Before diving into its quarterly results, here is some background on the company:
Though often categorized as a steel producer, the company is perhaps more aptly described as a metals recycler. The company buys scrap steel and iron, mostly from auto salvage yards, industrial manufacturers, and metals brokers, and then processes the scrap to sell as material to other steelmakers or to use in its own steel-making operations.
The company historically operated through two primary segments: the Auto and Metals Recycling Business (AMR) and the Steel Manufacturing Business (SMB), with the former segment outsizing the latter by far. About 60% of AMR segment revenue is attributed to ferrous sales and 30% to nonferrous. The remaining 10% is other sales. In addition to recycling, the AMR segment also includes the company’s auto parts business, which sells used auto parts in 16 states through its self-service facilities.
The Steel Manufacturing Business represented approximately 20% of revenue, and it includes facilities with an annual production capacity of 800,000 tons. This segment produces rebar and wire rod. In FY17, the company integrated its SMB segment with AMR's Oregon metals recycling operations, forming a new division, Cascade Steel and Scrap (CSS).
Circling back to the Company’s Q3 earnings report, EPS came in at $1.15, beating consensus by $0.08. This was in-line with its recent guidance from June 14, when it pre-announced EPS $1.22-$1.28, well ahead of the $0.97 expectation. Revenue climbed by 37% to $652 mln, essentially in-line with the $651 mln expectation.
As noted above, its AMR segment accounts for a majority of the overall business. In Q3, revenue was up 37% year/year to $530 mln, boosted by improved metal spreads, higher ferrous sales volumes of 19%, and higher ferrous and nonferrous net selling prices of 31% and 14%, respectively. SCHN's decision to increase its supply volumes, as well as productivity improvements, boosted results in this segment.
Meanwhile, its CSS business also performed quite well, with revenue growing by 35% to $130 mln and operating income surging to $11 mln from $1 mln in the year ago quarter. Like to its AMR segment, CSS benefited from higher net sales prices for finished steel prices (+29%) due to the impact of higher raw materials prices and reduced pressure from steel imports.
On a consolidated basis, SCHN generated operating cash flow of $64 mln, and its total debt was reduced to $173 mln from $211 mln in the year ago period. The strong cash flow also enables SCHN to repurchase shares (166K during the quarter) and pay a dividend to shareholders (current yield of 2.4%).