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Schnitzer Steel’s (SCHN - Snapshot Report) profit slid in the third quarter of fiscal 2013 (ended May 31, 2013), bogged down by restructuring charges associated with its cost saving initiatives and lower selling prices. The results were also impacted by average inventory accounting, which significantly reduced operating income in its core Metal Recycling Business (MRB) division.

The Ore.-based steelmaker logged a profit of roughly $0.8 million or 3 cents per share in the reported quarter, down 93% year over year. Excluding restructuring charges of $2 million, earnings were 9 cents a share, missing the Zacks Consensus Estimate by 9 cents.

Revenue and margin

Revenues slipped 19% year over year to $710 million in the quarter, missing the Zacks Consensus Estimate of $765 million. Schnitzer Steel witnessed double-digit year-over-year decline in its MRB division, partly offset by gains across Auto Parts Business (APB) and Steel Manufacturing Business (SMB) units. Ferrous export selling prices declined during the quarter, hurt by lower export demand.

Gross margin was 8.2% in the reported quarter, flat year over year. Operating income plummeted 67% year over year to roughly $7.2 million.

Segment Highlights

Revenues from the MRB division clipped 23% year over year to $605 million in the quarter. Ferrous sales volumes were 1.2 million tons, down 14% from the year-ago quarter but up 6% sequentially. Increased domestic volumes contributed to the sequential improvement.

Non-ferrous sales volumes fell 12% from the prior-year quarter to 135 million pounds, while improving 8% sequentially on higher production levels.

The APB unit recorded sales of $86 million, up 4% year over year. Sales rose 11% sequentially on higher admissions and parts sales and increased contributions from acquisitions.

Revenues from Schnitzer Steel’s SMB division climbed 18% year over year to $93 million. Finished steel sales volumes jumped 21% year over year and 31% sequentially to 125,000 tons. Average net sales prices for finished steel products declined 6% year over year, but were flat sequentially.

Financial Health

Schnitzer Steel ended the quarter with cash and cash equivalents of $37 million, down roughly 35% year over year. Long-term debt increased 16% year over year to $413.4 million. Schnitzer Steel generated operating cash flow of $45 million during the reported quarter.

Restructuring Program

Schnitzer Steel, in Aug 2012, announced some restructuring initiatives, including a reduction of about 7% of its workforce. The restructuring program also involves integration of the metals recycling and auto parts businesses. Schnitzer Steel expects total restructuring expenses of roughly $14 million and anticipates pre-tax cost saving of $25 million from the move.

Schnitzer Steel has already incurred restructuring charges of $10 million. It achieved a 10% reduction in selling, general and administrative costs during the first nine months of fiscal 2013.

Outlook

Schnitzer Steel expects tax rate for fiscal 2013 to be roughly 35%. Its APB division acquired its first store in Rhode Island following the third quarter. The new store, which has increased the company’s combined regional presence to 16 sites, is expected to strengthen APB's foothold in the core Northeastern market and boost operational synergies with the MRB unit.

Schnitzer Steel remains focused on increasing value through expansion of its metals recycling export platform and auto parts business, optimizing costs and boost performance through sustained operational improvement initiatives.

Schnitzer Steel retains a Zacks Rank #4 (Sell).

Other steel producing companies worth considering are Kobe Steel Ltd. , Shiloh Industries Inc. and ArcelorMittal South Africa Limited (AMSIY).  While both Kobe Steel and Shiloh Industries hold a Zacks Rank #1 (Strong Buy), ArcelorMittal South Africa retains a Zacks Rank #2 (Buy).

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