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 May 31, 1998 or
[ ] 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 0-22496
SCHNITZER STEEL INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OREGON 93-0341923
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 N.W. Yeon Ave., P.O Box 10047
Portland, OR 97296-0047
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(503) 224-9900
----------------------------------------------------
(Registrant's telephone number, including area code)
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 [ ]
The Registrant had 5,555,026 shares of Class A Common Stock, par value of $1.00
per share and 4,430,328 shares of Class B Common Stock, par value of $1.00 per
share outstanding at July 1, 1998.
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at May 31, 1998
and August 31, 1997.......................................................3
Consolidated Statement of Operations for the Three Months and
Nine Months Ended May 31, 1998 and 1997...................................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1997 and the Nine Months
Ended May 31, 1998........................................................5
Consolidated Statement of Cash Flows for the
Nine Months Ended May 31, 1998 and 1997...................................6
Notes to Financial Statements.................................................7
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................12
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K.............................................18
SIGNATURE PAGE...............................................................19
2
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
May 31, 1998 August 31, 1997
------------ ---------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 1,666 $ 3,106
Accounts receivable, less allowance for
doubtful accounts of $485 and $524 30,043 31,010
Accounts receivable from related parties 499 1,215
Inventories (Note 2) 104,506 95,154
Deferred income taxes 10,737 10,737
Prepaid expenses and other 6,834 3,168
---------- ----------
TOTAL CURRENT ASSETS 154,285 144,390
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT 142,925 151,136
---------- ----------
OTHER ASSETS:
Investment in joint venture partnerships 105,578 74,605
Advances to joint venture partnerships 9,161 7,145
Goodwill 41,320 42,230
Intangibles and other 9,753 8,480
---------- ----------
$ 463,022 $ 427,986
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 7) $ 166 $ 361
Accounts payable 15,673 19,456
Accrued payroll liabilities 4,355 5,158
Current portion of environmental liabilities (Note 4) 5,152 5,787
Other accrued liabilities 9,107 8,730
---------- ----------
TOTAL CURRENT LIABILITIES 34,453 39,492
---------- ----------
DEFERRED INCOME TAXES 28,117 28,409
---------- ----------
LONG-TERM DEBT LESS CURRENT PORTION (Note7) 128,988 92,881
---------- ----------
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 4) 23,030 24,530
---------- ----------
OTHER LONG-TERM LIABILITIES 3,311 3,613
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,555 and 5,737 shares issued and outstanding 5,555 5,737
Class B common stock--25,000 shares $1 par value
authorized, 4,431 and 4,445 shares issued and outstanding 4,431 4,445
Additional paid-in capital 105,124 109,994
Retained earnings 130,013 118,885
----------- ----------
245,123 239,061
----------- ----------
$ 463,022 $ 427,986
=========== ==========
The accompanying notes are an integral part of this statement.
3
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
For The Three Months Ended For The Nine Months Ended
May 31, May 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
REVENUES $ 80,918 $ 89,297 $ 268,216 $ 248,596
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of goods sold and
other operating expenses 71,296 76,230 237,567 219,434
Selling and administrative 5,520 4,888 16,150 15,443
----------- ----------- ----------- -----------
76,816 81,118 253,717 234,877
----------- ----------- ----------- -----------
INCOME FROM JOINT VENTURES 1,417 2,720 8,380 4,500
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 5,519 10,899 22,879 18,219
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (1,849) (1,551) (4,537) (3,583)
Other income 283 3,416 1,096 4,441
----------- ----------- ----------- -----------
(1,566) 1,865 (3,441) 858
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,953 12,764 19,438 19,077
Income tax provision (1,384) (4,340) (6,803) (6,494)
----------- ----------- ----------- -----------
NET INCOME $ 2,569 $ 8,424 $ 12,635 $ 12,583
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.26 $ 0.81 $ 1.25 $ 1.22
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.81 $ 1.25 $ 1.21
=========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
4
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
Class A Class B
Common Stock Common Stock Additional
----------------------- ----------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT 8/31/96 5,773 $ 5,773 4,575 $ 4,575 $ 113,747 $ 99,718 $ 223,813
Class B common stock converted
to Class A common stock 130 130 (130) (130)
Class A common stock repurchased (166) (166) (3,753) (3,919)
Net income 21,225 21,225
Dividends paid (2,058) (2,058)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT 8/31/97 5,737 5,737 4,445 4,445 109,994 118,885 239,061
Net Income 12,635 12,635
Class B common stock converted
to Class A common stock 14 14 (14) (14)
Class A common stock repurchased (196) (196) (4,870) (5,066)
Dividends paid (1,507) (1,507)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT 5/31/98 5,555 $ 5,555 4,431 $ 4,431 $ 105,124 $ 130,013 $ 245,123
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of this statement.
