Schnitzer to cut 300 jobs
Schnitzer Steel Industries, Inc. reported that in early June, export sales prices for ferrous metals, net of freight, dropped approximately $70 to $80 per ton from May levels, largely driven by slower global growth rates, economic uncertainty and the stronger U.S. dollar. Export sales prices remained relatively flat for the remainder of June and July before increasing slightly in August for September shipments. During the quarter, the supply of scrap continued to be constrained by low U.S. gross domestic product growth, and was further impacted in the fourth quarter by a lower price environment and unusually hot weather. As a result of these conditions, average inventory costs were not able to decline as quickly as cash purchase costs for raw materials. Average inventory costs are expected to adversely impact consolidated operating income by approximately $25 million compared to the third quarter, with approximately two-thirds of this impact affecting their metals recycling business.
In Schnitzers’ metals recycling business, ferrous average net selling prices are expected to decline 10 to 15 percent from the third quarter of fiscal 2012. Ferrous sales volumes are also expected to decline 10 to15 percent due to reduced flows of raw materials. Nonferrous average selling prices and volumes are expected to decline approximately 5 to 10 percent from the third quarter. Operating income per ferrous ton is expected to be $8 to $9, approximately 35 percent lower than the third quarter of fiscal 2012, primarily due to the adverse effect of average inventory accounting and the impact of lower volumes on unit costs partly offset by improved cash metal spreads generated in the early part of the quarter. For fiscal year 2012, Schnitzers’ metals recycling business is expected to achieve operating income per ferrous ton of approximately $12 on aggregate sales volumes of approximately 5 million ferrous tons and 600 million nonferrous lbs.
In the auto parts business, the sharp drop in commodity prices is expected to result in a decline of 15 to 20 percent in revenues from the third quarter of fiscal 2012. Operating margins in the fourth quarter are expected to approximate break-even, with over half of the decline from the third quarter due to the significant negative impact from average inventory accounting. The remainder of the decline is expected to result from the effects of falling commodity prices on scrap and core revenues and seasonally lower parts sales. For fiscal year 2012, their auto parts business is expected to generate an operating margin of approximately 10 percent on an aggregate 340 thousand cars purchased.
Schnitzer also announced initiatives which they expect will extract greater synergies from the significant acquisitions and technology investments made in fiscal 2011 and realign the organization to support future growth. The completion of these initiatives is expected to yield higher earnings by further integrating their metals recycling and auto parts businesses, streamlining corporate functions, and reducing organizational layers. These initiatives are expected to lower annual operating costs by $25 million and be substantially complete by the end of the first quarter of fiscal 2013. Total restructuring charges are expected to be approximately $12 million, with $5 million of that amount expected to be incurred in the fourth quarter of fiscal 2012. Of the remainder, approximately half is expected to be incurred in the first quarter of fiscal 2013, with the balance by the end of the fiscal 2013. The restructuring charges primarily represent costs connected with the elimination of approximately 300 positions.
In light of the expected segment operating performance, including the adverse impact of average inventory accounting, slight improvements expected in corporate costs and modest tax benefits as compared to the third quarter, their reported earnings are expected to approximate break-even for the quarter before restructuring charges of approximately $0.12 per diluted share. Actual financial performance may be materially different based on, among other factors, market conditions and the timing of shipments.
During the quarter, operating cash flow was used to fund capital expenditures, to repurchase approximately 500,000 additional shares of their Class A common stock and for the acquisition of a metals recycling facility in Canada. As a result, total debt to total capital is expected to be approximately 25 percent, in line with the third quarter.