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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, 2002 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 4,982,303 shares of Class A Common Stock, par value of $1.00
per share, 4,184,828 shares of Class B Common Stock, par value of $1.00 per
share, outstanding at July 1, 2002.
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SCHNITZER STEEL INDUSTRIES, INC.
INDEX
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PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at May 31, 2002 and August 31, 2001.......... 3
Consolidated Statement of Income for the Three Months and Nine
Months Ended May 31, 2002 and 2001.................................. 4
Consolidated Statement of Shareholders' Equity for the Year
Ended August 31, 2001 and the Nine Months Ended May 31, 2002........ 5
Consolidated Statement of Cash Flows for the Nine Months Ended
May 31, 2002 and 2001............................................... 6
Notes to Consolidated Financial Statements.............................. 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 11
Quantitative and Qualitative Disclosures About Market Risk.............. 21
SIGNATURE PAGE.......................................................... 22
2
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
MAY 31, 2002 AUG. 31, 2001
---------- ----------
(Unaudited) (Audited)
ASSETS
------
Current Assets:
Cash $ 15,176 $ 1,877
Accounts receivable, less allowance for doubtful accounts
of $850 and $920 29,371 22,315
Accounts receivable from related parties 368 546
Inventories (Note 2) 66,964 89,353
Deferred income taxes 3,837 3,837
Prepaid expenses and other 3,525 4,110
---------- ----------
Total current assets 119,241 122,038
Net property, plant and equipment 113,508 119,510
Other assets:
Investment in and advances to joint venture partnerships 111,414 108,457
Notes receivables less current portion (Note 3) 28,908 32,018
Goodwill 37,953 39,345
Other 2,865 4,502
---------- ----------
TOTAL ASSETS $ 413,889 $ 425,870
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 65 $ 200
Accounts payable 17,041 15,902
Accrued payroll liabilities 4,980 6,209
Current portion of environmental liabilities 3,038 2,000
Other accrued liabilities 6,027 6,317
---------- ----------
Total current liabilities 31,151 30,628
Deferred income taxes 28,696 30,039
Long-term debt less current portion 83,024 93,766
Environmental liabilities, net of current portion 18,229 20,915
Other long-term liabilities 2,432 2,453
Commitments and contingencies
Shareholders' equity:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 4,962 and 4,896 shares issued and outstanding 4,962 4,896
Class B common stock--25,000 shares $1 par value authorized,
4,185 and 4,304 shares issued and outstanding 4,185 4,304
Additional paid-in capital 95,278 95,923
Retained earnings 145,932 142,946
---------- ----------
Total shareholders' equity 250,357 248,069
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 413,889 $ 425,870
========== ==========
The accompanying notes are an integral part of this statement.
3
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited, in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- --------------------------
MAY 31, 2002 MAY 31, 2001 MAY 31, 2002 MAY 31, 2001
---------- ---------- ---------- ----------
Revenues $ 86,096 $ 68,990 $ 223,967 $ 227,167
---------- ---------- ---------- ----------
Costs and expenses:
Cost of goods sold and other
operating expenses 78,376 62,255 207,132 204,566
Selling and administrative expenses 7,648 6,435 21,708 20,067
---------- ---------- ---------- ----------
Income (loss) from wholly-owned operations 72 300 (4,873) 2,534
Income from joint ventures 4,599 1,674 13,793 5,777
---------- ---------- ---------- ----------
Income from operations 4,671 1,974 8,920 8,311
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (527) (1,188) (1,862) (4,058)
Other income (expense) 64 1,161 (1,613) 2,782
---------- ---------- ---------- ----------
(463) (27) (3,475) (1,276)
Income before income taxes 4,208 1,947 5,445 7,035
Income tax provision (841) (482) (1,088) (2,110)
---------- ---------- ---------- ----------
Net income $ 3,367 $ 1,465 $ 4,357 $ 4,925
========== ========== ========== ==========
Basic earnings per share $ 0.37 $ 0.16 $ 0.48 $ 0.52
========== ========== ========== ==========
Diluted earnings per share $ 0.36 $ 0.16 $ 0.47 $ 0.52
========== ========== ========== ==========
The accompanying notes are an integral part of this statement.
4
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited, in thousands)
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- -------- -------- -------- -------- --------
Balance at August 31, 2000 5,389 $ 5,389 4,312 $ 4,312 $101,840 $136,889 $248,430
Class B common stock converted
to Class A common stock 8 8 (8) (8)
Class A common stock repurchased (506) (506) (6,185) (6,691)
Class A common stock issued 5 5 54 59
Stock options issued 214 214
Net income 7,919 7,919
Dividends paid (1,862) (1,862)
-------- -------- -------- -------- -------- -------- --------
Balance at August 31, 2001 4,896 4,896 4,304 4,304 95,923 142,946 248,069
Class B common stock converted
to Class A common stock 119 119 (119) (119)
Class A common stock repurchased (99) (99) (1,157) (1,256)
Class A common stock issued 46 46 512 558
Net income 4,357 4,357
Dividends paid (1,371) (1,371)
-------- -------- -------- -------- -------- -------- --------
Balance at May 31, 2002 4,962 $ 4,962 4,185 $ 4,185 $ 95,278 $145,932 $250,357
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this statement.
