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 February 28, 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 5,902,626 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 April 1, 1997.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
--------------------------------
INDEX
PAGE NO.
----------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at February 28, 1997
and August 31, 1996........................................................3
Consolidated Statement of Operations for the Three Months and
Six Months Ended February 28, 1997 and February 29, 1996...................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1996 and the Six Months
Ended February 28, 1997....................................................5
Consolidated Statement of Cash Flows for the
Six Months Ended February 28, 1997 and February 29, 1996...................6
Notes to Financial Statements..................................................7
Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................12
PART II. OTHER INFORMATION
Submission of Matters to a Vote of Security Holders...........................17
Exhibits and Reports on Form 8-K..............................................18
SIGNATURE PAGE................................................................19
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
February 28, August 31,
1997 1996
--------------- ---------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 6,921 $ 1,896
Accounts receivable, less allowance for
doubtful accounts of $523 and $420 26,425 23,542
Accounts receivable from related parties 1,429 1,058
Inventories (Note 2) 97,656 90,746
Property held for sale (Note 6) 2,519
Deferred income taxes 5,555 3,128
Prepaid expenses and other 4,753 4,118
--------------- ---------------
TOTAL CURRENT ASSETS 145,258 124,488
--------------- ---------------
NET PROPERTY, PLANT & EQUIPMENT 154,884 150,517
OTHER ASSETS
Investment in joint venture partnerships 72,711 9,909
Advances to joint venture partnerships 1,359 4,163
Goodwill 43,361 43,445
Intangibles and other 6,439 4,967
--------------- ---------------
$ 424,012 $ 337,489
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 7) 357 254
Accounts payable 20,801 17,877
Accrued payroll liabilities 3,515 4,135
Deferred revenues 3,595 392
Current portion of environmental liabilities (Note 4) 2,463 2,202
Other accrued liabilities 9,502 6,360
--------------- ---------------
TOTAL CURRENT LIABILITIES 40,233 31,220
--------------- ---------------
DEFERRED INCOME TAXES 16,210 15,994
LONG-TERM DEBT LESS CURRENT PORTION (Notes 5 and 7) 107,723 44,475
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 4) 29,635 20,736
OTHER LONG-TERM LIABILITIES 3,272 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, 5,903 and 5,773 shares issued and outstanding 5,903 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 113,747 113,747
Retained earnings 102,844 99,718
--------------- ---------------
226,939 223,813
--------------- ---------------
$ 424,012 $ 337,489
=============== ===============
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 Ended For The Six Months Ended
------------------------------------ -----------------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES $ 76,599 $ 82,721 $ 159,299 $ 154,312
COSTS AND EXPENSES:
Cost of goods sold and
other operating expenses 69,062 70,436 143,261 130,474
Selling and administrative 5,823 4,269 10,498 8,704
---------------- ----------------- ---------------- ----------------
74,885 74,705 153,759 139,178
Income from joint ventures 1,053 193 1,780 1,649
---------------- ----------------- ---------------- ----------------
INCOME FROM OPERATIONS 2,767 8,209 7,320 16,783
---------------- ----------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (1,503) (1,177) (2,032) (2,110)
Other income 927 1,036 1,025 1,089
---------------- ----------------- ---------------- ----------------
(576) (141) (1,007) (1,021)
---------------- ----------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 2,191 8,068 6,313 15,762
Income tax provision (813) (2,668) (2,154) (5,284)
---------------- ----------------- ---------------- ----------------
NET INCOME $ 1,378 $ 5,400 $ 4,159 $ 10,478
================ ================= ================ ================
EARNINGS PER SHARE $ 0.13 $ 0.65 $ 0.40 $ 1.29
================ ================= ================ ================
The accompanying notes are an integral part of this statement
4
</TABLE>
