Note 1—Summary of significant accounting policies:

Nature of our business. Keystone Consolidated Industries, Inc. ("KCI" or "Keystone") (OTCQB: KYCN) is 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 billet produced in our steel mini-mill.

Organization. We are majority owned by Contran Corporation ("Contran"), which owned approximately 88% of our outstanding common stock at December 31, 2011. In March 2011, Contran completed a tender offer in which it purchased 1.6 million shares of our common stock and in August 2011, Contran acquired additional shares of our common stock from another stockholder. See Note 10. 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 related companies to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control Contran and us.

Basis of Presentation. Our Consolidated Financial Statements include the accounts of Keystone and our majority-owned subsidiaries. All material intercompany accounts and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation.

Our fiscal year is either 52 or 53 weeks and ends on the Sunday closest to December 31 of each year. 2009 and 2011 were each 52-week years while 2010 was a 53-week year.

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

Management's Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results may differ from previously estimated amounts under different assumptions or conditions.

Accounts receivable. We provide an allowance for doubtful accounts for known and estimated potential losses arising from our sales to customers based on a periodic review of these accounts.

Inventories and cost of sales; restatement for change in accounting principle. Inventories include the costs for raw materials and the costs to manufacture raw materials into finished goods. Depending on the inventory's stage of completion, our manufacturing costs can include the costs of packing and finishing, utilities, maintenance and depreciation, inbound and outbound shipping and handling, and salaries and benefits associated with our manufacturing process. We allocate fixed manufacturing overhead based on normal production capacity. Unallocated overhead costs resulting from periods with abnormally low production levels are charged to expense as incurred. As inventory is sold to third parties, we recognize the cost of sales in the same period the sale occurs. We periodically review our inventory for estimated obsolescence or instances when inventory is no longer marketable for its intended use, and we record any write-down equal to the difference between the cost of inventory and its estimated net realizable value based on assumptions about alternative uses, market conditions and other factors.

We state inventories at lower of cost or market net of allowance for obsolete and slow-moving inventories. Prior to December 31, 2011 the last-in, first-out ("LIFO") method was used to determine the cost of the productive inventories held at our Keystone Steel & Wire ("KSW") and Engineered Wire Products ("EWP") segments, while the first-in, first-out ("FIFO") method was used to determine the productive inventories held at our Keystone-Calumet segment and the average cost method was used to determine the cost of supplies inventories held at all our facilities. At the end of 2011 KSW changed its method for productive inventory costing from LIFO to FIFO, and EWP changed its method for productive inventory costing from LIFO to an average cost method. We believe the FIFO or average cost methods of accounting for inventories provides more meaningful information for financial statement readers as it enhances comparability to our peers and discloses the current value of inventories on our consolidated balance sheet. As required by accounting principles generally accepted in the United States of America ("GAAP"), we have retroactively reflected this change in accounting by restating our financial statements for prior periods. The following tables provide the effect of the accounting change on each financial statement line impacted as of December 31, 2010 and 2011 and for the years ended December 31, 2009, 2010 and 2011. Retained earnings and total stockholder's equity as of December 31, 2008 and 2009 were higher as a result of this accounting change by $21.7 million and $12.0 million, respectively. There was no impact to our previously-reported amounts of cash flows from operating, investing or financing activities for any period presented as a result of the accounting change.


	As of December 31,
	2010							2011
	(In thousands)
	As Reported under LIFO		Change in Accounting Principle Increase (Decrease)			As Currently Reported		As Computed under LIFO		Change in Accounting Principle Increase (Decrease)			As Currently Reported
Inventories	$	45,944	$	24,657		$	70,601	$	60,570	$	27,997		$	88,567
Current deferred income taxes		17,501		(9,395	)		8,106		22,971		(10,777	)		12,194
Total current assets		113,713		15,262			128,975		144,550		17,220			161,770
Total assets		357,217		15,262			372,479		310,727		17,220			327,947
Retained earnings		189,603		15,262			204,865		217,856		17,220			235,076
Total stockholders' equity		191,736		15,262			206,998		134,908		17,220			152,128
Total liabilities and stockholders' equity		357,217		15,262			372,479		310,727		17,220			327,947