5
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
FOR THE NINE MONTHS ENDED
--------------------------
MAY 31, 2002 MAY 31, 2001
---------- ----------
Operations:
Net income $ 4,357 $ 4,925
Noncash items included in income:
Depreciation and amortization 14,005 14,108
Equity in income of joint ventures (13,793) (5,777)
Deferred income taxes (1,343) (111)
(Gain) loss on disposal of assets 858 (340)
Cash provided (used) by changes in working capital:
Accounts receivable (5,353) 1,379
Inventories 22,127 (3,232)
Prepaid expenses (565) 423
Accounts payable 1,747 (161)
Accrued liabilities (1,605) (831)
Environmental liabilities (872)
Other assets and liabilities 2,860 609
---------- ----------
Net cash provided by operations 22,423 10,992
---------- ----------
Investing:
Capital expenditures (7,049) (6,079)
Cash received from joint ventures 119,999 120,856
Cash used by joint ventures (109,167) (118,257)
Proceeds from sale of assets 39 827
---------- ----------
Net cash provided (used by) investments 3,822 (2,653)
---------- ----------
Financing:
Repurchase of Class A common stock (1,256) (6,561)
Issuance of Class A common stock 558 60
Dividends declared and paid (1,371) (1,402)
Reduction in long-term debt (10,877) (950)
---------- ----------
Net cash used by financing (12,946) (8,853)
---------- ----------
Net increase (decrease) in cash 13,299 (514)
Cash at beginning of period 1,877 2,407
---------- ----------
Cash at end of period $ 15,176 $ 1,893
========== ==========
The accompanying notes are an integral part of this statement.
6
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2002 AND 2001
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
---------------------
The accompanying unaudited interim financial statements of Schnitzer Steel
Industries, Inc. (the Company) have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in annual financial
statements have been condensed or omitted pursuant to those rules and
regulations. In the opinion of management, all adjustments, consisting only
of normal, recurring adjustments considered necessary for a fair
presentation, have been included. Although management believes that the
disclosures made are adequate to ensure that the information presented is
not misleading, management suggests that these financial statements be read
in conjunction with the financial statements and notes thereto included in
the Company's annual report for the fiscal year ended August 31, 2001. The
results for the three and nine months ended May 31, 2002 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 (in
thousands, except per share amounts):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------- -------------------------
MAY 31, 2002 MAY 31, 2001 MAY 31, 2002 MAY 31, 2001
---------- ---------- ---------- ----------
Net income $ 3,367 $ 1,465 $ 4,357 $ 4,925
========== ========== ========== ==========
Computation of shares:
Average common shares outstanding 9,134 9,226 9,136 9,426
Stock options 173 18 98 18
---------- ---------- ---------- ----------
Diluted average common shares
outstanding 9,307 9,244 9,234 9,444
========== ========== ========== ==========
Basic EPS $ 0.37 $ 0.16 $ 0.48 $ 0.52
========== ========== ========== ==========
Diluted EPS $ 0.36 $ 0.16 $ 0.47 $ 0.52
========== ========== ========== ==========
Dividend per share $ 0.05 $ 0.05 $ 0.15 $ 0.15
========== ========== ========== ==========
Options to purchase 545,000 and 723,000 shares were outstanding at May 31,
2002 and 2001, respectively, but were not included in the computation of
diluted earnings per share because the options' exercise prices were
greater than the average market price of the common shares and, therefore,
the effect would be anti-dilutive.
7
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2002 AND 2001
(Unaudited)
NOTE 2 - INVENTORIES:
Inventories consisted of the following (in thousands):
MAY 31, AUGUST 31,
2002 2001
---------- ----------
(Unaudited) (Audited)
Recycled metals $ 14,676 $ 21,599
Work in process 15,280 17,600
Finished goods 24,150 36,960
Supplies 12,858 13,194
---------- ----------
$ 66,964 $ 89,353
========== ==========
NOTE 3 - RELATED PARTIES:
The Company converted $28.3 million in advances to its self-service auto
wrecking and parts joint venture into a note receivable. The note, dated
February 22, 2002, matures March 1, 2009. Interest at the prime rate less
2% is payable monthly. Principal payments are due quarterly and will be in
the amount of 25% of the joint venture's net income for its most recently
ended quarter. All outstanding principal and interest is due at maturity.
The balance of advances to this joint venture have been reclassified as of
August 31, 2001 for consistent presentation with the current year.
In the second quarter of fiscal 2002, the Company terminated two vessel
charter agreements with a related company to take advantage of lower
shipping rates currently available in the market, resulting in a loss of
$1.5 million. This loss is included in other expense in the accompanying
consolidated statement of income for the nine months ended May 31, 2002.
NOTE 4 - ENVIRONMENTAL LIABILITIES:
General Metals of Tacoma (GMT), a subsidiary of the Company, owns and
operates a metals recycling 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 more than 60
other parties were named potentially responsible parties (PRPs) for the
investigation and clean-up of contaminated sediment along the Hylebos
Waterway. On March 25, 2002, EPA issued Unilateral Administrative Orders
(UAOs) to GMT and another party to proceed with Remedial Design and
Remedial Action (RD/RA) for the head of the Hylebos and to two other
parties to proceed with the RD/RA for the balance of the waterway. It is
anticipated that the UAOs will be converted to more specific voluntary
consent decrees following further negotiations among EPA, GMT, and other
PRPs, and that EPA will take additional action against other PRPs. The
issuance of the UAOs did not require the Company to change its previously
recorded estimate of environmental liabilities for this site, as reflected
on the accompanying consolidated balance sheet. Significant uncertainties
continue to exist regarding the total cost to remediate this site as well
as the Company's share of those costs; nevertheless, the Company's estimate
of its liabilities related to this site is based on information currently
available.
8
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2002 AND 2001
(Unaudited)
The Washington State Department of Ecology named GMT, along with a number
of other parties, as Potentially Liable Parties (PLPs) for a site referred
to as Tacoma Metals. GMT operated on this site under a lease prior to 1982.
The property owner and current operator have taken the lead role in
performing a Remedial Investigation and Feasibility Study (RI/FS) for the
site. The RI/FS is now completed and the parties are currently involved in
a mediation settlement process to address cost allocations. The Company's
previously recorded environmental liabilities include an estimate of the
Company's potential liability at this site.
