Schnitzer Steel Industries, Inc. reported net income of $33.5 million on revenues of $226.8 million for the third quarter and net income of $112.4 million on revenues of $641.5 million for the nine months ended May 31, 2005.

Third Quarter Results—The $33.5 million net income ($1.08 per diluted share) compares to net income of $42.5 million ($1.37 per diluted share) for the quarter ended May 31, 2004. Revenues of $226.8 million compare to revenues of $193.8 million for the year-ago quarter.

Nine Month Results—Net income of $112.4 million ($3.61 per diluted share) compares to net income of $73.2 million ($2.36 per diluted share) for the first nine months of fiscal 2004. Revenues of $641.5 million compare to revenues of $483.7 million for the first nine months of fiscal 2004.

Comments—"Schnitzer Steel's wholly-owned operations continued to benefit from strong market conditions during the third quarter of fiscal 2005, including continued good demand for recycled ferrous metal and finished steel products," said John D. Carter, President and CEO. "Although the quarter's earnings were down from the near record levels reported in the 2004 fiscal third quarter, the results for our business remained strong. Our business continues to benefit from the strength of our growing asset base and the excellent management team of this company."

"On June 9, 2005, the company announced that it signed an agreement to separate and terminate its joint ventures with Hugo Neu Corp.," added Mr. Carter. "We remain on track to close this transaction sometime around the end of fiscal 2005. Our management team is actively developing and implementing a plan to smoothly transition and integrate the new businesses that we will receive in the separation. The company believes that this transaction provides us with a number of advantages including complete operational and financial control of strategic scrap franchises, improved direct access to scrap supply, and expanded access to worldwide markets. Finally, this transaction provides us with a stronger geographic platform and additional capital to expand our business, which we are actively pursuing."

Segment Highlights—Schnitzer’s wholly-owned Metals Recycling Business third quarter 2005 operating income amounted to $27.4 million, which is a decline of 15% compared to the near record of $32.5 million reported in the third quarter of last year. The decrease in operating income was driven by the lower ferrous metal selling prices combined with higher costs incurred to procure unprocessed metals compared to the same period last year. Ferrous sales volume rose 11% in the third quarter of fiscal 2005 to 496,000 tons, offset by a 3% decline in average net ferrous metal selling prices to $230 per ton from the same period last year.

Operating income from Joint Ventures amounted to $11.2 million in the third quarter of fiscal 2005, representing a 60% decline over the prior-year period. Lower profits were primarily due to compressed margins caused by higher freight rates and increased raw material costs. Operating income was also adversely affected by a 25% decrease in ferrous sales volume as compared to the third quarter of 2005, which was caused in part by the timing of large export shipments and lower purchases of unprocessed metal. The combined processing and trading sales volumes declined only slightly (3%) to 1.7 million tons as the decrease in processing volume was offset by a 35% increase in trading volume.

On June 9, 2005, the company announced that it had signed a Master Agreement with Hugo Neu Corp. (HNC) to separate and terminate its joint venture relationships, which is currently expected to close around the end of fiscal 2005. The company will acquire HNC's interest in the joint ventures operating in New England, the scrap metal trading business operating in Russia and certain Baltic countries, and HNC's wholly-owned scrap metal and green waste recycling business in Hawaii, and the company will receive a cash payment of approximately $52 million. HNC will acquire the company's interests in the joint ventures operating in New York, New Jersey and California, and the scrap metal trading business operating outside of Russia and the Baltic countries referred to above.

During the third quarter of fiscal 2005, Schnitzer’s Auto Parts Business grew its revenue by 33% as compared to the same period last year. This growth was due to the strong wholesale revenues resulting from higher metal prices and the addition of four new stores in the mid-west and eastern U.S. that were acquired in mid-January 2005 improving retail sales. The Auto Parts Business reported operating income of $8.5 million, which approximated the operating income of the prior year's third quarter. The higher revenues were partially offset by increases in the cost of procuring inventory, which was affected by the rise in prices for unprocessed scrap metals. Also, as expected, administrative expenses increased over the same period last year due to the development of management infrastructure in support of the company's growth plans.

