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, 1999 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 97296-0047
Portland, OR ----------
- ---------------------------------------- (Zip Code)
(Address of principal executive offices)
(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 5,338,726 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, 1999.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at February 28, 1999
and August 31, 1998.....................................................3
Consolidated Statement of Operations for the Three Months and
Six Months Ended February 28, 1999 and 1998.............................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1998 and the Six Months
Ended February 28, 1999.................................................5
Consolidated Statement of Cash Flows for the
Six Months Ended February 28, 1999 and 1998.............................6
Notes to Consolidated 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
2
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
February 28, 1999 August 31, 1998
----------------- ---------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,683 $ 3,800
Accounts receivable, less allowance for
doubtful accounts of $638 and $645 20,335 26,161
Accounts receivable from related parties 5,831 3,428
Inventories (Note 2) 94,298 103,136
Deferred income taxes 5,723 5,723
Prepaid expenses and other 9,327 8,020
-------------- --------------
TOTAL CURRENT ASSETS 138,197 150,268
-------------- --------------
NET PROPERTY, PLANT AND EQUIPMENT 140,634 142,582
-------------- --------------
OTHER ASSETS:
Investment in joint venture partnerships 99,621 103,494
Advances to joint venture partnerships 13,800 23,957
Goodwill 40,610 41,017
Intangibles and other 10,927 10,022
-------------- --------------
$ 443,789 $ 471,340
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 172 $ 168
Accounts payable 16,952 19,056
Accrued payroll liabilities 4,507 5,603
Current portion of environmental liabilities (Note 4) 5,041 5,552
Other accrued liabilities 7,770 8,781
-------------- --------------
TOTAL CURRENT LIABILITIES 34,442 39,160
-------------- --------------
DEFERRED INCOME TAXES 24,668 24,619
-------------- --------------
LONG-TERM DEBT LESS CURRENT PORTION 124,377 140,236
-------------- --------------
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 4) 22,520 22,749
-------------- --------------
OTHER LONG-TERM LIABILITIES 3,041 3,140
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,542 and 5,555 shares issued and outstanding 5,542 5,555
Class B common stock--25,000 shares $1 par value
authorized, 4,431 shares issued and outstanding 4,431 4,431
Additional paid-in capital 104,948 105,124
Retained earnings 119,820 126,326
-------------- --------------
234,741 241,436
-------------- --------------
$ 443,789 $ 471,340
============== ==============
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,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 51,722 $ 81,932 $ 118,888 $ 187,298
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of goods sold and
other operating expenses 50,406 72,547 111,258 165,489
Selling and administrative 5,832 5,752 11,529 11,407
----------- ----------- ----------- -----------
56,238 78,299 122,787 176,896
----------- ----------- ----------- -----------
INCOME (LOSS) FROM JOINT VENTURES (622) 3,169 (2,293) 6,963
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (5,138) 6,802 (6,192) 17,365
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (1,723) (1,444) (3,647) (2,689)
Other income 921 453 1,488 810
----------- ----------- ----------- -----------
(802) (991) (2,159) (1,879)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (5,940) 5,811 (8,351) 15,486
Income tax benefit (provision) 2,019 (2,034) 2,839 (5,420)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (3,921) $ 3,777 $ (5,512) $ 10,066
=========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE $ (0.39) $ 0.38 $ (0.55) $ 1.00
=========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.39) $ 0.37 $ (0.55) $ 0.99
=========== =========== =========== ===========
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 8/31/97 5,737 $ 5,737 4,445 $ 4,445 $ 109,994 $ 118,885 $ 239,061
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)
Net income 9,448 9,448
Dividends paid (2,007) (2,007)
--------- ---------- --------- ----------- ----------- ----------- -----------
BALANCE AT 8/31/98 5,555 5,555 4,431 4,431 105,124 126,326 241,436
Class A common stock repurchased (13) (13) (176) (189)
Net income (5,512) (5,512)
Dividends paid (994) (994)
--------- ---------- --------- ----------- ----------- ----------- -----------
BALANCE AT 2/28/99 5,542 $ 5,542 4,431 $ 4,431 $ 104,948 $ 119,820 $ 234,741
========= ========== ========= =========== =========== =========== ===========
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,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATIONS:
Net income $ (5,512) $ 10,066
Noncash items included in income:
Depreciation and amortization 9,015 9,393
Equity in loss (earnings) of joint ventures
and other investments 2,293 (6,963)
(Gain) loss on disposal of assets (471) 145
