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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 November 30, 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 5,024,688 shares of Class A Common Stock, par value of $1.00
per share, 4,179,858 shares of Class B Common Stock, par value of $1.00 per
share, outstanding at December 1, 2002.
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SCHNITZER STEEL INDUSTRIES, INC.
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at November 30, 2002
and August 31, 2002.....................................................3
Consolidated Statement of Income for the Three Months
Ended November 30, 2002.................................................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 2002 and the Three Months
Ended November 30, 2002.................................................5
Consolidated Statement of Cash Flows for the
Three Months Ended November 30, 2002 and 2001...........................6
Notes to Consolidated Financial Statements..................................7
Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................12
Quantitative and Qualitative Disclosures About Market Risk.................20
Controls and Procedures....................................................20
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K...........................................21
SIGNATURE PAGE.............................................................23
CERTIFICATIONS.............................................................24
2
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
Nov. 30, Aug. 31,
2002 2002
-------- --------
(Unaudited) (Audited)
Assets
------
Current Assets:
Cash $ 2,608 $ 32,974
Accounts receivable, less allowance for
doubtful accounts of $1,005 and $905 18,406 31,126
Accounts receivable from related parties 894 813
Inventories (Note 2) 72,952 57,917
Deferred income taxes 3,966 3,966
Other 4,817 4,911
-------- --------
Total current assets 103,643 131,707
Net property, plant and equipment 111,987 111,759
Other assets:
Investment in and advances to joint venture partnerships 100,715 96,440
Notes receivable, net of current portion 26,035 27,067
Goodwill 35,754 35,754
Intangibles and other 2,154 2,279
-------- --------
$380,288 $405,006
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 37,620 $ 60,220
Accounts payable 14,139 18,205
Accrued payroll liabilities 4,326 5,887
Current portion of environmental liabilities 3,028 3,030
Other accrued liabilities 5,232 5,014
-------- --------
Total current liabilities 64,345 92,356
Deferred income taxes 30,859 30,860
Long-term debt, net of current portion 8,210 8,305
Environmental liabilities, net of current portion 17,733 18,045
Other long-term liabilities 2,780 2,492
Commitments and contingencies
Shareholders' equity:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,025 shares issued and outstanding 5,025 5,025
Class B common stock--25,000 shares $1 par value
authorized, 4,180 shares issued and outstanding 4,180 4,180
Additional paid-in capital 96,074 96,074
Retained earnings 151,082 147,669
-------- --------
Total shareholders' equity 256,361 252,948
-------- --------
$380,288 $405,006
======== ========
The accompanying notes are an integral part of this statement
3
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts, unaudited)
For The Three Months
Ended November 30,
----------------------
2002 2001
-------- --------
Revenues $ 76,500 $ 76,834
Cost and expenses:
Cost of goods sold and other operating expenses 69,466 71,510
Selling and commission expenses 763 847
General and administrative expenses 5,883 5,837
-------- --------
Income (loss) from wholly-owned operations 388 (1,360)
Income from joint ventures 5,045 4,871
-------- --------
Income from operations 5,433 3,511
Other income (expense):
Interest expense (354) (777)
Other income 3 186
-------- --------
(351) (591)
-------- --------
Income before income taxes 5,082 2,920
Income tax provision (1,208) (876)
-------- --------
Net income $ 3,874 $ 2,044
======== ========
Basic earnings per share $ 0.42 $ 0.22
======== ========
Diluted earnings per share $ 0.41 $ 0.22
======== ========
The accompanying notes are an integral part of this statement
4
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, unaudited)
Class A Class B
Common Stock Common Stock Additional
-------------------- -------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
-------- -------- -------- -------- -------- -------- --------
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 124 124 (124) (124)
Class A common stock repurchased (99) (99) (1,157) (1,256)
Class A common stock issued 104 104 1,308 1,412
Net income 6,553 6,553
Dividends paid (1,830) (1,830)
-------- -------- -------- -------- -------- -------- --------
Balance at August 31, 2002 5,025 5,025 4,180 4,180 96,074 147,669 252,948
Net income 3,874 3,874
Dividends paid (461) (461)
-------- -------- -------- -------- -------- -------- --------
Balance at November 30, 2002 5,025 $ 5,025 4,180 $ 4,180 $ 96,074 $151,082 $256,361
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this statement
5
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
For The Three Months
Ended November 30,
----------------------
2002 2001
-------- --------
Operations:
Net income $ 3,874 $ 2,044
Noncash items included in income:
Depreciation and amortization 4,029 4,717
Equity in income of joint ventures (5,045) (4,871)
Loss on disposal of assets 16 19
Cash provided (used) by changes in working capital:
Accounts receivable 12,659 5,431
Inventories (15,035) 3,785
Prepaid expenses and other 74 (566)
Accounts payable (4,066) (1,465)
Accrued liabilities (1,343) (1,859)
Other assets and liabilities 1,118 549
-------- --------
Net cash (used) provided by operations (3,719) 7,784
-------- --------
Investing:
Capital expenditures (4,231) (2,150)
Cash received from joint ventures 1,005 16,064
Cash paid to joint ventures (284) (8,970)
Proceeds from sale of assets 18 22
-------- --------
Net cash (used) provided by investments (3,492) 4,966
-------- --------
Financing:
Repurchase of Class A common stock (620)
Dividends declared and paid (461) (456)
Decrease in long-term debt (22,694) (5,770)
-------- --------
Net cash used by financing (23,155) (6,846)
-------- --------
Net (decrease) increase in cash (30,366) 5,904
