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, 1997 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 5,737,326 shares of Class A Common Stock, par value of $1.00
per share and 4,445,328 shares of Class B Common Stock, par value of $1.00 per
share outstanding at July 1, 1997.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at May 31, 1997
and August 31, 1996........................................................3
Consolidated Statement of Operations for the Three Months and
Nine Months Ended May 31, 1997 and 1996....................................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1996 and the Nine Months
Ended May 31, 1997.........................................................5
Consolidated Statement of Cash Flows for the
Nine Months Ended May 31, 1997 and 1996....................................6
Notes to Financial Statements..................................................7
Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................12
SIGNATURE PAGE................................................................17
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
May 31, 1997 August 31, 1996
----------------- ------------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 3,957 $ 1,896
Accounts receivable, less allowance for
doubtful accounts of $524 and $420 25,809 23,542
Accounts receivable from related parties 1,007 1,058
Inventories (Note 2) 106,505 90,746
Property held for sale (Note 6) 2,806
Deferred income taxes 5,555 3,128
Prepaid expenses and other 2,840 4,118
----------------- ------------------
TOTAL CURRENT ASSETS 148,479 124,488
----------------- ------------------
NET PROPERTY, PLANT & EQUIPMENT 153,106 150,517
OTHER ASSETS
Investment in joint venture partnerships 67,096 9,909
Advances to joint venture partnerships 8,559 4,163
Goodwill 42,534 43,445
Intangibles and other 6,971 4,967
----------------- ------------------
$ 426,745 $ 337,489
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 7) 359 254
Accounts payable 17,398 17,877
Accrued payroll liabilities 4,303 4,135
Deferred revenues 3,719 392
Current portion of environmental liabilities (Note 4) 2,368 2,202
Other accrued liabilities 12,171 6,360
----------------- ------------------
TOTAL CURRENT LIABILITIES 40,318 31,220
----------------- ------------------
DEFERRED INCOME TAXES 16,210 15,994
LONG-TERM DEBT LESS CURRENT PORTION (Notes 5 and 7) 105,031 44,475
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 4) 29,508 20,736
OTHER LONG-TERM LIABILITIES 3,183 1,251
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,803 and 5,773 shares issued and outstanding 5,803 5,773
Class B common stock--25,000 shares $1 par value
authorized, 4,445 and 4,575 shares issued and outstanding 4,445 4,575
Additional paid-in capital 111,497 113,747
Retained earnings 110,750 99,718
----------------- ------------------
232,495 223,813
----------------- ------------------
$ 426,745 $ 337,489
================= ==================
The accompanying notes are an integral part of this statement.
3
</TABLE>
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
------------------------------------ -----------------------------------
May 31, 1997 May 31, 1996 May 31, 1997 May 31, 1996
---------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
REVENUES $ 89,297 $ 86,950 $ 248,596 $ 241,262
---------------- ----------------- --------------- -----------------
COSTS AND EXPENSES:
Cost of goods sold and
other operating expenses 76,230 74,858 219,434 205,449
Selling and administrative 4,888 4,897 15,443 13,484
---------------- ----------------- --------------- -----------------
81,118 79,755 234,877 218,933
---------------- ----------------- --------------- -----------------
Income from joint ventures 2,720 836 4,500 2,484
---------------- ----------------- --------------- -----------------
INCOME FROM OPERATIONS 10,899 8,031 18,219 24,813
---------------- ----------------- --------------- -----------------
OTHER INCOME (EXPENSE):
Interest expense (1,551) (891) (3,583) (3,001)
Other income (Note 7) 3,416 (346) 4,441 743
---------------- ----------------- --------------- -----------------
1,865 (1,237) 858 (2,258)
---------------- ----------------- --------------- -----------------
INCOME BEFORE INCOME TAXES 12,764 6,794 19,077 22,555
Income tax provision (4,340) (2,243) (6,494) (7,527)
---------------- ----------------- --------------- -----------------
NET INCOME $ 8,424 $ 4,551 $ 12,583 $ 15,028
================ ================= =============== =================
EARNINGS PER SHARE $ 0.81 $ 0.44 $ 1.21 $ 1.69
================ ================= =============== =================
The accompanying notes are an integral part of this statement.
