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, 1998 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 5,555,026 shares of Class A Common Stock, par value of $1.00
per share, and 4,430,328 shares of Class B Common Stock, par value of $1.00 per
share, outstanding at April 1, 1998.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at February 28, 1998
and August 31, 1997...................................................... 3
Consolidated Statement of Operations for the Three Months and
Six Months Ended February 28, 1998 and 1997.............................. 4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1997 and the Six Months
Ended February 28, 1998.................................................. 5
Consolidated Statement of Cash Flows for the
Six Months Ended February 28, 1998 and 1997.............................. 6
Notes to Financial Statements................................................ 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 12
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K............................................ 17
SIGNATURE PAGE.............................................................. 18
2
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
February 28, August 31,
1998 1997
--------------- ---------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,096 $ 3,106
Accounts receivable, less allowance for
doubtful accounts of $495 and $524 23,654 31,010
Accounts receivable from related parties 3,592 1,215
Inventories (Note 2) 96,505 95,154
Deferred income taxes 10,737 10,737
Prepaid expenses and other 8,702 3,168
-------------- --------------
TOTAL CURRENT ASSETS 145,286 144,390
-------------- --------------
NET PROPERTY, PLANT AND EQUIPMENT 146,885 151,136
-------------- --------------
OTHER ASSETS
Investment in joint venture partnerships 92,572 74,605
Advances to joint venture partnerships 11,285 7,145
Goodwill 41,624 42,230
Intangibles and other 8,621 8,480
-------------- --------------
$ 446,273 $ 427,986
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 6) $ 165 $ 361
Accounts payable 18,709 19,456
Accrued payroll liabilities 3,162 5,158
Current portion of environmental liabilities (Note 4) 5,809 5,787
Other accrued liabilities 10,400 8,730
-------------- --------------
TOTAL CURRENT LIABILITIES 38,245 39,492
-------------- --------------
DEFERRED INCOME TAXES 28,409 28,409
-------------- --------------
LONG-TERM DEBT LESS CURRENT PORTION (Note 6) 109,333 92,881
-------------- --------------
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 4) 23,873 24,530
-------------- --------------
OTHER LONG-TERM LIABILITIES 3,363 3,613
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,555 and 5,737 shares issued and outstanding 5,555 5,737
Class B common stock--25,000 shares $1 par value
authorized, 4,431 and 4,445 shares issued and outstanding 4,431 4,445
Additional paid-in capital 105,124 109,994
Retained earnings 127,940 118,885
-------------- --------------
243,050 239,061
-------------- --------------
$ 446,273 $ 427,986
============== ==============
The accompanying notes are an integral part of this statement
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
`
For The Three Months Ended For The Six Months Ended
February 28, February 28,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 81,932 $ 76,599 $ 187,298 $ 159,299
COSTS AND EXPENSES:
Cost of goods sold and
other operating expenses 73,000 69,062 166,392 143,199
Selling and administrative 5,299 5,823 10,504 10,560
--------- --------- --------- ---------
78,299 74,885 176,896 153,759
--------- --------- --------- ---------
INCOME FROM JOINT VENTURES 3,169 1,053 6,963 1,780
--------- --------- --------- ---------
INCOME FROM OPERATIONS 6,802 2,767 17,365 7,320
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (1,444) (1,503) (2,689) (2,032)
Other income 453 927 810 1,025
--------- --------- --------- ---------
(991) (576) (1,879) (1,007)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 5,811 2,191 15,486 6,313
Income tax provision (2,034) (813) (5,420) (2,154)
--------- --------- --------- ---------
NET INCOME $ 3,777 $ 1,378 $ 10,066 $ 4,159
========= ========= ========= =========
BASIC EARNINGS PER SHARE $ 0.38 $ 0.13 $ 1.00 $ 0.40
========= ========= ========= =========
DILUTED EARNINGS PER SHARE $ 0.37 $ 0.13 $ 0.99 $ 0.40
========= ========= ========= =========
The accompanying notes are an integral part of this statement
</TABLE>
4
<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 8/31/96 5,773 $ 5,773 4,575 $ 4,575 $ 113,747 $ 99,718 $ 223,813
Class B common stock converted
to Class A common stock 130 130 (130) (130)
Class A common stock repurchased (166) (166) (3,753) (3,919)
Net income 21,225 21,225
Dividends paid (2,058) (2,058)
-------- ---------- -------- ---------- --------------- ------------- ------------