Cash at beginning of period 32,974 1,877
-------- --------
Cash at end of period $ 2,608 $ 7,781
======== ========
The accompanying notes are an integral part of this statement
6
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 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, 2002. The results for the three
months ended November 30, 2002 and 2001 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 November 30,
2002 2001
------- -------
Net income $ 3,874 $ 2,044
======= =======
Computation of shares:
Average common shares outstanding 9,205 9,162
Stock options 150 13
------- -------
Diluted average common shares
outstanding 9,355 9,175
======= =======
Basic EPS $ 0.42 $ 0.22
======= =======
Diluted EPS $ 0.41 $ 0.22
======= =======
Dividend per share $ 0.05 $ 0.05
======= =======
Options to purchase 501,700 and 1,021,000 shares were outstanding at
November 30, 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 THREE MONTHS ENDED NOVEMBER 30, 2002 AND 2001
(Unaudited)
Goodwill
--------
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards Nos. 141 and 142 (SFAS 141
and SFAS 142), "Business Combinations" and "Goodwill and Other
Intangible Assets." SFAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides
guidance on purchase accounting related to the recognition of
intangible assets and accounting for negative goodwill. Effective
September 1, 2002, the Company adopted SFAS No. 142. This statement
changed the accounting for goodwill and indefinite-lived intangible
assets from an amortization approach to an impairment-only approach.
Under SFAS 142, the Company will perform impairments tests on the book
value of goodwill and other indefinite-lived intangible assets as of
the adoption date. Thereafter, impairments tests will be performed
annually and whenever events and circumstances indicate that the value
of goodwill and other indefinite-lived intangible assets might be
impaired. The Company is in the process of testing goodwill for
impairment and anticipates the testing will be completed by the end of
the second quarter of fiscal 2003.
The following table presents a reconciliation of reported net income
and income per share, as if SFAS 142 had been in effect:
For the Three Months
Ended November 30,
(in thousands, except
per share amounts)
--------------------------
2002 2001
--------- ---------
Reported net income $ 3,874 $ 2,044
Goodwill amortization, net of tax -- 239
--------- ---------
Adjusted net income $ 3,874 $ 2,283
========= =========
Reported basic income per share $ 0.42 $ 0.22
Goodwill amortization, net of tax -- 0.03
--------- ---------
Adjusted basic income per share $ 0.42 $ 0.25
========= =========
Reported diluted income per share $ 0.41 $ 0.22
Goodwill amortization, net of tax -- 0.03
--------- ---------
Adjusted diluted income per share $ 0.41 $ 0.25
========= =========
November 30, August 31,
2002 2002
--------- ---------
Goodwill balance (in thousands): $ 35,754 $ 35,754
========= =========
New Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (SFAS 143), "Accounting for Asset Retirement
Obligations". SFAS 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it
is incurred. When the liability is initially recorded, the entity is
required to capitalize the cost by increasing the carrying amount of
the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated
over the useful life of the related asset. SFAS 143 is effective for
fiscal years beginning after June 15, 2002 and was adopted by the
Company effective September 1, 2002. The adoption of this standard did
not have a material impact on the consolidated financial statements.
8
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2002 AND 2001
(Unaudited)
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144). SFAS 144 superceded SFAS 121. SFAS 144
applies to all long-lived assets (including discontinued operations)
and consequently amends Accounting Principles Board Opinion No. 30
"Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business." SFAS 144 develops one accounting model for
long-lived assets that are to be disposed of by sale. SFAS 144 requires
that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell.
Additionally, SFAS 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated
from the ongoing operations of the entity in a disposal transaction.
SFAS 144 was effective for the Company for all financial statements
issued beginning September 1, 2002. The adoption of this standard did
not have a material effect on the consolidated financial statements.
In May 2002, the FASB issued SFAS No. 145, (SFAS 145) "Rescission of
FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical
Corrections." Among other things, SFAS 145 rescinds various
pronouncements regarding early extinguishment of debt and allows
extraordinary accounting treatment for early extinguishment only when
the provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" are met. SFAS 145
provisions regarding early extinguishment of debt are generally
effective for fiscal years beginning after May 15, 2002. The adoption
of this statement did not have a material impact on the consolidated
financial statements.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to fiscal
2003 presentation. These changes had no impact on previously reported
results of operations or shareholders' equity.
Note 2 - Inventories:
Inventories consisted of the following (in thousands):
November 30, August 31,
2002 2002
------- -------
(Unaudited) (Audited)
Recycled metals $25,592 $13,432
Work in process 8,569 6,495
Finished goods 25,973 25,245
Supplies 12,818 12,745
------- -------
$72,952 $57,917
======= =======
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 is a partner
in joint ventures, which are in the metals recycling business or which
are suppliers of unprocessed metals. The Joint Ventures in the Metals
Recycling Business sell recycled metals that have been processed at
their facilities (Processing) and also buy and sell processed metals
(Trading). The Company considers all joint ventures to be separate
9
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2002 AND 2001
(Unaudited)
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
was obtained from internal data that was 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. (See Note 4.)
