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Schnitzer Reports Third Quarter 2013 Financial Results

06/27/2013 - Schnitzer Steel Industries achieved higher sales volumes in each of its businesses despite weaker market conditions in its third fiscal quarter ended 31 May 2013.

Schnitzer Steel Industries, Inc. reported adjusted earnings per share of US$0.09 and earnings per share of US$0.03 for its fiscal 2013 third quarter ended 31 May 2013. This compares to adjusted earnings per share of US$0.36 and earnings per share of US$0.32 in the second quarter of 2013. Adjusted results for the third quarter exclude a US$2 million, or US$0.06 per share, restructuring charge associated with cost reduction initiatives announced in August 2012. Third quarter results were adversely impacted by average inventory accounting which significantly reduced operating income in our Metals Recycling Business by approximately US$10 million, or US$9 per ton, as compared to the second quarter. The company's results in the second quarter included US$0.10 per share of discrete tax benefits. The company generated US$45 million in operating cash flow during the third quarter and our total debt to total capital ratio at the end of the third quarter approximated the second quarter.
Ferrous export selling prices declined steadily throughout the third quarter, with market prices at the end of May approximately US$50 per ton lower than at the end of the second quarter of fiscal 2013 driven primarily by lower export demand. The combination of declining selling prices, constrained supply, adverse impacts of average inventory accounting and lower tax benefits resulted in sequentially lower consolidated net income.
Subsequent to the third quarter, Schnitzer acquired its first Auto Parts store in Rhode Island which is located near existing Metals Recycling facilities. This new store adds to its supply chain in the Northeast, increasing its combined regional presence to 16 facilities.
“During the third quarter we achieved higher sales volumes in each of our businesses despite weaker market conditions. Operating income in our Metals Recycling Business was negatively impacted by the significant drop in ferrous selling prices which fell more quickly than purchase prices and offset some of the benefits from the increased volumes. Our major capital projects for fiscal 2013 in Canada and Puerto Rico continue to progress on schedule. In our Auto Parts Business, seasonal trends contributed to improved sequential results for stores owned more than one year and the integration of our 11 new sites added this fiscal year are on track. In our Steel Manufacturing Business, higher sales volumes reflected, in part, a market environment that is improving," said Tamara Lundgren, president and chief executive officer. "We generated positive operating cash flow this quarter which enabled us to continue our growth investments and capital allocation priorities while maintaining a healthy balance sheet."
Key business drivers during the third quarter of fiscal 2013:
  • Metals Recycling Business (MRB) generated operating income per ferrous ton of approximately US$8, which included an adverse impact from average inventory costs of US$9 per ton, as compared to the second quarter. Ferrous volumes increased 6% and nonferrous volumes increased 8% sequentially from the second quarter.
  • Auto Parts Business (APB) operating income margin of 12%, excluding new sites added in fiscal 2013, reflected seasonally higher parts sales. APB increased its car purchase volumes 3% sequentially, excluding the contribution from new stores in fiscal 2013.
  • Steel Manufacturing Business (SMB) selling volumes increased 31% from the second quarter, primarily due to normal seasonal improvements in demand in the third quarter. Operating results were break-even in the third quarter.
Metals Recycling Business
Sales Volumes: Ferrous sales volumes of 1.2 million tons in the third quarter increased 6% sequentially due to stronger domestic volumes and the timing of shipments. Nonferrous sales volumes of 135 million pounds increased 8%, primarily due to higher production levels and inventory draw down to satisfy customer demand.
Export customers accounted for 73% of total ferrous sales volumes in the third quarter. Our ferrous and nonferrous products were shipped to 13 countries, with China, Turkey and Malaysia being the top ferrous export destinations.
Pricing: Export prices declined steadily throughout the quarter as demand moderated. Higher priced sales orders before the market dropped resulted in average net ferrous selling prices which approximated second quarter levels. Nonferrous prices averaged slightly lower than the prior quarter.
Margins: Operating income per ferrous ton was US$8, which included a significant adverse impact from average inventory costs of US$9 per ton as compared to the second quarter. In the declining selling price environment, average inventory costs did not decline as quickly as cash purchase costs for raw materials, resulting in margin compression. Absent the impact from average inventory accounting, operating income per ferrous ton was in line with the second quarter.
Auto Parts Business
Revenues: Revenues in the third quarter increased 11% sequentially due to seasonally stronger admissions and part sales and the incremental contributions from acquisitions.
Margins: During the third quarter, operating margins, excluding the impact of new sites, increased sequentially to 12%, due in part to the impact of normal seasonal improvements in part sales. During the third quarter, APB incurred US$1 million of operating losses related to the new sites added during fiscal 2013, including integration and startup costs, which lowered APB's reported operating margin to 10%. (See Non-GAAP Financial Measures for reconciliation to U.S. GAAP.)
New Sites: Subsequent to the third quarter, APB acquired its first store in Rhode Island. This location is near our Metals Recycling facilities and will expand APB's presence in our core Northeastern market and further enhance operational synergies with our Metals Recycling Business.
Steel Manufacturing Business
Sales Volumes: Finished steel sales volumes of 125,000 tons increased 31% from the second quarter of fiscal 2013 due to seasonal improvements in demand.
Pricing: Average net sales prices for finished steel products of US$687 per ton approximated the second quarter.
Margins: Operating results during the quarter approximated break-even levels. The decline in margins compared to the second quarter was due primarily to the impact on costs of goods sold from lower utilization levels as customer demand was partially met with inventories produced during the second quarter.
Cost Reductions
During the first nine months of fiscal 2013, SG&A was lower by 10%, or US$16 million, as compared to the prior year, excluding the US$3 million impact from new APB acquisitions. Our cost reduction initiatives announced in August 2012 are on track to lower annual pre-tax operating costs by US$25 million and are anticipated to be substantially implemented by the end of fiscal 2013. During the third quarter, we incurred aUS$2 million expense related to the restructuring charge, which equates to US$0.06 per share. In aggregate, we have incurred US$10 million of the total US$14 million anticipated pre-tax restructuring charge in fiscal 2013. During the fourth quarter of fiscal 2013, the balance of the restructuring charges will primarily reflect costs of consolidating administrative functions in a single headquarters location.
Schnitzer Steel Industries, Inc. is one of the largest manufacturers and exporters of recycled ferrous metal products in the United States with 59 operating facilities located in 14 states, Puerto Rico and WesternCanada. The business has seven deep water export facilities located on both the East and West Coasts and in Hawaii and Puerto Rico. The company's integrated operating platform also includes its auto parts and steel manufacturing businesses. The company's auto parts business sells used auto parts through its 62 self-service facilities located in 17 states and Western Canada. With an effective annual production capacity of approximately 800,000 tons, the company's steel manufacturing business produces finished steel products, including rebar, wire rod and other specialty products. The company commenced its 107thyear of operations in 2013.