BALANCE AT 8/31/97 5,737 5,737 4,445 4,445 109,994 118,885 239,061
Net Income 10,066 10,066
Class B common stock converted
to Class A common stock 14 14 (14) (14)
Class A common stock repurchased (196) (196) (4,870) (5,066)
Dividends paid (1,011) (1,011)
-------- ---------- -------- ---------- --------------- ------------- ------------
BALANCE AT 2/28/98 5,555 $ 5,555 4,431 $ 4,431 $ 105,124 $ 127,940 $ 243,050
======== ========== ======== ========== =============== ============= ============
The accompanying notes are an integral part of this statement
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
For The Six Months Ended
February 28,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATIONS
Net income $ 10,066 $ 4,159
Noncash items included in income:
Depreciation and amortization 9,393 8,600
Deferred income taxes (2,211)
Equity in earnings of joint ventures
and other investments (6,963) (1,780)
Loss (gain) on disposal of assets 145 (32)
Cash provided (used) by assets and liabilities:
Accounts receivable 4,979 (603)
Inventories (1,351) (4,769)
Prepaid expenses and other (4,713) (58)
Accounts payable (747) (2,584)
Accrued expenses (327) 1,130
Environmental liabilities (635) (639)
Other assets and liabilities (372) 1,049
---------- ----------
NET CASH PROVIDED BY OPERATIONS 9,475 2,262
---------- ----------
INVESTMENTS:
Payment for purchase of Proler (42,456)
Capital expenditures (4,730) (8,079)
Advances (to) from joint ventures (4,140) 2,804
Investments in joint ventures (14,129) (27,378)
Distributions from joint ventures 3,106 36,608
Capitalization of losses on assets held for sale (969) (552)
Proceeds from sale of assets 198 4,498
---------- ----------
NET CASH USED BY INVESTMENTS (20,664) (34,555)
---------- ----------
FINANCING:
Repurchase of Class A common stock (5,066)
Dividends declared and paid (1,011) (1,033)
Increase in long-term debt 16,500 63,525
Reduction in long-term debt (244) (25,174)
---------- ----------
NET CASH PROVIDED BY FINANCING 10,179 37,318
---------- ----------
NET (DECREASE) INCREASE IN CASH (1,010) 5,025
CASH AT BEGINNING OF PERIOD 3,106 1,896
---------- ----------
CASH AT END OF PERIOD $ 2,096 $ 6,921
========== ==========
The accompanying notes are an integral part of this statement
</TABLE>
6
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(In thousands, except per share amounts)
(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, management suggests that these
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's annual report
for the fiscal year ended August 31, 1997. The results for the six
months ended February 28, 1998 are not necessarily indicative of the
results of operations for the entire year.
Earnings Per Share
------------------
For the quarter ended February 28, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
share", which specified the computation, presentation and disclosure
requirements for earnings per share ("EPS"). SFAS 128 replaces the
presentation of primary and fully diluted EPS with basic and diluted
EPS. Basic EPS is computed based upon the weighted average number of
common shares outstanding during the period. Diluted EPS reflects the
potential dilution that would occur if securities or other contracts to
issue common stock were exercised or converted into common stock. The
following represents a reconciliation from basic EPS to diluted EPS:
<TABLE>
<CAPTION>
Three Months Ended February 28, 1998
---------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $ 3,777 10,046 $ 0.38
=========
Options 76
----------- -------------
Diluted EPS $ 3,777 10,122 $ 0.37
=========== ============= =========
Three Months Ended February 28, 1997
---------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $ 1,378 10,348 $ 0.13
=========
Options 66
----------- -------------
Diluted EPS $ 1,378 10,414 $ 0.13
=========== ============= =========
</TABLE>
7
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended February 28, 1998
---------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $10,066 10,112 $ 1.00
=========
Options 48
----------- -------------
Diluted EPS $10,066 10,160 $ 0.99
=========== ============= =========
Six Months Ended February 28, 1997
---------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $ 4,159 10,348 $ 0.40
=========
Options 65
----------- -------------
Diluted EPS $ 4,159 10,413 $ 0.40
=========== ============= =========
</TABLE>
Note 2 - Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
February 28, August 31,
1998 1997
---------- ----------
(Unaudited) (Audited)
<S> <C> <C>
Scrap metals $ 23,380 $ 26,897
Work in process 15,661 24,358
Finished goods 41,473 28,109
Supplies 15,991 15,790
---------- ---------
$ 96,505 $ 95,154
========== =========
</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 $8,039 at February 28,
1998 and August 31, 1997.
