501		17,501
Income taxes receivable		2,029		-
Prepaid expenses and other		1,474		1,616
Total current assets		113,713		140,206
Property, plant and equipment:
Land		1,468		1,468
Buildings and improvements		63,375		64,073
Machinery and equipment		338,071		339,207
Construction in progress		4,628		5,295
		407,542		410,043
Less accumulated depreciation		319,533		322,241
Net property, plant and equipment		88,009		87,802
Other assets:
Pension asset		153,962		161,588
Other, net		1,533		1,510
Total other assets		155,495		163,098
Total assets	$	357,217	$	391,106

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

LIABILITIES AND STOCKHOLDERS' EQUITY	December 31,			March 31,
	2010			2011
				(unaudited)
Current liabilities:
Current maturities of long-term debt	$	27,744		$	38,293
Accounts payable		6,694			14,665
Accrued OPEB cost		1,279			1,279
Other accrued liabilities		22,901			25,679
Total current liabilities		58,618			79,916
Noncurrent liabilities:
Long-term debt		937			948
Accrued OPEB cost		45,247			45,529
Deferred income taxes		58,830			63,465
Other accrued liabilities		1,849			1,698
Total noncurrent liabilities		106,863			111,640
Stockholders' equity:
Common stock		125			121
Additional paid-in capital		100,111			98,863
Accumulated other comprehensive loss		(97,307	)		(96,720	)
Retained earnings		189,603			197,286
Treasury stock		(796	)		-
Total stockholders' equity		191,736			199,550
Total liabilities and stockholders’ equity	$	357,217		$	391,106

Commitments and contingencies (Note 5)

See accompanying Notes to Condensed Consolidated Financial Statements.

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

	Three months ended   March 31,
	2010			2011
	(unaudited)
Net sales	$	99,743		$	134,163
Cost of goods sold		(89,238	)		(121,194	)
Gross margin		10,505			12,969
Other operating income (expense):
Selling expense		(1,709	)		(1,815	)
General and administrative expense		(3,875	)		(3,464	)
Defined benefit pension credit		1,212			4,750
Other postretirement benefit credit		1,342			1,300
Total other operating income (expense)		(3,030	)		771
Operating income		7,475			13,740
Nonoperating income (expense):
Interest expense		(443	)		(275	)
Other income, net		64			123
Total nonoperating expense		(379	)		(152	)
Income before income taxes		7,096			13,588
Provision for income taxes		(2,721	)		(5,905	)
Net income	$	4,375		$	7,683
Basic and diluted income per share	$	0.36		$	0.63
Basic and diluted weighted average shares outstanding		12,102			12,102

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)

	Three months ended    March 31,
	2010			2011
	(unaudited)
Cash flows from operating activities:
Net income	$	4,375		$	7,683
Depreciation and amortization		3,261			2,823
Deferred income taxes		1,623			4,251
Defined benefit pension credit		(1,212	)		(4,750	)
OPEB credit		(1,342	)		(1,300	)
OPEB payments		(243	)		(323	)
Other, net		201			(35	)
Change in assets and liabilities:
Accounts receivable		(15,876	)		(14,790	)
Inventories		(18,072	)		(13,494	)
Accounts payable		6,910			7,971
Accrued liabilities		1,858			2,556
Income taxes		1,088			2,100
Other, net		519			(591	)
Net cash used in operating activities		(16,910	)		(7,899	)
Cash flows from investing activities:
Capital expenditures		(1,592	)		(2,705	)
Other, net		20			58
Net cash used in investing activities		(1,572	)		(2,647	)
Cash flows from financing activities:
Revolving credit facility, net		19,823			10,549
Principal payments on other notes payable and     long-term debt		(1,334	)		-
Deferred financing costs paid		(7	)		(3	)
Net cash provided by financing activities		18,482			10,546
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	$	240		$	243
Income taxes, net		9			10

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

Three months ended March 31, 2011

(In thousands)

	Common			Additional paid-in			Accumulated other comprehensive income (loss)						Retained		Treasury						Comprehensive
	stock			capital			Pensions			OPEB			Earnings		stock			Total			income
	(unaudited)
Balance – December 31, 2010	$	125		$	100,111		$	(116,745	)	$	19,438		$	189,603	$	(796	)	$	191,736
Net income		-			-			-			-			7,683		-			7,683		$	7,683
Retirement of treasury stock		(4	)		(1,248	)		-			-			-		796			(456	)
Amortization of actuarial   losses		-			-			1,551			1,291			-		-			2,842			2,842
Amortization of prior service    cost (credit)		-			-			186			(2,441	)		-		-			(2,255	)		(2,255	)
Balance – March 31, 2011	$	121		$	98,863		$	(115,008	)	$	18,288		$	197,286	$	-		$	199,550
Comprehensive income																					$	8,270

See accompanying Notes to Condensed Consolidated Financial Statements.