Revenues from external customers for the Company's wholly-owned
operations are as follows (in thousands):
For the Three Months Ended
November 30, November 30,
2002 2001
-------- --------
Metals Recycling Business $ 45,574 $ 48,441
Steel Manufacturing Business 42,830 36,402
Intersegment revenues (11,904) (8,009)
-------- --------
Consolidated revenues $ 76,500 $ 76,834
======== ========
The joint ventures' revenues from external customers are as follows (in
thousands):
For the Three Months Ended
November 30, November 30,
2002 2001
-------- --------
Joint Ventures in the Metals
Recycling Business:
Processing $104,570 $120,827
Trading 50,532 30,912
Joint Venture Suppliers of Metals 13,880 14,139
-------- --------
Total revenues $168,982 $165,878
======== ========
The Company's income (loss) from operations is as follows (in
thousands):
For the Three Months Ended
November 30, November 30,
2002 2001
------- -------
Metals Recycling Business $ 3,096 $ 978
Steel Manufacturing Business (1,257) (248)
Joint Ventures in the Metals
Recycling Business 3,070 3,699
Joint Venture Suppliers of Metals 1,975 1,172
Corporate expense (2,024) (1,966)
Intercompany eliminations 573 (124)
------- -------
Consolidated income from operations $ 5,433 $ 3,511
======= =======
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2002 AND 2001
(Unaudited)
The Company's share of depreciation and amortization expense included
in the determination of joint ventures' income from operations is as
follows:
For the Three Months Ended
November 30, November 30,
2002 2001
------- -------
Joint Ventures in the Metals
Recycling Business 1,721 1,621
Joint Venture Suppliers of Metals 565 527
Note 4 - Subsequent Event:
On January 10, 2003, the Company announced that its wholly-owned
subsidiary, Norprop, Inc., signed a definitive agreement to purchase
the stock of Pick and Pull Auto Dismantling, Inc., which is Norprop's
50% partner in Pick-N-Pull Auto Dismantlers, a California general
partnership (the "Joint Venture"). In addition, Norprop agreed to buy
Pick-N-Pull Auto Dismantlers, Stockton, LLC. ("Stockton"), which is not
part of the Joint Venture, but operates the single largest volume
Pick-N-Pull store. Both of the entities being acquired are owned by Bob
Spence, who has managed the business of the Joint Venture.
The Joint Venture stores together with Stockton ("Pick-N-Pull") are one
of the country's leading self service used auto parts and auto
dismantling networks with twenty-three (23) locations in northern
California and five other states.
The acquisition is expected to close in mid-February 2003. The
estimated purchase price is approximately $85 million, subject to
adjustment for certain year-end balance sheet items and environmental
liabilities, if any. The estimated purchase price includes the
assumption of approximately $10 million of net debt, approximately $6
million of which represents amounts currently owed to Schnitzer. In
addition to typical closing conditions, the transaction is contingent
upon satisfactory completion of environmental due diligence on
Pick-N-Pull's facilities. The agreement also provides for a purchase
price adjustment approximately one year after closing based upon the
operating results of the acquired business. The Company anticipates the
Pick-N-Pull acquisition will be accretive to earnings.
11
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. In addition, the Steel Manufacturing Business owns a
distribution facility in Southern California, and leases space in a facility 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. The Joint Ventures in the Metals Recycling
Business sell recycled metals that have been processed at their facilities
(Processing) and also buy and sell processed metals (Trading).
Results of Operations
The Company's revenues and operating results by business segment are summarized
below (in thousands):
For the Three Months Ended
November 30, November 30,
2002 2001
-------- --------
(unaudited)
REVENUES:
Metals Recycling Business:
Ferrous sales $ 33,930 $ 36,993
Nonferrous sales 10,115 9,890
Other sales 1,529 1,558
-------- --------
Total sales 45,574 48,441
Ferrous sales to Steel Manufacturing Business (11,904) (8,009)
Steel Manufacturing Business 42,830 36,402
-------- --------
Total $ 76,500 $ 76,834
======== ========
INCOME (LOSS) FROM OPERATIONS:
Metals Recycling Business $ 3,096 $ 978
Steel Manufacturing Business (1,257) (248)
Joint Ventures in the Metals Recycling Business 3,070 3,699
Joint Venture Suppliers of Metals 1,975 1,172
Corporate expense (2,024) (1,966)
Intercompany eliminations 573 (124)
-------- --------
Total $ 5,433 $ 3,511
======== ========
NET INCOME $ 3,874 $ 2,044
======== ========
12
SCHNITZER STEEL INDUSTRIES, INC.