8
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(In thousands, except per share amounts)
(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 at the end
of the time-charter. The Company entered into two additional seven year
time-charters in 1995. Charges incurred for these charters were $2,069
and $2,441 for the three months ended February 28, 1998 and 1997,
respectively, and $4,380 and $4,503 for the six months ended February
28, 1998 and 1997, respectively.
The Company purchased scrap metals from its joint venture operations
totaling $3,644 and $2,165 for the three months ended February 28, 1998
and 1997, respectively, and $7,855 and $4,266 for the six months ended
February 28, 1998 and 1997, respectively.
The Company leases certain land and buildings from a real estate
company which is a related entity. The rent expense was $386 and $357
for the three months ended February 28, 1998 and 1997, respectively,
and $772 and $711 for the six months ended February 28, 1998 and 1997,
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 generally charged to the related
parties based upon costs plus a 15% margin for overhead and profit. The
administrative charges totaled $529 and $362, for the three months
ended February 28, 1998 and 1997, respectively, and $736 and $510 for
the six months ended February 28, 1998 and 1997, 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 for the collection of income and payment of expenses
related to sub-charter activities. Charges incurred for these
subcharters for the three months ended February 28, 1998 totaled $251,
offset by income of $215. There was no subcharter activity for the
three months ended February 28, 1997. For the six months ended February
28, 1998 and 1997, charges incurred for sub-charter activities were
$607 and $870, respectively, offset by income of $407 and $747,
respectively.
9
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(In thousands, except per share amounts)
(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),
the Company hired an independent third-party consultant to estimate the
costs to cure both current and future potential environmental
liabilities. The cumulative provision for the total cost 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, 1998 aggregated
$20,500.
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
Schnitzer Steel of Tacoma (SST) scrap yard is located. SST and five
other PRPs voluntarily entered into an Administrative Order of Consent
with the Environmental Protection Agency (EPA) to fund a pre-remedial
study of sediment contamination and remediation alternatives. SST's
share of the study, which is expected to be complete in 1998, is
approximately $2,000. Any further potential liabilities, if any, cannot
be estimated at this time.
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 potential
liabilities related to Proler's wholly-owned and joint venture
properties. Proler recorded a liability of $8,600 for the probable
costs to remediate its wholly-owned properties based upon the
consultant's estimates, increasing its environmental reserves to
$9,800. The Company carried over the aggregate reserve to its financial
statements upon acquiring Proler and $8,900 remained outstanding on
February 28, 1998. Concurrently, based upon the consultant's estimates,
Proler's joint venture operations recorded additional liabilities of
$4,100 for the probable costs to remediate their properties. The
liability was recorded prior to the Company's acquisition of Proler.
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 a preliminary site
investigation of this property, and in December 1996, added the site to
the "National Priorities List". MRI and Proler, along with several
other parties, have been named as PRPs for this site by the EPA. Proler
included the probable costs associated with this site in the
aforementioned reserve. Additionally, Proler and this subsidiary have
been named or identified as PRPs at several other sites.
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
lease renewal with the Port of Los Angeles, to be responsible for a
multi-year, remedial clean-up project involving certain environmental
conditions 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.
10
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(In thousands, except per share amounts)
(Unaudited)
Note 5 - Acquisition of Proler International Corp.:
Between November 29, 1996 and December 6, 1996, PIC Acquisition Corp.
(PIC), a wholly-owned subsidiary of the Company, acquired 100% of the
common stock of Proler. 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.
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.
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 period shown.
For the Six Months Ended
February 28, 1997
------------------------
Revenues $ 162,445
==========
Net loss $ (2,460)
==========
Loss per share $ (0.24)
==========
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 period presented or of future results of operations of the
consolidated entities.
Note 6 - Interest Rate Instruments:
In February 1998, the Company entered into interest rate swap
agreements with two of its banks for the purpose of managing its
exposure to adverse movements in interest rates and lowering the cost
of various debt instruments. The Company does not use financial
instruments for trading purposes, nor is it a party to leveraged
derivatives. Pursuant to the swap agreements, the Company exchanged its
floating rate interest obligations on $50,000 notional principal amount
for a fixed interest obligation of 5.55% for three years. The
differential paid or received on interest rate agreements is recognized
as an adjustment to interest expense.
