Schnitzer Reports Fourth Quarter Fiscal 2013 Financial Results
Schnitzer Steel Industries, Inc. reported an adjusted loss per share of US$(0.51) for the fourth quarter ended 31 August 2013, excluding a non-cash goodwill impairment charge, other asset impairment charges, restructuring charges and tax valuation allowances. The company reported a loss per share of US$(10.82) for the fourth quarter ended 31 August 2013. This compares with an adjusted earnings per share of US$0.11, excluding restructuring charges, and a reported loss per share of US$(0.02) for the fourth quarter of fiscal 2012. Notwithstanding the significant impact to earnings as a result of the impairments and other charges, the company generated positive operating cash flows of US$38 million in the fourth quarter.
Challenging market conditions for recycled ferrous metals resulted in lower export selling prices and reduced sales volumes as compared to both the third quarter of fiscal 2013 and the fourth quarter of fiscal 2012. In addition, purchase prices for raw materials did not decrease as much as selling prices during the quarter due to constrained supply which contributed to operating margin compression in both our Metals Recycling and Auto Parts Businesses.
In the fourth quarter, the Metals Recycling Business took a non-cash goodwill impairment charge of US$321 million and other asset impairment charges of US$13 million. In the fourth quarter, MRB’s adjusted operating loss of US$6 per ton excludes the non-cash goodwill impairment, other asset impairment charges and restructuring charges. MRB's adjusted operating income includes an estimated adverse impact of US$12 per ton from a combination of average inventory costing and other items related to inventory valuations, costs associated with fire damage at two facilities and a bad debt expense from a customer bankruptcy.
The Auto Parts Business generated operating margins of 7% in the fourth quarter, before the impact of new stores opened in fiscal 2013. APB's operating margin includes an adverse impact of approximately 400 basis points from average inventory costing. During the fourth quarter, APB incurred US$2 million of operating losses related to the new sites added during fiscal 2013 which lowered APB's reported operating margin to 4%.
The Steel Manufacturing Business reported its best fourth quarter and full year performance since fiscal 2008, generating US$2 million of quarterly operating income driven largely by slowly improving demand leading to increased sales volumes and by productivity improvements.
During fiscal 2013, the company implemented restructuring initiatives which reduced annual operating expenses by US$25 million. These benefits were more than offset by the impact of adverse market conditions. In light of continued market challenges, it is implementing additional cost reduction and productivity improvement initiatives which are targeted to further reduce our annual operating expenses by US$30 million with approximately 70% expected to benefit fiscal 2014 performance and the full benefits achieved in fiscal 2015. The additional savings, which are primarily in the Metals Recycling operations, are expected to result from a combination of reducing organizational layers, productivity improvements, procurement savings, internal synergies and other operating efficiencies. It anticipates incremental restructuring charges of US$3 million to be incurred in fiscal 2014.
Tamara Lundgren, president and chief executive officer, commented on the company’s results: “While each of our businesses is well positioned to achieve higher profitability when market conditions improve, this quarter was negatively impacted by a number of significant items and an adverse impact from average inventory costs. Notwithstanding the significant impact to reported earnings, we generated US$38 million of operating cash flow in the fourth quarter and continued to invest in our business and to return capital to our shareholders through our quarterly dividend.”
Lundgren continued: "In fiscal 2013, we delivered US$25 million of savings from reducing SG&A and production efficiencies which lowered our cost of goods sold. However, these benefits were offset by the adverse impact of weak market conditions. In fiscal 2014, we expect to deliver organic growth in each of our businesses and, in addition, we are targeting US$30 million of additional savings. With our major capital projects completed, we also anticipate significantly lower capital spending in fiscal 2014.”
Lundgren concluded: “With slowly improving demand for steel driving increased sales volumes and with the benefits of productivity improvements, SMB delivered its best performance since fiscal 2008. Our focus in fiscal 2014 will be to continue to deliver cost savings and productivity improvements throughout the company and to further leverage the synergies between APB and MRB, all of which we expect will make our company stronger in the long-run. We are very gratified that, in light of the market environment that the company is facing, our teams continue to do an unwavering and excellent job in serving our customers and our communities. It is their commitment to excellence that was reflected in our selection as “Scrap company of the Year” by American Metal Market.”