Between 1977 and 1987, MRI Corporation (MRI), a wholly-owned subsidiary of
Proler International Corp. (Proler), which in turn is a wholly-owned
subsidiary of the Company, 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, were named as PRPs for the site by the EPA. In March 2002, MRI
paid the EPA $375,000 pursuant to a voluntary consent decree in full
settlement of its and Proler's obligations with respect to the remediation
of this site. In a related action, MRI transferred the property to another
PRP which has agreed to perform the remediation and indemnify MRI and
Proler against any further liability. The $375,000 payment was covered by
the Company's existing environmental liability 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 March
15, 2002, the Rhode Island Department of Environmental Management (DEM)
issued a Notice of Violation (NOV) against Metals' Johnston, Rhode Island
facility, alleging violations of provisions of the Rhode Island Clean Air
Act and the regulations promulgated thereunder, and seeking to impose
financial penalties of $1.1 million against Metals. On April 5, 2002,
Metals filed its answer and request for a hearing, in which it denied
liability for such alleged violations.
NOTE 5 - 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, which are 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 income from 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.
9
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2002 AND 2001
(Unaudited)
Revenues from external customers for the Company's wholly-owned operations
are as follows (in thousands):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
MAY 31, 2002 MAY 31, 2001 MAY 31, 2002 MAY 31, 2001
------------ ------------ ------------ ------------
Metals Recycling Business $ 50,466 $ 46,833 $ 137,675 $ 143,051
Steel Manufacturing Business 46,183 36,607 113,076 122,037
Intersegment revenues (10,553) (14,450) (26,784) (37,921)
------------ ------------ ------------ ------------
Consolidated revenues $ 86,096 $ 68,990 $ 223,967 $ 227,167
============ ============ ============ ============
The joint ventures' revenues from external customers are as follows (in
thousands):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
MAY 31, 2002 MAY 31, 2001 MAY 31, 2002 MAY 31, 2001
------------ ------------ ------------ ------------
Joint Ventures in the Metals Recycling
Business $ 131,438 $ 90,397 $ 362,254 $ 311,213
Joint Venture Suppliers of Metals 13,111 14,443 41,915 42,515
------------ ------------ ------------ ------------
Total revenues $ 144,549 $ 104,840 $ 404,169 $ 353,728
============ ============ ============ ============
The Company's income (loss) from operations is as follows (in thousands):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
MAY 31, 2002 MAY 31, 2001 MAY 31, 2002 MAY 31, 2001
------------ ------------ ------------ ------------
Metals Recycling Business $ 3,732 $ 872 $ 5,278 $ 5,319
Steel Manufacturing Business (1,374) 1,840 (3,762) 3,503
Joint Ventures in the Metals Recycling
Business 2,867 584 10,273 3,383
Joint Venture Suppliers of Metals 1,732 1,090 3,520 2,394
Corporate expense (2,289) (1,784) (6,315) (6,454)
Eliminations 3 (628) (74) 166
------------ ------------ ------------ ------------
Consolidated income from operations $ 4,671 $ 1,974 $ 8,920 $ 8,311
============ ============ ============ ============
Income from operations generated by the joint ventures represents the
Company's equity in the income or loss of these entities.
10
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company operates in two industry segments. The Company's Metals Recycling
Business collects, processes and recycles steel scrap through its facilities
located on the West Coast, with major facilities in Oakland, California,
Portland, Oregon, and Tacoma, Washington. The Company's Steel Manufacturing
Business operates a mini-mill near Portland, Oregon, which produces finished
steel products and maintains two mill depots in Southern California and one in
Central California. Additionally, the Company is a partner in joint ventures
that are either in the metals recycling business or are suppliers of unprocessed
metals.
RESULTS OF OPERATIONS
The Company's revenues and operating results by business segment are summarized
below (in thousands):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
MAY 31, 2002 MAY 31, 2001 MAY 31, 2002 MAY 31, 2001
------------ ------------ ------------ ------------
(Unaudited)
REVENUES:
Metals Recycling Business:
Ferrous sales $ 37,779 $ 34,834 $ 103,195 $ 107,726
Nonferrous sales 11,423 10,824 29,669 31,767
Other sales 1,264 1,175 4,811 3,558
------------ ------------ ------------ ------------
Total sales 50,466 46,833 137,675 143,051
Ferrous sales to Steel Manufacturing Business (10,553) (14,450) (26,784) (37,921)
Steel Manufacturing Business 46,183 36,607 113,076 122,037
------------ ------------ ------------ ------------
Total $ 86,096 $ 68,990 $ 223,967 $ 227,167
============ ============ ============ ============
INCOME FROM OPERATIONS:
Metals Recycling Business $ 3,732 $ 872 $ 5,278 $ 5,319
Steel Manufacturing Business (1,374) 1,840 (3,762) 3,503
Joint Ventures in the Metals Recycling Business 2,867 584 10,273 3,383
Joint Venture Suppliers of Metals 1,732 1,090 3,520 2,394
Corporate expense (2,289) (1,784) (6,315) (6,454)
Intercompany eliminations 3 (628) (74) 166
------------ ------------ ------------ ------------
Total $ 4,671 $ 1,974 $ 8,920 $ 8,311
============ ============ ============ ============
NET INCOME $ 3,367 $ 1,465 $ 4,357 $ 4,925
============ ============ ============ ============
11
SCHNITZER STEEL INDUSTRIES, INC.