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
-------- ----------- -------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Class A common stock repurchased (41) (41) (925) (966)
Net income 20,783 20,783
Dividends paid (1,827) (1,827)
-------- ----------- -------- ----------- ------------- ------------- --------------
BALANCE AT 8/31/96 5,773 5,773 4,575 4,575 113,747 99,718 223,813
Net income 12,583 12,583
Class B common stock converted
to Class A common stock 130 130 (130) (130)
Class A common stock repurchased (100) (100) (2,250) (2,350)
Dividends paid (1,551) (1,551)
-------- ----------- -------- ----------- ------------- ------------- --------------
BALANCE AT 5/31/97 5,803 $ 5,803 4,445 $ 4,445 $ 111,497 $ 110,750 $ 232,495
======== =========== ======== =========== ============= ============= ==============
The accompanying notes are an integral part of this statement
5
</TABLE>
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For The Nine Months Ended
---------------------------------------
May 31, 1997 May 31, 1996
---------------- ----------------
OPERATIONS
<S> <C> <C>
Net income $ 12,583 $ 15,028
Noncash items included in income:
Depreciation and amortization 13,055 10,568
Deferred income taxes (2,211) (825)
Equity in earnings of joint ventures
and other investments (4,500) (2,484)
Loss (gain) on disposal of assets (65) (74)
Cash provided (used) by assets and liabilities:
Accounts receivable 64 (2,925)
Inventories (13,618) (30,204)
Prepaid expenses and other 1,855 (2,224)
Accounts payable (5,987) (52)
Deferred revenue 3,327 449
Accrued expenses 1,855 (3,708)
Environmental liabilities (861)
Other assets and liabilities (367) (2,147)
---------------- ----------------
NET CASH PROVIDED (USED) BY OPERATIONS 5,130 (18,598)
---------------- ----------------
INVESTMENTS
Payment for purchase of Proler (42,456)
Capital expenditures (10,499) (42,920)
Advances (to) from joint ventures (4,396) 318
Investments in joint ventures (47,489)
Distributions from joint ventures 66,210 1,945
Capitalization of losses on assets held for sale (1,057)
Proceeds from sale of assets 4,859 1,408
---------------- ----------------
NET CASH USED BY INVESTMENTS (34,828) (39,249)
---------------- ----------------
FINANCING:
Proceeds from sale of Class A common stock 69,850
Repurchase of Class A common stock (2,350)
Dividends declared and paid (1,551) (1,310)
Increase in long-term debt 63,526 38,216
Reduction in long-term debt (27,866) (48,903)
---------------- ----------------
NET CASH PROVIDED BY FINANCING 31,759 57,853
---------------- ----------------
NET INCREASE IN CASH 2,061 6
CASH AT BEGINNING OF PERIOD 1,896 1,598
---------------- ----------------
CASH AT END OF PERIOD $ 3,957 $ 1,604
================ ================
The accompanying notes are an integral part of this statement.
6
</TABLE>
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1997 AND 1996
(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, 1996. The results for the nine
months ended May 31, 1997 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 10,371,463 and 10,444,143 for the three
months ended May 31, 1997 and 1996, respectively, and 10,399,243 and
8,915,640 for the nine months ended May 31, 1997 and 1996,
respectively.
Note 2 - Inventories:
- --------------------
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
May 31, 1997 August 31, 1996
(Unaudited) (Audited)
------------ ---------------
<S> <C> <C>
Scrap metals $ 28,913 $ 21,006
Work in process 20,291 24,535
Finished goods 41,830 29,767
Supplies 15,471 15,438
------------ -------------
$ 106,505 $ 90,746
============ =============
</TABLE>
Scrap metal inventories are valued at LIFO; the remainder are at FIFO.
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 $7,336,000 and $8,215,000
at May 31, 1997 and August 31, 1996, respectively.