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KEYSTONE CONSOLIDATED INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(unaudited)

Note 1 – Organization and basis of presentation:

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

At March 31, 2011, Contran Corporation (“Contran”) owned approximately 75% of our outstanding common stock.  Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons (for which Mr. Simmons is the sole trustee) or is held directly by Mr. Simmons or other persons or companies related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control Contran and us.

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

Note 2 – Business segment information:

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

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

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

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

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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   March 31,
	2010			2011
	(In thousands)
Net sales:
KSW	$	102,490		$	135,337
EWP		7,376			11,042
Calumet		4,251			6,397
Elimination of intersegment sales		(14,374	)		(18,613	)
Total net sales	$	99,743		$	134,163
Operating income (loss):
KSW	$	6,985		$	8,810
EWP		(363	)		(218	)
Calumet		147			100
Pension credit		1,212			4,750
OPEB credit		1,342			1,300
Other (1)		(1,848	)		(1,002	)
Total operating income		7,475			13,740
Non operating income (expense):
Interest expense		(443	)		(275	)
Other income, net		64			123
Income before income taxes	$	7,096		$	13,588

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

Note 3 – Inventories, net:

	December 31,		March 31,
	2010		2011
	(In thousands)
Raw materials	$	3,957	$	5,199
Billet		5,832		8,449
Wire rod		7,042		11,224
Work in process		5,030		6,520
Finished products		22,821		28,598
Supplies		25,919		24,592
Inventory at FIFO		70,601		84,582
Less LIFO reserve		24,657		25,117
Total	$	45,944	$	59,465

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

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Note 4 - Debt:

	December 31,		March 31,
	2010		2011
	(In thousands)
Wachovia revolving credit facility	$	27,740	$	38,289
Other		941		952
Total debt		28,681		39,241
Less current maturities		27,744		38,293
Total long-term debt	$	937	$	948

Note 5 – Environmental matters and other commitments and contingencies:

We have been named as a defendant for certain environmental sites pursuant to governmental laws and private actions, including waste disposal sites and facilities currently or previously owned, operated or used by us.  These proceedings seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources.  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 March 31, 2011, the upper end of the range of reasonably possible costs to us for sites where we have been named a defendant is approximately $2.1 million, including our recorded accrual of $.6 million.  Our cost estimates have not been discounted to present value due to the uncertainty of the timing of the pay out.  At each balance sheet date, we make an estimate of the amount of our accrued environmental costs that will be paid out over the subsequent twelve months, and we classify such amount as a current liability.  We classify the remainder of the accrued environmental costs as noncurrent liabilities. See Note 6.

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

Prior to one of our subsidiaries’ 1996 acquisition of DeSoto, Inc. (“DeSoto”), DeSoto was notified by the Texas Natural Resource Conservation Commission (now called the Texas Commission on Environmental Quality or “TCEQ”) that there were certain deficiencies in prior reports to the TCEQ relative to one of DeSoto’s non-operating facilities located in Gainesville, Texas.  During 1999, that subsidiary entered into the TCEQ's Voluntary Cleanup Program as it relates to that facility.  Remediation activities at this site are expected to continue for another two to three years and total future remediation costs are presently estimated to be between $.3 million and $1.7 million.

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In February 2009, we received a Notice of Violation from the United States Environmental Protection Agency (the “U.S. EPA”) regarding alleged air permit issues at KSW.  The U.S. EPA alleges KSW (i) is exceeding its sulfur dioxide emission limits set forth in its permits, (ii) failed to apply for a permit that would be issued under the U.S. Clean Air Act and the Illinois Environmental Protection Act in connection with the installation of certain equipment in its melt shop, and (iii) failed to monitor pH readings of an air scrubber in the wire galvanizing area of the plant.  We disagree with the U.S. EPA’s assertions and we were in discussions with the U.S. EPA throughout 2009.  On December 31, 2009, we were notified the case had been referred to the Department of Justice (the “DOJ”) for review and follow-up.  During the first quarter of 2010, we submitted letters regarding our perspective on the matter to the DOJ and we are awaiting their response.  During the second quarter of 2010, the U.S. EPA requested additional information regarding the alleged permit issues and we submitted such information in May 2010.  There has been no subsequent communication with the U.S. EPA to date regarding this matter.  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 for.

