e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended
June 30, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
from to
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Commission file number 1-31926
MITTAL STEEL USA INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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71-0871875
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number)
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1 South Dearborn, Chicago,
Illinois
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60603
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(Address of Principal Executive
Offices)
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(Zip
Code)
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(312) 899-3400
(Registrants Telephone
Number Including Area Code)
The Registrant meets the conditions set forth in General
Instruction H(1)(a) and (b) of
Form 10-Q
and is therefore filing this Form with the reduced disclosure
format.
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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
Filer o Accelerated
Filer o Non-Accelerated
Filer þ
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of August 14, 2006, the Registrant had
120.81658 shares of common stock, par value $0.01 per
share, all of which are ultimately owned by Mittal Steel Company
N.V., a company organized under the laws of The Netherlands
(Mittal).
PART I
FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL
STATEMENTS
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MITTAL
STEEL USA INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in millions)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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June 30,
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June 30,
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2006
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2005
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2006
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2005
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Net sales
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$
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3,375
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$
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2,558
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$
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6,736
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$
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3,462
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Costs and expenses:
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Cost of sales (excluding
Depreciation and amortization shown separately below)
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2,873
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2,217
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5,789
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2,856
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Selling, general and
administrative and other expenses
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68
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62
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147
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70
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Depreciation and amortization
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89
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61
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183
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86
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Total costs and expenses
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3,030
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2,340
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6,119
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3,012
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Income from operations
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345
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218
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617
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450
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Interest and other financing
expense, net
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49
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43
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98
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63
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Income before income taxes
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296
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175
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519
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387
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Provision for income taxes
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118
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42
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179
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126
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Net income
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$
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178
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$
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133
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$
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340
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$
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261
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See accompanying notes to consolidated financial statements.
3
MITTAL
STEEL USA INC.
Consolidated Balance Sheets
(Dollars in millions except share and per share amounts)
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June 30,
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December 31,
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2006
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2005
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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6
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$
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55
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Restricted cash
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2
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8
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Receivables, net of allowances of
$70 and $60
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1,150
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975
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Receivable from related companies
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8
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6
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Inventories
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2,497
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2,508
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Prepaid expenses and other
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121
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145
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Total current assets
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3,784
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3,697
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Long-term assets:
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Property, plant and equipment, net
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5,664
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5,779
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Investments in and advances to
joint ventures
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304
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273
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Receivable from related companies
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172
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109
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Other assets
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208
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307
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Goodwill
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177
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Deferred income taxes
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202
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163
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Total assets
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$
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10,511
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$
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10,328
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LIABILITIES AND STOCKHOLDER
EQUITY
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Current liabilities:
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Accounts payable
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$
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937
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$
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1,018
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Payables to related companies
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138
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35
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Accrued salaries, wages and benefits
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421
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284
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Accrued taxes
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279
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212
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Accrued expenses and other
liabilities
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234
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155
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Unfavorable contracts
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262
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367
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Current debt and capital lease
obligations
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25
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42
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Deferred income taxes
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129
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99
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Total current liabilities
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2,425
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2,212
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Long-term liabilities:
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Related party debt
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2,120
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2,270
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Debt and capital lease obligations
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774
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821
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Pension and other retiree benefits
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1,901
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1,988
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Other long-term liabilities
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629
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684
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Total long-term liabilities
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5,424
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5,763
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Total liabilities
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7,849
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7,975
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Stockholder
equity
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Preferred stock, $.01 par
value, 100 shares authorized, 100 shares issued and
outstanding, liquidation value $90
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90
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90
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Common stock, $.01 par value,
1,000 shares authorized, 121 shares issued and
outstanding
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Additional paid-in capital
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2,542
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2,550
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Retained earnings
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663
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323
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Accumulated other comprehensive loss
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(633
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(610
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Total stockholder equity
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2,662
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2,353
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Total liabilities and stockholder
equity
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$
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10,511
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$
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10,328
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See accompanying notes to consolidated financial statements.
4
MITTAL
STEEL USA INC.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
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Six Months
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Six Months
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Ended
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Ended
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June 30, 2006
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June 30, 2005
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Operating activities:
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Net income
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$
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340
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$
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261
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Adjustments to reconcile net
income to net cash provided by operating activities:
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Depreciation
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183
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86
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Deferred income taxes
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97
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85
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Net amortization of purchased
intangibles and contracts
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(190
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)
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(42
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Undistributed earnings from joint
ventures
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(21
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(21
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Other non-cash operating expenses
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11
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(5
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Change in operating assets and
liabilities, net of effects from acquisitions:
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Receivables
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(176
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232
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Inventories
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10
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81
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Prepaid expenses and other assets
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(8
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(8
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Accounts payable
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(42
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)
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(146
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Payables to / receivables from
related companies
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33
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4
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Deferred employee benefit cost
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49
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(345
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Accrued expenses and other
liabilities
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47
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(3
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Net cash provided by operating
activities
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333
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179
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Investing activities:
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Capital expenditures
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(156
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(101
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Investment in, advances to and
distributions from joint ventures, net
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10
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14
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Restricted cash
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6
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(13
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Acquisition of ISG, net of cash
acquired
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(1,472
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Proceeds from sale of property,
plant and equipment
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15
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13
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Other cash from investing
activities
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11
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Net cash used in investing
activities
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(114
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(1,559
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Financing activities:
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Proceeds from long-term debt and
note payable to related companies
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2,072
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Proceeds (payments) from revolver
borrowings
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212
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Payments on long-term debt to
related companies
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(229
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)
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(612
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)
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Payments of note payable and
long-term debt
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(13
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(7
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Payments on note receivable from
related companies, net
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(248
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)
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Deferred financing costs
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(4
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Proceeds (payments) payable to
banks
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(22
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(6
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Net cash provided by (used in)
financing activities
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(268
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)
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1,411
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Net change in cash and cash
equivalents
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(49
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)
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31
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Cash and cash
equivalents beginning of period
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55
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81
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Cash and cash
equivalents end of period
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$
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6
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$
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112
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Supplemental schedule of
noncash operating and financing activities:
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Conversion of long term Pension
Benefit Guaranty Note to Parents common stock
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35
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See accompanying notes to consolidated financial statements.
5
MITTAL
STEEL USA INC.
Notes to
Financial Statements
(Unaudited)
(Dollars in millions)
Effective December 31, 2005, Mittal Steel USA ISG Inc.