The Joint Ventures' revenues and results of operations were as follows (in
thousands):
For the Three Months Ended
November 30, November 30,
2002 2001
-------- --------
(unaudited)
Total revenues from external customers recognized by:
Joint Ventures in the Metals Recycling Business:
Processing $104,570 $120,827
Trading 50,532 30,912
Joint Venture Suppliers of Metals 13,880 14,139
-------- --------
$168,982 $165,878
======== ========
Income from joint ventures recognized by the Company from:
Joint Ventures in the Metals Recycling Business $ 3,070 $ 3,699
Joint Venture Suppliers of Metals 1,975 1,172
-------- --------
$ 5,045 $ 4,871
======== ========
The following table summarizes certain selected operating data for the Company
and its joint venture businesses:
For the Three Months Ended
November 30, November 30,
2002 2001
-------- --------
(unaudited)
SHIPMENTS (in thousands):
METALS RECYCLING BUSINESS:
Ferrous recycled metal (long tons):
To Steel Manufacturing Business 115 93
To other unaffiliated domestic customers 38 6
To export customers 142 249
-------- --------
Total ferrous recycled metal 295 348
======== ========
Nonferrous metal (pounds) 25,500 29,100
======== ========
STEEL MANUFACTURING BUSINESS
Finished steel products (net tons) 142 124
======== ========
JOINT VENTURES IN THE METALS RECYCLING BUSINESS
Ferrous recycled metal (long tons):
Processing 637 894
======== ========
Trading 388 240
======== ========
First Quarter Fiscal 2003 Compared to First Quarter Fiscal 2002
- ---------------------------------------------------------------
General. In the first quarter of fiscal 2003, the Metals Recycling Business
experienced market conditions not seen since before the 1997 Asian financial
crisis. Prices began to rise in early calendar 2002 as supplies of ferrous
recycled metals from the countries of the former Soviet Union decreased as a
result of export tariffs and outright bans in certain countries. By the end of
the Company's 2002 fiscal year, foreign steel producers were delaying their
purchases in an attempt to lower buying prices. By the end of the first quarter,
foreign buyers needed to replenish their inventories at price levels that were
at or above prices recognized in the first two months of the quarter. As a
13
SCHNITZER STEEL INDUSTRIES, INC.
result, the Metals Recycling Business' ferrous sales volumes decreased in the
first quarter of fiscal 2003; however, increased order volume began late in the
first quarter of fiscal 2003 and is anticipated to continue through the second
fiscal quarter. The Joint Ventures in the Metals Recycling Business were
affected by the same supply and demand situation as the Company's wholly-owned
Metals Recycling Business. Improved demand for nonferrous recycled metals,
particularly from China, boosted selling prices, though the West Coast
longshoreman's lockout had a small effect by temporarily deferring sales volumes
and increasing freight costs.
The Steel Manufacturing Business saw higher sales volumes and selling prices in
the first quarter of fiscal 2003 compared with the first quarter of fiscal 2002.
The sales volume increases were driven by wire rod sales. Anti-dumping and
countervailing duties preliminarily determined by the U.S. Department of
Commerce in April 2002 and finally confirmed by the U.S. International Trade
Commission in October 2002 made domestic wire rod products more competitive with
imported products. The Steel Manufacturing Business turned this price parity
with imported wire products into increased sales and market share. On the other
hand, the Company believes that merchant bar and rebar prices have not seen a
significant positive impact from tariffs imposed in March 2002 by the Federal
Government under section 201 of the Trade Act of 1974. However, merchant bar
selling prices have increased modestly industry-wide in order to adjust up to
the cash costs of production. In the first quarter of fiscal 2003, the Steel
Manufacturing Business nearly completed two capital projects to the rolling
mill, which allow it to now produce higher margin specialty wire products and to
improve the packaging of coiled products. Production costs per ton for the Steel
Manufacturing Business declined as production in the melt shop and the rolling
mills increased by 23% and 33%, respectively, compared with the first quarter of
fiscal 2002. However, this improvement was partially offset by higher raw
material prices.
Net income for the first quarter of fiscal 2003 compared with the same quarter
in the previous fiscal years benefited from higher average selling prices for
ferrous recycled metals, decreased depreciation and amortization expense, a
lower tax rate (see "Income Tax Provision" below) and a positive impact from
intercompany profit eliminations. Depreciation expense was $0.4 million lower
due to the Company reducing its asset base during fiscal 2002. Amortization
expense decreased by $0.3 million as the Company implemented FAS 142 in fiscal
2003, which eliminates goodwill amortization. Also, in the first quarter of
fiscal 2003, income from operations benefited by $0.6 million as a result of a
decrease from the beginning to the end of the quarter in the amount of
intercompany profit eliminations. Profit on intercompany sales of ferrous metals
by the Metals Recycling Business to the Steel Manufacturing Business is
eliminated until the Steel Manufacturing Business converts the ferrous metals
into finished products and sells them to third parties. The decrease in
intercompany profit eliminations occurred as higher margin ferrous metals sold
to the Steel Manufacturing Business in the fourth quarter of fiscal 2002 flowed
through the inventories of the Steel Manufacturing Business in the first quarter
of fiscal 2003, and were replaced through intercompany sales at the lower
margins prevailing during this quarter.
REVENUES. Consolidated revenues for the three months ended November 30, 2002,
decreased $0.3 million to $76.5 million compared with the first quarter of
fiscal 2002.
