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, 1996 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 5,813,399 shares of Class A Common Stock, par value of $1.00
per share and 4,575,255 Class B Common Stock, par value of $1.00 per share
outstanding at July 1, 1996.
1
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NO.
-------
Consolidated Balance Sheet at May 31, 1996
and August 31, 1995.................... ...................................3
Consolidated Statement of Operations for the three months and
nine months ended May 31, 1996 and 1995....................................4
Consolidated Statement of Shareholders' Equity for the
year ended August 31, 1995 and the nine months
ended May 31, 1996.........................................................5
Consolidated Statement of Cash Flows for the
nine months ended May 31, 1996 and 1995....................................6
Notes to Financial Statements..................................................7
Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................10
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K..............................................15
SIGNATURE PAGE................................................................16
2
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
5/31/96 8/31/95
(Unaudited) (Audited)
-------------- -------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,604 $ 1,598
Accounts receivable, less allowance for
doubtful accounts of $365 and $797 19,920 17,124
Accounts receivable from related parties 1,041 912
Inventories (Note 2) 102,057 71,853
Deferred income taxes 4,557 4,835
Prepaid expenses and other 4,043 2,313
--------------- --------------
TOTAL CURRENT ASSETS 133,222 98,635
--------------- --------------
NET PROPERTY, PLANT & EQUIPMENT 152,344 119,664
--------------- --------------
OTHER ASSETS:
Investment in joint venture partnerships 9,537 9,026
Advances to joint venture partnerships 3,521 3,839
Goodwill 43,748 44,665
Intangibles and other 4,650 4,476
--------------- --------------
61,456 62,006
--------------- --------------
$ 347,022 $ 280,305
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 252 $ 247
Accounts payable 20,544 20,596
Accrued payroll liabilities 3,725 5,360
Accounts payable to related parties 740
Accrued income taxes payable 2,266
Deferred revenues 4,365 3,916
Current portion of environmental liabilities (Note 4) 2,334 2,513
Other accrued liabilities 6,353 6,900
--------------- --------------
TOTAL CURRENT LIABILITIES 38,313 41,798
--------------- --------------
DEFERRED INCOME TAXES 13,081 14,184
--------------- --------------
LONG-TERM DEBT LESS CURRENT PORTION 54,006 64,698
--------------- --------------
ENVIRONMENTAL LIABILITIES, NET OF CURRENT PORTION (Note 4) 20,771 22,342
--------------- --------------
OTHER LONG-TERM LIABILITIES 1,310 1,310
--------------- --------------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value authorized,
5,814 and 3,128 shares issued 5,814 3,128
Class B common stock--25,000 shares $1 par value
authorized, 4,575 and 4,761 shares issued 4,575 4,761
Additional paid-in capital 114,672 47,322
Retained earnings 94,480 80,762
--------------- --------------
219,541 135,973
--------------- --------------
$ 347,022 $ 280,305
============== =============
The accompanying notes are an integral part of this statement.
</TABLE>
3
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
---------------------- ----------------------
5/31/96 5/31/95 5/31/96 5/31/95
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 86,950 $ 106,611 $ 241,262 $ 225,951
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of goods sold and other
operating expenses 74,858 89,661 205,449 194,104
Selling and administrative 4,897 4,993 13,484 11,576
--------- --------- --------- ---------
79,755 94,654 218,933 205,680
--------- --------- --------- ---------
Income From Joint Ventures 836 745 2,484 1,789
--------- --------- --------- ---------
INCOME FROM OPERATIONS 8,031 12,702 24,813 22,060
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (891) (1,254) (3,001) (1,489)
Other income (expense) (346) 926 743 2,162
--------- --------- --------- ---------
(1,237) (328) (2,258) 673
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 6,794 12,374 22,555 22,733
Income Tax Provision (2,243) (4,520) (7,527) (8,352)
--------- --------- --------- ---------
NET INCOME $ 4,551 $ 7,854 $ 15,028 $ 14,381
========= ========= ========= =========
EARNINGS PER SHARE $ 0.44 $ 0.98 $ 1.69 $ 1.80
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional
------------------ ------------------ Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
------ ---------- -------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 8/31/94 3,123 $ 3,123 4,766 $ 4,766 $ 47,322 $ 60,093 $ 115,304
Class B common stock
converted to Class A
common stock 5 5 (5) (5)
Net income 22,247 22,247
Dividends paid (1,578) (1,578)
------ ---------- -------- --------- ---------- ---------- ----------
BALANCE AT 8/31/95 3,128 3,128 4,761 4,761 47,322 80,762 135,973
Class A common stock
issued 2,500 2,500 67,350 69,850
Class B common stock
converted to Class A
common stock 186 186 (186) (186)
Net income 15,028 15,028
Dividends paid (1,310) (1,310)
------ ---------- -------- --------- ---------- ---------- ----------