(Mittal ISG) merged with another indirect wholly owned
subsidiary of Mittal Steel Company N.V. (Mittal), Ispat Inland
Inc. (Inland). Mittal ISG was the surviving subsidiary and was
renamed Mittal Steel USA Inc. (MSUSA or the Company). On
April 15, 2005, Mittal acquired International Steel Group
Inc. (ISG) which was renamed Mittal Steel USA ISG Inc. The
business combination was accounted for under the purchase
method. See Note 2, ISG Acquisition for a
description of the acquisition.
The merger of Mittal ISG and Inland was accounted for as a
merger of net assets under common control. The existing book
values of the companies were combined without remeasuring the
assets and liabilities at the business combination date. The
additional paid in capital of Mittal ISG and Inland were
combined as of the date of the merger. Although Mittal ISG was
the surviving entity, Mittal was the controlling party and the
merger between Mittal ISG and Inland was accounted for as a
reverse acquisition, with Inland as the accounting acquirer.
These financial statements present the combined company for
2006. These financial statements include the results of Mittal
ISG and Inland since they have been under the control of Mittal
for all periods presented for Inland and since April 15,
2005 for Mittal ISG.
These interim financial statements are unaudited and include
only selected notes. They do not contain all information
required for annual statements under United States generally
accepted accounting principles and should be read together with
the audited financial statements in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2005. In the opinion of
management, these interim financial statements reflect all
adjustments that are necessary to fairly present the results for
the interim periods presented. Certain prior period amounts have
been reclassified to conform to the current presentation.
The preparation of financial statements in conformity with
United States generally accepted accounting principles requires
that management make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. The results of operations for the interim periods shown
in this report are not necessarily indicative of the results to
be expected for a full year.
On April 15, 2005, ISG became a wholly owned subsidiary of
Mittal. ISGs stockholders received $2,072 in cash and
60,891,883 shares of Mittal Class A common shares
valued at $1,922. Mittal accounted for the acquisition under
SFAS No. 141, Business Combinations.
Assets recorded in the purchase include $386 assigned to
favorable supply and sales contracts that are being amortized
over the term of the associated contracts ranging from one to
six years (two year weighted average). The fair value of $1,095
assigned to unfavorable supply and sales contracts is being
amortized over the term of the associated contracts ranging from
one to 15 years (three year weighted average). We
recognized income of $101 and $190 during the three and six
month periods ended June 30, 2006 related to the net
amortization of these items.
In connection with this acquisition, we identified certain
facilities we are no longer operating. We permanently idled the
iron and steel producing operations at our Weirton plant, our
hot briquette iron plant in Trinidad, and our AK-ISG joint
venture. This will affect about 1,000 employees. We recorded a
$180 liability comprised of $113 for contract termination costs,
including lease obligations, and $67 for severance and other
employee benefits. See Note 9, Other Long-Term
Liabilities for a summary of spending against these
liabilities.
6
MITTAL
STEEL USA INC.
Notes to
Financial Statements (Continued)
We would have recorded sales of $3,025 and net income of $158
for the three month period ended June 30, 2005 and sales of
$6,589 and net income of $483 for the six month period ended
June 30, 2005 on a pro forma basis, if the merger had been
consummated at the beginning of the period. The pro forma
adjustments include the effects of the increased value of
property, plant and equipment, amortization of intangibles and
other acquisition costs. This pro forma data is based on
historical information and does not necessarily reflect the
actual results that would have occurred, nor is it indicative of
future results of operations.
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(3)
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Recently
Issued or Adopted Accounting Standards
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SFAS No. 151 In November 2004, the
Financial Accounting Standards Board (FASB) issued
SFAS No. 151, Inventory
Costs. SFAS No. 151 clarifies the accounting
for abnormal amounts of idle facility expense, freight handling
costs, and wasted material (spoilage). SFAS No. 151
requires that those items be recognized as current period
charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production
facilities. There was no material impact to our financial
statements upon the adoption of SFAS No. 151 on
January 1, 2006.
SFAS No. 123R In December 2004, the FASB
issued SFAS No. 123R Share Based Payment, which
replaces SFAS No. 123, and supersedes APB No. 25.
SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair
values. We started expensing stock options from 2003 using the
prospective method. In March 2005, the SEC staff issued Staff
Accounting Bulletin (SAB) No. 107, Share-Based Payment
regarding the SECs interpretation of
SFAS No. 123R and the valuation of share-based
payments for public companies. The adoption of
SFAS No. 123R on January 1, 2006 had no impact on
our financial statements.
FSP
FAS 109-1
In December 2004, the FASB staff issued FSP
FAS No. 109-1
Application of FASB Statement No. 109, Accounting for
Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of
2004. This FSP clarifies that the manufacturers
deduction provided for under the American Jobs Creation Act of
2004 should be accounted for as a special deduction in
accordance with SFAS No. 109 and not as a tax rate
reduction. We accounted for the special deduction accordingly,
beginning with the date of the acts enactment.
SFAS No. 153 In December 2004, the FASB
issued SFAS No. 153, Exchange of Non-monetary
Assets. SFAS No. 153 is based on the
principle that exchange of non-monetary assets should be
measured based on the fair market value of the assets exchanged.
SFAS No. 153 eliminates the exception of non-monetary
exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do
not have commercial substance. For MSUSA, SFAS No. 153
was effective for non-monetary asset exchanges in 2006 and
thereafter. This statement will only impact our financial
statements to the extent we have non-monetary exchanges in the
future. None are presently contemplated.
SFAS No. 154 In May 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error
Corrections that replaces APB No. 20 Accounting
Changes and SFAS No. 3, Reporting Accounting
Changes in Interim Financial
Statements. SFAS No. 154 provides guidance on
the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application to the
earliest practicable date, as the required method for reporting
a change in accounting principle and the reporting of a
correction of an error. We have had no changes in accounting
methods or error corrections that have required restatement
since we adopted the pronouncement on January 1, 2006.
SFAS No. 155 In February 2006, the FASB
issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. This statement eliminates a
restriction on the passive derivatives instruments that a
qualifying special-purpose entity (SPE) may hold and is
effective for all financial instruments acquired or
7
MITTAL
STEEL USA INC.
Notes to
Financial Statements (Continued)
issued after the beginning of an entitys first fiscal year
that begins after September 15, 2006. We do not expect the
adoption of this pronouncement to have an impact on our
financial statements.
