UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended November 30, 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 (Zip Code)
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 5,354,726 shares of Class A Common Stock, par value of $1.00
per share and 4,370,328 shares of Class B Common Stock, par value of $1.00 per
share outstanding on January 1, 2000.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at November 30, 1999
and August 31, 1999.................................................... 3
Consolidated Statement of Operations for the
Three Months Ended November 30, 1999 and 1998.......................... 4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1999 and the Three Months
Ended November 30, 1999................................................ 5
Consolidated Statement of Cash Flows for the
Three Months Ended November 30, 1999 and 1998.......................... 6
Notes to Consolidated Financial Statements............................... 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 13
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)
Nov. 30, 1999 Aug. 31, 1999
------------- -------------
(Unaudited) (Audited, restated)
see Note 5)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,974 $ 6,174
Accounts receivable, less allowance for
doubtful accounts of $638 20,696 21,714
Accounts receivable from related parties 1,359 1,935
Inventories (Note 2 and Note 5) 97,656 90,967
Deferred income taxes (Note 5) 5,281 4,795
Prepaid expenses and other 4,070 3,417
------------- -------------
TOTAL CURRENT ASSETS 132,036 129,002
NET PROPERTY, PLANT & EQUIPMENT 135,987 135,814
OTHER ASSETS:
Investment in joint venture partnerships 103,315 103,980
Advances to joint venture partnerships 34,872 27,754
Goodwill 39,683 39,992
Intangibles and other 9,430 9,816
------------- -------------
$ 455,323 $ 446,358
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 191 $ 436
Accounts payable 15,302 16,390
Accrued payroll liabilities 6,648 6,072
Current portion of environmental liabilities (Note 4) 5,141 5,154
Other accrued liabilities 7,777 7,568
------------- -------------
TOTAL CURRENT LIABILITIES 35,059 35,620
------------- -------------
DEFERRED INCOME TAXES 28,004 27,882
------------- -------------
LONG-TERM DEBT LESS CURRENT PORTION 127,907 119,826
------------- -------------
ENVIRONMENTAL LIABILITIES, NET OF CURRENT PORTION 19,552 19,661
------------- -------------
OTHER LONG-TERM LIABILITIES 2,916 2,996
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,355 and 5,295 shares issued and outstanding 5,355 5,295
Class B common stock--25,000 shares $1 par value
authorized, 4,371 and 4,431 shares issued and outstanding 4,371 4,431
Additional paid-in capital 102,179 102,179
Retained earnings (Note 5) 129,980 128,468
------------- -------------
241,885 240,373
------------- -------------
$ 455,323 $ 446,358
============= =============
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
November 30,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 71,233 $ 67,165
------------ ------------
COSTS AND EXPENSES:
Cost of goods sold and other operating expenses 61,033 60,852
Selling and administrative 6,241 5,696
------------ ------------
67,274 66,548
------------ ------------
Loss from joint ventures (505) (1,671)
------------ ------------
INCOME (LOSS) FROM OPERATIONS 3,454 (1,054)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (1,709) (1,924)
Other income 606 567
------------ ------------
(1,103) (1,357)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 2,351 (2,411)
Income tax (provision) benefit (353) 820
------------ ------------
NET INCOME (LOSS) $ 1,998 $ (1,591)
============ ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.21 $ (0.16)
============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.20 $ (0.16)
============ ============
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 8/31/98, as
previously reported 5,555 $ 5,555 4,431 $ 4,431 $ 105,124 $ 126,326 $ 241,436
Cumulative effect on prior years of
applying FIFO method of
accounting (Note 5) 3,487 3,487
Class A common stock repurchased (260) (260) (2,945) (3,205)
Net income, restated (Note 5) 621 621
Dividends paid (1,966) (1,966)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT 8/31/99 5,295 5,295 4,431 4,431 102,179 128,468 240,373
Class B common stock converted to
Class A Common Stock 60 60 (60) (60)
Net income 1,998 1,998
Dividends paid (486) (486)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT 11/30/99 5,355 $ 5,355 4,371 $ 4,371 $ 102,179 $ 129,980 $ 241,885
=========== =========== =========== =========== =========== =========== ===========
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 Three Months Ended
November 30,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATIONS:
Net income (loss) $ 1,998 $ (1,591)
Noncash items included in income:
Depreciation and amortization 4,462 4,654
