<PAGE>
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 29, 2000 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 5,364,726 shares of Class A Common Stock, par value of $1.00
per share, and 4,360,328 shares of Class B Common Stock, par value of $1.00 per
share, outstanding at April 1, 2000.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at February 29, 2000
and August 31, 1999............................................................................3
Consolidated Statement of Operations for the Three Months and
Six Months Ended February 29, 2000 and February 28, 1999.......................................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1999 and the Six Months
Ended February 29, 2000........................................................................5
Consolidated Statement of Cash Flows for the
Six Months Ended February 29, 2000 and February 28, 1999.......................................6
Notes to Consolidated Financial Statements.........................................................7
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................10
Quantitative and Qualitative Disclosures About Market Risk........................................16
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
</TABLE>
2
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Feb. 29, 2000 Aug. 31, 1999
------------- ---------------
(Unaudited) (Audited, restated)
(See Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,639 $ 6,174
Accounts receivable, less allowance for
doubtful accounts of $938 and $638 20,006 21,714
Accounts receivable from related parties 3,542 1,935
Inventories (Note 2) 98,053 90,967
Deferred income taxes (Note 2) 5,281 4,795
Prepaid expenses and other 3,365 3,417
------------- ---------------
TOTAL CURRENT ASSETS 132,886 129,002
NET PROPERTY, PLANT AND EQUIPMENT 132,257 135,814
OTHER ASSETS:
Investment in joint venture partnerships 106,079 103,980
Advances to joint venture partnerships 31,914 27,754
Goodwill 39,374 39,992
Intangibles and other 9,743 9,816
------------- ---------------
TOTAL ASSETS $ 452,253 $ 446,358
============= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 257 $ 436
Accounts payable 15,634 16,390
Accrued payroll liabilities 5,153 6,072
Current portion of environmental liabilities 5,139 5,154
Other accrued liabilities 6,610 7,568
------------- ---------------
TOTAL CURRENT LIABILITIES 32,793 35,620
DEFERRED INCOME TAXES 28,490 27,882
LONG-TERM DEBT LESS CURRENT PORTION 125,162 119,826
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION 19,427 19,661
OTHER LONG-TERM LIABILITIES 2,838 2,996
------------- ---------------
TOTAL LIABILITIES 208,710 205,985
------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,365 and 5,295 shares issued and outstanding 5,365 5,295
Class B common stock--25,000 shares $1 par value
authorized, 4,361 and 4,431 shares issued and outstanding 4,361 4,431
Additional paid-in capital 102,179 102,179
Retained earnings (Note 2) 131,638 128,468
------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 243,543 240,373
------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 452,253 $ 446,358
============= ===============
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
Feb. 29, 2000 Feb. 28, 1999 Feb. 29, 2000 Feb. 28, 1999
-------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
REVENUES $ 75,822 $ 51,722 $ 147,055 $ 118,888
Cost of goods sold and
other operating expenses 67,409 50,406 128,442 111,258
Selling and administrative 6,674 5,832 12,915 11,529
Income (loss) from joint ventures 3,788 (622) 3,283 (2,293)
-------------- ------------- ------------ ---------------
INCOME (LOSS) FROM OPERATIONS 5,527 (5,138) 8,981 (6,192)
-------------- ------------- ------------ ---------------
OTHER INCOME (EXPENSE):
Interest expense (1,986) (1,723) (3,695) (3,647)
Other (expense) income (442) 921 164 1,488
-------------- ------------- ------------ ---------------
(2,428) (802) (3,531) (2,159)
-------------- ------------- ------------ ---------------
INCOME (LOSS) BEFORE INCOME TAXES 3,099 (5,940) 5,450 (8,351)
Income tax (provision) benefit (955) 2,019 (1,308) 2,839
-------------- ------------- ------------ ---------------
NET INCOME (LOSS) $ 2,144 $ (3,921) $ 4,142 $ (5,512)
============== ============= ============ ===============
BASIC EARNINGS (LOSS) PER SHARE $ 0.22 $ (0.39) $ 0.43 $ (0.55)
============== ============= ============ ===============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.22 $ (0.39) $ 0.42 $ (0.55)
============== ============= ============ ===============
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional
----------------------------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
