Schnitzer Steel (SCHN) Sees Q4 Net Loss

August 27, 2013 8:35 AM EDT
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Schnitzer Steel Industries, Inc. (Nasdaq: SCHN) announced its outlook for its fourth quarter of fiscal 2013 ending August 31, 2013. During the quarter, export demand for recycled metals weakened versus the third quarter as reflected by lower shipped volumes and lower average sales prices. Average purchase prices for material shipped during the quarter declined more slowly than sales prices resulting in lower margins compared to the third quarter. Positive operating cash flow, driven by a strong focus on working capital, is expected to result in a reduction of total debt outstanding in the fourth quarter, after payment of the Company’s quarterly dividend. During the fourth quarter, the Company completed the construction of its major capital projects in Canada and Puerto Rico which is expected to result in a significant reduction in capital expenditures in fiscal 2014.

In the Metals Recycling Business, ferrous sales volumes are anticipated to be 5-10% lower than the third quarter and average ferrous selling prices are expected to decline 8-10% sequentially. Nonferrous sales volumes are expected to approximate the third quarter while average nonferrous selling prices are expected to decline approximately 5%. Operating results in the fourth quarter are expected to be adversely impacted by the weaker market conditions, including the impact of average inventory costs which, in a declining selling price environment, do not decrease as quickly as cash purchase costs for raw materials, as well as higher unit costs resulting from lower anticipated volumes and a material increase in bad debt expense. These factors are expected to contribute to the Metals Recycling Business incurring an operating loss in the fourth quarter.

In the fourth quarter, the Metals Recycling Business also anticipates recording a material non-cash impairment charge to the carrying value of goodwill reflecting the broader impact of the weaker macroeconomic environment as well as other factors. In addition, the Company expects to record a non-cash deferred tax valuation allowance in the fourth quarter related to foreign operations in the Metals Recycling Business. The impairment charge and valuation allowance are not expected to impact the Company’s ability to continue the quarterly dividend or to repurchase shares.

In the Auto Parts Business, car purchase volumes are expected to approximate the third quarter. Despite challenging market conditions, car purchase volumes for the full year are anticipated to increase 5% compared to the prior fiscal year, including the impact of new stores acquired in fiscal 2013. Operating margins are expected to be positive but lower sequentially mainly due to the adverse impact of average inventory accounting. The fourth quarter will also include approximately $2 million of start-up costs related to the 11 new stores added in fiscal 2013, including our recently acquired first store in Rhode Island. The new stores are expected to provide additional benefits to the Auto Parts Business in fiscal 2014 as the start-up phase is completed.

In the Steel Manufacturing Business, sales volumes are expected to increase sequentially by approximately 10%, driven by improvements in demand for finished steel in the Western US. These volume benefits are expected to offset a slight decline in average selling prices compared to the third quarter resulting from lower scrap costs. The improvement in demand and additional cost efficiencies from increased productivity are expected to generate positive operating income and to result in the best full-year performance for the Steel Manufacturing Business since fiscal 2008.

Consolidated financial performance, including corporate expenses, net interest expense and taxes, is expected to result in a net loss on a reported and adjusted basis for restructuring, goodwill impairment and other charges.

*** The Street was looking for EPS of $0.20.

The Company continues to adjust to market conditions by reducing costs, further integrating its Metals Recycling and Auto Parts Businesses, and focusing on improved returns from its previous capital investments. The Company believes its ability to utilize its Auto Parts platform to supply its Metals Recycling Business remains a competitive advantage and it continues to be a strategic priority to maximize these benefits. Fiscal 2014 is expected to benefit from a full year of the previously announced $25 million of cost reductions and we anticipate further cost reductions to be phased in over the next 12 months.

The Company expects to report fourth quarter and fiscal 2013 results in the second half of October.

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