The Company's joint ventures' revenues and results of operations were as follows
(in thousands):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
MAY 31, 2002 MAY 31, 2001 MAY 31, 2002 MAY 31, 2001
------------ ------------ ------------ ------------
(Unaudited)
Total revenues from external customers recognized by:
Joint Ventures in the Metals Recycling Business $ 131,438 $ 90,397 $ 362,254 $ 311,213
Joint Venture Suppliers of Metals 13,111 14,443 41,915 42,515
------------ ------------ ------------ ------------
$ 144,549 $ 104,840 $ 404,169 $ 353,728
============ ============ ============ ============
Income from joint ventures recognized by the Company from:
Joint Ventures in the Metals Recycling Business $ 2,867 $ 584 $ 10,273 $ 3,383
Joint Venture Suppliers of Metals 1,732 1,090 3,520 2,394
------------ ------------ ------------ ------------
$ 4,599 $ 1,674 $ 13,793 $ 5,777
============ ============ ============ ============
The following table summarizes certain selected operating data for the Company
and its joint venture businesses:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
MAY 31, 2002 MAY 31, 2001 MAY 31, 2002 MAY 31, 2001
------------ ------------ ------------ ------------
SHIPMENTS (in thousands): (Unaudited)
METALS RECYCLING BUSINESS:
Ferrous recycled metal (long tons):
To Steel Manufacturing Business 112 167 303 427
To other unaffiliated domestic customers 13 18 36 135
To export customers 268 207 803 615
------------ ------------ ------------ ------------
Total ferrous recycled metal 393 392 1,142 1,177
============ ============ ============ ============
Nonferrous metal (pounds) 30,300 29,600 83,600 85,000
============ ============ ============ ============
STEEL MANUFACTURING BUSINESS
Finished steel products (net tons) 169 124 410 418
============ ============ ============ ============
JOINT VENTURES IN THE METALS RECYCLING BUSINESS
Ferrous recycled metal (long tons) 897 587 2,682 2,126
============ ============ ============ ============
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with Generally Accepted Accounting Principles (GAAP). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. This provides a basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, and these differences may
be material.
12
SCHNITZER STEEL INDUSTRIES, INC.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
FIFO (first-in, first-out) and average cost methods. The production and
accounting process utilized by the Company to record recycled metals inventory
quantities relies on significant estimates, which can be affected by weight
imprecisions, moisture, production yields and other factors.
REVENUE RECOGNITION
The Company recognizes revenue when it has a contract or purchase order from a
customer with a fixed price, the title and risk of loss transfer to the buyer
and collectibility is reasonably assured. Title for both recycled metals and
finished steel products transfers upon shipment.
ENVIRONMENTAL COSTS
The estimated future costs for known environmental remediation requirements are
accrued on an undiscounted basis when it is probable that the Company has
incurred a liability and the related costs can be reasonably estimated. When
only a range of amounts is established, and no amount within the range is better
than another, the minimum amount of the range is recorded. Adjustments to the
liabilities are made when additional information becomes available that affects
the estimated costs to remediate. Recoveries of environmental remediation costs
from other parties are recorded as assets when collection is probable.
DEFERRED TAXES
Deferred income taxes reflect the differences between the financial reporting
and tax bases of assets and liabilities at year-end based on enacted tax laws
and statutory tax rates. Tax credits are recognized as a reduction of income tax
expense in the year the credit arises. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized.
THIRD QUARTER FISCAL 2002 VS. THIRD QUARTER FISCAL 2001
- -------------------------------------------------------
REVENUES. Consolidated revenues for the three months ended May 31, 2002,
increased $17.1 million (25%) from the same period last year. The higher
revenues were primarily attributed to higher sales volume to external customers
for both the Steel Manufacturing Business and the Metals Recycling Business, and
higher average selling prices for the Metals Recycling Business.
During the quarter ended May 31, 2002, revenues for the Metals Recycling
Business, before intercompany eliminations, increased $3.6 million (8%)
primarily due to higher average selling prices for both ferrous and nonferrous
metals. Ferrous sales volume was comparable with the prior year quarter and
nonferrous sales volumes increased by 2%. The average sales prices for ferrous
and nonferrous metals increased by $8 per ton (9%) to $96 per ton and by $0.01
per pound (3%) to $0.38 per pound, respectively, from the third quarter of
fiscal 2001. The average sales price per ton for ferrous metals increased
largely due to lower competing supplies coming from the countries of the former
Soviet Union and strong demand from Asia, particularly China and Korea. Compared
with the third quarter of fiscal 2001, export sales increased 60,100 tons (29%)
to 267,500 tons; sales to the Steel Manufacturing Business decreased 54,800 tons
(33%) to 111,800 tons; and domestic sales to external customers decreased 4,600
tons (26%) to 13,300 tons. Though total ferrous sales volume was the same as the
third quarter of fiscal 2001, export sales volume was up as strong demand from
Asia continued. Domestic sales to external customers decreased as the U.S.
economy remained sluggish tempering demand for finished steel. Sales to the
13
SCHNITZER STEEL INDUSTRIES, INC.
Company's Steel Manufacturing Business declined as its melt shop production
curtailment continued. Sales volume for nonferrous metals remained firm as
demand from China was strong.
The Steel Manufacturing Business' revenues for the three months ended May 31,
2002 increased $9.6 million (26%), to $46.2 million compared with the prior year
quarter, reflecting higher sales volumes. Finished steel shipments increased
44,800 tons (36%) to 168,800 tons and the average finished steel selling price
decreased $21 per ton (7%) to $274 per ton compared with the same quarter last
year. The increase in sales volumes is primarily due to higher sales of wire rod
and rebar. Wire rod sales volumes increased as the Steel Manufacturing Business
obtained additional sales from a major customer. Rebar sales increased as
customers locked in sales before anticipated price hikes due to tariffs and
duties imposed by the Federal Government in March and April 2002 on lower priced
imported steel products. However, the tariffs and duties have not resulted in
any significant increases in price. Domestic competitors, especially rebar
producers, have been hesitant to support significant price increases due to the
lack of a rise in end user demand. However, preliminary antidumping duties the
Commerce Department imposed on wire rod imports from some foreign countries have
had a positive effect on wire rod selling prices.
COST OF GOODS SOLD. Consolidated cost of goods sold increased $16.1 million
(26%) for the three months ended May 31, 2002, compared with the same period
last year. Cost of goods sold increased as a percentage of revenues from 90% to
91%. Gross profit increased $1.0 million to $7.7 million during the latest
quarter as compared to the prior year quarter.
Cost of goods sold for the Metals Recycling Business in the third quarter of
fiscal 2002 was comparable with the prior year quarter. Cost of goods sold as a
percentage of revenues decreased compared with the third quarter of fiscal 2001
from 90% to 84%. Gross profit increased by $3.7 million to $8.3 million. The
increase in gross profit was attributable to higher average selling prices.
