Claymont Steel 10Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007

¨	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from to

Commission File Number 1-33212

CLAYMONT STEEL HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

20-2928495

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

4001 Philadelphia Pike

Claymont, Delaware 19703

(302) 792-5400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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 x No: ¨

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 ¨ Accelerated filer ¨ Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 13, 2007, there were 17,566,754 shares of the registrant’s common stock par value $0.001 per share outstanding.

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Statements of Earnings (Unaudited)	3

	Consolidated Balance Sheets (Unaudited)	4

	Consolidated Statement of Cash Flows (Unaudited)	5

	Notes to Consolidated Financial Statements	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4	Controls and Procedures	22

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	23

Item 1A	Risk Factors	23

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	Not Applicable

Item 3	Defaults Upon Senior Securities	Not Applicable

Item 4	Submission of Matters to a Vote of Security Holders	Not Applicable

Item 5	Other Information	Not Applicable

Item 6	Exhibits	24

SIGNATURES		25

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

Claymont Steel Holdings, Inc., Condensed Consolidated Statements of Earnings (Unaudited), dollar amounts in thousands


	Three Months (13 weeks) Ended June 30, 2007			Three Months (13 weeks) Ended July 1, 2006			Six Months (26 weeks) Ended June 30, 2007			Six Months (26 weeks) Ended July 1, 2006
Sales	$	90,715		$	82,382		$	175,492		$	163,722
Cost of sales		69,776			54,615			133,636			110,257

Gross profit		20,939			27,767			41,856			53,465
Selling, general and administrative expenses		4,307			3,443			8,450			6,193

Income from operations		16,632			24,324			33,406			47,272
Other income (expense):
Interest income		60			773			462			1,614
Interest expense		(3,390	)		(6,055	)		(34,241	)		(11,866	)
Other non-operating income											139

Total other income (expense)		(3,330	)		(5,282	)		(33,779	)		(10,113	)

Income (loss) before income taxes		13,302			19,042			(373	)		37,159
Income tax expense (benefit)		4,588			7,201			(227	)		13,934

Net Income (Loss)	$	8,714		$	11,841		$	(146	)	$	23,225


Net Earnings (Loss) per Common Share – basic	$	0.50		$	1.05		$	(0.01	)	$	2.07
Net Earnings (Loss) per Common Share – diluted	$	0.49		$	1.05		$	(0.01	)	$	2.05

Weighted Average Shares Outstanding:
Basic		17,511,108			11,244,446			17,510,636			11,242,874
Diluted		17,835,571			11,316,754			17,822,237			11,316,754

See notes to condensed consolidated financial statements.

Claymont Steel Holdings, Inc., Condensed Consolidated Balance Sheets (Unaudited), dollar amounts in thousands


	June 30, 2007			December 31, 2006
	(dollars in thousands, except per share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,280		$	20,120
Investment securities		4,984			94,774
Accounts receivable, net		49,607			41,081
Inventories		50,880			40,698
Deferred income taxes		890			795
Income taxes receivable		3,189			2,949
Prepaid expenses		2,860			515
Other current assets		426

Total current assets		114,116			200,932

Property, plant and equipment, net		29,595			24,103
Intangible assets, net		4,284			4,975
Accrued pension asset		472			472
Deferred financing fees, net		3,579			9,583

Total assets	$	152,046		$	240,065


LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt	$	6,667		$	75,000
Accounts payable		26,414			17,117
Accrued expenses		3,082			2,425
Accrued taxes		542
Accrued profit sharing		1,508			3,115
Accrued interest payable		3,520			12,958

Total current liabilities		41,733			110,615

Long-term debt		150,940			168,848
Deferred income taxes		181			916

Total liabilities		192,854			280,379

STOCKHOLDERS’ DEFICIT:
Common stock, $0.001 par value – authorized 100,000,000 and issued and outstanding 17,566,754		6			6
Additional paid-in capital		97,602			97,602
Accumulated deficit		(139,131	)		(138,637	)
Accumulated other comprehensive income		715			715

Total stockholders’ deficit		(40,808	)		(40,314	)

Total liabilities and stockholders’ deficit	$	152,046		$	240,065

See notes to condensed consolidated financial statements.

Claymont Steel Holdings, Inc., Condensed Consolidated Statements of Cash Flows (Unaudited), dollar amounts in thousands


	January 1 to June 30, 2007			January 1 to July 1, 2006
OPERATING ACTIVITIES:
Net income (loss)	$	(146	)	$	23,225
Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		13,204			2,443
Deferred taxes, net		(830	)		161
Stock compensation		476
Changes in assets and liabilities which provided (used) cash:
Accounts receivable		(8,526	)		(4,934	)
Inventory		(10,182	)		(3,603	)
Prepaid expenses		(2,345	)		132
Income taxes receivable		(240	)
Accounts payable		9,297			8,180
Accrued interest payable		(9,437	)		234
Accrued taxes		536			(876	)
Accrued liabilities and profit sharing		(950	)		(2,273	)
Due to seller					(500	)
Other assets and liabilities		(426	)		4

Net cash provided by (used in) operating activities		(9,570	)		22,193

INVESTING ACTIVITIES:
Capital expenditures		(7,120	)		(6,721	)
Purchase of investment securities		(15,603	)		(207,757	)
Maturities of investment securities		105,393			276,074

Net cash provided by (used in) investing activities		82,670			61,596

Claymont Steel Holdings, Inc. (formerly CitiSteel USA, Inc.) Condensed Consolidated Statements of Cash Flows (Unaudited), dollar amounts in thousands


	January 1 to June 30, 2007		January 1 to July 1, 2006
FINANCING ACTIVITIES:
Borrowings under revolving credit facility, net	34,828
Borrowings under term loan	20,000
Repayments under term loan	(2,222	)
Borrowings under senior notes due 2015	105,000
Repayment under senior secured floating rate notes due 2010	(170,110	)
Borrowings under senior secured floating rate notes due 2010			(1,890	)
Repayment under pay-in-kind notes due 2010	(75,000	)
Deferred financing costs	(3,618	)	(692	)
IPO fees and expenses	37
Dividends paid	(855	)	(69,504	)

Net cash used in financing activities	(91,940	)	(72,086	)

NET INCREASE (DECREASE) IN CASH	(18,840	)	11,703
CASH—Beginning of period	20,120		2,619

CASH—End of period	1,280		14,322

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION – Cash paid during the period for:
Interest expense	20,192		11,078

Income taxes	345		9,441

See notes to condensed consolidated financial statements.

Claymont Steel Holdings, Inc. – Notes to Condensed Consolidated Financial Statements (Unaudited)

1. BASIS OF INTERIM PRESENTATION: The information furnished in Item 1 reflects all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods and are of a normal and recurring nature. The information furnished has not been audited; however, the December 31, 2006 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the audited financial statements of Claymont Steel Holdings, Inc. and subsidiary (the “Company”) for the fiscal year ended December 31, 2006.

Comprehensive income is equal to net income for the twenty-six weeks ended June 30, 2007. Comprehensive income for the year ended December 31, 2006 included $715,000 for the adoption of SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Postretirement Plans.” The adoption of SFAS No. 158 should have been recorded as an adjustment to accumulated other comprehensive income and not as a component of comprehensive income. Had the adoption been recorded as prescribed by the guidance in SFAS No. 158, comprehensive income for the year ended December 31, 2006 would have been $31,996.

The Company operates one business segment, the production and sale of steel plates. As a result, all assets, operating revenues, operating income and net income shown in the Company’s consolidated financial statements relate to this business segment. No one customer accounts for more than 10% of operating revenue.