For the first quarter of fiscal 2003, revenues for the Metals Recycling
Business, before intercompany eliminations, decreased $2.9 million (6%) compared
with the first quarter of fiscal 2002 primarily due to lower ferrous export
sales volumes. Total ferrous sales volumes decreased 53,100 tons (15%) due
primarily to the market conditions previously mentioned. Partially offsetting
the decrease in ferrous export sales volumes were increased sales volumes to the
Steel Manufacturing Business and external domestic customers. Sales volumes to
the Steel Manufacturing Business increased 21,600 tons (23%) to 115,000 tons as
the melt shop ramped up billet production. Sales volumes to external domestic
customers increased 31,700 tons (562%) reflecting increased sales to a Pacific
Northwest steel manufacturer. The average sales price net of shipping costs
(average net sales price) for ferrous metals increased $15 per ton (17%) to $102
per ton from the first quarter of fiscal 2002 due to the lower supplies and
tight inventories of recycled metals suppliers. Nonferrous sales volume
decreased 12%, which was primarily attributable to the West Coast longshoreman's
lockout and discontinuing the purchase and sale of a certain nonferrous metal
commodity.
14
SCHNITZER STEEL INDUSTRIES, INC.
However, the lower nonferrous sales volume was offset by a 19% increase in the
average net sales price compared with the same period last year primarily as a
result of strong demand from China.
The Steel Manufacturing Business' revenues for the three months ended November
30, 2002 increased $6.4 million (18%), to $42.8 million compared with the prior
year quarter, reflecting higher sales volumes and higher average sales prices.
Finished steel shipments increased 18,300 tons (15%) to 142,300 tons with the
average finished steel net selling price up $4 per ton (1%) to $284 per ton
compared with the same quarter last year. The increase in sales volumes is
primarily due to higher sales of wire rod as the Steel Manufacturing Business
obtained additional sales from a major customer directly related to the
anti-dumping and countervailing duties mentioned in the "General" paragraph
above. The wire rod average net sales price was up 3% since the first quarter of
last year and 4% since the market lows in the third quarter of fiscal 2002 due
to these duties. However, the Company believes that the tariffs imposed under
Section 201 of the Trade Act of 1974 in March and April 2002 on lower priced
imported steel products have not resulted in any significant increases in price
for other finished steel products, especially rebar and merchant bar. Merchant
bar selling prices have increased 9% from extremely low levels as cash
production costs for most suppliers were higher than selling prices and selling
prices needed to be adjusted upward.
COST OF GOODS SOLD. Consolidated cost of goods sold decreased $2.0 million (3%)
for the three months ended November 30, 2002, compared with the same period last
year. Cost of goods sold decreased as a percentage of revenues from 93% to 91%.
Gross profit increased $1.7 million to $7.0 million during the latest quarter as
compared to the prior year quarter as profit margins increased for the Metals
Recycling Business.
For the Metal Recycling Business, the cost of goods sold as a percentage of
revenues decreased compared with the first quarter of fiscal 2002 from 90% to
85%. Gross profit increased by $1.9 million to $7.0 million. The increase in
gross profit was attributable to higher average net selling prices. Compared
with the first quarter of last year, the average ferrous metals cost of sales
per ton increased 10% due to higher purchase costs for unprocessed ferrous
metals. Generally, the cost of unprocessed metal has a correlation to changes in
the average selling price. Thus, as selling prices rose compared with last
year's quarter, so did the cost of unprocessed metal. This increase in ferrous
cost of sales was more than offset by the higher average ferrous net selling
price per ton.
For the first quarter of fiscal 2003, cost of goods sold for the Steel
Manufacturing Business increased $7.5 million (21%) compared to the same period
last year and as a percentage of revenues increased from 99% to 101%. Cost of
goods sold per ton increased 4%. In the first quarter of fiscal 2003, the
negative gross margin was ($0.5) million compared with a positive gross margin
of $0.5 million in the first quarter of last year. The cost of goods sold
increase was primarily due to a 15% increase in the cost of ferrous recycled
metals, the main raw material component of mini-mill steel manufacturing and a
product mix shift to wire rod, which has higher production costs than rebar.
JOINT VENTURES. The Joint Ventures in the Metals Recycling Business
predominantly sell recycled ferrous metal. Revenues for this segment in the
first quarter of fiscal 2003 increased $3.4 million (2%) compared with the prior
year quarter primarily due to increased sales of a recycled metals trading joint
venture. The increase was a result of better sales to European countries and the
timing of its shipments. Partially offsetting the increase was lower sales
revenues for the joint ventures that process recycled metals. Due to the same
supply and demand circumstances described earlier for the Company's wholly-owned
businesses, the joint ventures that process recycled metals had a 29% decrease
in sales volume partially offset by a 17% increase in average net selling price.
Also, fiscal 2002 first quarter volumes were unusually high due to the
non-recurring volumes from the World Trade Center tragedy.
The Company's equity in income from its Joint Ventures in the Metals Recycling
Business for the first quarter of fiscal 2003 decreased to $3.1 million from
$3.7 million in the first quarter of fiscal 2002. The decrease in income from
these Joint Ventures was primarily caused by the lower sales volumes of the
processing Joint Ventures. Additionally, the Joint Ventures have worked to
reduce the cost of unprocessed inventory as a percentage of the selling price
and to improve operational efficiencies, thereby increasing their operating
margins per ton.