SFAS No. 156 In March 2006, the FASB
issued SFAS No. 156, Accounting for Servicing of
Financial Assets. We have a consolidated SPE that
purchased certain of our receivables. This entity previously had
a financing arrangement with a group of banks. That arrangement
is no longer in place, but the SPE still exists. See Note 7
(l) Debt Former Credit Facilities in our
financial statements contained in our Annual Report filed on
Form 10-K
for the year ended December 31, 2005 for further details.
We are currently evaluating whether SFAS No. 156 will
impact the accounting for our SPE and our consolidated financial
statements. This statement is effective January 1, 2007.
FIN No. 48 In June 2006, the FASB issued
Financial Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes, which applies to all tax
positions related to income taxes. FIN No. 48
prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. Additionally,
FIN No. 48 provides guidance on the derecognition,
classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. FIN No. 48
is effective for fiscal years beginning after December 15,
2006. We are currently evaluating the impact, if any, this
statement will have on our financial statements.
Inventories are stated at the lower of cost or market, which
approximates replacement cost. Costs include the purchase costs
of raw materials, conversion costs, and an allocation of fixed
and variable production overhead. The reserve increase for the
three months ended June 30, 2006 was $17 and for the six
months ended June 30, 2006 was $43. The following table
presents the components of inventories:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
First-in, first-out (FIFO) or
average cost:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,007
|
|
|
$
|
1,005
|
|
Finished and semi-finished goods
|
|
|
1,540
|
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,547
|
|
|
|
2,515
|
|
LIFO reserve
|
|
|
(50
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,497
|
|
|
$
|
2,508
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2005, MSUSA (previously Inland)
changed its accounting policies for valuing inventory from FIFO
to LIFO. We believe the LIFO method is preferable to the FIFO
method because it provides better matching of current revenues
and costs in the income statement, primarily as a result of the
volatility in the key steel related energy and commodity markets
and because it provides better comparability to the LIFO method
used by many of the Companys competitors. We accounted for
the change in accounting method under APB No. 20,
Accounting Changes. APB No. 20 requires reporting a change
in accounting principle (with certain exceptions) in the year of
adoption with the cumulative effect on prior periods shown in
the income statement in the current year. The cumulative effect
of implementing LIFO on prior periods and the pro forma effects
of retroactive application is not determinable primarily because
the necessary accounting records since the inception of the
Company in 1998, which would be required to compute the
cumulative effect, are no longer available. The effect of
changing from FIFO to LIFO would have resulted in a reduction of
net income of $45 for the six months ended June 30, 2005
had the change been made during the quarter ended March 31,
2005.
8
MITTAL
STEEL USA INC.
Notes to
Financial Statements (Continued)
On April 20, 2005, we entered into definitive agreements as
borrower with respect to a new $1 billion term loan
facility and a new $700 term loan facility. Mittal Steel US
Finance LLC, a wholly owned subsidiary of Mittal is the lender
under each of the term loan facilities. These intercompany
borrowings were entered into as part of the financing
arrangements to pay the cash portion of the merger consideration
to ISGs former stockholders. The term loan facilities
represent an intercompany loan to the Company that another
subsidiary of Mittal borrowed under a credit agreement, dated as
of April 7, 2005 among Mittal and certain subsidiaries of
Mittal as original borrowers, and ABN AMRO Bank N.V., Citigroup
Global Markets Limited, Credit Suisse First Boston
International, Deutsche Bank AG London, HSBC Bank Plc and UBS
Limited, as lead arrangers, certain other lenders signatory to
the credit agreement and HSBC Bank Plc, as facility agent.
MSUSA drew down on each of the term loan facilities in the
principal amounts of $1 billion and $700 on April 21,
2005. Each of the term loan facilities will mature on
April 21, 2010. Each term loan facility contains general
undertakings which principally requires that all of the
Companys transactions with affiliates be conducted on an
arms length basis and limits our ability to incur additional
indebtedness, consummate certain extraordinary business
transactions such as mergers, and create liens on its properties.
We are required to pay interest on each of the term loan
facilities at an annual rate for each applicable interest period
equal to the sum of (i) a margin, initially set at 0.475%
and then subject to adjustment based on Mittals
unsubordinated unsecured debt rating plus 0.125%, and
(ii) the London Interbank Offering Rate (LIBOR) for the
applicable interest period. The initial interest period for each
of the term loan facilities is six months and then shall be
agreed upon between borrower and lender for subsequent periods
not to exceed six months.
MSUSA has $500 of senior, unsecured debt securities due 2014.
The debt bears interest at a rate of 6.5% and is paid
semi-annually. In addition, in 2004, an indirect subsidiary of
Mittal, Ispat Inland, ULC (Borrower) issued $800 principal
amount of senior secured notes: $150 of floating rate notes
bearing interest at LIBOR plus 6.75% due April 1, 2010 and
$650 of fixed rate notes bearing interest at 9.75% (issued at
99.212% to yield 9.875%) due April 1, 2014 (the Senior
Secured Notes). Also in 2004, the Company issued $800 principal
amount of First Mortgage Bonds (Series Y, in a principal
amount of $150, and Series Z, in a principal amount of
$650) to Ispat Inland Finance, LLC, an affiliate of the
Borrower, which, in turn, pledged them to the trustee for the
Senior Secured Notes as security. On April 1, 2006, the
Company redeemed all of its $150 outstanding floating rate
Senior Secured Notes at a redemption price equal to 103% of the
outstanding principal amount, plus accrued interest.
The Senior Secured Notes are also secured by a second position
lien on the inventory of the Company. As further credit
enhancement, the Senior Notes are fully and unconditionally
guaranteed by the Company, certain subsidiaries of the Company,
Mittal and certain other affiliates of the Borrower. The Company
is obligated to pay interest on the Series Y Bonds at the
rate paid on the floating rate Senior Secured Notes, plus
one-half of one percent per annum, and on the Series Z
Bonds at a rate of 10.25%.
We had a $35 convertible note with the Pension Benefit Guaranty
Corporation (PBGC) that bore interest at 6.0% and required
semi-annual interest payments. On April 20, 2006, the PBGC
note was converted into 1,268,719 class A common shares of
Mittal. On April 25, 2006 an inter-group payable was
created between Mittal and MSUSA for $48 which represented the
fair value of the shares on the date of conversion. The
difference of $12 was a recorded as a reduction to additional
paid-in capital.
We have $121 in various unsecured Industrial Development Revenue
Bonds that bear interest at rates that range from 5.75% to 7.25%
and maturity dates that range from 2007 to 2014.
9
MITTAL
STEEL USA INC.
