Schnitzer Steel Reports Record Annual Earnings
PORTLAND, Ore.--Oct. 6, 2005--Schnitzer Steel Industries, Inc. today reported for the fiscal year ended August 31, 2005, record net income of $146.9 million, or $4.72 per diluted share, on revenues of $853.1 million. In comparison, net income was $111.2 million, or $3.58 per diluted share, on revenues of $688.2 million for the 2004 fiscal year.For the fourth quarter ended August 31, 2005, Schnitzer Steel reported net income of $34.4 million, or $1.11 per diluted share, on revenues of $195.7 million. In comparison, net income was $37.9 million, or $1.22 per diluted share, on revenues of $204.5 million for the same quarter last year.
"Schnitzer Steel completed another strong quarter that resulted in a record year for earnings and revenues not only for the Company as a whole, but also for each of our three business segments," said John D. Carter, President and Chief Executive Officer. "We continue to see good demand for all our products and remain optimistic regarding the fundamentals underpinning our businesses."
"We feel that our recent transactions to grow Schnitzer will position it well for the positive market conditions we anticipate in 2006. We are pleased with the initial progress in integrating the businesses that we acquired through the separation of our joint ventures with Hugo Neu. We will further strengthen the recently acquired New England metals recycling operation when we acquire the minority interests in the Rhode Island business. Finally, we believe our Greenleaf acquisition will enable a significant expansion of our Pick-N-Pull Auto Parts Business in a region where supplies are growing," added Mr. Carter.
Commenting on the fourth quarter's results, Mr. Carter said, "We are pleased with our strong performance. In particular, we are pleased with the strong margins our wholly-owned metals recycling business has consistently produced despite volatile pricing conditions. The sales volumes in our wholly-owned scrap business were below our average quarterly run rate; this reflects low inventory levels in our yards, driven in part by necessary operational adjustments while we carry out our capital investment program and install new equipment."
"As we anticipated, our Steel Manufacturing Business saw average selling prices decline from the levels reported in the fiscal third quarter of 2005, but as the fourth quarter ended we saw market prices rising that should benefit our Company in the first quarter of 2006," Carter continued. "Finally, as we expected, our Auto Parts Business experienced margin compression in the recent quarter, which resulted from the combination of higher cost inventory coupled with lower prices received on the sale of auto-bodies and other ferrous metal."
Metals Recycling Business
The wholly-owned Metals Recycling Business reported 2005 operating income of $123.6 million, an increase of 60% compared with the $77.3 million reported in the 2004 fiscal year. Ferrous sales volume in fiscal 2005 approximated last year's level and totaled 1.9 million tons. Average ferrous selling prices rose to $230 per ton, representing a 25% improvement over last year.
For the fourth quarter of fiscal 2005, the Metals Recycling Business reported operating income of $22.4 million, which was an increase of 3% compared with $21.8 million in the fourth quarter of last year. The improved profitability was primarily due to higher average ferrous selling prices, which increased $12 per ton, or 6%, from the fourth quarter of last year. These amounts were offset in part by a 15% decline in fourth quarter 2005 ferrous sales volume, which principally reflected lower fourth quarter inventory available to sell as higher volumes were shipped during the first nine months of fiscal 2005 as compared with 2004 and the necessary operational adjustments referred to above.
As previously announced on September 7, 2005, the Company agreed to acquire substantially all of the assets of Regional Recycling LLC, a metals recycling business with 10 facilities located in Georgia and Alabama. This acquisition is anticipated to close in late October and will allow Schnitzer to expand its geographic footprint in the eastern U.S. In 2004, Regional Recycling had revenues of $190.4 million and processed 500,000 tons of ferrous metal and 1,000,000 pounds of nonferrous metal. The purchase price will be $65.5 million in cash and the assumption of certain liabilities.
The Company also recently announced the appointment of Don Hamaker as President of its Metals Recycling Business. Mr. Hamaker, who was previously President of Hugo Neu Corporation, will take lead responsibilities for all of the Company's scrap metal recycling facilities.