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
(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 4,159 4,159
Class B common stock converted
to Class A common stock 130 130 (130) (130)
Dividends paid (1,033) (1,033)
-------- ----------- -------- ---------- ------------- -------------- --------------
BALANCE AT 2/28/97 5,903 $ 5,903 4,445 $ 4,445 $ 113,747 $ 102,844 $ 226,939
======== =========== ======== ========== ============= ============== ==============
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 Six Months Ended
---------------------------------------
February 28, February 29,
1997 1996
---------------- ----------------
OPERATIONS
<S> <C> <C>
Net income $ 4,159 $ 10,478
Noncash items included in income:
Depreciation and amortization 8,600 6,918
Deferred income taxes (2,211) (2,415)
Equity in earnings of joint ventures
and other investments (1,780) (1,648)
Loss (gain) on disposal of assets (32) 34
Cash provided (used) by assets and liabilities:
Accounts receivable (603) 587
Inventories (4,769) (20,122)
Prepaid expenses and other (58) (2,501)
Accounts payable (2,584) 2,091
Deferred revenue 3,203 (3,474)
Accrued expenses (2,073) (4,133)
Environmental liabilities (639)
Other assets and liabilities 1,049 (2,198)
---------------- ----------------
NET CASH PROVIDED (USED) BY OPERATIONS 2,262 (16,383)
---------------- ----------------
INVESTMENTS
Payment for purchase of Proler (42,456)
Capital expenditures (8,079) (35,348)
Advances (to) from joint ventures 2,804 (930)
Investments in joint ventures (27,378)
Distributions from joint ventures 36,608 1,520
Capitalization of losses on assets held for sale (552)
Proceeds from sale of assets 4,498 1,286
---------------- ----------------
NET CASH USED BY INVESTMENTS (34,555) (33,472)
---------------- ----------------
FINANCING:
Proceeds from sale of Class A common stock 69,850
Dividends declared and paid (1,033) (789)
Increase in long-term debt 63,525 29,808
Reduction in long-term debt (25,174) (48,864)
---------------- ----------------
NET CASH PROVIDED BY FINANCING 37,318 50,005
---------------- ----------------
NET INCREASE IN CASH 5,025 150
CASH AT BEGINNING OF PERIOD 1,896 1,598
---------------- ----------------
CASH AT END OF PERIOD $ 6,921 $ 1,748
================ ================
The accompanying notes are an integral part of this statement.
6
</TABLE>
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 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 six
months ended February 28, 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 10,413,655 and 8,338,336 for the three
months ended February 28, 1997 and February 29, 1996, respectively, and
10,412,803 and 8,142,857 for the six months ended February 28, 1997 and
February 29, 1996, respectively.
NOTE 2 - INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
February 28, August 31,
1997 1996
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Scrap metals $ 22,425 $ 21,006
Work in process 11,400 24,535
Finished goods 47,236 29,767
Supplies 16,595 15,438
--------- ----------
$ 97,656 $ 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 and $8,215 at
February 28, 1997 and August 31, 1996, respectively.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(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 $2,441,000 and $2,613,000 for the three months ended
February 28, 1997 and February 29, 1996, respectively, and $4,503,000
and $4,266,000 for the six months ended February 28, 1997 and February
29, 1996, respectively.
The Company purchased scrap metals from its joint venture operations
totaling $2,165,000 and $1,792,000 for the three months ended February
28, 1997 and February 29, 1996, respectively, and $4,266,000 and
$4,021,000 for the six months ended February 28, 1997 and February 29,
1996, respectively.
The Company leases certain land and buildings from a real estate
company which is a related entity. The rent expense was $357,000 and
$324,000 for the three months ended February 28, 1997 and February 29,
1996, respectively, and $711,000 and $629,000 for the six months ended
February 28, 1997 and February 29, 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 $362,000 and $366,000 for the three
months ended February 28, 1997 and February 29, 1996, respectively, and
$510,000 and $500,000 for the six months ended February 28, 1997 and
February 29, 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. There was no sub-charter activity
during the three months ended February 28, 1997 and February 29, 1996.