Note 7 - Subsequent Events:
On April 2, 1998 the Board of Directors declared a 5 cent per share
dividend on Class A and Class B common stock payable on May 21, 1998 to
holders of record on May 6, 1998. Additionally, the Board of Directors
authorized the purchase of an additional 1,100 shares under its
existing stock repurchase program.
11
<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, the Company
participates, through joint ventures, in the management of 29 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 steel reinforcing bar, merchant bar, and coiled
rebar and wire rod. Mill depots are maintained in California.
Results of Operations
The Company's revenues and operating results by business segment are
summarized below (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
February 28, February 28,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Scrap Operations:
Ferrous sales $ 47,248 $ 40,045 $ 102,864 $ 91,589
Nonferrous sales 5,701 6,894 12,007 4,702
Other sales 4,298 4,476 8,595 6,282
---------- ---------- ---------- ----------
Total sales 57,247 51,415 123,466 102,573
Ferrous sales to Steel Operations (13,982) (10,447) (28,116) (22,748)
Steel Operations 38,667 35,631 91,948 79,474
---------- ---------- ---------- ----------
Total $ 81,932 $ 76,599 $ 187,298 $ 159,299
========== ========== ========== ==========
INCOME FROM OPERATIONS:
Scrap Operations $ 3,601 $ 2,593 $ 11,021 $ 6,865
Steel Operations 1,612 1,031 2,639 2,194
Joint ventures 3,084 1,053 6,845 1,780
Corporate expense & eliminations (1,495) (1,910) (3,140) (3,519)
---------- ---------- ---------- ----------
Total $ 6,802 $ 2,767 $ 17,365 $ 7,320
========== ========== ========== ==========
NET INCOME $ 3,777 $ 1,378 $ 10,066 $ 4,159
========== ========== ========== ==========
</TABLE>
12
<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
February 28, February 28,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
SHIPMENTS:
SCRAP OPERATIONS
Ferrous scrap (long tons):
To Steel Operations 117 94 231 204
To unaffiliated customers 248 246 546 501
---------- ---------- ---------- ----------
Total 365 340 777 705
========== ========== ========== ==========
Export tons 180 196 429 406
========== ========== ========== ==========
Nonferrous scrap (pounds) 14,386 16,641 29,056 28,720
========== ========== ========== ==========
STEEL OPERATIONS
Finished steel products (short tons) 111 105 260 238
========== ========== ========== ==========
</TABLE>
Revenues. Consolidated revenues for the three months ended February 28, 1998
increased $5.3 million (7%) over the same quarter last year For the six months
ended February 28, 1998, consolidated revenues increased $28.0 million (18%)
over the same period last year. Revenue increases were generated by both Scrap
and Steel Operations.
Revenues from Scrap Operations, before intercompany eliminations, increased $5.8
million (11%) for the three months ended February 28, 1998 reflecting both an
increase in tons shipped and higher average selling prices. Ferrous scrap
revenues increased $7.2 million (18%). Average selling prices increased $12 to
$130 per ton compared to the quarter ended February 28, 1997. Tons shipped to
Steel Operations increased 25%. For the six months ended February 28, 1998,
Scrap Operations' revenues, before intercompany eliminations, were $20.8 million
(20%) over the same period last year. The increase is due to a 10% increase in
ferrous tons shipped coupled with a 9% increase in average selling prices.
For the three months ended February 28, 1998, Steel Operations' revenues
increased by $3.0 million (9%) to $38.7 million. The Company's sales of finished
steel increased 6,100 tons. The overall average selling price for finished steel
products increased $8 per ton (2%) to $347 per ton over the same period last
year. Revenues also increased due to the addition of wire rod and coiled rebar
into the product mix. These products were not produced in the first quarter of
1997. For the three and six months ended February 28, 1998, the Company sold
14,000 tons and 28,000 tons of these new products, respectively. For the six
months ended February 28, 1998, revenues from Steel Operations increased 16% to
$91.9 million. Finished steel shipments increased 22,000 tons (9%) to 260,000
tons. Increased tonnage shipped, coupled with slightly higher selling prices
resulted in higher sales for the period. Additionally, a change in product mix
to higher priced products contributed to the increase in revenue and average
selling price.