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 $1,841,000 and $2,310,000 for the three months ended May
31, 1997 and 1996, respectively, and $6,332,000 and $6,536,000 for the
nine months ended May 31, 1997 and 1996, respectively.
The Company purchased scrap metals from its joint venture operations
totaling $3,879,000 and $2,260,000 for the three months ended May 31,
1997 and 1996, respectively, and $9,019,000 and $6,281,000 for the nine
months ended May 31, 1997 and 1996, respectively.
The Company leases certain land and buildings from a real estate
company which is a related entity. The rent expense was $387,000 and
$313,000 for the three months ended May 31, 1997 and 1996,
respectively, and $1,098,000 and $942,000 for the nine months ended May
31, 1997 and 1996, respectively.
Transactions Affecting Selling and Administrative Expenses
----------------------------------------------------------
The Company performs some administrative services and provides
operation and maintenance of management information systems for certain
related parties. These services are charged to the related parties
based upon costs plus a 15% margin for overhead and profit. The
administrative charges totaled $285,000 and $136,000 for the three
months ended May 31, 1997 and 1996, respectively, and $795,000 and
$636,000 for the nine months ended May 31, 1997 and 1996, 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 for the three months ended May 31, 1996, and
$871,000 and $2,858,000 for the nine months ended May 31, 1997 and
1996, respectively. These charges were offset by income of $251,000 for
the three months ended May 31, 1996, and $747,000 and $2,883,000 for
the nine months ended May 31, 1997 and 1996, respectively. There was no
sub-charter activity during the three months ended May 31, 1997.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1997 AND 1996
(Unaudited)
Note 3 - Related Party Transactions (Continued):
- -----------------------------------------------
Transactions Affecting Property, Plant & Equipment
--------------------------------------------------
From time to time, the law firm of Ball Janik LLP, 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 $9,048,000 for the
three and nine months ended May 31, 1996, respectively. No payments to
ECC have been made in fiscal 1997.
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 May 31, 1997 aggregated $22.0 million.
A portion of the liability relates to the ongoing investigation and
cleanup of the Hylebos Waterway in Tacoma, adjacent to which MMI's
subsidiary, General Metals of Tacoma, Inc. (GMT), operates a scrap
yard. GMT, along with well over sixty other parties, has been named as
a potentially responsible party (PRP) for contaminated sediment and
alleged damage to natural resources in the waterway. GMT and five other
PRP's have entered into an Administrative Order of Consent with the
U.S. Environmental Protection Agency (EPA) to fund a pre-remedial
design study of sediment contamination and remediation alternatives.
GMT's share of the estimated $6 million study, which is expected to be
completed in 1997, is approximately $1 million. 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.
In 1996, prior to the Company's acquisition of Proler International
Corp. (Proler) (see Note 5), an independent third-party consultant was
engaged to estimate the costs to cure present and future 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 $9.7 million remained
outstanding on May 31, 1997. Also, Proler's joint venture operations
recorded additional liabilities of $4.1 million for the probable costs
to remediate their properties based upon the consultant's estimates.
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 site investigations
of this property and, in December 1996, added the site to the "National
Priorities List". MRI, 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.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1997 AND 1996
(Unaudited)
Note 4 - Environmental Liabilities (Continued):
- ----------------------------------------------
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
recent 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.
Note 5 - Acquisition of Proler International Corp.:
- --------------------------------------------------
On November 29, 1996, PIC Acquisition Corp. (PIC), a wholly owned
subsidiary of the Company, acquired 4,079,000 shares of common stock of
Proler International Corp. (Proler), representing approximately 86% of
the outstanding shares of Proler, for $9 cash per share pursuant to a
tender offer for all of the outstanding shares of common stock of
Proler. Subsequent to November 30, 1996, PIC purchased an additional
342,600 shares, thereby increasing its ownership to approximately 94%
of the outstanding Proler shares. On December 6, 1996, the Company
completed the merger of PIC with Proler and, as a result, Proler became
a wholly-owned subsidiary of the Company. As a result of the merger,
all remaining outstanding shares of Proler common stock were converted
into the right to receive the same $9 per share in cash paid in the
tender offer. The Company borrowed funds to pay for the Proler shares
under its existing credit facilities.