Equity in losses of joint ventures 505 1,671
Gain on disposal of assets (13) (36)
Cash provided (used) by changes in working capital:
Accounts receivable 1,594 6,084
Inventories (6,689) 7,921
Prepaid expenses and other (653) (1,499)
Accounts payable (1,088) (1,904)
Accrued liabilities 300 2,014
Other assets and liabilities 303 (163)
------------ ------------
NET CASH PROVIDED BY OPERATIONS 719 17,151
------------ ------------
INVESTMENTS:
Capital expenditures (4,312) (2,252)
Advances (to) from joint ventures (7,118) 966
Distributions from joint ventures 150 932
Proceeds from sale of assets 12 50
------------ ------------
NET CASH USED BY INVESTMENTS (11,268) (304)
------------ ------------
FINANCING:
Repurchase of Class A common stock (189)
Dividends declared and paid (486) (499)
Reduction in long-term debt (65) (13,340)
Increase in long-term debt 7,900
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING 7,349 (14,028)
------------ ------------
NET (DECREASE) INCREASE IN CASH (3,200) 2,819
CASH AT BEGINNING OF PERIOD 6,174 3,800
------------ ------------
CASH AT END OF PERIOD $ 2,974 $ 6,619
============ ============
The accompanying notes are an integral part of this statement.
</TABLE>
6
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999 and 1998
(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, 1999. The results for the three
months ended November 30, 1999 are not necessarily indicative of the
results of operations for the entire year.
Earnings Per Share
------------------
Basic earnings per share (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 for the three months ended November 30, 1999 and 1998
(in thousands, except per share amounts):
Three Months Ended November 30, 1999
-----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Basic EPS $ 1,998 9,725 $ 0.21
===========
Options 61
----------- -------------
Diluted EPS $ 1,998 9,786 $ 0.20
=========== ============= ===========
Three Months Ended November 30, 1998
-----------------------------------------
Loss Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Basic and Diluted EPS $ (1,591) 9,975 $ (0.16)
=========== ============= ===========
7
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999 and 1998
(Unaudited)
Note 2 - Inventories:
Inventories consist of the following (in thousands):
November 30, August 31,
1999 1999
----------- ----------
(Unaudited) (Audited)
Scrap metals $ 23,317 $ 25,890
Work in process 17,082 20,372
Finished goods 34,293 29,578
Supplies 22,964 15,127
----------- ----------
$ 97,656 $ 90,967
=========== ==========
Recycled metal inventories are valued at FIFO; the remainder are at
average cost. See Note 5.
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 recycled metal to foreign markets. In 1993, the Company
signed a five-year time-charter agreement for one vessel which expired
in June 1998. The agreement guaranteed the ship owner a residual market
value of $2,500,000 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 time-charters and additional spot charters
of other vessels were $2,776,000 and $824,000 for the quarters ended
November 30, 1999 and 1998, respectively.
The Company purchased recyclable metals from its joint venture
operations totaling $1,769,000 and $2,333,000 for the quarters ended
November 30, 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 $339,000 and
$406,000 for the quarters ended November 30, 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 $285,000 and $223,000 for the quarters
ended November 30, 1999 and 1998, respectively.
8
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999 and 1998
(Unaudited)
Transactions Affecting Other Income (Expense)
---------------------------------------------
The vessels discussed above are periodically sub-chartered to third
parties. In this case, a related shipping agency company acts as the
Company's agent in the collection of income and payment of expenses
related to sub-charter activities. Charges incurred for these
sub-charters were $945,000 for the three months ended November 30,
1998. These charges were offset by income of $797,000 for the three
months ended November 30, 1998. There were no sub-charters for the
three months ended November 30, 1999.
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 November 30, 1999 aggregated
$18,200,000.
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 is approximately
$2,000,000 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 $8,600,000 for the
probable costs to remediate its wholly owned properties based upon the
consultant's estimates, increasing its environmental reserve to
$9,800,000. The Company carried over the aggregate reserve to its
financial statements upon acquiring Proler and $6,500,000 remained
outstanding on November 30, 1999. Also, Proler's joint ventures
recorded additional liabilities of $4,100,000 for the probable costs to
remediate their properties, based upon the consultant's estimates.
