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, 2000 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 5,415,726 shares of Class A Common Stock, par value of $1.00
per share, and 4,311,828 shares of Class B Common Stock, par value of $1.00 per
share, outstanding at July 1, 2000.
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at May 31, 2000
and August 31, 1999............................................................................3
Consolidated Statement of Operations for the Three Months and
Nine Months Ended May 31, 2000 and 1999........................................................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1999 and the Nine Months
Ended May 31, 2000.............................................................................5
Consolidated Statement of Cash Flows for the
Nine Months Ended May 31, 2000 and 1999........................................................6
Notes to Consolidated Financial Statements.........................................................7
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................11
Quantitative and Qualitative Disclosures About Market Risk........................................17
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K..................................................................17
SIGNATURE PAGE....................................................................................18
2
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
May 31, 2000 Aug. 31, 1999
------------------- -------------------
(Unaudited) (Audited, restated)
(See Note 2)
ASSETS
CURRENT ASSETS:
Cash $ 5,515 $ 6,174
Accounts receivable, less allowance for
doubtful accounts of $634 and $638 29,589 21,714
Accounts receivable from related parties 1,891 1,935
Inventories (Note 2) 85,092 90,967
Deferred income taxes (Note 2) 5,281 4,795
Prepaid expenses and other 2,321 3,417
--------- ---------
TOTAL CURRENT ASSETS 129,689 129,002
NET PROPERTY, PLANT AND EQUIPMENT 130,387 135,814
OTHER ASSETS:
Investment in joint venture partnerships 108,275 103,980
Advances to joint venture partnerships 31,060 27,754
Goodwill 39,065 39,992
Intangibles and other 9,787 9,816
--------- ---------
TOTAL ASSETS $ 448,263 $ 446,358
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 259 $ 436
Accounts payable 18,218 16,390
Accrued payroll liabilities 6,355 6,072
Current portion of environmental liabilities (Note 4) 5,137 5,154
Other accrued liabilities 7,143 7,568
--------- ---------
TOTAL CURRENT LIABILITIES 37,112 35,620
DEFERRED INCOME TAXES 28,490 27,882
LONG-TERM DEBT LESS CURRENT PORTION 113,687 119,826
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 4) 19,164 19,661
OTHER LONG-TERM LIABILITIES 2,771 2,996
--------- ---------
TOTAL LIABILITIES 201,224 205,985
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,413 and 5,295 shares issued and outstanding 5,413 5,295
Class B common stock--25,000 shares $1 par value
authorized, 4,313 and 4,431 shares issued and outstanding 4,313 4,431
Additional paid-in capital 102,179 102,179
Retained earnings (Note 2) 135,134 128,468
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 247,039 240,373
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 448,263 $ 446,358
========= =========
The accompanying notes are an integral part of this statement.
3
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
For the Three Months Ended For the Nine Months Ended
May 31, May 31,
-------------------------- -------------------------
2000 1999 2000 1999
--------- -------- --------- ---------
REVENUES $ 94,927 $ 66,639 $ 241,982 $ 185,526
Cost of goods sold and
other operating expenses 85,698 58,945 214,139 170,203
Selling and administrative 6,675 6,093 19,590 17,620
Income (loss) from joint ventures 2,605 893 5,888 (1,401)
--------- -------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 5,159 2,494 14,141 (3,698)
--------- -------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (1,997) (1,800) (5,692) (5,447)
Other income 1,061 2,297 1,225 3,785
--------- -------- --------- ---------
(936) 497 (4,467) (1,662)
--------- -------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 4,223 2,991 9,674 (5,360)
Income tax (provision) benefit (240) (1,136) (1,548) 1,703
--------- -------- --------- ---------
NET INCOME (LOSS) $ 3,983 $ 1,855 $ 8,126 $ (3,657)
========= ======== ========= =========
BASIC EARNINGS (LOSS) PER SHARE $ 0.41 $ 0.19 $ 0.84 $ (0.37)
========= ======== ========= =========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.40 $ 0.19 $ 0.83 $ (0.37)
========= ======== ========= =========
The accompanying notes are an integral part of this statement.