13
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
Cost of Goods Sold. Overall cost of goods sold increased $3.9 million (6%)
during the first quarter of fiscal 1998 compared with the first quarter of
fiscal 1997. Cost of goods sold as a percentage of revenues decreased from 90%
to 89%. Gross profit in total increased by $1.4 million (18%) as a result of the
increases in selling prices realized by Scrap and Steel Operations. For the six
months ended February 28, 1998, consolidated cost of goods sold increased $23.1
million, compared with the same period last year. Cost of goods sold as a
percentage of revenues decreased from 90% to 89% for the same period, and gross
profit increased $4.8 million (30%), again due to an increase in shipments at
higher average selling prices.
For the three months ended February 28, 1998, cost of goods sold for Scrap
Operations increased $4.9 million and decreased as a percentage of revenues from
89% to 88%. Scrap Operations' gross profit increased from $5.8 million to $6.8
million. The increase was due to the impact of higher volumes shipped at higher
average selling prices. For the six months ended February 28, 1998, Scrap
Operations' average ferrous scrap cost of goods sold increased 7% to $114 per
ton. The increase in average selling prices resulted in a decrease in cost of
goods sold as a percentage of revenues from 88% to 86%. The increase in tonnage
and selling prices resulted in a $4.6 million (37%) increase in gross profit to
$17.1 million.
Steel Operations' cost of good sold for the second quarter of fiscal 1998
increased $2.3 million to $36.3 million and decreased as a percentage of revenue
from 95% to 94%. The increase in cost of goods sold is attributable to the
increase in finished steel shipments. Cost of goods sold per ton, excluding
billet sales, remained unchanged at approximately $320 per ton. Gross profit
increased from $1.7 million to $2.4 million as a result in a change in the mix
of products shipped. For the six months ended February 28, 1998, Steel
Operations' average cost of goods sold per ton increased from $316 to $318. This
occurred because of the introduction of higher cost wire rod and coiled rebar
which was not produced during the same period of the prior year. Higher average
selling prices for finished steel increased gross profit by 16% to $4.1 million.
Cost of sales as a percentage of revenues remained unchanged at 96%.
Income from Joint Ventures. The Company's joint ventures generated $95.7 million
of revenues and contributed $3.1 million to income from joint ventures for the
quarter ended February 28, 1998. This compares with $100.5 million of revenues,
and $1.1 million contribution to income from joint ventures for the same period
last year. The Joint Ventures in the Scrap Processing Business shipped 592,000
tons and 784,000 tons for the same periods, respectively. For the six months
ended February 28, 1998, the joint ventures generated $193.9 million of revenues
and contributed $7.0 million to income. This compares with $169.6 million of
revenues and $1.8 million contribution to income for the same period last year.
The Joint Ventures in the Scrap Processing Business shipped 1.2 million tons for
each of the six months ended February 28, 1998 and 1997. The revenues,
contribution to income, and tons shipped for the six months ended February 28,
1997 include activity which occurred prior to the Company's acquisition of
Proler.
The Company's increase in income from joint ventures is primarily attributable
to the Proler joint ventures which were acquired November 29, 1996. Income for
the six months ended February 28, 1997 included three months of earnings from
these operations.
14
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
Export Sales. The Company to date has been able to ship and receive payment for
all export sales that is has booked and it anticipates this will continue to be
the case. However, the Company has experienced, and for the near term expects to
experience, reduced margins on export sales to Asia. Selling prices for export
scrap to Asia have dropped, and while the Company is adjusting buying prices, it
has not yet been able to drop the buying price enough to make up for the drop in
selling prices. Additionally, the Company is seeing some softening in demand for
scrap in certain regions of Asia.
In addition to adjusting its scrap purchase price, the Company has increased its
domestic sales volume and has begun selling to Asian countries it has not
historically sold to. With the increased emphasis on domestic sales, the Company
believes that fiscal 1998 sales to Asia will be less than 60% of tonnage sold,
which has been the average over the last several years. The Company's Joint
Ventures in the Scrap Processing Business are even less dependent upon Asian
sales, expecting to ship less than 45% of total tonnage to Asia this fiscal
year. The Company believes the joint ventures in the Northeast are particularly
well positioned to take advantage of demand in the steel producing areas in the
Eastern United States.
While the Company cannot predict how long the Asian crisis will impact its
business operations, it believes that the factors cited above will serve to help
minimize the financial impact.
Interest Expense. Interest expense decreased from $1.5 million for the three
months ended February 28, 1997 to $1.4 million for the same period this year
primarily as a result of lower average borrowings. For the six months ended
February 28, 1998, compared to the same period last year, interest expense
increased $0.7 million. This occurred because average borrowings in the first
quarter of 1998 were higher than during the first quarter of 1997, primarily as
a result of the Proler acquisition.