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. The Company's consultant estimated the
probable costs associated with this prior to the Company's acquisition
of Proler.
9
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999 and 1998
(Unaudited)
Note 4 - Environmental Liabilities (Continued):
As part of the Proler acquisition, the Company became a fifty-percent
owner of Hugo Neu-Proler Company (HNP). HNP has agreed, 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.
Metals Recycling LLC (Metals) is a scrap metals processing business
with locations in Rhode Island and Massachusetts. The members of Metals
are one of the Company's Proler joint ventures and Metals Recycling,
Inc. On June 9, 1999, the Rhode Island Department of Environmental
Management (DEM) issued a Notice of Violation (NOV) against Metals
alleging Metals had violated federal and state regulations relating to
the storage, management, and transportation of hazardous waste and
imposed an administrative penalty of $718,045. Metals has filed an
answer to the NOV in which it denied the allegations and requested an
adjudicatory hearing. In July 1999, the DEM issued a NOV to Rhode
Island Resource Recovery Corporation (RIRRC), which included a civil
penalty of $307,752, relating to the alleged disposal of hazardous
waste by Metals at a landfill operated by RIRRC. Metals and RIRRC have
denied the DEM's allegations. RIRRC has requested an adjudicatory
hearing. Pursuant to an Alternative Coverage Disposal Agreement between
RIRRC and Metals, Metals has agreed to defend and indemnify RIRRC with
regard to the NOV.
In late January of 1999, federal and state officials searched Metal's
Johnston, Rhode Island and Worcester, Massachusetts facilities. Metals
has been advised that the search was part of a state criminal
investigation into possible violations of state and federal hazardous
waste programs and a Rhode Island statute that prohibits the disposal
of out-of-state solid waste at the landfill operated by RIRRC. A grand
jury has been empanelled to consider the allegations. No proceedings
have been commenced against Metals or its officers. The Company
believes Metals has substantial defenses to the alleged violations.
Note 5 - Change in Accounting Principle:
In the first quarter of fiscal 2000, the Company changed its method of
accounting for recycled metals inventories from Last-In, First-Out
(LIFO) to First-In, First-Out (FIFO). Given the volatility of both
prices and quantities, management believes that accounting for
inventories using the FIFO method better matches revenues and expenses,
and therefore is preferable. In addition, the method is consistent with
its other inventory pools. In accordance with Accounting Principles
Board No. 20, "Accounting Changes," upon adoption, the Company
retroactively restated prior periods by applying the FIFO method of
accounting in prior periods. Because the Company had not recorded a
LIFO adjustment during the first quarter of fiscal 1999, no restatement
of the statement of operations for that period was required. The
balance sheet and statement of equity have been restated to reflect the
change.
10
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999 and 1998
(Unaudited)
Note 6 - Segment Information:
The Company operates in two industry segments: metal processing and
recycling (Metals Recycling Business) and mini-mill steel manufacturing
(Steel Manufacturing Business). Additionally, the Company is a partner
in joint ventures in the metals recycling business or which are
suppliers of unprocessed metals. The Company considers these joint
ventures to be separate business segments because they are managed
separately. These joint ventures are accounted for using the equity
method. As such, the operating information provided below related to
the joint ventures is shown separately from consolidated information,
except for the Company's equity in the net income of the joint
ventures.
The information provided below is obtained from internal information
that is provided to the Company's chief operating decision-makers for
the purpose of corporate management. The Company does not allocate
corporate interest income and expense, income taxes or other income and
expenses related to corporate activity to its operating segments.
Assets and capital expenditures are not shown for the joint ventures as
management does not use that information to allocate resources or
assess performance.