4
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Unaudited, in thousands)
Class A Class B
Common Stock Common Stock Additional
------------------- -------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
--------- --------- --------- --------- ---------- --------- ---------
Balance at August 31, 1998, as
previously reported 5,555 $ 5,555 4,431 $ 4,431 $ 105,124 $ 126,326 $ 241,436
Cumulative effect on prior years of
applying FIFO method of
accounting (Note 2) 3,487 3,487
Class A common stock repurchased (260) (260) (2,945) (3,205)
Net income, restated (Note 2) 621 621
Dividends paid (1,966) (1,966)
--------- --------- --------- --------- --------- --------- ---------
Balance at August 31, 1999 5,295 5,295 4,431 4,431 102,179 128,468 240,373
Class B common stock converted
to Class A common stock 118 118 (118) (118)
Net income 8,126 8,126
Dividends paid (1,460) (1,460)
--------- --------- --------- --------- --------- --------- ---------
Balance at May 31, 2000 5,413 $ 5,413 4,313 $ 4,313 $ 102,179 $ 135,134 $ 247,039
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of this statement.
5
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
For the Nine Months Ended
May 31,
-------------------------
2000 1999
-------- --------
OPERATIONS:
Net income $ 8,126 $ (3,657)
Noncash items included in income:
Depreciation and amortization 13,757 13,473
Equity in (earnings) loss of joint venutres
and other investments (5,888) 1,401
Deferred income taxes 122 49
Loss (gain) on disposal of assets 1,280 (1,300)
Environmental reserve reversal (1,904)
Cash provided (used) by changes in working capital:
Accounts receivable (7,831) 5,291
Inventories 5,875 8,895
Prepaid expenses 1,096 1,510
Accounts payable 1,828 (3,196)
Accrued liabilities (142) (1,202)
Environmental liabilities (17) (449)
Other assets and liabilities (817) (1,592)
-------- --------
NET CASH PROVIDED BY OPERATIONS 17,389 17,319
-------- --------
INVESTMENTS:
Capital expenditures (9,690) (8,400)
Advances (to) from joint ventures (3,306) 1,815
Investments in joint ventures (20)
Distributions from joint ventures 1,565 2,132
Proceeds from sale of assets 1,159 2,994
-------- --------
NET CASH USED BY INVESTMENTS (10,272) (1,479)
-------- --------
FINANCING:
Repurchase of Class A common stock (3,205)
Dividends declared and paid (1,460) (1,481)
Reduction in long-term debt (6,399) (12,700)
Increase in long-term debt 83 214
-------- --------
NET CASH USED BY FINANCING (7,776) (17,172)
-------- --------
NET DECREASE IN CASH (659) (1,332)
CASH AT BEGINNING OF PERIOD 6,174 3,800
-------- --------
CASH AT END OF PERIOD $ 5,515 $ 2,468
======== ========
The accompanying notes are an integral part of this statement.
6
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2000 AND 1999
(Unaudited, in thousands, except per share amounts)
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, management suggests 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, 1999. The results for the three
and nine months ended May 31, 2000 are not necessarily indicative of
the results of operations for the entire year.
EARNINGS AND DIVIDENDS PER SHARE
Basic earnings per share (EPS) are computed based upon the weighted
average number of common shares outstanding during the period. Diluted
EPS reflect 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 For the Nine Months
Ended May 31, Ended May 31,
--------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
Net income (loss) $ 3,983 $ 1,855 $ 8,126 $(3,657)
======= ======= ======= =======
Computation of shares:
Average common shares outstanding 9,726 9,783 9,726 9,910
Stock options 118 14 61 7
------- ------- ------- -------
Diluted average common shares
outstanding 9,844 9,797 9,787 9,917
======= ======= ======= =======
Basic EPS $ 0.41 $ 0.19 $ 0.84 $ (0.37)
======= ======= ======= =======
Diluted EPS $ 0.40 $ 0.19 $ 0.83 $ (0.37)
======= ======= ======= =======
Dividend per share $ 0.05 $ 0.05 $ 0.15 $ 0.15
======= ======= ======= =======
7
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2000 AND 1999
(Unaudited, in thousands, except per share amounts)
NOTE 2 - INVENTORIES:
Inventories consisted of the following:
May 31, August 31,
2000 1999
----------- -------------------
(Unaudited) (Audited, restated)
Recycled metals $ 23,582 $ 25,890
Work in process 13,196 20,372
Finished goods 34,005 29,578
Supplies 14,309 15,127
-------- ---------
$ 85,092 $ 90,967
======== =========
In the first quarter of fiscal 2000, the Company changed its method of
accounting for recycled metals inventories from Last-In, First-Out
(LIFO) to First-In, First-Out (FIFO). Given the volatility of both
prices and quantities, management believes that accounting for
inventories using the FIFO method better matches revenues and
expenses, and therefore is preferable. In addition, the method is
consistent with its other inventory pools. In accordance with
Accounting Principles Board No. 20, "Accounting Changes," upon
adoption of FIFO, the Company retroactively restated prior periods by
applying the FIFO method of accounting in prior periods. Because the
Company had not recorded a LIFO adjustment during the first three
quarters of fiscal 1999, no restatement of the statement of operations
for the three or nine month periods ended May 31, 1999 was required.
