UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended November 30, 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 5,847,949 shares of Class A Common Stock, par value of $1.00
per share and 4,500,005 shares of Class B Common Stock, par value of $1.00 per
share outstanding at January 1, 1997.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at November 30, 1996
and August 31, 1996........................................................3
Consolidated Statement of Operations for the
Three Months Ended November 30, 1996 and 1995..............................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1996 and the Three Months
Ended November 30, 1996....................................................5
Consolidated Statement of Cash Flows for the
Three Months Ended November 30, 1996 and 1995..............................6
Notes to Financial Statements..................................................7
Management's Discussion and Analysis of
Financial Condition........................................................11
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K..............................................15
SIGNATURE PAGE................................................................16
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nov. 30, 1996 Aug. 31, 1996
--------------- ---------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 5,349 $ 1,896
Accounts receivable, less allowance for
doubtful accounts of $455 and $420 21,078 23,542
Accounts receivable from related parties 768 1,058
Inventories (Note 2) 94,831 90,746
Property held for sale (Note 6) 5,000
Deferred income taxes 3,128 3,128
Prepaid expenses and other 4,206 4,118
--------------- ---------------
TOTAL CURRENT ASSETS 134,360 124,488
--------------- ---------------
NET PROPERTY, PLANT & EQUIPMENT 161,121 150,517
OTHER ASSETS
Investment in joint venture partnerships 75,838 9,909
Advances to joint venture partnerships 6,341 4,163
Goodwill 43,141 43,445
Intangibles and other 7,866 4,967
--------------- ---------------
133,186 62,484
--------------- ---------------
$ 428,667 $ 337,489
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 7) 13,453 254
Accounts payable 20,888 17,877
Accrued payroll liabilities 4,990 4,135
Deferred revenues 367 392
Current portion of environmental liabilities (Note 4) 2,202 2,202
Other accrued liabilities 9,642 6,360
--------------- ---------------
TOTAL CURRENT LIABILITIES 51,542 31,220
--------------- ---------------
DEFERRED INCOME TAXES 15,994 15,994
--------------- ---------------
LONG-TERM DEBT LESS CURRENT PORTION (Note 7) 57,544 44,475
--------------- ---------------
ENVIRONMENTAL LIABILITIES, NET OF CURRENT PORTION 30,436 20,736
--------------- ---------------
ACQUISITION PRICE PAYABLE (Note 5) 42,456
--------------- ---------------
OTHER LONG-TERM LIABILITIES 4,617 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, 5,848 and 5,773 shares issued and outstanding 5,848 5,773
Class B common stock--25,000 shares $1 par value
authorized, 4,500 and 4,575 shares issued and outstanding 4,500 4,575
Additional paid-in capital 113,747 113,747
Retained earnings 101,983 99,718
--------------- ---------------
226,078 223,813
--------------- ---------------
$ 428,667 $ 337,489
=============== ===============
The accompanying notes are an integral part of this statement
</TABLE>
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For The Three Months Ended November 30,
-----------------------------------------------
1996 1995
-------------------- -------------------
<S> <C> <C>
REVENUES $ 82,700 $ 71,591
COSTS AND EXPENSES:
Cost of goods sold and other operating expenses 74,199 60,153
Selling and administrative 4,675 4,319
-------------------- -------------------
78,874 64,472
Income from joint ventures 727 1,456
-------------------- -------------------
INCOME FROM OPERATIONS 4,553 8,575
-------------------- -------------------
OTHER INCOME (EXPENSE):
Interest expense (529) (933)
Other income 98 52
-------------------- -------------------
(431) (881)
-------------------- -------------------
INCOME BEFORE INCOME TAXES 4,122 7,694
Income tax provision (1,341) (2,616)
-------------------- -------------------
NET INCOME $ 2,781 $ 5,078
==================== ===================
EARNINGS PER SHARE $ 0.27 $ 0.64
==================== ===================
The accompanying notes are an integral part of this statement
</TABLE>
<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 8/31/95 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 2,781 2,781
Class B common stock converted
to Class A common stock 75 75 (75) (75)
Dividends paid (516) (516)
-------- ----------- -------- ---------- ------------- -------------- --------------
BALANCE AT 11/30/96 5,848 $ 5,848 4,500 $ 4,500 $ 113,747 $ 101,983 $ 226,078
======== =========== ======== ========== ============= ============== ==============
The accompanying notes are an integral part of this statement
</TABLE>
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For The Three Months Ended November 30,
---------------------------------------------
1996 1995
------------------- -------------------
OPERATIONS
<S> <C> <C>
Net income $ 2,781 $ 5,078
Noncash items included in income:
Depreciation and amortization 4,606 3,388
Equity in earnings of joint ventures
and other investments (727) (1,456)
Gain on disposal of assets 96 (4)
Cash provided (used) by assets and liabilities:
Accounts receivable 4,592 (4,672)
Inventories (1,653) (16,599)
Prepaid expenses and other 931 (2,019)
Accounts payable (2,642) 9,377