<TABLE>
<CAPTION>
Three Months Ended November 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues from external customers:
Metals Recycling Business $ 40,109 $ 37,113
Steel Manufacturing Business 42,290 42,159
Intersegment revenues (11,166) (12,107)
------------- -------------
Consolidated revenues $ 71,233 $ 67,165
============= =============
</TABLE>
The joint ventures' revenues from external customers are as follows:
<TABLE>
<CAPTION>
Three Months Ended November 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Joint Ventures in the Metals Recycling Business $ 100,225 $ 77,745
Joint Venture Suppliers of Metals 11,475 12,910
------------- -------------
$ 111,700 $ 90,655
============= =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended November 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Income (loss) from operations:
Metals Recycling Business $ 2,785 $ (350)
Steel Manufacturing Business 1,826 2,916
Joint Ventures in the Metals Recycling Business (1,188) (2,252)
Joint Venture Suppliers of Metals 683 581
Corporate expense and eliminations (652) (1,949)
------------- -------------
Consolidated income from operations $ 3,454 $ (1,054)
============= =============
</TABLE>
Income from operations generated by the joint ventures represents the
Company's equity in the net income of these entities.
11
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999 and 1998
(Unaudited)
Note 7 - Subsequent Event:
As mentioned in Note 3, the Company has recorded a time charter of a
vessel, which a related company owns, as a capital lease. The vessel's
operating costs now exceed the cost to charter from a third-party due
primarily to market conditions in the shipping industry and the
vessel's age and condition. This situation is expected to continue into
the foreseeable future. Thus, in December 1999, the company decided to
sell the vessel to a third party, which was approved by the Company's
outside board members. The sale of the vessel is expected to be
complete in the second quarter of fiscal year 2000. The Company
anticipates recognizing a loss of approximately $1.1 million in
conjunction with this transaction.
12
<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 primary business segments. The Company's
Metals Recycling Business collects, processes and recycles steel scrap
through its facilities. The Company's Steel Manufacturing Business
operates a mini-mill in Oregon, which produces finished steel products
and maintains a mill depot in California. Additionally, the Company
owns equity in joint ventures that participate in the purchase,
collection and processing of recycled metals.
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
November 30,
--------------------------
(unaudited)
1999 1998
---------- ----------
<S> <C> <C>
REVENUES:
Metals Recycling Business:
Ferrous sales $ 30,872 $ 28,155
Nonferrous sales 7,450 5,909
Other sales 1,787 3,049
---------- ----------
Total sales 40,109 37,113
Ferrous sales to Steel Manufacturing Business (11,166) (12,107)
Steel Manufacturing Business 42,290 42,159
---------- ----------
Total $ 71,233 $ 67,165
========== ==========
INCOME (LOSS) FROM OPERATIONS:
Metals Recycling Business $ 2,785 $ (350)
Steel Manufacturing Business 1,826 2,916
Joint Ventures in the Metals Recycling Business (1,188) (2,252)
Joint Venture Suppliers of Metals 683 581
Corporate expense and eliminations (652) (1,949)
---------- ----------
Total $ 3,454 $ (1,054)
========== ==========
NET INCOME (LOSS) $ 1,998 $ (1,591)
========== ==========
</TABLE>
13
<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
November 30,
--------------------------
(unaudited)
1999 1998
---------- ----------
<S> <C> <C>
SHIPMENTS:
METALS RECYCLING BUSINESS
Ferrous scrap (long tons):
To Steel Manufacturing Business 127 140
To unaffiliated customers 226 192
---------- ----------
Total 353 332
========== ==========
Export tons 170 144
========== ==========
STEEL MANUFACTURING BUSINESS
Finished steel products (short tons) 150 127
========== ==========
</TABLE>
Revenues. Consolidated revenues for the three months ended November 30,
1999 increased $4.0 million (6%) from the same period last year.
Revenues for both the Metals Recycling Business and the Steel
Manufacturing Business were higher.
Revenues for the Metals Recycling Business before intercompany
eliminations increased $3.0 million (8%) as a result of both increased
average selling prices and higher sales volume. These were partially
offset by a decrease in the sales volume to the Steel Manufacturing
Business. Ferrous scrap revenues increased $2.7 million (10%).
Shipments of ferrous scrap to unaffiliated customers increased 34,000
tons (18%) to 226,000 tons, while shipments to the Steel Manufacturing
Business decreased 13,000 tons (9%) to 127,000 tons. Prices rose
modestly as Asian markets continued to stabilize and construction
spending in those regions improved, which increased demand for finished
steel products, consequently, ferrous scrap. In addition, the Company
recently completed two major construction projects at its Tacoma,
Washington facility, which has increased both its overall production
capacity of shredded metal and its ability to more efficiently load
export shipments.