BALANCE AT 5/31/96 5,814 $ 5,814 4,575 $ 4,575 $ 114,672 $ 94,480 $ 219,541
====== ========== ======== ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
-----------------------------
May 31, 1996 May 31, 1995
------------ ------------
<S> <C> <C>
OPERATIONS:
Net income $ 15,028 $ 14,381
Noncash items included in income:
Depreciation and amortization 10,568 8,236
Deferred income taxes (825) 780
Equity in earnings of joint ventures
and other investments (2,484) (1,789)
Gain on disposal of assets (74) (579)
Cash provided (used) by assets and liabilities:
Accounts receivable (2,925) (4,146)
Inventories (30,204) (12,173)
Prepaid expenses and other (2,224) (120)
Accounts payable (52) 929
Deferred revenue 449
Accrued expenses (3,708) 3,383
Other assets and liabilities (2,147) (2,019)
-------- --------
NET CASH (USED) PROVIDED BY OPERATIONS (18,598) 6,883
-------- --------
INVESTMENTS:
Payment for purchase of MMI, net of cash acquired (64,832)
Capital expenditures (42,920) (18,128)
Advances to joint ventures 318 (4,346)
Distributions from joint ventures 1,945 570
Proceeds from sale of assets 1,408 585
-------- --------
NET CASH USED BY INVESTMENTS (39,249) (86,151)
-------- --------
FINANCING:
Proceeds from sale of Class A common stock 69,850
Dividends declared and paid (1,310) (1,181)
Increase in long-term debt 38,216 76,700
Reduction in long-term debt (48,903) (129)
-------- --------
NET CASH PROVIDED BY FINANCING 57,853 75,390
-------- --------
NET INCREASE (DECREASE) IN CASH 6 (3,878)
CASH AT BEGINNING OF PERIOD 1,598 4,385
-------- --------
CASH AT END OF PERIOD $ 1,604 $ 507
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1996 AND 1995
(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 statement, 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, 1995. The results for the nine months ended May
31, 1996 are not necessarily indicative of the results of operations
for the entire year.
Net Income Per Common Share
- - ---------------------------
Net income per common share is based on the weighted average number of
common shares outstanding of 10,444,143 and 7,987,731 for the three
months ended May 31, 1996 and 1995, respectively, and 8,915,640 and
7,987,731 for the nine months ended May 31, 1996 and 1995,
respectively.
NOTE 2. INVENTORIES
Inventories consist of the following (in thousands):
May 31, 1996 Aug. 31, 1995
(Unaudited) (Audited)
------------ -------------
Scrap metals $ 22,459 $11,861
Work in process 36,139 29,468
Finished goods 29,155 20,591
Supplies 14,304 9,933
-------- -------
$102,057 $71,853
======== =======
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
$8,428,000 and $10,478,000 at May 31, 1996 and August 31, 1995,
respectively.
7
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1996 AND 1995
(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 $2,500,000 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 $2,310,000 and $1,230,000 for the three months ended May
31, 1996 and 1995, respectively, and $6,536,000 and $2,906,000 for the
nine months ended May 31, 1996 and 1995, respectively.
The Company purchased scrap metals from its joint venture operations
totalling $2,260,000 and $2,169,000 for the three months ended May 31,
1996 and 1995, respectively, and $6,281,000 and $5,680,000 for the nine
months ended May 31, 1996 and 1995, respectively.
The Company leases certain land and buildings from a related real
estate company. The rent expense was $313,000 and $358,000 for the
three months ended May 31, 1996 and 1995, respectively, and $942,000
and $983,000 for the nine months ended May 31, 1996 and 1995,
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 totalled $136,000 and $77,000 for the three
months ended May 31, 1996 and 1995, respectively, and $636,000 and
$708,000 for the nine months ended May 31, 1996 and 1995, 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 $267,000 and $2,858,000 for the three and nine months
ended May 31, 1996, respectively. These charges were offset by income
of $251,000 and $2,883,000 for the three and nine months ended May 31,
1996, respectively. There was no sub-charter activity in the nine
months ended May 31, 1995.
Transactions Affecting Property, Plant & Equipment
--------------------------------------------------
From time to time, the law firm of Ball, Janik & Novack, of which
director Robert S. Ball is a partner, provides legal services to the
Company. Mr. Ball is a director, significant shareholder and the
secretary of Electrical Construction Company (ECC), an electrical
contractor, which has provided electrical construction services on the
Company's new rolling mill. The Company paid ECC $108,000 and $314,000
for the three months ended May 31, 1996 and 1995, respectively, and
$9,048,000 and $314,000 for the nine months ended May 31, 1996 and
1995, respectively.
8
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1996 AND 1995
(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),
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 aggregated $24,366,000 and was included in MMI's
statement of operations prior to its acquisition by the Company
resulting in an increase in MMI's reserve for environmental liabilities
to $24,981,000. As of May 31, 1996, the environmental liability
aggregated $23,105,000.
