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TheStreet Open House

Mechel Reports The 1H 2012 Financial Results

Adjusted net income / (loss) represents net income / (loss) before Impairment of long-lived assets and goodwill and Provision for the amounts due from related parties, including the effect on income tax and amounts attributable to noncontrolling interests. Our adjusted net income / (loss) may not be similar to adjusted net income / (loss) measures of other companies. Adjusted net income / (loss) is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that our adjusted net income / (loss) provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations. While impairment of long-lived assets and goodwill and provision for the amounts due from related parties are considered operating costs under generally accepted accounting principles, these expenses represent the non-cash current period allocation of costs associated with assets acquired or constructed in prior periods. Our adjusted net income / (loss) calculation is used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the metals and mining industry.

Adjusted EBITDA can be reconciled to our consolidated statements of operations as follows:

Consolidated results

US$ thousand 1H 20 12 1H 20 11
Net (loss) / income (605,004) 501,022
Add:
Depreciation, depletion and amortization 313,062 278,791
Forex loss / (gain) 120,801 (164,209)
Loss from remeasurement of contingent liabilities at fair value 929 856
Interest expense 325,121 290,966
Interest income (36,569) (7,029)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for the loan given to related parties 674,047 (5,388)
Amount attributable to noncontrolling interests (10,672) 46,551
Income taxes 67,133 237,614
Adjusted EBITDA 848,848 1,179,174
     
US$ thousand 2Q 20 12 1Q 20 12
Net (loss) / income (823,023) 218,019
 Add:
Depreciation, depletion and amortization 157,205 155,857
Forex loss / (gain) 291,716 (170,915)
Loss from remeasurement of contingent liabilities at fair value 469 460
Interest expense 164,060 161,061
Interest income (17,798) (18,772)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for the loan given to related parties 674,567 (516)
Amount attributable to noncontrolling interests (25,688) 15,016
Income taxes (36,059) 103,192
Adjusted EBITDA 385,446 463,402

Adjusted Net income / (loss) can be reconciled as follows:

US$ thousand 1H 20 12 1H 20 11
Net (loss) / income (605,004) 501,021
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for amounts due from related parties 693,806 --
Amount attributable to noncontrolling interests (27,778) --
Income taxes (20,042) --
Adjusted net income 40,982 501,021
     
US$ thousand 2Q 20 12 1Q 20 12
Net (loss) / income (823,023) 218,019
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for amounts due from related parties 693,806 --
Amount attributable to noncontrolling interests (27,778) --
Income taxes (20,042) --
Adjusted net (loss) / income (177,037) 218,019

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousand 1H 20 12 1H 20 11
Revenue, net 6,035,955 6,406,944
Adjusted EBITDA 848,849 1,179,174
Adjusted EBITDA, margin 14.06% 18.40%
     
US$ thousand 2Q 20 12 1Q 20 12
Revenue, net 3,085,908 2,950,047
Adjusted EBITDA 385,446 463,402
Adjusted EBITDA, margin 12.49% 15.71%

Mining Segment

US$ thousand 1H 20 12 1H 20 11
Net income 211,480 616,620
Add:
Depreciation, depletion and amortization 166,495 162,190
Forex loss / (gain) 95,535 (190,186)
Loss from remeasurement of contingent liabilities at fair value 929 856
Interest expense 140,824 171,239
Interest income (54,628) (87,907)
Net result on the disposal of non-current assets 1,582 378
Amount attributable to noncontrolling interests 28,180 40,751
Income taxes 69,623 205,214
Adjusted EBITDA 660,021 919,155
     
US$ thousand 2Q 20 12 1Q 20 12
Net income (30,024) 241,504
Add:
Depreciation, depletion and amortization 84,875 81,620
Forex loss / (gain) 197,945 (102,410)
Loss from remeasurement of contingent liabilities at fair value 469 460
Interest expense 72,291 68,533
Interest income (31,053) (23,575)
Net result on the disposal of non-current assets 1,166 419
Amount attributable to noncontrolling interests 10,264 17,916
Income taxes (4,026) 73,649
Adjusted EBITDA 301,906 358,116