Compared with the third quarter of last year, the average ferrous metals cost of
sales per ton increased $4 per ton (5%) due to higher purchase costs for ferrous
metals. This increase in ferrous cost of sales was offset by the higher average
ferrous selling price per ton and lower nonferrous cost of sales per pound.
For the three months ended May 31, 2002, cost of goods sold for the Steel
Manufacturing Business increased $12.8 million (38%) compared to the same period
last year and increased as a percentage of revenues from 93% to 101%. Cost of
goods sold per ton increased $3 (1%) to $277 per ton. In the third quarter of
fiscal 2002, the negative gross margin was ($0.5) million compared with a gross
profit of $2.7 million in the third quarter of last year. Margins were down
compared with the third quarter of last year due to a lower average sales price
per ton and higher average cost of goods sold per ton. The cost of goods sold
increase was caused by fixed costs being spread over fewer production tons as
the melt shop continued the production curtailment that began in August 2001 in
response to the decrease in demand as well as increasing raw material prices.
Also, there was an increase of nearly 40% in the average electricity rate paid
per kilowatt hour, which resulted from a new contract negotiated in the first
quarter of fiscal 2002. The cost increase was partially offset as orders for
wire rod began to rise which allowed the Company to ramp up production of its
rolling mills. The higher production volume lowered the rolling mill and
finishing production costs per ton. Also, the mill continued to partially offset
higher electricity rates by achieving production efficiency and taking advantage
of lower off-peak electricity rates.
SELLING AND ADMINISTRATIVE EXPENSES. Overall, selling and administrative
expenses increased $1.2 million during the third quarter of fiscal 2002 compared
with the same quarter last year. The increase was attributable to higher
commission expense resulting from increased ferrous export sales and higher
insurance costs due to policy renewal costs combined with adverse insurance
market conditions since September 11, 2001. Additionally, the Company paid
consulting fees related to a comprehensive study that identified enterprise zone
tax credits available to the Company, which will result in $1.6 million of tax
credits being realized.
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SCHNITZER STEEL INDUSTRIES, INC.
In the quarter ended May 31, 2002, corporate expense increased $0.5 million
compared with the same period last year. The increase was primarily due to
consulting fees paid related to a comprehensive study that identified enterprise
zone tax credits available to the Company, which will result in $1.6 million of
tax credits being realized.
JOINT VENTURES. The Joint Ventures in the Metals Recycling Business
predominantly sell recycled ferrous metal. Revenues for this segment in the
third quarter of fiscal 2002 were higher than the prior year quarter primarily
due to 53% higher export sales volumes and 7% higher average selling prices.
Like the Company's Metals Recycling Business, the sales to Asia, especially
Korea and China, were strong and the decreased competing supply from the
countries of the former Soviet Union pushed up sales volumes and average selling
prices. Higher volumes from the World Trade Center disaster also partially
contributed to higher sales volumes.
The Company's equity in income from its Joint Ventures in the Metals Recycling
Business for the third quarter of fiscal 2002 increased to $2.9 million from
$0.6 million in the third quarter of fiscal 2001. The increase in income from
these joint ventures was primarily caused by the increased sales volumes coupled
with the higher average selling price per ton. The Joint Ventures have also
worked to reduce the cost of unprocessed inventory and improve operational
efficiencies, thereby increasing their operating margins.
Revenues from the Joint Venture Suppliers of Metals decreased $1.3 million
during the third quarter of fiscal 2002 as compared to the third quarter of last
year. For the three months ended May 31, 2002, the Company's equity in income
from these joint ventures increased $0.6 million to $1.7 million. The Company's
self-service auto wrecking and parts joint venture was primarily responsible for
the increase due to refinements in its operations and system enhancements.
INTEREST EXPENSE. Interest expense for the third quarter of fiscal 2002
decreased $0.7 million to $0.5 million compared with the third quarter of fiscal
2001. The decrease was primarily a result of lower average borrowings due to
good cash flow from both the wholly-owned and joint venture businesses, as well
as lower average interest rates.
OTHER INCOME (EXPENSE). In the third quarter of fiscal 2002, other income
decreased $1.1 million compared with the third quarter of fiscal 2001. The
decrease was primarily due to lower interest income as a result of lower
interest rates in the third quarter of fiscal 2002. In addition, the fiscal 2001
quarter included $0.4 million of income from an electrode antitrust settlement.
INCOME TAX PROVISION. The tax rate for the third quarter of fiscal 2002 was 20%
compared with 25% for the prior year quarter. In the second quarter of fiscal
2002, as a result of a comprehensive study, it was determined that the Company
qualified for certain tax credits in the State of California aggregating $1.6
million. These credits do not expire and can be used to offset California state
income taxes. Accordingly, the tax provision was adjusted to reflect the effect
of this tax benefit.
FIRST NINE MONTHS OF FISCAL 2002 VS. FIRST NINE MONTHS OF FISCAL 2001
- ---------------------------------------------------------------------
REVENUES. Consolidated revenues for the nine months ended May 31, 2002,
decreased $3.2 million (1%) from the same period last year. The lower revenues
were primarily attributed to lower average sale prices for both the Steel
Manufacturing Business and the Metals Recycling Business and lower sales volume
for the Steel Manufacturing Business, partially offset by increased export sales
volume for the Metals Recycling Business.
For the nine months ended May 31, 2002, revenues for the Metals Recycling
Business, before intercompany eliminations, decreased $5.4 million (4%), which
was attributed to lower shipping volumes coupled with lower average sales
prices. Ferrous and nonferrous sales volumes decreased by 3% and 2%,
respectively, from the same period in the prior year. Ferrous sales volumes
decreased by 35,300 tons (3%) because domestic sales to external customers and
the Company's Steel Manufacturing Business declined as markets softened due to
the slow U.S. economy and the Steel Manufacturing Business' mill curtailed
15
SCHNITZER STEEL INDUSTRIES, INC.
production. This decrease was partially offset by shifting sales to the export
market causing a 30% increase in export sales volume. Strong foreign demand,
especially from Asia, and lower supply coming out of the countries of the former
Soviet Union drove the increase in export volumes. Average sales prices for
ferrous and nonferrous metals were $1 per ton (2%) and $0.02 per pound (5%)
lower, respectively, than the first nine months of fiscal 2001. The lower prices
were caused by lower demand as a result of slower worldwide economic activity in
fiscal 2002 as compared to the same period in fiscal 2001.