On August 3, 2006, the Company changed its name from CitiSteel Holdings USA, Inc. to Claymont Steel Holdings, Inc. and its subsidiary changed its name from CitiSteel USA Inc. to Claymont Steel, Inc. in order to establish a separate corporate identity from the Company’s previous owner, CITIC USA Holdings, Inc. As a result of the name change the Company wrote off the value of the trade name included in intangible assets.

The Company effected an initial public offering of its common stock, issuing 6,250,000 primary shares at $17.00 per share, on December 18, 2006. The Company’s shares trade on the NASDAQ national market under the symbol “PLTE.” The Company received $97.6 million in net proceeds which were used to redeem the Senior Secured Pay-in-Kind Notes. The offering also included 3,755,000 of secondary shares sold by affiliates of H.I.G. Capital, LLC.

2. PRINCIPLES OF CONSOLIDATION: The condensed consolidated financial statements include the accounts of the Company and its subsidiary. Significant intercompany transactions and accounts have been eliminated.

3. INVESTMENT SECURITIES: Investment securities available for sale at June 30, 2007 and December 31, 2006 are as follows:


	Amortized Cost		Fair Value
	(in thousands)
June 30, 2007:
Municipal and tax-exempt agency obligations	$	4,903	$	4,903
Closed end funds		81		81

	$	4,984	$	4,984

December 31, 2006:
Municipal and tax-exempt agency obligations		62,616		62,616
Closed end funds		32,158		32,158

	$	94,774	$	94,774

4. INVENTORIES: Inventories, net of any reserves, consist of the following:


	June 30, 2007		December 31, 2006
	(in thousands)
Raw materials	$	7,235	$	6,252
Work-in-process		17,599		9,720
Finished Goods		19,006		17,182
Spare Parts Inventory		598		1,030
Supplies		6,442		6,514

	$	50,880	$	40,698

5. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is recorded net of accumulated depreciation and is $29.6 million at June 30, 2007 and $24.1 million at December 31, 2006.

6. FINANCING ARRANGEMENTS

Debt refinancing and redemption – The Company redeemed its $75 million 15% senior secured pay-in-kind notes due 2010 in February 2007 with the proceeds from the initial public offering. The Company then refinanced its remaining debt, also in February 2007, by issuing $105 million of 8.875% senior notes due 2015 and entering into an $80 million senior secured revolving credit facility and using the proceeds from this debt to redeem its $170 million senior secured floating rate notes due 2010. The Company wrote-off $9.4 million of deferred financing fees related to the debt redemption and incurred $3.7 million of deferred financing costs related to issuing the new debt. The Company is amortizing the new deferred financing costs over the expected life of the debt.

Line of Credit – On August 25, 2005 the Company established a $20 million revolving credit facility with US Bank under which the Company may borrow, repay and re-borrow funds, as needed, subject to a total maximum amount equal to the lesser of (a) a borrowing base determined from eligible accounts receivable and eligible inventory or (b) the maximum revolver amount which is equal to $20 million less any outstanding letters of credit. The revolving facility matures on August 25, 2008. There were no amounts outstanding under the revolving credit agreement during 2006. Interest is payable at US Bank’s prime rate, which was 8.25% on December 31, 2006. This line of credit was cancelled and replaced on February 15, 2007.

On February 15, 2007, the Company replaced the $20 million revolving credit facility with an $80 million senior secured revolving credit facility from US Bank, including a $60 million revolving credit facility and a $20 million term loan. The Company may borrow, repay and re-borrow funds, as needed, subject to a total maximum amount equal to the lesser of (a) a borrowing base determined from eligible accounts receivable and eligible inventory or (b) the maximum revolver amount which is equal to $60 million less any outstanding letters of credit. The revolving facility matures on February 15, 2012. A total of $44.0 million was borrowed on the $60 million revolving credit facility when the facility was established and $34.8 million remains outstanding at June 30, 2007. Interest is payable at either US Bank’s prime rate, which was 8.25% on June 30, 2007. Availability under the line of credit was$25.2 million at June 30, 2007.

Long-Term Debt – On August 25, 2005 the Company issued $172 million of Senior Secured Floating Rate Notes. Interest was payable at six month LIBOR plus 7.5% semiannually on March 1 and September 1. There were no scheduled principal payments prior to the maturity date. The interest rate for the interest payment period on March 1, 2006 was 11.6%, the rate for the September 1, 2006 payment was 12.6% and the rate for the March 1, 2007 payment was 13.0%. The Notes were issued at a 1% discount to face value. The discount was being amortized over the expected life of the Notes. The Notes were secured by a lien on substantially all the assets of the Company. The Notes were redeemed on March 19, 2007.

On February 15, 2007, the Company issued $105 million of 8.875% senior notes due 2015. The proceeds of these notes and the revolving credit facility were used to redeem the $172 million senior secured floating rate notes. Interest is payable at 8.875% and the notes mature on February 15, 2015. The notes contain certain financial covenants, including limitations on additional indebtedness and restricting certain defined payments. The Company is required to register the notes with the Securities and Exchange Commission within 180 days after the issuance date. The Company filed a registration statement on Form S-4 to register the notes. The Securities and Exchange Commission declared the registration statement effective on August 9, 2007. On February 15, 2007, the Company borrowed $20 million under a term loan from US Bank as part of the $80 million senior secured revolving credit facility. Interest is payable at either US Bank’s prime rate, which was 8.25% at June 30, 2007, or at LIBOR + 2.5%. Payments of principal amortize in equal monthly installments over 36 months. In addition, the term loan requires quarterly mandatory prepayments in an amount equal to 50% of excess cash flow (as defined by the loan agreement). As of June 30, 2007 there have not been any mandatory prepayments.

Long-term debt at June 30, 2007 and December 31, 2006 consists of the following:


	June 30, 2007		December 31, 2006
	(in thousands)
Revolving Credit Facility	$	34,828		—
Term Loan		17,779
Senior Notes, due 2015		105,000
Senior Secured Pay-in-Kind Notes, due 2010				75,000
Secured Floating Rate Notes, due 2010				168,848

	$	157,607	$	243,848
Less current portion of long-term debt		6,667		75,000

	$	150,940	$	168,848

Future maturities of long-term debt are: $5 million for the six months ended December 31, 2007; $6.7 million for the year ended December 31, 2008; $6.7 million for the year ended December 31, 2009; $0.5 million for the year ended December 31, 2010, $34.8 million for the year ended December 31, 2012; and, $105 million for the year ended December 31, 2015.

7. EMPLOYEE BENEFIT PLANS: The Company has a noncontributory defined benefit pension plan which covers substantially all full-time employees. Pension benefits are based on years of service and annual earnings. Plan provisions and funding meet the requirements of the Employee Retirement Income Security Act of 1974. No contributions were made for the twenty-six week period ended June 30, 2007 and the expected employer contributions for the year ended December 31, 2007 are $0. The components of net periodic pension cost for the twenty-six week period ended June 30, 2007 are:


	Three Months (13 weeks) Ended June 30, 2007			Three Months (13 weeks) Ended July 1, 2006			Six Months (26 weeks) Ended June 30, 2007			Months (26 weeks) Ended July 1, 2006
	(in thousands)
Service cost	$	148		$	162		$	296		$	325
Interest cost		131			144			262			288
Expected return on plan assets		(184	)		(202	)		(368	)		(404	)

Net periodic pension cost	$	95		$	104		$	190		$	209

8. DIVIDENDS: In January 2007, $855,000 of withheld dividends declared during 2006 were released to the Company’s chief executive officer.

