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 November 30, 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 5,542,526 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 on January 1, 1999.
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at November 30, 1998
and August 31, 1998......................................................3
Consolidated Statement of Operations for the
Three Months Ended November 30, 1998 and 1997............................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1998 and the Three Months
Ended November 30, 1998..................................................5
Consolidated Statement of Cash Flows for the
Three Months Ended November 30, 1998 and 1997............................6
Notes to Consolidated Financial Statements...................................7
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................11
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K............................................16
SIGNATURE PAGE..............................................................17
2
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
Nov. 30, 1998 Aug. 31, 1998
-------------- --------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 6,619 $ 3,800
Accounts receivable, less allowance for
doubtful accounts of $638 and $645 18,889 26,161
Accounts receivable from related parties 4,616 3,428
Inventories (Note 2) 95,215 103,136
Deferred income taxes 5,723 5,723
Prepaid expenses and other 9,519 8,020
-------------- --------------
TOTAL CURRENT ASSETS 140,581 150,268
NET PROPERTY, PLANT & EQUIPMENT 140,411 142,582
OTHER ASSETS:
Investment in joint venture partnerships 100,882 103,494
Advances to joint venture partnerships 22,991 23,957
Goodwill 40,713 41,017
Intangibles and other 10,015 10,022
-------------- --------------
$ 455,593 $ 471,340
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 170 $ 168
Accounts payable 17,152 19,056
Accrued payroll liabilities 6,542 5,603
Current portion of environmental liabilities (Note 4) 5,394 5,552
Other accrued liabilities 9,856 8,781
-------------- --------------
TOTAL CURRENT LIABILITIES 39,114 39,160
-------------- --------------
DEFERRED INCOME TAXES 24,677 24,619
-------------- --------------
LONG-TERM DEBT LESS CURRENT PORTION 126,894 140,236
-------------- --------------
ENVIRONMENTAL LIABILITIES, NET OF CURRENT PORTION 22,667 22,749
-------------- --------------
OTHER LONG-TERM LIABILITIES 3,084 3,140
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued Class A common
stock--75,000 shares $1 par value
authorized, 5,542 and 5,555 shares issued and outstanding 5,542 5,555
Class B common stock--25,000 shares $1 par value
authorized, 4,431 shares issued and outstanding 4,431 4,431
Additional paid-in capital 104,948 105,124
Retained earnings 124,236 126,326
-------------- --------------
239,157 241,436
-------------- --------------
$ 455,593 $ 471,340
============== ==============
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 November 30,
---------------------------------------
1998 1997
-------------- --------------
REVENUES $ 67,165 $ 105,403
-------------- --------------
COSTS AND EXPENSES:
Cost of goods sold and other operating expenses 60,852 92,978
Selling and administrative 5,696 5,657
-------------- --------------
66,548 98,635
-------------- --------------
(Loss) income from joint ventures (1,671) 3,794
-------------- --------------
(LOSS) INCOME FROM OPERATIONS (1,054) 10,562
-------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (1,924) (1,245)
Other income 567 358
-------------- --------------
(1,357) (887)
-------------- --------------
(LOSS) INCOME BEFORE INCOME TAXES (2,411) 9,675
Income tax benefit (provision) 820 (3,386)
-------------- --------------
NET (LOSS) INCOME $ (1,591) $ 6,289
============== ==============
BASIC (LOSS) EARNINGS PER SHARE $ (0.16) $ 0.62
============== ==============
DILUTED (LOSS) EARNINGS PER SHARE $ (0.16) $ 0.61
============== ==============
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 8/31/97 5,737 $ 5,737 4,445 $ 4,445 $ 109,994 $ 118,885 $ 239,061
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)
Net income 9,448 9,448
Dividends paid (2,007) (2,007)
-------- ---------- --------- ---------- ----------- ---------- ----------
BALANCE AT 8/31/98 5,555 5,555 4,431 4,431 105,124 126,326 241,436
Class A common stock repurchased (13) (13) (176) (189)
Net income (1,591) (1,591)
Dividends paid (499) (499)
-------- ---------- --------- ---------- ----------- ---------- ----------