The Steel Manufacturing Business' revenues for the nine months ended May 31,
2002 decreased $8.9 million (7%), to $113.1 million, from the first nine months
of the prior year. Finished steel shipments decreased 7,900 tons (2%) and the
average finished steel selling price declined $16 per ton (5%). The decreases in
both sales volume and average selling prices were primarily due to the slowdown
in the U.S. economy. President Bush's announced tariffs on certain imported
steel products, which compete in the Company's West Coast markets, have only
marginally increased the average selling prices. Domestic competitors,
especially rebar producers, have been hesitant to support significant price
increases due to the lack of a rise in end user demand. The Commerce Department
has imposed preliminary antidumping duties on wire rod imports from some foreign
countries, which have had a positive effect on wire rod selling prices. Final
duties are expected to be announced later this year.
COST OF GOODS SOLD. Consolidated cost of goods sold increased by $2.6 million
(1%) for the nine months ended May 31, 2002, compared with the same period last
year. Cost of goods sold increased as a percentage of revenues from 90% to 92%,
compared with the first nine months of fiscal 2001, which contributed to a $5.8
million decline in gross profit.
During the first nine months of fiscal 2002, the Metals Recycling Business' cost
of goods sold decreased $7.1 million (6%) over the prior year. The cost of goods
sold as a percentage of revenues decreased from 88% for the first nine months of
fiscal 2001 to 87% during the first nine months of fiscal 2002, contributing to
a $1.7 million increase in gross profit. This increase in gross margin in the
first nine months of fiscal 2002 was attributable to better operating
efficiencies and efforts to reduce operating costs, resulting in a $1 per ton
(1%) decrease in the average ferrous metals cost of sales per ton. Local
competition for the purchase of ferrous metals in the Pacific Northwest
continued to adversely impact the cost of sales, also directly affecting overall
gross margin.
During the first nine months of fiscal 2002, cost of goods sold for the Steel
Manufacturing Business decreased $1.6 million (1%) compared to the same period
last year and increased as a percentage of revenues from 95% to 101%. Gross
profit decreased from $6.0 million to a negative $1.4 million compared with the
first nine months of last year. The average sales price per ton decreased and
the average cost of goods sold per ton increased. Due to higher production costs
per ton compared with the first nine months of fiscal 2001, the average cost of
goods sold per ton increased $2 per ton (1%) to $279 per ton, further eroding
margins. This increase was primarily due to continued mill curtailments, which
increased production costs per ton as fixed costs were spread over fewer
production tons.
SELLING AND ADMINISTRATIVE EXPENSES. Overall, year-to-date selling and
administrative expenses rose $1.6 million compared with the same period last
year. Higher commission expenses related to increases in ferrous export sales
drove the increase as well as the costs related to identifying enterprise zone
tax credits available to the Company.
JOINT VENTURES. For the nine months ended May 31, 2002, revenues for Joint
Ventures in the Metals Recycling Business increased by $51.0 million from the
first nine months of last year. The increase was primarily due to higher sales
volumes for ferrous metals, which were partially offset by lower average ferrous
per ton sales price. The higher sales volumes were caused primarily by strong
demand from Asia, especially Korea and China, coupled with lower supply from the
countries of the former Soviet Union. Income recognized from these joint
ventures increased by $6.9 million over the first nine months of fiscal 2001 to
$10.3 million. The increase in income was primarily caused by the higher sales
volumes and increased operating margins. The increased operating margins were a
16
SCHNITZER STEEL INDUSTRIES, INC.
result of the Joint Ventures' successful efforts to reduce the cost of
unprocessed inventory and improve operational efficiencies, as well as a
significant increase in volume from the World Trade Center disaster. As of May
31, 2002, most of the World Trade Center volume has been processed and sold.
Revenues of Joint Venture Suppliers of Metal decreased from $42.5 million to
$41.9. Year-to-date, the Company's equity in income from these joint ventures
increased to $3.5 million from $2.4 million for the previous year primarily as a
result of higher income from the Company's self-service auto wrecking and parts
joint venture.
INTEREST EXPENSE. For the nine months ended May 31, 2002, interest expense
decreased $2.2 million to $1.9 million compared with the same period last year.
The decrease was a result of lower average borrowings due to good cash flow from
both the wholly-owned and joint venture businesses, as well as lower average
interest rates.
OTHER INCOME (EXPENSE). In the first nine months of fiscal 2002, other income
decreased $4.4 million compared with the first nine months of fiscal 2001. The
decrease was partially attributable to a loss of $1.5 million recorded in fiscal
2002 related to the termination of two vessel charter agreements with a related
party. Additionally, the Company recognized a non-cash loss of $0.8 million on
the sale of a non-strategic steel forging business that was part of a 1995
Metals Recycling Business acquisition (see "Related Parties" discussion below).
Fiscal 2002 year-to-date interest income was lower because of lower interest
rates charged on receivables. Finally, in fiscal 2001 the company recognized
$0.4 million income on the settlement of an electrode antitrust lawsuit.
INCOME TAX PROVISION. The income tax rate used for the first nine months of
fiscal 2002 was 20% compared with 30% for the same period of fiscal 2001. In the
second quarter of fiscal 2002, as a result of a comprehensive study, it was
determined that the Company qualified for certain tax credits in the State of
California aggregating $1.6 million. The tax credits, which do not expire and
can be utilized to offset California income taxes, are responsible for the
decline in the tax rate.
