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Schnitzer's EPS Beats, Sales Misses

Zacks Equity Research

Schnitzer Steel Industries Inc. (SCHN) delivered earnings per share (EPS) of 40 cents in its third quarter ended May 31, 2012, surpassing the Zacks Consensus Estimate of 24 cents. Results were disappointing when compared to the year ago quarter’s EPS of $1.17. However, on a sequential basis EPS improved 16%.

Revenues for the company plunged 10% year over year and 1% sequentially to $880 million, falling short of the Zacks Consensus Estimate of $904 million.

Costs & Margin Performance

Cost of goods sold decreased 1% sequentially to $808 million in the quarter. Gross profit increased 3% to $72 million compared to the second quarter and gross margin expanded 30 basis points to 8.2%. Selling, general, administrative and engineering (SG&A) expenses improved 4% year over year to $50 million.

Operating income was up 23% sequentially to $22 million with operating margin expanding 50 basis points to 2.5%. The improvement stemmed mainly from the Auto Parts Business attributed to higher parts sales and lower SG&A expenses.

Segment Performance

Metal Recycling Business: Total revenue inched up 1% sequentially to $786 million in the quarter.  Ferrous sales volumes were 1.4 million tons, flat compared with second quarter and non-ferrous sales volumes were 154 million pounds, down 9% from the second quarter.

It should be noted that second quarter level was abnormally high as it included benefits of processing backlog material. Average ferrous prices at $424 were flat sequentially, while average non-ferrous prices increased 7% to $0.97. Operating profit declined 11% sequentially to $18 million in the quarter.

Auto Parts Business: Higher part sales led to a 6% sequential increase in revenues to $83 million. Segment operating profit surged 44% sequentially to $13 million due to higher volumes, as well as seasonal benefits on parts sales and, admissions and lower SG&A expenses.

Steel Manufacturing Business: Revenues dipped 7% to $79 compared to the second quarter of fiscal 2012 as finished steel sales volumes decreased 8% to 103,000 tons. Average net sales prices for finished steel products were up slightly compared with the prior quarter due to product mix. The business reported a break-even quarter as slightly higher sales prices and lower production costs offset lower sales volumes.

Financial Position

Schnitzer had cash and cash equivalents of $56.5 million as of May 31, 2012, up from $32.8 million as of May 31, 2011 and $51.7 million as of February 29, 2012. As of May 31, 2012, debt-to-capitalization ratio further improved to 25% from 27% as of February 29, 2012 and 30% as of May 31, 2011. During the quarter, Schnitzer repurchased 555,000 shares of its Class A Common Stock for a total cost of $15 million. The company has 2.6 million shares available for repurchase.


The company stated that the price of recycled metals are trending downwards and as average inventory costs generally decline at a slower rate than the cash purchase costs for raw materials, its fourth quarter results may be negatively impacted. Schnitzer will provide its fourth quarter market outlook during the second half of August 2012.

The company’s sound cash flow and balance sheet has enabled it to return capital to shareholders through share repurchases during the quarter and a substantial increase in quarterly dividend in the second quarter as well as invest in growth projects. However, all of its divisions remain impacted by challenging market conditions resulting from the global economic slowdown. The stock retains a quantitative Zacks #5 Rank (short term Strong Sell rating) over the near term.

Portland, Oregon-based Schnitzer Steel Industries, Inc., is one of the nation's largest recyclers of scrap metal, a leading provider of used and recycled auto parts and a manufacturer of finished steel products. The company represents the complete cycle of reuse through its three integrated operating segments. It competes with the likes of Commercial Metals Company (CMC), Nucor Corporation (NUE) and Sims Metal Management Limited (SMS).

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