Cash provided (used) by assets and liabilities:
Accounts receivable 3,478 4,979
Inventories 8,864 (1,351)
Prepaid expenses (1,558) (4,713)
Accounts payable (2,166) (747)
Accrued liabilities (2,123) (327)
Environmental liabilities (740) (635)
Other assets and liabilities 56 (372)
------------ ------------
NET CASH PROVIDED BY OPERATIONS 11,136 9,475
------------ ------------
INVESTMENTS:
Capital expenditures (5,572) (4,730)
Advances from (to) joint ventures 10,157 (2,655)
Investments in joint ventures (20) (15,178)
Distributions from joint ventures 1,582 2,670
Capitalization of losses on assets held for sale (969)
Proceeds from sale of assets 478 198
------------ ------------
NET CASH PROVIDED (USED) BY INVESTMENTS 6,625 (20,664)
------------ ------------
FINANCING:
Repurchase of Class A common stock (189) (5,066)
Dividends declared and paid (994) (1,011)
Increase in long-term debt 16,500
Reduction in long-term debt (17,695) (244)
------------ ------------
NET CASH (USED) PROVIDED BY FINANCING (18,878) 10,179
------------ ------------
NET DECREASE IN CASH (1,117) (1,010)
CASH AT BEGINNING OF PERIOD 3,800 3,106
------------ ------------
CASH AT END OF PERIOD $ 2,683 $ 2,096
============ ============
The accompanying notes are an integral part of this statement.
</TABLE>
6
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
(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, 1998. The results for the six
months ended February 28, 1999 are not necessarily indicative of the
results of operations for the entire year.
Earnings Per Share
------------------
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share", which specifies the computation,
presentation and disclosure requirements for earnings per share
("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, 1999
------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
------------ ------------ ------------
<S> <C> <C> <C>
Basic EPS $ (3,921) 9,973 $ (0.39)
============
Options
------------ ------------
Diluted EPS $ (3,921) 9,973 $ (0.39)
============ ============ ============
</TABLE>
<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
============ ============ ============
</TABLE>
7
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended February 28, 1999
------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
------------ ------------ ------------
<S> <C> <C> <C>
Basic EPS $ (5,512) 9,974 $ (0.55)
============
Options
------------ ------------
Diluted EPS $ (5,512) 9,974 $ (0.55)
============ ============ ============
</TABLE>
<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
============ ============ ============
</TABLE>
Statement of Cash Flows
- -----------------------
Non-cash transactions are excluded from the statement of cash flows. In fiscal
1999, the Company increased its ownership in one of its joint ventures from 50%
to 100% in a non-cash transaction.
Note 2 - Inventories:
Inventories consist of the following:
February 28, August 31,
1999 1998
--------- ---------
(Unaudited) (Audited)
Scrap metals $ 21,191 $ 28,952
Work in process 20,523 13,192
Finished goods 36,772 44,276
Supplies 15,812 16,716
--------- ---------
$ 94,298 $ 103,136
========= =========
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 $5,811 at February 28,
1999 and August 31, 1998.
8
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
(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
guaranteed the ship owner a residual market value of $2,500 at the end
of the time-charter. Upon expiration of the time charter, the Company
paid the guaranteed residual and entered into an additional five-year
time charter. The Company has accounted for the transaction as a
capital lease, as ownership of the vessel is transferred at expiration
of the time-charter. The Company entered into two additional seven year
time-charters in May 1995 for other vessels. Charges incurred for these
charters were $935 and $2,069 for the three months ended February 28,
1999 and 1998, respectively, and $1,758 and $4,380 for the six months
ended February 28, 1999 and 1998, respectively.
The Company purchased scrap metals from its joint venture operations
totaling $2,471 and $3,644 for the three months ended February 28, 1999
and 1998, respectively, and $4,804 and $7,855 for the six months ended
February 28, 1999 and 1998, respectively.
The Company leases certain land and buildings from a real estate
company which is a related entity. The rent expense was $405 and $386
for the three months ended February 28, 1999 and 1998, respectively,
and $811 and $772 for the six months ended February 28, 1999 and 1998,
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 $246 and $529, for the three months
ended February 28, 1999 and 1998, respectively, and $469 and $736 for
the six months ended February 28, 1999 and 1998, 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
subcharters for the three months ended February 28, 1999 and 1998 were
$784 and $251, respectively, offset by income of $854 and $215,
respectively. For the six months ended February 28, 1999 and 1998,
charges incurred for sub-charter activity were $1,728 and $607,
respectively, offset by income of $1,650 and $407, respectively.