RELATED PARTIES. The Company enters into financial transactions with certain of
its joint venture partnerships and other companies in which shareholders of the
Company or their relatives own significant interests as discussed below:
o One related company, a shipping agent, arranges ship charters for the
Metals Recycling Business' recycled ferrous metal export shipments.
The charters can be with ships owned by a related company or with
independently owned ships. The Company pays market rate for all
charters.
In the second quarter of fiscal 2002, the Company terminated two
vessel charter agreements with a related company. These agreements
were entered into in the mid-1990s for the purpose of hedging ocean
shipping rates. At the time the Charters were terminated, ocean
shipping rates were $7 to $8 per ton lower than the all-in contracted
rates. Thus, the Company decided to terminate these charters to take
advantage of these lower rates currently available in the market.
Ocean freight rates continue to be significantly lower than the
contracted rates. The Company has no remaining vessel charter
agreements with the related company.
o The Company purchases recycled metals in the form of auto bodies from
its self-service auto wrecking and parts joint venture. The Company
negotiates prices monthly, based on prevailing market conditions, to
purchase a significant portion of the joint venture's inventory. This
process provides a consistent and predictable flow of raw material to
the Company's Oakland, California export facility.
o The Company leases certain land and buildings from a related real
estate company under operating leases. Lease amounts are market rates
and are adjusted every three years, with the exception of the Metals
Recycling Business's Portland, Oregon facility. The rent for that
17
SCHNITZER STEEL INDUSTRIES, INC.
facility will be adjusted in 2003 and every 15 years thereafter to
market rates. In 2008 and every five years thereafter, except in the
year of a market rate adjustment, the rent will be adjusted based on
the Consumer and Producer Price Indices.
o The Company performs some administrative services and provides
operation and maintenance of information systems for certain related
parties. These services are charged to the related parties based upon
cost plus a 15% margin for overhead.
o The Company converted $28.3 million in advances to its self-service
auto wrecking and parts joint venture into a note receivable. The
note, dated February 22, 2002, matures March 1, 2009. Interest is
payable monthly and is calculated at prime rate less 2%. Principal
payments are made quarterly and will be in the amount of 25% of the
joint venture's net income for the quarter just ended. All outstanding
principal and interest is due at maturity.
o The Company funds its pro rata share of the working capital needs of
the Joint Ventures in the Metals Recycling Business. These joint
ventures remit cash to the Company as it is available.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations for the nine months
ended May 31, 2002, was $22.4 million compared with $11.0 million for the same
period in fiscal 2001. The increase in cash flow was due to inventory reductions
at both the Steel Manufacturing Business and the Metals Recycling Business.
Capital expenditures for the nine months ended May 31, 2002 and 2001, were $7.0
million. The Company expects to spend approximately $3.5 million on capital
projects during the remainder of fiscal 2002.
As a result of acquisitions completed in prior years, the Company had $21.3
million of accrued environmental liabilities as of May 31, 2002. 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 May 31, 2002, the Company had committed unsecured revolving lines of
credit totaling $200 million maturing in June 2003. The Company also had
additional unsecured lines of credit of $40 million, which were uncommitted. In
the aggregate, the Company had borrowings outstanding under these lines totaling
$75 million at May 31, 2002. The Company's debt agreements have certain
restrictive covenants. As of May 31, 2002, the Company was in compliance with
such covenants.
The Company has certain contractual obligations and commercial commitments to
make future payments. The following table summarizes these future obligations
and commitments as of May 31, 2002 (in thousands):
LESS THAN 1-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
---------- ---------- ---------- ---------- ----------
Long-term debt $ 83,089 $ 65 $ 75,184 $ 140 $ 7,700
Operating leases 99,731 2,303 4,116 3,598 89,714
Letters of credit 4,900 4,900
---------- ---------- ---------- ---------- ----------
Total $ 187,720 $ 7,268 $ 79,300 $ 3,738 $ 97,414
========== ========== ========== ========== ==========
Pursuant to a stock repurchase program, the Company is authorized to repurchase
up to 3.0 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
18
SCHNITZER STEEL INDUSTRIES, INC.
enhances shareholder value. During the first nine months of fiscal 2002, the
Company repurchased 99,000 shares for $1.3 million. As of May 31, 2002, the
Company had repurchased a total of 1.3 million shares under this program.
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.
The principal sources of liquidity are cash flows from the sales of processed
recycled metals by its Metals Recycling Business and the sales of finished steel
products by its Steel Manufacturing Business. For the Metals Recycling Business,
cash flows from sales are subject to market price changes for both the purchase
of unprocessed recycled metals and the sale of processed recycled metals.
Currently, due to strong demand and lower supplies of recycled metals worldwide,
prices have been rising for purchases and sales of metals. The Steel
Manufacturing Business is subject to sales price market risk from both domestic
and foreign makers. The Steel Manufacturing Business is not a market leader and,
consequently must make price changes consistent with the larger producing market
leaders. Also, foreign producers sell their products in the U.S. at prices lower
than the major domestic producers, taking away market share. On March 6, 2002,
President Bush announced tariffs on certain imported steel products which
compete in the Company's West Coast markets. Two major products, rebar and
merchant bar, had tariffs imposed of 15% and 30%, respectively. The tariffs will
be in effect for three years, but will decline each year during the tariff
period. Additionally, on April 3, 2002, the U.S. Commerce Department announced a
preliminary determination that steel wire rod from seven countries is being sold
in the U.S. market below fair value. The Commerce Department has imposed
preliminary antidumping duties on wire rod imports from these countries. Final
duties are expected to be announced later this year. The tariffs and duties have
had only a marginal positive impact as domestic competitors have been hesitant
to support any significant price increases due to lack of end user demand. Also,
see FACTORS THAT COULD AFFECT FUTURE RESULTS below.