15
SCHNITZER STEEL INDUSTRIES, INC.
Revenues of the Joint Venture Suppliers of Metals decreased $0.3 million during
the first quarter of fiscal 2003 compared to the first quarter of last year due
to the slowdown in the United States economy. However, the Company's
self-service auto wrecking and parts joint venture had an increase in revenue
for the period. For the three months ended November 30, 2002, the Company's
equity in income from these joint ventures increased $0.8 million to $2.0
million from the first fiscal quarter of last year. The Company's self-service
auto wrecking and parts joint venture was primarily responsible for the increase
due to higher margins and cost reductions related to refinements in its
operations.
INTEREST EXPENSE. Interest expense for the first quarter of fiscal 2003
decreased 50% to $0.4 million compared with the first quarter of fiscal 2002.
The decrease was primarily a result of lower average principal balances
outstanding in the first quarter of fiscal 2003 as compared with last year's
first quarter, as well as lower average interest rates.
INCOME TAX PROVISION. The tax rate for the first quarter of fiscal 2003 was
approximately 23% compared with 30% for the prior year quarter. The tax rate is
lower in this year's quarter because FAS 142, which was implemented by the
Company in fiscal 2003, eliminates the amortization of goodwill. This had the
effect of reducing the tax rate because goodwill was never deductible for tax
purposes. Also, management anticipates higher export sales, which under Federal
law are taxed at a lower rate than domestic sales. The tax rate also continues
to reflect the benefit from net operating loss carryforwards that accompanied an
earlier acquisition.
LIQUIDITY AND CAPITAL RESOURCES. Cash used by operations for the three months
ended November 30, 2002 was $3.7 million compared with cash provided of $7.8
million for the same period in the prior fiscal year. The decrease in cash flow
was due to inventory increases. The most significant increase came in the Metals
Recycling Business where inventories grew primarily due to the timing of export
orders and shipments mentioned above. The inventory increases were partially
offset by a decrease in the accounts receivable balance also due to the timing
of cash receipts for export shipments.
Capital expenditures for the three months ended November 30, 2002 was $4.2
million compared with $2.2 million during the quarter ended November 30, 2001.
The increase was due to the costs associated with dock renovations and
improvement projects at the Company's Portland, Oregon and Oakland, California
recycling facilities. The Company expects to spend approximately $11.3 million
on capital projects during the remainder of fiscal 2003.
As a result of acquisitions completed in prior years, the Company had $20.8
million of accrued environmental liabilities as of November 30, 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 November 30, 2002, the Company had a committed unsecured bank credit
facility totaling $200 million that matures in June 2003. The Company also had
additional unsecured lines of credit of $40 million, which were uncommitted. In
the aggregate, the Company had bank borrowings outstanding totaling $37.4
million at November 30, 2002. These borrowings are classified as a current
liability due to the June 2003 expiration of the bank credit facility.
Management intends to replace the bank credit facility with a new agreement.
Further, Management believes it has the ability to refinance the facility based
upon the Company's financial position and from preliminary discussions with
various banks that participate in its current facility. The Company's debt
agreements have certain restrictive covenants. As of November 30, 2002, the
Company was in compliance with such covenants.
In July 2002, the Company's metals recycling joint ventures with Hugo Neu
Corporation entered into a $70 million revolving credit facility ("JV Credit
Facility") with a group of banks for working capital and general corporate
purposes. Prior to this time, the joint ventures' working capital and other cash
needs had been met by advances provided equally by the Company and its partner,
Hugo Neu Corporation. The JV Credit Facility expires in July 2004, is secured by
the inventory and receivables of the joint venture businesses and has certain
restrictions on future borrowings. The Company is not a guarantor of the JV
Credit Facility. The JV Credit Facility has a number of covenants and
restrictions,
16
SCHNITZER STEEL INDUSTRIES, INC.
including restrictions on the level of distributions to the joint venture
partners. As of November 30, 2002, the joint ventures were in compliance with
such covenants. Borrowings under the JV Credit Facility totaled $35.0 million at
November 30, 2002.
The Company has certain contractual obligations and commercial commitments to
make future payments. The following table summarizes these future obligations
and commitments as of November 30, 2002 (in thousands):
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
-------- -------- -------- -------- --------
Long-term debt(1) $ 45,830 $ 37,620 $ 370 $ 140 $ 7,700
Operating leases 99,155 1,727 4,116 3,598 89,714
Letters of credit 4,900 4,900 -- -- --
JV credit facility (50%)(2) 17,500 -- 17,500 -- --
-------- -------- -------- -------- --------
Total $167,385 $ 44,247 $ 21,986 $ 3,738 $ 97,414
======== ======== ======== ======== ========
(1) The Company has a $200 million credit facility with a group of banks for
working capital and other general purposes. The facility expires in June
2003 and has therefore been classified by the Company as a current
liability at August 31, 2002. Management believes it has the ability to
refinance the facility and expects to complete the refinancing in 2003.
(2) This disclosure assumes that if the JV Credit Facility is not renewed or
refinanced upon expiration, the Company and Hugo Neu Corporation would
restore their previous arrangement under which each funded one-half of the
joint ventures' cash needs.