9
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
(In thousands, except per share amounts)
(Unaudited)
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, 1999 aggregated $20.0
million.
General Metals of Tacoma (GMT), a subsidiary of MMI, owns and operates
a scrap facility located on the Hylebos Waterway, a part of
Commencement Bay, which is the subject of an ongoing environmental
investigation and remediation project by the U.S. Environmental
Protection Agency (EPA) under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA). GMT and well over 60 other
parties were named potentially responsible parties (PRP) for the
investigation and clean up of contaminated sediment along the Hylebos
Waterway. GMT and five other PRPs voluntarily have entered into an
Administrative Order on Consent with the EPA to fund a pre-remedial
study of sediment contamination and remediation alternatives. GMT's
share of the study, which is now expected to be completed in late 1999,
is approximately $2 million and is included in the reserve above. Any
further potential liabilities, if any, cannot be estimated at this
time.
In 1996, prior to the Company's acquisition of Proler, an independent
third-party consultant was engaged to estimate the costs to cure
present and future environmental liabilities related to Proler's wholly
owned and joint venture properties. Proler recorded a liability of $8.6
million for the probable costs to remediate its wholly owned properties
based upon the consultant's estimates, increasing its environmental
reserve to $9.8 million. The Company carried over the aggregate reserve
to its financial statements upon acquiring Proler and $7.6 million
remained outstanding on February 28, 1999. Also, Proler's joint
ventures recorded additional liabilities of $4.1 million for the
probable costs to remediate their properties, based upon the
consultant's estimates, in 1996 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 preliminary site
investigations 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 the site by the EPA.
Additionally, Proler and this subsidiary have been named or identified
as PRPs at several other sites. Proler included the probable costs
associated with this site in the aforementioned reserve.
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
1996 lease renewal with the Port of Los Angeles, to be responsible for
a multi-year, phased remedial clean-up project involving certain
environmental conditions on its scrap processing facility at its
Terminal Island site in Los Angeles, California by the year 2001.
Remediation will include limited excavation and treatment of
contaminated soils, paving, installation of a stormwater management
system, construction of a noise barrier and perimeter wall around the
facility, and groundwater monitoring. The probable costs to remediate
this property are included in the aforementioned reserve.
10
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
(In thousands, except per share amounts)
(Unaudited)
Note 5 - Subsequent Events:
On April 9, 1999, the Board of Directors declared a 5 cent per share
dividend on Class A and Class B common stock payable on May 20, 1999 to
holders of record on May 5, 1999.
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, California, and Nevada. 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; Portland, Maine;
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. A mill depot is 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,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Scrap Operations:
Ferrous sales $ 18,751 $ 47,405 $ 46,906 $ 102,864
Nonferrous sales 5,328 5,701 11,237 12,007
Other sales 1,955 4,141 5,004 8,595
----------- ----------- ----------- -----------
Total sales 26,034 57,247 63,147 123,466
Ferrous sales to Steel Operations (9,595) (13,982) (21,702) (28,116)
Steel Operations 35,283 38,667 77,443 91,948
----------- ----------- ----------- -----------
Total $ 51,722 $ 81,932 $ 118,888 $ 187,298
=========== =========== =========== ===========
INCOME (LOSS) FROM OPERATIONS:
Scrap Operations $ (2,326) $ 3,516 $ (2,708) $ 10,903
Steel Operations (473) 1,612 2,443 2,639
Joint ventures (622) 3,169 (2,293) 6,963
Corporate expense & eliminations (1,717) (1,495) (3,634) (3,140)
----------- ----------- ----------- -----------
Total $ (5,138) $ 6,802 $ (6,192) $ 17,365
=========== =========== =========== ===========
NET INCOME (LOSS) $ (3,921) $ 3,777 $ (5,512) $ 10,066
=========== =========== =========== ===========
</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,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
SHIPMENTS:
SCRAP OPERATIONS:
Ferrous scrap (long tons):
To Steel Operations 121 117 261 232
To unaffiliated customers 112 248 304 546
----------- ----------- ----------- -----------
Total 233 365 565 778
=========== =========== =========== ===========
Export tons 63 180 207 429
=========== =========== =========== ===========
Nonferrous scrap (pounds) 16,428 14,386 35,097 29,056
=========== =========== =========== ===========
STEEL OPERATIONS:
Finished steel products (short tons) 114 111 241 260
=========== =========== =========== ===========
</TABLE>
Revenues. Consolidated revenues for the three months ended February 28, 1999
decreased $30.2 million (37%) in comparison with the same quarter last year. For
the six months ended February 28, 1999, consolidated revenues decreased $68.4
million (37%) compared with the same period last year. The revenue decreases
were attributable to both Scrap and Steel Operations.