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 Tacoma
scrap yard is located, as well as for alleged damage to natural
resources in the waterway. Additionally, the Washington State
Department of Ecology issued a consent decree in 1990 which required
paving of MMI's ferrous scrap yard, which is substantially completed,
and the installation of a stormwater treatment system, which is
completed. In 1994, MMI reached a settlement with its insurance
carriers with respect to costs incurred under the 1990 Consent Decree
and Hylebos Waterway projects. Under this settlement, the Company can
be reimbursed for covered costs up to $1,710,000 in 1996 through 1997
as funds are expended. The remaining recorded liability covers
third-party sites at which MMI has been named as a PRP, as well as
potential future cleanup of other sites at which MMI has conducted
business or allegedly disposed of materials.
NOTE 5. SHAREHOLDERS' EQUITY
In February 1996, the Company sold 2.5 million shares of Class A common
stock at $29.50 per share in a public offering. Net proceeds to the
Company from the sale of the shares were $69.9 million after the
underwriting discount and offering expenses.
NOTE 6. SUBSEQUENT EVENT
On July 8, 1996, the Board of Directors declared a 5 cent per share
dividend on Class A and Class B common stock payable on August 23, 1996
to holders of record on August 8, 1996.
9
<PAGE>
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 and California. Steel Operations operates a
mini-mill in Oregon which produces finished steel products and
maintains mill depots in California.
Liquidity and Capital Resources
-------------------------------
For the nine months ended May 31, 1996, net cash used by operations was
$18.6 million, compared with cash provided by operations of $6.9
million for the same period last year. This decrease in cash flow from
operations is primarily a result of increased inventories of $30.2
million, reflecting a $10.6 million increase in inventories at Scrap
Operations and a $19.6 million increase in inventories at Steel
Operations. The increase in inventories at Scrap Operations is
primarily due to the timing of export shipments. Steel Operations'
finished goods inventories increased $8.6 million predominately due to
softened demand combined with increased production partially due to the
startup of the bar mill portion of its new rolling mill in February
1996. The increase in work in progress inventories of $6.7 million and
the increase in supplies inventories of $4.3 million, were both in
anticipation of the new bar mill. Steel Operations' inventories are
expected to decrease over the next two quarters as sales volumes are
expected to exceed production volumes.
Capital expenditures for the nine months ended May 31, 1996 and 1995
were $42.9 million and $18.1 million, respectively. Fiscal year to
date, capital expenditures include $28.6 million in progress payments
related to construction of the new wire rod and bar mill for Steel
Operations. The Company expects to spend approximately $12 million on
capital improvements, including the new wire rod mill, during the
remainder of fiscal 1996. At May 31, 1996, the Company had outstanding
purchase commitments related to the wire rod mill aggregating $3.9
million.
At May 31, 1996, the Company had a $100.0 million, five year (expires
March 2000), unsecured revolving credit facility and had additional
lines of credit available of $55 million, $35 million of which was
uncommitted. In aggregate, the Company had borrowings outstanding under
its lines of credit at May 31, 1996 of $51 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 and debt service
requirements for the next twelve months. The Company does not presently
anticipate that additional funding sources will be required for the
completion of Steel Operations' wire rod mill, currently scheduled for
fiscal 1997. In the longer term, the Company may seek to finance
business expansion, including potential acquisitions, with additional
borrowing arrangements or additional equity financing.
10
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Results of Operations
---------------------
The Company's revenues and operating results by business segment are
summarized below (in thousands, except number of shipments):
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
---------------------------- ----------------------------
5/31/96 5/31/95 5/31/96 5/31/95
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Scrap Operations:
Ferrous sales $ 50,991 $ 71,798 $ 159,589 $ 134,900
Nonferrous sales 3,317 12,218 8,380 22,599
Other sales 1,762 2,505 5,393 4,323
--------- --------- --------- ---------
Total Sales 56,070 86,521 173,362 161,822
Ferrous sales to Steel Operations (13,444) (13,965) (41,304) (40,016)
Steel Operations 44,324 34,055 109,204 104,145
--------- --------- --------- ---------
Total $ 86,950 $ 106,611 $ 241,262 $ 225,951
========= ========= ========= =========
INCOME FROM OPERATIONS:
Scrap Operations $ 8,121 $ 11,609 $ 22,035 $ 18,028
Steel Operations 740 2,165 4,837 6,550
Joint Ventures 836 745 2,484 1,789
Corporate Expense and Eliminations (1,666) (1,817) (4,543) (4,307)
--------- --------- --------- ---------
Total $ 8,031 $ 12,702 $ 24,813 $ 22,060
========= ========= ========= =========
NET INCOME $ 4,551 $ 7,854 $ 15,028 $ 14,381
========= ========= ========= =========
SHIPMENTS:
SCRAP OPERATIONS
Ferrous Scrap (Long Tons):
To Steel Operations 114.2 108.4 343.2 320.0
To Unaffiliated Customers 236.6 317.6 747.4 522.6
--------- --------- --------- ---------
Total 350.8 426.0 1,090.6 842.6
========= ========= ========= =========
Number of scrap export shipments 7 10 22 17
========= ========= ========= =========
Nonferrous scrap (pounds) 7,438 18,717 19,148 38,703
========= ========= ========= =========
STEEL OPERATIONS (Short Tons)
Finished steel products 133.5 96.7 321.7 292.6
========= ========= ========= =========
Billets 2.4 21.2
========= ========= ========= =========
</TABLE>
11
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Revenues
--------
Revenues for the three months ended May 31, 1996 decreased $19.7
million (18%) but increased for the nine months ended May 31, 1996
$15.3 million (7%), compared to the same periods last year. For the
three months ended May 31, 1996, Scrap Operations' revenues before
intercompany eliminations decreased $30.5 million (35%), compared to
the same period last year, reflecting lower ferrous shipments at lower
average selling prices combined with decreased nonferrous scrap sales.