Joint Venture Businesses
Operating income from Joint Ventures in fiscal 2005 amounted to $69.6 million, which included a LIFO benefit of $2.8 million for this year's LIFO inventory adjustment. In comparison, last year's operating income from Joint Ventures was $61.6 million and included a $6.1 million LIFO charge. Processing joint venture sales volumes increased 9% to 3.9 million tons and trading sales volumes increased 13% to 3.0 million tons. Operating income also benefited from an increase in average selling prices resulting from strong market conditions.
For the fourth quarter of 2005, operating income from Joint Ventures amounted to $21.8 million, including the $2.8 million LIFO benefit. In comparison, last year's fourth quarter result was $18.9 million, including the $6.1 million LIFO charge. Fourth quarter processing sales volumes increased 13% to 1.1 million tons and trading sales volumes were roughly comparable to the levels in the fourth quarter of 2004. The increase in processing sales volumes was caused in part by the timing of shipments between the third and fourth fiscal quarters and the decision to lower year-end inventories. The average ferrous selling price declined modestly for Joint Ventures.
On September 30, 2005, the Company completed its previously announced separation agreement with Hugo Neu Corporation, under which the Company terminated its joint venture relationships. Under that agreement, the Company received Hugo Neu's interest in the joint ventures operating in New England, the scrap metal trading business operating in Russia and certain Baltic countries, and Hugo Neu's wholly-owned scrap metal and green waste recycling business in Hawaii, and the Company received cash consideration from Hugo Neu of $52 million. Hugo Neu acquired the Company's interests in the joint ventures operating in New York, New Jersey and Southern California, and the joint venture's scrap metal trading business operating outside of Russia and the Baltic countries.
Related to the joint venture separation was Schnitzer's recent announcement to purchase the minority partner's interest in its Rhode Island based scrap business. This purchase, when final, will allow the Company to fully integrate the New England business.
With the completion of this transaction, the Company will report, beginning in the first quarter of fiscal 2006, the results of the acquired operations as part of its Metals Recycling Business segment.
Auto Parts Business
For fiscal 2005, the Auto Parts Business reported record revenues of $107.8 million, representing an increase of 32% over the same period last year. This increase primarily reflected the addition of four new stores in the midwest and eastern U.S., which the Company acquired in mid-January 2005.
The Auto Parts Business reported record operating income of $29.6 million in fiscal 2005, an 11% increase over fiscal 2004. Also, as expected, administrative expenses increased over the same period last year due to the development of the Auto Parts Business management infrastructure in support of the Company's growth plans.
During the fourth quarter of fiscal 2005, the Auto Parts Business grew its revenue by 24% compared with the same period last year. This increase principally reflected the addition of new stores. The Auto Parts Business reported operating income of $6.5 million for the fourth quarter of fiscal 2005, an 11% decline from the prior year's fourth quarter. The lower operating income primarily reflected a decline in ferrous scrap selling prices affecting the revenue realized for crushed auto-bodies, as well as the sale of higher-cost inventory, which compressed margins.
On September 30, 2005, the Company closed its acquisition of Greenleaf Auto Recyclers LLC and five locations leased by Greenleaf. Greenleaf is engaged in the business of auto dismantling and parts recycling and sells its products primarily to collision and mechanical repair shops. Greenleaf currently operates in 22 locations throughout the United States. The total consideration paid in connection with the Greenleaf transaction was $44 million, subject to a post-closing working capital adjustment.
The Company believes the acquisition of Greenleaf enables significant expansion of its self-service Pick-N-Pull business and represents an initial venture into the "full service" side of the auto dismantling business, which the Company sees as a large market and a complementary extension of the self-service auto dismantling business.
Steel Manufacturing Business
The Steel Manufacturing Business reported its second consecutive year of record earnings. The mill reported a fiscal 2005 operating profit of $42.7 million, a 73% improvement from the record earnings recorded the year earlier. The improved profitability principally reflected higher average selling prices, which were offset in part by an 8% reduction in sales volumes and generally higher costs incurred to procure scrap metal and other raw materials used in the production process. Average selling prices were $512 per ton for the year ended August 31, 2005, while last year prices averaged $404 per ton. The average selling prices increased due to higher worldwide demand for steel, coupled with strong West Coast consumption of finished steel.