Metals Recycling Business
Sales Volumes: Ferrous sales volumes of 1.1 million tons in the fourth quarter decreased 7% from the third quarter, primarily due to softer export demand. Nonferrous sales volumes of 141 million pounds increased 4% sequentially, primarily due to benefits from higher production levels and increased shipments in August.
Export customers accounted for 74% of total ferrous sales volumes in the fourth quarter. Our ferrous and nonferrous products were shipped to 14 countries, with Turkey, China and South Korea the top export destinations for ferrous shipments.
Pricing: Demand softened in the export markets in early June, driving average ferrous net sales prices in the fourth quarter down by US$31 per ton, or 8%, from third quarter levels. Domestic selling prices were also lower sequentially, however an upward movement mid-quarter resulted in a lower overall decline as compared to export prices. Nonferrous prices decreased 5% sequentially in the fourth quarter, primarily due to lower commodity prices.
Margins: Adjusted operating loss per ferrous ton of US$6 in the fourth quarter of fiscal 2013 reflected weaker export market conditions, including an estimated adverse impact of US$12 per ton from a combination of average inventory costs and other items related to inventory valuations, costs associated with fire damage at two facilities and a bad debt expense related to a customer bankruptcy.
Auto Parts Business
Revenues: Revenues in the fourth quarter decreased 8% sequentially resulting from a decline in commodity prices and seasonally lower admissions and part sales.
Margins: Operating margins of 7%, before the impact of new stores added in fiscal 2013, were compressed by lower commodity prices, an estimated adverse impact of approximately 400 basis points from average inventory costing, and retail seasonality. During the fourth quarter, APB incurred US$2 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 4%. (See Non-GAAP Financial Measures for reconciliation to U.S. GAAP)
Steel Manufacturing Business
Sales Volumes: Finished steel sales volumes of 138,000 tons increased 10% from the third quarter as well as the prior year quarter due to higher demand for long products on the West Coast.
Pricing: Average net sales prices for finished steel products decreased 3% primarily due to the impact of lower scrap prices on selling prices for finished goods.
Margins: Operating income of US$2 million resulted from improved demand for finished steel products, benefits from higher sales volumes and operational efficiencies arising from productivity improvements.
During fiscal 2013, SG&A was lower by 9%, or US$19 million, as compared to the prior year, excluding US$5 million of operating expenses related to new APB sites in fiscal 2013 and US$2 million of environmental credits which benefited fiscal 2012. Including production efficiencies which reduced costs of goods sold, our cost reduction initiatives lowered annual pre-tax operating costs by US$25 million in fiscal 2013. Total restructuring charges in fiscal 2013 were US$8 million pre-tax, or approximately US$0.20 of diluted earnings per share. During the fourth quarter, we incurred US$3 million of restructuring charges, or approximately US$0.05 of diluted earnings per share. The restructuring charges consisted primarily of cash severance costs from headcount reductions, contract termination costs, and other related costs.
An additional cost reduction program beginning in fiscal 2014 is targeted to further reduce operating expenses by US$30 million, primarily in our Metals Recycling Business. We expect these cost reductions to include approximately US$27 million from reduced production expenses within costs of goods sold and US$3 million from reduced SG&A.
Fiscal Year 2013 Results
For fiscal 2013, Schnitzer reported full year revenues of US$2.6 billion and adjusted loss per share of US$(0.07). Reported loss per share was US$(10.56) for fiscal 2013. This compares with fiscal 2012 revenues of US$3.3 billion and adjusted diluted earnings per share of US$1.12 and reported diluted earnings per share of US$0.99.
During fiscal 2013, the company invested US$50 million in acquisitions, including the purchase of noncontrolling interests, and US$90 million in capital expenditures and returned US$20 million to shareholders through dividend payments.
The company's effective tax rate for fiscal year 2013 was a benefit of 17% which was lower than the federal statutory rate primarily due to the recognition of a valuation allowance on deferred tax assets and the impact of the non-deductible portion of the goodwill impairment charge.
Schnitzer Steel Industries, Inc. is one of the largest manufacturers and exporters of recycled ferrous metal products in the United States with 60 operating facilities located in 14 states, Puerto Rico and Western Canada. 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 61 self-service facilities located in 16 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 106th year of operations in 2013.