International Steel Group Inc. reported net income of $94.1 million on net sales of $2,083.8 million for the second quarter, and net income of $165.0 million on net sales of $3,854.1 for the first six months of 2004.

Second Quarter Results—Comparisons to 2003 are not meaningful because the acquisition of Bethlehem Steel Corp.'s assets in May 2003 more than doubled the size of ISG and significantly improved its product and customer mix. Net income of $94.1 million ($0.92 per diluted share) was 33% higher than the $70.9 million in the first quarter 2004. The company reported a net loss of $27.5 million for the second quarter 2003.

Net sales of $2,083.8 million represent an increase of $313.5 million, or 18%, from the first quarter 2004. The average selling price per ton shipped increased to $546 in the second quarter 2004 from $458 in the first quarter as strong global demand for steel continues. Shipments were about the same and Weirton, which was acquired during May 2004, accounted for about 5% of second quarter shipments.

Cost of sales includes substantial LIFO provisions principally attributable to significant increases in the cost and the quantities of purchased coke that are expected to be consumed in the second half of 2004.

Operating income improved by about 50% from $86.5 million in the first quarter 2004 to $129.5 million in the second quarter 2004.

Financing Expense—Second quarter interest expense was higher than in the first quarter 2004 because of higher average debt outstanding, including the $600 million 6.5% Senior Notes due 2014 issued in April 2004. The company also wrote off $10.6 million of deferred financing fees related to debt repaid with proceeds from the Senior Notes.

Estimated Effective Tax Rate—Because the company has previously recorded a full valuation allowance for its net deferred tax asset, the provision for income taxes typically will reflect the amounts the company expects to pay or recover for the year plus certain allowable deferred taxes. ISG’s estimated effective income tax rate for 2004 is now about 9% compared to a normally expected rate of about 40% for federal and state income taxes. The expected additional 2004 pretax income from Weirton caused the effective tax rate to increase to the current estimate of about 9% from the 7% used in the first quarter of 2004. As a result, the effective tax rate for the second quarter 2004 is about 10% in order to bring the first half 2004 effective tax rate to the 9% full year rate.

Liquidity and Cash Flow from Operations—ISG defines liquidity as cash position and remaining availability under the revolving credit facility. At June 30, 2004, the company had liquidity of $559.7 million consisting of cash of $362.2 million and available borrowing capacity of $197.5 million under the $350.0 million revolving credit facility. As of December 31, 2003, liquidity had been $432.7 million.

Cash provided by operating activities for the first half 2004 was $209.9 million. Receivables were higher as a result of higher sales in the current period. Inventory quantities increased during the first half of 2004, particularly coke purchased in international markets for use in the second half 2004, and the higher unit costs were included in cost of sales as a result of the LIFO method of accounting for most inventories. The company also made cash advances to secure certain coke in the international market, increasing prepaid and other current assets during the first half 2004. Higher prices for raw materials also resulted in higher accounts payable at June 30, 2004.

Financings—On April 14, 2004, ISG issued $600 million aggregate principal amount of 6.5% Senior Notes due 2014 that were sold at 99.096% of par resulting in an effective yield to maturity of 6.625%. Certain proceeds were used to repay outstanding debt totaling $323.1 million. Remaining funds will be used to pay down other debt, for strategic investments and for general corporate purposes.

ISG is currently in discussions with its lenders to replace current credit facilities with a new arrangement that provides more liquidity and fewer covenants. The company expects to complete these discussions prior to year-end.

Outlook—With the acquisition of Weirton completed in the second quarter, ISG expects shipments to increase about 300,000 tons in the third quarter. Average selling prices are expected to increase about $50 per ton as announced increases in base prices and raw material surcharges take effect. Production costs are expected to increase as scrap and other metallic cost increases are expected to be greater than the decline in coke costs. The markets for steel remain strong and the company expects income from operations to increase about 50% in the third quarter.

International Steel Group Inc. is one of the largest steel producers in North America. It produces a variety of steel products including hot-rolled, cold-rolled and coated sheets, tin mill products, carbon and alloy plates, wire rod and rail products and semi-finished shapes to serve the automotive, construction, pipe and tube, appliance, container and machinery markets.