For the fourth quarter of fiscal 2005, the Steel Manufacturing Business reported an operating profit of $11.1 million, representing a 26% decline from the record earnings in the fourth quarter of 2004. The decline in profitability principally reflected lower average selling prices, coupled with higher costs to procure scrap metal and alloys used to produce finished steel. Selling prices averaged $493 per ton for the fourth quarter of 2005 while during the same period of last year the average selling prices reached $511 per ton. The fourth quarter average selling prices declined by $17 per ton from the third quarter of 2005, due to price reductions instituted during the quarter in response to lower prices from imported steel. Steel shipments rose 5% in the fourth quarter of fiscal 2005 over the prior year's fourth quarter due to strong demand for steel in the western U.S.
Outlook
Prices for ferrous recycled metal remained volatile during the fourth quarter of fiscal 2005. Early in the quarter export prices declined, but firmed and rose throughout August and into early September. The Company's Metals Recycling Business traditionally takes ferrous export orders 60 to 90 days ahead of shipment, which tends to provide management with the ability to adjust its buying prices to minimize the margin impact of changing selling prices. Based upon the previously wholly-owned Metals Recycling Businesses' current order backlog, contracted average net selling prices that are anticipated to be shipped in the first fiscal quarter of 2006 should approximate the levels in the fourth quarter of fiscal 2005. Ocean freight rates are expected to rise modestly from the fourth quarter level, but be approximately 15% to 20% below the rates reported in the first quarter of fiscal 2005.
Sales volumes from the Company's West Coast based business should approximate 450,000 to 475,000 tons of ferrous metal. The processing businesses received as part of the joint venture separation will be adversely affected by the temporary shut-down of the shredder in Rhode Island and low inventory levels, resulting in unusually low ferrous sales volume.
The self-service portion of the Auto Parts Business generally experiences modest seasonal increases in retail demand in the fall months due to moderating weather conditions increasing customer admissions. For the first quarter of 2006, wholesale revenues are anticipated to rise due to favorable pricing for auto-bodies and other unprocessed recycled metal. Over the last few quarters the business has incurred increasing costs to procure automobile inventories due to rising ferrous metal prices. This trend is anticipated to continue into the first quarter of fiscal 2006. The stores acquired as part of the Greenleaf acquisition are anticipated to generate a modest loss in the first quarter as the integration and transition process begins.
West Coast consumption of finished steel long products remains strong and the Steel Manufacturing Business continues to experience good overall demand. Effective September 8, 2005, the Company announced a $45 per ton price increase for rebar and merchant bar products, which was in reaction to rising scrap metal prices and increases from other West Coast competitors. In addition, in late September the Company announced a further price increase on rebar and merchant bar products of $20 per ton that took effect on October 3, 2005. The announced price increases are anticipated to result in modestly higher average selling prices for the first quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005. This increase in average selling prices is anticipated to be partially offset by a modest seasonal decline in sales volume and higher ferrous metal purchase prices.
We estimate the effective tax rate for the first quarter of fiscal 2006 will be approximately 36%.
Fourth Quarter 2005 Conference Call
A conference call to discuss results will be held today, October 6, 2005, at 11:30 a.m. EDT, hosted by John Carter, Chief Executive Officer, Kenneth Novack, Chairman of the Board, Greg Witherspoon, Chief Financial Officer, and Kelly Lang, Vice President, Asset and Business Integration. The call will be webcast and is accessible on Schnitzer Steel's web site at www.schnitzersteel.com.
Schnitzer Steel Industries, Inc. is one of the nation's largest recyclers of ferrous metals, a used auto parts retailer with more than 50 locations across the U.S. and in Canada, and a manufacturer of finished steel products. The Company has a significant metals presence on both the West Coast and Northeastern seaboard, as well as a trading business that principally sells recycled metal products in foreign markets. In addition, the Company's steel mill has an annual production capacity of approximately 700,000 tons of finished steel products. For more information about Schnitzer Steel Industries, Inc., visit www.schnitzersteel.com.