The Company has accounted for this acquisition using the purchase
method. Accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based on their fair values
as of the effective date of the acquisition.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Proler as though
the acquisition had occurred at the beginning of the periods shown.
For the Nine Months Ended
-------------------------
May 31, 1997 May 31, 1996
------------ ------------
(in thousands)
Revenues $ 251,742 $ 251,733
========== ==========
Net income $ 5,964 $ 8,801
========== ==========
Earnings per share $ .57 $ .99
========== ==========
During the nine months ended May 31, 1997, Proler recorded a provision
for environmental liabilities of $8.6 million.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1997 AND 1996
(Unaudited)
Note 5 - Acquisition of Proler International Corp. (Continued):
- --------------------------------------------------------------
These pro forma results have been prepared for comparative purposes
only and include certain adjustments to give effect for the
acquisition, together with related income tax effects. They do not
purport to be indicative of the results of operations which actually
would have resulted had the combination been in effect at the beginning
of the periods presented or of future results of operations of the
consolidated entities.
Note 6 - Property Held for Sale:
- -------------------------------
Certain properties which the Company acquired when it purchased Proler
(see Note 5) are being held for sale. The assets have been recorded at
their estimated fair market values. The Company capitalized losses from
operations and ongoing operating expenses, related to the maintenance
of the properties, which have been incurred since the Company's
acquisition of Proler, aggregating $1,057,000. The Company expects to
dispose of the assets within a year.
Note 7 - Long-term Debt:
- -----------------------
In conjunction with the acquisition of Proler (see Note 5), the Company
assumed a $25,000,000 note due to Proler's bank. Subsequent to the
acquisition, the Company refinanced this balance under its existing
credit facilities.
In February 1997, the Company issued tax-exempt economic development
revenue bonds aggregating $7.7 million to finance certain industrial
facilities owned by its Cascade Steel Rolling Mills, Inc. subsidiary.
The bonds, which were issued through the State of Oregon, are
guaranteed by a letter of credit issued by a bank on behalf of the
Company. Interest is currently payable monthly at a variable rate,
which was 4.05% at May 31, 1997. The bonds are due on January 1, 2021.
In February 1997, the Company entered into an interest rate agreement
for the sole purpose of locking in the interest rate on a planned
private placement of debt. The Company subsequently decided against
pursuing the private placement in April 1997 and, thus, recognized the
deferred gain on the agreement of approximately $3 million. This amount
is included in other income in the accompanying statement of operations
for the three and nine months ended May 31, 1997.
Note 8 - Subsequent Events:
- --------------------------
On July 14, 1997, the Board of Directors declared a 5 cent per share
dividend on Class A and Class B common stock payable on August 21, 1997
to holders of record on August 6, 1997.
In June 1997, the Company increased its revolving credit facility to
$200 million and extended the maturity of the facility to June 2002.
<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, Alaska and California. Additionally, as a result of
its acquisition of Proler International Corp. (Proler) effective
November 29, 1996 (see Note 5 to the accompanying consolidated
financial statements), through joint ventures, the Company participates
in the management of an additional 15 scrap collection and processing
facilities, including export terminals in Los Angeles, California;
Everett, Massachusetts; Providence, Rhode Island and Jersey City, New
Jersey. Steel Operations operates a mini-mill in Oregon which produces
finished steel products and maintains mill depots in California.