Adjusted Net income/loss can be reconciled as follows:

US$ thousand 1H 20 12 1H 20 11
Net income 211,480 616,620
Provision for amounts due from related parties 20,706 --
Adjusted net income 232,186 616,620
     
US$ thousand 2Q 20 12 1Q 20 12
Net (loss) / income (30,024) 241,504
Provision for amounts due from related parties 20,706 --
Adjusted net (loss) / income (9,318) 241,504

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousand 1H 20 12 1H 20 11
Revenue (including intersegment sales) 2,246,605 2,469,388
Adjusted EBITDA 660,021 919,155
Adjusted EBITDA, margin 29.38% 37.22%
     
US$ thousand 2Q 20 12 1Q 20 12
Revenue (including intersegment sales) 1,088,265 1,158,340
Adjusted EBITDA 301,906 358,116
Adjusted EBITDA, margin 27.74% 30.92%

Steel Segment

US$ thousand 1H 20 12 1H 20 11
Net loss (640,841) (56,254)
Add:
Depreciation, depletion and amortization 84,895 61,494
Forex loss 25,073 36,878
Interest expense 182,027 160,067
Interest income (5,884) (9,042)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for the loan given to related parties 518,980 (1,582)
Amount attributable to noncontrolling interests (22,692) (99)
Income taxes (1,716) 23,753
Adjusted EBITDA 139,841 215,215
     
US$ thousand 2Q 20 12 1Q 20 12
Net loss (625,277) (15,564)
Add:
Depreciation, depletion and amortization 41,244 43,651
Forex loss / (gain) 116,228 (91,155)
Interest expense 95,163 86,864
Interest income (2,861) (3,023)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for the loan given to related parties 518,523 457
Amount attributable to noncontrolling interests (19,295) (3,398)
Income taxes (32,474) 30,757
Adjusted EBITDA 91,251 48,589

Adjusted Net income / (loss) can be reconciled as follows:

US$ thousand 1H 20 12 1H 20 11
Net loss (640,841) (56,254)
Impairment of long-lived assets and goodwill and provision for amounts due from related parties 518,506 --
Amount attributable to noncontrolling interests (15,320) --
Income taxes (14,797) --
Adjusted net loss (152,452) (56,254)
     
US$ thousand 2Q 2012 1Q 2012
Net loss (625,277) (15,564)
Impairment of long-lived assets and goodwill and provision for amounts due from related parties 518,506 --
Amount attributable to noncontrolling interests (15,320) --
Income taxes (14,797) --
Adjusted net loss (136,888) (15,564)

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousand 1H 20 12 1H 20 11
Revenue (including intersegment sales) 3,692,321 3,981,197
Adjusted EBITDA 139,841 215,215
Adjusted EBITDA, margin 3.79% 5.41%
     
US$ thousand 2Q 20 12 1Q 20 12
Revenue (including intersegment sales) 1,964,199 1,728,122
Adjusted EBITDA 91,251 48,589
Adjusted EBITDA, margin 4.65% 2.81%

Ferroalloys Segment

US$ thousand 1H 20 12 1H 20 11
Net loss (163,094) (22,746)
Add:
Depreciation, depletion and amortization 53,918 44,115
Forex loss / (gain) 206 (11,145)
Interest expense 15,453 40,388
Interest income (308) (891)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill 101,049 475
Amount attributable to noncontrolling interests (18,128) 2,419
Income taxes (3,974) 1,708
Adjusted EBITDA (14,878) 54,323
     
US$ thousand 2Q 20 12 1Q 20 12
Net loss (107,054) (56,040)
Add:
Depreciation, depletion and amortization 27,439 26,480
Forex (gain) / loss (22,457) 22,663
Interest expense 7,360 8,093
Interest income (97) (212)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill 100,947 102
Amount attributable to noncontrolling interests (16,698) (1,430)
Income taxes 3,180 (7,154)
Adjusted EBITDA (7,381) (7,498)