BALANCE AT 11/30/98 5,542 $ 5,542 4,431 $ 4,431 $ 104,948 $ 124,236 $ 239,157
======== ========== ========= ========== =========== ========== ==========
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 Three Months Ended November 30,
---------------------------------------
1998 1997
------------ ------------
OPERATIONS:
Net income $ (1,591) $ 6,289
Noncash items included in income:
Depreciation and amortization 4,654 4,719
Equity in earnings of joint ventures 1,671 (3,794)
(Gain) loss on disposal of assets (36) 77
Cash provided (used) by assets and liabilities:
Accounts receivable 6,084 2,043
Inventories 7,921 5,939
Prepaid expenses and other (1,499) 545
Accounts payable (1,904) 6,139
Accrued liabilities 2,014 1,935
Other assets and liabilities (163) (245)
------------ ------------
NET CASH PROVIDED BY OPERATIONS 17,151 23,647
------------ ------------
INVESTMENTS:
Capital expenditures (2,252) (2,558)
Advances from joint ventures 966 100
Distributions from joint ventures 932 460
Proceeds from sale of assets 50 157
Other (464)
------------ ------------
NET CASH USED BY INVESTMENTS (304) (2,305)
------------ ------------
FINANCING:
Repurchase of Class A stock (189) (1,751)
Dividends declared and paid (499) (506)
Decrease in long-term debt (13,340) (19,022)
------------ ------------
NET CASH USED BY FINANCING (14,028) (21,279)
------------ ------------
NET INCREASE IN CASH 2,819 63
CASH AT BEGINNING OF PERIOD 3,800 3,106
------------ ------------
CASH AT END OF PERIOD $ 6,619 $ 3,169
============ ============
The accompanying notes are an integral part of this statement.
6
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 and 1997
(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, 1998. The results for the three
months ended November 30, 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 for the three months ended November 30,
1998 and 1997 (in thousands, except per share amounts):
Three Months Ended November 30, 1998
--------------------------------------------------
Loss Shares Per-share
(Numerator) (Denominator) Amount
Basic and Diluted EPS $(1,591) 9,975 $(0.16)
======= ===== =======
Three Months Ended November 30, 1997
--------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
Basic EPS $ 6,289 10,178 $ 0.62
Options -- 130 ======
------- ------
Diluted EPS $ 6,289 10,308 $ 0.61
======= ====== ======
7
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 and 1997
(Unaudited)
Note 2 - Inventories:
Inventories consist of the following (in thousands):
November 30, August 31,
1998 1998
----------- -----------
(Unaudited) (Audited)
Scrap metals $ 20,720 $ 28,952
Work in process 15,093 13,192
Finished goods 43,080 44,276
Supplies 16,322 16,716
---------- ----------
$ 95,215 $ 103,136
========== ==========
Scrap metal inventories are valued at LIFO; the remainder are at
average cost. The determination of inventory under the LIFO method can
be made only at the end of each year based on the inventory levels and
costs at that time. 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
$5,811 at November 30, 1998 and August 31, 1998.
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 which expired in June
1998. The agreement guaranteed the ship owner a residual market value
of $2,500,000 at the end of the time-charter. Upon expiration of the
time charter, the Company paid the guaranteed residual and entered into
an additional five-year time charter. The Company has accounted for the
transaction as a capital lease, as ownership of the vessel is
transferred at expiration of the time-charter. The Company entered into
two additional seven-year time-charters in May 1995 for other vessels.
Charges incurred for these charters were $824,000 and $2,320,000 for
the quarters ended November 30, 1998 and 1997, respectively.
The Company purchased scrap metals from its joint venture operations
totaling $2,333,000 and $4,211,000 for the quarters ended November 30,
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 $406,000 and
$272,000 for the quarters ended November 30, 1998 and 1997,
respectively.
8
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 and 1997
(Unaudited)
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 $223,000 and $207,000 for the quarters
ended November 30, 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 $945,000 and $348,000 for the three months ended
November 30, 1998 and 1997, respectively. These charges were offset by
income of $797,000 and $192,000 for the three months ended November 30,
1998 and 1997, respectively.
