UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended February 28, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 | |
For the Transition Period from __________ to __________
Commission File Number 000-22496
SCHNITZER STEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon | 93-0341923 | |||
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |||
299 SW Clay Street, Suite 350 , Portland, Oregon | 97201 | |||
(Address of principal executive offices) | (Zip Code) |
(503) 224-9900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A Common Stock, $1.00 par value | SCHN | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ |
Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The Registrantregistrant had 27,003,29127,254,958 shares of Class A common stock, par value of $1.00 per share, and 200,000 shares of Class B common stock, par value of $1.00 per share, outstanding as of JanuaryApril 5, 2018.
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
Statements and information included in this Quarterly Report on Form 10-Q by Schnitzer Steel Industries, Inc. (the “Company”) that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Except as noted herein or as the context may otherwise require, all references to “we,” “our,” “us,” “the Company,” and “SSI” refer to the CompanySchnitzer Steel Industries, Inc. and its consolidated subsidiaries.
Forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding future events or our expectations, intentions, beliefs, and strategies regarding the future, which may include statements regarding trends, cyclicalitythe impact of equipment upgrades, equipment failures, and changes infacility damage on production, including timing of repairs and resumption of operations; the markets we sell into;realization of insurance recoveries; the Company'simpact of pandemics, epidemics, or other public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic; the Company’s outlook, growth initiatives, or expected results or objectives, including pricing, margins, sales volumes, and profitability; completion of acquisitions and integration of acquired businesses; the impacts of supply chain disruptions, inflation, and rising interest rates; liquidity positions; our ability to generate cash from continuing operations; trends, cyclicality, and changes in the markets we sell into; strategic direction or goals; targets; changes to manufacturing and production processes; the realization of deferred tax assets; planned capital expenditures; the cost of and the status of any agreements or actions related to our compliance with environmental and other laws; expected tax rates, deductions, and credits andcredits; the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; the recently enacted federal tax reform; the realization of deferred tax assets; planned capital expenditures; liquidity positions; ability to generate cash from continuing operations; the potential impact of adopting new accounting pronouncements;labor shortages or increased labor costs; obligations under our retirement plans; benefits, savings, or additional costs from business realignment, cost containment, and productivity improvement programs; the potential impact of adopting new accounting pronouncements; and the adequacy of accruals.
Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “outlook,” “target,” “aim,” “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “will,” “should,” “could,” “opinions,” “forecasts,” “projects,” “plans,” “future,” “forward,” “potential,” “probable,” and similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.
We may make other forward-looking statements from time to time, including in reports filed with the Securities and Exchange Commission, press releases, presentations, and on public conference calls. All forward-looking statements we make are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements, except as may be required by law. Our business is subject to the effects of changes in domestic and global economic conditions and a number of other risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in “Item 1A. Risk Factors” inof Part I of our most recent Annual Report on Form 10-K and Part II of this Quarterly Report on Form 10-Q.10-K. Examples of these risks include: potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the impact of equipment upgrades, equipment failures, and facility damage on production; failure to realize or delays in realizing expected benefits from capital projects, including investments in processing and manufacturing technology improvements; the cyclicality and impact of general economic conditions; the impact of inflation, rising interest rates, and foreign currency fluctuations; changing conditions in global markets including the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; increases in the relative value of the U.S. dollar; economic and geopolitical instability in international markets;including as a result of military conflict; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials and other inputs we purchase; significant decreases in recycled metal prices; imbalances in supply and demand conditions in the global steel industry; difficulties associated with acquisitions and integration of acquired businesses; supply chain disruptions; reliance on third-party shipping companies, including with respect to freight rates and the availability of transportation; the impact of goodwill impairment charges; the impact of long-lived asset and cost and equity method investment impairment charges; the impact of pandemics, epidemics, or other public health emergencies, such as the COVID-19 pandemic; inability to achieve or sustain the benefits from productivity, cost savings, and restructuring initiatives; difficulties associated with acquisitions and integration of acquired businesses;inability to renew facility leases; customer fulfillment of their contractual obligations; increases in the relative value of the U.S. dollar; the impact of foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under the agreement governing our bank credit agreement;facilities; the impact of consolidation in the steel industry; inability to realize expected benefits from investments in technology; freight