Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a North American mini-mill steel manufacturer, steel pipe producer, and scrap processor, with facilities in several locations throughout the U.S. and Canada. Our major products are hot-rolled discrete plate and coil, billets, heat treated plate & pipe, cut-to-length plate, tubular products and processed scrap metal. We also provide tubular product finishing services. We operate as a single business segment. Our tubular and cut-to-length products are produced primarily with our own coil, which provides added value on our steel products. In favorable market conditions, we purchase additional coil from third party vendors in order to optimize utilization at all our facilities. Our customers, located primarily in the U.S. and Canada, are in the service center, distribution, energy, agricultural equipment, transportation equipment, heavy machinery and construction industry sectors. Almost three-quarters of our sales are made to U.S. customers.

Over the past four years, our sales have increased from $1.13 billion in 2002 to $3.78 billion in 2006. Average sales price per ton has increased from $391 per ton in 2002 to $928 per ton in 2006. Total tons sold have increased 40% from 2.9 million tons in 2002 to 4.1 million tons in 2006. This growth has been generated through an expansion of our assets and product line sales into U.S. markets.

The following Management’s Discussion and Analysis includes the acquisition of NSG on December 1, 2006 and one month of its operating results.

Results of Operations

2006 Compared to 2005

Revenue of $3.8 billion in 2006 was an increase of $743 million, or 24%, over 2005, resulting from higher year-over-year prices in all product lines and significant volume increases in our plate and large diameter product lines. Our average unit selling price increased to $928 per ton in 2006 from $876 per ton in 2005. Total shipments increased 608,000 tons compared to last year. Steel mill products increased 375,000 tons or 16% compared to 2005 while tubular increased 233,000 tons or 21% over the same period.

Our average unit selling price for steel mill products increased $25 per ton to $796 per ton, a 3% increase over the $771 per ton average price last year. Our average unit selling price for tubular products increased 8% or $92 per ton to $1,192 per ton as a result of higher prices in all product lines.

Cost of sales increased 30% to $2.67 billion compared to $2.05 billion in 2005 due to both volume increases and increases in the average cost per ton. Nearly 60% of the increase was due to volume. As a manufacturer of steel products, the costs of our products include scrap steel raw material costs, direct and indirect labor, energy costs and other direct and indirect manufacturing costs. The primary raw material used in our operations is steel scrap, which in 2006 represented approximately 41% of the cost of steel products manufactured. Factors that impacted cost of sales per ton in 2006 were year-over-year increases in the costs of scrap, alloys, natural gas, electricity and purchased coil inputs, a higher proportion of purchased versus internally produced coil to our pipe mills and cut-to-length lines, conversion and yield cost increases, higher freight and outside conversion costs.

In 2006, a total of $1.3 billion was spent on major raw materials and consumables for our four steelworks, up 20% from the spending in 2005. Included in this amount are expenditures for steel scrap, pig iron, alloys, carbon electrodes, oxygen, refractories, limestone, natural gas and electricity.

The procurement of ferrous scrap, our largest input, is on a monthly cycle largely through the spot market. During 2006, we purchased 4.0 million tons of scrap, 15% more than the prior year. For 2006, the average cost of scrap consumed increased 11%. Scrap consumption costs peaked mid-year 2006 with some reduction later in the year. Our internally generated scrap provided 6% of our overall needs. Sourcing for the remainder of our scrap needs was readily available.

Our electric arc furnaces consume significant amounts of electricity which contributes a significant portion of our costs. In 2006, our electricity cost per kilowatt-hour increased 13% and electricity cost per ton of steel produced increased by 9% compared to 2005. Natural gas costs increased 14% compared to 25% in 2005. Energy as a percentage of 2006 total steel production cost was 10%.

Gross profit increased to $1.1 billion compared to $981.2 million in 2005 due primarily to the volume increases mentioned above. Gross margin percentage declined to 29.4% of sales versus 32.4% in 2005. This margin compression occurred due to increases in input and conversion costs which more than offset the increases in average realized pricing.

Shipments: The following table details tons shipped (in thousands) by major product line.

Shipments to U.S. customers were 3,039,600 tons, 75% of the total compared to 2,498,200 tons in 2005, while Canadian based customers accounted for 1,029,000 tons, or 25% in 2006 versus 962,200 in 2005.

Plate shipments increased 16% from 2005 due to strong end-user demand in transportation, energy and infrastructure markets.

Our coil processing facilities in Houston, St. Paul and Toronto, all make temper-leveled cut plate products. Shipments of cut plate from coil processing facilities were 595,000 tons, an increase of 16% from 2005. Canadian shipments increased 14% compared to 2005 levels, while U.S. shipments increased 16%.

Energy tubular product sales increased 7% or 57,600 tons due to higher oil and gas drilling activity related to the continuing strength in the oil and gas markets. The average number of active drilling rigs increased on a year-over-year basis from 1,383 to 1,649 in the U.S. and increased slightly from 458 to 470 in Canada for a combined increase of 15%. Shipments of non-energy tubular increased from 217,000 to 228,600, or 5%.

Production:

Capacity utilization is a key driver of performance for us. Output tonnage is in part a function of the number of production turns at each facility. Theoretically, all production equipment is available 168 hours a week, less operating downtime for routine maintenance. Therefore, to maximize plant and equipment utilization and minimize absorbed cost per ton of output, optimum cost performance occurs when four crews run the facilities around-the-clock. Optimum utilization after routine maintenance is about 95%.

Capacity, utilization and production, by facilities, are illustrated in the following table:

(1)                In thousands of tons; based upon liquid steel for steelworks and finished products for other facilities.

(2)                Includes 24” mill which was not at full capacity