OUTLOOK. The Company expects that the Metals Recycling Business will continue to
improve for the remainder of fiscal 2002 due to increased global demand, lower
supply from former Soviet Union countries and the resulting rise in recycled
metals selling prices. The results from the Joint Ventures in the Metals
Recycling Business are expected to remain good due to the same market
fundamentals as the Company's wholly-owned business. However, joint venture
sales volumes are expected to show a decrease in the quarter because of the
decline in World Trade Center volume, as well as reduced inventory levels coming
off strong third quarter sales and the decision to build inventory at year end
to avoid adverse tax consequences of LIFO accounting. The fourth quarter outlook
for the Steel Manufacturing Business is to approximate the third quarter
results. The Company expects selling prices will rise slowly as the economy
continues to recover. However, electricity prices will experience seasonal rises
through August. The Steel Manufacturing Business will continue to report an
operating loss in the fourth quarter. Moreover, cash flow is expected to remain
strong as it has been for most of fiscal 2002. The Company's effective annual
tax rate should approximate 20%, which is significantly lower than the statutory
rates due primarily to state tax credits and the utilization of previously
acquired net operating loss carryforwards. The Company anticipates that net
income for the fourth quarter of fiscal 2002 will be in the range of $0.35 to
$0.40 per share. This estimate excludes any impact that may occur from year-end
non-cash LIFO adjustments made at two of the Company's joint venture businesses.
FACTORS THAT COULD AFFECT FUTURE RESULTS. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, particularly the Outlook
section appearing immediately above, 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 that are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. One can generally identify
these forward-looking statements because they contain "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.
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SCHNITZER STEEL INDUSTRIES, INC.
Examples of factors affecting Schnitzer Steel Industries, Inc.'s wholly-owned
operations and its joint ventures (the Company) that could cause actual results
to differ materially are the following:
Cyclicality and General Market Considerations: Selling prices for recycled
metals are highly cyclical in nature and subject to worldwide economic
conditions. In addition, the cost and availability of recycled metals are
subject to volatile supply and demand conditions beyond the Company's control,
resulting in periodic fluctuations in recycled metals prices. While the Company
attempts to maintain margins by responding to changing recycled metals selling
prices through adjustments to its metals purchase prices, the Company's ability
to do so is limited by competitive factors as well as the impact of lower prices
on the volume of scrap available to the Company. Moreover, increases in recycled
metals prices can adversely affect the operating results of the Company's Steel
Manufacturing Business because increases in steel prices generally lag increases
in ferrous recycled metals prices.
The steel industry is also highly cyclical in nature and sensitive to general
economic conditions. Future economic downturns or a stagnant economy may
adversely affect the performance of the Company.
The Company expects to continue to experience seasonal fluctuations in its
revenues and net income. Revenues can fluctuate significantly quarter to quarter
due to factors such as the seasonal slowdown in the construction industry, which
is an important buyer of the Company's finished steel products. The timing and
extent of the slowdown is also dependent on the weather.
The Company makes a number of large ferrous recycled metals shipments to foreign
steel producers each year. Customer requirements, shipping schedules and other
factors limit the Company's control over the timing of these shipments.
Variations in the number of foreign shipments from quarter to quarter will
result in fluctuations in quarterly revenues and earnings. The Company's
expectations regarding ferrous metal sales prices and volumes, as well as
earnings, are based in part on the assumption that orders from customers for
larger shipments are not cancelled or delayed.
Competition: The recycled metals industry is highly competitive, with the volume
of purchases and sales subject to a number of competitive factors, principally
price. The Company has competition from both large and numerous smaller
companies in its markets for the purchase of recyclable metals. The Company
competes with a number of U.S. and foreign recycled metals processors for sales
to foreign customers.
The domestic steel industry also is highly competitive. Steel prices can be
highly volatile and price is a significant competitive factor. The Company
competes with several steel producers in the western U.S. for sales of its
products. In addition, in recent years, the Company has experienced significant
foreign competition, which is often subsidized by large government agencies. On
March 6, 2002, President Bush announced tariffs on certain imported steel
products which compete in the Company's West Coast markets. Two major products,
rebar and merchant bar, had tariffs imposed of 15% and 30%, respectively. The
tariffs will be in effect for three years, but will decline each year during
that period. Additionally, on April 3, 2002, the U.S. Commerce Department
announced a preliminary determination that steel wire rod from seven countries
is being sold in the U.S. market below fair value. The Commerce Department has
imposed preliminary antidumping duties on wire rod imports from these countries.
Final duties are expected to be announced later this year.
Joint Ventures: The Company has significant investments in joint venture
companies. The Company does not manage the day-to-day activities of these
businesses. As a result, it does not have the same ability to control the
operations and related financial results as it does with its wholly owned
businesses. These businesses are, however, affected by many of the same risk
factors mentioned above. Therefore, it is difficult to predict the financial
results of these businesses.
Energy Supply: The Company and its joint ventures utilize various energy sources
to operate their facilities. In particular, electricity and natural gas
currently represent approximately 10% of the cost of steel manufactured for the
20
SCHNITZER STEEL INDUSTRIES, INC.
Company's Steel Manufacturing Business. The Steel Manufacturing Business
purchases hydroelectric power under long-term contracts from government sources
which rely on the Bonneville Power Administration (BPA). Historically, these
contracts have had favorable prices and are long-term in nature. The Company has
a contract that expires in September 2006. The BPA increased rates as much as
46% as of October 1, 2001. Rates will be adjusted by the BPA every six months
from then forward. It is not possible to predict future rate changes.
The Steel Manufacturing Business also has long-term contracts for natural gas.
In October 2000, the Company entered into a new contract, which is set to expire
on October 31, 2002. The latest contract negotiations resulted in rates that
were 30% higher than the previous agreement. As this contract comes to an end,
the Company will attempt to negotiate a new long-term contract; however, it is
not possible to predict the terms of the contract.
The inability of the Company to negotiate favorable terms of electricity,
natural gas and other energy sources could adversely affect the performance of
the Company.
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, 2001.
21
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, 2002 By: /s/ Barry A. Rosen
------------- ------------------------
Barry A. Rosen
Vice President, Finance
22