Notes to
Financial Statements (Continued)
The Company fully redeemed all of its remaining $17 Pollution
Control Series 1977, 5.75% Bonds due February 2007 during
the first quarter 2006. Mittal repaid this on the behalf of
MSUSA and reduced an inter- company promissory note owed MSUSA
by an equivalent amount.
The income tax provision for the first six months of 2006 is
based on an estimated annual effective rate of 36.8% for
ordinary operations before consideration of discreet items. The
estimated annual effective rate after consideration of discreet
items approximates 35.9%. The income tax provision for the six
month period ending June 30, 2006 includes a one-time
benefit of $12 related to a change in Indiana income taxes that
phases in a single sales factor for apportioning income to the
state.
SFAS No. 109, Accounting for Income Taxes,
requires that we record a valuation allowance for a deferred tax
asset when it is more likely than not (a likelihood
of more than 50%) that some portion or all of the deferred tax
asset will not be realized based on available positive and
negative evidence. The realization of the deferred tax
asset is ultimately dependent upon the Companys generation
of sufficient future taxable income during periods in which
those net temporary differences become deductible and before the
expiration of the NOL carryforwards. The valuation allowance at
June 30, 2006 is $52.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
178
|
|
|
$
|
133
|
|
|
$
|
340
|
|
|
$
|
261
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in value during the period
|
|
|
15
|
|
|
|
(10
|
)
|
|
|
(39
|
)
|
|
|
(10
|
)
|
Recognized in net income
|
|
|
(5
|
)
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Income taxes
|
|
|
(3
|
)
|
|
|
4
|
|
|
|
14
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
(loss)
|
|
|
7
|
|
|
|
(6
|
)
|
|
|
(23
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
185
|
|
|
$
|
127
|
|
|
$
|
317
|
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSUSA is exposed to fluctuations in interest rates and the
prices of certain commodities such as natural gas, fuel oil,
coke, steel scrap, iron ore and various non-ferrous metals.
Management is authorized to use various financial instruments
where available to manage the exposures associated with these
fluctuations. MSUSA may employ the use of futures, forwards,
collars, options and swaps to manage certain exposures when
practical. By policy, MSUSA does not enter into such contracts
for the purpose of speculation. MSUSAs policies include
establishing a risk management philosophy and objectives,
providing guidelines for derivative usage and establishing
procedures for control and reporting of derivative activity. For
certain transactions MSUSA may elect to account for these
transactions as hedges. In this case, the change in value of the
effective portion of financial instruments used to hedge certain
exposures is reported as a component of other comprehensive
income and is reclassified into earnings in the same period
during which the hedged transactions affect earnings. Because of
the extensive documentation requirements necessary to elect
hedge treatment for derivative instruments, we did not elect
this accounting during 2005 and all unrealized gains and losses
in the market value of these instruments were recognized in the
period in which the change in value occurred. Effective January
2006, we implemented the appropriate documentation requirements
and elected hedge treatment for certain qualifying derivative
instruments.
10
MITTAL
STEEL USA INC.
Notes to
Financial Statements (Continued)
|
|
(8)
|
Pension
and Other Postretirement Benefit Plans
|
Under our labor agreement with the United Steelworkers of
America (USW), the Company and the USW established defined
contribution benefit trusts (VEBA) to fund retiree medical and
death benefits for retirees and dependents from certain
bargaining units formerly represented by the USW. We have a
similar agreement with the Independent Steel Workers Union (ISU)
at our Weirton facility. We have contributed $57 so far in 2006.
We provide a non-contributory defined benefit pension plan
covering substantially all USW represented employees at our
Hibbing Taconite joint venture and our Indiana Harbor East
facility. Hibbings non-represented salaried employees and
certain non-represented salaried employees of the former Inland
also receive defined pension benefits. Employees at other
facilities are not covered by a defined benefit pension plan. We
expect to contribute certain funds to the Inland trust in 2006,
depending on operating cash flows. There are no PBGC or ERISA
funding requirements in 2006.
Substantially all USW represented employees are covered under
postretirement life insurance and medical benefit plans that
require deductible and co-insurance payments from retirees. For
most employees, the Companys share of the healthcare costs
are capped at 2008 levels for years 2010 and beyond. The
postretirement life insurance benefits are primarily specific
amounts for hourly employees. We are not required to pre-fund
any amounts under the defined benefit postretirement plans and
expect the benefits to be paid in 2006 to be about $76. Our
prorated required contribution to the Hibbing plan for other
benefits based on tons produced in 2005 and expected benefit
payments is $10 in 2006.
ISGs labor contract with the USW provided defined benefit
retiree medical and death benefit plans covering employees who
are eligible to retire under the current labor agreements. We do
not intend to provide similar retiree medical benefits for
employees who retire after the current labor agreement expires,
but as required by accounting rules, have recognized a
healthcare obligation for all active employees, including those
expected to retire after the expiration of the current agreement.
The details of our period pension and other postretirement
expense follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other Benefits
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
|
|
41
|
|
|
|
40
|
|
|
|
14
|
|
|
|
14
|
|
Expected return on plan assets
|
|
|
(51
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
(1
|
)
|
Amortization of unrecognized
actuarial loss
|
|
|
18
|
|
|
|
14
|
|
|
|
2
|
|
|
|
|
|
Amortization of unrecognized prior
service cost (credit)
|
|
|
3
|
|
|
|
2
|
|
|
|
(19
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic postretirement
benefit cost (credit)
|
|
$
|
21
|
|
|
$
|
19
|
|
|
$
|
(1
|
)
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
MITTAL
STEEL USA INC.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension
|
|
|
Benefits
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
20
|
|
|
$
|
19
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Interest cost
|
|
|
82
|
|
|
|
79
|
|
|
|
28
|
|
|
|
27
|
|
Expected return on plan assets
|
|
|
(102
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
(1
|
)
|
Amortization of unrecognized
actuarial loss
|
|
|
36
|
|
|
|
28
|
|
|
|
4
|
|
|
|
|
|
Amortization of unrecognized prior
service cost (credit)
|
|
|
6
|
|
|
|
4
|
|
|
|
(38
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic postretirement
benefit cost (credit)
|
|
$
|
42
|
|
|
$
|
38
|
|
|
$
|
(2
|
)
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9)
|
Other
Long-Term Liabilities
|
We are subject to various legal actions and contingencies in the
normal course of conducting business. We accrue liabilities for
such matters when a loss is probable and the amount can be
reasonably estimated. The effect of the ultimate outcome of
these matters on future results of operations and liquidity
cannot be predicted with any certainty. While the resolution of
these matters may have a material effect on the results of
operations of a particular future quarter or year, we believe
that the ultimate resolution of such matters in excess of
liabilities recorded will not have a material adverse effect on
our competitive position or financial position.