5
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
For The Nine Months Ended
May 31,
----------------------------
1998 1997
---------- ----------
OPERATIONS:
Net income $ 12,635 $ 12,583
Noncash items included in income:
Depreciation and amortization 14,123 13,055
Deferred income taxes (292) (2,211)
Equity in earnings of joint ventures
and other investments (8,380) (4,500)
Gain on disposal of assets (113) (65)
Cash provided (used) by assets and liabilities:
Accounts receivable 1,683 64
Inventories (9,352) (13,618)
Prepaid expenses and other (2,608) 1,855
Accounts payable (3,783) (5,987)
Deferred revenue (76) 3,327
Accrued expenses (351) 1,855
Environmental liabilities (2,135) (861)
Other assets and liabilities (1,491) (367)
---------- ----------
NET CASH (USED) PROVIDED BY OPERATIONS (140) 5,130
---------- ----------
INVESTMENTS:
Payment for purchase of Proler (42,456)
Capital expenditures (7,512) (10,499)
Advances to joint ventures (2,016) (4,396)
Investments in joint ventures (22,892) 18,721
Proceeds from sale of assets 2,986 4,859
Other (1,205) (1,057)
---------- ----------
NET CASH USED BY INVESTMENTS (30,639) (34,828)
---------- ----------
FINANCING:
Repurchase of Class A common stock (5,066) (2,350)
Dividends declared and paid (1,507) (1,551)
Increase in long-term debt 36,200 63,526
Reduction in long-term debt (288) (27,866)
---------- ----------
NET CASH PROVIDED BY FINANCING 29,339 31,759
---------- ----------
NET (DECREASE) INCREASE IN CASH (1,440) 2,061
CASH AT BEGINNING OF PERIOD 3,106 1,896
---------- ----------
CASH AT END OF PERIOD $ 1,666 $ 3,957
========== ==========
The accompanying notes are an integral part of this statement.
6
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
Note 1 - Summary Of Significant Accounting Policies:
Basis of Presentation
---------------------
The accompanying unaudited interim financial statements of Schnitzer
Steel Industries, Inc. (the Company) have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and note disclosures normally included in annual
financial statements have been condensed or omitted pursuant to those
rules and regulations. In the opinion of management, all adjustments,
consisting only of normal, recurring adjustments considered necessary
for a fair presentation, have been included. Although management
believes that the disclosures made are adequate to ensure that the
information presented is not misleading, it is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's annual report
for the fiscal year ended August 31, 1997. The results for the nine
months ended May 31, 1998 are not necessarily indicative of the results
of operations for the entire year.