The balance sheet and statement of equity have been restated to
reflect the change.
NOTE 3 - SEGMENT INFORMATION:
The Company operates in two industry segments: metals processing and
recycling (Metals Recycling Business) and mini-mill steel manufacturing
(Steel Manufacturing Business). Additionally, the Company has joint
ventures within the metals recycling business (Joint Ventures in the
Metals Recycling Business) and joint ventures which are suppliers of
unprocessed metals (Joint Venture Suppliers of Metals). The Company
considers these joint ventures to be separate business segments because
they are managed separately. These joint ventures are accounted for
using the equity method. As such, the joint venture operating
information provided below is shown separately from the consolidated
information, except for the Company's equity in the net income of the
joint ventures.
The information provided below is obtained from internal information
that is provided to the Company's chief operating decision-makers for
the purpose of corporate management. The Company does not allocate
corporate interest income and expense, income taxes or other income and
expenses related to corporate activity to its operating segments.
Assets and capital expenditures are not shown for the joint ventures as
management does not use that information to allocate resources or
assess performance.
8
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2000 AND 1999
(Unaudited, in thousands, except per share amounts)
Revenues from external customers as reported on the Consolidated
Statement of Operations are as follows:
For the Three Months Ended For the Nine Months Ended
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------ ------------ ------------ ------------
Revenues from external customers:
Metals Recycling Business $ 54,391 $ 31,888 $140,208 $ 95,035
Steel Manufacturing Business 52,284 46,581 135,386 124,023
Intersegment revenues (11,748) (11,830) (33,612) (33,532)
-------- -------- -------- --------
Consolidated revenues $ 94,927 $ 66,639 $241,982 $185,526
======== ======== ======== ========
The following represents the joint ventures' total revenues from
external customers:
For the Three Months Ended For the Nine Months Ended
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------ ------------ ------------ ------------
Joint Ventures in the Metals
Recycling Business $133,706 $ 77,855 $362,921 $227,459
Joint Venture Suppliers of Metals 14,351 11,359 38,197 35,074
-------- -------- -------- --------
Total revenues $148,057 $ 89,214 $401,118 $262,533
======== ======== ======== ========
The following is a reconciliation of consolidated income (loss) from
operations:
For the Three Months Ended For the Six Months Ended
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------ ------------ ------------ ------------
Income (loss) from operations:
Metals Recycling Business $ 3,790 $ 2,118 $ 9,750 $ (590)
Steel Manufacturing Business 1,850 1,163 5,267 3,607
Joint Ventures in the Metals
Recycling Business 1,981 214 4,128 (2,873)
Joint Venture Suppliers of Metals 624 679 1,760 1,472
Corporate expense (2,186) (1,621) (5,970) (5,072)
Eliminations (900) (59) (794) (242)
-------- -------- -------- --------
Consolidated income (loss)
from operations $ 5,159 $ 2,494 $ 14,141 $ (3,698)
======== ======== ======== ========
Income (loss) from operations generated by the joint ventures
represents the Company's equity in the net income (loss) of these
entities.