rates and the availability of transportation; the impact of equipment upgrades, equipment failures and facility damage on production; product liability claims; the impact of legal proceedings and legal compliance; the adverse impact of climate change; the impact of not realizing deferred tax assets; the impact of tax increases and changes in tax rules; the impact of one or more cybersecurity incidents; environmental compliance costs and potential environmental liabilities;translation risks associated with fluctuation in foreign exchange rates; inability to obtain or renew business licenses and permits or renew facility leases;permits; environmental compliance costs and potential environmental liabilities; increased environmental regulations and enforcement; compliance with climate change and greenhouse gas emission laws and regulations; the impact of labor shortages or increased labor costs; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share amounts)
November 30, 2017 | August 31, 2017 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 9,194 | $ | 7,287 | |||
Accounts receivable, net of allowance for doubtful accounts of $2,265 and $2,280 | 144,578 | 138,998 | |||||
Inventories | 216,365 | 166,942 | |||||
Refundable income taxes | 692 | 2,366 | |||||
Prepaid expenses and other current assets | 24,591 | 22,357 | |||||
Total current assets | 395,420 | 337,950 | |||||
Property, plant and equipment, net of accumulated depreciation of $719,192 and $756,494 | 386,847 | 390,629 | |||||
Investments in joint ventures | 11,521 | 11,204 | |||||
Goodwill | 167,203 | 167,835 | |||||
Intangibles, net of accumulated amortization of $4,089 and $3,913 | 4,248 | 4,424 | |||||
Other assets | 20,674 | 21,713 | |||||
Total assets | $ | 985,913 | $ | 933,755 | |||
Liabilities and Equity | |||||||
Current liabilities: | |||||||
Short-term borrowings | $ | 657 | $ | 721 | |||
Accounts payable | 97,176 | 94,674 | |||||
Accrued payroll and related liabilities | 23,667 | 41,593 | |||||
Environmental liabilities | 7,214 | 2,007 | |||||
Accrued income taxes | 2,177 | 9 | |||||
Other accrued liabilities | 40,593 | 37,256 | |||||
Total current liabilities | 171,484 | 176,260 | |||||
Deferred income taxes | 19,712 | 19,147 | |||||
Long-term debt, net of current maturities | 184,225 | 144,403 | |||||
Environmental liabilities, net of current portion | 47,444 | 46,391 | |||||
Other long-term liabilities | 11,431 | 10,061 | |||||
Total liabilities | 434,296 | 396,262 | |||||
Commitments and contingencies (Note 5) | |||||||
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity: | |||||||
Preferred stock – 20,000 shares $1.00 par value authorized, none issued | — | — | |||||
Class A common stock – 75,000 shares $1.00 par value authorized, 27,003 and 26,859 shares issued and outstanding | 27,003 | 26,859 | |||||
Class B common stock – 25,000 shares $1.00 par value authorized, 200 and 200 shares issued and outstanding | 200 | 200 | |||||
Additional paid-in capital | 40,059 | 38,050 | |||||
Retained earnings | 516,842 | 503,770 | |||||
Accumulated other comprehensive loss | (36,920 | ) | (35,293 | ) | |||
Total SSI shareholders’ equity | 547,184 | 533,586 | |||||
Noncontrolling interests | 4,433 | 3,907 | |||||
Total equity | 551,617 | 537,493 | |||||
Total liabilities and equity | $ | 985,913 | $ | 933,755 |
(Currency - U.S. Dollar)
|
| February 28, 2023 |
|
| August 31, 2022 |
| ||
Assets |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 11,459 |
|
| $ | 43,803 |
|
Accounts receivable, net of allowance for credit losses of $1,744 |
|
| 240,632 |
|
|
| 237,654 |
|
Inventories |
|
| 286,733 |
|
|
| 315,189 |
|
Refundable income taxes |
|
| 2,219 |
|
|
| 1,696 |
|
Prepaid expenses and other current assets |
|
| 52,447 |
|
|
| 73,044 |
|
Total current assets |
|
| 593,490 |
|
|
| 671,386 |
|
Property, plant and equipment, net of accumulated depreciation of $882,121 and $855,032 |
|
| 689,374 |
|
|
| 664,120 |
|
Operating lease right-of-use assets |
|
| 112,600 |
|
|
| 122,413 |
|
Investments in joint ventures |
|
| 11,681 |
|
|
| 12,841 |
|
Goodwill |
|
| 268,497 |
|
|
| 255,198 |
|
Intangibles, net of accumulated amortization of $9,412 and $7,256 |
|
| 35,570 |
|
|
| 26,155 |
|
Deferred income taxes |
|
| 22,254 |
|
|
| 24,598 |
|
Other assets |
|
| 47,629 |
|
|
| 49,886 |
|
Total assets |
| $ | 1,781,095 |
|
| $ | 1,826,597 |
|
Liabilities and Equity |
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Short-term borrowings |
| $ | 6,527 |
|
| $ | 6,041 |
|
Accounts payable |
|
| 212,598 |
|
|
| 217,689 |
|
Accrued payroll and related liabilities |
|
| 26,045 |
|
|
| 59,702 |
|
Environmental liabilities |
|
| 8,495 |
|
|
| 13,031 |
|
Operating lease liabilities |
|
| 20,601 |
|
|
| 21,660 |
|
Accrued income taxes |
|
| 763 |
|
|
| 3,856 |
|
Other accrued liabilities |
|
| 46,186 |
|
|
| 59,594 |
|
Total current liabilities |
|
| 321,215 |
|
|
| 381,573 |
|
Deferred income taxes |
|
| 55,968 |
|
|
| 63,328 |
|
Long-term debt, net of current maturities |
|
| 303,552 |
|
|
| 242,521 |
|
Environmental liabilities, net of current portion |
|
| 54,980 |
|
|
| 55,469 |
|
Operating lease liabilities, net of current maturities |
|
| 93,074 |
|
|
| 101,651 |
|
Other long-term liabilities |
|
| 23,868 |
|
|
| 23,581 |
|
Total liabilities |
|
| 852,657 |
|
|
| 868,123 |
|
Commitments and contingencies (Note 5) |
|
|
|
|
|
| ||
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity: |
|
|
|
|
|
| ||
Preferred stock – 20,000 shares $1.00 par value authorized, none issued |
|
| — |
|
|
| — |
|
Class A common stock – 75,000 shares $1.00 par value authorized, |
|
| 27,255 |
|
|
| 26,747 |
|
Class B common stock – 25,000 shares $1.00 par value authorized, |
|
| 200 |
|
|
| 200 |
|
Additional paid-in capital |
|
| 20,831 |
|
|
| 22,975 |
|
Retained earnings |
|
| 917,266 |
|
|
| 941,146 |
|
Accumulated other comprehensive loss |
|
| (40,605 | ) |
|
| (37,089 | ) |
Total SSI shareholders’ equity |
|
| 924,947 |
|
|
| 953,979 |
|
Noncontrolling interests |
|
| 3,491 |
|
|
| 4,495 |
|
Total equity |
|
| 928,438 |
|
|
| 958,474 |
|
Total liabilities and equity |
| $ | 1,781,095 |
|
| $ | 1,826,597 |
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statement are an integral part of these statements.