Adjusted Net income / (loss) can be reconciled as follows:

US$ thousand 1H 20 12 1H 20 11
Net loss (163,094) (22,746)
Impairment of long-lived assets and goodwill 100,702 --
Amount attributable to noncontrolling interests (12,458) --
Income taxes (5,243) --
Adjusted net loss (80,097) (22,746)
     
US$ thousand 2Q 20 12 1Q 20 12
Net loss (107,054) (56,040)
Impairment of long-lived assets and goodwill   100,702 --
Amount attributable to noncontrolling interests (12,458) --
Income taxes (5,246) --
Adjusted net loss (24,057) (56,040)

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousand 1H 20 12 1H 20 11
Revenue (including intersegment sales) 307,062 379,018
Adjusted EBITDA (14,878) 54,323
Adjusted EBITDA, margin -4.85% 14.33%
     
US$ thousand 1Q 20 12 1Q 20 12
Revenue (including intersegment sales) 154,517 152,544
Adjusted EBITDA (7,381) (7,498)
Adjusted EBITDA, margin -4.78% -4.92%

Power Segment

US$ thousand 1H 20 12 1H 20 11
Net (loss) / income (48,619) 13,473
Add:
Depreciation, depletion and amortization 7,754 10,992
Forex (gain) / loss (13) 244
Interest expense 11,083 10,293
Interest income (15) (210)
Net result on the disposal of non-current assets, impairment of goodwill 52,436 (4,660)
Amount attributable to noncontrolling interests 1,968 3,481
Income taxes 3,200 6,939
Adjusted EBITDA 27,794 40,552
     
US$ thousand 2Q 20 12 1Q 20 12
Net (loss) / income (60,054) 11,435
Add:
Depreciation, depletion and amortization 3,646 4,107
Forex loss / (gain) 1 (13)
Interest expense 5,460 5,624
Interest income 0 (15)
Net result on the disposal of non-current assets, impairment of goodwill 53,932 (1,495)
Amount attributable to noncontrolling interests 40 1,928
Income taxes (2,739) 5,939
Adjusted EBITDA 287 27,510

Adjusted Net income/loss can be reconciled as follows:

US$ thousand 1H 20 12 1H 20 11
Net (loss) / income (48,619) 13,473
Impairment of goodwill 53,893 --
Adjusted net income 5,274 13,473
     
US$ thousand 2Q 2012 1Q 2012
Net (loss) / income (60,054) 11,435
Impairment of goodwill 53,893 --
Adjusted net (loss) / income (6,160) 11,435

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousand 1H 20 12 1H 20 11
Revenue (including intersegment sales) 667,394 669,707
Adjusted EBITDA 27,794 40,552
Adjusted EBITDA, margin 4.16% 6.06%
     
US$ thousand 2Q 20 12 1Q 20 12
Revenue (including intersegment sales) 287,790 379,604
Adjusted EBITDA 287 27,510
Adjusted EBITDA, margin 0.10% 7.25%
     
Consolidated Balance Sheets    
(in thousands of U.S. dollars)    
  June 30, 2012 December 31, 2011
  (unaudited)  
ASSETS    
Cash and cash equivalents $150,759 $643,379
Accounts receivable, net of allowance for doubtful accounts of $63,912 as of June 30, 2012 and $50,966 as of December 31, 2011 821,103 824,560
Due from related parties 1,372,690 1,315,288
Inventories 2,108,589 2,599,097
Deferred income taxes 52,901 36,056
Prepayments and other current assets 595,447 654,285
Total current assets 5,101,489 6,072,665
     