9. STOCK BASED COMPENSATION:

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share Based Payment.The Company granted Jeff Bradley, the Company’s chief executive officer, 75,451 shares of restricted stock on July 11, 2005. The shares can not be sold or transferred and are subject to forfeiture if Mr. Bradley is terminated from the Company for any reason. The restricted shares vest, and the restrictions lapse, as follows: One-half of the restricted shares vest according to the following time schedule: 25% on June 23, 2006; 25% on June 23, 2007; 25% on June 23, 2008; and, 25% on June 23, 2009. The other one-half of the shares vest on the following dates based on achieving certain EBITDA targets for each of the 12-month periods ended on each of the vesting dates: 25% on June 30, 2006; 25% on June 30, 2007; 25% on June 30, 2008; and, 25% on June 30, 2009. As of June 30, 2007, one-half of the total restricted shares vested. The fair value of the restricted shares on the date of grant was estimated to be $703,000 and was determined based on the aggregate purchase price of the Acquisition of $105,477,000. The fair value of the restricted shares is being charged to compensation expense over the four year vesting period of the restricted shares. The valuation was made by the Company contemporaneously with the granting of the restricted stock based on the opening balance sheet values.

Common stock dividend payments on Mr. Bradley’s restricted shares are subject to certain vesting provisions. Mr. Bradley received common stock dividends of $89,000 in the year ended December 31, 2006. The Company withheld payment of $377,000 of declared dividends from Mr. Bradley from Holdings’ June 2006 common stock dividend and $478,000 from the July 2006 dividend. The withheld dividends were distributed to Mr. Bradley in January 2007.

In December 2006, the Company adopted the Claymont Steel Holdings, Inc. 2006 Stock Incentive Plan concurrently with its initial public offering in order to encourage employees and non-employee directors to remain with the Company and to more closely align their interests with those of the Company’s stockholders. As of June 30, 2007, awards under the program consisted of stock options and restricted stock units (“RSUs”). The Company currently issues the shares related to its stock incentive plan from the Company’s authorized and unissued shares of common stock. As of June 30, 2007, 450,000 shares of common stock have been authorized for this stock incentive plan.

For the thirteen week and twenty-six week period ended June 30, 2007 the Company incurred stock-based compensation expense of $163,000 ($106,000 after tax) and $313,000 ($203,000 after tax), respectively. The compensation expense was recorded in selling, general and administrative expense.

Stock Options

Generally, options expire seven years from the date of grant. Options generally vest in equal annual installments over a four-year period based on continued employment or service on the board of directors. The fair value of each option award on the grant date was estimated using the Black-Scholes option-pricing model with the following assumptions:


	Three and Six Months Ended June 30, 2007
Expected dividend yield	—
Expected stock price volatility	45	%
Weighted average risk-free interest rate	4.82
Expected life of options (years)	4.75

The expected life of the employee options was calculated using the shortcut method allowed by the provisions of SFAS No. 123R and interpreted by SAB No. 107. The expected volatility is estimated by the Company utilizing volatility statistics from peer groups and other factors. The risk-free interest rate is based on the continuous rates provided by the U.S. Treasury with a term approximating the expected life of the option. The expected dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.

A summary of the Company’s stock option awards as of June 30, 2007 and December 31, 2006, and changes during the twenty-six week period then ended is presented as follows:


	Shares Subject to Options	Weighted Average Exercise Price (per share)		Weighted Average Remaining Contractual Life (years)
Outstanding at December 31, 2006	106,465	$	17.00	7.0
Granted January 31, 2007	80,000	$	18.65	7.0

Outstanding at June 30, 2007	186,465	$	17.71	6.5

Exercisable at June 30, 2007	0		0	0

As of June 30, 2007, the Company had $1,358,000 of total unrecognized compensation expense related to unvested stock options that will be recognized over the weighted average period of 3.5 years.

Restricted Stock and Restricted Stock Units (RSUs)

RSUs granted in 2006 vest in equal annual installments over a four-year period based on the continued employment or service on the board of directors. The cost of the RSUs, generally determined to be the fair market value of the shares at the date of grant, is charged to compensation expense ratably over the vesting period of the award.

A summary of the status of the Company’s RSUs, and the restricted stock granted to Mr. Bradley in July 2005, as of June 30, 2007 and December 31, 2006, and changes during the twenty-six week period then ended, is presented below:


	Units/Shares		Weighted Average Grant Date Fair Value (per share)
Outstanding at December 31, 2006	138,940		$	13.87
Vested June 23, 2007	(18,863	)	$	9.32

Outstanding at June 30, 2007	120,077		$	14.59

For the thirteen and twenty-six weeks ended June 30, 2007, the aggregate grant date fair value of RSUs and restricted stock that vested was $175,800. As of June 30, 2007, the Company had $1,827,600 of total unrecognized compensation expense related to RSUs and restricted stock that will be recognized over the weighted average period of 3.0.

10. MANAGEMENT AGREEMENT: On June 10, 2005 the Company entered into a management agreement with H.I.G. Capital, LLC, an affiliate of a 43% stockholder, that included a $675,000 annual fee and called for certain additional payments. In December 2006, in connection with the Company’s initial public offering, the Company paid H.I.G. Capital $3 million to terminate the agreement and $1.1 million of additional compensation related to the initial public offering. The agreement is no longer in effect and no further payments are due.

The Company entered into a 12-month management services agreement with CITIC as part of the acquisition in June 2005 for the provision of services by a certain executive. The agreement called for total payments of $551,000 plus a year-end 2005 payment of $500,000. The year-end 2005 payment was made in March 2006 and the agreement is no longer in effect and no further payments are due.

11. EARNINGS PER SHARE: The following table represents the calculation of net earnings per common share – basic and diluted:


	Three Months (13 weeks) Ended June 30, 2007		Three Months (13 weeks) Ended July 1, 2006		Six Months (26 weeks) Ended June 30, 2007			Six Months (26 weeks) Ended July 1, 2006
Weighted average common shares outstanding		17,511,108		11,244,446		17,510,636			11,242,874
Dilutive effect of outstanding options and restricted stock		324,463		72,308		311,601			73,880

Weighted average common and common equivalent shares outstanding		17,835,571		11,316,754		17,822,237			11,316,754

Net earnings (loss) per common share—basic	$	0.50	$	1.05	$	(0.01	)	$	2.07

Net earnings (loss) per common and common equivalent share— diluted	$	0.49	$	1.05	$	(0.01	)	$	2.05

Net income (loss)	$	8,714	$	11,841	$	(146	)	$	23,225

12. LITIGATION AND ENVIRONMENTAL: In October 2006, the Delaware Department of Natural Resources and Environmental Control (DNREC) issued a Notice of Conciliation and Secretary’s Order requiring the Claymont Steel to fund an independent study to determine engineering and operational options to control dust and other particulate emissions. The Company proposed several dust control projects that will specifically control fugitive dust from slag processing, the melt shop, the scrap yard and plant roadways. Based on these proposals, DNREC will develop a Phase I implementation plan and schedule by October 1, 2007. The projects are not expected to have a material effect on the Company’s results of operations or financial conditions.

automobile-free scrap. The Order also requires Claymont Steel to elect one of the alternatives set forth in the Order for reducing mercury emissions and to notify DNREC of the alternative selected by January 31, 2007. On January 30, 2007, Claymont Steel notified DRNEC that it elected to implement an enhanced pollution prevention program to further reduce the amount of mercury in the feed to the electric arc furnace to reduce the emissions of mercury. The Order requires Claymont Steel to have the selected alternative operational as soon as practical but no later than December 31, 2008. On June 28, 2007, Claymont Steel filed a Semi-Annual Source Reduction Progress Report to DNREC that indicated the mercury emissions had dropped significantly since the source reduction measures were implemented. The elimination of some scraps containing lower metallic content and identifying non-auto sources of shredded material were the most significant factors in achieving the reduction. Due to the progress the Company has achieved it does not foresee the need for additional mercury emissions control equipment in the near term future. It is still very early in the assessment of this issue. As such Claymont Steel cannot estimate the full cost of the corrective measures that will be necessary. If Claymont Steel were ultimately required to install and operate a carbon injection system, it does not believe the associated costs would have a material effect on its results of operations or financial condition.