4
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
(Currency - U.S. Dollar)
|
| Three Months Ended February 28, |
|
| Six Months Ended February 28, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Revenues |
| $ | 755,953 |
|
| $ | 783,198 |
|
| $ | 1,354,683 |
|
| $ | 1,581,316 |
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of goods sold |
|
| 682,937 |
|
|
| 670,539 |
|
|
| 1,232,948 |
|
|
| 1,353,783 |
|
Selling, general and administrative |
|
| 63,957 |
|
|
| 61,081 |
|
|
| 128,185 |
|
|
| 116,348 |
|
(Income) from joint ventures |
|
| (311 | ) |
|
| (591 | ) |
|
| (1,101 | ) |
|
| (827 | ) |
Restructuring charges and other exit-related activities |
|
| 828 |
|
|
| 4 |
|
|
| 2,420 |
|
|
| 26 |
|
Operating income (loss) |
|
| 8,542 |
|
|
| 52,165 |
|
|
| (7,769 | ) |
|
| 111,986 |
|
Interest expense |
|
| (4,908 | ) |
|
| (1,901 | ) |
|
| (8,232 | ) |
|
| (3,273 | ) |
Other loss, net |
|
| (99 | ) |
|
| (55 | ) |
|
| (3,983 | ) |
|
| (102 | ) |
Income (loss) from continuing operations before income taxes |
|
| 3,535 |
|
|
| 50,209 |
|
|
| (19,984 | ) |
|
| 108,611 |
|
Income tax benefit (expense) |
|
| 513 |
|
|
| (12,073 | ) |
|
| 6,545 |
|
|
| (23,170 | ) |
Income (loss) from continuing operations |
|
| 4,048 |
|
|
| 38,136 |
|
|
| (13,439 | ) |
|
| 85,441 |
|
Income from discontinued operations, net of tax |
|
| 224 |
|
|
| 29 |
|
|
| 155 |
|
|
| — |
|
Net income (loss) |
|
| 4,272 |
|
|
| 38,165 |
|
|
| (13,284 | ) |
|
| 85,441 |
|
Net loss (income) attributable to noncontrolling interests |
|
| 81 |
|
|
| (550 | ) |
|
| (151 | ) |
|
| (1,627 | ) |
Net income (loss) attributable to SSI shareholders |
| $ | 4,353 |
|
| $ | 37,615 |
|
| $ | (13,435 | ) |
| $ | 83,814 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) per share attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) per share from continuing operations |
| $ | 0.15 |
|
| $ | 1.33 |
|
| $ | (0.49 | ) |
| $ | 2.97 |
|
Net income (loss) per share |
| $ | 0.16 |
|
| $ | 1.33 |
|
| $ | (0.48 | ) |
| $ | 2.97 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) per share from continuing operations |
| $ | 0.14 |
|
| $ | 1.27 |
|
| $ | (0.49 | ) |
| $ | 2.81 |
|
Net income (loss) per share |
| $ | 0.15 |
|
| $ | 1.27 |
|
| $ | (0.48 | ) |
| $ | 2.81 |
|
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 28,081 |
|
|
| 28,231 |
|
|
| 27,912 |
|
|
| 28,195 |
|
Diluted |
|
| 28,617 |
|
|
| 29,712 |
|
|
| 27,912 |
|
|
| 29,798 |
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Revenues | $ | 483,279 | $ | 334,161 | |||
Operating expense: | |||||||
Cost of goods sold | 406,251 | 295,892 | |||||
Selling, general and administrative | 51,043 | 37,492 | |||||
(Income) from joint ventures | (450 | ) | (412 | ) | |||
Other asset impairment charges (recoveries), net | (88 | ) | 401 | ||||
Restructuring charges and other exit-related activities | 100 | 201 | |||||
Operating income | 26,423 | 587 | |||||
Interest expense | (2,059 | ) | (1,741 | ) | |||
Other income, net | 849 | 437 | |||||
Income (loss) from continuing operations before income taxes | 25,213 | (717 | ) | ||||
Income tax (expense) benefit | (5,957 | ) | 62 | ||||
Income (loss) from continuing operations | 19,256 | (655 | ) | ||||
Loss from discontinued operations, net of tax | (35 | ) | (53 | ) | |||
Net income (loss) | 19,221 | (708 | ) | ||||
Net income attributable to noncontrolling interests | (857 | ) | (618 | ) | |||
Net income (loss) attributable to SSI | $ | 18,364 | $ | (1,326 | ) | ||
Net income (loss) per share attributable to SSI: | |||||||
Basic: | |||||||
Income (loss) per share from continuing operations attributable to SSI | $ | 0.66 | $ | (0.05 | ) | ||
Loss per share from discontinued operations attributable to SSI | — | — | |||||
Net income (loss) per share attributable to SSI | $ | 0.66 | $ | (0.05 | ) | ||
Diluted: | |||||||
Income (loss) per share from continuing operations attributable to SSI | $ | 0.64 | $ | (0.05 | ) | ||
Loss per share from discontinued operations attributable to SSI | — | — | |||||
Net income (loss) per share attributable to SSI | $ | 0.64 | $ | (0.05 | ) | ||
Weighted average number of common shares: | |||||||
Basic | 27,695 | 27,372 | |||||
Diluted | 28,662 | 27,372 | |||||
Dividends declared per common share | $ | 0.1875 | $ | 0.1875 |
(Currency - U.S. Dollar)
|
| Three Months Ended February 28, |
|
| Six Months Ended February 28, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net income (loss) |
| $ | 4,272 |
|
| $ | 38,165 |
|
| $ | (13,284 | ) |
| $ | 85,441 |
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustments |
|
| (1,361 | ) |
|
| 722 |
|
|
| (3,607 | ) |
|
| (393 | ) |
Pension obligations, net |
|
| 58 |
|
|
| 119 |
|
|
| 91 |
|
|
| 509 |
|
Total other comprehensive (loss) income, net of tax |
|
| (1,303 | ) |
|
| 841 |
|
|
| (3,516 | ) |
|
| 116 |
|
Comprehensive income (loss) |
|
| 2,969 |
|
|
| 39,006 |
|
|
| (16,800 | ) |
|
| 85,557 |
|
Less comprehensive loss (income) attributable to noncontrolling interests |
|
| 81 |
|
|
| (550 | ) |
|
| (151 | ) |
|
| (1,627 | ) |
Comprehensive income (loss) attributable to SSI shareholders |
| $ | 3,050 |
|
| $ | 38,456 |
|
| $ | (16,951 | ) |
| $ | 83,930 |
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Net income (loss) | $ | 19,221 | $ | (708 | ) | ||
Other comprehensive income (loss), net of tax: | |||||||
Foreign currency translation adjustments | (1,709 | ) | (1,034 | ) | |||
Pension obligations, net | 82 | (65 | ) | ||||
Total other comprehensive loss, net of tax | (1,627 | ) | (1,099 | ) | |||
Comprehensive income (loss) | 17,594 | (1,807 | ) | ||||
Less comprehensive income attributable to noncontrolling interests | (857 | ) | (618 | ) | |||
Comprehensive income (loss) attributable to SSI | $ | 16,737 | $ | (2,425 | ) |
(Currency - U.S. Dollar)
|
| Common Stock |
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| Class A |
|
| Class B |
|
| Additional |
|
|
|
|
| Other |
|
| Total SSI |
|
|
|
|
|
|
| ||||||||||||||||
Three Months Ended February 28, 2022 |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Shareholders’ |
|
| Noncontrolling |
|
| Total |
| ||||||||||
Balance as of December 1, 2021 |
|
| 27,624 |
|
| $ | 27,624 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 43,641 |
|
| $ | 834,504 |
|
| $ | (35,279 | ) |
| $ | 870,690 |
|
| $ | 4,066 |
|
| $ | 874,756 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 37,615 |
|
|
| — |
|
|
| 37,615 |
|
|
| 550 |
|
|
| 38,165 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 841 |
