UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended May 31, 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
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 5,294,726 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 July 1, 1999.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at May 31, 1999
and August 31, 1998....................................................3
Consolidated Statement of Operations for the Three Months and
Nine Months Ended May 31, 1999 and 1998................................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1998 and the Nine Months
Ended May 31, 1999.....................................................5
Consolidated Statement of Cash Flows for the
Nine Months Ended May 31, 1999 and 1998................................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..........................................18
SIGNATURE PAGE............................................................19
2
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
May 31, 1999 August 31, 1998
------------ ---------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,468 $ 3,800
Accounts receivable, less allowance for
doubtful accounts of $638 and $645 22,323 26,161
Accounts receivable from related parties 2,030 3,428
Inventories (Note 2) 94,267 103,136
Deferred income taxes 5,723 5,723
Prepaid expenses and other 6,260 8,020
------------ ------------
TOTAL CURRENT ASSETS 133,071 150,268
------------ ------------
NET PROPERTY, PLANT AND EQUIPMENT 138,059 142,582
------------ ------------
OTHER ASSETS:
Investment in joint venture partnerships 99,283 103,494
Advances to joint venture partnerships 22,142 23,957
Goodwill 40,291 41,017
Intangibles and other 11,407 10,022
------------ ------------
$ 444,253 $ 471,340
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 174 $ 168
Accounts payable 15,922 19,056
Accrued payroll liabilities 5,523 5,603
Current portion of environmental liabilities (Note 4) 5,103 5,552
Other accrued liabilities 7,675 8,781
------------ ------------
TOTAL CURRENT LIABILITIES 34,397 39,160
------------ ------------
DEFERRED INCOME TAXES 24,668 24,619
------------ ------------
LONG-TERM DEBT LESS CURRENT PORTION 129,393 140,236
------------ ------------
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 4) 19,749 22,749
------------ ------------
OTHER LONG-TERM LIABILITIES 2,953 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, 5,295 and 5,555 shares issued and outstanding 5,295 5,555
Class B common stock--25,000 shares $1 par value
authorized, 4,431 and 4,431 shares issued and outstanding 4,431 4,431
Additional paid-in capital 102,179 105,124
Retained earnings 121,188 126,326
------------ ------------
233,093 241,436
------------ ------------
$ 444,253 $ 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 Nine Months Ended
May 31, May 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 66,639 $ 80,918 $ 185,526 $ 268,216
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of goods sold and
other operating expenses (Note 4) 58,945 70,913 170,203 236,402
Selling and administrative 6,093 5,903 17,620 17,315
---------- ---------- ---------- ----------
65,038 76,816 187,823 253,717
---------- ---------- ---------- ----------
INCOME (LOSS) FROM JOINT VENTURES 893 1,417 (1,401) 8,380
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 2,494 5,519 (3,698) 22,879
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (1,800) (1,849) (5,447) (4,537)
Other income (Note 5) 2,297 283 3,785 1,096
---------- ---------- ---------- ----------
497 (1,566) (1,662) (3,441)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 2,991 3,953 (5,360) 19,438
Income tax (provision) benefit (1,136) (1,384) 1,703 (6,803)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 1,855 $ 2,569 $ (3,657) $ 12,635
========== ========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE $ 0.19 $ 0.26 $ (0.37) $ 1.25
========== ========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.19 $ 0.26 $ (0.37) $ 1.25
========== ========== ========== ==========
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
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 (260) (260) (2,945) (3,205)
Net loss (3,657) (3,657)
Dividends paid (1,481) (1,481)
--------- ---------- --------- ---------- ---------- ---------- ----------
BALANCE AT 5/31/99 5,295 $ 5,295 4,431 $ 4,431 $ 102,179 $ 121,188 $ 233,093
========= ========== ========= ========== ========== ========== ==========
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 Nine Months Ended
May 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATIONS:
Net income $ (3,657) $ 12,635
Noncash items included in income:
Depreciation and amortization 13,473 14,123
Deferred income taxes (292)
Equity in earnings of joint ventures