Ferrous scrap revenues decreased $20.8 million (29%) and shipments
decreased by 75,000 tons (18%). Ferrous scrap sales to unaffiliated
customers decreased $20.3 million (35%) and shipments to unaffiliated
customers decreased 81,000 tons (26%). Ferrous scrap shipments to
unaffiliated customers included a 65,000 ton decrease in export
shipments, due to the timing of export shipments, and a 16,000 ton
decrease in shipments to other domestic steel mills. Average selling
prices of ferrous scrap decreased $12 per ton (8%) to $145 per ton as a
result of what the Company believes to be short term market conditions
and seasonality. Compared to the second quarter of fiscal 1996, average
selling prices of ferrous scrap increased $2 per ton. Third quarter
nonferrous scrap revenues were down $8.9 million (73%) from the prior
year due to a 60% decrease in nonferrous shipments primarily as a
result of the sale in July 1995 of the Company's Portland, Oregon
nonferrous operations.
For the nine months ended May 31, 1996, Scrap Operations' revenues
before intercompany eliminations increased $11.5 million (7%), compared
to the same period last year, reflecting increased shipments of ferrous
scrap offset by reduced average selling prices and decreased nonferrous
scrap sales. Ferrous scrap revenues increased $24.7 million (18%) and
shipments increased 248,000 tons (29%). Ferrous scrap sales to
unaffiliated customers increased $23.5 million (25%), reflecting a
225,000 ton (43%) increase in shipments. Ferrous scrap to unaffiliated
customers included a 190,000 ton increase in export shipments and a
35,000 ton increase in shipments to other domestic steel mills as a
result of the acquisition of MMI in March 1995. Average selling prices
of ferrous scrap decreased $6 per ton (4%) to $146 per ton. Nonferrous
scrap revenues were down $14.2 million (63%) from the prior year
resulting from a 51% decrease in nonferrous shipments, due to the sale
of the Company's Portland, Oregon nonferrous operations in July 1995,
combined with a 25% decrease in average selling prices.
Steel Operations' revenues increased $10.3 million (30%) for the three
months ended May 31, 1996 compared to the same period last year
resulting from increased shipments of finished steel products offset by
lower average selling prices and decreased billet sales. Finished steel
revenues increased $10.8 million (32%) as shipments increased 37,000
tons (38%) primarily due to the new rolling mill, which began
production in February. There were no billet sales in the three months
ended May 31, 1996 compared to 2,000 tons of billet shipments in the
same period last year. It is not the Company's intent to produce
billets for resale. Average finished steel selling prices, excluding
billets, decreased $15 per ton (4%) to $332 per ton as finished steel
selling prices remained relatively soft throughout the third quarter.
The Company expects pricing pressure to continue at least through the
fourth fiscal quarter.
For the nine months ended May 31, 1996, Steel Operations' revenues
increased $5.1 million (5%) compared to the same period last year
primarily due to increased shipments of finished steel products offset
by lower billet sales. Finished steel revenues increased $9.8 million
(10%) as shipments increased 29,000 tons (10%). There were no billet
sales in the nine months ended May 31, 1996 compared to 21,000 tons of
billet shipments, or $4.7 million in billet revenues, in the same
period last year. For the nine months ended May 31, 1996, average
finished steel prices, excluding billets, remained unchanged at $339
per ton.
12
<PAGE>
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 $14.6 million (16%) for the three
months ended May 31, 1996 but increased $11.6 million (6%) for the nine
months ended May 31, 1996, compared to the same periods last year.
However, cost of goods sold increased as a percentage of revenues from
84% to 86% for the three months ended May 31, 1996 and decreased from
86% to 85% for the nine months ended May 31, 1996, compared to the same
periods last year. Gross profit decreased $5.1 million (30%) to $12.1
million for the three months ended May 31, 1996 and increased $3.7
million (12%) to $35.8 million for the nine months ended May 31, 1996,
compared to the same periods last year.