|
|
| 841 |
|
|
| — |
|
|
| 841 |
|
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (759 | ) |
|
| (759 | ) |
Share repurchases |
|
| (200 | ) |
|
| (200 | ) |
|
| — |
|
|
| — |
|
|
| (7,665 | ) |
|
| — |
|
|
| — |
|
|
| (7,865 | ) |
|
| — |
|
|
| (7,865 | ) |
Issuance of restricted stock |
|
| 9 |
|
|
| 9 |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,854 |
|
|
| — |
|
|
| — |
|
|
| 4,854 |
|
|
| — |
|
|
| 4,854 |
|
Dividends ($0.1875 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,343 | ) |
|
| — |
|
|
| (5,343 | ) |
|
| — |
|
|
| (5,343 | ) |
Balance as of February 28, 2022 |
|
| 27,433 |
|
| $ | 27,433 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 40,821 |
|
| $ | 866,776 |
|
| $ | (34,438 | ) |
| $ | 900,792 |
|
| $ | 3,857 |
|
| $ | 904,649 |
|
|
| Common Stock |
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| Class A |
|
| Class B |
|
| Additional |
|
|
|
|
| Other |
|
| Total SSI |
|
|
|
|
|
|
| ||||||||||||||||
Three Months Ended February 28, 2023 |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Shareholders' |
|
| Noncontrolling |
|
| Total |
| ||||||||||
Balance as of December 1, 2022 |
|
| 27,165 |
|
| $ | 27,165 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 18,582 |
|
| $ | 918,094 |
|
| $ | (39,302 | ) |
| $ | 924,739 |
|
| $ | 3,765 |
|
| $ | 928,504 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,353 |
|
|
| — |
|
|
| 4,353 |
|
|
| (81 | ) |
|
| 4,272 |
|
Other comprehensive (loss), net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,303 | ) |
|
| (1,303 | ) |
|
| — |
|
|
| (1,303 | ) |
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (193 | ) |
|
| (193 | ) |
Issuance of restricted stock |
|
| 90 |
|
|
| 90 |
|
|
| — |
|
|
| — |
|
|
| (90 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock withheld for taxes |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| (2 | ) |
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,341 |
|
|
| — |
|
|
| — |
|
|
| 2,341 |
|
|
| — |
|
|
| 2,341 |
|
Dividends ($0.1875 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,181 | ) |
|
| — |
|
|
| (5,181 | ) |
|
| — |
|
|
| (5,181 | ) |
Balance as of February 28, 2023 |
|
| 27,255 |
|
| $ | 27,255 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 20,831 |
|
| $ | 917,266 |
|
| $ | (40,605 | ) |
| $ | 924,947 |
|
| $ | 3,491 |
|
| $ | 928,438 |
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | 19,221 | $ | (708 | ) | ||
Adjustments to reconcile net income (loss) to cash (used in) provided by | |||||||
operating activities: | |||||||
Depreciation and amortization | 12,522 | 12,543 | |||||
Other asset impairment charges (recoveries), net | (88 | ) | 401 | ||||
Exit-related asset impairment charges | — | 158 | |||||
Inventory write-down | 38 | — | |||||
Share-based compensation expense | 5,004 | 3,408 | |||||
Deferred income taxes | 761 | (60 | ) | ||||
Undistributed equity in earnings of joint ventures | (450 | ) | (412 | ) | |||
Loss on disposal of assets, net | 51 | 45 | |||||
Unrealized foreign exchange gain, net | (407 | ) | (23 | ) | |||
Bad debt expense (recoveries), net | (14 | ) | 17 | ||||
Changes in assets and liabilities: | |||||||
Accounts receivable | (8,640 | ) | (1,546 | ) | |||
Inventories | (47,267 | ) | (12,586 | ) | |||
Income taxes | 3,842 | (150 | ) | ||||
Prepaid expenses and other current assets | 70 | (614 | ) | ||||
Other long-term assets | (112 | ) | 164 | ||||
Accounts payable | 8,548 | 14,343 | |||||
Accrued payroll and related liabilities | (17,894 | ) | (10,080 | ) | |||
Other accrued liabilities | 3,504 | 899 | |||||
Environmental liabilities | 4,034 | (29 | ) | ||||
Other long-term liabilities | 1,487 | (193 | ) | ||||
Distributed equity in earnings of joint ventures | 200 | 350 | |||||
Net cash (used in) provided by operating activities | (15,590 | ) | 5,927 | ||||
Cash flows from investing activities: | |||||||
Capital expenditures | (15,157 | ) | (10,603 | ) | |||
Joint venture receipts (payments), net | 11 | (55 | ) | ||||
Proceeds from sale of assets | 1,534 | 73 | |||||
Net cash used in investing activities | (13,612 | ) | (10,585 | ) | |||
Cash flows from financing activities: | |||||||
Borrowings from long-term debt | 189,500 | 102,631 | |||||
Repayment of long-term debt | (149,713 | ) | (107,491 | ) | |||
Payment of debt issuance costs | — | (53 | ) | ||||
Taxes paid related to net share settlement of share-based payment arrangements | (2,851 | ) | (3,301 | ) | |||
Distributions to noncontrolling interests | (331 | ) | (522 | ) | |||
Dividends paid | (5,478 | ) | (5,185 | ) | |||
Net cash provided by (used in) financing activities | 31,127 | (13,921 | ) | ||||
Effect of exchange rate changes on cash | (18 | ) | (140 | ) | |||
Net increase (decrease) in cash and cash equivalents | 1,907 | (18,719 | ) | ||||
Cash and cash equivalents as of beginning of period | 7,287 | 26,819 | |||||
Cash and cash equivalents as of end of period | $ | 9,194 | $ | 8,100 |
(Currency - U.S. Dollar)
|
| Common Stock |
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| Class A |
|
| Class B |
|
| Additional |
|
|
|
|
| Other |
|
| Total SSI |
|
|
|
|
|
|
| ||||||||||||||||
Six Months Ended February 28, 2022 |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Shareholders' |
|
| Noncontrolling |
|
| Total |
| ||||||||||
Balance as of September 1, 2021 |
|
| 27,332 |
|
| $ | 27,332 |
|
|
| 200 |
|
| $ | 200 |
|
|
| 49,074 |
|
| $ | 793,712 |
|
| $ | (34,554 | ) |
| $ | 835,764 |
|
| $ | 4,015 |
|
| $ | 839,779 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 83,814 |
|
|
| — |
|
|
| 83,814 |
|
|
| 1,627 |
|
|
| 85,441 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 116 |
|
|
| 116 |
|
|
| — |
|
|
| 116 |
|
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,785 | ) |
|
| (1,785 | ) |
Share repurchases |
|
| (200 | ) |
|
| (200 | ) |
|
| — |
|
|
| — |
|
|
| (7,665 | ) |
|
| — |
|
|
| — |
|
|
| (7,865 | ) |
|
| — |
|
|
| (7,865 | ) |
Issuance of restricted stock |
|
| 479 |
|
|
| 479 |
|
|
| — |
|
|
| — |
|
|
| (479 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock withheld for taxes |
|
| (178 | ) |
|
| (178 | ) |
|
| — |
|
|
| — |
|
|
| (9,399 | ) |
|
| — |
|
|
| — |
|
|
| (9,577 | ) |
|
| — |
|
|
| (9,577 | ) |
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,290 |
|
|
| — |
|
|
| — |
|
|
| 9,290 |
|
|
| — |
|
|
| 9,290 |
|
Dividends ($0.375 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10,750 | ) |
|
| — |
|
|
| (10,750 | ) |
|
| — |
|
|
| (10,750 | ) |