Deferred revenue (25) (3,449)
Accrued expenses 726 1,080
Other assets and liabilities 22 (484)
------------------- -------------------
NET CASH PROVIDED (USED) BY OPERATIONS 8,707 (9,760)
------------------- -------------------
INVESTMENTS
Capital expenditures (3,658) (20,883)
Advances (to) from joint ventures (2,178) 1,007
Investments in joint ventures (550)
Distributions from joint ventures 380 400
Proceeds from sale of assets 499
------------------- -------------------
NET CASH USED BY INVESTMENTS (6,006) (18,977)
------------------- -------------------
FINANCING:
Dividends declared and paid (516) (394)
Increase in long-term debt 1,400 29,800
Reduction in long-term debt (132) (128)
------------------- -------------------
NET CASH PROVIDED BY FINANCING 752 29,278
------------------- -------------------
NET INCREASE IN CASH 3,453 541
CASH AT BEGINNING OF PERIOD 1,896 1,598
------------------- -------------------
CASH AT END OF PERIOD $ 5,349 $ 2,139
=================== ===================
The accompanying notes are an integral part of this statement
</TABLE>
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 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 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 three
months ended November 30, 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 10,411,945 and 7,947,200 for the quarters
ended November 30, 1996 and 1995, respectively.
Note 2 - Inventories:
- ---------------------
Inventories consist of the following (in thousands):
November 30, August 31,
1996 1996
(Unaudited) (Audited)
------------ ------------
Scrap metals $ 24,251 $ 21,006
Work in process 21,502 24,535
Finished goods 33,218 29,767
Supplies 15,860 15,438
--------- --------
$ 94,831 $ 90,746
========= ========
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
November 30, 1996 and August 31, 1996, respectively.
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 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 $2,033,000 and $1,613,000 for the quarters ended November
30, 1996 and 1995, respectively.
The Company purchased scrap metals from its joint venture operations
totaling $2,111,000 and $2,229,000 for the quarters ended November 30,
1996 and 1995, respectively.
The Company leases certain land and buildings from a real estate
company which is a related entity. The rent expense was $354,000 and
$305,000 for the quarters ended November 30, 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 totaled $100,000 and $134,000 for the quarters
ended November 30, 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 $819,000 and $2,963,000 for the three months ended
November 30, 1996 and 1995, respectively. These charges were offset by
income of $753,000 and $2,634,000 for the three months ended November
30, 1996 and 1995, respectively.
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. For the three months ended November 30, 1995, the Company
paid ECC $3,013,000. No payments were made in the same period this
year.
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 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 November 30, 1996, the environmental liability
aggregated $22,938,000.
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, and the installation of a
stormwater treatment system, which were completed in fiscal 1996. 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 $600,000 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.
Additionally, while performing its due diligence in conjunction with
the acquisition of Proler International Corp. (see Note 5), the Company
engaged a consultant to estimate the costs to cure both current and
future potential liabilities. Based on the preliminary report provided
by the consultants, the Company has recorded an estimated liability of
$13 million. This amount may be revised when the final report is
available.
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. As of November 30, 1996, the total amount of funds
required to acquire Proler pursuant to the tender offer and merger of
$42.5 million was recorded as a payable in the accompanying
consolidated balance sheet. After November 30, 1996, the Company
borrowed funds to pay for the tendered 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 estimated
fair values as of the effective date of the acquisition. This
allocation was based on preliminary estimates and may be revised at a
later date upon the receipt of appraisals for substantially all of the
long-term assets and property held for sale of Proler.
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(Unaudited)
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 Three Months Ended
November 30,
-----------------------------
1996 1995
--------- ----------
(in thousands)
Revenues $ 85,846 $ 75,162
========= ========
Net income $ 1,818 $ 4,960
========= ========
Earnings per share $ .17 $ .62
========= ========
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 owned by Proler (see Note 5) are being held for
sale. The estimated fair values of such properties at November 30, 1996
aggregated $5,000,000. These estimates are preliminary and may be
revised at a later date.
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 November
30, 1996, the Company refinanced this balance under its existing credit
facilities.
Note 8 - Subsequent Events:
- ---------------------------
On January 6, 1996 the Board of Directors declared a 5 cent per share
dividend on Class A and Class B common stock payable on February 21,
1997 to holders of record on February 6, 1997.