Schnitzer’s Steel Manufacturing Business reported an operating profit of $13.4 million in the third quarter of fiscal 2005, which was a 93% ($6.5 million) improvement over the third quarter of 2004. The quarter-over-quarter increase was driven by higher average selling prices spurred by the strong demand and increased volumes. The third quarter 2005 sales volumes amounted to 171,900 tons, which was 11% and 38% higher than the volumes shipped in the third quarter of fiscal 2004 and the second quarter of fiscal 2005, respectively. Sales volumes grew due to seasonal improvements in demand for construction related products. In addition, the mill held higher inventory levels as it entered the third quarter of fiscal 2005, which allowed it to fulfill the strong seasonal demand. Average selling prices reached $510 per ton for the third quarter of 2005 while during the same period of last year the average selling prices were $448 per ton. The third quarter average selling prices declined by $7 per ton from the second quarter of 2005 due to product mix and price reductions.

Outlook—According to Schnitzer, recycled metal markets continue to experience significant price volatility; however, consumption remains strong. Over the last 60 days, market selling prices for ferrous metal declined, but recent export market activity has shown evidence that prices may have firmed and even risen modestly on some individual sales. The company's wholly-owned Metals Recycling Business traditionally takes ferrous export orders 60 to 90 days ahead of shipment, which may provide management with the ability to adjust its buying prices to minimize the margin impact of changes in selling prices. Ocean freight rates have declined sharply in recent weeks, which partially mitigates the reduction in ferrous selling prices. Based upon the wholly-owned Metals Recycling Businesses' current order backlog, contracted average net selling prices that are anticipated to be shipped in the fourth fiscal quarter of 2005 will be lower than the $230 per ton average reported in the third quarter of fiscal 2005, but should remain above the $199 per ton reported in last year's fourth fiscal quarter. Fourth quarter 2005 sales volumes are anticipated to be below the fiscal 2005 quarterly run rate, but total fiscal 2005 sales volume should approximate last year's level. The lower fourth quarter sales volumes are due in part to the timing of export shipping dates and lower fourth quarter inventory levels. The cost of unprocessed ferrous metal also remains very competitive and volatile.

Joint ventures in the metals recycling business are expected to experience similar market trends as the company's wholly-owned Metals Recycling Business; however, their financial results will vary depending on a number of factors including geographic locations, competition and available inventory.

The Auto Parts Business generally experiences modest seasonal declines in retail demand in the summer months due to hot weather conditions reducing customer admissions. Wholesale revenues are anticipated to have mixed results during the fiscal 2005 fourth quarter; core sales volumes and pricing should remain strong, but prices for crushed auto bodies are expected to be lower than the prices realized during the third quarter of fiscal 2005 due to the recent decline in ferrous metal selling prices. Over the last few quarters the business has incurred increasing costs to procure automobile inventories due to rising ferrous metal prices. In recent weeks, the business has reduced its prices paid to procure inventory and is anticipated to continue to do so through the balance of the fourth quarter. However, fourth quarter margins are anticipated to be affected as the higher priced inventory is sold and replaced by lower cost automobiles.

West Coast consumption of finished steel long products remains strong. Schnitzer’s Steel Manufacturing Business continues to experience good overall demand. In May 2005, the company announced a $30 per ton price decrease for rebar and merchant bar products, which was in reaction to declines by other domestic competitors. Also, in early July, the company announced a similar decrease for wire rod products. The announced price decreases are anticipated to result in a modest decline in fourth quarter average selling prices as compared to the third quarter of fiscal 2005 and the fourth quarter of fiscal 2004. The reduction in average selling prices is anticipated to be partially mitigated by declines in ferrous metal purchase prices. Fourth quarter 2005 sales volumes should approximate 155,000 tons, which should approximate the estimated volume of steel produced during the period.

Schnitzer says the company's effective fourth quarter tax rate should approximate 36%.

Schnitzer Steel Industries is one of the nation's largest recyclers of ferrous metals, a leading self-service used auto parts retailer with 30 locations in the U.S. and Canada, and manufacturer of finished steel products. The company, with its joint venture partners, processes approximately 5.4 million tons of recycled ferrous metals per year as well as trades nearly 3.0 million tons. In addition, the company's steel mill — Cascade Steel Rolling Mills — has an annual production capacity of approximately 700,000 tons of finished steel products. The company and its joint venture partners operate primarily along the West Coast and Northeastern seaboard of the United States.