Balance as of February 28, 2022 |
|
| 27,433 |
|
| $ | 27,433 |
|
| 200 |
|
| $ | 200 |
|
| $ | 40,821 |
|
| $ | 866,776 |
|
| $ | (34,438 | ) |
| $ | 900,792 |
|
| $ | 3,857 |
|
| $ | 904,649 |
|
|
| Common Stock |
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| Class A |
|
| Class B |
|
| Additional |
|
|
|
|
| Other |
|
| Total SSI |
|
|
|
|
|
|
| ||||||||||||||||
Six Months Ended February 28, 2023 |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Shareholders' |
|
| Noncontrolling |
|
| Total |
| ||||||||||
Balance as of September 1, 2022 |
|
| 26,747 |
|
| $ | 26,747 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 22,975 |
|
| $ | 941,146 |
|
| $ | (37,089 | ) |
| $ | 953,979 |
|
| $ | 4,495 |
|
| $ | 958,474 |
|
Net (loss) income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13,435 | ) |
|
| — |
|
|
| (13,435 | ) |
|
| 151 |
|
|
| (13,284 | ) |
Other comprehensive (loss), net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,516 | ) |
|
| (3,516 | ) |
|
| — |
|
|
| (3,516 | ) |
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,155 | ) |
|
| (1,155 | ) |
Issuance of restricted stock |
|
| 762 |
|
|
| 762 |
|
|
| — |
|
|
| — |
|
|
| (762 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock withheld for taxes |
|
| (254 | ) |
|
| (254 | ) |
|
| — |
|
|
| — |
|
|
| (6,555 | ) |
|
| — |
|
|
| — |
|
|
| (6,809 | ) |
|
| — |
|
|
| (6,809 | ) |
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,173 |
|
|
| — |
|
|
| — |
|
|
| 5,173 |
|
|
| — |
|
|
| 5,173 |
|
Dividends ($0.375 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10,445 | ) |
|
| — |
|
|
| (10,445 | ) |
|
| — |
|
|
| (10,445 | ) |
Balance as of February 28, 2023 |
|
| 27,255 |
|
| $ | 27,255 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 20,831 |
|
| $ | 917,266 |
|
| $ | (40,605 | ) |
| $ | 924,947 |
|
| $ | 3,491 |
|
| $ | 928,438 |
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
(Currency - U.S. Dollar)
|
| Six Months Ended February 28, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net (loss) income |
| $ | (13,284 | ) |
| $ | 85,441 |
|
Adjustments to reconcile net (loss) income to cash provided by operating activities: |
|
|
|
|
|
| ||
Asset impairment charges |
|
| 4,000 |
|
|
| — |
|
Exit-related asset impairments |
|
| 143 |
|
|
| — |
|
Depreciation and amortization |
|
| 43,850 |
|
|
| 35,816 |
|
Inventory write-downs |
|
| 575 |
|
|
| 304 |
|
Deferred income taxes |
|
| (6,337 | ) |
|
| 13,988 |
|
Undistributed equity in earnings of joint ventures |
|
| (1,101 | ) |
|
| (827 | ) |
Share-based compensation expense |
|
| 5,144 |
|
|
| 9,231 |
|
Loss on disposal of assets, net |
|
| 16 |
|
|
| 1,345 |
|
Unrealized foreign exchange loss, net |
|
| 85 |
|
|
| 121 |
|
Credit loss, net |
|
| 195 |
|
|
| 16 |
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
| ||
Accounts receivable |
|
| (13,914 | ) |
|
| (47,762 | ) |
Inventories |
|
| 33,834 |
|
|
| (52,624 | ) |
Income taxes |
|
| (4,783 | ) |
|
| (697 | ) |
Prepaid expenses and other current assets |
|
| 9,758 |
|
|
| 1,309 |
|
Other long-term assets |
|
| (1,389 | ) |
|
| (651 | ) |
Operating lease assets and liabilities |
|
| 232 |
|
|
| (903 | ) |
Accounts payable |
|
| 12,245 |
|
|
| 11,762 |
|
Accrued payroll and related liabilities |
|
| (33,421 | ) |
|
| (39,711 | ) |
Other accrued liabilities |
|
| (7,177 | ) |
|
| 7,583 |
|
Environmental liabilities |
|
| (4,914 | ) |
|
| (12,482 | ) |
Other long-term liabilities |
|
| 1,935 |
|
|
| 455 |
|
Distributed equity in earnings of joint ventures |
|
| — |
|
|
| 1,000 |
|
Net cash provided by operating activities |
|
| 25,692 |
|
|
| 12,714 |
|
Cash flows from investing activities: |
|
|
|
|
|
| ||
Capital expenditures |
|
| (74,511 | ) |
|
| (69,409 | ) |
Acquisitions, net of acquired cash |
|
| (26,902 | ) |
|
| (113,939 | ) |
Proceeds from insurance and sale of assets |
|
| 3,026 |
|
|
| 11,129 |
|
Deposit on land option |
|
| — |
|
|
| (80 | ) |
Net cash used in investing activities |
|
| (98,387 | ) |
|
| (172,299 | ) |
Cash flows from financing activities: |
|
|
|
|
|
| ||
Borrowings from long-term debt |
|
| 333,242 |
|
|
| 405,094 |
|
Repayment of long-term debt |
|
| (274,036 | ) |
|
| (225,395 | ) |
Payment of debt issuance costs |
|
| (156 | ) |
|
| — |
|
Repurchase of Class A common stock |
|
| — |
|
|
| (7,865 | ) |
Taxes paid related to net share settlement of share-based payment awards |
|
| (6,809 | ) |
|
| (9,577 | ) |
Distributions to noncontrolling interests |
|
| (1,155 | ) |
|
| (1,785 | ) |
Dividends paid |
|
| (10,671 | ) |
|
| (10,841 | ) |
Net cash provided by financing activities |
|
| 40,415 |
|
|
| 149,631 |
|
Effect of exchange rate changes on cash |
|
| (64 | ) |
|
| (41 | ) |
Net decrease in cash and cash equivalents |
|
| (32,344 | ) |
|
| (9,995 | ) |
Cash and cash equivalents as of beginning of period |
|
| 43,803 |
|
|
| 27,818 |
|
Cash and cash equivalents as of end of period |
| $ | 11,459 |
|
| $ | 17,823 |
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
9
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
(Currency - U.S. Dollar)
|
| Six Months Ended February 28, |
| |||||
|
| 2023 |
|
| 2022 |
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SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
|
| ||
Interest |
| $ | 7,339 |
|
| $ | 1,748 |
|
Income taxes, net |
| $ | 4,332 |
|
| $ | 9,829 |
|
Schedule of noncash investing and financing transactions: |
|
|
|
|
|
| ||
Purchases of property, plant and equipment included in liabilities |
| $ | 13,815 |
|
| $ | 21,828 |
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
10
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements of Schnitzer Steel Industries, Inc. and its majority-owned and wholly-owned subsidiaries (the “Company”) have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for Form 10-Q, including Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all normal, recurring adjustments considered necessary for a fair statement have been included. Management suggests that these Unaudited Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
August 31,Segment Reporting
The Company acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors, and brokers, and it procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores. Most of these auto parts stores supply the Company’s shredding facilities with auto bodies that are processed into saleable recycled metal products. In July 2015,addition to the sale of recycled metal products processed at its facilities, the Company provides a variety of recycling and related services. The Company also produces a range of finished steel long products at its electric arc furnace (“EAF”) steel mill using recycled ferrous metal sourced internally from its recycling and joint venture operations and other raw materials.