The Steel Manufacturing Business' revenues increased slightly, $0.1
million (less than 1%), to $42.3 million. Finished steel shipments
increased 23,000 tons (18%) offset by a decrease in the average
finished steel selling price of about $50 per ton (15%) compared with
the same quarter last year. The increase in finished steel shipments is
primarily a result of an increase in wire rod sales due to increased
demand from a major customer. The decrease in the average selling price
is primarily due to competing finished steel being dumped on the West
Coast from Asian and other countries, competitive pressures in the
domestic market and a lower margin product sales mix.
Cost of Goods Sold. Consolidated cost of goods sold remained relatively
unchanged, increasing $0.2 million (less than 1%) for the first quarter
of fiscal 2000 compared with the first quarter of fiscal 1999. Cost of
goods sold did, however, decrease as a percentage of revenues from 91%
to 86%. Gross profit increased $3.9 million as a result of increased
margins in the Metals Recycling Business partially offset by decreased
margins in the Steel Manufacturing Business.
14
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
The Metals Recycling Business' cost of goods sold as a percentage of
revenues remained unchanged at 84%. Gross profit increased $3.6 million
to $6.3 million, primarily as a result of higher selling prices and
increased volumes.
In the first quarter of fiscal 2000, cost of goods sold for the Steel
Manufacturing Business increased $1.2 million to $39.6 million and
increased as a percentage of revenues from 91% to 94%. The increase in
cost of goods sold resulted from increased finished steel shipments
partially offset by a decrease in production costs. Cost of goods sold
per ton, excluding billets, decreased $36 per to $260 per ton. This
decrease was primarily a result of reduced scrap costs and increased
production volumes that lowered the average amount of fixed costs per
unit produced. Gross profit decreased $1.1 million to $2.7 million as a
result of lower sales prices, partially offset by the impact of lower
manufacturing costs.
Income from Joint Ventures. The Company's joint venture's revenues and
results of operations were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended November 30,
-------------------------------
(unaudited)
1999 1998
---------- ----------
<S> <C> <C>
Total revenues from external customers recognized by:
Joint Ventures in the Metals Recycling Business $ 100,225 $ 77,745
Joint Venture Suppliers of Metals 11,475 12,910
---------- ----------
$ 111,700 $ 90,655
========== ==========
(Loss) income from joint ventures recognized by the Company:
Joint Ventures in the Metals Recycling Business $ (1,188) $ (2,252)
Joint Venture Suppliers of Metals 683 581
---------- ----------
$ (505) $ (1,671)
========== ==========
</TABLE>
The joint ventures in the Metals Recycling Business predominantly
process and sell recycled ferrous metal. The increase in revenues
recognized by these joint ventures is attributable to higher ferrous
selling prices, the impact of which was partially offset by a decrease
in tonnage shipped. Shipments of ferrous metal processed by the joint
ventures decreased to 630,500 tons for the quarter ended November 30,
1999 from 652,000 tons in the prior year. The decrease in ferrous tons
shipped was primarily due to fewer sales to Asian countries partially
offset by an increase in domestic sales. The average selling price of
ferrous recycled metal increased during that period to $93 per ton from
$80 per ton, predominantly due to the strengthening world market and a
stronger domestic market. Conversely, the price paid to vendors for
unprocessed metal also increased.
The Company's equity in losses from its joint ventures in the Metals
Recycling Business for the first quarter of fiscal 2000 decreased to
$1.2 million from $2.2 in the first quarter of fiscal 1999. The smaller
loss was a result of higher average ferrous selling prices partially
offset by fewer tons sold.
15
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
Revenues from the Joint Venture Suppliers of Metal declined to $11.5
million for the three months ended November 30, 1999 from $12.9 million
for the three months ended November 30, 1998. The decline was
attributable primarily to decreased revenues by the Company's rail
marketing joint venture. Equity in income from these joint ventures
increased to $0.7 million from $0.6 million primarily due to rising
domestic metal prices.