and other investments 1,401 (8,380)
Gain on disposal of assets (1,300) (113)
Environmental reserve reversal (1,904)
Cash provided (used) by assets and liabilities:
Accounts receivable 5,291 1,683
Inventories 8,895 (9,352)
Prepaid expenses and other 1,510 (2,608)
Accounts payable (3,196) (3,783)
Accrued expenses (1,202) (427)
Environmental liabilities (875) (2,135)
Other assets and liabilities (1,117) (1,491)
---------- ----------
NET CASH PROVIDED (USED) BY OPERATIONS 17,319 (140)
---------- ----------
INVESTMENTS:
Capital expenditures (8,400) (7,512)
Advances from (to) joint ventures 1,815 (10,809)
Investments in joint ventures (20) (17,103)
Distributions from joint ventures 2,132 3,004
Proceeds from sale of assets 2,994 2,986
Other (1,205)
---------- ----------
NET CASH USED BY INVESTMENTS (1,479) (30,639)
---------- ----------
FINANCING:
Repurchase of Class A common stock (3,205) (5,066)
Dividends declared and paid (1,481) (1,507)
(Decrease) increase in long-term debt (12,700) 36,200
Reduction in long-term debt 214 (288)
---------- ----------
NET CASH (USED) PROVIDED BY FINANCING (17,172) 29,339
---------- ----------
NET DECREASE IN CASH (1,332) (1,440)
CASH AT BEGINNING OF PERIOD 3,800 3,106
---------- ----------
CASH AT END OF PERIOD $ 2,468 $ 1,666
========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
6
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 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, 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, 1998. The results for the nine
months ended May 31, 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"). 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 May 31, 1999
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $ 1,855 9,783 $ 0.19
=========
Options -- 14
--------- ---------
Diluted EPS $ 1,855 9,797 $ 0.19
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended May 31, 1998
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $ 2,569 9,985 $ 0.26
=========
Options -- 62
--------- ---------
Diluted EPS $ 2,569 10,047 $ 0.26
========= ========= =========
</TABLE>
7
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1999 and 1998
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended May 31, 1999
-------------------------------------------
Loss Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $ (3,657) 9,910 $ (0.37)
=========
Options -- 7
--------- ---------
Diluted EPS $ (3,657) 9,917 $ (0.37)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended May 31, 1998
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $ 12,635 10,070 $ 1.25
=========
Options -- 71
--------- ---------
Diluted EPS $ 12,635 10,141 $ 1.25
========= ========= =========
</TABLE>
Note 2 - Inventories:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
May 31, 1999 August 31, 1998
(Unaudited) (Audited)
------------ ---------------
<S> <C> <C>
Scrap metals $ 24,004 $ 28,952
Work in process 23,863 13,192
Finished goods 31,069 44,276
Supplies 15,331 16,716
---------- ----------
$ 94,267 $ 103,136
========== ==========
</TABLE>
Scrap metal inventories are valued at LIFO; the remainder are at FIFO.
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 May 31, 1999
and August 31, 1998.
8
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 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. No charges were incurred
for these charters for the three months ended May 31, 1999. Charges
incurred for these charters were $1,522 for the three months ended May
31, 1998, and $1,754 and $5,836 for the nine months ended May 31, 1999
and 1998, respectively.
The Company purchased scrap metals from certain of its joint venture
operations totaling $2,888 and $4,452 for the three months ended May
31, 1999 and 1998, respectively, and $7,692 and $12,307 for the nine
months ended May 31, 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 $398 and $338
for the three months ended May 31, 1999 and 1998, respectively, and
$1,209 and $998 for the nine months ended May 31, 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 charged to the related parties
based upon costs plus a 15% margin for overhead and profit. The
administrative charges totaled $361 and $233 for the three months ended
May 31, 1999 and 1998, respectively, and $830 and $969 for the nine
months ended May 31, 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
sub-charters for the three months ended May 31, 1999 and 1998 were
$1,588 and $123, respectively, offset by income of $1,550 for the three
months ended May 31, 1999. There was no subcharter income for the three
months ended May 31, 1998. For the nine months ended May 31, 1999 and
1998 charges incurred for sub-charter activity were $3,317 and $743,
respectively, offset by income of $3,200 and $408, respectively.