Cost of goods sold for Scrap Operations for the three months ended May
31, 1996 decreased $26.5 million (37%), and decreased as a percentage
of revenues from 83% to 81%. Average cost of goods sold per ton for
ferrous scrap decreased from $127 to $120, while the average cost per
pound for nonferrous scrap decreased from $.63 to $.40. Scrap
Operations' gross profit decreased $4.0 million to $10.6 million
primarily as a result of a $4.0 million decrease in ferrous scrap gross
profit compared to the same period last year. Ferrous gross profit
decreased as a result of a $5 per ton decrease in average gross profit
combined with a 75,000 ton decrease in shipments. Compared to the
second quarter of fiscal 1996, average gross profit per ton increased
by $4 as the Company began to realize the benefit of its efforts to
lower scrap purchase prices at the scale. Nonferrous gross profit
decreased $.1 million as a result of an $.03 increase in average gross
profit offset by an 11 million pound decrease in shipments.
For the nine months ended May 31, 1996, Scrap Operations' cost of goods
sold increased $6.2 million (4%), but decreased as a percentage of
scrap revenues from 85% to 83%. For the same period, average cost of
goods sold per ton of ferrous scrap decreased from $129 to $123. Scrap
Operations' gross profit increased $5.3 million to $29.5 million
primarily as a result of a $5.1 million increase in ferrous scrap gross
profit compared to the same period last year. Ferrous gross profit
increased as a result of a 248,000 ton increase in shipments offset by
a $1 per ton decrease in average gross profit. For the nine months
ended May 31, 1996, nonferrous gross profit decreased $1.1 million
primarily as a result of a 20 million pound decrease in shipments.
Steel Operations' cost of goods sold increased $11.5 million (37%) in
the three months ended May 31, 1996 compared to the same period last
year, and increased as a percentage of revenues from 92% to 97%. Gross
profit for Steel Operations decreased $1.3 million to $1.5 million as a
result of a $19 per ton (57%) decrease in average gross profit
partially offset by a 37,000 ton increase in finished steel shipments.
The $19 per ton decrease resulted from a $4 per ton increase in average
cost of goods sold and a $15 per ton decrease in average selling price.
The $4 per ton cost increase is primarily the result of increased
rolling mill costs due to the start up of the new rolling mill offset
by a decrease in billet production costs.
For the nine months ended May 31, 1996, Steel Operations' cost of goods
sold increased $6.8 million (7%) compared to the same period last year,
and increased as a percentage of revenues from 92% to 94%. The increase
in amount resulted predominately from increased finished steel
shipments combined with a $7 per ton increase in average finished steel
cost of goods sold. The $7 per ton increase reflects increased rolling
mill costs primarily due to the start up of the new rolling mill. Steel
Operations' gross profit decreased $1.8 million to $6.8 million, a
decrease of $8 per ton, as a result of the increase in cost of goods
sold (with no change in average selling price) partially offset by the
increase in finished steel shipments.
13
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Selling and Administrative Expense
----------------------------------
Selling and administrative expenses decreased $.1 million (2%) and
increased $1.9 million (16%) for the three and nine months ended May
31, 1996 , respectively, compared to the same periods last year,
primarily due to the Company's acquisition of MMI in March 1995.
Income from Joint Ventures
--------------------------
Income from joint ventures for the three months ended May 31, 1996
increased $.1 million compared to the same period last year. For the
nine months ended May 31, 1996, income from joint ventures increased
$.7 million compared to the same period last year, predominately due to
increased earnings from the environmental remediation and used auto
parts joint ventures.
Interest Expense
----------------
Interest expense decreased $.4 million for the three months ended May
31, 1996, compared to the same period last year. This decrease reflects
lower average borrowings during this period as the Company used the
proceeds received from its February 1996 stock offering to pay down
debt. For the nine months ended May 31, 1996, interest expense
increased $1.5 million compared to the same period last year, primarily
as a result of higher average borrowings at higher interest rates
offset by capitalized interest. Increased average borrowings were
principally a result of the Company's acquisition of MMI in March 1995,
purchases relating to the new wire rod and bar mill being constructed
at Steel Operations and increased inventories.
Forward Looking Statements
--------------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward looking statements that involve a number
of risks and uncertainties. In particular, the Company has stated its
belief that decreases in scrap market prices are a result, at least in
part, of short term market conditions. Future market conditions are
subject to supply and demand conditions and decisions of other market
participants over which the Company has no control and which are
inherently difficult to predict. Accordingly, there can be no assurance
that scrap prices will rise in the short term. In addition to the
factors discussed above, among the other factors that could cause
actual results to differ materially are the following: business
conditions and growth in the scrap and steel industries; competitive
factors, including pricing pressures from national steel companies;
availability of scrap supply; fluctuations in scrap prices; seasonality
of results; the uncertainty of the Company being able to complete
future acquisitions; the risk that there will not be a successful
start-up of the wire rod mill at Steel Operations in fiscal 1997; and
the risk factors listed from time to time in the Company's SEC reports,
including but not limited to the report on Form 10-K for the fiscal
year ended August 31, 1995 (Part I, Item 1, Business).
14
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Extension of Lease dated May 28, 1996 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters.