The environmental liabilities and asset retirement obligations
of Mittal ISG were recognized in a business combination, while
the liabilities of Inland were not. In accordance with
SFAS No. 141, Business Combinations, the
expected future environmental remediation costs and asset
retirement obligations acquired with the purchase of ISG were
recorded at present value amounts determined at appropriate
current interest rates at the time of the acquisition (4.75%).
We determined that rate to be the risk free rate (not
credit-adjusted). The environmental liabilities of Inland (and
any liabilities recognized in the future) were recorded in
accordance with Statement of Position 96-1, Environmental
Remediation Liabilities. These amounts are not
discounted because the amount and timing of cash payments are
not fixed or reliably determinable. We recorded asset retirement
obligations for Inland for the removal of asbestos and the
closure of our iron ore mining properties. We accounted for
these liabilities in accordance with SFAS No. 143,
Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that we
discount the liabilities using a credit-adjusted risk free rate
(amounts at 6.15% and 7.00%).
12
MITTAL
STEEL USA INC.
Notes to
Financial Statements (Continued)
The activity associated with these liabilities including
environmental, asset retirement obligations (ARO) and those
recorded in connection with the facilities that are no longer
being operated (see note 2, ISG Acquisition) follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
Environmental
|
|
|
|
Employee
|
|
|
Termination
|
|
|
|
and ARO
|
|
|
|
Termination
|
|
|
Costs
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
2006
|
|
|
2006
|
|
Balance beginning of
period
|
|
$
|
287
|
|
|
$
|
8
|
|
|
|
$
|
55
|
|
|
$
|
45
|
|
Liabilities recognized at
acquisition
|
|
|
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
Revision of amounts previously
recorded in business combination
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
68
|
|
Recognized in earnings
|
|
|
7
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Spending charged to the liability
|
|
|
(14
|
)
|
|
|
(3
|
)
|
|
|
|
(45
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of period
|
|
$
|
280
|
|
|
$
|
240
|
|
|
|
$
|
22
|
|
|
$
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undiscounted amount
|
|
$
|
477
|
|
|
$
|
386
|
|
|
|
$
|
22
|
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10)
|
Related
Party Transactions
|
The table below summarizes related party transactions (see
Note 5, Debt for a discussion of long term related
party debt). Included in payables to related parties shown on
the balance sheet are advances between MSUSA and Mittal which
are treated as short term promissory notes in addition to
amounts owed for management fees. During the first quarter 2006,
Mittal paid $95 to MSUSA for promissory notes entered into
during 2005. The payment of $95 included $17 that was a
reduction of inter-company debt related to Mittals
redemption of the Pollution Control Series Bonds on behalf
of MSUSA. In addition, Mittal advanced $70 to MSUSA under a new
promissory note during the first quarter 2006.
During the second quarter 2006, MSUSA repaid $70 to Mittal for
promissory notes entered into during the first quarter 2006. In
addition, MSUSA advanced $158 to Mittal under a new promissory
note during the second quarter of 2006. MSUSA redeemed the $150
Series Y First Mortgage Bond, plus paid an early redemption
fee of $5 to Ispat Inland Finance LLC. The $35 convertible note
with the PBGC was converted into 1,268,719 class A common
shares of Mittal. An inter-group payable was created between
Mittal and MSUSA for $48 which represented the fair value of the
shares on the date of conversion.
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Balance sheet:
|
|
|
|
|
|
|
|
|
Payable to related parties
|
|
$
|
138
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
Receivable from related parties
|
|
$
|
180
|
|
|
$
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Statements of
Operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other financing
expense, net to related parties
|
|
$
|
49
|
|
|
$
|
39
|
|
|
$
|
97
|
|
|
$
|
56
|
|
MSUSA purchases from related
parties
|
|
|
90
|
|
|
|
93
|
|
|
|
138
|
|
|
|
164
|
|
MSUSA sales of inventory to
related parties
|
|
|
104
|
|
|
|
135
|
|
|
|
199
|
|
|
|
238
|
|
13
MITTAL
STEEL USA INC.
Notes to
Financial Statements (Continued)
For the three months ending June 30 we recorded $9 and $10
for 2006 and 2005 for our share of earnings in the joint
ventures as a reduction of cost of sales. For the six months
ending June 30 we recorded $21 and $21 for 2006 and 2005
for our share of earnings in the joint ventures as a reduction
of cost of sales.
A summary of combined financial information of our
unconsolidated joint ventures follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Results for the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
402
|
|
|
$
|
286
|
|
|
$
|
731
|
|
|
$
|
541
|
|
Costs and expenses
|
|
|
350
|
|
|
|
271
|
|
|
|
628
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
52
|
|
|
$
|
15
|
|
|
$
|
103
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2006
|
|
12/31/2005
|
|
Balance sheet:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
238
|
|
|
$
|
276
|
|
Total assets
|
|
|
878
|
|
|
|
904
|
|
Current liabilities
|
|
|
255
|
|
|
|
271
|
|
Total liabilities
|
|
|
527
|
|
|
|
584
|
|
Net assets
|
|
$
|
351
|
|
|
$
|
320
|
|
Most of these joint ventures provide services to our operations.
They bill for these services at cost or some other contractual
rate that may not reflect the market rate for these services.
(12) Subsequent
Events
On August 1, 2006, the U.S. Department of Justice (DOJ)
announced that it had concluded that the acquisition by Mittal
Steel Company N.V., our parent company, of Arcelor, a
Luxembourg-based steelmaker, which closed on August 1, was
likely to substantially lessen competition in the market for tin
mill products in the Eastern United States, and filed in the
U.S. District Court in Washington, D.C. a consent decree, which
Mittal Steel had previously signed with the DOJ on May 11,
2006. The consent decree requires the divestiture of Dofasco
Inc., a Canadian-based steel producer acquired by Arcelor in
February 2006 or, if Dofasco cannot be sold, the divestiture of
whichever of two identified, alternative assets is selected by
DOJ. In April 2006, Arcelor announced that it had transferred
its Dofasco holdings to S3, an independent Dutch foundation, in
order to prevent any sale of Dofasco for five years, unless
S3s board of directors decides to dissolve S3 earlier. The
two alternative assets identified in the consent decree are
Mittal Steels Sparrows Point facility located near
Baltimore, Maryland and Mittal Steels Weirton facility
located in Weirton, West Virginia. In the twelve months ended
December 31, 2005, the Sparrows Point facility, which
primarily serves the construction, tin and distribution markets,
represented approximately 15% of the Companys total
production volume and 11% of total sales volume, and the Weirton
facility, which primarily operates finishing facilities for tin
products but does not currently produce liquid steel,
represented approximately 6% of the Companys total sales
volume, in each case on a pro forma basis assuming that the
acquisition of ISG had occurred on January 1, 2005. Mittal
Steel Company remains firmly committed to performing its
obligations under the consent decree, including with respect to
the sale of Dofasco.