For the six months ended February 28, 1997 and February 28, 1996,
charges incurred for sub-charter activities were $870,000 and
$2,590,000, respectively, offset by income of $747,000 and $2,634,000,
respectively.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 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 $5,927,000 and $8,940,000 for the
three and six months ended February 29, 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 February 28, 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 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
PRPs have entered into an Administrative Order of Consent with the U.S.
Environmental Protection Agency (EPA) to fund a 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. Under AICPA Statement of Position No. 96-1, 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 this reserve to its financial statements upon acquiring
Proler and it remained outstanding on February 28, 1997. Also, Proler's
joint venture operations recorded additional liabilities of $4.1
million for the probable costs to remediate its properties based upon
the consultant's estimates.
Between 1982 and 1987, MRI Corporation (MRI), a subsidiary of Proler,
operated a tin can shredding and detinning facility in Tampa, Florida.
In 1989 and 1992, the EPA conducted a site investigation 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.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 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 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, as
part of a recent lease renewal with the Port of Los Angeles, 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.
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.
<TABLE>
<CAPTION>
For the Six Months Ended
February 28, February 29,
1997 1996
---------- ------------
(in thousands)
<S> <C> <C>
Revenues $ 162,445 $ 161,232
========= =========
Net (loss) income $ (2,460) $ 6,881
========= =========
(Loss) earnings per share $ (0.24) $ 0.85
========== =========
</TABLE>
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(Unaudited)
NOTE 5 - ACQUISITION OF PROLER INTERNATIONAL CORP. (CONTINUED):
During the six months ended February 28, 1997, Proler recorded a
provision for environmental liabilities of $8.6 million.
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 $552,000. 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 Cascade Steel Rolling Mills, Inc. 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 3.45% at February 28,
1997. The bonds are due on January 1, 2021.
NOTE 8 - SUBSEQUENT EVENTS:
On April 14, 1997 the Board of Directors declared a 5 cent per share
dividend on Class A and Class B common stock payable on May 21, 1997 to
holders of record on May 6, 1997.
In April 1997, the Company issued a private placement memorandum in an
effort to raise $100 million by offering senior unsecured notes. The
terms of the debt have not yet been finalized. In anticipation of the
debt issuance, the Company entered into an interest rate swap agreement
in February 1997. As of February 28, 1997, the deferred gain related to
the agreement was not material.
<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 Six Months Ended
-------------------------------- ---------------------------
2/28/97 2/29/96 2/28/97 2/29/96
----------- ---------- --------- ----------
(unaudited)
REVENUES:
Scrap Operations:
<S> <C> <C> <C> <C>
Ferrous sales $ 44,400 $ 59,345 $ 91,589 $ 108,598
Nonferrous sales 2,539 2,728 4,702 5,623
Other sales 4,476 1,715 6,282 3,071
---------- ---------- ---------- ----------
Total sales 51,415 63,788 102,573 117,292
Ferrous sales to Steel Operations (10,447) (12,172) (22,748) (27,860)
Steel Operations 35,631 31,105 79,474 64,880
---------- ---------- ---------- -----------
Total $ 76,599 $ 82,721 $ 159,299 $ 154,312
========== ========== ========== ===========
INCOME FROM OPERATIONS:
Scrap Operations $ 2,593 $ 7,586 $ 6,865 $ 13,914
Steel Operations 1,031 1,582 2,194 4,100
Joint ventures 1,053 193 1,780 1,649
Corporate expense & eliminations (1,910) (1,152) (3,519) (2,880)
---------- ---------- ---------- -----------
Total $ 2,767 $ 8,209 $ 7,320 $ 16,783
========== ========== ========== ===========
NET INCOME $ 1,378 $ 5,400 $ 4,159 $ 10,478
========== ========== ========== ===========
</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 Six Months Ended
---------------------------- ---------------------------
2/28/97 2/29/96 2/28/97 2/29/96
-------- --------- ---------- ------------
(unaudited)
SHIPMENTS:
SCRAP OPERATIONS Ferrous scrap (long tons):
<S> <C> <C> <C> <C>
To Steel Operations 94 103 204 229
To unaffiliated customers 246 311 501 511
-------- --------- ----------- -----------
Total 340 414 705 740
========= ========= =========== ===========
Number of scrap export shipments 7 10 15 15
========= ======== =========== ===========
Nonferrous scrap (pounds) 5,826 5,938 11,916 11,710
========= ======== =========== ===========
STEEL OPERATIONS
Finished steel products (short tons) 105 90 238 188
========= ========== =========== ===========
</TABLE>
REVENUES. For the three and six months ended February 28, 1997,
consolidated revenues decreased $6.1 million (7%) and increased $5.0
million (3%), respectively, compared with the same periods last year.