Earnings Per Share
------------------
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per share", which specifies the computation,
presentation and disclosure requirements for earnings per share
("EPS"). SFAS 128 replaces the presentation of primary and fully
diluted EPS with basic and diluted EPS. Basic EPS is computed based
upon the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that would
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The following represents a
reconciliation from basic EPS to diluted EPS:
Three Months Ended May 31, 1998
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $ 2,569 9,985 $ 0.26
Options -- 62 =========
----------- -------------
Diluted EPS $ 2,569 10,047 $ 0.26
=========== ============= =========
Three Months Ended May 31, 1997
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $ 8,424 10,343 $ 0.81
Options -- 28 =========
----------- -------------
Diluted EPS $ 8,424 10,371 $ 0.81
=========== ============= =========
7
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
Nine Months Ended May 31, 1998
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $ 12,635 10,070 $ 1.25
Options -- 71 =========
----------- -------------
Diluted EPS $ 12,635 10,141 $ 1.25
=========== ============= =========
Nine Months Ended May 31, 1997
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $ 12,583 10,340 $ 1.22
Options -- 59 =========
----------- -------------
Diluted EPS $ 12,583 10,399 $ 1.21
=========== ============= =========
Note 2 - Inventories:
Inventories consist of the following (in thousands):
May 31, 1998 August 31, 1997
------------ ---------------
(Unaudited) (Audited)
Scrap metals $ 25,864 $ 26,897
Work in process 11,783 24,358
Finished goods 50,690 28,109
Supplies 16,169 15,790
---------- ----------
$ 104,506 $ 95,154
========== ==========
Scrap metal inventories are valued at LIFO; the remainder are at FIFO.
Interim LIFO calculations are based on the Company's estimates of
expected year-end inventory levels and costs. The cost of scrap metal
inventories exceeded the stated LIFO value by $8,039 at May 31, 1998
and August 31, 1997.
8
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
Note 3 - Related Party Transactions:
Certain shareholders of the Company own significant interests in, or
are related to owners of, the entities discussed below. As such, these
entities are considered related parties for financial reporting
purposes.
Transactions Affecting Cost of Goods Sold and Other Operating Expenses
----------------------------------------------------------------------
The Company charters several vessels from related shipping companies to
transport scrap metal to foreign markets. In 1993, the Company signed a
five-year time-charter agreement for one vessel. The agreement
guarantees the ship owner a residual market value of $2,500 at the end
of the time-charter. The Company entered into two additional seven-year
time-charters in May 1995. Charges incurred for these charters were
$1,522 and $1,841 for the three months ended May 31, 1998 and 1997,
respectively, and $5,836 and $6,332 for the nine months ended May 31,
1998 and 1997, respectively.
The Company purchased scrap metals from certain of its joint venture
operations totaling $4,452 and $3,879 for the three months ended May
31, 1998 and 1997, respectively, and $12,307 and $9,019 for the nine
months ended May 31, 1998 and 1997, respectively.
The Company leases certain land and buildings from a real estate
company which is a related entity. The rent expense was $338 and $387
for the three months ended May 31, 1998 and 1997, respectively, and
$998 and $1,098 for the nine months ended May 31, 1998 and 1997,
respectively.
Transactions Affecting Selling and Administrative Expenses
----------------------------------------------------------
The Company performs some administrative services and provides
operation and maintenance of management information systems for certain
related parties. These services are charged to the related parties
based upon costs plus a 15% margin for overhead and profit. The
administrative charges totaled $233 and $285 for the three months ended
May 31, 1998 and 1997, respectively, and $969 and $795 for the nine
months ended May 31, 1998 and 1997, respectively.
Transactions Affecting Other Income (Expense)
---------------------------------------------
The vessels discussed above are periodically sub-chartered to third
parties. In this case, a related shipping agency company acts as the
Company's agent in the collection of income and payment of expenses
related to sub-charter activities. Charges incurred for these
sub-charters were $123 for the three months ended May 31, 1998, and
$743 and $871 for the nine months ended May 31, 1998 and 1997,
respectively. There was no subcharter income for the three months ended
May 31, 1998 and 1997. These charges were offset by income of $408 and
$747 for the nine months ended May 31, 1998 and 1997, respectively.
9
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
Note 4 - Environmental Liabilities:
During fiscal 1995, in conjunction with the due diligence proceedings
for the Company's acquisition of Manufacturing Management, Inc. (MMI),
the Company hired an independent third-party consultant to estimate the
costs to cure both current and future potential environmental
liabilities. The cumulative provision for the total cost specified in
the consultant's report was included in MMI's statement of operations
prior to its acquisition by the Company. This reserve was carried over
to the Company's balance sheet and at May 31, 1998 aggregated $20,200.