The accounting standards for reporting information about operating segments define an accounting standard update was issuedoperating segment as a component of an enterprise that requires an entity to measure certain types of inventory, including inventoryengages in business activities from which it may earn revenues and incur expenses for which discrete financial information is available that is measured usingevaluated regularly by the first-in, first out ("FIFO") or average cost method, at the lower of costchief operating decision-maker in deciding how to allocate resources and net realizable value.in assessing performance. The accounting standard in effect at the time of issuance of the update required an entity to measure inventory at the lower of cost or market, whereby market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments do not apply to inventory that is measured using the last-in, first-out ("LIFO") or retail inventory method. The Company adopted the new requirement, which is to be applied prospectively, as of the beginning of the first quarter of fiscal 2018 with no impact to the Unaudited Condensed Consolidated Financial Statements.Company’s internal organizational and reporting structure reflects a functionally based, integrated model and includes a single operating and reportable segment.
Cash and Cash Equivalents
Cash and cash equivalents include short-term securities that are not restricted by third parties and have an original maturity date of 90 days or less. Included in accounts payable are book overdrafts representing outstanding checkspayments in excess of funds on deposit of $30$64 million and $21$56 million as of
Accounts Receivable, net
Accounts receivable represent amounts primarily due from customers on product and other sales. These accounts receivable, which are reduced by an allowance for credit losses, are recorded at the invoiced amount and do not bear interest. The Company extends credit to customers under contracts containing customary and explicit payment terms, and payment is generally required within 30 to 60 days of shipment. Nonferrous export sales typically require a deposit prior to shipment. Historically, almost all of the Company’s ferrous export sales have been made with letters of credit. Ferrous and nonferrous metal sales to domestic customers and finished steel sales are generally made on open account, and a portion of these sales are covered by credit insurance.
The Company evaluates the collectibility of its accounts receivable based on a combination of factors, including whether sales were made pursuant to letters of credit or required deposits prior to shipment, the aging of customer receivable balances, the financial condition of the Company’s customers, historical collection rates, and economic trends. Management uses this evaluation to estimate the amount of customer receivables that may not be collected in the future and records a provision for expected credit losses. Accounts are written off when all efforts to collect have been exhausted.
Also included in accounts receivable are short-term advances to scrap metal suppliers used as a mechanism to acquire unprocessed scrap metal. The advances are generally repaid with scrap metal, as opposed to cash. Repayments of advances with scrap metal are treated as noncash operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows and totaled $6 million for each of the six months ended February 28, 2023 and 2022.
11
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Prepaid Expenses
The Company’s prepaid expenses, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets, totaled $26 million and $43 million as of February 28, 2023 and August 31, 2022, respectively, and consisted primarily of deposits on capital projects, prepaid services, prepaid insurance, and prepaid property taxes.
Other Assets
The Company’s other assets, exclusive of prepaid expenses and assets relating to certain employee benefit plans, consisted primarily of receivables from insurers, capitalized implementation costs for cloud computing arrangements, cash held in a client trust account relating to a legal settlement, major spare parts and equipment, two equity investments, debt issuance costs, and notes and other contractual receivables. Other assets are reported within either prepaid expenses and other current assets or other assets in the Unaudited Condensed Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle of one year from the reporting date.
Receivables from insurers represent the portion of insured losses expected to be recovered from the Company’s insurers under various insurance policies or from a Qualified Settlement Fund holding settlement amounts deposited by certain insurers of claims against the Company related to the Portland Harbor Superfund site. The receivables are recorded at an amount not to exceed the recorded loss and only if the terms of legally enforceable insurance contracts support that the insurance recovery will not be disputed and is deemed collectible, or if recovery of the loss by the Company from a Qualified Settlement Fund is probable. Receivables from insurers totaled $26 million and $28 million as of February 28, 2023 and August 31, 2022, respectively. As of February 28, 2023, receivables from insurers comprised primarily $10 million relating to property loss and damage and other claims in connection with the December 2021 fire at the Company’s shredder facility in Everett, Massachusetts, $12 million relating to environmental claims, $2 million relating to workers’ compensation claims, and $2 million relating to third-party claims. As of August 31, 2022, receivables from insurers comprised primarily $10 million relating to property loss and damage and other claims in connection with the December 2021 fire at the Company’s shredder facility in Everett, Massachusetts, $7 million relating to environmental claims, $6 million relating to third-party claims, and $4 million relating to workers’ compensation claims. See “Accounting for Impacts of Involuntary Events” below in this Note for further discussion of receivables and advance payments from insurers relating to property damage and business interruption claims.