Interest Expense. Interest expense for the first quarter of fiscal 2000
decreased $0.2 million to $1.7 million compared with the first quarter
of fiscal 1999. The decrease was primarily a result of lower average
borrowings due to lower average inventories and accounts receivable for
the first quarter of fiscal 2000 compared with the same quarter last
year.
Income tax provision. The income tax rate used for the first quarter of
fiscal 2000 is 15%, compared with 34% for the first quarter of fiscal
1999. The lower rate results from the use of net operating losses
(NOLs) acquired with the Proler acquisition. Previous federal tax rules
limited the use of the NOLs to offset taxable income only from the
acquired Proler entities. Recent federal tax rules changes now allow
the Company to use these NOLs to offset substantially all of its
income, subject to certain annual dollar limits.
Year 2000. In response to Year 2000 compliance issues, the Company
developed and executed a systematic approach to identifying and
assessing potential Year 2000 issues. The process consisted of
modifying or replacing equipment and software and performing final
testing to ensure that all systems were Year 2000 compliant after
modifications were installed, or that any failure to be Year 2000
compliant would not have a material impact on the Company. These phases
were completed in 1999. As of the date of this filing, the Company has
not experienced any significant Year 2000 issues with respect to its
computer hardware and software systems. While management believes that
the risk is low, it is early in the Year 2000 and there is a
possibility that a Year 2000 compliance failure related to the
Company's hardware or software systems may occur. The Company will
continue to monitor its systems for such an occurrence.
The Company incurred approximately $947,000 for correction of the year
2000 issues, including software and hardware upgrades and the cost of
personnel allocated to the project. The Year 2000 upgrades have been
funded through normal operating funds.
The Company also assessed the Year 2000 readiness of its "key" vendors
using questionnaires and letters. As of the date of this filing, none
of the Company's critical vendors have been found to be non-compliant.
Liquidity and Capital Resources. Cash provided by operations for the
first quarter of fiscal 2000 was $0.7 million, compared with $17.2
million for the first quarter of fiscal 1999. The decrease in cash flow
is primarily due to an increase in inventories and the timing of the
collection of accounts receivable.
Capital expenditures for the three months ended November 30, 1999 were
$4.3 million compared with $2.2 million during the same period last
year. The increase is primarily due to the expansion of the dock, which
was completed in March 1999, and the installation of the new shredder
at the Company's Tacoma, Washington facility, which was completed
during the first quarter of fiscal 2000.
16
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
As a result of acquisitions completed in prior years, the Company has
$24.7 million of accrued environmental liabilities as of November 30,
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 November 30, 1999, the Company had committed unsecured revolving
lines of credit totaling $200 million maturing in 2003. The Company had
additional unsecured lines of credit of $85 million, $65 million of
which was uncommitted. In the aggregate, the Company had borrowings
outstanding on these lines totaling $117.8 million at November 30,
1999. The Company's debt agreements have certain restrictive
convenants. As of November 30, 1999, the Company was in compliance with
such covenants.
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 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 November 30, 1999 the
Company had repurchased 708,600 shares under this program. No shares
were repurchased during the three months ended November 30, 1999.
The Company believes that its 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 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
effect of stabilization of certain Asian financial markets. 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
recycled metals supply; fluctuations in recycled metals 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.
PART II
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
<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: January 14, 2000 By: 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> 3-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 2,974
<SECURITIES> 0
<RECEIVABLES> 20,696
<ALLOWANCES> 638
<INVENTORY> 97,656
<CURRENT-ASSETS> 132,036
<PP&E> 135,987
<DEPRECIATION> 0
<TOTAL-ASSETS> 455,323
<CURRENT-LIABILITIES> 35,059
<BONDS> 127,907
0
0
<COMMON> 9,726
<OTHER-SE> 232,159
<TOTAL-LIABILITY-AND-EQUITY> 455,323
<SALES> 71,233
<TOTAL-REVENUES> 71,233
<CGS> 61,033
<TOTAL-COSTS> 61,033
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,709
<INCOME-PRETAX> 2,351
<INCOME-TAX> 353
<INCOME-CONTINUING> 1,998
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,998
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.20
</TABLE>