9
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2000 AND 1999
(Unaudited, in thousands, except per share amounts)
NOTE 4 - ENVIRONMENTAL LIABILITIES:
Federal and state environmental regulatory agencies have been
investigating potential contamination to a portion of the Willamette
River in Portland, Oregon known as the Portland Harbor. The Oregon
Department of Environmental Quality (DEQ) has requested operating
history and other information from numerous persons and entities which
own or conduct operations on properties adjacent to or upland from the
Portland Harbor. The DEQ has contacted Schnitzer Investment Corp.
(SIC), from whom the Company leases its metals recycling and deep water
terminal facility in Portland, Oregon, and requested that SIC perform a
voluntary remedial investigation of that property. DEQ has indicated
that it believes that activities conducted on that property may
currently be contributing, or may have in the past contributed,
contamination to the Willamette River. SIC has agreed to perform an
investigation of the property. The Company is obligated under the lease
with SIC to bear all costs relating to the investigation and
remediation of the property. The cost of the investigation is not
expected to be material; because of the early stage of the
investigation, no estimate has been made of the cost of remediation, if
any.
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 primary business segments. The Company's
Metals Recycling Business collects, processes and recycles ferrous and
nonferrous metals through its facilities. The Company's Steel
Manufacturing Business operates a mini-mill in McMinnville, Oregon,
which produces finished steel products and maintains a mill depot in
California. Additionally, the Company owns equity in joint ventures
that participate in the purchase, collection and processing of
recycled metals.
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, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------ ------------ ------------ ------------
(Unaudited)
REVENUES:
Metals Recycling Business:
Ferrous sales $ 40,329 $ 22,496 $105,334 $ 69,402
Nonferrous sales 10,910 7,259 27,770 18,496
Other sales 3,152 2,133 7,104 7,137
-------- -------- -------- --------
Total sales 54,391 31,888 140,208 95,035
Ferrous sales to Steel
Manufacturing Business (11,748) (11,830) (33,612) (33,532)
Steel Manufacturing Business 52,284 46,581 135,386 124,023
-------- -------- -------- --------
Total $ 94,927 $ 66,639 $241,982 $185,526
======== ======== ======== ========
INCOME (LOSS) FROM OPERATIONS:
Metals Recycling Business $ 3,790 $2,118 $ 9,750 $ (590)
Steel Manufacturing Business 1,850 1,163 5,267 3,607
Joint Ventures in the Metals
Recycling Business 1,981 214 4,128 (2,873)
Joint Venture Suppliers of Metals 624 679 1,760 1,472
Corporate expense (2,186) (1,621) (5,970) (5,072)
Eliminations (900) (59) (794) (242)
-------- -------- -------- --------
Total $ 5,159 $ 2,494 $ 14,141 $ (3,698)
======== ======== ======== ========
NET INCOME (LOSS) $ 3,983 $ 1,855 $ 8,126 $ (3,657)
======== ======== ======== ========
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 For the Nine Months Ended
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------ ------------ ------------ ------------
(Unaudited)
SHIPMENTS:
METALS RECYCLING BUSINESS:
Ferrous metals (thousands of long tons):
To Steel Manufacturing Business 119 148 352 408
Other domestic 54 48 179 145
Export 238 84 582 292
-------- -------- -------- --------
Total 411 280 1,113 845
======== ======== ======== ========
Nonferrous metals (millions of lbs.) 26 20 68 55
======== ======== ======== ========
Average ferrous sales price ($/ton)
Domestic $ 99 $ 82 $ 97 $ 84
Export 97 76 92 78
Average 98 80 95 82
STEEL MANUFACTURING BUSINESS:
Finished steel (thousands of short tons) 178 159 467 400
======== ======== ======== ========
Average sales price ($/ton) $ 293 $ 293 $ 289 $ 310
======== ======== ======== ========
THIRD QUARTER FISCAL 2000 VS. THIRD QUARTER FISCAL 1999
REVENUES. Consolidated revenues for the three months ended May 31,
2000 increased $28.3 million (42%) from the same period last year. The
higher revenues were primarily attributed to increases in prices and
sales volumes for the Metals Recycling Business.