----------- --------- -------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1998, 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 2) 3,487 3,487
Class A common stock repurchased (260) (260) (2,945) (3,205)
Net income, restated (Note 2) 621 621
Dividends paid (1,966) (1,966)
----------- --------- -------- --------- ------------ ----------- -----------
Balance at August 31, 1999 5,295 5,295 4,431 4,431 102,179 128,468 240,373
Class B common stock converted
to Class A common stock 70 70 (70) (70)
Net income 4,142 4,142
Dividends paid (972) (972)
----------- --------- -------- --------- ------------ ----------- -----------
Balance at February 29, 2000 5,365 $ 5,365 4,361 $ 4,361 $ 102,179 $ 131,638 $ 243,543
=========== ========= ======== ========= ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For The Six Months Ended
Feb. 29, 2000 Feb. 28, 1999
------------- -------------
<S> <C> <C>
OPERATIONS:
Net income $ 4,142 $ (5,512)
Noncash items included in income:
Depreciation and amortization 9,071 9,015
Equity in (earnings) loss of joint ventures
and other investments (3,283) 2,293
Deferred income taxes 123
Loss (gain) on disposal of assets 1,275 (471)
Cash provided (used) by changes in working capital:
Accounts receivable 101 3,478
Inventories (7,086) 8,864
Prepaid expenses 52 (1,558)
Accounts payable (756) (2,166)
Accrued liabilities (1,827) (2,123)
Environmental liabilities (249) (740)
Other assets and liabilities (125) 56
------------- -------------
NET CASH PROVIDED BY OPERATIONS 1,438 11,136
------------- -------------
INVESTMENTS:
Capital expenditures (7,322) (5,572)
Advances (to) from joint ventures (4,160) 10,157
Investments in joint ventures (20)
Distributions from joint ventures 1,165 1,582
Proceeds from sale of assets 1,159 478
------------- -------------
NET CASH (USED) PROVIDED BY INVESTMENTS (9,158) 6,625
------------- -------------
FINANCING:
Repurchase of Class A common stock (189)
Dividends declared and paid (972) (994)
Reduction in long-term debt (132) (17,695)
Increase in long-term debt 5,289
------------- -------------
NET CASH PROVIDED (USED) BY FINANCING 4,185 (18,878)
------------- -------------
NET DECREASE IN CASH (3,535) (1,117)
CASH AT BEGINNING OF PERIOD 6,174 3,800
------------- -------------
CASH AT END OF PERIOD $ 2,639 $ 2,683
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
(Unaudited, in thousands, except per share amounts)
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, 1999. The results for the three
and six months ended February 29, 2000 are not necessarily indicative
of the results of operations for the entire year.
EARNINGS AND DIVIDENDS PER SHARE
Basic earnings per share (EPS) are computed based upon the weighted
average number of common shares outstanding during the period. Diluted
EPS reflect 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>
For the Three Months Ended For the Six Months Ended
Feb. 29, 2000 Feb. 28, 1999 Feb. 29, 2000 Feb. 28, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $2,144 $(3,921) $4,142 $(5,512)
======= ======== ======= ========
Computation of shares:
Average common shares outstanding 9,726 9,973 9,726 9,974
Stock options 127 -- 63 --
-------- -------- ------- --------
Diluted average common shares
outstanding 9,853 9,973 9,789 9,794
======== ======== ======= =======
Basic EPS $ 0.22 $ (0.39) $ 0.43 $ (0.55)
======= ======== ======= =======
Diluted EPS $ 0.22 $ (0.39) $ 0.42 $ (0.55)
======= ======== ======= =======
Dividend per share $ 0.05 $ 0.05 $ 0.10 $ 0.10
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
7
<PAGE>
NOTE 2 - INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
February 29, August 31,
2000 1999
----------- ---------
(Unaudited) (Audited)
<S> <C> <C>
Recycled metals $ 24,899 $ 25,890
Work in process 12,240 20,372
Finished goods 38,811 29,578
Supplies 22,103 15,127
--------- ----------
$ 98,053 $ 90,967
========= =========
</TABLE>
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 or second quarters
of fiscal 1999, no restatement of the statement of operations for the
three or six months ended February 28, 1999 period was required. The
balance sheet and statement of equity have been restated to reflect
the change.
NOTE 3 - 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 has joint
ventures within the metals recycling business (Joint Ventures in the
Metals Recycling Business) and joint ventures which are suppliers of
unprocessed metals (Joint Venture Suppliers of Recycled 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 joint venture operating
information provided below is shown separately from the 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.