A portion of the liability recorded in fiscal 1995 relates to MMI's
status as a potentially responsible party (PRP) for the investigation
and cleanup of sediment along the Hylebos Waterway, on which the
Schnitzer Steel of Tacoma (SST) scrap yard is located. SST and five
other PRPs voluntarily entered into an Administrative Order of Consent
with the Environmental Protection Agency (EPA) to fund a pre-remedial
study of sediment contamination and remediation alternatives. SST's
share of the study, which is expected to be complete in 1998, is
approximately $2,000. Any further potential liabilities, if any, cannot
be estimated at this time.
In 1996, prior to the Company's acquisition of Proler International
Corp. (Proler) (see Note 5), an independent third party consultant was
engaged to estimate the costs to cure present and future potential
liabilities related to Proler's wholly-owned and joint venture
properties. Proler recorded a liability of $8,600 for the probable
costs to remediate its wholly-owned properties based upon the
consultant's estimates, increasing its environmental reserves to
$9,800. The Company carried over the aggregate reserve to its financial
statements upon acquiring Proler and $8,000 remained outstanding on May
31, 1998. Concurrently, based upon the consultant's estimates, Proler's
joint venture operations recorded additional liabilities of $4,100 for
the probable costs to remediate their properties. The liability was
recorded prior to the Company's acquisition of Proler.
Between 1982 and 1987, MRI Corporation (MRI), a wholly-owned subsidiary
of Proler, operated a tin can shredding and detinning facility in
Tampa, Florida. In 1989 and 1992, the EPA conducted a preliminary site
investigation of this property, and in December 1996, added the site to
the "National Priorities List". MRI and Proler, along with several
other parties, have been named as PRPs for this site by the EPA. Proler
included the probable costs associated with this site in the
aforementioned reserve. Additionally, Proler and this subsidiary have
been named or identified as PRPs at several other sites.
As part of the Proler acquisition, the Company became a fifty-percent
owner of Hugo Neu-Proler Company (HNP). HNP has agreed, as part of its
lease renewal with the Port of Los Angeles, to be responsible for a
multi-year, remedial clean-up project involving certain environmental
conditions at its Terminal Island Site in Los Angeles, California by
the year 2001. Remediation will include limited excavation and
treatment of contaminated soils, paving, installation of a stormwater
management system, construction of a noise barrier and perimeter wall
around the facility and groundwater monitoring. The probable costs to
remediate this property are included in the aforementioned reserve.
Certain of the Company's joint ventures have completed acquisitions or
made investments in joint ventures. Prior to the closing of these
transactions, the joint ventures caused environmental liabilities
totaling approximately $5.0 million to be recorded on the books of
these new entities.
10
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
Note 5 - Acquisition of Proler International Corp.:
Between November 29, 1996 and December 6, 1996, PIC Acquisition Corp.
(PIC), a wholly-owned subsidiary of the Company, acquired 100% of the
common stock of Proler. On December 6, 1996, the Company completed the
merger of PIC with Proler and, as a result, Proler became a
wholly-owned subsidiary of the Company.
The Company accounted for this acquisition using the purchase method.
Accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their estimated fair
values as of the effective date of the acquisition.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Proler as though
the acquisition had occurred at the beginning of the period shown.
For the Nine Months Ended
May 31, 1997
-------------------------
Revenues $ 251,742
Net income $ 5,964
===========
Earnings per share $ .57
===========
These pro forma results have been prepared for comparative purposes
only and include certain adjustments to give effect for the
acquisition, together with related income tax effects. They do not
purport to be indicative of the results of operations which actually
would have resulted had the combination been in effect at the beginning
of the period presented or of future results of operations of the
consolidated entities.