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
-------------------------- -------------------------
May 31, 1997 May 31, 1996 May 31, 1997 May 31, 1996
------------ ------------ ------------ ------------
(unaudited)
REVENUES:
Scrap Operations:
<S> <C> <C> <C> <C>
Ferrous sales $ 51,634 $ 50,991 $ 143,223 $ 159,589
Nonferrous sales 3,175 3,317 7,877 8,380
Other sales 5,456 1,762 11,738 5,393
---------- ---------- ---------- ----------
Total sales 60,265 56,070 162,838 173,362
Ferrous sales to Steel Operations (18,161) (13,444) (40,909) (41,304)
Steel Operations 47,193 44,324 126,667 109,204
---------- ---------- ---------- ----------
Total $ 89,297 $ 86,950 $ 248,596 $ 241,262
========== ========== ========== ==========
INCOME FROM OPERATIONS:
Scrap Operations $ 8,261 $ 8,121 $ 15,126 $ 22,035
Steel Operations 1,518 740 3,712 4,837
Joint ventures 2,720 836 4,500 2,484
Corporate expense & eliminations (1,600) (1,666) (5,119) (4,543)
---------- ---------- ---------- ----------
Total $ 10,899 $ 8,031 $ 18,219 $ 24,813
========== ========== ========== ==========
NET INCOME $ 8,424 $ 4,551 $ 12,583 $ 15,028
========== ========== ========== ==========
</TABLE>
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
May 31, 1997 May 31, 1996 May 31, 1997 May 31, 1996
------------ ------------ ------------ ------------
(unaudited)
SHIPMENTS:
SCRAP OPERATIONS Ferrous scrap (long tons):
<S> <C> <C> <C> <C>
To Steel Operations 149 114 353 343
To unaffiliated customers 221 237 722 747
------- ------- ------- -------
Total 370 351 1,075 1,090
======= ======= ======= =======
Number of scrap export shipments 6 7 21 22
======= ======= ======= =======
Nonferrous scrap (pounds) 6,694 7,438 18,610 19,148
======= ======= ======= =======
STEEL OPERATIONS
Finished steel products (short tons) 140 134 378 322
======= ======= ======= =======
</TABLE>
REVENUES. For the three and nine months ended May 31, 1997,
consolidated revenues increased $2.3 million (3%) and $7.3 million
(3%), respectively, compared with the same periods last year.
Scrap Operations' revenues, including sales to the Company's Steel
Operations, increased by $4.2 million (7%) for the three months ended
May 31, 1997, reflecting higher ferrous scrap shipments partially
offset by lower average selling prices. Ferrous shipments to domestic
customers, primarily the Company's Steel Operations, increased by
44,000 tons while ferrous scrap exported decreased by 25,000 tons due
to the timing of shipments. The Company made six export shipments this
quarter compared with seven for the third quarter of fiscal 1996. The
average selling price per ton of ferrous scrap declined $5 to $140, but
rose from the average selling price of $131 per ton in the second
quarter of fiscal 1997. Ferrous scrap export selling prices on sales
booked so far during the fourth quarter of fiscal 1997 are $8 per ton
higher than the average price realized during the third quarter.
For the nine months ended May 31, 1997, Scrap Operations' revenues,
including sales to Steel Operations, were $10.5 million (6%) less than
the same period last year as a result of lower tonnage shipped and
lower average selling prices. Due predominantly to the timing of
ferrous export shipments, foreign sales declined 47,000 tons, which was
partially offset by increased sales to domestic customers of 32,000
tons. The average ferrous scrap selling price per ton declined by $13
to $133 per ton. The Company believes that, due to a temporary build-up
in scrap inventories by scrap processors and steel mills caused by a
temporary slackening in demand, the average prices for ferrous scrap on
the world market declined during the fourth quarter of fiscal 1996
through the second quarter of fiscal 1997.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Steel Operations' revenues increased $2.9 million (6%) for the three
months ended May 31, 1997 compared with the same quarter in fiscal
1996. The increase resulted from a 5% increase in shipments to 140,000
tons and a $6 per ton increase in the average selling price to $337 per
ton. During the third quarter of fiscal 1997, Steel Operations sold
approximately 5,300 tons of coiled reinforcing bar (rebar) and wire rod
products manufactured by the Company's new rod block, which became
operational at the end of the previous quarter. The increase in the
average selling price per ton is primarily attributable to an increase
in sales of higher value merchant bar products offset by a decline in
sales of lower priced rebar, although the average selling prices for
most products did increase slightly.