	Years ended December 31,
	2009								2010							2011
	(In thousands)
	As Reported under LIFO		Change in Accounting Principle Increase (Decrease)			As Currently Reported			As Reported under LIFO		Change in Accounting Principle Increase (Decrease)			As Currently Reported		As Computed under LIFO			Change in Accounting Principle Increase (Decrease)			As Currently Reported
Cost of goods sold	$	299,787	$	15,200		$	314,987		$	423,341	$	(5,423	)	$	417,918	$	523,355		$	(3,340	)	$	520,015
Gross margin		22,560		(15,200	)		7,360			27,404		5,423			32,827		40,630			3,340			43,970
Operating income (loss)		3,209		(15,200	)		(11,991	)		16,462		5,423			21,885		48,228			3,340			51,568
Income (loss) before income taxes		2,533		(15,200	)		(12,667	)		15,236		5,423			20,659		47,709			3,340			51,049
Income tax expense (benefit)		2,292		(5,535	)		(3,243	)		6,493		2,152			8,645		19,456			1,382			20,838
Net income (loss)		241		(9,665	)		(9,424	)		8,743		3,271			12,014		28,253			1,958			30,211
Basic and diluted income (loss) per share		0.02		(0.80	)		(0.78	)		0.72		0.27			0.99		2.34			0.16			2.50
Comprehensive income (loss)		28,126		(9,665	)		18,461			43,966		3,271			47,237		(56,533	)		1,958			(54,575	)

Property, plant and equipment and depreciation expense. Property, plant and equipment are stated at cost. Depreciation for financial reporting purposes is computed using principally the straight-line method over the estimated useful lives of 10 to 30 years for buildings and improvements and three to 15 years for machinery and equipment. Accelerated depreciation methods are used for income tax purposes, as permitted. Depreciation expense for financial reporting purposes was $13.6 million, $12.1 million and $11.2 million during 2009, 2010 and 2011, respectively. Upon sale or retirement of an asset, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized in income currently.

We expense expenditures for maintenance, repairs and minor renewals as incurred, including planned major maintenance. We capitalize expenditures for major improvements. We capitalize interest costs related to major long-term capital projects and renewals as a component of construction costs. We did not capitalize any material interest costs in 2009, 2010 or 2011.

We perform impairment tests when events or changes in circumstances indicate the carrying value of our property, plant and equipment may not be recoverable. We consider all relevant factors. We perform the impairment test by comparing the estimated future undiscounted cash flows associated with the asset to the asset's net carrying value to determine if an impairment exists.

Long-term debt and deferred financing costs. We state long-term debt net of any unamortized original issue premium or discount. We classify amortization of deferred financing costs and any premium or discount associated with the issuance of indebtedness in interest expense, and compute such amortization by the interest method over the term of the applicable issue.

Pension plans and other postretirement benefits. Accounting and funding policies for our pension plans and other postretirement benefits ("OPEB") are described in Note 6.

Environmental liabilities. We record liabilities related to environmental remediation when estimated future expenditures are probable and reasonably estimable. If we are unable to determine that a single amount in an estimated range of probable future expenditures is more likely, we record the minimum amount of the range. Such accruals are adjusted as further information becomes available or circumstances change. We do not discount costs of future expenditures for environmental remediation obligations to their present value due to the uncertain timeframe of payout. We expense any legal costs related to environmental remediation as incurred. We record recoveries of environmental remediation costs from other parties as assets when their receipt is deemed probable. We did not have any such assets recorded at December 31, 2010 or 2011. See Note 7.

Income taxes. In August 2011, we became a member of Contran's consolidated U.S. federal income tax group (the "Contran Tax Group") pursuant to Contran's purchase of additional shares of our common stock which resulted in Contran's ownership interest increasing to more than 80%. See Note 10. We also file consolidated income tax returns with Contran in various U.S. state jurisdictions. As a member of the Contran Tax Group, we are now a party to a tax sharing agreement with Contran which provides that, beginning in August 2011, we compute our tax provision for U.S. income taxes on a separate-company basis using the tax elections made by Contran. Pursuant to the tax sharing agreement, we make payments to, or receive payments from, Contran in amounts we would have paid to or received from the U.S. Internal Revenue Service or the applicable state tax authority had we not been a member of the Contran Tax Group for all periods after August 2011. We paid Contran $.2 million for income taxes in 2011.

Deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the income tax and financial reporting carrying amounts of assets and liabilities. We periodically evaluate our deferred tax assets and adjust any related valuation allowance based on the estimate of the amount of such deferred tax assets which we believe does not meet the more-likely-than-not recognition criteria.

We record a reserve for uncertain tax positions for tax positions where we believe it is more-likely-than-not our position will not prevail with the applicable tax authorities. Our reserve for uncertain tax positions was nil in each of 2009, 2010 and 2011.

Net sales. We record sales when products have shipped and title and other risks and rewards of ownership have passed to the customer. We include amounts charged to customers for shipping and handling in net sales. Our sales are stated net of volume rebates and discounts for price and early payment. We report taxes assessed by a governmental authority such as sales, use, value added and excise taxes on a net basis (i.e., we do not recognize these taxes in either our revenues or in our costs and expenses).

Selling, general and administrative expenses. Selling, general and administrative expenses include costs related to marketing, sales, distribution, environmental costs and administrative functions such as accounting, treasury and finance, and includes costs for salaries and benefits, travel and entertainment, promotional materials and professional fees. Advertising costs, expensed as incurred, were $1.1 million, $1.4 million and $1.8 million in 2009, 2010 and 2011, respectively.