Note 6 - Disposal of Lathrop, California Facility:
In May 1998, the Company disposed of a tin scrap processing facility in
Lathrop, California. The facility was acquired as part of the Proler
acquisition (Note 5). The sale resulted in a gain of $1.1 million, of
which $.8 million was recorded as a reduction in cost of goods sold and
$.3 million as a gain on sale of assets for the three months ended May
31, 1998.
Note 7 - Interest Rate Instruments:
In February 1998, the Company entered into interest rate swap
agreements with two of its banks for the purpose of managing its
exposure to adverse movements in interest rates and lowering the cost
of various debt instruments. The Company does not use financial
instruments for trading purposes, and is not a party to leveraged
derivatives. Pursuant to the swap agreements, the Company exchanged its
floating rate interest obligations on $50,000 notional principal amount
for a fixed interest obligation of 5.55% for three years. The
differential paid or received on interest rate agreements is recognized
as an adjustment to interest expense.
11
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company operates in two business segments. Scrap Operations
collects, processes and recycles steel scrap through facilities in
Oregon, Washington, Alaska and California. Additionally, the Company
participates, through joint ventures, in the management of 29 scrap
collection and processing facilities, including export terminals in Los
Angeles, California; Everett, Massachusetts; Portland, Maine;
Providence, Rhode Island and Jersey City, New Jersey. Steel Operations
operates a mini-mill in Oregon which produces steel reinforcing bar,
merchant bar, coiled rebar and wire rod. Mill depots are maintained in
California.
Results of Operations
The Company's revenues and operating results by business segment are
summarized below (in thousands):
For the Three Months Ended For the Nine Months Ended
--------------------------- ---------------------------
May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997
------------ ------------ ------------ ------------
(unaudited)
REVENUES:
Scrap Operations:
Ferrous sales $ 40,497 $ 47,325 $ 143,361 $ 132,156
Nonferrous sales 7,998 7,484 20,005 18,944
Other sales 3,672 5,456 12,267 11,738
--------- --------- --------- ---------
Total sales 52,167 60,265 175,633 162,838
Ferrous sales to Steel Operations (16,430) (18,161) (44,546) (40,909)
Steel Operations 45,181 47,193 137,129 126,667
--------- --------- --------- ---------
Total $ 80,918 $ 89,297 $ 268,216 $ 248,596
========= ========= ========= =========
INCOME FROM OPERATIONS:
Scrap Operations $ 2,866 $ 8,261 $ 13,886 $ 15,126
Steel Operations 3,137 1,518 5,775 3,712
Joint ventures 1,417 2,720 8,380 4,500
Corporate expense & eliminations (1,901) (1,600) (5,162) (5,119)
--------- --------- --------- ---------
Total $ 5,519 $ 10,899 $ 22,879 $ 18,219
========= ========= ========= =========
NET INCOME $ 2,569 $ 8,424 $ 12,635 $ 12,583
========= ========= ========= =========
12
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
For the Three Months Ended For the Nine Months Ended
--------------------------- ---------------------------
May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997
------------ ------------ ------------ ------------
(unaudited)
SHIPMENTS:
SCRAP OPERATIONS
Ferrous scrap (long tons):
To Steel Operations 148 149 379 353
To unaffiliated customers 200 221 746 722
--------- --------- --------- ---------
Total 348 370 1,125 1,075
========= ========= ========= =========
Export tons 117 177 547 583
========= ========= ========= =========
STEEL OPERATIONS
Finished steel products (short tons) 131 140 392 378
========= ========= ========= =========
Revenues. Consolidated revenues for the three months ended May 31, 1998
decreased $8.4 million (9%) over the same quarter last year. For the
nine months ended May 31, 1998, consolidated revenues increased $19.6
million (8%) over the same period last year. Revenue increases for the
nine months ended May 31, 1998 were generated by both Scrap and Steel
Operations.