Scrap Operations' revenues declined while revenues generated by Steel
Operations increased for the second quarter of fiscal 1997 and
year-to-date.
Revenues from Scrap Operations before intercompany eliminations
decreased by $12.4 million (19%) for the three months ended February
28, 1997, reflecting lower ferrous scrap shipments and average selling
prices. Ferrous sales decreased $14.9 million (25%) to $44.4 million.
Due primarily to the timing of ferrous scrap export shipments, the
Company's foreign sales declined by 81,200 tons (29%). Shipments to the
Company's unaffiliated domestic customers increased by 16,700 tons,
offsetting a slight decrease in shipments to Steel Operations. Due to
what the Company believes to be a temporary build-up in scrap
inventories by steel mills, average selling prices for ferrous scrap on
the world market have declined. The Company's average selling price for
ferrous scrap declined $13 to $131 per ton. Ferrous scrap export
selling prices on sales booked so far during the third quarter of
fiscal 1997 are over $13 per ton higher than the average price realized
during the second quarter.
For the six months ended February 28, 1997, Scrap Operations' revenues,
before intercompany eliminations, were $14.7 million (13%) less than
the same period last year as a result of lower average selling prices
and tonnage shipped. Ferrous scrap sales to unaffiliated customers
decreased $11.9 million (15%) as shipments to unaffiliated customers
decreased by 9,400 tons (2%). Although the Company shipped fifteen bulk
exports, which was consistent with last year, the average tons per
shipment were lower. The average ferrous scrap selling price per ton
declined by $17 to $130. Total sales to Steel Operations declined by
25,600 tons due to Steel Operations' efforts to reduce scrap inventory
levels.
Steel Operations' revenues increased $4.5 million (15%) for the three
months ended February 28, 1997 compared with the same quarter in fiscal
1996. The increase resulted from a 17% increase in shipments to 105,200
tons, partially offset by a decrease in the average selling price from
$345 to $339 per ton. The addition of a new rolling mill in February
1996 has enabled the Company to ship more tons. While average selling
prices for all product categories declined, the impact on the overall
average selling price per ton was somewhat mitigated by a change in
product mix toward more higher priced merchant bar products. 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 West Coast.
For the six months ended February 28, 1997, revenues generated by Steel
Operations increased 22% to $79.5 million because of the addition of
the new rolling mill. Finished steel shipments increased 27% (49,900
tons) to 238,100 tons. A decline in the average selling price from $345
to $334 per ton, however, offset some of the impact of the higher
shipments. The average selling price for all product categories
decreased and the mix of products sold changed slightly to emphasize
more lower priced reinforcing bar (rebar) products, resulting in the
overall decline in the average selling price. The capacity expansion by
the Company's competitors and influx of finished steel shipments from
Mexico accounted for the decline in average selling prices for the six
months ended February 28, 1997 as well.
COST OF GOODS SOLD. Overall, cost of goods sold decreased $1.4 million
(2%) during the second quarter of fiscal 1997 compared with the second
quarter of fiscal 1996. Cost of goods sold as a percentage of revenues
increased from 85% to 90% and gross profit declined by $4.7 million
(39%) due to the decline in average selling prices realized by both
Scrap and Steel Operations. For the six months ended February 28, 1997,
compared with the same period last year, consolidated cost of goods
sold increased $12.8 million (10%). Cost of goods sold as a percentage
of revenues increased from 85% to 90% for this period as well and gross
profit declined $7.8 million (33%), again due to a decrease in the
average selling prices for steel and scrap products.