Revenues from Scrap Operations, before intercompany eliminations, declined by
$31.2 million to $26.0 million for the quarter ended February 28, 1999 compared
with the same period last year, reflecting both lower average selling prices and
lower volumes. Ferrous scrap revenue decreased $28.7 million (60%). The average
selling price of ferrous scrap dropped by $49 per ton to $81. Ferrous scrap
shipments were 132,000 tons (36%) lower. For the six months ended February 28,
1999, ferrous scrap revenue declined $56.0 million (54%) to $46.9 million
compared with the same period last year. The average selling price of ferrous
scrap declined by $49 to $83 per ton and shipments of ferrous scrap were 213,000
tons (27%) lower. Although the impact of the Asian financial crisis on worldwide
scrap markets is predominantly responsible for these declines, the
reconstruction of the Company's Tacoma dock facilities has also been a
contributing factor. During the construction process, which began in November
1998, this facility was only able to ship to the domestic market, thereby
further reducing the Company's aggregate export shipments. The dock
reconstruction project is nearing completion and the facility resumed its normal
export shipment activity in March 1999.
Steel Operations' revenues for the three months ended February 28, 1999 declined
$3.4 million (9%) to $35.3 million. While shipments remained at relatively the
same level, the average selling price per ton decreased by $39. For the six
months ended February 28, 1999, revenues declined $14.5 million (16%) to $77.4
million compared with the same period last year. For this period, shipments of
finished steel products declined by 19,000 tons and the average selling price
was $16 per ton lower. Lower finished steel selling prices and volumes are
primarily a result of competing finished steel being dumped on the West Coast by
Asian and other countries. A change in product mix to lower priced products for
both the three months and six months ended February 28, 1999 also contributed to
the decrease in the average selling prices for these periods.
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. Consolidated cost of goods sold declined $22.1 million (31%)
during the second quarter of fiscal 1999 compared with the second quarter of
fiscal 1998. Cost of goods sold as a percentage of revenues increased from 89%
to 97%. Gross profit of $1.3 million for the quarter was $8.1 million lower than
for the same quarter last year resulting from lower margins for both Scrap and
Steel Operations. For the six months ended February 28, 1999, consolidated cost
of goods sold declined by $54.2 million (33%). Cost of goods sold as a
percentage of revenue rose to 94% from 88% during the same period last year.
Gross profit of $7.6 million year-to-date represented a decline of $14.2 million
from the same period last year and is almost solely due to lower margins
generated by Scrap Operations.
For the three months ended February 28, 1999, Scrap Operations' cost of goods
sold decreased $25.1 million and as a percentage of revenue increased from 88%
to 96%. Scrap Operations' gross profit decreased $6.1 million to $1.0 million.
For the six months ended February 28, 1999, cost of goods sold for Scrap
Operations decreased by $46.2 million and as a percentage of revenue increased
from 86% to 94%. Gross profit for this period declined by $14.1 million to $3.7
million. The lower gross profit for both the three and six months ended February
28, 1999 is attributable to lower selling prices and reduced volumes.
Steel Operations' cost of goods sold for the second quarter of fiscal 1999 was
$1.3 million lower than for the same quarter last year. As a percentage of
revenue, cost of goods sold increased from 94% to 99%. Cost of sales per ton,
excluding billets, declined from $320 to $300. Gross profit declined by $2.1
million to $.3 million, predominantly due to lower average selling prices and
shipments partially offset by lower operating costs. Additionally, the Company
temporarily shut down one its two rolling mills during most of the quarter
partially in response to lower demand as a result of pressure experienced from
imported finished steel products. Seasonal demand changes, an effort to reduce
existing inventory balances and the achievement of higher productivity also
contributed to the decision to shut down the rolling mill. The shutdown resulted
in the expensing of certain costs during the quarter that normally would have
been capitalized in inventory, further reducing the gross margin. For the six
months ended February 28, 1999, cost of goods sold declined $14.5 million and,
as a percentage of revenue, remained at 95% compared with the same period last
year. Cost of sales per ton, excluding billets, declined from $318 to $298.