Revenues from Scrap Operations, before intercompany eliminations,
decreased $8.1 million (13%) for the three months ended May 31, 1998,
reflecting a decrease in ferrous tons shipped at lower average selling
prices. Ferrous scrap revenues decreased $6.8 million (14%). Average
selling prices decreased $11 to $117 per ton compared to the quarter
ended May 31, 1997. This decrease in average selling price is primarily
attributable to the decline in export prices related to the Asian
financial crisis. Ferrous tons shipped to Steel Operations decreased
1%. For the nine months ended May 31, 1998, Scrap Operations' revenues,
before intercompany eliminations, were $12.8 million (8%) over the same
period last year. The increase is due to a 5% increase in ferrous tons
shipped, at a 4% higher average selling price.
For the three months ended May 31, 1998, Steel Operations' revenues
decreased by $2.0 million (4%) to $45.2 million. The Company's sales of
finished steel decreased 9,000 tons, primarily as a result of adverse
weather conditions in California. The effect of decreased tonnage
shipped was partially offset by an increase in average selling price
for finished steel products of $7 per ton (2%) to $344 per ton over the
same period last year. Revenues also increased due to increased sales
of wire rod and coiled rebar. These products were first introduced into
the product mix during the third quarter of 1997 and production of
these higher priced items has risen steadily since that time. For the
three and nine months ended May 31, 1998, the Company sold 12,700 tons
and 41,100 tons of these new products, respectively. This compares to
5,300 tons for the three and nine months ended May 31, 1997. For the
nine months ended May 31, 1998, revenues from Steel Operations
increased 8% to $137.1 million. Finished steel shipments increased
14,000 tons (4%) to 392,000 tons. Increased tonnage shipped, coupled
with a slight increase in selling prices resulted in higher sales for
the period. Additionally, a change in product mix to higher priced
products contributed to the increase in revenue and average selling
price.
13
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Cost of Goods Sold. Overall cost of goods sold decreased $4.9 million
(6%) during the third quarter of fiscal 1998 compared with the third
quarter of fiscal 1997. Cost of goods sold as a percentage of revenues
increased from 85% to 88%. Gross profit in total decreased by $3.4
million (26%) primarily as a result of decreases in export prices
realized by Scrap Operations. For the nine months ended May 31, 1998,
consolidated cost of goods sold increased $18.1 million, compared with
the same period last year. Cost of goods sold as a percentage of
revenues increased from 88% to 89% for the same period, and gross
profit increased $1.5 million (5%), due to an increase in scrap and
finished steel tons shipped at higher average selling prices.
For the three months ended May 31, 1998, cost of goods sold for Scrap
Operations decreased $2.8 million and increased as a percentage of
revenues from 82% to 89%. Scrap Operations' gross profit decreased from
$11 million to $5.7 million. The decrease was due to the impact of
reduced tonnage shipped and lower average selling prices. For the nine
months ended May 31, 1998, Scrap Operations' average ferrous scrap cost
of goods sold increased 5% to $112 per ton. Cost of goods sold as a
percentage of revenues increased slightly from 86% to 87%. The increase
in tonnage and selling prices, offset by increased cost of raw scrap
resulted in a $.7 million (3%) decrease in gross profit to $22.7
million.
As a part of its acquisition of Proler (Note 5), the Company acquired a
tin scrap processing facility in Lathrop, California that was sold in
May 1998. The Company had recorded an environmental reserve for the
property when it was acquired. The remaining reserve was reversed upon
sale of the facility. The sale resulted in a gain of $1.1 million, of
which $.8 million is recorded as a reduction of cost of goods sold and
$.3 million as gain on sale of assets for the three months ended May
31, 1998.
Steel Operations' cost of goods sold for the third quarter of fiscal
1998 decreased $3.8 million (9%) to $41.1 million and decreased as a
percentage of revenue from 95% to 91%. The decrease in cost of goods
sold is attributable to a decrease in finished steel shipments, a
change in the mix of products shipped, and lower scrap prices. Cost of
goods sold per ton, excluding billet sales, decreased from $318 to $308
per ton. Gross profit increased 78% from $2.3 million to $4.1 million
as a result of a change in the mix of products shipped and increased
plant efficiencies. For the nine months ended May 31, 1998, Steel
Operations' average cost of goods sold per ton decreased from $320 to
$319. Cost of sales as a percentage of revenues dropped from 95% to
94%. These reductions were the result of increased rolling mill
efficiencies.