This news release, particularly the "Outlook" section, contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the Company's outlook for the business, and can be identified generally because they contain "expect," "believe," "anticipate," "estimate" and other words that convey a similar meaning. One can also identify these statements as statements that do not relate strictly to historical or current facts. Examples of factors affecting the Company that could cause actual results to differ materially from current expectations are the following: volatile supply and demand conditions affecting prices and volumes in the markets for both the Company's products and raw materials it purchases; world economic conditions; world political conditions; changes in federal and state income tax laws; impact of pending or new laws and regulations regarding imports and exports into the United States and other foreign countries; foreign currency fluctuations; competition; seasonality, including weather; energy supplies; freight rates; loss of key personnel; the inability to complete expected large scrap export shipments in the current quarter; consequences of the pending investigation by the Company's audit committee into Far East payment practices; business integration issues relating to acquisitions of businesses and the separation of the joint venture business described above; and business disruptions resulting from installation or replacement of major capital assets, as discussed in more detail under the heading "Factors That Could Affect Future Results" in the Company's most recent annual report on Form 10-K or quarterly report on Form 10-Q. 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. The Company does not assume any obligation to update any forward-looking statement.
For more information about Schnitzer Steel Industries, Inc. go to www.schnitzersteel.com.
SCHNITZER STEEL INDUSTRIES, INC.
FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts)
(Unaudited)
For the For the
Three Months Ended Year Ended
-------------------- ----------------------
August 31, August 31, August 31, August 31,
2005 2004 2005 2004
--------- --------- ---------- ----------
REVENUES:
Metals Recycling
Business:
Ferrous sales $ 96,883 $110,466 $ 488,206 $ 392,992
Nonferrous sales 18,710 17,293 70,747 56,954
Other sales 1,386 1,617 21,194 6,356
--------- --------- ---------- ----------
Total sales 116,979 129,376 580,147 456,302
Auto Parts Business 28,994 23,319 107,808 81,518
Steel Manufacturing
Business 87,283 86,165 315,476 271,293
Intercompany sales
eliminations (37,576) (34,369) (150,353) (120,893)
--------- --------- ---------- ----------
Total $195,680 $204,491 $ 853,078 $ 688,220
========= ========= ========== ==========
INCOME FROM OPERATIONS:
Metals Recycling
Business $ 22,433 $ 21,772 $ 123,643 $ 77,319
Auto Parts Business 6,491 7,267 29,630 26,804
Steel Manufacturing
Business 11,135 15,130 42,661 24,636
Joint ventures 21,809 18,937 69,630 61,571
Corporate expense (6,324) (3,853) (20,817) (15,570)
Intercompany
eliminations 1,808 1,489 (186) (4,380)
Environmental matters
and impairment
charges (1) (3,726) (3,500) (11,951) (3,500)
--------- --------- ---------- ----------
Total $ 53,626 $ 57,242 $ 232,610 $ 166,880
========= ========= ========== ==========
NET INCOME $ 34,442 $ 37,940 $ 146,867 $ 111,181
========= ========= ========== ==========
BASIC EARNINGS PER
SHARE $ 1.13 $ 1.26 $ 4.83 $ 3.71
========= ========= ========== ==========
DILUTED EARNINGS PER
SHARE $ 1.11 $ 1.22 $ 4.72 $ 3.58
========= ========= ========== ==========
SHARE INFORMATION
(THOUSANDS):
Basic shares
outstanding 30,473 30,210 30,427 29,976
========= ========= ========== ==========
Diluted shares
outstanding 31,012 31,077 31,097 31,058
========= ========= ========== ==========
(1) FY2005 amounts relate to environmental matters primarily
associated with the Hylebos Waterway project, FY2004 relate to
impairment charges.
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
(Unaudited)
For the For the
Three Months Ended Year Ended
---------------------- ----------------------
August 31, August 31, August 31, August 31,
2005 2004 2005 2004
----------- ----------- ---------- -----------
Revenues $195,680 $204,491 $853,078 $688,220
--------- --------- --------- ---------
Cost of goods sold 144,167 149,427 622,856 533,477
Selling, general and
administrative 15,970 13,259 55,291 45,934
Environmental matters and
impairment charges 3,726 3,500 11,951 3,500
--------- --------- --------- ---------
Income from wholly-owned
operations 31,817 38,305 162,980 105,309
Operating income from
joint ventures 21,809 18,937 69,630 61,571
--------- --------- --------- ---------
Operating income 53,626 57,242 232,610 166,880
Other expense:
Interest expense (107) (560) (847) (2,048)
Other expense, net (322) (345) (877) (506)
--------- --------- --------- ---------
(429) (905) (1,724) (2,554)
--------- --------- --------- ---------
Income before income
taxes and minority
interests 53,197 56,337 230,886 164,326
Income tax provision (18,265) (17,718) (81,522) (50,669)
--------- --------- --------- ---------
Income before minority
interests 34,932 38,619 149,364 113,657
Minority interests, net
of tax (490) (679) (2,497) (2,476)
--------- --------- --------- ---------
Net income $ 34,442 $ 37,940 $146,867 $111,181
========= ========= ========= =========
Basic earnings per
share $ 1.13 $ 1.26 $ 4.83 $ 3.71
========= ========= ========= =========
Diluted earnings per
share $ 1.11 $ 1.22 $ 4.72 $ 3.58
========= ========= ========= =========
Schnitzer Steel Industries, Inc.