Year 2000. The Company has assessed and continues to assess the impact that the
Year 2000 issue will have on its reporting systems and operations. The Company
has determined that the operating and financial software systems it is currently
implementing are Year 2000 compliant. The Company will test new systems for Year
2000 compliance as they are implemented. Additionally, the Company does not
believe that the cost of bringing any of its retained software into year 2000
compliance will be material. The Company does not believe that it is
substantially reliant on any one customer or supplier and therefore does not
believe that the Year 2000 compliance of such companies will have a significant
impact on the Company. The Company does not anticipate that the Year 2000 issue
will have a significant impact on its financial position or results of
operations.
Liquidity and Capital Resources. Cash provided by operations for the six months
ended February 28, 1998 was $9.5 million, compared with $2.3 million for the
same period last year. The increase in cash flow is primarily attributable to
increased earnings, the timing of collection of accounts receivable, and a
smaller increase in inventories compared to the same period last year.
Capital expenditures for the three months ended February 28, 1998 totaled $2.2
million compared with $4.4 million during the same period last year. For the six
months ended February 28, 1998 and 1997, capital expenditures totaled $4.7
million and $8.1 million, respectively. The Company anticipates spending
approximately $9.8 million on capital expenditures during the remainder of
fiscal 1998.
15
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
As a result of certain acquisitions, the Company carries environmental reserves
totaling $29.7 million. The Company expects to require significant future cash
outlays as it incurs the actual costs relating to the remediation of such
environmental liabilities.
As of February 28, 1998, the Company had an unsecured revolving line of credit
totaling $200 million maturing in 2002. The Company had additional unsecured
lines of credit available of $55 million, of which $20 million was committed. In
the aggregate, the Company had borrowings outstanding under these lines totaling
$99.1 million at February 28, 1998.
Pursuant to a stock repurchase program announced by the Company in May 1994 and
amended in April 1998, the Company is authorized to repurchase up to 1.6 million
shares of its stock when the market price of the Company's stock is not
reflective of management's opinion of an appropriate valuation of the stock.
Management believes that repurchasing shares under these conditions enhances
shareholder value. As of February 28, 1998, a total of 448,300 shares had been
purchased under this program. During the six months ended February 28, 1998, the
Company repurchased 196,000 shares of its stock for a total of $5.1 million.
The Company believes that the current cash balance, internally generated funds,
and existing credit facilities will provide adequate financing for capital
expenditures, working capital, stock repurchases, and debt service requirements
for the next twelve months. In the longer term, the Company may seek to finance
business expansion, including potential acquisitions, with additional borrowing
arrangements or additional equity financing.
Forward Looking Statements. Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward looking statements that
involve a number of risks and uncertainties. In particular, the Company has
stated its expectations regarding its financial results. Among the factors that
could cause actual results to differ materially are the following: supply and
demand conditions and decisions of other market participants over which the
Company has no control and which are inherently difficult to predict; the
current financial crisis facing certain Asian countries; the performance of the
various joint ventures in which the Company is involved; railroad service
difficulties; 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 and seasonality of
results.
16
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
PART II
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
<PAGE>
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, 1998 By: /s/ BARRY A. ROSEN
-------------- -------------------------------------
Barry A. Rosen
Vice President, Finance
18
<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> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-28-1997
<CASH> 2,096
<SECURITIES> 0
<RECEIVABLES> 27,741
<ALLOWANCES> 495
<INVENTORY> 96,505
<CURRENT-ASSETS> 145,286
<PP&E> 267,396
<DEPRECIATION> 120,511
<TOTAL-ASSETS> 446,273
<CURRENT-LIABILITIES> 38,245
<BONDS> 109,333
0
0
<COMMON> 9,986
<OTHER-SE> 233,064
<TOTAL-LIABILITY-AND-EQUITY> 446,273
<SALES> 187,298
<TOTAL-REVENUES> 187,298
<CGS> 166,392
<TOTAL-COSTS> 176,896
<OTHER-EXPENSES> (810)
<LOSS-PROVISION> 145
<INTEREST-EXPENSE> 2,689
<INCOME-PRETAX> 15,486
<INCOME-TAX> 5,420
<INCOME-CONTINUING> 10,066
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,066
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 0.99
</TABLE>