Income from Joint Ventures. The Company's joint ventures generated
$93.9 million of revenues and contributed $1.4 million to income for
the quarter ended May 31, 1998. This compares with $92.2 million of
revenues, and $2.7 million contribution to income for the same period
last year. The Joint Ventures in the Scrap Processing Business shipped
601,000 tons and 619,000 tons for the same periods, respectively. For
the nine months ended May 31, 1998, the joint ventures generated $287.8
million of revenues and contributed $8.4 million to income. This
compares with $261.8 million of revenues and $4.5 million contribution
to income for the same period last year. The Joint Ventures in the
Scrap Processing Business shipped 1.8 million tons for each of the nine
months ended May 31, 1998 and 1997. Income from Joint Ventures
decreased from $2.7 million for the quarter ended May 31, 1997 to $1.4
million for the quarter ended May 31, 1998. The decrease was due
primarily to the Joint Ventures in the Scrap Processing business being
negatively impacted by the Asian financial crisis. The revenues,
contribution to income, and tons shipped for the nine months ended May
31, 1997 in the discussion above include activity which occurred prior
to the Company's acquisition of Proler.
14
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
The increase in income from joint ventures fiscal year to date compared
to the same period last year is primarily attributable to the Proler
joint ventures, which the company acquired in November 1996. Income for
the nine months ended May 31, 1997 includes only six months of earnings
from these operations.
Export Sales. The Company to date has been able to ship and receive
payment for all export sales that it has booked and it anticipates this
will continue to be the case. However, the Company has experienced, and
for the near term expects to experience, reduced margins on export
sales. Selling prices for export scrap to Asia have dropped over $40
per ton since the first of the fiscal year, and while the Company is
adjusting buying prices, it has not yet been able to drop the buying
price enough to make up for the drop in selling prices. Additionally,
the Company continues to see softening in demand for scrap in certain
regions of Asia.
In addition to lowering its scrap purchase price, the Company has
increased its domestic sales volume and has begun selling to Asian
countries it has not historically sold to. Concurrently, the Company
has implemented a variety of cost control measures. With the increased
emphasis on domestic sales, the Company believes that fiscal 1998 sales
to Asia will be less than 60% of tonnage sold, which has been the
average over the last several years. The Company's Joint Ventures in
the Scrap Processing Business are less dependent upon Asian sales,
expecting to ship approximately 45% of total tonnage to Asia this
fiscal year. The Company believes the joint ventures in the Northeast
are particularly well positioned over the next several years to take
advantage of increasing capacity and demand for scrap in the steel
producing areas in the Eastern United States.
While the Company cannot predict how long the Asian crisis will impact
its business operations, it believes that the factors cited above will
serve to help minimize the financial impact.
Other Income (Expense). In February 1997, the Company entered into an
interest rate agreement for the sole purpose of locking in the interest
rate on a planned private placement of debt. The Company decided
against pursuing the private placement in April 1997, and thus
recognized the deferred gain on the agreement of approximately $3
million. This amount is included in other income in the accompanying
statement of operations for the three and nine months ended May 31,
1997.
Interest Expense. Interest expense increased from $1.5 million for the
three months ended May 31, 1997 to $1.8 million for the same period
this year primarily as a result of higher average borrowings. For the
nine months ended May 31, 1998, compared to the same period last year,
interest expense increased $.9 million to $4.5 million. This occurred
because average borrowings in the first quarter of 1998 were higher
than during the first quarter of 1997, primarily as a result of the
Proler acquisition.
15
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Year 2000. The Company continues to assess the potential impact that
the Year 2000 issue will have on its reporting systems and operations.