9
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 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, 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 costs specified in
the consultant's report was included in MMI's statement of operations
prior to its acquisition by the Company. This reserve was carried over
to the Company's balance sheet and at May 31, 1999 aggregated $18,200.
General Metals of Tacoma (GMT), a subsidiary of MMI, owns and operates
a scrap facility located in the State of Washington 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 $2,000 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 International
Corp. (Proler), the Company engaged an independent third-party
consultant 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 $8,600 for the
probable costs to remediate its wholly owned properties based upon the
consultant's estimates, increasing its environmental reserve to $9,800.
The Company carried over the aggregate reserve to its financial
statements upon acquiring Proler and $6,600 remained outstanding on May
31, 1999. Also, Proler's joint ventures recorded additional liabilities
of $4,100 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, to be completed 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 NINE MONTHS ENDED MAY 31, 1999 and 1998
(in thousands, except per share amounts)
(Unaudited)
During the third quarter of fiscal 1999, the Company engaged an
independent consultant to review the Company's environmental issues and
to perform a periodic assessment of its remaining potential
liabilities. Based upon additional remediation investigation, certain
previously established reserves were eliminated. As a result, cost of
goods sold for the quarter ended May 31, 1999 was lowered by the $1,900
reversal of these reserves.
Note 5 - Other Income:
The Company sold its Union City, California mill depot in March 1999,
recognizing a gain of $1,200. Additionally, the Company received a
$1,000 settlement as a result of antitrust litigation related to
graphite electrodes pricing which was recognized in May 1999. Both of
these items are included in other income in the accompanying
consolidated statement of operations.
Note 6 - Disposal of Lathrop, California Facility:
In May 1998, the Company disposed of a tin scrap processing facility in
Lathrop, California. The facility was acquired as part of the
acquisition of Proler International Corp. The sale resulted in a gain
of $1,100, of which $800 was recorded as a reduction in cost of goods
sold and $300 as a gain on sale of assets for the three months ended
May 31, 1998.
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 Nine Months Ended
----------------------------- -----------------------------
May 31, 1999 May 31, 1998 May 31, 1999 May 31, 1998
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Scrap Operations:
Ferrous sales $ 22,496 $ 40,497 $ 69,402 $ 143,361
Nonferrous sales 7,259 7,998 18,496 20,005
Other sales 2,133 3,672 7,137 12,267
---------- ---------- ---------- ----------
Total sales 31,888 52,167 95,035 175,633
Ferrous sales to Steel Operations (11,830) (16,430) (33,532) (44,546)
Steel Operations 46,581 45,181 124,023 137,129
---------- ---------- ---------- ----------
Total $ 66,639 $ 80,918 $ 185,526 $ 268,216
========== ========== ========== ==========
INCOME (LOSS) FROM OPERATIONS:
Scrap Operations $ 2,118 $ 2,746 $ (590) $ 13,646
Steel Operations 1,163 3,137 3,607 5,775
Joint ventures 893 1,417 (1,401) 8,380
Corporate expense & eliminations (1,680) (1,781) (5,314) (4,922)
---------- ---------- ---------- ----------
Total $ 2,494 $ 5,519 $ (3,698) $ 22,879
========== ========== ========== ==========
NET INCOME (LOSS) $ 1,855 $ 2,569 $ (3,657) $ 12,635
========== ========== ========== ==========
</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 Nine Months Ended
----------------------------- -----------------------------
May 31, 1999 May 31, 1998 May 31, 1999 May 31, 1998
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
SHIPMENTS:
SCRAP OPERATIONS
Ferrous scrap (long tons):
To Steel Operations 148 148 408 379
To unaffiliated customers 132 200 437 746
---------- ---------- ---------- ----------
Total 280 348 845 1,125
========== ========== ========== ==========
Export tons 84 117 292 547
========== ========== ========== ==========
STEEL OPERATIONS
Finished steel products (short tons) 159 131 400 392
========== ========== ========== ==========
</TABLE>
Revenues. Consolidated revenues for the three months ended May 31, 1999
decreased $14.3 million (18%) in comparison with the same quarter last
year. For the nine months ended May 31, 1999, consolidated revenues
decreased $82.7 million (31%) compared with the same period last year.