Please refer to our 2010 Annual Report for a discussion of certain other legal proceedings to which we are a party.

Note 6 - Other accrued liabilities:

	December 31,		March 31,
	2010		2011
	(In thousands)
Current:
Employee benefits	$	12,679	$	13,078
Self insurance		4,935		4,881
Environmental		472		420
Other		4,815		7,300
Total	$	22,901	$	25,679
Noncurrent:
Workers compensation payments	$	1,242	$	1,142
Environmental		265		180
Other		342		376
Total	$	1,849	$	1,698

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Note 7 – Retirement of treasury stock:

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

Note 8 – Employee benefit plans:

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

	Three months ended  March 31,
	2010			2011
	(In thousands)
Service cost	$	832		$	931
Interest cost		4,936			4,752
Expected return on plan assets		(10,951	)		(13,310	)
Amortization of accumulated other comprehensive income:
Prior service cost		302			308
Actuarial losses		3,669			2,569
Total pension credit	$	(1,212	)	$	(4,750	)

We currently expect our 2011 other postretirement benefit (“OPEB”) credit will be $5.2 million.  As allowed under certain of our amended benefit plans, we exercised our right to create supplemental pension benefits in lieu of certain 2011 benefit payments due under one of our OPEB plans.  As such, we anticipate contributing an aggregate of $1.3 million to our OPEB plans during 2011. We have the ability to decide whether or not to exercise such rights on a year-by-year basis.  If we had not exercised such rights for 2011, our expected OPEB contributions would be $2.9 million higher.  The components of our net periodic credit related to OPEB for the first quarter of 2010 and 2011 are presented in the table below.

	Three months ended    March 31,
	2010			2011
	(In thousands)
Service cost	$	28		$	31
Interest cost		611			574
Amortization of accumulated other comprehensive income:
Prior service credit		(3,966	)		(4,042	)
Actuarial losses		1,985			2,137
Total OPEB credit	$	(1,342	)	$	(1,300	)

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

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Note 9 – Income taxes:

	Three months ended
	March 31,
	2010		2011
	(In thousands)
Expected income tax expense, at statutory rate	$	2,484	$	4,756
U.S. state income tax expense, net		226		1,142
Other, net		11		7
Income tax expense	$	2,721	$	5,905

Our provision for income taxes in the first quarter of 2011 includes a $.6 million non-cash charge for state deferred income taxes related to an increase in our effective state income tax rate as a result of an increase in the tax rate of the State of Illinois.

Tax authorities are examining certain of our U.S. tax returns and may propose tax deficiencies, including penalties and interest.  We cannot guarantee that 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.

Note 10 – Financial instruments:

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

	December 31, 2010				March 31, 2011
	Carrying  amount		Fair value		Carrying  amount		Fair value
	(In thousands)
Restricted cash equivalents	$	250	$	250	$	250	$	250
Accounts receivable, net		46,765		46,765		61,624		61,624
Accounts payable		6,694		6,694		14,665		14,665
Debt:
Variable-rate debt		27,740		27,740		38,289		38,289
Fixed-rate debt		941		1,019		952		1,025

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

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

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

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

·   Customer inventory levels,

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

·   Availability of raw materials,

·   The possibility of labor disruptions,

·   General global economic and political conditions,

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

·   Customer and competitor strategies,

·   The impact of pricing and production decisions,

·   Environmental matters (such as those requiring emission and discharge 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),

·   Our ability to renew or refinance credit facilities,

·   The ability of our customers to obtain adequate credit,

·   Any possible future litigation, and

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

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

-14-

RESULTS OF OPERATIONS

Business Overview

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

Recent Developments

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

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

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  March 31,
	2010			2011
	(In thousands)
Operating income as reported	$	7,475		$	13,740
Defined benefit pension credit		(1,212	)		(4,750	)
OPEB credit		(1,342	)		(1,300	)
Operating income before pension and OPEB	$	4,921		$	7,690

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

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

	Three months ended   March 31,
	2010			2011
Sales volume (000 tons):
Wire rod		81			93
Fabricated wire products		22			26
Industrial wire		11			16
Wire mesh		9			11
Bar		5			6
Coiled rebar			(1)			(1)
Other		3			3
Total		131			155
(1) Less than 1,000 tons.
Average per-ton selling prices:
Wire rod	$	594		$	707
Fabricated wire products		1,286			1,331
Industrial wire		881			963
Wire mesh		857			937
Bar		859			982
Coiled rebar		597			696
All products		755			856

Segment Operating Results:

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

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

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

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

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

	KSW			EWP			Calumet			Other(1)			Total
	(In thousands)
Three months ended March 31, 2010
Net sales	$	102,490		$	7,376		$	4,251		$	(14,374	)	$	99,743
Cost of goods sold		(91,767	)		(7,172	)		(3,898	)		13,599			(89,238	)
Gross margin		10,723			204			353			(775	)		10,505
Selling and administrative expense		(3,738	)		(567	)		(206	)		(1,073	)		(5,584	)
Operating income (loss) before pension/OPEB	$	6,985		$	(363	)	$	147		$	(1,848	)	$	4,921
Three months ended March 31, 2011
Net sales	$	135,337		$	11,042		$	6,397		$	(18,613	)	$	134,163
Cost of goods sold		(122,882	)		(10,681	)		(6,109	)		18,478			(121,194	)
Gross margin		12,455			361			288			(135	)		12,969
Selling and administrative expense		(3,645	)		(579	)		(188	)		(867	)		(5,279	)
Operating income (loss) before pension/OPEB	$	8,810		$	(218	)	$	100		$	(1,002	)	$	7,690

(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.

Keystone Steel & Wire

	Three months ended March 31,
	2010			% of sales			2011			% of sales
	($ in thousands)
Net sales	$	102,490			100.0	%	$	135,337			100.0	%
Cost of goods sold		(91,767	)		(89.5	)		(122,882	)		(90.8	)
Gross margin		10,723			10.5			12,455			9.2
Selling and administrative expense		(3,738	)		(3.6	)		(3,645	)		(2.7	)
Operating income before pension/OPEB	$	6,985			6.9	%	$	8,810			6.5	%

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

	Three months ended  March 31,
	2010			2011
Sales volume (000 tons):
Wire rod		98			112
Fabricated wire products		22			26
Industrial wire		11			15
Billet		12			13
Coiled rebar			(1)			(1)
Total sales		143			166
(1) Less than 1,000 tons.
Average per-ton selling prices:
Wire rod	$	593		$	705
Fabricated wire products		1,286			1,331
Industrial wire		881			972
Billet		428			509
Coiled rebar		597			696
All products		709			811
Average per-ton ferrous scrap cost of goods sold	$	250		$	342
Increase in LIFO reserve and cost of goods sold	$	306		$	132
Average electricity cost per kilowatt hour	$	0.04		$	0.04
Kilowatt hours consumed (000 hours)		128,443			138,023
Average natural gas cost per therm	$	0.58		$	0.46
Natural gas therms consumed (000 therms)		5,924			5,765

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

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Engineered Wire Products, Inc.

	Three months ended March 31,
	2010			% of sales			2011			% of sales
	($ in thousands)
Net sales	$	7,376			100.0	%	$	11,042			100.0	%
Cost of goods sold		(7,172	)		(97.2	)		(10,681	)		(96.7	)
Gross margin		204			2.8			361			3.3
Selling and administrative expense		(567	)		(7.7	)		(579	)		(5.2	)
Operating loss before pension/OPEB	$	(363	)		(4.9	)	$	(218	)		(1.9	)%

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

	Three months ended  March 31,
	2010		2011
Sales volume (000 tons):
Wire mesh		9		11
Industrial wire		-		1
Average per-ton selling prices:
Wire mesh	$	857	$	937
Industrial wire		-		807
All products		857		928
Average per-ton wire rod cost of goods sold	$	587	$	673
Increase in LIFO reserve and cost of goods sold	$	93	$	329

Keystone – Calumet, Inc.

	Three months ended March 31,
	2010			% of sales			2011			% of sales
	($ in thousands)
Net sales	$	4,251			100.0	%	$	6,397			100.0	%
Cost of goods sold		(3,898	)		(91.7	)		(6,109	)		(95.5	)
Gross margin		353			8.3			288			4.5
Selling and administrative expense		(206	)		(4.8	)		(188	)		(2.9	)
Operating income before pension/OPEB	$	147			3.5	%	$	100			1.6	%

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

	Three months ended   March 31,
	2010		2011
Sales volume (000 tons) -  Bar		5		6
Average per-ton selling prices - Bar	$	859	$	982
Average per-ton billet cost of goods sold	$	439	$	493

Calumet’s operating performance during the first quarter of 2011 was also impacted by a 25-day production outage for the installation of new equipment which resulted in a higher percentage of fixed costs included in cost of goods sold and higher conversion cost due to production delays associated with the initial performance of the new equipment.  By the end of the first quarter most performance issues associated with the new equipment had been resolved.  We believe the new equipment will allow the mill to operate more efficiently, thereby reducing future conversion costs.