Long-term investments in related parties 8,089 8,150
Other long-term investments 13,362 13,997
Property, plant and equipment, net 6,972,286 7,076,303
Mineral licenses, net 4,622,565 4,733,676
Other non-current assets 200,134 222,442
Deferred income taxes 38,171 27,817
Goodwill 981,261 1,151,187
Total assets $17,937,357 $19,306,237
     
LIABILITIES AND EQUITY    
Short-term borrowings and current portion of long-term debt $2,740,938 $2,651,357
Accounts payable and accrued expenses:    
Trade payable to vendors of goods and services 921,565 976,187
Advances received 165,216 206,156
Accrued expenses and other current liabilities 307,163 281,762
Taxes and social charges payable 288,584 277,284
Unrecognized income tax benefits 2,265 2,190
Due to related parties 141,802 179,672
Asset retirement obligation, current portion 5,181 3,703
Deferred income taxes 33,924 41,822
Pension obligations, current portion 21,789 22,172
Dividends payable 181,597 4
Finance lease liabilities, current portion 107,943 96,907
Total current liabilities $4,917,967 $4,739,216
     
Long-term debt, net of current portion 6,110,372 6,745,524
Asset retirement obligations, net of current portion 38,647 40,214
Pension obligations, net of current portion 144,798 144,182
Deferred income taxes 1,455,324 1,514,014
Finance lease liabilities, net of current portion 342,306 375,249
Other long-term liabilities 392,836 382,512
     
EQUITY    
Common shares (10 Russian rubles par value; 497,969,086 shares authorized, 416,270,745 shares issued and outstanding as of June 30, 2012 and December 31, 2011) 133,507 133,507
Preferred shares (10 Russian rubles par value; 138,756,915 shares authorized, 83,254,149 shares issued and outstanding as of June 30, 2012 and December 31, 2011) 25,314 25,314
Additional paid-in capital 846,277 845,994
Accumulated other comprehensive loss (375,847) (356,580)
Retained earnings 3,559,841 4,345,754
Equity attributable to shareholders of Mechel OAO 4,189,092 4,993,989
Noncontrolling interests 346,015 371,337
Total equity 4,535,107 5,365,326
Total liabilities and equity $17,937,357 $19,306,237
 
Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands of U.S. dollars) Six months ended June 30,
  2012 2011
  (unaudited) (unaudited)
Revenue, net (including related party amounts of $335,765 and $539,780 during six months 2012 and 2011, respectively) $6,035,955 $6,406,944
Cost of goods sold (including related party amounts of $475,111 and $994,110 during six months 2012 and 2011, respectively) (4,171,524) (4,221,564)
Gross profit 1,864,431 2,185,380
     
Selling, distribution and operating expenses:    
Selling and distribution expenses (944,333)  (874,161)
Taxes other than income tax (54,741) (63,798)
Accretion expense (2,580) (3,445)
Loss on write-off of property, plant and equipment (2,054) (2,814)
Impairment of goodwill and long-lived assets (470,967)  -- 
Provision for amounts due from related parties (222,839)  -- 
Provision for doubtful accounts (16,714) (4,565)
General, administrative and other operating expenses, net (306,783) (311,912)
Total selling, distribution and operating expenses (2,021,011) (1,260,695)
     
Operating (loss) income  (156,580) 924,685
     
Other income and (expense):    
     
Income from equity investments 467  129
Interest income 36,569 7,029
Interest expense (325,121) (290,966)
Foreign exchange (loss) gain (120,801) 164,209
Other income(expenses), net 16,923 (19,899)
Total other income and (expense), net (391,963) (139,498)
(Loss) income before income tax (548,543) 785,187
     
Income tax expense (67,133) (237,614)
Net (loss) income  (615,676) 547,573
Less: Net loss (income) attributable to noncontrolling interests  10,672 (46,551)
Net (loss) income attributable to shareholders of Mechel OAO $(605,004) $501,022
Less: Dividends on preferred shares (79,056)  (78,281)
Net (loss) income attributable to common shareholders of Mechel OAO (684,060)  422,741
     