Revenues from Scrap Operations, before intercompany eliminations,
declined by $20.3 million to $31.9 million for the quarter ended May
31, 1999 compared with the same period last year, reflecting both lower
average selling prices and lower volumes. Ferrous scrap revenue
decreased $18.0 million (44%) to $22.5 million. The average selling
price of ferrous scrap dropped by $36 per ton to $80. Ferrous scrap
shipments were 68,000 tons (20%) lower. For the nine months ended May
31, 1999, ferrous scrap revenue decline $74.0 million (52%) to $69.4
million compared with the same period last year. For this period, the
average selling price of ferrous scrap declined by $45 per ton to $82
and shipments of ferrous scrap were 280,000 tons (25%) lower compared
with the same period last year. The impact of the Asian financial
crisis on worldwide scrap markets is predominantly responsible for
these declines. Additionally, the reconstruction of the Company's
Tacoma dock facilities also contributed to lower shipments, primarily
during the second quarter of fiscal 1999. During the construction
project, 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 program was
completed and the facility resumed its normal export shipment activity
in March 1999.
Steel Operations' revenues for the three months ended May 31, 1999 of
$46.6 million represented an improvement of $1.4 million (3%) over the
same quarter last year. Although the average selling price for finished
steel products declined by $52 per ton to $293, volume increased by 21%
to 159,000 tons. For the nine months ended May 31, 1999, revenues
declined $13.1 million (10%) to $124.0 million compared with the same
period last year while volume remained relatively unchanged. For this
period, the lower revenue level was driven by lower average selling
prices. The average selling price, excluding billets, declined by $30
per ton to $310. Lower finished steel selling prices 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 and nine months ended May 31, 1999 also
contributed to the decrease in 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 $12.0
million (17%) during the third quarter of fiscal 1999 compared with the
same quarter in fiscal 1998. Netted against cost of goods sold and
operating expenses for the quarter ended May 31, 1999 is a $1.9 million
reversal of a previously established environmental reserve. Cost of
goods sold as a percentage of revenues remained unchanged at 88%. Gross
profit for the quarter of $7.7 million was $2.3 million lower than for
the same quarter last year resulting from lower margins for both Scrap
and Steel Operations. For the nine months ended May 31, 1999,
consolidated cost of goods sold declined by $66.2 million (28%). Cost
of goods sold as a percentage of revenue rose to 92% from 88% during
the same period last year. Gross profit year-to-date of $15.3 million
represented a decline of $16.5 million from the same period last year
and is predominantly attributable to lower margins generated by Scrap
Operations.
For the three months ended May 31, 1999, Scrap Operations' cost of
goods sold decreased $20.0 million and as a percentage of revenue
improved from 88% to 82%. Scrap Operations' gross profit declined $.3
million to $5.8 million. For the nine months ended May 31, 1999, cost
of goods sold for Scrap Operations decreased by $66.2 million and as a
percentage of revenue increased from 87% to 90%. Gross profit for this
period declined by $14.4 million to $9.4 million. The lower gross
profit for both the three and nine months ended May 31, 1999 is
attributable to lower selling prices and reduced volumes.
As mentioned above, cost of goods sold for the third quarter of fiscal
1999 was lowered by a $1.9 million reversal of environmental reserves.
An independent consultant was engaged to review the Company's
environmental issues and to perform a periodic assesment of its
remaining potential liabilities. Based upon additional remediation
investigation, certain previously established reserves were eliminated.
As part of its acquisition of Proler International Corp in November
1996, the Company acquired a tin scrap processing facility in Lathrop,
California that was sold in May 1998. The Company had recorded an
environmental reserve for the property when it was acquired. The
remaining reserve was reversed upon sale of the facility. The sale
resulted in a gain of $1.1 million, of which $.8 million is recorded as
a reduction of cost of goods sold and $.3 million as gain on sale of
assets for the three months ended May 31, 1998.
Steel Operations' cost of goods sold for the third quarter of fiscal
1999 was $3.5 million higher than for the same quarter last year. As a
percentage of revenue, cost of goods sold increased from 91% to 96%.