Note 4 - Environmental Liabilities:
In conjunction with the due diligence proceedings for the Company's
acquisition of Manufacturing Management, Inc. (MMI) in March 1995, an
independent third-party consultant was hired to estimate the costs to
cure both current and future potential environmental liabilities. The
cumulative provision for the total costs 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 November 30, 1998 aggregated $20.1
million.
General Metals of Tacoma (GMT), a subsidiary of MMI, owns and operates
a scrap facility located on the Hylebos Waterway, a part of
Commencement Bay, which is the subject of an ongoing environmental
investigation and remediation project by the U.S. Environmental
Protection Agency (EPA) under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA). GMT and well over 60 other
parties were named potentially responsible parties (PRP) for the
investigation and clean up of contaminated sediment along the Hylebos
Waterway. GMT and five other PRPs voluntarily have entered into an
Administrative Order on Consent with the EPA to fund a pre-remedial
study of sediment contamination and remediation alternatives. GMT's
share of the study, which is now expected to be completed in late 1999,
is approximately $2 million and is included in the reserve above. Any
further potential liabilities, if any, cannot be estimated at this
time.
In 1996, prior to the Company's acquisition of Proler, an independent
third-party consultant was engaged to estimate the costs to cure
present and future environmental liabilities related to Proler's wholly
owned and joint venture properties. Proler recorded a liability of $8.6
million for the probable costs to remediate its wholly owned properties
based upon the consultant's estimates, increasing its environmental
reserve to $9.8 million. The Company carried over the aggregate reserve
to its financial statements upon acquiring Proler and $8.0 million
remained outstanding on
9
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 and 1997
(Unaudited)
November 30, 1998. Also, Proler's joint ventures recorded additional
liabilities of $4.1 million for the probable costs to remediate their
properties, based upon the consultant's estimates, in 1996 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 preliminary site
investigations 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 the site by the EPA.
Additionally, Proler and this subsidiary have been named or identified
as PRPs at several other sites. Proler included the probable costs
associated with this site in the aforementioned reserve.
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
1996 lease renewal with the Port of Los Angeles, to be responsible for
a multi-year, phased remedial clean-up project involving certain
environmental conditions on its scrap processing facility 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.
10
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
Alaska, Oregon, California and Washington. Additionally, as a result of
its acquisition of Proler International Corp. (Proler) in November
1996, the Company participates 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, through joint ventures. Steel
Operations operates a mini-mill in Oregon which produces finished steel
products and maintains mill depots in California.
As a result of pressure the Company is experiencing from imported
finished steel products on the West Coast, the Company will not operate
one of its two rolling mills for at least 60 days during the second
quarter. As a result, the Company's Steel Operations' revenues, margins
and profitability in the second quarter will be negatively impacted.
Results of Operations
The Company's revenues and operating results by business segment are
summarized below (in thousands, except number of shipments):
For the Three Months Ended
November 30,
-------------------------------
1998 1997
---------- ----------
(unaudited)
REVENUES:
Scrap Operations:
Ferrous sales $ 28,155 $ 55,459
Nonferrous sales 5,909 6,306
Other sales 3,049 4,454
---------- ----------
Total sales 37,113 66,219
Ferrous sales to Steel Operations (12,107) (14,098)
Steel Operations 42,159 53,282
---------- ----------
Total $ 67,165 $ 105,403
========== ==========
INCOME FROM OPERATIONS:
Scrap Operations $ (350) 7,420
Steel Operations 2,916 1,027
Joint ventures (1,671) 3,794
Corporate expense & eliminations (1,949) (1,679)
---------- ----------
Total $ (1,054) $ 10,562
========== ==========
NET INCOME $ (1,591) $ 6,289
========== ==========
11
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued):
For the Three Months Ended
November 30,
-------------------------------
1998 1997
---------- ----------
(unaudited)
SHIPMENTS:
SCRAP OPERATIONS Ferrous scrap (long tons):
To Steel Operations 140 115
To unaffiliated customers 192 298
---------- ----------
Total 332 413
========== ==========
Export tons 144 250
========== ==========
Nonferrous scrap (pounds) 18,669 14,670
========== ==========
STEEL OPERATIONS
Finished steel products (short tons) 127 149
========== ==========
Revenues. Consolidated revenues for the three months ended November 30, 1998
decreased $38.2 million (36%) from the same period last year. Both Scrap and
Steel Operations revenues were down.