Pension Credit

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

Income Tax Expense

A tabular reconciliation of the difference between the U.S. Federal statutory income tax rate and our effective income tax rates is included in Note 9 to our Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Historical Cash Flows

Operating Activities

During the first quarter of 2011, net cash used in operations totaled $7.9 million as compared to net cash used in operations of $16.9 million during the first quarter of 2010.  The $9.0 million decrease in cash used for operating activities was primarily due to the net effects of:

·   higher operating income before pension and OPEB during 2011 of $2.8 million; and

·   less net cash used as a result of relative changes in our inventory in 2011 of $4.6 million due to lower inventory levels at March 31, 2011 caused by an increase in the rate at which we are selling inventory produced.

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Investing Activities

We spent $2.7 million on capital expenditures during the first quarter of 2011 as compared to $1.6 million of capital expenditures during the first quarter of 2010.  The increase in capital expenditures primarily relates to upgrades of production equipment at KSW and Calumet.

Financing Activities

We increased borrowings on our revolving credit facility during the first quarter of 2011 by $10.5 million as compared to increasing borrowings by $19.8 million during the first quarter of 2010.  The decreased borrowings during 2011 were primarily due to the decreased usage of cash in operations as discussed above.

Future Cash Requirements

Capital Expenditures

Capital expenditures for 2011 are expected to be approximately $14 million and are primarily related to upgrades of production equipment.  We expect to fund capital expenditures using cash flows from operations and borrowing availability under our revolving credit facility.

Commitments and Contingencies

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

Pension and Other Postretirement Obligations

We currently do not expect to be required to make contributions to our defined benefit pension plans during 2011.  As allowed under certain of our amended benefit plans, we exercised our right to create supplemental pension benefits in lieu of certain 2011 benefit payments due under one of our OPEB plans.  As such, we anticipate contributing an aggregate of $1.3 million to our OPEB plans during 2011. We have the ability to decide whether or not to exercise such rights on a year-by-year basis.  If we had not exercised such rights for 2011, our expected OPEB contributions would be $2.9 million higher.  Future variances from assumed actuarial rates, including the rate of return on plan assets, may result in increases or decreases to pension and OPEB funding requirements in future periods.

Off-balance Sheet Financing Arrangements

We do not have any off-balance sheet financing agreements other than the operating leases discussed in our 2010 Annual Report.

Working Capital and Borrowing Availability

	December 31,		March 31,
	2010		2011
	(In thousands)
Working capital	$	55,095	$	60,290
Outstanding balance under revolving credit facility		27,740		38,289
Additional borrowing availability		38,779		27,681

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The revolving credit facility requires us to use our daily cash receipts to reduce outstanding borrowings, which results in us maintaining zero cash balances when there are balances outstanding under this credit facility.

The amount of available borrowings under our revolving credit facility is based on formula-determined amounts of trade receivables and inventories, less the amount of outstanding letters of credit ($5.2 million at March 31, 2011). Our revolving credit facility requires us to maintain a minimum fixed charge coverage ratio, as defined in the agreement, of 1.0 if excess availability falls below $10.0 million.  Current forecasts indicate that we will be able to maintain excess availability of at least $10.0 million throughout 2011.  However, as of March 31, 2011, our fixed charge coverage ratio was 0.9; as such we could only borrow $17.7 million of the availability disclosed above without violating the financial covenants of the facility.

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

RECENT ACCOUNTING PRONOUNCEMENTS

There have been no recent accounting pronouncements affecting our Condensed Consolidated Financial Statements for the period ended March 31, 2011.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures.  The term "disclosure controls and procedures," as defined by regulations of the SEC, means controls and other procedures that are designed to ensure information required to be disclosed in the reports we file or submit to the SEC under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure information we are required to disclose in the reports we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure.  Each of David L. Cheek, our President and Chief Executive Officer, and Bert E. Downing, Jr., our Vice President, Chief Financial Officer, Corporate Controller and Treasurer, have evaluated the design and operating effectiveness of our disclosure controls and procedures as of March 31, 2011.  Based upon their evaluation, these executive officers have concluded our disclosure controls and procedures were effective as of March 31, 2011.

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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 March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

ITEM 6. Exhibits.

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

31.1 Certification.

31.2 Certification.

32.1 Certification.

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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:  May 13, 2011   By/s/ Bert E. Downing, Jr. Bert E. Downing, Jr. Vice President, Chief Financial Officer, Corporate Controller and Treasurer

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