Claymont Steel is also working with DNREC to investigate potential PCB and PAH contamination in the active scrap yard area. In April 2007, the Company submitted a Facility Evaluation Report indicating the scrap yard was within the regulatory limits for these issues. DNREC has agreed with this assessment and as such the Company believes there are no foreseeable requirements for the remediation of the facility.

In addition, certain claims and suits have been filed or are pending against the Company. In the opinion of management, all matters are adequately covered by insurance or, if not covered, involve such amounts, which would not have a material adverse effect on the consolidated financial position or results of operations of the Company if disposed of unfavorably.

Item 2.

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

Cautionary Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include, the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” or similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

•

the cyclical nature of the steel industry and the industries we serve;

•

the availability and cost of scrap, other raw materials and energy;

•

the level of global demand for steel;

•

the level of imports of steel into the United States;

•

excess global steel capacity and the availability of competitive substitute materials;

•

intense competition in the steel industry;

•

currency fluctuations;

•

environmental regulations;

•

unionization of our workforce, related work stoppages, and equipment failures;

•

loss of key personnel; and

•

other factors described in our annual report on Form 10-K, as amended, for the year ended December 31, 2006. See Part II, Item 1A-Risk Factors.

We believe the forward-looking statements in this quarterly report on Form 10-Q are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

Thirteen Weeks Ended June 30, 2007 Compared to Thirteen Weeks Ended July 1, 2006

Discussion and Analysis of Income


					Change
	2007		2006		Amount			%
	(dollars in thousands, except average selling price data)
Sales
Custom	$	66,615	$	52,942	$	13,673		25.8	%
Standard		24,100		29,365		(5,265	)	(17.9	)%
Toll Processing		0		75		(75	)
Total	$	90,715	$	82,382	$	8,333		10.1	%

Tons
Custom		73,609		61,537		12,072		19.6	%
Standard		30,096		38,346		(8,250	)	(21.5	)%
Toll Processing		0		335		(335	)
Total		103,705		100,218		3,487		3.5	%

Average Selling Price
Custom	$	905	$	860	$	45		5.2	%
Standard	$	801	$	766	$	35		4.6	%
Total⁽¹⁾	$	875	$	824	$	51		6.2	%

⁽¹⁾	Total average selling price excludes toll processing.

Sales

Sales increased 10.1% in the thirteen weeks ended June 30, 2007 compared to the same period in 2006 as a result of a 6.2% increase in average selling price coupled with a 3.5% increase in tons shipped. Increased customer demand, compared to the thirteen weeks ended July 1, 2006, led by growth in domestic construction and manufacturing, continued economic expansion, and a decline in steel plate imports drove higher shipments. Sales were hampered by inefficiencies due to higher than normal delays, as the plate mill annual planned outage was delayed until the beginning of the third quarter.

Average selling price increased 6.2% in the thirteen weeks ended June 30, 2007 compared to the same period in 2006 due to increased prices for custom and standard sizes. Custom sizes continue to command a price premium over standard sizes, averaging 13% in 2007, over standard sizes and the custom share of shipments continues to grow, reaching 71.0% of tons shipped in the thirteen weeks ended June 30, 2007, compared to 61.4% in the second quarter of 2006.

Cost of Goods Sold and Gross Profit


	Thirteen Weeks Ended						Change
	June 30, 2007			July 1, 2006			$			%
	(dollars in thousands, except per ton shipped data)
Cost of Goods Sold	$	69,776		$	54,615		$	15,161		27.8	%
Gross Profit	$	20,939		$	27,767		$	(6,828	)	(24.6	)%
Gross Profit Margin		23.1	%		33.7	%

Cost of goods sold increased 27.8% in the thirteen weeks ended June 30, 2007 compared to the same period in 2006, as a result of a 3.5% increase in tons shipped coupled with a 23.5% increase in cost of goods sold per ton shipped. Cost of goods sold per shipped ton increased to $673 largely because of an $88 per shipped ton increase in raw material costs, an $11 increase in energy costs, a $10 increase in supplies, a $4 increase in service and a $4 increase in parts.

Raw material costs are comprised of scrap steel, purchased slabs and alloy and flux. In the thirteen weeks ended June 30, 2007, scrap steel accounted for 70.8% of raw material costs, an increase from 67.5% in the second quarter of 2006 as the consumption of scrap averaged $265 per ton, an increase of $68 per ton from 2006. Scrap prices began to rise in February 2007 as domestic demand for steel plate grew and higher levels of scrap were being exported from the United States. Scrap reached $278 per purchased ton at the end of the first quarter 2007 and eventually leveled off to $230 by the end of the second quarter.

Purchased slabs accounted for 15.5% of raw material costs in the thirteen weeks ended June 30, 2007, a decrease from 18.4% in the same period in 2006, as 17.2% less purchased slab tons were used by the plate mill. However, the average cost of purchased slabs increased significantly to $495 per purchased ton in the thirteen weeks ended June 30, 2007 from $360 per purchased ton in the same period in 2006. During the thirteen weeks ended June 30, 2007, the Company used 12,000 tons of purchased slabs in the plate mill but their cost was roughly equivalent to the internal cost of production. During the thirteen weeks ended July 1, 2006, the Company used 14,500 tons of purchased slabs.

Alloy and flux accounted for 13.7% of raw material costs in the thirteen weeks ended June 30, 2007, with an overall cost of $51 per ship ton compared to $40 per shipped ton in the same period in 2006 as the purchase price of vanadium, siliconmanganese, and ferromanganese increased in price from the second quarter 2006.

Supplies are largely comprised of electrodes and furnace refractories used by the melt shop. These items increased in cost by $10 per shipped ton in thirteen weeks ended June 30, 2007 compared to the same period in 2006 due to vendor price increases and increased usage as a result of the higher melt shop output coupled with expanded custom production requiring higher volumes of specialized grades.

Energy costs increased $11 per shipped ton in the thirteen weeks ended June 30, 2007 compared to the same period in 2006 largely as a result of higher electricity rates and increased production at the electric arc furnace.

Labor, parts and service costs increased a total of $10 per shipped ton in the thirteen weeks ended June 30, 2007 compared to the same period in 2006. Operational difficulties at the plate mill due to a postponement of an annual plate mill outage until the third quarter 2007, impacted production and increased costs during the second quarter.

Depreciation expense increased by $0.3 million, or $3 per shipped ton, in the thirteen weeks ended June 30, 2007 compared to the same period in 2006. The change is largely due to the capital plan which is estimated to have a run rate of $15 million in 2007.

Gross profit declined $6.8 million, or 24.5%, in the thirteen weeks ended June 30, 2007 compared to the same period in 2006 as a result of the 27.8% increase in cost of goods sold, somewhat offset by the 10.1% increase in revenues. Gross profit margins in the thirteen weeks ended June 30, 2007 declined to 23.1% from 33.7% in the same period in 2006 as cost of goods sold per shipped ton increased $128 per ton while average selling prices increased only $51 per ton (total average selling price excludes toll processing in 2006). As costs rose during the thirteen weeks ended June 30, 2007 from scrap prices, internal operational difficulties, including the plate mill curtailment and the increase in the cost of purchased slabs, the Company was unable to recoup the entire amount through increased selling prices due to overall market constraints.