During the quarter ended May 31, 2000, revenues for the Metals
Recycling Business, before intercompany eliminations, increased $22.5
million (71%) to $54.4 million, which is attributed to higher average
sales prices and higher export sales volumes. Ferrous and nonferrous
sales volumes increased by 47% and 28%, respectively, from the
comparable prior year quarter. In addition, the average sales prices
for ferrous and nonferrous metals increased by 23% and 17%,
respectively, from the third quarter of fiscal 1999. Both the higher
prices and higher sales volumes were attributable to the rebound in
the Asian economies which resulted in increases in demand by Asian
steel and metal producers.
The Steel Manufacturing Business' revenues for the three months ended
May 31, 2000 increased $5.7 million (12%), to $52.3 million from the
prior year quarter. The increase in revenues was primarily due to a
19,000 ton (12%) increase in finished steel shipments during the
quarter compared to the same quarter in the prior year. This increase
was primarily the result of increased demand for wire rod products.
Although demand increased, lower cost Asian imports continued to hold
prices down for most products. Additionally, the sales mix in the
third quarter of fiscal 2000 emphasized lower priced products. Thus,
the average selling price of finished steel was unchanged.
12
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
COST OF GOODS SOLD. Consolidated cost of goods sold increased $26.8
million (45%) for the three months ended May 31, 2000, compared with
the same period last year. Cost of goods sold increased as a
percentage of revenues from 88% to 90%. The gross margin improved by
$1.5 million for the third quarter of fiscal 2000 compared with the
prior year quarter.
During the third quarter of fiscal 2000, the Metals Recycling
Business' cost of goods sold increased $20.9 million over the prior
year quarter. During the third quarter of fiscal 1999, cost of goods
sold was reduced by a $1.9 million reversal of environmental reserves.
Cost of goods sold as a percentage of revenues was 82% during the
third quarter of fiscal 1999, but would have been 88% if not for the
reversal of environmental reserves. Cost of goods sold as a percentage
of revenues increased to 86% during the third quarter of fiscal 2000,
and the gross profit increased by $1.6 million to $7.3 million. The
increase in gross margins is directly attributable to the higher
selling prices and volumes sold brought about by increasing demand
from Asian countries.
For the three months ended May 31, 2000, cost of goods sold for the
Steel Manufacturing Business increased $4.9 million compared to the
same period last year and decreased as a percentage of revenues from
96% to 95%. Gross profit increased from $2.0 million to $2.8 million
compared with the third quarter last year. Although the average
selling price remained the same, margins improved because inventory
costs per ton leading into the third quarter of fiscal 2000 were lower
than the prior year quarter. During the second quarter of fiscal 1999,
the Company curtailed production due to excess supplies of low cost
steel imports, resulting in higher inventory costs. Cost of goods sold
per ton, excluding billets, decreased $3 per ton from the third
quarter of last year to $274 per ton.
FIRST NINE MONTHS OF FISCAL 2000 VS. FIRST NINE MONTHS OF FISCAL 1999
REVENUES. Consolidated revenues for the nine months ended May 31, 2000
increased $56.5 million (30%) from the same period last year. The
higher revenues were primarily attributed to increases in prices and
sales volumes for the Metals Recycling Business.
During the nine months ended May 31, 2000, revenues for the Metals
Recycling Business, before intercompany eliminations, increased $45.2
million (48%) to $140.2 million. The increase is attributable to
higher average selling prices and higher export volumes. Ferrous and
nonferrous sales volumes increased by 32% and 23%, respectively, from
the same period in the prior year. In addition, the average sales
prices for ferrous and nonferrous metals increased by 15% and 22%,
respectively, from the first nine months of fiscal 1999. The higher
prices and higher sales volumes were primarily caused by the rebound
in the Asian economies, which resulted in increases in demand by Asian
steel and metal producers.
The Steel Manufacturing Business' revenues for the nine months ended
May 31, 2000 increased $11.4 million (9%), to $135.4 million, from the
same period of the prior year. The increase in revenues was due to a
67,000 ton (17%) increase in finished steel shipments during the first
nine months of fiscal 2000 compared to the prior year. Higher
productivity in the Steel Manufacturing Business' newest rolling mill
has resulted in increasing production volumes of wire rod products,
allowing the Company to meet improving demand for such products. The
higher sales volumes were offset in part by a $21 per ton (7%)
decrease in the average selling price, which was due to the increased
supply of lower cost steel imports as well as a lower priced product
sales mix.