8
<PAGE>
Revenues from external customers as reported on the Consolidated
Statement of Operations are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
Feb. 29, 2000 Feb. 28, 1999 Feb. 29, 2000 Feb. 28, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues from external customers:
Metals Recycling Business $ 45,708 $ 26,034 $ 85,817 $ 63,147
Steel Manufacturing Business 40,812 35,283 83,102 77,443
Intersegment revenues (10,698) (9,595) (21,864) (21,702)
------------- ------------- ------------- -------------
Consolidated revenues $ 75,822 $ 51,722 $ 147,055 $ 118,888
============= ============= ============= =============
</TABLE>
The following represents the joint ventures' total revenues from
external customers:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
Feb. 29, 2000 Feb. 28, 1999 Feb. 29, 2000 Feb. 28, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Joint Ventures in the Metals
Recycling Business $128,991 $ 71,859 $229,215 $149,604
Joint Venture Suppliers of Metals 12,370 10,805 23,846 23,715
------------- ------------- ------------- -------------
Total revenues $141,361 $ 82,664 $253,061 $173,319
============= ============= ============= =============
</TABLE>
The following is a reconciliation of consolidated income (loss) from
operations:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
Feb. 29, 2000 Feb. 28, 1999 Feb. 29, 2000 Feb. 28, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income (loss) from operations:
Metals Recycling Business $ 3,229 $(2,326) $ 6,050 $(2,708)
Steel Manufacturing Business 1,590 (473) 3,417 2,444
Joint Ventures in the Metals
Recycling Business 3,335 (835) 2,147 (3,087)
Joint Venture Suppliers of Metals 453 213 1,136 794
Corporate expense and eliminations (3,080) (1,717) (3,769) (3,635)
------------- ------------- ------------- -------------
Consolidated income (loss)
from operations $ 5,527 $(5,138) $ 8,981 $(6,192)
============= ============= ============= =============
</TABLE>
Income (loss) from operations generated by the joint ventures
represents the Company's equity in the net income (loss) of these
entities.
9
<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 ferrous and
nonferrous metals 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 For the Six Months Ended
Feb. 29, 2000 Feb. 28, 1999 Feb. 29, 2000 Feb. 28, 1999
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Metals Recycling Business:
Ferrous sales $ 34,133 $ 18,751 $ 65,004 $ 46,906
Nonferrous sales 9,410 5,328 16,861 11,237
Other sales 2,165 1,955 3,952 5,004
------------- ------------- ------------- -------------
Total sales 45,708 26,034 85,817 63,147
Ferrous sales to Steel
Manufacturing Business (10,698) (9,595) (21,864) (21,702)
Steel Manufacturing Business 40,812 35,283 83,102 77,443
------------- ------------- ------------- -------------
Total $ 75,822 $ 51,722 $ 147,055 $ 118,888
============= ============= ============= =============
INCOME (LOSS) FROM OPERATIONS:
Metals Recycling Business $ 3,229 $ (2,326) $ 6,050 $ (2,708)
Steel Manufacturing Business 1,590 (473) 3,417 2,444
Joint Ventures in the Metals
Recycling Business 3,335 (835) 2,147 (3,087)
Joint Venture Suppliers of Metals 453 213 1,136 794
Corporate expense & eliminations (3,080) (1,717) (3,769) (3,635)
------------- ------------- ------------- -------------
Total $ 5,527 $ (5,138) $ 8,981 $ (6,192)
============= ============= ============= =============
NET INCOME (LOSS) $ 2,144 $ (3,921) $ 4,142 $ (5,512)
============= ============= ============= =============
</TABLE>
10
<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
Feb. 29, 2000 Feb. 28, 1999 Feb. 29, 2000 Feb. 28, 1999
------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
SHIPMENTS:
METALS RECYCLING BUSINESS:
Ferrous metals (thousands of long tons):
To Steel Manufacturing Business 105 121 232 261
Other domestic 69 49 125 97
Export 174 63 344 207
------------- ------------- ------------- -------------
Total 348 233 701 565
Nonferrous metals (thousands lbs.) 23,167 16,428 42,262 35,097
============= ============= ============= =============
Average ferrous sales price ($/ton)
Domestic $ 103 $ 83 $ 96 $ 86
Export 93 75 89 79
Average 98 81 93 83
STEEL MANUFACTURING BUSINESS
Finished steel (thousands of short tons) 139 114 289 241
============= ============= ============= =============
Average sales price ($/ton) $ 294 $ 310 $ 287 $ 322
============= ============= ============= =============
</TABLE>
SECOND QUARTER FISCAL 2000 VS. SECOND QUARTER FISCAL 1999
REVENUES. Consolidated revenues for the three months ended February
29, 2000 increased $24.1 million (47%) from the same period last year.