14
|
|
ITEM 2.
|
MANAGEMENTS
NARRATIVE ANALYSIS RESULTS OF
OPERATIONS
|
Forward-Looking
Statements
The Company and its representatives may from time to time make
forward-looking statements in reports filed with the Securities
and Exchange Commission (SEC), reports to stockholders, press
releases, other written documents and oral presentations. These
forward-looking statements may be identified by the use of
predictive, future-tense or forward-looking terminology, such as
believes, anticipates,
expects, estimates, intends,
may, or similar terms. These statements speak only
as of the date of such statements and the Company will undertake
no ongoing obligation, other than that imposed by law, to update
these statements. These statements appear in a number of places
in this report and include statements regarding the
Companys intent, belief or current expectations of its
directors, officers or advisors with respect to, among other
things:
|
|
|
|
|
trends affecting the Companys financial condition, results
of operations or future prospects;
|
|
|
|
business and growth strategies;
|
|
|
|
operating culture and philosophy; and
|
|
|
|
financing plans and forecasts.
|
Any such forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and
actual results may differ materially from those contained in the
forward-looking statements as a result of various factors, some
of which are unknown. The factors that could adversely affect
the Companys actual results and performance include,
without limitation:
|
|
|
|
|
negative overall economic conditions or conditions in the
markets served;
|
|
|
|
competition within the steel industry;
|
|
|
|
legislation or regulatory changes including changes in
U.S. or foreign trade policy affecting steel imports or
exports;
|
|
|
|
changes in foreign currencies affecting the strength of the
U.S. dollar;
|
|
|
|
actions by domestic and foreign competitors;
|
|
|
|
the inability to achieve our anticipated growth objectives;
|
|
|
|
changes in availability or cost of raw materials, energy or
other supplies; and
|
|
|
|
labor issues affecting the Companys workforce or the steel
industry generally;
|
Results
of operations
On April 15, 2005, Mittal Steel Company N.V. (Mittal)
acquired International Steel Group Inc. (ISG). The business
combination was accounted for under the purchase method. See
Note 2, ISG Acquisition in our financial statements
for a description. Effective December 31, 2005, Mittal
Steel USA ISG Inc. (Mittal ISG) merged with Ispat Inland Inc.
(Inland). The merger of Mittal ISG and Inland was accounted for
as a merger of net assets under common control. The existing
book values of the companies were combined without remeasuring
the assets and liabilities at the business combination date.
Although Mittal ISG was the surviving entity, Mittal was the
controlling party and the merger between Mittal ISG and Inland
was accounted for as a reverse acquisition, as if Inland was the
surviving entity. These financial statements include the results
of Mittal ISG and Inland since they have been under the control
of Mittal for all periods presented for Inland and since
April 15, 2005 for Mittal ISG.
To facilitate the discussion of the three and six month periods
ended June 30, 2006 against the results of operations for
the same periods in 2005, the historical operations of Inland,
ISG and MSUSA ISG have been combined even though they were
separate reporting entities under different control. No pro
forma adjustments have been made and we have simply combined
their respective results.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
|
|
|
MSUSA
|
|
ISG
|
|
MSUSA ISG
|
|
Inland
|
|
Combined
|
|
|
|
|
4/1/06 6/30/06
|
|
4/1/05 4/15/05
|
|
4/16/05 6/30/05
|
|
4/1/05 6/30/05
|
|
4/1/05 6/30/05
|
|
|
|
|
(Dollars and tons in millions)
|
|
|
|
Net sales
|
|
$
|
3,375
|
|
|
$
|
468
|
|
|
$
|
1,939
|
|
|
$
|
626
|
|
|
$
|
3,033
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,873
|
|
|
|
389
|
|
|
|
1,673
|
|
|
|
552
|
|
|
|
2,614
|
|
|
|
|
|
Selling, gen.& admin.
|
|
|
68
|
|
|
|
86
|
|
|
|
53
|
|
|
|
9
|
|
|
|
148
|
|
|
|
|
|
Depreciation
|
|
|
89
|
|
|
|
7
|
|
|
|
35
|
|
|
|
26
|
|
|
|
68
|
|
|
|
|
|
Other (income) exp.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
Interest expense, net
|
|
|
49
|
|
|
|
4
|
|
|
|
22
|
|
|
|
21
|
|
|
|
47
|
|
|
|
|
|
Income taxes
|
|
|
118
|
|
|
|
1
|
|
|
|
39
|
|
|
|
3
|
|
|
|
43
|
|
|
|
|
|
Net income(loss)
|
|
$
|
178
|
|
|
$
|
(19
|
)
|
|
$
|
117
|
|
|
$
|
16
|
|
|
$
|
114
|
|
|
|
|
|
Shipments
|
|
|
5.1
|
|
|
|
.5
|
|
|
|
3.0
|
|
|
|
1.0
|
|
|
|
4.5
|
|
|
|
|
|
Raw steel production
|
|
|
5.8
|
|
|
|
.5
|
|
|
|
3.0
|
|
|
|
1.0
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
MSUSA
|
|
ISG
|
|
MSUSA ISG
|
|
Inland
|
|
Combined
|
|
|
|
|
1/1/06 6/30/06
|
|
1/1/05 4/15/05
|
|
4/16/05 6/30/05
|
|
1/1/05 6/30/05
|
|
1/1/05 6/30/05
|
|
|
|
|
(Dollars and tons in millions)
|
|
|
|
Net sales
|
|
$
|
6,736
|
|
|
$
|
3,128
|
|
|
$
|
1,939
|
|
|
$
|
1,531
|
|
|
$
|
6,598
|
|
|
|
|
|
Cost of goods sold
|
|
|
5,789
|
|
|
|
2,644
|
|
|
|
1,673
|
|
|
|
1,191
|
|
|
|
5,508
|
|
|
|
|
|
Selling, gen.& admin.
|
|
|
147
|
|
|
|
159
|
|
|
|
53
|
|
|
|
19
|
|
|
|
231
|
|
|
|
|
|
Depreciation
|
|
|
183
|
|
|
|
48
|
|
|
|
35
|
|
|
|
51
|
|
|
|
134
|
|
|
|
|
|
Other (income) exp.