13
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
COST OF GOODS SOLD. Consolidated cost of goods sold increased by $43.9
million (26%) for the nine months ended May 31, 2000, compared with
the same period last year. Cost of goods sold decreased as a
percentage of revenues from 92% to 88%, which resulted in an $12.5
million increase in gross margin during for the first nine months of
fiscal 2000 as compared to the same period in the prior year.
During the first nine months of fiscal 2000, the Metals Recycling
Business' cost of goods sold increased $33.9 million over the prior
year. In addition, cost of goods sold as a percentage of revenues
decreased from 90% for the nine months ended May 31, 1999 to 85% for
the same period of fiscal 2000. As a result, gross profit increased by
$11.3 million to $20.7 million. The increase in gross margins is
directly attributable to the higher selling prices brought about by
the increasing demand from Asian countries.
During the first nine months of fiscal 2000, cost of goods sold for
the Steel Manufacturing Business increased $9.6 million compared to
the same period last year and decreased as a percentage of revenues
from 95% to 94%. Gross profit increased from $6.1 million to $7.9
million compared with the first nine months of last year. Although
prices were lower, margins improved due to increased production
volumes that lowered production costs per ton. Production volumes were
lower during the second quarter of last year as excess supplies of low
cost steel imports necessitated the mill's curtailment of production.
Cost of goods sold per ton, excluding billets, decreased $7 per ton
from the first nine months of last year to $269 per ton.
INCOME FROM JOINT VENTURES. Because the Company accounts for its
investments in joint ventures using the equity method, the joint
ventures' revenues are not included in the Company's consolidated
revenues. Total revenues recognized by the joint ventures from
external customers were (in thousands):
For the Three Months Ended For the Nine Months Ended
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------ ------------ ------------ ------------
(Unaudited)
Joint Ventures in the Metals
Recycling Business $133,706 $ 77,855 $362,921 $227,459
Joint Venture Suppliers
of Metals 14,351 11,359 38,197 35,074
-------- -------- -------- --------
$148,057 $ 89,214 $401,118 $262,533
======== ======== ======== ========
The Company's share of income (loss) from the joint ventures was as
follows (in thousands):
For the Three Months Ended For the Nine Months Ended
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------ ------------ ------------ ------------
(Unaudited)
Joint Ventures in the Metals
Recycling Business $ 1,981 $ 214 $ 4,128 $ (2,873)
Joint Venture Suppliers
of Metals 624 679 1,760 1,472
-------- -------- -------- --------
$ 2,605 $ 893 $ 5,888 $ (1,401)
======== ======== ======== ========
14
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
The Joint Ventures in the Metals Recycling Business predominantly
sell recycled ferrous metal. The increase in revenues recognized by
these joint ventures is attributable to higher ferrous selling prices
and an increase in tonnage shipped. Shipments of ferrous metal
processed by the joint ventures increased to 717,000 tons for the
quarter ended May 31, 2000 from 633,000 tons for the same quarter in
the prior year. The average prices for ferrous recycled metal
increased by 28% from the same quarter of last year.
For the nine months ended May 31, 2000, ferrous metal shipments
increased to 2.1 million tons from 2.0 million tons during the same
period last year. The average selling price of ferrous recycled metal
increased 19% during that period, predominantly due to the
strengthening world market and a stronger domestic market. The
increases in ferrous tons shipped and average selling price per ton
for the three and nine months ended May 31, 2000 were due to
increases in both export and domestic sales.
The Company's equity in income from its Joint Ventures in the Metals
Recycling Business for the third quarter of fiscal 2000 increased to
$2.0 million from $0.2 million in the third quarter of fiscal 1999.
For the nine months ended May 31, 2000, the Company's equity in
income from its Joint Ventures in the Metals Recycling Business
increased to $4.1 million from $2.9 million in the same period last
year. The increase for both periods was a result of higher average
ferrous selling prices and an increase in tons sold. Additionally,
$0.7 million of the increase in the Company's equity in earnings from
these joint ventures is attributable to improvements in one of the
joint venture's stainless steel operation.
