Schnitzer Steel Industries, Inc. reported net income of $44 million for the fiscal 2007 third quarter, a third-quarter record, and net income of $93 million for the first nine months ended May 31, 2007.
Third Quarter Results—The $44 million net income ($1.47 per diluted share) was a third-quarter record. This compares to net income of $30 million ($0.98 per diluted share) during the third quarter of fiscal 2006; third quarter 2006 results included a $4 million charge related to the estimated settlement of the SEC and Department of Justice investigations into the company’s past payment practices in Asia. Excluding the charge, third quarter 2006 net income would have been $34 million ($1.11 per share).
Nine-Month Results—The $93 million net income ($3.06 per diluted share) compares to net income of $93 million ($3.02 per diluted share) for the same period in 2006. Fiscal year-to-date 2006 results included a $34-million (after tax) gain in the first quarter for disposition of the Hugo Neu joint venture assets. Net income in 2006 was reduced by charges of $15 million for reserves relating to the SEC and Department of Justice investigations. Excluding the gain from the disposition of joint-venture assets and the charges for the investigation reserve, fiscal year-to-date 2006 net income for the comparable period would have been $74 million ($2.40 per diluted share).
Management Comments—“We had strong financial results in all of our businesses,” said John Carter, President and CEO. “Net income improved 54% from the second quarter as we took advantage of the positive markets in which we are operating by continuing our focus on maximizing the utilization of our assets.”
“In the Metals Recycling Business our ability to export allowed us to take advantage of significant differences between foreign and domestic markets. Our deep water port facilities on both coasts enabled us to target our sales to the regions of the world that provided the best incremental returns. The Auto Parts Business doubled its operating income from the second quarter due to higher parts sales and scrap and core volumes. The Steel Manufacturing Business had higher volumes and record average sales prices to post a 47% sequential improvement in operating income, which was the third highest in the mill’s history,” said Carter.
“Operationally, we are seeing great results from our capital investments,” continued Tamara Lundgren, Executive Vice President and Chief Operating Officer. “Our acquisitions in the Metals Recycling Business have contributed to both ferrous and nonferrous volumes in our New England operations. In addition, our investments in megashredders and nonferrous extraction equipment have resulted in lower unit processing costs and record nonferrous volumes for the division. In our Auto Parts Business, we saw improved results from the operational leverage achieved by increasing our scrap and core sales volumes. The Steel Manufacturing Business completed the quarter with sequential increases in revenues and operating income notwithstanding the five-week planned shutdown to complete major capital projects, which will expand capacity and improve efficiencies.”
Steel Manufacturing Results—The Steel Manufacturing Business recorded the third highest operating income in its history.
Revenues, driven by record net average prices, improved 14% from second quarter of 2007 and 8% from the third quarter of 2006. Average net sales prices increased $60/ton (11%) compared to the second quarter, and sales volumes increased 3%, as the company utilized inventory produced in the second quarter to offset the planned five week shutdown of its rolling mills to install a new reheat furnace and billet craneway. On a year-over-year basis, a $73/ton increase in average net selling prices more than offset a 4% decline in sales volumes.
Operating income improved compared to the second quarter due to the higher sales volumes and significantly higher sales prices, which were only partially offset by higher scrap and other raw material costs and the costs associated with the shutdown of the reheat furnace. Compared to the third quarter of 2006, operating income declined due to lower volumes, the costs associated with the shutdown and scrap and other raw material costs, which rose more than the increase in average net selling prices.
Steel Manufacturing Outlook—The company expects demand for steel products to remain strong in the West Coast construction markets. Based on current market conditions, the company also expects average net prices to approximate or rise slightly during the next quarter from the record prices of the recently completed third quarter.
The company also expects sales volumes to be slightly higher during the coming quarter compared to the volumes shipped during the third quarter of this year. The company also expects operating margins to be consistent with the third quarter as a reduction in the rate of increase in scrap costs should offset an increase in the cost of alloys used in steelmaking.
Schnitzer Steel Industries is one of the largest manufacturers and exporters of recycled ferrous metal products in the United States with 32 operating facilities located in 11 states throughout the country, including six export facilities located on both the East and West Coasts and in Hawaii. The company’s vertically integrated operating platform also includes its auto parts and steel manufacturing businesses. With an annual production capacity of over 750,000 tons, the company’s steel manufacturing business—Cascade Steel Rolling Mills—produces finished steel products, including rebar, wire rod and other specialty products. The company commenced its 101st year of operations in 2007.