Selected Operating Statistics
(Unaudited)
Q1 FY05 Q2 FY05 Q3 FY05 Q4 FY05 FY05
------- ------- ------- ------- ----
Metals Recycling
Business
Ferrous Recycled
Metal Sales
Prices ($/LT)
Domestic $221 $220 $222 $206 $217
Export $245 $247 $237 $216 $238
Average $236 $240 $231 $211 $230
Ferrous Sales
Volume (LT)
Domestic
Processed (a) 133,687 98,900 163,254 147,291 543,132
Domestic
Brokered (a) 42,276 20,573 43,208 40,963 147,020
Export 294,900 356,607 293,746 229,921 1,175,174
--------------------------------------------------
Total (a) 470,863 476,080 500,208 418,175 1,865,326
==================================================
(a) Includes sales
to the Steel
Manufacturing
Business 159,463 110,033 189,559 166,268 625,323
==================================================
Steel Manufacturing
Business
Sales Prices ($/NT)
Average $534 $517 $510 $493 $512
Sales Volume (NT)
Rebar 55,956 62,302 103,973 93,331 315,562
Coiled Products 56,679 50,391 51,579 57,306 215,955
Merchant Bar
and Other 13,703 11,957 16,349 19,161 61,170
--------------------------------------------------
Total 126,338 124,650 171,901 169,798 592,687
==================================================
Joint Ventures
Ferrous Recycled
Metal Sales Volume
Processing (LT) 929,667 1,049,572 814,522 1,118,906 3,912,667
Trading (LT) 750,034 717,574 798,731 752,232 3,018,571
--------------------------------------------------
1,679,701 1,767,146 1,613,253 1,871,138 6,931,238
==================================================
Auto Parts Business
Number of retail
locations at end
of quarter 26 30 30 30 NA
Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY04 FY04
------- ------- ------- ------- ----
Metals Recycling
Business
Ferrous Recycled
Metal Sales
Prices ($/LT)
Domestic $135 $168 $228 $186 $179
Export $144 $154 $243 $208 $187
Average $140 $158 $237 $199 $184
Ferrous Sales
Volume (LT)
Domestic
Processed (a) 99,781 105,371 112,310 142,198 459,660
Domestic
Brokered (a) 73,366 40,658 52,627 49,333 215,984
Export 235,481 355,304 280,493 298,484 1,169,762
--------------------------------------------------
Total (a) 408,628 501,333 445,430 490,015 1,845,406
==================================================
(a) Includes sales
to the Steel
Manufacturing
Business 157,989 131,837 158,314 169,459 617,599
==================================================
Steel Manufacturing
Business
Sales Prices ($/NT)
Average $310 $351 $448 $511 $404
Sales Volume (NT)
Rebar 91,204 89,699 71,069 88,462 340,434
Coiled Products 55,171 54,111 66,250 57,826 233,358
Merchant Bar
and Other 16,219 18,499 17,510 16,039 68,267
--------------------------------------------------
Total 162,594 162,309 154,829 162,327 642,059
==================================================
Joint Ventures
Ferrous Recycled
Metal Sales Volume
Processing (LT) 674,622 827,787 1,086,024 993,326 3,581,759
Trading (LT) 677,395 623,077 620,640 754,981 2,676,093
--------------------------------------------------
1,352,017 1,450,864 1,706,664 1,748,307 6,257,852
==================================================
Auto Parts Business
Number of retail
locations at
end of quarter 23 23 26 26 NA
Note: Price information is shown after a reduction for the cost of
freight incurred to deliver the product to the customer