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
(12
|
)
|
|
|
|
|
Interest expense, net
|
|
|
98
|
|
|
|
15
|
|
|
|
22
|
|
|
|
41
|
|
|
|
78
|
|
|
|
|
|
Income taxes
|
|
|
179
|
|
|
|
109
|
|
|
|
39
|
|
|
|
87
|
|
|
|
235
|
|
|
|
|
|
Net income(loss)
|
|
$
|
340
|
|
|
$
|
163
|
|
|
$
|
117
|
|
|
$
|
144
|
|
|
$
|
424
|
|
|
|
|
|
Shipments
|
|
|
10.2
|
|
|
|
4.3
|
|
|
|
3.0
|
|
|
|
2.3
|
|
|
|
9.6
|
|
|
|
|
|
Raw steel production
|
|
|
11.8
|
|
|
|
5.4
|
|
|
|
2.9
|
|
|
|
2.3
|
|
|
|
10.6
|
|
|
|
|
|
Second
Quarter 2006 Compared to Second Quarter 2005
Net income in the second quarter of 2006 rose by
$64 million, or 56%, to $178 million from
$114 million in the second quarter of 2005. This was
partially driven by a 13% increase in steel shipments in the
second quarter of 2006. Second quarter 2006 shipments increased
to 5.1 million tons from the 4.5 million tons shipped
in the second quarter of 2005. The increase in volume was due in
particular to certain markets replenishing inventories that had
been reduced throughout 2005. With the increase in shipment
volume, the sales revenue in the second quarter of 2006
increased by 11% to $3,375 million from $3,033 million
in the second quarter of 2005. The average selling price per ton
decreased in the second quarter of 2006 by 2%, to $662 per
ton from $674 per ton in the second quarter of 2005,
reflecting the market trends.
Cost of goods sold, exclusive of depreciation, increased in the
second quarter of 2006 by 10% to $2,873 million from
$2,614 million in the comparable period of 2005. This
increase in cost was the result of higher sales volume, higher
input prices, and the impact of operating outages at three of
our facilities. In April, 2006 a fire occurred at one of the
steelmaking shops at our Indiana Harbor Plant. Indiana Harbor
has since resumed production. In mid-June a motor failure
occurred at our Conshohocken plate mill. A replacement for the
motor is expected in late August. The company also experienced
an outage resulting from a lightning strike at our blast furnace
at the Sparrows Point Plant toward the end of the quarter. The
losses arising out of these incidents are covered by insurance.
Selling and general administrative expenses decreased by
$80 million to $68 million in the second quarter of
2006 from $148 million in the second quarter of 2005,
primarily due to the merger related expenses which were incurred
at the time of the acquisition of ISG.
16
Depreciation expense increased by $21 million in the second
quarter of 2006 to $89 million compared to $68 million
in the second quarter of 2005 due to the inclusion of the assets
acquired from ISG. Net interest expense was also higher for the
three month period ended June 30, 2006 compared to the same
period in 2005 due to higher average debt outstanding including
the $1,700 billion intercompany borrowings at Mittal Steel
US Finance LLC, a wholly owned subsidiary of Mittal. The
intercompany borrowings were entered into as part of the
financing arrangements to pay for the cash portion of the ISG
acquisition.
In June 2005 the Company recognized discrete benefits related to
state tax law changes, which accounted for the lower tax
provision for the second quarter ended June 30, 2005 when
compared to the second quarter ended June 30, 2006.
First Six
Months 2006 Compared to First Six Months 2005
Net income in the first six months of 2006 decreased by
$84 million to $340 million from $424 million in
the first six months of 2005. Sales revenue increased by 2% to
$6,736 million in the first six months of 2006 from
$6,598 million in the first six months of 2005 as shipments
were 10.2 million tons in 2006 compared to 9.6 million
tons in 2005. Average net sales price decreased by 4% to
$660 per ton in the first half of 2006 compared to
$687 per ton in the first half of 2005 due to a better
market balance of supply and demand.
Cost of goods sold, exclusive of depreciation, increased in the
first six months of 2006 by 5% to $5,789 million from
$5,508 million in the comparable period of 2005. This cost
increase was the result of higher sales volume, higher input
prices, and the impact of the operating outages mentioned above.
Selling and general administrative expenses decreased by
$84 million to $147 million in the first six months of
2006 from $231 million in the first half of 2005, primarily
due to the merger related expenses which were incurred at the
time of the acquisition of ISG in the second quarter of 2005.
Depreciation expense increased by $49 million in the first
half of 2006 to $183 million compared to $134 million
in the first half of 2005 due to the assets acquired from ISG.
Net interest expense was also higher for the six month period
ended June 30, 2006 compared to the same period in 2005 due
to higher average debt from Mittal Steel US Finance LLC.
The income tax provision for the six months ended June 30,
2006 is slightly higher when compared to the six months ended
June 30, 2005 due to the recognition of discrete state tax
benefits in both periods and a provision for a valuation reserve
for state tax assets in 2006.
Liquidity
The Companys cash balance at June 30, 2006 was
$6 million ($55 million as on December 31, 2005).
Cash provided by operating activities for the six months ended
June 30, 2006 was $333 million. During the six months
ended June 2006, the Companys net payments to related
parties for notes entered into prior to 2006 were
$71 million. In addition, Mittal advanced $70 million
to the Company under a new promissory note during the first
quarter 2006, which was repaid in the second quarter 2006. The
Company has advanced Mittal $158 million under a new
promissory note this quarter.
|
|
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
EVALUATION
OF DISCLOSURE CONTROLS
Management is responsible for establishing and maintaining a
system of disclosure controls and procedures and a system of
internal control over financial reporting for Mittal Steel USA.
Disclosure controls and procedures means controls
and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time
period specified in the SECs rules and forms.
Internal control over financial reporting includes
those policies and procedures that pertain to the maintenance of
records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of
17
the Company; provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements for external purposes in accordance with accounting
principles generally accepted in the United States of America,
and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and
directors of the Company; and provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Companys assets
that could have a material effect on the financial statements.