10.2 Third Amendment of Lease dated May 29, 1996 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters.
10.3 Deferred Bonus Agreement dated January 1, 1996 between an
executive officer and the Registrant.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
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 12, 1996 By: /s/Barry A. Rosen
----------------------------- ------------------------------------
Barry A. Rosen
Vice President, Finance
16
<PAGE>
SCHNITZER STEEL INDUSTRIES. INC.
INDEX TO EXHIBITS
10.1 Second Extension of Lease dated May 28, 1996 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters.
10.2 Third Amendment of Lease dated May 29, 1996 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters.
10.3 Deferred Bonus Agreement dated January 1, 1996 between an executive
officer and the Registrant.
27 Financial Data Schedule
SECOND EXTENSION OF LEASE
THIS SECOND EXTENSION OF LEASE is written and made in duplicate on the 28th
day of May, 1996, by and between SCHNITZER INVESTMENT CORP. (the "Landlord") and
SCHNITZER STEEL INDUSTRIES, INC., (the "Tenant"). Each may be referred to from
time to time as a "Party" and collectively as the "Parties."
RECITALS
WHEREAS, under a certain indenture of Lease (the "Lease") dated September
1, 1988, as amended by the Amendment of Lease dated May 31, 1991, the Extension
of Lease dated August 27, 1993, and the Second Amendment of Lease dated October
18, 1995, the Landlord leased certain real property in Portland, Multnomah
County, Oregon, as described in the Lease to the Tenant. The term of the Lease,
unless extended, expires on August 31, 1998; and,
WHEREAS, the Parties now wish to extend the Term of the Lease for eight (8)
years and four (4) months; and it is the purpose of this Second Extension of
Lease to set forth all of the terms and conditions of the Parties' agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained in this Second Extension of Lease, the Parties covenant and agree as
follows:
1. Extension Term: The term of the Lease is hereby extended to midnight on
December 31, 2006 (the "Extension Term").
2. Rent: On September 1, 1998, September 1, 2001, and September 1, 2004 (the
"Adjustment Dates"), Rent shall be adjusted upward to Fair Market Rental
(FMR) as agreed between the Parties. If the Parties cannot agree on the FMR
by sixty (60) days prior to any Adjustment Date, then each shall select a
realtor who together shall select a third realtor and the majority of the
three shall determine, by thirty (30) prior to the Adjustment Date, the
FMR. The Realtors chosen shall be familiar with the industrial real estate
market in northwest Portland. In no event shall the adjusted rental be less
than the rental previously in effect.
3. Other Terms: Except as they may be modified by this Second Extension of
Lease, all the other terms and conditions of the Lease shall remain in full
force and effect.
IN WITNESS WHEREOF, the Landlord and the Tenant have signed this Second
Extension of Lease as of the date first hereinabove written.
LANDLORD: TENANT:
SCHNITZER INVESTMENT CORP. SCHNITZER STEEL INDUSTRIES, INC.
By /s/Linda M. Wakefield By /s/James W. Cruckshank
--------------------- -----------------------
Title Vice President Title Corporate Controller
------------------ --------------------
C:\WP51\AMD\SSI3200.ex2
THIRD AMENDMENT OF LEASE
THIS THIRD AMENDMENT OF LEASE is written and made in duplicate on the 29th
day of May, 1996, by and between SCHNITZER INVESTMENT CORP. (the "Landlord") and
SCHNITZER STEEL INDUSTRIES, INC., Successor in Interest to Schnitzer Steel
Products Co. (the "Tenant"). Each may be referred to from time to time as a
"Party" and collectively as the "Parties".
RECITALS
WHEREAS, under a certain indenture of Lease (the "Lease") dated March 24,
1980, as amended by the Extension of Lease dated April 19, 1985, an Amendment to
Lease dated June 4, 1987, a Second Extension of Lease dated April 15, 1988, a
Third Extension of Lease dated September 1, 1988, and a Fourth Extension of
Lease dated August 27, 1993, which are, with the Lease, incorporated by this
reference, the Landlord leased certain real property to Tenant in Portland,
Multnomah County, Oregon, as described in the Lease to the Tenant, and;
WHEREAS, the Parties now wish to amend the Lease to provide for increased
square footage effective May 15, 1996, and it is the purpose of this Third
Amendment of Lease to set forth all of the terms and conditions of the Parties'
agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained in this Third Amendment of Lease, the Parties covenant and agree as
follows:
1. Premises: Effective May 15, 1996, Paragraph 1. Premises of the Lease is
amended to provide for 5,654 square feet of leased office space.
2. Basic Rent: Effective May 15, 1996, Paragraph 3. Rent of the Lease is
amended to provide for equal monthly installments of $5,476.67 each.
3. Operating Expenses: Effective May 15, 1996, Tenant's proportionate share of
operating expense increases as set forth under Paragraph 6 of the Lease
shall increase to 34%.