Although average selling prices declined, scrap and operating costs were also
lower, resulting in gross profit of $4.1 million which was unchanged compared
with the same period last year.
Income (Loss) from Joint Ventures. The Company's joint ventures generated $83.0
million of revenues and the Company's share of their losses was $.6 million for
the quarter ended February 28, 1999. This compares with revenues of $99.0
million and income contributed of $3.2 million for the same period last year.
The Joint Ventures in the Scrap Processing Business shipped 634,000 tons this
quarter compared with 592,000 tons for the same quarter last year. For the six
months ended February 28, 1999, the joint ventures generated revenues of $180.7
million with the Company's share of losses being $2.3 million. For the same
period last year, the joint ventures' revenues aggregated $202.5 million and the
Company's share of income was $7.0 million. The Joint Ventures in the Scrap
Processing Business shipped 1.3 million tons and 1.2 million tons for the six
months ended February 28, 1999 and 1998, respectively. A reduction in margins
caused by the Asian financial crisis contributed to lower earnings for the Joint
Ventures in the Scrap Processing Business. Severe weather conditions in
California contributed to lower earnings for the Joint Venture Suppliers of
Scrap.
Interest Expense. Interest expense for the three months ended February 28, 1999
increased $.3 million to $1.7 million from the same period last year. For the
six months ended February 28, 1999, interest expense increased by $1.0 million
to $3.6 million. The increases were primarily a result of increased borrowings,
partially offset by the impact of lower interest rates.
14
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
Year 2000. The following discussion is provided in response to the Securities
and Exchange Commission's Interpretation of Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisors, Investment Companies, and
Municipal Securities Issuers.
In response to Year 2000 compliance issues, the Company has developed a
systematic approach that consists of the following three phases: (1)
identification and assessment of potential Year 2000 issues, (2) modification or
replacement of equipment and software, (3) final testing to ensure that all
systems are Year 2000 compliant after modifications are installed.
The Company has divided its Year 2000 issues into the following categories: (a)
physical hardware and related operating systems at the Corporate Data Processing
Facility, (b) business and financial reporting systems at all locations, (c)
personal computers and peripheral equipment at all locations, (d) facility and
support systems (including communication devices and safety systems) at all
locations, (e) manufacturing systems at Cascade Steel Rolling Mills.
The Company has completed the identification and assessment phase.
The Company has completed the modification of equipment at the Corporate Data
Processing Facility, the business and financial reporting systems at all
locations, personal computers at all locations, and expects the remainder of
Phase 2 activities to be complete no later than May 31, 1999, except for Steel
Operations which is expected to be complete no later than November 30, 1999.
The Company expects to complete Phase 3 activities by no later than August 31,
1999, except for Steel Operations which is expected to be complete no later than
November 30, 1999.
Management estimates that the costs for correction of the Year 2000 issues,
including any software and hardware upgrades (but excluding replacements that
would have occurred even without the Year 2000 issue), and the cost of personnel
allocated to this project should not exceed $1,300,000, of which $1,000,000 is
expected to be capital expenditures. Approximately $366,000 has been spent to
date. The year 2000 upgrades are being funded through normal operating funds and
are expected to account for less than 5% of the Company's Information Technology
(IT), maintenance and manufacturing capital budgets. There can be no assurance
that the costs and timeframes above will not change as the Company continues its
assessments.
The Year 2000 project is a priority project for the Company's IT and Engineering
departments. No significant IT or engineering projects are being deferred as a
result of the Company's Year 2000 efforts.
The Company is also in the process of assessing the Year 2000 readiness of its
"key" vendors using questionnaires and letters. In the event a critical vendor
is found to be non-compliant, the Company will develop contingency plans to
address the issue.
As the Company is not dependent on any significant customer, and given the
nature of the scrap business, no Year 2000 assessment of customers is
anticipated.
At the present time, the Company has not expended the resources to develop a
contingency plan with respect to year 2000 compliance as the Company believes it
will be Year 2000 ready.