Revenues from the Joint Venture Suppliers of Metals increased to
$14.4 million for the three months ended May 31, 2000 from $11.4
million for the three months ended May 31, 1999. For the three months
ended May 31, 2000, the Company's equity in income from these joint
ventures decreased to $0.6 million from $0.7 million in the same
period last year. For the nine months ended May 31, 2000, revenues
increased from $35.1 million to $38.2 million. Year-to-date, the
Company's equity in income from these joint ventures increased to
$1.8 million from $1.5 million for the previous year. The increase in
revenues for both periods is primarily due to rising domestic
recycled metal prices.
OTHER INCOME. In the second quarter of fiscal 2000, the Company and
its outside board members approved the sale by a related party of a
ship used by the Company to export recycled metal. The vessel had
been recorded as a capital lease in the Company's financial
statements. The sale resulted in a $1.0 million loss during the
quarter ended February 29, 2000. Other income for the third quarter
of fiscal 1999 included a gain on the sale of the Company's Union
City, California mill depot of $1.2 million and a $1.0 million
settlement as a result of antitrust litigation related to graphite
electrodes pricing.
INCOME TAX PROVISION. The income tax rate used for the first nine
months of fiscal 2000 was 16%, compared with 32% for the 1999 period.
The lower rate results from the use of net operating losses (NOLs)
acquired with the fiscal 1996 Proler acquisition. Previous federal
tax rules limited the use of the NOLs to offset taxable income only
from the acquired Proler entities. Recent changes in federal tax
rules now allow the Company to use these NOLs to offset income from
all sources, subject to certain annual dollar limits. During the
third quarter of fiscal 2000, the Company's income tax rate was
adjusted to reflect the expected partial utilization of such NOLs and
the resulting anticipated income tax rate of 16% for the full year.
The NOLs total $23 million as of May 31, 2000 and expire in the years
2007 through 2012.
15
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations for the
nine months ended May 31, 2000 was $17.4 million, compared with $17.3
million for the same period of fiscal 1999. Higher net income during
the first three quarters of fiscal 2000 compared with fiscal 1999
year-to-date was offset by an increase in accounts receivable, which
was caused by the timing of a large export shipment near the end of
the quarter, the balance of which was subsequently collected in June.
For the nine months ended May 31, 2000 capital expenditures totaled
$9.7 million compared with $8.4 million during the same period last
year. The increase is primarily due to the expansion of the dock
and the installation of the new automobile shredder at the
Company's Tacoma, Washington facility. These projects were
completed in the first quarter of fiscal 2000.
As a result of acquisitions completed in prior years, the Company has
$24.3 million of accrued environmental liabilities as of May 31,
2000. The Company expects to make significant future cash outlays as
it incurs the actual costs relating to the remediation of such
environmental liabilities.
As of May 31, 2000 the Company had committed, unsecured revolving
lines of credit totaling $200 million maturing in 2003. The Company
also has two unsecured and uncommitted lines of credit totaling $50
million. In the aggregate, the Company had borrowings outstanding on
these lines totaling $103.5 million at May 31, 2000. The Company's
debt agreements have certain restrictive convenants. As of May 31,
2000, the Company was in compliance with such covenants.
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. As of May 31, 2000
the Company had repurchased 708,600 shares under this program. No
shares were repurchased during the nine months ended May 31, 2000.
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 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.
16
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
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, the adequacy of reserves,
financial projections and results and global factors affecting the
Company's financial prospects. Examples of factors that could cause
actual results to differ materially are the following: supply and
demand conditions; fiscal policy in both the U.S. and abroad;
competitive factors and pricing pressures from national steel
companies; availability of unprocessed ferrous and nonferrous metal
supply; fluctuations in recycled metals 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company periodically uses derivative financial instruments to
limit exposure to changes in interest rates. Because such derivative
instruments are used solely as hedges and not for speculative trading
purposes, they do not represent incremental risk to the Company. For
further discussion of derivative financial instruments, refer to
"FAIR VALUE OF FINANCIAL INSTRUMENTS" in the consolidated Financial
Statements included in Item 8 of Form 10-K for the fiscal year ended
August 31, 1999.
PART II OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
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 14, 2000 By: /s/ Barry A. Rosen
------------- -----------------------------
Barry A. Rosen
Vice President, Finance
18