4. Other Terms: Except as they may be modified by this Third Amendment of
Lease, all the other terms and conditions of the Lease shall remain in full
force and effect.
IN WITNESS WHEREOF, the Landlord and Tenant have signed this Third
Amendment of Lease as of the date first hereinabove written.
Landlord: Tenant:
SCHNITZER INVESTMENT CORP. SCHNITZER STEEL INDUSTRIES,
INC., Successor in Interest to
Schnitzer Steel Products Co.
By /s/Linda M. Wakefield By /s/L. Conner /s/James W. Cruckshank
--------------------- ------------------------------------
Title Vice President Title Dir. MIS / Corporate Controller
------------------ --------------------------------
C:\WP51\AMD\SSI-DP.AM3
5/96
DEFERRED BONUS AGREEMENT
THIS AGREEMENT is effective the first day of January, 1996, by and between
Cascade Steel Rolling Mills, Inc., a wholly owned subsidiary of Schnitzer Steel
Industries, Inc., both corporations organized under the laws of the State of
Oregon (collectively referenced as "Company") and Kurt Zetzsche a resident of
Oregon ("Employee").
WITNESSETH THAT:
In consideration of the agreements hereinafter contained the parties hereto
agree as follows:
1. The Company has previously agreed to employ the Employee and the Employee has
agreed to serve the Company in such capacity as the Board of Directors of the
Company ("Board") may designate from time to time. During the term of his
employment, Employee has agreed to devote all of his time and attention, skill
and effort to the performance of his duties for the Company as directed by the
Board.
2. The Company has agreed to pay the Employee during the term of his employment
such salary payable bi-weekly as the Board may from time to time determine
together with deferred compensation payable as provided in paragraph 5 below, in
addition to being eligible for other benefits normally provided by the Company
to its employees.
3. In addition to his salary payable as indicated in paragraph 2 above, the
Company shall from time to time declare that the Employee shall be eligible for
a bonus in an amount determined solely at the discretion of the Board, usually
between the Company's year end of August 31 of each year and the subsequent
calendar year end of December 31.
4. Any such annual bonus amount as declared by the Board shall be paid 60% in
cash, subject to all usual and required income tax and other withholdings to the
Employee, as soon as practicable. The balance and remainder of any such bonus
shall be credited by the Company to a Deferred Compensation Account on the
Company's books of account and treated as a liability by the Company to the
Employee payable under terms as specified in this agreement as follows:
(a) The Deferred Compensation Account and amounts credited thereto shall
continue at all times to be a general liability of the Company and shall not be
required to be set aside or invested in cash, portfolio investments or other
assets.
(b) In addition to the amounts of bonus credited to the Deferred
Compensation Account each year, the Company shall also credit on January 1 of
each year an interest factor based on 120% of the average annual applicable
federal long term rate, with annual compounding (as prescribed under Section
1274(d) of the Internal Revenue Code) as published monthly during the prior
calendar year. Such interest shall be computed and credited based on the average
monthly outstanding balance in the deferred compensation account for the
immediate prior calendar year.
(c) The Company may, solely at the discretion of the Board, choose to
invest some or all of amounts credited to the Deferred Compensation Account in a
separate cash account or in a portfolio of investment securities or other
assets. However, title to and beneficial ownership of any such assets, including
the Deferred Compensation Account itself, whether in cash or investments or
other assets which the Company may earmark to pay Deferred Compensation to the
Employee hereunder, shall at all times remain with the Company. The Employee and
his designated beneficiary shall not have any property or beneficial interest
whatsoever in any specific assets of the Company.
5. The benefits to be paid to the Employee as Deferred Compensation pursuant to
this agreement are as follows:
(a) If the Employee's employment is terminated on or after the Employee
shall have reached the age of 60 the Company shall pay him in 5 annual
installments an amount which each year is computed based on the balance in the
Deferred Compensation Account as of the prior December 31 divided by: 5 minus
the number of annual installment payments which have already been paid.
(b) Notwithstanding the foregoing, the balance in the Deferred Compensation
Account shall continue to be increased each year based on the interest rate
specified in paragraph 4(b) of this agreement. If the Employee should die before
5 annual payments are made, the unpaid balance will continue to be paid for the
unexpired portion of the 5 year period to the designated beneficiary or
beneficiaries of the Employee in the same manner as set forth above.
(c) If the Employee's employment hereunder is terminated for any reason
other than death or disability before the Employee shall have reached age 60,
then the amount in the Deferred Compensation Account shall continue to be
credited with annual increases based on the interest rate specified in Paragraph
4(b) of this agreement and no payment shall be made until the date when the
employee reaches age 60 and such payments then shall be made to the Employee in
the same manner and to the same extent as set forth in Paragraph 5(a) above to
the Employee.