Selling, General and Administrative Expenses


	Thirteen Weeks Ended				Change
	June 30, 2007		July 1, 2006		$		%
	(in thousands)
Selling, general and administrative expense	$	4,307	$	3,443	$	864	25.1	%

Selling, general and administrative expenses increased $0.9 million, or 25.1%, in the thirteen weeks ended June 30, 2007 compared to the same period in 2006 primarily due to increases to support growth and our public company reporting requirements, which include costs for increased headcount, for Sarbanes Oxley compliance, and for filing reports required by the Securities and Exchange Commission.

Interest Income and Expense


	Thirteen Weeks Ended				Change
	June 30, 2007		July 1, 2006		$			%
	(in thousands)
Interest Income	$	60	$	773	$	(713	)	(92.2	)%
Interest Expense	$	3,390	$	6,055	$	(2,665	)	(44.0	)%

Interest income is earned on short-term investment securities and overnight deposits of any available cash balances. The balance in these investment securities declined during the thirteen weeks ended June 30, 2007 compared to the same period in 2006 therefore the corresponding income from these accounts decreased as well. The Company is committed to paying down the debt associated with the revolving credit facility and term loans. Going forward the company will use its excess cash to reduce these encumbrances as opposed to investing.

Interest expense is comprised of interest and the amortization of deferred financing fees on the Company’s revolving credit facility, term loan, and long term bonds. Interest expense has decreased by $2.7 million in the thirteen weeks ended June 30, 2007 compared to the same period in 2006 as a result of the first quarter 2007 debt restructuring. Interest expense should continue to decrease as the Company executes its financial strategy of debt reduction.

Income Tax Expense


	Thirteen Weeks Ended				Change
	June 30, 2007		July 1, 2006		$			%
	(in thousands)
Income Tax Expense	$	4,588	$	7,201	$	(2,613	)	(36.3	)%

Income tax expense declined by $2.6 million in the thirteen weeks ended June 30, 2007 compared to the same period in 2006 as a result of a $5.7 million decline in pre-tax income. The Company had an effective tax rate of 34.5% in the thirteen weeks ended June 30, 2007 and 37.8% in the same period in 2006. The effective tax rate decreased in the thirteen weeks ended June 30, 2007 as a result of investments in tax exempt securities and other permanent differences recognized in the period.

Net Income


	Thirteen Weeks Ended				Change
	June 30, 2007		July 1, 2006		$			%
	(in thousands)
Net Income	$	8,714	$	11,841	$	(3,127	)	(26.4	)%

Net income declined $3.1 million in the thirteen weeks ended June 30, 2007 compared to the same period in 2006 as a result of a $7.7 million decrease in income from operations. Sales increased 10.1%; however this was offset by a 27.8% increase in cost of sales and a 25.1% increase in selling, general and administrative expenses.

EBITDA

EBITDA, which we define as earnings before interest (income) expense, net income tax expense, depreciation and amortization, is not a measure of financial performance under GAAP. EBITDA (and adjusted EBITDA) do not represent and should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities as a measure of our profitability or liquidity. We believe, however, that EBITDA is a valuable measure of the operating performance of our business and can assist in comparing our performances on a consistent basis without regard to depreciation and amortization. The following table sets forth a reconciliation of EBITDA from net income, which management believes is the most nearly equivalent measure under GAAP for the reporting periods indicated:


	Thirteen Weeks Ended				Change
	June 30, 2007		July 1, 2006		$			%
	(in thousands)
Net Income	$	8,714	$	11,841	$	(3,127	)	(26.4	)%
Interest (Income) Expense, net		3,330		5,282		1,952		(37.0	)%
Income Tax Expense		4,588		7,201		(2,613	)	(36.3	)%
Depreciation and Amortization		1,026		647		379		58.6	%


	Thirteen Weeks Ended				Change
	June 30, 2007		July 1, 2006		$			%
	(in thousands)
EBITDA	$	17,658	$	24,971	$	(7,313	)	(29.3	)%
Non-cash compensation		664		—		664		—

Adjusted EBITDA	$	18,322	$	24,971	$	(6,649	)	(26.6	)%

EBITDA declined $7.3 million in the thirteen weeks ended June 30, 2007 compared to the same period in 2006 largely as a result of the $6.8 million decline in gross profit and the $0.9 million increase in selling, general and administrative expenses. Adjusted EBITDA includes the add back of non-cash compensation as a result of vesting of stock options and restricted stock awards under the Company’s equity compensation programs and vacation expense accruals. These amounts totaled $0.7 million in the thirteen weeks ended June 30, 2007 and $0 million in the same period in 2006 and are expected to increase significantly in the balance of 2007.

Twenty-six Weeks Ended June 30, 2007 Compared to Twenty-six Weeks Ended July 1, 2006

Discussion and Analysis of Income


					Change
	2007		2006		Amount			%
	(dollars in thousands, except average selling price data)
Sales
Custom	$	131,328	$	108,237	$	23,091		21.3	%
Standard		44,164		55,410		(11,246	)	(20.9	)%
Toll Processing		0		75		(75	)
Total	$	175,492	$	163,722		11,770		7.2	%

Tons
Custom		148,231		125,362		22,869		18.2	%
Standard		56,602		73,761		(17,159	)	(23.3	)%
Toll Processing		0		335		(335	)
Total		204,834		199,458		5,376		2.7	%

Average Selling Price
Custom	$	886	$	863	$	23		2.7	%
Standard	$	780	$	752	$	28		3.7	%
Total⁽¹⁾	$	857	$	822	$	35		4.3	%

⁽¹⁾	Total average selling price excludes toll processing.

Sales

Sales increased 7.2% in twenty-six weeks ended June 30, 2007 compared to the same period in 2006 as a result of a 4.3% increase in average selling price coupled with a 2.7% increase in tons shipped. Increased customer demand, compared to the twenty-six weeks ended July 1, 2006, led by growth in domestic construction and manufacturing, continued economic expansion, and a decline in steel plate imports drove higher shipments.

Average selling price increased 4.3% in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 due to increased prices for custom and standard sizes. Custom sizes continue to command a price premium over standard sizes, averaging 13.6% in 2007, over standard sizes and the custom share of shipments continues to grow, reaching 72.4% of tons shipped in the twenty-six weeks ended June 30, 2007, compared to 62.9% in the same period in 2006.

Cost of Goods Sold and Gross Profit


	Twenty -six Weeks Ended						Change
	June 30, 2007			July 1, 2006			$			%
	(dollars in thousands, except per ton shipped data)
Cost of Goods Sold	$	133,636		$	110,257		$	23,379		21.2	%
Gross Profit	$	41,856		$	53,465		$	(11,609	)	(21.7	)%
Gross Profit Margin		23.9	%		32.7	%

Cost of goods sold increased 21.2% in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 as a result of a 2.7% increase in tons shipped coupled with a 17.9% increase in cost of goods sold per ton shipped. Cost of goods sold per shipped ton increased to $652 largely because of a $65 per shipped ton increase in raw material costs, a $10 increase in supplies, a $5 increase in energy, and a $5 increase in service costs.

Raw material costs are comprised of scrap steel, purchased slabs and alloy and flux. In the twenty-six weeks ended June 30, 2007, scrap steel accounted for 68.3% of raw material costs, an increase from 63.6% in the same period in 2006, and the consumption of scrap averaged $233 per ton, an increase of $49 per ton from 2006. Scrap prices began to rise in the beginning of 2007 as domestic demand for steel plate grew and higher levels of scrap were being exported from the United States. Scrap reached a high of $278 per purchased ton at the end of the first quarter 2007 and eventually leveled off to $230 by the end of the second quarter.