Because of their inherent limitations, systems of disclosure
controls and procedures and internal control over financial
reporting, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control
objectives and may not prevent or detect misstatements. Further,
because of changes in conditions (including staffing and
operations integration, as discussed in more detail below),
effectiveness of disclosure controls and procedures and internal
control over financial reporting may vary over time.
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
Under the supervision and with the participation of our
management, including our chief executive officer and chief
financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13 (a)-15
(e) and 15
(d)-15
(e) under the Exchange Act as of June 30, 2006
(Evaluation Date). Based on this evaluation, for the reasons
discussed in the following paragraphs, the Companys
principal executive officer and principal financial officer
concluded that the Companys disclosure controls and
procedures were, as of the Evaluation Date, effective to provide
reasonable assurance that information required to be disclosed
by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the SECs rules and
forms. We reached this conclusion despite the past
identification of three material weaknesses, discussed below, in
our internal control over financial reporting. As we discussed
in our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006, we have taken extraordinary steps to
improve our disclosure controls, including a detailed review of
several of our accounting practices, which we believe mitigate
the potential effect of the previously identified material
weaknesses in our internal control over financial reporting.
In preparing our Exchange Act filings, we utilized processes and
procedures to provide reasonable assurance that information
relating to the Company that was required to be disclosed in
such filings was recorded, processed, summarized and reported
within the time periods specified by applicable SEC rules and
was accumulated and communicated to the Companys
management as appropriate to allow timely decisions regarding
required disclosure. These processes and procedures are designed
to, among other things, mitigate the effect of any deficiencies
in our internal control over financial reporting on information
relating to the Company that is required to be disclosed in our
Exchange Act filings.
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(b)
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Status
Of, And Changes In, Internal Control over Financial
Reporting
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Mittal Steel USA applied for and was granted approval to exit
from accelerated filer status in December 2005 and is therefore
not currently subject to certain reporting requirements of
Section 404 of the Sarbanes-Oxley Act of 2002. The Company
has, however, prepared the following update on internal controls
over financial reporting.
As noted in our Annual report on
Form 10-K
for the year ended December 31, 2005, our predecessor
company (ISG) and its external auditor concluded that the
Companys system of internal controls over financial
reporting was not effective as of December 31, 2004, as a
result of the following three material weaknesses: deficiencies
in policies and procedures in the inventory and cost of goods
sold process, excessive access to significant spreadsheets, and
inadequate segregation of duties in the revenue cycle. In
addition, in the course of managements work to finalize
the Companys financial statements for the fiscal year
ended December 31, 2005, we agreed, in consultation with
our external auditors, that we must strengthen our controls over
accounting for deferred taxes and for derivative instruments for
financial reporting.
18
Recent
Review of Internal Control Over Financial Reporting
Management has not identified any additional material weaknesses
in internal controls over financial reporting in the first or
second quarter of 2006.
Remediation
Activities
Management has taken actions in 2005 and 2006 to improve its
internal controls over financial reporting, as discussed in our
Annual Report on Form 10-K for the year ended
December 31, 2005 and our Quarterly Report of
Form 10-Q for the quarter ended March 31, 2006. As a
result of these actions, management believes that the internal
controls around all of the issues that we and our auditors have
previously commented on have been addressed. We continue to
assess our internal controls over financial reporting and will
make all necessary improvements identified by our ongoing review
process.
PART II
OTHER INFORMATION
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ITEM 1.
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LEGAL
PROCEEDINGS
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Environmental
Matters
The Companys operations are subject to a broad range of
laws and regulations relating to the protection of human health
and the environment. The prior owners of the Companys
facilities expended in the past, and the Company expects to
expend in the future, substantial amounts to achieve or maintain
ongoing compliance with U.S. federal, state, and local laws
and regulations, including the Resource Conservation and
Recovery Act (RCRA), the Clean Air Act (CAA), and the Clean
Water Act (CWA). These environmental expenditures are not
projected to have a material adverse effect on the
Companys consolidated financial position or on the
Companys competitive position with respect to other
similarly situated U.S. steelmakers subject to the same
environmental requirements.
The following describes material changes that have occurred
during the reporting quarter.
CAA, CWA
and Other Matters
Clean Air
Act
In April, 2006 the Maryland Department of Environment (MDE)
notified the Companys Sparrows Point facility of
alleged violations of emissions limitations on volatile organic
compounds from the facilitys sinter plant. The company is
discussing the allegations with MDE and expects to enter into a
Consent Order Agreement to resolve the matter before the end of
the year. The Consent Order is expected to impose a monetary
penalty payment which is expected to be approximately $75,000.
Clean
Water Act
Our Weirton facility is subject to stipulated penalties for
National Pollution Discharge Elimination System (NPDES) permit
excursions under a 1996 Multimedia Consent Decree. In April,
2006 the company was notified by the U.S. Dept. of Justice
that it was demanding $231,000 in stipulated penalties for the
time period May 17, 2004 through December 31, 2005.
The Company paid the penalty in July, 2006.
The Indiana Department of Environmental Management (IDEM) issued
the Companys Burns Harbor facility a Notice of Violation
(NOV) on February 23, 2006 alleging NPDES permit
excursions. We are evaluating the NOV and are in discussions
with IDEM to effect a resolution of this matter. It is possible
that IDEM may seek a civil penalty with respect to the
allegations, however such penalty is not expected to be material.
19
Other
In addition to the above matters, the Company receives notices
of violation relating to minor environmental matters from time
to time in the ordinary course of business. The Company does not
expect any material unrecorded reclamation requirements, fines
or penalties to arise from these items and none of these involve
potential individual monetary sanctions in excess of $100,000.
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31
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.1
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Certification by the Chief
Executive Officer pursuant to
Rules 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934.
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31
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.2
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Certification by the Chief
Financial Officer pursuant to
Rules 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934.
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32
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.1
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Certifications pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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20
SIGNATURE
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.
MITTAL STEEL USA INC.
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By:
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/s/ Vaidya Sethuraman
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Name: Vaidya Sethuraman
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Title:
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Vice President Finance and
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Chief Accounting Officer
Mittal Steel USA Inc.
Date: August 14, 2006
21
EXHIBIT INDEX
QUARTERLY
REPORT ON
FORM 10-Q
MITTAL
STEEL USA INC.
FOR THE
QUARTER ENDED JUNE 30, 2006
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Exhibit
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31
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.1
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Certification by the Chief
Executive Officer pursuant to
Rules 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934.
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31
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.2
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Certification by the Chief
Financial Officer pursuant to
Rules 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934.
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32
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.1
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Certifications pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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22