(d) If the Employee's employment has been terminated for any reason before
he reaches age 60 and satisfactory evidence of the Employee's disability or
death is submitted, then the Company shall make the 5 annual installment
payments to the Employee or his designated beneficiaries in the same manner and
to the same extent as provided in Paragraph 5(a) and (b) above. The beneficiary
or beneficiaries designated by the Employee in this paragraph may be designated
or changed by the Employee without the consent of any prior beneficiary on a
form provided by the Company and delivered to the Company before the death of
the Employee. If no such beneficiary shall have been designated or if no
designated beneficiary shall survive the Employee, the installment payments
under this agreement shall be payable to the Employee's estate.
(e) The Employee shall be deemed to have become disabled for purposes of
this agreement if the Board shall find on the basis of medical evidence
satisfactory to the Board that the Employee is totally disabled, mentally or
physically, so as to be prevented from engaging in further employment by the
Company and that such disability will be permanent and continuous during the
remainder of his life.
(f) The installment payments to be made to the Employee on account of his
death or disability shall commence on the first day of the month following the
date of the Board determination based on evidence submitted that death or
disability has occurred. The installment payment to be made to the Employee on
account of any event other than death or disability shall commence on the first
day of the month following the later of the date on which the Employee reaches
age 60 or the date of his termination of employment.
6. Nothing contained in this agreement and no action taken pursuant to the
provisions of this agreement shall create or be construed to create a trust of
any kind, or a fiduciary relationship between the Company and the Employee, his
designated beneficiary or any other person. Any funds which may be invested
under the provisions of this agreement shall continue for all purposes to be a
part of the general funds of the Company, and no person other than the Company
shall by virtue of the provisions of this agreement have any interest in such
funds. To the extent that any person acquires a right to receive payments from
the Company under this agreement, such right shall be no greater than the right
of any unsecured general creditor of the Company.
7. The right of the Employee or any other person to the payment of Deferred
Compensation or other benefits under this agreement shall not be assigned,
transferred, pledged or encumbered except by will or by laws of decent and
distribution.
8. If the Board shall find that any person to whom any payment is payable under
this agreement is unable to care for his affairs because of illness or accident,
or is a minor, any payment due (unless a prior claim therefore shall have been
made by a duly appointed guardian, committee or other legal representative) may
be paid to the spouse, a child, a parent, or a brother or sister, or to any
person deemed by the Board to have incurred expense for such person otherwise
entitled to payment, in such manner and proportions as the Board may determine.
Any such payment shall be a complete discharge of the liabilities of the Company
under this agreement.
9. Nothing contained herein shall be construed as conferring upon the Employee
the right to continue in the employee of the Company as an executive or in any
other capacity.
10. Any Deferred Compensation payable under this agreement shall not be deemed
salary or other compensation to the Employee for the propose of computing
benefits for which he may be entitled under any retirement plan or other
arrangement of the Company for the benefit of its employees.
11. The Board shall have full power and authority to interpret, construe and
administer this agreement and the Board's interpretations and construction
thereof, and actions thereunder including any valuation of Deferred Compensation
account or the amount or recipient of the payment to be made therefrom, shall be
binding and conclusive on all persons for all purposes. No member of the Board
shall be liable to any person for any action taken or omitted in connection with
the interpretation or administration of this agreement unless attributable to
his own willful misconduct or lack of good faith.
12. This agreement shall be binding upon and inure to the benefit of the
Company, its successors and assigns, and the Employee and his heirs, executors,
administrators and legal representative.
13. This agreement shall be construed in accordance with and governed by the
laws of the State of Oregon.
IN WITNESS WHEREOF, the Company has caused this Deferred Bonus agreement to be
executed by its duly authorized officer and the Employee has affixed his
signature and date to this agreement as written.
SCHNITZER STEEL INDUSTRIES, INC.
/s/Robert Philip
--------------------------------
Signature
President 1/10/96
--------------------------------
Title Date
CASCADE STEEL ROLLING MILLS, INC.
/s/Edgar C. Shanks
--------------------------------
Signature
VP Taxation 1/10/96
--------------------------------
Title Date
EMPLOYEE
/s/Kurt C. Zetzsche
--------------------------------
Signature
1/10/96
--------------------------------
Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 1,604
<SECURITIES> 0
<RECEIVABLES> 20,285
<ALLOWANCES> 365
<INVENTORY> 102,057
<CURRENT-ASSETS> 133,222
<PP&E> 249,348
<DEPRECIATION> 97,004
<TOTAL-ASSETS> 347,022
<CURRENT-LIABILITIES> 38,313
<BONDS> 54,006
0
0
<COMMON> 10,389
<OTHER-SE> 209,152
<TOTAL-LIABILITY-AND-EQUITY> 347,022
<SALES> 241,262
<TOTAL-REVENUES> 241,262
<CGS> 205,449
<TOTAL-COSTS> 218,933
<OTHER-EXPENSES> (743)
<LOSS-PROVISION> 164
<INTEREST-EXPENSE> 3,001
<INCOME-PRETAX> 22,555
<INCOME-TAX> 7,527
<INCOME-CONTINUING> 15,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,028
<EPS-PRIMARY> 2
<EPS-DILUTED> 2
</TABLE>