15
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
Liquidity and Capital Resources. Cash provided by operations for the six months
ended February 28, 1999 was $11 million, compared with $9.5 million for the same
period last year. The increase in cash flow is primarily attributable to a
decrease in inventories, offset partially by lower earnings.
Capital expenditures for the three months ended February 28, 1999 totaled $3.3
million compared with $2.2 million during the same period last year. For the six
months ended February 28, 1999 and 1998, capital expenditures totaled $5.6
million and $4.7 million, respectively. The Company anticipates spending
approximately $8 million on capital expenditures during the remainder of fiscal
1999.
As a result of certain acquisitions completed in prior years, the Company has
$27.6 million of accrued environmental liabilities as of February 28, 1999. 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, 1999, the Company had an unsecured revolving line of credit
totaling $200 million maturing in 2003. The Company had additional unsecured
lines of credit available of $85 million, of which $65 million was committed. In
the aggregate, the Company had borrowings outstanding under these lines totaling
$112.5 million at February 28, 1999.
Pursuant to a stock repurchase program announced by the Company in May 1994 and
amended in April 1998, the Company is authorized to repurchase 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, 1999, a total of 460,800 shares had been purchased
under this program. During the six months ended February 28, 1999, the Company
repurchased 12,500 shares of its stock for a total of $189,000. Subsequent to
February 28, 1999, the Company repurchased an additional 247,800 shares for a
total of $3,017,000.
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, within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934, all of which are subject to risks and uncertainties. One
can generally identify these forward-looking statements through the use of words
such as "expect," "believe," and other words which convey a similar meaning. One
can also identify these statements as they do not relate strictly to historical
or current facts. They are likely to address the Company's business strategy,
financial projections and results and other global factors affecting the
Company's financial prospects. An example of this is the current financial
crisis facing certain Asian and other countries. Other factors that could cause
actual results to differ materially are the following: supply and demand
conditions; the Company's ability to mitigate the effects of the Asian situation
and foreign fiscal policies on its profitability; competitive factors and
pricing pressures from national steel companies; imports of foreign steel;
availability of scrap supply; fluctuations in scrap prices and seasonality of
results. One should understand that it is not possible to predict or identify
all factors that could cause actual results to differ from the Company's forward
looking statements. Consequently, the reader should not consider any such list
to be a complete statement of all potential risks or uncertainties. Further, the
Company does not assume any obligation to update any forward-looking statement.
16
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
PART II
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1999 annual meeting of the shareholders was held on January 25,
1999. Holders of 4,433,604 shares of the Company's Class A common
stock, entitled to one vote per share, and 4,421,728 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, Scott Lewis, Jean S. Reynolds, 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, Scott Lewis, Jean
S. Reynolds, 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 48,024,639 626,245
Robert W. Philip 48,023,989 626,895
Kenneth M. Novack 48,026,239 624,645
Gary Schnitzer 48,024,139 626,745
Dori Schnitzer 48,024,172 626,712
Carol S. Lewis 48,024,072 624,812
Scott Lewis 48,024,639 626,245
Jean S. Reynolds 48,026,172 624,712
Robert S. Ball 48,024,739 626,145
William A. Furman 48,024,639 626,245
Ralph R. Shaw 48,024,739 626,145
2. To approve and ratify the appointment of PricewaterhouseCoopers
LLP as the independent auditors of the Corporation.
This proposal was approved by the stockholders with 48,641,568
votes cast for and 2,626 votes cast against. There were 6,690
abstentions and 0 broker non-votes.
17
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
<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, 1999 By: /s/ BARRY A. ROSEN
-------------- -------------------------------------
Barry A. Rosen
Vice President, Finance
19
<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-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 2,683
<SECURITIES> 0
<RECEIVABLES> 20,335
<ALLOWANCES> 638
<INVENTORY> 94,298
<CURRENT-ASSETS> 138,197
<PP&E> 140,634
<DEPRECIATION> 0
<TOTAL-ASSETS> 443,789
<CURRENT-LIABILITIES> 34,442
<BONDS> 124,377
0
0
<COMMON> 9,973
<OTHER-SE> 224,768
<TOTAL-LIABILITY-AND-EQUITY> 443,789
<SALES> 118,888
<TOTAL-REVENUES> 118,888
<CGS> 111,258
<TOTAL-COSTS> 111,258
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,647
<INCOME-PRETAX> (8,351)
<INCOME-TAX> (2,839)
<INCOME-CONTINUING> (5,512)
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