The higher revenues were primarily attributed to increases in prices
and sales volumes for the Metals Recycling Business.
During the quarter ended February 29, 2000, revenues for the Metals
Recycling Business, before intercompany eliminations, increased $19.7
million (76%), which is attributed to higher average sales prices and
higher shipping volumes. Ferrous and nonferrous sales volumes
increased by 49% and 41%, respectively, from the prior year quarter.
In addition, the average sales prices for ferrous and nonferrous
metals increased by 22% and 25%, respectively, from the second quarter
of fiscal 1999. The higher prices and higher sales volumes were caused
by the rebound in the Asian economies which resulted in increases in
demand by Asian steel and metal producers.
The Steel Manufacturing Business' revenues for the three months ended
February 29, 2000 increased $5.5 million (16%), to $40.8 million from
the prior year quarter. The increase in revenues is primarily due to a
25,000 ton increase (22%) in finished steel shipments during the
quarter compared to the prior year. This increase was primarily the
result of increased demand for wire rod products. The higher sales
volumes were offset in part by a $16 per ton (5%) decrease in the
average selling price, which was due to the increased supply of lower
cost steel imports as well as a lower priced product sales mix.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
COST OF GOODS SOLD. Consolidated cost of goods sold increased $17.0
million (34%) for the three months ended February 29, 2000, compared
with the same period last year. Cost of goods sold decreased as a
percentage of revenues from 97% to 89%, which resulted in a $7.1
million increase in gross margin during the latest quarter as compared
to the prior year quarter.
During the second quarter of fiscal 2000, the Metals Recycling
Business' cost of goods sold increased $13.6 million over the prior
year quarter. In addition, cost of goods sold as a percentage of
revenues decreased from 96% during the second quarter of fiscal 1999
to 84% during the second quarter of fiscal 2000. As a result gross
profit increased by $6.1 million to $7.1 million. The increase in
gross margins is directly attributable to the higher selling prices
brought about by increasing demand from Asian countries and a lower
average cost per ton due to higher production levels.
For the three months ended February 29, 2000, cost of goods sold for
the Steel Manufacturing Business increased $3.5 million compared to
the same period last year and decreased as a percentage of revenues
from 99% to 94%. Gross profit increased from $0.3 million to $2.4
million compared with the second quarter last year. Although prices
were lower, margins improved due to lower raw material costs as well
as increased production volumes that lowered production costs per ton.
Production volumes were lower during the second quarter of last year
as excess supplies of low cost steel imports necessitated the mill's
curtailment of production. Cost of goods sold per ton, excluding
billets, decreased $27 per ton from the second quarter of last year to
$273 per ton.
FIRST HALF OF FISCAL 2000 VS. FIRST HALF OF FISCAL 1999
REVENUES. Consolidated revenues for the six months ended February 29,
2000 increased $28.2 million (24%) from the same period last year. The
higher revenues were primarily attributed to increases in prices and
sales volumes for the Metals Recycling Business.
During the six months ended February 29, 2000, revenues for the Metals
Recycling Business, before intercompany eliminations, increased $22.7
million (36%), which is attributed to higher average sales prices and
higher shipping volumes. Ferrous and nonferrous sales volumes
increased by 24% and 20%, respectively, from the same period in the
prior year. In addition the average sales prices for ferrous and
nonferrous metals increased by 11% and 25%, respectively, from the
first half of fiscal 1999. The higher prices and higher sales volumes
were caused by the rebound in the Asian economies which resulted in
increases in demand by Asian steel and metal producers.
The Steel Manufacturing Business' revenues for the six months ended
February 29, 2000 increased $5.7 million (7%), to $83.1 million, from
the first half of the prior year. The increase in revenues was
primarily due to a 48,000 ton increase (20%) in finished steel
shipments during the first six months of fiscal 2000 compared to the
prior year. This increase was primarily due to the increased demand
for wire rod products as well as higher productivity in the Company's
newest rolling mill that has resulted in increasing production volumes
of wire rod products. The higher sales volumes were offset in part by
a $34 per ton (11%) decrease in the average selling price, which was
due to the increased supply of lower cost steel imports as well as a
lower priced product sales mix.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
COST OF GOODS SOLD. Consolidated cost of goods sold increased by $17.2
million (15%) for the six months ended February 29, 2000, compared
with the same period last year. Cost of goods sold decreased as a
percentage of revenues from 94% to 87%, which resulted in an $11.0
million increase in gross margin during for the first six months of
fiscal 2000 as compared to the prior year.