Steel Operation's revenues for the nine months ended May 31, 1997
reflect an increase of $17.5 million (16%) over the same period last
year. Tons of finished steel shipped increased by 56,000 tons (17%),
due in part to the addition of a new rolling mill in February 1996.
However, the effect of these additional sales on revenues was partially
offset by an overall decline in the average selling price of finished
steel from $339 to $335 per ton. The average selling prices for all
product categories declined while the mix of products sold remained
relatively unchanged. The expansion of steel-making capacity by the
Company's competitors and an influx of finished steel shipments from
Mexico into Southern California have been predominantly responsible for
the decline in average selling prices in the market on the U.S. West
Coast.
COST OF GOODS SOLD. Overall, the total cost of goods sold increased
$1.4 million (2%) during the third quarter of fiscal 1997 compared with
the third quarter of fiscal 1996. Cost of goods sold as a percentage of
revenues decreased from 86% to 85% and gross profit increased by $1.0
million (8%). For the nine months ended May 31, 1997 compared with the
same period last year, consolidated cost of goods sold increased $14.0
million (7%). Cost of goods sold as a percentage of revenues increased
from 85% to 88% and gross profit declined $6.7 million (19%).
For the three months ended May 31, 1997, Scrap Operations' average cost
of goods sold per ton of ferrous scrap declined $5 to $114. The
favorable impact of this decline was partially offset by the effect of
lower average selling prices, resulting in an increase in cost of goods
sold as a percentage sales from 81% to 82%. Gross profit increased by
$.3 million, however, due to the increase in shipments.
Scrap Operations' average ferrous scrap cost of goods sold per ton
declined by $7 to $116 for the nine months ended May 31, 1997. The
decline in average selling prices per ton more than outweighed this
reduction, resulting in an increase in cost of goods sold as a
percentage of revenues from 83% to 86%. The decline in average selling
prices and ferrous scrap shipments caused total gross profit for Scrap
Operations to decline by $6.1 million (21%) to $23.4 million.
Scrap Operations' cost of goods sold for the nine months ended May 31,
1997 was reduced by $.9 million due to the elimination of an
environmental reserve for property that the Company acquired as part of
the Manufacturing Management, Inc. (MMI) acquisition in March 1995. The
Company was required to provide an indemnity to cover any environmental
issues related to the property when it sold the property subsequent to
the acquisition. During the second quarter of fiscal 1997, the
Company's responsibilities under the indemnity agreement were relieved.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Steel Operations' average cost of goods sold per ton remained virtually
unchanged for the quarter ended May 31, 1997 compared with the same
quarter last year. Reductions in the average cost for most product
categories was offset by a shift in the mix of products sold to higher
cost products. The increase in average selling prices resulted in a
decrease in cost of goods sold as a percentage of sales from 97% to 95%
and, along with the increase in tons sold, contributed to an increase
in gross profit of $.7 million to $2.2 million.
For the nine months ended May 31, 1997, Steel Operations' average cost
of goods sold per ton increased 1% to $320. Lower average selling
prices for the period resulted in an increase in cost of goods sold as
a percentage of sales from 94% to 95%. The lower prices, partially
offset by the impact of increased tonnage sold, caused the gross profit
to decline by $1.0 million to $5.8 million.
SELLING AND ADMINISTRATIVE EXPENSES. For the nine months ended May 31,
1997, selling and administrative expenses increased predominantly as a
result of increases to accommodate corporate growth and the Proler
acquisition.
INCOME FROM JOINT VENTURES. Income from joint ventures for the three
and nine months ended May 31, 1997 increased $1.9 million and $2.0
million, respectively, predominantly due to the acquisition of the
Proler joint ventures (see Note 5 to the consolidated financial
statements). Additionally, during the three months ended May 31, 1997,
the Company's joint venture which operates self-service used auto parts
yards experienced increased sales over the same period last year due to
improved weather conditions. For the nine months ended May 31, 1997,
income from the Company's industrial plant reclamation and asbestos
removal joint ventures declined because those joint ventures had major
projects in progress during the first quarter of fiscal 1996 which were
completed during that quarter.