Purchased slabs accounted for 16.7% of raw material costs in the twenty-six weeks ended June 30, 2007, a decrease from 21.2% in same period in 2006, as 18.1% less purchased slab tons were used by the plate mill. However, the average cost of purchased slabs increased significantly to $508 per purchased ton in the twenty-six weeks ended June 30, 2007 from $368 per purchased ton in the same period in 2006. During the twenty-six weeks ended June 30, 2007, the Company used 24,000 tons of purchased slabs in the plate mill which increased cost of goods sold $890,000 above what it would have cost to internally produce those slabs. During the twenty-six weeks ended July 1, 2006, the Company used 29,000 tons of purchased slabs, but their cost was roughly equivalent to the internal cost of production.

Alloy and flux accounted for 14.9% of raw material costs in the twenty-six weeks ended June 30, 1007, with an overall cost of $53 per shipped ton compared to $44 per shipped ton in the twenty-six weeks ended July 1, 2006 as the purchase price of vanadium, siliconmanganese, and ferromanganese increased in price from 2006.

Supplies are largely comprised of electrodes and furnace refractories used by the melt shop. These items increased in cost by $10 per shipped ton in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 due to vendor price increases and increased usage as a result of the higher melt shop output coupled with expanded custom production requiring higher volumes of specialized grades.

Energy costs increased $5 per shipped ton in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 largely as a result of higher electricity rates and higher output at the EAF furnace.

Labor, parts and service costs increased a total of $11 per shipped ton in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006. This increase is on top of the $2.3 million ($23 per shipped ton) of costs incurred in the first quarter 2006 related to the two-week planned plate mill shut down. A number of operational difficulties hindered production during the twenty-six weeks ended June 30, 2007. First, in January 2007, the plate mill did not have an adequate supply of slabs to roll. This was caused by production difficulties in the melt shop – related to the electrical field and to fine-tuning of the electrical transformers and reactors – which were remedied in late January 2007, and also related to not having an adequate supply of purchased slabs of the proper grades. The slab shortage caused a production curtailment in the plate mill of approximately 10,000 tons. Secondly, in February and March 2007 the plate mill curtailed operations due to a shortage of natural gas caused by inadequate local transmission capacity during the extraordinarily cold weather. The local utility gave priority to residential customers and restricted the Company’s access to natural gas. As a result, plate mill production was curtailed by a total of 9,000 tons in February and March 2007. The Company is now working to secure an uninterrupted supply of natural gas during the winter months. Finally, higher than normal delays at the plate mill in the second quarter 2007 impacted production and increased costs.

Depreciation expense increased by $5 per shipped ton in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 as a result of increased capital expenditures.

Gross profit declined $11.6 million, or 21.7%, in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 as a result of the 21.2% increase in cost of goods sold, which was partially offset by the 7.2% increase in revenues. Gross profit margins in the twenty-six weeks ended June 30, 2007 declined to 23.9% from 32.7% in the same period in 2006 as cost of goods sold per shipped ton increased $99 while average selling prices increased only $35. Very high

scrap costs flowing through the second quarter coupled with the Company’s record average selling prices at this time made it difficult to recapture this additional cost. In conjunction with the scrap impact was the inability of the plate mill to run evenly as a result of gas curtailments in February and March and then ran less efficiently in June as the reheat furnace outage was delayed until the beginning of the third quarter. Slabs, though a factor, had a lesser impact as the melt shop continued to produce at a consistent level.

Selling, General and Administrative Expenses


	Twenty-six Weeks Ended				Change
	June 30, 2007		July 1, 2006		$		%
	(in thousands)
Selling, general and administrative expense	$	8,450	$	6,193	$	2,257	36.4	%

Selling, general and administrative expenses increased $2.3 million, or 36.4%, in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 primarily due to increases in support growth and our public company reporting requirements, which include costs for increased headcount, for Sarbanes Oxley compliance, and for filing reports required by the Securities and Exchange Commission.

Interest Income and Expense


	Twenty-six Weeks Ended				Change
	June 30, 2007		July 1, 2006		$			%
	(in thousands)
Interest Income	$	462	$	1,614	$	(1,152	)	(71.4	)%
Interest Expense	$	34,241	$	11,866	$	22,375		188.6	%

Interest income is earned on short-term investment securities and overnight deposits of available cash balances. The earnings associated with these investments decreased $1.2 million, or 71.4%, in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 as the balance in investment securities declined. The Company restructured their long term debt in February and all cash balances go to the pay down of the revolving credit facility and the term loan.

Interest expense is comprised of interest, amortization of original issue discount and amortization of deferred financing fees on the Company’s revolving credit facility, term loan, and notes. Interest expense increased by $22.4 million in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006. This increase was due to the one-time charges related to refinancing debt, as follows:


	Amount		Type of charge
	(in thousands)
Senior Secured Pay-in-Kind Notes:
Call premium	$	7,500	Cash
Write-off of deferred financing fees		3,098	Non-cash

Subtotal	$	10,598
Secured Floating Rate Notes:
Call premium	$	5,103	Cash
Write-off of deferred financing fees		6,485	Non-cash
Write-off of original issue discount		1,261	Non-cash

Subtotal	$	12,849

Grand Total	$	23,447

The Company redeemed its $75 million 15% Senior Secured Pay-in-Kind notes in February 2007 with the proceeds from the initial public offering. The Company then refinanced its remaining debt, also in February 2007, by issuing $105 million of 8.875% senior notes due 2015 and entering into an $80 million senior secured revolving credit facility and using the proceeds from this debt to redeem its $170 million Senior Secured Floating Rate Notes. The Company incurred $3.7 million of deferred financing costs related to the newly issued debt and is amortizing the amount over the expected life of the debt.

The Company projects ongoing annual interest expense to be approximately $15 million.

Income Tax Expense


	Twenty-six Weeks Ended					Change
	June 30, 2007			July 1, 2006		$			%
	(in thousands)
Income Tax Expense (benefit)	$	(227	)	$	13,934	$	(14,161	)	(101.6	)%

Income tax expense declined by $14.2 million in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 as a result of a $37.5 million decline in pre-tax income. The Company realized a tax benefit during the twenty-six weeks ended June 30, 2007 due largely to the refinancing activities that occurred during the month of February but also related to the lower than targeted operating income. The expected tax rate for the year will be near previously projected levels of 38% to 39%.

Net Income


	Twenty-six Weeks Ended					Change
	June 30, 2007			July 1, 2006		$			%
	(in thousands)
Net Income (loss)	$	(146	)	$	23,225	$	(23,371	)	(100.6	)%

Net income declined $23.4 million in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 as a result of a $13.9 million decrease in income from operations. Sales increased 7.2%; however this was offset by a 21.2% increase in cost of sales and a 36.4% increase in selling, general and administrative expenses.

EBITDA


	Twenty-six Weeks Ended					Change
	June 30, 2007			July 1, 2006		$			%
	(in thousands)
Net Income (loss)	$	(146	)	$	23,225	$	(23,371	)	(100.6	)%
Interest (Income) Expense, net		33,779			10,252		23,527		229.5	%
Income Tax Expense (Benefit)		(227	)		13,934		(14,161	)	(101.6	)%
Depreciation and Amortization		2,318			1,294		1,024		79.1	%

EBITDA	$	35,724		$	48,705	$	(12,981	)	(26.7	)%
Non-cash compensation		827			—		827		—

Adjusted EBITDA	$	36,551		$	48,705	$	(12,154	)	(25.0	)%

EBITDA declined $13.0 million in the twenty-six weeks ended June 30, 2007 compared to the same period in 2006 largely as a result of the $11.6 million decline in gross profit and the $2.3 million increase in selling, general and administrative expenses. Adjusted EBITDA includes the add back of non-cash compensation as a result of vesting of stock options and restricted stock awards under the Company’s equity compensation programs and vacation expense accruals. These amounts totaled $0.8 million in the twenty-six weeks ended June 30, 2007 and $0 million in the same period in 2006 and are expected to increase significantly in the balance of 2007.