<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. 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), the Company participates in the management of 15 scrap
collection and processing facilities, including export terminals in Los
Angeles, California; Everett, Massachusetts; Providence, Rhode Island
and Jersey City, New Jersey, through joint ventures. Steel Operations
operates a mini-mill in Oregon which produces finished steel products
and maintains mill depots in California.
Results of Operations
- ---------------------
The Company's revenues and operating results by business segment are
summarized below (in thousands, except number of shipments):
For the Three Months Ended
November 30,
-------------------------------
1996 1995
--------- ---------
(unaudited)
REVENUES:
Scrap Operations:
Ferrous sales $ 47,189 $ 49,253
Nonferrous sales 2,163 2,895
Other sales 1,806 1,356
--------- ---------
Total sales 51,158 53,504
Ferrous sales to Steel Operations (12,301) (15,688)
Steel Operations 43,843 33,775
--------- ---------
Total $ 82,700 $ 71,591
========= =========
INCOME FROM OPERATIONS:
Scrap Operations $ 4,272 $ 6,328
Steel Operations 1,163 2,518
Joint ventures 727 1,456
Corporate expense & eliminations (1,609) (1,727)
--------- --------
Total $ 4,553 $ 8,575
========= ========
NET INCOME $ 2,781 $ 5,078
========= ========
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
For the Three Months Ended
November 30,
--------------------------
1996 1995
------ ------
(unaudited)
SHIPMENTS:
SCRAP OPERATIONS Ferrous scrap (long tons):
To Steel Operations 110 126
To unaffiliated customers 255 200
----- -----
Total 365 326
===== =====
Number of scrap export shipments 8 5
===== =====
Nonferrous scrap (pounds) 6,090 5,772
===== =====
STEEL OPERATIONS
Finished steel products (short tons) 133 98
===== =====
REVENUES. Consolidated revenues for the three months ended November 30,
1996 increased $11.1 million (16%) over the same quarter last year due
to increased revenues for Steel Operations offset by a slight decline
in Scrap Operations' revenues.
Revenues from Scrap Operations before intercompany eliminations
decreased by $2.3 million (4%), reflecting increased shipments of
ferrous scrap offset by lower average selling prices. Ferrous scrap
revenues declined $2.1 million (4%), although shipments increased by
39,000 tons, because lower average selling prices were realized. An
increase in ferrous scrap shipments to unaffiliated customers of 55,000
tons to 255,000 tons, due to the timing of scrap shipments, was offset
by a decrease in sales to Steel Operations of 16,000 tons to 110,000
tons. Shipments to Steel Operations declined due to the timing of
shipments and Steel Operations' efforts to reduce scrap inventory
levels. The Company has experienced a softening in prices for scrap
metals due to a slowdown in domestic and world economic activity as
well as a build-up of scrap inventories by both the Company's
competitors and its customers. As a result, the average selling price
for ferrous scrap declined $22 to $129 per ton.
Steel Operations' revenues increased by $10.1 million to $43.8 million
as a result of a 36% increase in shipments of finished steel to 133,000
tons due to the addition of a new rolling mill in February 1996. A
decline in the average selling price of $15 per ton to $330 per ton,
however, offset part of the positive impact of the additional
shipments. Steel Operations' selling prices have softened as the result
of weakness in the market for finished steel products on the West Coast
and because the mix of products sold has included more lower priced
reinforcing bar (rebar).
COST OF GOODS SOLD. Overall cost of goods sold increased $14.0 million
(23%) during the first quarter of fiscal 1997 compared with the first
quarter of fiscal 1996. Cost of goods sold as a percentage of revenues
increased from 84% to 90%, due primarily to the decline in average
selling prices realized by both Scrap and Steel Operations. Gross
profit in total declined by $2.9 million (26%) as a result of a $1.9
million decrease in Scrap Operations' gross profit and a $1.4 million
decrease in Steel Operations' gross profit.
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Cost of goods sold for Scrap Operations decreased by $.5 million (1%)
to $44.5 million and increased as a percentage of revenues from 84% to
87%. The average cost of goods sold per ton of ferrous scrap decreased
from $129 to $113 per ton as the Company managed purchase prices at the
scale. Scrap Operations' gross profit declined from $8.6 million to
$6.7 million. The decrease was due to the impact of lower average
selling prices, partially offset by higher volumes shipped and lower
prices paid at the scale.
Steel Operations' cost of goods sold for the first quarter of fiscal
1997 increased $11.4 million to $42.0 million and increased as a
percentage of revenues from 91% to 96%. The increase in cost of goods
sold is attributable to the increase in finished steel shipments. Cost
of goods sold per ton increased slightly (1%) to $316 per ton. Gross
profit decreased from $3.2 million to $1.8 million as a result of lower
average selling prices partially offset by the increase in finished
steel shipments.