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
enhances shareholder value. During the first three months of fiscal 2003, the
Company made no share repurchases. As of November 30, 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,
existing credit facilities and its anticipation of being able to refinance its
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.
OUTLOOK. Due to the delay in receiving first quarter export orders, the Company
expects both its wholly-owned and joint ventures metals recycling businesses to
have near record sales volumes in the second quarter of fiscal 2003. Further,
the average ferrous net selling prices are expected to be modestly higher than
the amounts reported in the first quarter of fiscal 2003. The Company expects
net sales prices and margins to be partially tempered by rising ocean freight
rates coupled with increases in the cost of unprocessed metal. Looking beyond
the second quarter, the Company continues to anticipate good demand, primarily
from Asian customers, for ferrous recycled metal and tight available supply.
These advantageous market conditions have not existed since before the 1997
Asian financial crisis, but appear to be sustainable for the foreseeable future
as was the case during much of the 1990's. Thus, the Company's management
believes it is again well positioned to capture the benefits of these stronger
market fundamentals.
It's anticipated that the Steel Manufacturing Business will continue to improve
its cost structure throughout fiscal 2003. In December, the Company completed an
upgrade to its wire rod mill that will allow it to produce higher
17
SCHNITZER STEEL INDUSTRIES, INC.
margin products beginning in the second quarter of this year. The rise in
recycled metal prices is expected to partially offset some of the operating
improvements. In the end, the Company anticipates the Steel Manufacturing
Business will further narrow its operating losses in the second quarter of
fiscal 2003.
Overall, the Company anticipates income from operations to be in the $8 million
to $9 million range for the second quarter of fiscal 2003. Currently, the
Company estimates its effective tax rate will continue to benefit from net
operating loss carry forwards that were acquired in an earlier acquisition.
This, as well as other tax benefits, should result in a fiscal 2003 effective
tax rate that is in the low-to-mid twenty percent range.
FACTORS THAT COULD AFFECT FUTURE RESULTS. Management's Discussion and Analysis
of Financial Condition and Results of Operations, particularly "Outlook" 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, and 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. 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 domestic and foreign recycled metals processors for
sales to foreign customers. In the recent past lower cost ferrous recycled
metals supplies from the countries of the former Soviet Union have adversely
affected the Company's ferrous recycled metals selling prices and volumes.
Currently, those countries have export tariffs and some outright export bans
which have significantly reduced their export volumes and lowered the worldwide
supply of ferrous recycled metals. These tariffs and bans have had a positive
effect on the Company's selling prices and volumes. However, the Company cannot
18
SCHNITZER STEEL INDUSTRIES, INC.
predict when or if the countries of the former Soviet Union will change their
export policies and what effect, if any, such changes might have on the
Company's operating results.
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 United States for sales of
its products. In addition, in recent years, the Company has experienced
significant foreign competition, which is sometimes subsidized by large
government agencies. There can be no assurance that such competition will not
increase in the future. In March and April 2002, the ITC imposed tariffs on
imported steel, under Section 201 of the 1974 Trade Act, to aid the domestic
steel industry. To date, those tariffs have not significantly benefited selling
prices for finished steel products. In October 2002, the ITC announced duty
margins of up to 360% and subsidy rate of up to 18% against wire rod products
from eight foreign countries. The Company cannot, however, predict the impact of
these duty margins and subsidy rates on prices and operating results. In
December 2002, Nucor Corporation assumed ownership of the assets of Birmingham
Steel Corp., a steel manufacturing business in Seattle, Washington. Nucor
Corporation has a significant share of the West Coast finished steel market and
is considered an aggressive competitor. The impact, if any, that Nucor's
ownership and operation of Birmingham Steel's Seattle facility will have on the
Steel Manufacturing Business' and the Metals Recycling Business' operating
results cannot be determined at this time.
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 13% of the cost of steel manufactured for the
Company's Steel Manufacturing Business. The Steel Manufacturing Business
purchases electric power under a long-term contract from McMinnville Water &
Light (McMinnville) which in turn relies on the Bonneville Power Administration
(BPA). Historically, these contracts have had favorable prices and are long-term
in nature. The Company has a five-year contract that expires in September 2006.
On October 1, 2001, the BPA increased its electricity rates due to increased
demand on the West Coast and lower supplies. This increase was in the form of a
Cost Recovery Adjustment Clause (CRAC) added to BPA's contract with McMinnville.
The CRAC is an additional monthly surcharge on selected power charges to recover
costs associated with buying higher priced power during the West Coast power
shortage. The CRAC, which BPA can adjust every six months, was 46% at October 1,
2001, and then adjusted to 39% at April 1, 2002 and 43% at October 1, 2002. The
BPA has announced an anticipated CRAC adjustment to 50% on April 1, 2003.
However, 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 set to expire on
October 31, 2003. The latest contract negotiations resulted in rates that were
30% higher then 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.
TAX LAWS: The Company has been able to reduce its effective tax rate below the
federal statutory tax rate for each of the last three years by using a
combination of Net Operating Loss Carryforwards (NOLs), State of California
Enterprise Zone tax credits and Foreign Sales Corporations or Extraterritorial
Income Exclusions. The Company cannot predict how future tax law changes might
affect the Company's effective tax rate.