The Company has determined that the operating and financial software
systems it is currently implementing are Year 2000 compliant. The
Company will test new systems for Year 2000 compliance as they are
implemented. Additionally, the Company does not believe that the cost
of bringing any of its retained software into year 2000 compliance will
be material. The Company does not believe that it is substantially
reliant on any one customer or supplier and therefore does not believe
that the Year 2000 compliance of such companies will have a significant
impact on the Company. The Company does not anticipate that the Year
2000 issue will have a significant impact on its financial position or
results of operations.
Liquidity and Capital Resources. Cash used by operations for the nine
months ended May 31, 1998 was $140,000, compared with cash provided of
$5.1 million for the same period last year. The decrease in cash flow
is primarily attributable to the growth in inventories and a reduction
in accounts payable compared to the same period last year.
Capital expenditures for the three months ended May 31, 1998 totaled
$2.8 million compared with $2.4 million during the same period last
year. For the nine months ended May 31, 1998 and 1997, capital
expenditures totaled $7.5 million and $10.5 million, respectively. The
Company anticipates spending approximately $3.5 million on capital
expenditures during the remainder of fiscal 1998.
As a result of certain acquisitions, the Company carries environmental
reserves totaling $28.2 million. The Company expects to require
significant future cash outlays as it incurs the actual costs related
to the remediation of such environmental liabilities.
As of May 31, 1998, the Company had an unsecured revolving line of
credit totaling $200 million maturing in 2002. The Company had
additional unsecured lines of credit available of $55 million, of which
$20 million was committed. In the aggregate, the Company had borrowings
outstanding under these lines totaling $118.8 million at May 31, 1998.
Pursuant to a stock repurchase program announced by the Company in May
1994 and amended in April 1998, the Company is authorized to repurchase
up to 1.6 million shares of its stock when the market price of the
Company's stock is not reflective of management's opinion of an
appropriate valuation of the stock. Management believes that
repurchasing shares under these conditions enhances shareholder value.
As of May 31, 1998, a total of 448,300 shares had been purchased under
this program. During the nine months ended May 31, 1998, the Company
repurchased 196,000 shares of its stock for a total of $5.1 million.
The Company believes that the current cash balance, internally
generated funds, and existing credit facilities will provide adequate
financing for capital expenditures, working capital, stock repurchases,
and debt service requirements for the next twelve months. In the longer
term, the Company may seek to finance business expansion, including
potential acquisitions, with additional borrowing arrangements or
additional equity financing.
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SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Forward Looking Statements. Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward looking
statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Act of 1934, all of which are
subject to risks and uncertainties. One can identify these forward
looking statements through the use of words such as "expect,"
"believe," and other words which convey a similar meaning. One can also
identify these statements as they do not relate strictly to historical
or current facts. They are likely to address the Company's business
strategy, financial projections and results and other global factors
affecting the Company's financial prospects. An example of this is the
current financial crisis facing certain Asian countries and Year 2000
compliance matters. Other factors that could cause actual results to
differ materially are the following: supply and demand conditions; the
Company's ability to mitigate the effects of the Asian situation and
foreign fiscal policies on its profitability; railroad service
difficulties; competitive factors and pricing pressures from national
steel companies; imports of foreign steel; availability of scrap
supply; fluctuations in scrap prices and seasonality of results. One
should understand that it is not possible to predict or identify all
factors that could cause actual results to differ from the Company's
forward looking statements. Consequently, the reader should not
consider any such list to be a complete statement of all potential
risks or uncertainties. Further, the Company does not assume any
obligation to update any forward looking statement.
17
SCHNITZER STEEL INDUSTRIES, INC.
PART II
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
3.2 Restated Bylaws of the Registrant
(b) Reports on Form 8-K
None
18
SCHNITZER STEEL INDUSTRIES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHNITZER STEEL INDUSTRIES, INC.
(Registrant)
Date: July 15, 1998 By: /s/ BARRY A. ROSEN
------------- -------------------------------------
Barry A. Rosen
Vice President, Finance
19