Liquidity and Capital Resources

At June 30, 2007, Claymont Steel’s liquidity consisted of cash and funds available under the $80.0 million Claymont Steel credit agreement totaling approximately $25.9 million. Net working capital at June 30, 2007 increased $14.2 million to $72.4 million from $58.2 million at July 1, 2006 primarily due to the increase in inventories and accounts receivables. Rising scrap values during the period have affected inventory valuations as well as the average selling prices associated with the

outstanding receivables. The percentage of long-term debt to total capital was 127% at June 30, 2007 and 157% at July 1, 2006. We believe the funds provided by operations, together with borrowings under the Claymont Steel credit agreement will be adequate to meet future capital expenditure and working capital requirements for existing operations for at least the next twelve months.

Cash Flows

Operating Activities. Net cash flows used by operating activities were $9.6 million for the twenty-six weeks ended June 30, 2007 and net cash flows provided by operating activities were $22.2 million for the twenty-six weeks ended July 1, 2006.

During the twenty-six weeks ended June 30, 2007 the net loss adjusted for non-cash items provided $12.7 million of cash. Accounts receivable grew by $8.5 million as a result of an 4.3% increase in average selling price. The price during the comparison period in 2006 averaged $822 per shipped ton (total average selling price excludes toll processing) while the current receivable pricing for the period ending June 30, 2007 was $857 per ton. The Days Sales Outstanding (DSO) increased slightly from 47 days at June 30, 2007 as compared to 44 days at July 1, 2006. Inventory grew by $10.2 million as a result of the affect of higher scrap costs on inventory valuations and holding more slab tons, 13,546 tons, in inventory. Slab inventory was valued at $474 per ton in 2007 as compared to $411 per ton in 2006 and finished plate inventory was valued at $647 per ton as compared to $549 per ton. Inventory turns remained constant between the periods at 5.6 times. The payment of cash interest associated with the PIK Notes and the Senior Secured Floating Rate Notes, used $9.4 million. These uses of cash were partially offset by a $9.3 million increase in accounts payable which grew as a result of higher scrap and purchased slab prices. Days Payable Outstanding (DPO) was at 58 days at June 30, 2007 and 65 days on July 1, 2006.

Investing Activities. Cash flows provided by investing activities were $82.7 million and $61.6 million for the twenty-six weeks ended June 30, 2007 and July 1, 2006, respectively.

During the twenty-six weeks ended June 30, 2007, the Company redeemed $89.7 million of investment securities (net of $15.6 million of purchases) from funds generated by the initial public offering in December 2006 in order to call the Senior Pay-in-Kind Notes which were redeemed in February 2007 for a total payment of $88.9 million. $7.1 million was spent on major capital projects—some of which began in 2006—which included enhancements to the melt shop, plate mill and custom burning facility. In the melt shop, the installation of the new scarfing facility was completed at the end of June. When fully operational the equipment will alleviate a material flow bottleneck as well as reduce maintenance costs on the overhead cranes. In the plate mill, spending on the physical lab facility continued as the project nears completion. The lab is expected to reduce costs for testing as well as improve customer service by reducing current lead times associated with acquiring test results from the existing vendor. Spending for the upcoming shutdown continued as well. The reheat furnace will be refurbished and new controls will be added which will improve quality and gas consumption rates. During the first quarter of 2007, a backup armature for the 2Hi roughing stand was also completed and stored at the facility during this period. In the custom burning facility, new overhead cranes and mobile equipment were added to expand capacity.

Financing Activities. Cash flows used in financing activities were $91.9 million and $72.1 million for the twenty-six weeks ended June 30, 2007 and July 1, 2006, respectively.

During the twenty-six weeks ended June 30, 2007, the Company redeemed the $75.0 million Senior Secured Pay-In-Kind Notes and the $170.1 million of Secured Floating Rate Notes. Net proceeds from the initial public offering were used to redeem the Senior Secured Pay-In-Kind Notes and the Company issued the following new debt in order to redeem the $170.1 million Secured Floating Rate Notes: $105 million of 8.875% Senior Notes; a $20.0 million term loan and $44.0 million of borrowings under a $60.0 million revolving credit facility. During the twenty-six weeks ended June 30, 2007 the Company repaid $2.2 million on the term loan and $9.2 million on the revolving credit facility.

Capital Expenditures

Capital expenditures were $7.1 million in the twenty-six weeks ended June 30, 2007, compared to $6.7 million in the twenty-six weeks ended July 1, 2006. We are undertaking a number of deferred capital projects including capacity enhancement and efficiency improvement projects. Capital expenditures are projected to be at least $15.0 million for each of the full years of 2007 and 2008. The planned capital expenditures for 2007 and 2008 are a result of our initiatives to increase plant capacity and to reduce operating costs as well as maintain the facility at a high level of efficiency.

Environmental Issues

In October 2006, the Delaware Department of Natural Resources and Environmental Control (DNREC) issued a Notice of Conciliation and Secretary’s Order requiring the Claymont Steel to fund an independent study to determine engineering and operational options to control dust and other particulate emissions. The Company proposed several dust control projects

that will specifically control fugitive dust from slag processing, the melt shop, the scrap yard and plant roadways. Based on these proposals, DNREC will develop a Phase I implementation plan and schedule by October 1, 2007. The projects are not expected have a material effect on the Company’s results of operations or financial conditions.

In 2006, Claymont Steel performed an emissions test that indicated that mercury emissions were higher than previously calculated by it using information supplied by the United States Environmental Protection Agency. In November 2006, DNREC issued a Secretary’s Order, which requires Claymont Steel to monitor and reduce mercury emissions. The Order requires Claymont Steel to implement a quarterly testing program and to develop a plan to reduce the mercury contained in the feed to the electric arc furnace. Mercury-containing scrap is an industry-wide problem. Automobile scrap may contain mercury switches that have not been removed during the recycling process, and thus mercury can be emitted when Claymont Steel melts recycled scrap steel products, including used automobiles, to produce custom steel plate products. Claymont Steel has already taken steps to reduce mercury levels in the feed—it is no longer using municipal solid waste scrap, is partially funding a national mercury switch removal program through an industry trade association and is increasing its purchases of automobile-free scrap. The Order also requires Claymont Steel to elect one of the alternatives set forth in the Order for reducing mercury emissions and to notify DNREC of the alternative selected by January 31, 2007. On January 30, 2007, Claymont Steel notified DRNEC that it elected to implement an enhanced pollution prevention program to further reduce the amount of mercury in the feed to the electric arc furnace to reduce the emissions of mercury. The Order requires Claymont Steel to have the selected alternative operational as soon as practical but no later than December 31, 2008. On June 28, 2007, Claymont Steel filed a Semi-Annual Source Reduction Progress Report to DNREC that indicated the mercury emissions had dropped significantly since the source reduction measures were implemented. The elimination of some scraps containing lower metallic content and identifying non-auto sources of shredded material were the most significant factors in achieving the reduction. Due to the progress the Company has achieved it does not foresee the need for additional mercury emissions control equipment in the near term future. It is still very early in the assessment of this issue. As such Claymont Steel cannot estimate the full cost of the corrective measures that will be necessary. If Claymont Steel were ultimately required to install and operate a carbon injection system, it does not believe the associated costs would have a material effect on its results of operations or financial condition.

Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. The Company’s critical accounting policies that require the use of estimates and assumptions were discussed in detail in the 2006 Form 10-K and have not changed materially from that discussion.

Recently Issued Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 (Accounting for Derivative Instruments and Hedging Activities) and No. 140 (Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities), which permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. In addition, SFAS No. 155 established a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation under the requirements of Statement No. 133. This Statement will be effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 on January 1, 2007 did not have a material impact on the Company’s consolidated financial condition or results of operations.

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes(“FIN No. 48”), which is effective in fiscal years beginning after December 15, 2006. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN No. 48 on January 1, 2007 did not have a material impact on the Company’s consolidated financial condition or results of operations.

In March 2006, the FASB issued Statement No. 156,Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140. This statement provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value on each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and, 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair vale in the statement of financial position and additional footnote disclosure. This standard is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. The adoption of FASB Statement No. 156 on January 1, 2007 did not have a material impact on the Company’s consolidated financial condition or results of operations.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,Accounting for Purchases of Life Insurance – Determining the Amount that Could be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The adoption of Issue No. 06-5 on January 1, 2007 did not have a material impact on the Company’s consolidated financial condition or results of operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet financing arrangements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk. We are exposed to market risk in the form of interest rate risk relating to the borrowings under the Claymont Steel credit agreement. Revolving credit loans under the Claymont Steel credit agreement accrue interest at floating rates equal to the prime rate of interest or LIBOR plus 1.00% to 1.75% (based on the amount of availability), as applicable per annum. Advances under the letters of credit under the Claymont Steel credit agreement accrue interest at floating rates equal to LIBOR plus 1.00% to 1.75% (based on the amount of availability) per annum. The rate at June 30, 2007 was LIBOR plus 1.50%. Borrowings under the term loan accrue interest at floating rates equal to LIBOR plus 2.50% per annum. If the prime or LIBOR rates increase at any time, the interest rates applicable to our borrowings under the Claymont Steel credit agreement would increase, thereby increasing the applicable interest on our interest expense and reducing our net income. We do not have any instruments, such as interest rate swaps or caps, in place that would mitigate our exposure to interest rate risk relating to these borrowings. At June 30, 2007, $52.6 million was outstanding under the Claymont Steel credit agreement. The effect of a hypothetical 1% increase in interest rates based on $52.6 million outstanding would increase our annual interest expense by $0.5 million and decrease our net income by approximately $0.3 million.

Commodity Price Risk. In the ordinary course of business, we are exposed to market risk for price fluctuations of raw materials and energy, principally scrap steel, steel slabs, electricity and natural gas. We attempt to negotiate the best prices for our raw materials and energy requirement and to obtain prices for our steel products that match market price movements in response to supply and demand. We introduced a raw material surcharge in January 2004 designed to pass through increases in scrap steel costs to our customers. Our surcharge mechanism has worked effectively to reduce the impact of increased scrap costs so we can maintain higher and more consistent gross margins. Any increase in the prices for raw materials or energy resources could materially increase our costs and lower our earnings.

Item 4.

Controls and Procedures.

Disclosure Controls and Procedures

The Company has disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) to ensure that information required to be disclosed in the reports it files or submits under the Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls and procedures include,

without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, management has evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. As of June 30, 2007, these officers concluded that the disclosure controls and procedures in place are effective and provide reasonable assurance that the disclosure controls and procedures accomplished their objectives.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

See Note 12 of the Notes to Consolidated Financial Statements which is incorporated by reference.

Item 1A.

Risk Factors

See Item 1A. Risk Factors in Part 1 of the Form 10-K, as amended, for the year ended December 31, 2006 for a discussion of the Company’s risk factors. There have been no material changes to these risk factors from those previously disclosed in the Form 10-K with the exception of the following risk factor:

We have substantial indebtedness, and we have negative stockholders’ equity, which could adversely affect our financial condition and otherwise adversely impact our business and growth prospects.

We have a substantial amount of debt and we have negative stockholders’ equity. As of June 30, 2007, we have total indebtedness of approximately $150.9 million and stockholders’ deficit of $40.8 million. Our substantial level of indebtedness could have important consequences to you, including the following:

•

we must use a substantial portion of our cash flow from operations to pay interest on our other indebtedness, which will reduce the funds available to us for other purposes;

•

our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be limited;

•

our flexibility in reacting to changes in the industry may be limited and we could be more vulnerable to adverse changes in our business or economic conditions in general; and

•

we may be at a competitive disadvantage to those of our competitors who operate on a less leveraged basis.

Furthermore, any borrowings under the Claymont Steel credit agreement bears interest at variable rates. There were $52.6 million in borrowings outstanding under this agreement on June 30, 2007. If these rates were to increase significantly, our ability to borrow additional funds may be reduced, our interest expense would significantly increase, and the risks related to our substantial indebtedness would intensify.

Our ability to generate cash flows from operations and to make scheduled payments on our indebtedness will depend on our future financial performance. Our future performance will be affected by a range of economic, competitive, legislative, operating and other business factors, many of which we cannot control, such as general economic and financial conditions in our industry or the economy at large. A significant reduction in operating cash flows resulting from changes in economic conditions, increased competition, or other events could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations and prospects and our ability to service our debt and other obligations. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as reducing or delaying acquisitions and capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking equity capital. We cannot assure you that any of these alternative strategies could be effected on satisfactory terms, if at all, or that they would yield sufficient funds to make required payments on the notes and our other indebtedness.

Excess global capacity and the availability of competitive substitute materials have, at times, resulted in intense competition and may, in the future, cause downward pressure on prices.

Competition within the steel industry, both domestic and worldwide, is intense and is expected to remain so. We compete primarily on the basis of price, quality and the ability to meet customers’ product needs and delivery schedules. The highly competitive nature of the steel industry periodically exerts downward pressure on prices for our products. In the case of certain product applications, we and other steel manufacturers compete with manufactures of other materials, including plastic, aluminum, graphite composites, ceramics, glass, wood and concrete. The global steel industry is generally characterized by overcapacity, which can have a negative impact on domestic steel prices. This overcapacity has sometimes resulted in high levels of steel imports into the United States exerting downward pressure on domestic steel prices and resulting in, at times, a dramatic reduction in, or in the case of many steel producers, the elimination of, gross margins.

In addition, Mittal Steel USA is planning to restart the idled plate mill in Gary, Indiana, due to increasing demand in the energy market. The reopening of the 160-inch plate mill is targeted for September 2007. Mittal also plans to participate in the export market. We have no ability to estimate what effect, if any, this reopening will have on steel pricing.

Item 6.

Exhibits.

(a) Exhibits.


Exhibit No.		Description
31.1†		Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)

31.2†		Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

32.1†		Certification Pursuant to 18 U.S.C. Section 1350 (Chief Executive Officer and Chief Financial Officer)

†	Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


	CLAYMONT STEEL HOLDINGS, INC.

Date: August 14, 2007	By:	/S/ JEFF BRADLEY
		Jeff Bradley Chief Executive Officer and Director (Principal Executive Officer)

Date: August 14, 2007	By:	/S/ DAVID CLARK
		David Clark Chief Financial Officer (Principal Financial Officer)

Exhibit Index


Exhibit No.		Description
31.1†		Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)

31.2†		Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

32.1†		Certification Pursuant to 18 U.S.C. Section 1350 (Chief Executive Officer and Chief Financial Officer)

†	Filed herewith.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Claymont Steel Inactive 10-Q2007 Q2 Quarterly report

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