Revenues from Scrap Operations before intercompany eliminations decreased $29.1
million (44%) as a result of both decreased average selling prices and fewer
shipments. Ferrous scrap revenues decreased $27.3 million (49%). Average selling
prices for ferrous scrap dropped $49 per ton (37%). Shipments of ferrous scrap
to unaffiliated customers decreased 106,000 tons (36%) to 192,000 tons, while
shipments to Steel Operations increased 25,000 tons (22%) to 140,000 tons. Both
lower sales prices and volumes are primarily a result of the impact of the Asian
financial crisis on the worldwide scrap markets. While these factors
predominantly account for Scrap Operations' operating loss of $.4 million for
the quarter, construction projects at the Company's Tacoma, Washington facility
were also a factor. The Tacoma operation is undergoing two major projects,
reconstruction of its dock facilities and installation of a state-of-the-art
shredder, that are expected to be completed in the third fiscal quarter. As a
result of these projects, the Company is currently able to service only the
domestic market from its Tacoma facility.
Steel Operations' revenues decreased $11.1 million (21%) to $42.2 million. The
decrease is a result of lower finished steel shipments (down 22,000 tons or 15%)
combined with only 100 tons of billet shipments compared with 16,400 tons of
billet shipments in the same quarter last year. Average finished steel selling
prices increased about $1 per ton. Lower finished steel sales volumes are
primarily a result of competing finished steel being dumped on the West Coast
from Asian and other countries.
Cost of Goods Sold. Consolidated cost of goods sold decreased $32.1 million
(35%) during the first quarter of fiscal 1999 compared with the first quarter of
fiscal 1998. However, cost of goods sold increased as a percentage of revenues
from 88% to 91%. Gross profit decreased $6.1 million as a result of decreased
margins at Scrap Operations partially offset by increased margins at Steel
Operations.
Scrap Operations' cost of goods sold increased as a percentage of revenues to
93% from 84%. Scrap Operations' gross profit decreased $8.0 million to $2.7
million as a result of lower selling prices and reduced volumes.
12
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued):
Cost of goods sold for Steel Operations for the first quarter decreased $13.2
million to $38.4 million and decreased as a percentage of revenues from 97% to
91%. The decrease in cost of goods sold is a result of lower finished steel and
billet shipments. Cost of goods sold per ton, excluding billets, decreased $20
per ton to $296 per ton. Gross profit increased from $1.7 million to $3.8
million as a result of lower scrap prices and operating efficiencies.
Income from Joint Ventures. The Company's joint ventures generated a loss of
$1.7 million for the quarter ended November 30, 1998 compared with income of
$3.8 million for the same period last year. For the quarter, the Joint Ventures
in the Scrap Processing Business lost $2.2 million, while the Joint Venture
Suppliers of Scrap earned $.5 million. These joint ventures contributed $2.8
million and $1.0 million in the same period last year, respectively. The loss by
the Joint Ventures in the Scrap Processing Business is attributable to the Asian
financial crisis combined with softening demand for scrap from domestic steel
mills. Primarily due to expanded joint venture interests, for the quarter,
shipments by the Joint Ventures in the Scrap Processing Business increased to
670,000 tons compared with 610,000 tons for the same quarter last year.
Interest expense. Interest expense increased from $1.3 million for the three
months ended November 30, 1997 to $1.9 million for the same period this year
primarily as a result of higher average borrowings associated with higher
inventories and investment in and advances to joint ventures.
Year 2000. The following discussion is provided in response to the Securities
and Exchange Commission's Interpretation of Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisors, Investment Companies, and
Municipal Securities Issuers.
In response to Year 2000 compliance issues, the Company has developed a
systematic approach that consists of the following three phases: (1)
identification and assessment to identify potential Year 2000 issues, (2)
modification or replacement of equipment and software, (3) final testing to
ensure that all systems are Year 2000 compliant after modifications are
installed.