SHIPPING AND HANDLING: Both the Metals Recycling Business and the Steel
Manufacturing Business often rely on third parties to handle and transport their
products to end users in a timely manner. The cost to transport the
19
SCHNITZER STEEL INDUSTRIES, INC.
products, in particular by ocean freight, can be affected by circumstances over
which the Company has no control such as fuel prices, political events,
governmental regulations on transportation and changes in market rates due to
carrier availability.
INSURANCE: The cost of the Company's insurance is affected not only by its own
loss experience but also by cycles in the insurance market. Though the Company's
loss record and relationship with its underwriters is good it cannot predict
future events and circumstances which could cause rates to materially change
such as war, terrorist activities or natural disasters. The Company's property
insurance and casualty insurance are to be renewed in February and March
respectively, and are anticipated to increase approximately $1.0 million per
year based on current market conditions.
PENDING PICK-N-PULL ACQUISITION: In addition, Note 4 of Notes to Consolidated
Financial Statements includes a forward looking statement predicting that the
Pick-N-Pull acquisition will be accretive to the Company's earnings. There is a
significant risk that environmental issues will prevent the transaction from
closing or require renegotiation of the purchase agreement. Assuming the
transaction closes, Pick-N-Pull's business is subject to a number of risks that
could prevent it from maintaining or exceeding its current levels of
profitability, such as volatile supply and demand conditions affecting prices
and volumes in the markets for Pick-N-Pull's products, services and raw
materials; local and worldwide economic conditions; increased competition;
purchase accounting assumptions surrounding intangibles and goodwill; and
business integration and management transition issues.
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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Schnitzer Steel Industries, Inc. management, including the Chief Executive
Officer and Chief Financial Officer, has conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15 within 90 days of the filing of this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion. There have been no significant changes in
internal controls, or in factors that could significantly affect internal
controls, subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
20
SCHNITZER STEEL INDUSTRIES, INC.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Stock and Membership Interest Purchase Agreement dated January 8,
2003 among Bob Spence, Pick and Pull Auto Dismantling, Inc.,
Pick-N-Pull Auto Dismantlers, Pick-N-Pull Auto Dismantlers,
Stockton, LLC and Norprop, Inc.
The following schedules and exhibits to the Stock and Membership
Interest Purchase Agreement have been omitted and will be provided
to the Securities and Exchange Commission upon request:
Schedule 4.1 Capitalization
Schedule 4.2 Organization
Schedule 4.3 Authorization
Schedule 4.4 Subsidiaries
Schedule 4.5 Financial Statements
Schedule 4.6 Absence of Certain Changes or Events
Schedule 4.7 Title to Assets
Schedule 4.8 Condition of Tangible Assets
Schedule 4.9 Contracts and Commitments
Schedule 4.10 No Conflict or Violation
Schedule 4.11 Consents and Approvals
Schedule 4.12 Litigation
Schedule 4.13 Labor Matters
Schedule 4.14 Liabilities
Schedule 4.15 Compliance with Law
Schedule 4.16 Brokers
Schedule 4.17 Other Agreements to Sell Assets
Schedule 4.18 Proprietary Rights
Schedule 4.19 Status of Contracts
Schedule 4.20 Employee Benefit Plans
Schedule 4.21 Transactions with Seller
Schedule 4.22 Tax Matters
Schedule 4.23 Employment Agreements and Compensation
Schedule 4.24 Insurance
Schedule 4.25 Receivables
Schedule 4.26 Inventories
Schedule 4.27 Purchase Commitments and Outstanding Bids
Schedule 4.28 Payments
Schedule 4.29 Environmental
Schedule 4.30 Warranties and Liability
Schedule 4.31 Permits and Licenses
Schedule 4.32 Undisclosed Liabilities
Schedule 4.33 Bank Accounts
Schedule 4.34 Records
Schedule 4.35 Misstatements or Omissions
Schedule 6.2 Guarantees of Seller
Schedule 6.3 Certain Prohibited Transactions
21
SCHNITZER STEEL INDUSTRIES, INC.
Exhibit A Wire Transfer Instructions
Exhibit B Form of Spence Employment Agreement
Exhibit C Form of Reddy Employment Agreement
Exhibit D Form of Escrow Agreement
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
22
SCHNITZER STEEL INDUSTRIES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHNITZER STEEL INDUSTRIES, INC.
(Registrant)
Date: January 10, 2003 By: /s/Barry A. Rosen
--------------------- -------------------------------------
Barry A. Rosen
Vice President, Finance and Chief
Financial Officer
23
SCHNITZER STEEL INDUSTRIES, INC.
CERTIFICATION
I, Robert W. Philip, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Schnitzer Steel
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
January 10, 2003
/s/ ROBERT W. PHILIP
- -----------------------------
Robert W. Philip
President and Chief Executive Officer
24
SCHNITZER STEEL INDUSTRIES, INC.
CERTIFICATION
I, Barry A. Rosen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Schnitzer Steel
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
January 10, 2003
/s/ BARRY A. ROSEN
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Barry A. Rosen
Vice President, Finance and Treasurer, and
Chief Financial Officer