Net (loss) income (615,676) 547,573
Currency translation adjustment (23,668) 212,332
Change in pension benefit obligation (1,775) 2,314
Adjustment of available-for-sale securities (132)  (315)
Comprehensive (loss) income $(641,251) $761,904 
Comprehensive loss (income) attributable to noncontrolling interests 16,980 (77,320)
Comprehensive (loss) income attributable to shareholders of Mechel OAO (624,271) 684,584
 
Consolidated Statements of Cash Flows
(in thousands of U.S. dollars) Six months ended June 30,
  2012 2011
   (unaudited)  (unaudited)
Cash Flows from Operating Activities    
Net (loss) income attributable to shareholders of Mechel OAO (605,004) 501,022
Net (loss) income attributable to noncontrolling interests (10,672) 46,551
Net (loss) income $(615,676) $547,573
Adjustments to reconcile net (loss) income to net cash provided by operating activities:    
Depreciation 226,997 186,582
Depletion and amortization 86,065 92,209
Foreign exchange loss (gain) 120,801 (164,209)
Deferred income taxes (82,128) 21,225
Provision for doubtful accounts 16,714 4,565
Change in inventory reserves 16,565 (2,854)
Accretion expense 2,580 3,445
Revision in asset retirement obligations (1,848) (2,751)
Loss on write-off of property, plant and equipment 2,054 2,814
Impairment of goodwill and long-lived assets 470,967  --
Provision for amounts due from related parties 222,839  --
Income from equity investments (467) (129)
Non-cash interest on pension liabilities 6,060 6,871
Loss (gain) on sale of property, plant and equipment 2,109 (6,200)
Gain on accounts payable with expired legal term (615) (2,081)
Amortization of loan origination fee 21,575 30,143
Loss resulting from accretion and remeasurement of contingent liability 929 856
Pension service cost, amortisation of prior service cost and actuarial (gain) loss, other expenses 2,009 3,545
Changes in working capital items, net of effects from acquisition of new subsidiaries:    
Accounts receivable (25,518) (329,930)
Inventories 450,100 (456,605)
Trade payable to vendors of goods and services (3,508) 88,714
Advances received (39,404) (72,300)
Accrued taxes and other liabilities 47,977 62,730
Settlements with related parties (323,734) 27,195
Other current assets 45,712 (72,501)
Unrecognized income tax loss (benefits) 75 (2,426)
Net cash provided by (used in) operating activities 649,230 (33,519)
     
Cash Flows from Investing Activities    
Acquisition of DEMP, less cash acquired (16,405)  --
Short-term loans issued and other investments (1,032) (252,068)
Proceeds from short-term loans issued 1,572 211,807
Proceeds from disposals of property, plant and equipment 14,625 11,974
Prepayment for the participation in auction --  (10,480)
Purchases of mineral licenses (1,061) (11,307)
Purchases of property, plant and equipment (576,669) (758,195)
Net cash used in investing activities (578,970) (808,269)
     
Cash Flows from Financing Activities    
Proceeds from borrowings 2,130,900 3,016,782
Repayment of borrowings (2,612,598) (2,163,770)
Acquisition of noncontrolling interest in subsidiaries (33) (96)
Repayment of obligations under finance lease (59,801) (40,246)
Sale leaseback proceeds  --  13,692
Net cash (used in) provided by financing activities (541,532) 826,362
     
Effect of exchange rate changes on cash and cash equivalents (21,348) 30,806
     
Net (decrease) increase in cash and cash equivalents (492,620) 15,380
     
Cash and cash equivalents at beginning of period 643,379 340,800
Cash and cash equivalents at end of period $150,759 $356,180
CONTACT: Mechel OAO
         Vladislav Zlenko
         Director of Investor Relations
         Mechel OAO
         Phone: 7-495-221-88-88
         Fax: 7-495-221-88-00
         vladislav.zlenko@mechel.com

Mechel OAO Logo

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