Cost of goods sold per ton, excluding billets, declined from $308 to
$277, primarily due to lower scrap prices. Gross profit declined by
$2.1 million to $2.0 million, predominantly due to lower average
selling prices, partially offset by lower operating costs. For the nine
months ended May 31, 1999, cost of goods sold declined $11.0 million
and, as a percentage of revenue, increased from 94% to 95%. Cost of
goods sold per ton, excluding billets, decreased from $314 to $290,
again, predominantly due to lower scrap prices. Although operating
costs per ton declined, the reduction in average selling prices more
than offset them, resulting in gross profit of $6.1 million which was
$2.1 million lower than for the same period last year.
Income (Loss) from Joint Ventures. The Company's joint ventures
generated revenues of $97.4 million and the Company's share of their
income was $.9 million for the quarter ended May 31, 1999. This
compares with revenues of $79.0 million and income contributed of $1.4
million for the same period last year. The Joint Ventures in the Scrap
Processing Business shipped 730,000 tons this
14
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SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
quarter compared with 601,000 tons for the same quarter last year. For
the nine months ended May 31, 1999, the joint ventures generated
revenues of $278.1 million, with the Company's share of losses being
$1.4 million. For the same period last year, the joint ventures'
revenues aggregated $281.5 million and the Company's share of income
was $8.4 million. The Joint Ventures in the Scrap Processing Business
shipped 2.1 million tons and 1.8 million tons for the nine months ended
May 31, 1999 and 1998, respectively. The increase in shipments was
partially due to expanded joint venture interests. A reduction in
margins caused by the Asian financial crisis contributed to lower
earnings for the Joint Ventures in the Scrap Processing Business. The
Joint Venture Suppliers of Scrap contributed $.7 million for the
quarter ended May 31, 1999, compared with $1.0 million for the same
quarter last year. For the nine months ended May 31, 1999, the
Company's share of income from its Joint Venture Suppliers of Scrap was
$1.5 million compared with $2.6 million last year during the same
period. Severe weather conditions in California, primarily during the
second quarter of fiscal 1999, contributed to lower earnings for the
Joint Venture Suppliers of Scrap during the nine months ended May 31,
1999.
During the three months ended May 31, 1999, the Joint Ventures in the
Scrap Processing Business received refunds of harbor maintenance fees
paid in prior years, which were subsequently determined to be illegally
charged by the U.S. government. The Company's share of such refunds
aggregated $.7 million and is included in income from joint ventures
for that period.
Interest Expense. Interest expense for the three months ended May 31,
1999 decreased $.1 million to $1.8 million due to lower average
borrowings and lower interest rates. For the nine months ended May 31,
1999, interest expense increased by $.9 million to $5.4 million. The
increase was due to increased average borrowings for the year to date,
partially offset by lower average interest rates.
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, (f) business
systems for Pick-N-Pull, the Company's self-service auto dismantling
joint venture.
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 the remainder of Phase 2 activities, except for Steel
Operations and Pick-N-Pull, which are expected to
15
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
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 and Pick-N-Pull, which are
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 $445,000 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.
Liquidity and Capital Resources. Cash provided by operations for the
nine months ended May 31, 1999 was $17.3 million, compared with cash
used by operations of $.1 million for the same period last year. The
increase in cash flow is primarily attributable to the reduction of
inventories and accounts receivable compared to the same period last
year.
Capital expenditures for the three months ended May 31, 1999 totaled
$2.8 million which was the same as for the same period last year. For
the nine months ended May 31, 1999 and 1998, capital expenditures
totaled $8.4 million and $7.5 million, respectively. The Company
anticipates spending approximately $5.2 million on capital expenditures
during the remainder of fiscal 1999.
As a result of certain acquisitions, the Company carries environmental
reserves totaling $24.9 million. The Company expects to require
significant future cash outlays as it incurs the actual costs related
to the remediation of such environmental liabilities.
As of May 31, 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 $117.4 million at May 31, 1999.
16
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
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 May 31, 1999, a total of 708,600 shares had been purchased under
this program. During the nine months ended May 31, 1999, the Company
repurchased 260,300 shares of its stock for a total of $3.2 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, within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange 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.
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: July 15, 1999 By: /s/ BARRY A. ROSEN
------------- -------------------------------------
Barry A. Rosen
Vice President, Finance
19
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<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>
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