Other assets as of each of February 28, 2023 and August 31, 2022 also included approximately $7 million in connection with cash deposited into a client trust account in the second quarter of fiscal 2021 to fund the remediation of a site, a portion of which was previously leased to and operated by an indirect, wholly-owned subsidiary. The cash was deposited into the client trust account by other potentially liable parties in connection with settlement of a lawsuit relating to allocation of the remediation costs, including agreement by the Company’s subsidiary to perform certain remedial actions. See “Other Legacy Environmental Loss Contingencies” within “Contingencies – Environmental” in Note 5 - Commitments and Contingencies for further discussion of this matter.
The Company invested $6 million in the equity of a privately-held U.S. waste and recycling entity in fiscal 2017, and in May 2022, the Company invested $6$5 million in athe equity of an unrelated privately-held Canadian recycling technology entity. In August 2022, the privately-held U.S. waste and recycling entity merged with a publicly-traded U.S. entity. As a result of the merger, the Company's investment is held in equity units of a subsidiary of the publicly-traded entity, which equity units are not publicly traded but are exchangeable for shares of the publicly traded entity. The timing and magnitude of exchange is solely at the discretion of the publicly traded entity. The Company's influence over the operating and financial policies of theeach entity is not significant, and, thus, the investment isinvestments are accounted for under the cost method. Under the cost method, the investment isguidance for investments in equity securities. The equity investments do not have readily determinable fair values and, therefore, are carried at cost and adjusted only for other-than-temporary impairments certain distributions and additional investments. Theobservable price changes. In the first quarter of fiscal 2023, the Company identified an impairment indicator for its investment is presented as partin the U.S. waste and recycling entity and, based on its fair value measurement incorporating observable trading prices of the Autopublicly-traded entity and Metals Recycling ("AMR") reportable segment andunobservable inputs, recognized a $4 million impairment in other loss, net on the Unaudited Condensed Consolidated Statement of Operations. The Company has not recorded any impairments or upward or downward adjustments to the carrying value of its investment in the Canadian recycling technology entity since its acquisition. Both investments are reported within other assets in the Unaudited Condensed Consolidated Balance Sheets. The Company does not hold any other cost-method investments. TheAs of February 28, 2023 and August 31, 2022, the aggregate carrying value of the investmentinvestments was $6$7 million and $11 million, respectively.
12
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accounting for Impacts of Involuntary Events
Assets destroyed or damaged as a result of involuntary events are written off or reduced in carrying value to their salvage value. When recovery of all or a portion of the amount of property damage loss or other covered expenses through insurance proceeds is demonstrated to be probable, a receivable is recorded and offsets the loss or expense up to the amount of the total loss or expense. No gain is recorded until all contingencies related to the insurance claim have been resolved.
On May 22, 2021, the Company experienced a fire at its steel mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. As a result of the fire, the rolling mill production ceased in early June 2021. In August 2021, the steel mill began ramping up operations following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. The Company experienced the loss of business income during the shutdown of the steel mill and the subsequent ramp-up phase, which was substantially completed during the second quarter of fiscal 2022. The Company filed insurance claims for the physical loss and damage experienced at the mill’s melt shop and business income losses resulting from the matter. As of August 31, 2021, prepaid expenses and other current assets included an initial $10 million insurance receivable recognized in fiscal 2021, primarily offsetting applicable losses including capital purchases of $10 million that had been incurred by the Company as of November 30, 2017 and August 31, 2017. As2021. In the first half of November 30, 2017,fiscal 2022, the Company had not identified any events or changes in circumstances that may haveincreased the amount of this insurance receivable to $25 million and recognized a significant adverse effect on the fair valuerelated $15 million insurance recovery gain, $3 million and $12 million of the investment or indicators of other-than-temporary impairment.
On December 8, 2021, the Company experienced a fire at its metals recycling facility in Everett, Massachusetts. Direct physical loss or damage to property from the incident was limited to the facility’s shredder building and equipment, with no bodily injuries and no physical loss or damage to property reported at other buildings or equipment. As a result of the fire, shredding operations ceased, while all non-shredding operations at the facility continued, including torching, shearing, separating, and sorting purchased non-shreddable recycled ferrous metals. On January 28, 2022, shredding operations at the facility began ramping up following the replacement and repairs to shredder equipment that had been damaged. Completion of the remainder of repair and replacement of property that experienced physical loss or damage, primarily buildings and improvements, will occur over a longer period and impacts on business income may continue. In addition, shredding operations temporarily ceased at the facility on June 18, 2022 and, following discussions with the Massachusetts Department of Environmental Protection and the Massachusetts Attorney General’s office, the Company installed a temporary emission capture system and controls that allowed for the resumption of shredding operations on November 11, 2022 and for continued operation during the repair and replacement of the shredder enclosure building. Non-shredding operations at the facility continued during this period. The Company filed insurance claims for the property that experienced physical loss or damage and anticipated business income losses resulting from the matter. In fiscal 2022, after the fire, the Company recognized an aggregate $17 million insurance receivable and related insurance recovery gain, $10 million of which was recorded in the second quarter of fiscal 2022, reported within prepaid expenses and other current assets and cost of goods sold, respectively, reflecting recovery of costs including impairment charges of $7 million related to the carrying value of plant and equipment assets lost in or damaged by the fire and initial capital purchases, non-capitalizable repair and replacement costs, and other applicable losses totaling $10 million that had been incurred by the Company as of August 31, 2022. Also, during fiscal 2022, the Company received advance payments from insurers totaling approximately $7 million towards the Company's claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the insurance receivable to $10 million as of February 28, 2023 and August 31, 2022.
13
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Investments in Joint Ventures
As of August 31, 2022, the Company had two50%-owned joint venture interests which were accounted for under the equity method of accounting. On November 7, 2022, the Company sold its ownership interest in one of the 50%-owned joint ventures for approximately $2 million. No gain or loss was recognized as a result of the sale.