During the first half of fiscal 2000, the Metals Recycling Business'
cost of goods sold increased $13.0 million over the prior year. In
addition, cost of goods sold as a percentage of revenues decreased
from 94% for the first half of fiscal 1999 to 84% during the first
half of fiscal 2000. As a result, gross profit increased by $9.7
million to $13.4 million. The increase in gross margins is directly
attributable to the higher selling prices brought about by the
increasing demand from Asian countries and lower costs per ton due to
higher production levels.
During the first six months of fiscal 2000, cost of goods sold for the
Steel Manufacturing Business increased $4.7 million compared to the
same period last year and decreased as a percentage of revenues from
95% to 94%. Gross profit increased from $4.1 million to $5.1 million
compared with the first half of last year. Although prices were lower,
margins improved due to increased production volumes that lowered
production costs per ton. Production volumes were lower during the
second quarter of last year as excess supplies of low cost steel
imports necessitated the mill's curtailment of production. Cost of
goods sold per ton, excluding billets, decreased $32 per ton from the
first six months of last year to $266 per ton.
INCOME FROM JOINT VENTURES. The Company's joint ventures' revenues and
results of operations were as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
Feb. 29, 2000 Feb. 28, 1999 Feb. 29, 2000 Feb. 28, 1999
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Total revenues from external
customers recognized by:
Joint Ventures in the Metals
Recycling Business $ 128,991 $ 71,859 $ 229,215 $ 149,604
Joint Venture Suppliers
of Metals 12,370 10,805 23,846 23,715
------------- ------------- ------------- -------------
$ 141,361 $ 82,664 $ 253,061 $ 173,319
============= ============= ============= =============
Income (loss) from joint
ventures recognized by
the Company from:
Joint Ventures in the Metals
Recycling Business $ 3,335 $ (835) $ 2,147 $ (3,087)
Joint Venture Suppliers
of Metals 453 213 1,136 794
------------- ------------- ------------- -------------
$ 3,788 $ (622) $ 3,283 $ (2,293)
============= ============= ============= =============
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
The Joint Ventures in the Metals Recycling Business predominantly
sell recycled ferrous metal. The increase in revenues recognized by
these joint ventures is attributable to higher ferrous selling prices
and an increase in tonnage shipped. Shipments of ferrous metal
processed by the joint ventures increased to 749,000 tons for the
quarter ended February 29, 2000 from 665,000 tons for the same
quarter in the prior year. The average prices for ferrous recycled
metal increased by 25% from the second quarter of last year.
For the six months ended February 29, 2000, ferrous metal shipments
increased to 1.4 million tons from 1.3 million tons during the same
period last year. The average selling price of ferrous recycled metal
increased 13% during that period, predominantly due to the
strengthening world market and a stronger domestic market. The
increase in ferrous tons shipped and average selling price per ton
for the three and six months ended February 29, 2000 was primarily
due to an increase in domestic sales.
The Company's equity in income from its Joint Ventures in the Metals
Recycling Business for the second quarter of fiscal 2000 increased to
$3.3 million from a loss of $0.8 million in the second quarter of
fiscal 1999. For the six months ended February 29, 2000, the
Company's equity in income from its Joint Ventures in the Metals
Recycling Business increased to $2.1 million from a loss of $3.1
million in the same period last year. The increase for both periods
was a result of higher average ferrous selling prices and an increase
in tons sold.
Revenues from the Joint Venture Suppliers of Recycled Metals
increased to $12.4 million for the three months ended February 29,
2000 from $10.8 million for the three months ended February 28, 1999.
For the three months ended February 29, 2000, the Company's equity in
income from these joint ventures increased to $0.5 million from $0.2
million in the same period last year. For the six months ended
February 29, 2000, revenues increased from $23.7 million to $23.8
million. Year-to-date, the Company's equity in income from these
joint ventures increased to $1.1 million from $0.8 million for the
previous year. The increase for both periods is primarily due to
rising domestic recycled metal prices.
OTHER EXPENSE. In the second quarter of fiscal 2000, the Company and
its outside board members approved the sale by a related party of a
ship used by the Company to export recycled metal. The vessel had
been recorded as a capital lease in the Company's financial
statements. The sale resulted in a $1.0 million loss during the
latest quarter.