INTEREST EXPENSE. Interest expense for the third quarter of fiscal 1997
increased $.7 million because of debt incurred to finance the
acquisition of Proler. For the nine months ended May 31, 1997, interest
expense increased $.6 million as a result of slightly higher average
borrowings and higher average interest rates. The increase in
borrowings due to the acquisition of Proler was offset by lower average
borrowings during the first quarter of fiscal 1997. The Company used
funds generated from an offering of its common stock in February 1996
to pay down debt.
LIQUIDITY AND CAPITAL RESOURCES. For the nine months ended May 31,
1997, cash generated by operations was $5.1 million compared with cash
used by operations of $18.6 million for the same period last year. The
positive cash flow this year-to-date is predominantly attributable to
the fact that inventories increased less this period than during the
same period last year. Since August 31, 1996, Steel Operations'
inventories increased by $7.9 million due to an increase in finished
goods, partially offset by decreases in scrap and billet inventories.
Scrap Operations' inventories also increased $7.9 million during the
same period.
Capital expenditures for the nine months ended May 31, 1997 aggregated
$10.5 million compared with $42.9 million during the same period last
year. Last year's expenditures reflect significant cash payments made
in conjunction with the construction of the new rolling mill, which was
commissioned in February 1996. The final phase of the new mill, a wire
rod block, was completed in February 1997. The Company expects to spend
approximately $7 million on capital improvements during the rest of
fiscal 1997.
In March 1995, the Company purchased all of the outstanding stock of
MMI. Prior to the acquisition, MMI established a reserve of
approximately $24 million to reflect the cost to cure environmental
liabilities, which reserve was carried over to the Company's balance
sheet. Additionally, in conjunction with the Company's acquisition of
Proler in November 1996, the Company recorded environmental liabilities
of $9.8 million, representing the reserve that Proler had established
prior to the acquisition. At May 31, 1997, the remaining balance of
these reserves aggregated $31.9 million. The Company expects to require
significant future cash outlays as it incurs the actual costs relating
to the remediation of such environmental liabilities.
On June 2, 1997, the Company completed a renegotiation of its revolving
credit agreement whereby it increased the facility to $200 million and
extended the maturity of the facility to June 2002. As of May 31, 1997,
the Company also had additional lines of credit available of $55
million, $35 million of which was uncommitted. In the aggregate, the
Company had borrowings outstanding under these lines of $94.7 million
as of that date. The increase in borrowings outstanding under the lines
since August 31, 1996 is predominantly due to the acquisition of Proler
in November 1996 offset by additional financing of approximately $7.7
million related to the Company's Steel Operations.
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. In the longer term, the
Company may seek to finance business expansion 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 that involve a number of risks and uncertainties. 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. Additionally,
among 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 and the
uncertainty of the Company being able to complete future acquisitions.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHNITZER STEEL INDUSTRIES, INC.
(Registrant)
Date: July 15, 1997 By:/s/Barry A. Rosen
--------------- ------------------------
Barry A. Rosen
Vice President, Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS 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-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 3,957
<SECURITIES> 0
<RECEIVABLES> 26,333
<ALLOWANCES> 524
<INVENTORY> 106,505
<CURRENT-ASSETS> 148,479
<PP&E> 263,406
<DEPRECIATION> 110,300
<TOTAL-ASSETS> 426,745
<CURRENT-LIABILITIES> 40,318
<BONDS> 105,390
0
0
<COMMON> 10,248
<OTHER-SE> 222,247
<TOTAL-LIABILITY-AND-EQUITY> 426,745
<SALES> 248,596
<TOTAL-REVENUES> 248,596
<CGS> 219,434
<TOTAL-COSTS> 234,877
<OTHER-EXPENSES> (4,441)
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<INTEREST-EXPENSE> 3,583
<INCOME-PRETAX> 19,077
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<NET-INCOME> 12,583
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.21
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