INCOME FROM JOINT VENTURES. Income from joint ventures declined $.7
million (50%) because the Company's industrial plant reclamation and
asbestos removal joint ventures had major projects in progress during
the first quarter of fiscal 1996 which were completed during that
quarter. Income from joint ventures will be significantly effected in
future quarters by the results of the joint venture interests acquired
in the Proler acquisition.
INTEREST EXPENSE. Interest expense declined from $.9 million during the
three months ended November 30, 1995 to $.5 million for the same period
this year primarily as a result of lower average borrowings. The
Company used funds generated from operations and proceeds from an
offering of its common stock in February 1996 to pay down debt.
Interest expense will increase in future quarters as a result of
borrowings associated with the Proler acquisition.
LIQUIDITY AND CAPITAL RESOURCES. Cash generated by operations for the
first quarter of fiscal 1997 was $8.7 million compared with cash used
by operations of $9.8 million for the first quarter of fiscal 1996. The
positive cash flow this year-to-date is predominantly attributable to
the timing of collection of accounts receivable and because inventories
increased less this quarter than in the same quarter in fiscal 1996.
Last year, Steel Operations was building its billet inventory in
anticipation of the new wire rod and bar mill. At November 30, 1996,
the billet inventory was significantly lower; this decrease was offset
by an increase in finished goods inventory due to production by the new
rolling mill. An increase in Scrap Operations' inventories from $19.2
million to $21.8 million is due to the timing of shipments and
receipts.
Capital expenditures for the three months ended November 30, 1996
aggregated $3.7 million compared with $20.9 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, is currently under construction and its
completion is planned for the second quarter of fiscal 1997. The
Company expects to spend $21.4 million on capital improvements,
including completion of the wire rod mill, during the rest of fiscal
1997. As of November 30, 1996, the Company had outstanding purchase
commitments related to the new mill of $4.4 million.
In March 1995, the Company purchased all of the outstanding stock of
MMI. Prior to the acquisition, MMI established a reserve of $24.4
million to reflect the cost to cure environmental liabilities. As of
November 30, 1996, the environmental liability aggregated $22.9
million. The Company expects to require significant future cash outlays
as it incurs the actual costs relating to the remediation of such
environmental liabilities. Additionally, while performing its due
diligence in conjunction with the acquisition of Proler, the Company
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
engaged a consultant to estimate the costs to cure both current and
future potential environmental liabilities. Based upon preliminary
estimates provided by the consultants, the Company expects to spend
approximately $13 million related to the liabilities incurred by Proler
and its joint ventures as actual costs are incurred for remediation.
At November 30, 1996, the Company had a $100 million, unused, 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 of $46.0 million. At November 30, 1996, the Company had a
balance payable for the acquisition of Proler of $42.5 million.
Substantially all of this balance was financed under the Company's
existing credit facilities subsequent to November 30, 1996.
Additionally, the Company paid off Proler's existing bank debt at the
date of acquisition by drawing on these credit facilities.
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, including potential
acquisitions, with additional borrowing arrangements or additional
equity financing.
FORWARD LOOKING STATEMENTS. Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward looking
statements 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; the uncertainty
of the Company being able to complete future acquisitions; and the risk
that there will not be a successful start-up of the wire rod mill at
Steel Operations in 1997.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
27 Financial Data Schedule
(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.
<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: January 14 , 1997 By:/s/Barry A. Rosen
------------------- ------------------
Barry A. Rosen
Vice President, Finance
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NO.
- -------
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only and
not filed.
<PAGE>
<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> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 5,349
<SECURITIES> 0
<RECEIVABLES> 21,533
<ALLOWANCES> 455
<INVENTORY> 94,831
<CURRENT-ASSETS> 134,360
<PP&E> 263,529
<DEPRECIATION> 102,408
<TOTAL-ASSETS> 428,667
<CURRENT-LIABILITIES> 51,542
<BONDS> 70,997
0
0
<COMMON> 10,348
<OTHER-SE> 215,730
<TOTAL-LIABILITY-AND-EQUITY> 428,667
<SALES> 82,700
<TOTAL-REVENUES> 82,700
<CGS> 74,199
<TOTAL-COSTS> 78,874
<OTHER-EXPENSES> (98)
<LOSS-PROVISION> 35
<INTEREST-EXPENSE> 529
<INCOME-PRETAX> 4,122
<INCOME-TAX> 1,341
<INCOME-CONTINUING> 2,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,781
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