INCOME TAX PROVISION. The income tax rate used for the first six
months of fiscal 2000 was 24%, compared with 34% for the 1999 period.
The lower rate results from the use of net operating losses (NOLs)
acquired with the fiscal 1996 Proler acquisition. Previous federal
tax rules limited the use of the NOLs to offset taxable income only
from the acquired Proler entities. Recent changes in federal tax
rules 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, modifying or replacing
equipment and software and performing testing to ensure that all
systems were Year 2000 compliant. 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 and does not
foresee any future potential problems.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
The Company incurred costs of approximately $1.1 million 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.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations, for the
six months ended February 29, 2000, was $1.4 million, compared with
$11.1 million for the first half of fiscal 1999. The decrease in cash
flow is primarily due to an increase in inventories related to the
Steel Manufacturing Business.
For the six months ended February 29, 2000 capital expenditures
totaled $7.3 million compared with $5.6 million during the same
period last year. The increase is primarily due to the expansion of
the dock and the installation of the new automobile shredder at the
Company's Tacoma, Washington facility. These projects were completed
in the first quarter of fiscal 2000.
As a result of acquisitions completed in prior years, the Company has
$24.6 million of accrued environmental liabilities as of February 29,
2000. 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 29, 2000 the Company had committed, unsecured
revolving lines of credit totaling $200 million maturing in 2003. The
Company has additional unsecured lines of credit totaling $50
million, of which $30 million is uncommitted. In the aggregate, the
Company had borrowings outstanding on these lines totaling $114.7
million at February 29, 2000. The Company's debt agreements have
certain restrictive convenants. As of February 29, 2000, the Company
was in material 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. As of February 29,
2000 the Company had repurchased 708,600 shares under this program.
No shares were repurchased during the six months ended February 29,
2000.
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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued):
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 global factors affecting the Company's financial
prospects. Examples of 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 lower cost imports;
fiscal policy in both the U.S. and abroad; competitive factors and
pricing pressures from national steel companies; availability of
unprocessed ferrous metal supply; fluctuations in recycled ferrous
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company periodically uses derivative financial instruments to
limit exposure to changes in interest rates. Because such derivative
instruments are used solely as hedges and not for speculative trading
purposes, they do not represent incremental risk to the Company. For
further discussion of derivative financial instruments, refer to
"FAIR VALUE OF FINANCIAL INSTRUMENTS" in the consolidated Financial
Statements included in Item 8 of Form 10-K for the fiscal year ended
August 31, 1999.
16
<PAGE>
PART II
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 2000 annual meeting of the shareholders was held on January 24,
2000. Holders of 3,263,226 shares of the Company's Class A common
stock, entitled to one vote per share, and 4,367,728 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:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
Leonard Schnitzer 46,933,068 7,438
Robert W. Philip 46,935,418 5,088
Kenneth M. Novack 46,935,418 5,088
Gary Schnitzer 46,935,568 4,938
Dori Schnitzer 46,931,885 8,621
Carol S. Lewis 46,931,574 8,932
Scott Lewis 46,934,968 5,538
Jean S. Reynolds 46,931,285 9,221
Robert S. Ball 46,935,457 5,049
William A. Furman 46,935,457 5,049
Ralph R. Shaw 46,935,457 5,049
</TABLE>
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 46,932,568 votes
cast for and 5,501 votes cast against. There were 27,801 abstentions
and 0 broker non-votes.
17
<PAGE>
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: April 14, 2000 By:/s/Barry A. Rosen
------------------- ------------------------------
Barry A. Rosen
Vice President, Finance
19
<TABLE> <S> <C>
<PAGE>
<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> DEC-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 2,639
<SECURITIES> 0
<RECEIVABLES> 20,006
<ALLOWANCES> 938
<INVENTORY> 98,053
<CURRENT-ASSETS> 132,886
<PP&E> 132,257
<DEPRECIATION> 0
<TOTAL-ASSETS> 452,253
<CURRENT-LIABILITIES> 32,793
<BONDS> 125,162
0
0
<COMMON> 9,726
<OTHER-SE> 233,817
<TOTAL-LIABILITY-AND-EQUITY> 452,253
<SALES> 75,822
<TOTAL-REVENUES> 75,822
<CGS> 67,409
<TOTAL-COSTS> 67,409
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,986
<INCOME-PRETAX> 3,099
<INCOME-TAX> 955
<INCOME-CONTINUING> 2,144
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,144
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
</TABLE>