The Company has divided its Year 2000 issues into the following categories: (a)
physical hardware and related operating systems at the Corporate Data Processing
Facility, (b) business and financial reporting systems at all locations, (c)
personal computers and peripheral equipment at all locations, (d) facility and
support systems (including communication devices and safety systems) at all
locations, (e) manufacturing systems at Cascade Steel Rolling Mills.
The Company has substantially completed the identification and assessment phase
and expects that all Phase 1 activities will be complete by March 1, 1999.
The Company has completed the modification of equipment at the Corporate Data
Processing Facility, the business and financial reporting systems at all
locations, personal computers at all locations, and expects the remainder of
Phase 2 activities to be complete no later than May 31, 1999, except for Steel
Operations which is expected to be complete no later than November 30, 1999.
The Company expects to complete Phase 3 activities by no later than May 31,
1999, except for Steel Operations which is expected to be complete no later than
November 30, 1999.
Management estimates that the costs for correction of the Year 2000 issues,
including any software and hardware upgrades (but excluding replacements that
would have occurred even without the Year 2000 issue), and the cost of
13
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued):
personnel allocated to this project should not exceed $1,000,000, of which
$500,000 is expected to be capital expenditures. Approximately $225,000 has been
spent to date. The year 2000 upgrades are being funded through normal operating
funds and are expected to account for less than 5% of the Company's Information
Technology (IT), maintenance and manufacturing capital budgets. There can be no
assurance that the costs and timeframes above will not change as the Company
continues its assessments.
The Year 2000 project is a priority project for the Company's IT and Engineering
departments. No significant IT or engineering projects are being deferred as a
result of the Company's Year 2000 efforts.
The Company is also in the process of assessing the Year 2000 readiness of its
"key" vendors using questionnaires and letters. In the event a critical vendor
is found to be non-compliant, the Company will develop contingency plans to
address the issue.
As the Company is not dependent on any significant customer, and given the
nature of the scrap business, no Year 2000 assessment of customers is
anticipated.
At the present time, the Company has not expended the resources to develop a
contingency plan with respect to year 2000 compliance as the Company believes it
will be Year 2000 ready.
Liquidity and Capital Resources. Cash provided by operations for the first
quarter of 1999 was $17.2 million, compared with $23.6 million for the first
quarter of fiscal 1998. The decrease in cash flow is primarily attributable to
decreased earnings, the timing of collection of accounts receivable, an increase
in inventories, and a decrease in accounts payable and accrued liabilities
during the quarter ended November 30, 1998.
Capital expenditures for the three months ended November 30, 1998 totaled $2.2
million compared with $2.6 million during the same period last year. The Company
anticipates spending approximately $10 million on capital expenditures during
the remainder of fiscal 1999.
As a result of acquisitions completed in prior years, the Company has $28.1
million of accrued environmental liabilities as of November 30, 1998. The
Company expects to require significant future cash outlays as it incurs the
actual costs relating to the remediation of such environmental liabilities.
As of November 30, 1998, the Company had committed unsecured revolving lines of
credit totaling $200 million maturing in 2003. The Company had additional
unsecured lines of credit of $75 million, $55 million of which was uncommitted.
In the aggregate, the Company had borrowings outstanding under these lines
totaling $117 million at November 30, 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 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 November 30, 1998, a total of 460,800 shares had been purchased
under this program. During the quarter ended November 30, 1998, the Company
repurchased 12,500 shares of its stock for a total of $189,000.
The Company believes that its current cash balance, internally generated funds
and existing credit facilities will provide adequate financing for capital
expenditures, working capital, stock repurchases, and debt service
14
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued):
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.
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 generally 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 and other countries. 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; competitive factors and
pricing pressures from national steel companies; imports of foreign steel;
availability of scrap supply; costs associated with a 60-day shutdown of one of
its rolling mills; 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.
15
SCHNITZER STEEL INDUSTRIES, INC.
PART II
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
None
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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: January 14, 1999 By: /s/ BARRY A. ROSEN
---------------- -------------------------------------
Barry A. Rosen
Vice President, Finance
17