For the three months ended February 28, 1997, Scrap Operations' average
cost of goods sold per ton of ferrous scrap remained unchanged at $122
per ton. However, cost of goods sold as a percentage of revenues
increased from 84% to 89% because of the reduction in average selling
prices. Gross profit declined $4.5 million (44%) to $5.8 million due to
the impact of lower average selling prices and lower shipments.
As part of its acquisition of MMI, the Company acquired a property
which it subsequently sold to a related party. The Company had recorded
an environmental reserve for the property when it was acquired. When
the Company sold the property, the Company was required to provide an
indemnity to cover any environmental issues. During the second quarter
of fiscal 1997, the Company's responsibilities under the indemnity
agreement were relieved and the Company recognized the remaining
environmental reserve of $.9 million as a reduction of cost of goods
sold for that period.
Scrap Operations' average ferrous scrap cost of goods sold for the
fiscal year-to-date as of February 28, 1997 declined $7 to $118 per
ton. The decline in average selling prices per ton resulted in an
increase in cost of goods sold as a percentage of revenues from 84% to
88%. The lower average selling prices, along with lower shipments,
resulted in a $6.4 million (34%) decrease in gross profit to $12.5
million.
Steel Operations' average cost of goods sold per ton remained virtually
unchanged for the quarter ended February 28, 1997 compared with the
same quarter last year despite the shift in mix to higher cost merchant
bar products. The decline in selling prices resulted in an increase in
cost of sales as a percentage of revenues from 93% to 95% and caused a
decline in gross profit of 19% to $1.7 million. An increase in finished
steel shipments partially mitigated the impact of lower prices on the
gross profit.
For the six months ended February 28, 1997, Steel Operations' average
cost of goods sold per ton increased 1% to $319. Lower average selling
prices for finished steel shipments reduced the gross profit by 33% to
$3.5 million and resulted in an increase in cost of sales as a
percentage of revenues from 92% to 96%. Again, higher shipments
partially offset the impact that lower prices had on the total gross
profit.
SELLING AND ADMINISTRATIVE EXPENSES. For the three and six months ended
February 28, 1997, selling and administrative expenses increased
predominantly as a result of increases in staffing to accommodate
corporate growth and the Proler acquisition.
INCOME FROM JOINT VENTURES. Income from joint ventures for the three
and six months ended February 28, 1997 increased $.9 million and $.1
million, respectively, predominantly due to the acquisition of the
Proler joint ventures (see Note 5 to the consolidated financial
statements). For the six months ended February 28, 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 second quarter of fiscal
1997 increased $.3 million to $1.5 million because of debt incurred to
finance the acquisition of Proler. For the six months ended February
28, 1997, interest expense declined as a result of lower average
borrowings for the first quarter of fiscal 1997, as the Company used
funds generated from operations and proceeds from an offering of its
common stock in February 1996 to pay down debt. The decline was largely
offset, however, by additional interest incurred on debt incurred to
finance the Proler acquisition.
LIQUIDITY AND CAPITAL RESOURCES. For the six months ended February 28,
1997, cash generated by operations was $2.3 million compared with cash
used by operations of $16.4 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 $5.4 million, due to decreases in scrap and
billet inventories offset by an increase in finished goods. Scrap
Operations inventories increased $1.4 million.
Capital expenditures for the six months ended February 28, 1997
aggregated $8.1 million compared with $35.3 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 $12 million on capital improvements
during the rest of fiscal 1997.
In March 1995, the Company purchased all of the outstanding stock of
Manufacturing Management, Inc. (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. As of February
28, 1997, the remaining balance of these reserves aggregated $32.1
million. The Company expects to require significant future cash outlays
as it incurs the actual costs relating to the remediation of such
environmental liabilities.
At February 28, 1997, the Company had a $100 million unsecured
revolving credit facility which expires in March 2000 and 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 $97.5 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. The Company is currently seeking to raise $100 million through a private
placement of senior notes to take advantage of currently available interest
rates. The proceeds from the placement will be used to repay existing bank debt
and for general corporate purposes, including potential acquisitions. The terms
of the notes have not yet been finalized. Additionally, the Company is currently
renegotiating to extend the term of its $100 million revolving credit facility.
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The 1997 annual meeting of the shareholders was held on January 6,
1997. Holders of 3,392,577 shares of the Company's Class A common
stock, entitled to one vote per share, and 4,550,878 shares of the
Company's Class B common stock, entitled to ten votes per share, were
present in person or by proxy at the meeting.
(b) Leonard Schnitzer, Robert W. Philip, Kenneth M. Novack, Gary
Schnitzer, Dori Schnitzer, Carol S. Lewis, Jean S. Reynolds, Manuel
Schnitzer, Robert S. Ball, William A. Furman and Ralph R. Shaw were
elected Directors of the Company.
(c) The meeting was called for the following purposes:
1. To elect Leonard Schnitzer, Robert W. Philip, Kenneth M. Novack,
Gary Schnitzer, Dori Schnitzer, Carol S. Lewis, Jean S.
Reynolds, Manuel Schnitzer, Robert S. Ball, William A. Furman
and Ralph R. Shaw as Directors of the Company.
This proposal was approved as follows:
Votes For Votes Withheld
--------- --------------
Leonard Schnitzer 49,362,307 20,350
Robert W. Philip 49,362,507 20,150
Kenneth M. Novack 49,362,507 20,150
Gary Schnitzer 49,362,507 20,150
Dori Schnitzer 49,362,507 20,150
Carol S. Lewis 49,360,307 22,350
Jean S. Reynolds 49,283,807 98,850
Manuel Schnitzer 48,984,070 98,587
Robert S. Ball 49,362,307 20,350
William A. Furman 49,060,770 21,887
Ralph R. Shaw 49,365,307 17,350
2. To approve the proposed Amendment of the 1993 Stock Incentive
Plan.
This proposal was approved by the stockholders with 48,320,346
votes cast for and 322,611 votes cast against. There were 23,175
abstentions and 716,525 broker non-votes.
3. To approve and ratify the appointment of Price Waterhouse LLP as
the independent auditors of the Corporation.
This proposal was approved by the stockholders with 49,377,133
votes cast for and 1,044 votes cast against. There were 4,480
abstentions and 0 broker non-votes.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
A Form 8-K was filed on December 13, 1996 to report the acquisition of
Proler International Corp. (Proler). The Form 8-K incorporated by
reference the unaudited financial statements of Proler as of July 31,
1996 and for the six months then ended from Proler's Form 10-Q for the
quarter ended July 31, 1996.
A Form 8K/A was filed on February 11, 1997 to amend the Form 8-K filed
on December 13, 1996. This form 8-K/A incorporated by reference the
audited financial statements of Proler and of Proler's joint operations
as of January 31, 1996 and 1995 and for the three years ended January
31,1996 from Proler's Form 10-K for the year ended January 31, 1996 and
included the required pro forma financial information related to the
acquisition of Proler.
<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: April 14, 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 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>
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<S> <C>
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<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 6,921
<SECURITIES> 0
<RECEIVABLES> 26,948
<ALLOWANCES> 523
<INVENTORY> 97,656
<CURRENT-ASSETS> 145,258
<PP&E> 261,203
<DEPRECIATION> 106,319
<TOTAL-ASSETS> 424,012
<CURRENT-LIABILITIES> 40,233
<BONDS> 108,080
0
0
<COMMON> 10,348
<OTHER-SE> 216,591
<TOTAL-LIABILITY-AND-EQUITY> 424,012
<SALES> 159,299
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