Business Acquisitions
The Company recognizes the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. Within one year from the date of acquisition, the Company may update the value allocated to the assets acquired and liabilities assumed and the resulting goodwill balance as a result of information received regarding the valuation of such assets and liabilities that was not available at the time of purchase. Measuring assets and liabilities at fair value requires the Company to determine the price that would be paid by a third-party market participant based on the highest and best use of the assets or interests acquired. Acquisition costs are expensed as incurred. See Note 3 - Business Acquisitions for further detail.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable, and notes and other contractual receivables from suppliers.receivable. The majority of cash and cash equivalents is maintained with major financial institutions. Balances with these and certain other institutions exceeded the Federal Deposit Insurance Corporation insured amount of
Recent Accounting Pronouncements
The Company isdoes not expect that its adoption in the processfuture of examining its current revenue streams and significant contracts with customers under the requirements of the new standard and, based on the progress of this examination to date, does not believe the standardany recently issued accounting pronouncements will have a material impact on its financial position, net income or cash flows. In particular, the Company is currently examining certain scrap metal purchase and sale arrangements to determine if it is the principal or the agent in the transaction under the new guidance. The outcome of this determination could result in a different classification of the cost of scrap metal purchased compared to the Company's treatment under the existing revenue standard. The Company is also analyzing the expanded disclosure requirements under the new standard, the method of adoption, and potential changes to its accounting policies, processes, systems and internal controls that may be required to support the new standard.
Note 3
Inventories consisted of the following (in thousands):
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| February 28, 2023 |
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| August 31, 2022 |
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Processed and unprocessed scrap metal |
| $ | 135,975 |
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| $ | 166,368 |
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Semi-finished goods |
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| 18,226 |
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|
| 20,009 |
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Finished goods |
|
| 70,180 |
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|
| 72,625 |
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Supplies |
|
| 62,352 |
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|
| 56,187 |
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Inventories |
| $ | 286,733 |
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| $ | 315,189 |
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Note 3 - Business Acquisitions
Fiscal 2023 Business Acquisition
On November 18, 2022, the Company used cash on hand and borrowings under existing credit facilities to acquire the operating assets of ScrapSource, a recycling services company that provides solutions for industrial companies that generate scrap metal from their manufacturing process. The acquired business expands the Company's national recycling services operations, giving rise to expected benefits supporting the amount of acquired goodwill. The transaction qualified as a business combination for accounting purposes, which involves application of the acquisition method described in Accounting Standards Codification Topic 805, Business Combinations, and summarized in “Business Acquisitions” in Note 1 - Summary of Significant Accounting Policies. The total purchase consideration was approximately $25 million. As of the date of this report, measurement of the fair values of certain assets acquired and liabilities assumed is still preliminary and subject to change based on the completion of valuation procedures.
14
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the provisional fair values of assets acquired and liabilities assumed by the Company as of the November 18, 2022 acquisition date (in thousands):
Operating lease right-of-use assets |
| $ | 466 |
|
Goodwill(1) |
|
| 13,105 |
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Other intangible assets |
|
| 11,955 |
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Other assets |
|
| 9 |
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Total assets acquired |
|
| 25,535 |
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Operating lease liability |
|
| 466 |
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Total liabilities assumed |
|
| 466 |
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Net assets acquired |
| $ | 25,069 |
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November 30, 2017 | August 31, 2017 | ||||||
Processed and unprocessed scrap metal | $ | 129,635 | $ | 88,441 | |||
Semi-finished goods (billets) | 7,514 | 3,243 | |||||
Finished goods | 45,332 | 40,462 | |||||
Supplies | 33,884 | 34,796 | |||||
Inventories | $ | 216,365 | $ | 166,942 |
The following table summarizes the provisional purchase price allocation to the identifiable intangible assets and their estimated useful lives as of the November 18, 2022 acquisition date (in thousands):
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|
|
|
| Useful Life | |
Supplier relationships |
| $ | 10,375 |
|
| 6 |
Non-compete intangible assets |
|
| 1,360 |
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| 5 |
Customer relationships |
|
| 220 |
|
| 6 |
|
| $ | 11,955 |
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|
|
The results of operations for the acquired ScrapSource business beginning as of the November 18, 2022 acquisition date are included in the accompanying financial statements. For the three and six months ended February 28, 2023, the revenues and net income contributed by the acquired ScrapSource business and reported in the Unaudited Condensed Consolidated Statements of Operations were not material to the financial statements taken as a whole.
Fiscal 2022 Business Acquisitions
On October 1, 2021, the Company completed the acquisition of eight metals recycling facilities across Mississippi, Tennessee, and Kentucky from Columbus Recycling, a provider of recycled ferrous and nonferrous metal products and recycling services. The total purchase consideration of $117 million was allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the date of the acquisition. The $65 million excess of the total purchase consideration over the fair value of the identifiable net assets acquired was recorded as goodwill. The results of operations for the acquired Columbus Recycling business beginning as of the October 1, 2021 acquisition date are included in the accompanying financial statements.
On April 29, 2022, the Company completed the acquisition of two recycling facilities in the greater Atlanta, Georgia metropolitan area, including a metal shredding operation and recycled auto-parts center, from the previous owners of Encore Recycling. The total purchase consideration of $64 million was allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the date of the acquisition. The $21 million excess of the total purchase consideration over the fair value of the identifiable net assets acquired was recorded as goodwill. The results of operations for the acquired Encore Recycling business beginning as of the April 29, 2022 acquisition date are included in the accompanying financial statements.
Unaudited Pro Forma Information
The following unaudited pro forma information presents the effect on the consolidated financial results of the Company of the Columbus Recycling and Encore Recycling businesses acquired during fiscal 2022 as though the businesses had been acquired as of the beginning of fiscal 2021 (in thousands):
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| Three Months Ended February 28, |
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| Six Months Ended February 28, |
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| 2022 |
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| 2022 |
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Revenues |
| $ | 802,000 |
|
| $ | 1,642,500 |
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Net income |
| $ | 41,500 |
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| $ | 94,000 |
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Net income attributable to SSI shareholders |
| $ | 41,000 |
|
| $ | 92,500 |
|
15
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
There are no individually material, nonrecurring pro forma adjustments directly attributable to the business combinations included in these pro forma revenues and earnings.
For the three months ended February 28, 2022 and for the six months ended February 28, 2023 and 2022, the unaudited pro forma amounts of revenues and net income of the acquired ScrapSource business were not material to the financial statements taken as a whole and, therefore, are not included in the unaudited pro forma information presented above.
The information included in the unaudited pro forma amounts is derived from historical information obtained from the sellers of the businesses. These unaudited pro forma results are not necessarily indicative of what actual results would have been had these acquisitions occurred as of the beginning of fiscal 2021. In addition, the unaudited pro forma results are not intended to be a projection of future results and do not reflect any synergies that may be achieved from combining operations.
Note 4 - Goodwill
The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. There were no triggering events identified during the three months ended November 30, 2017first half of fiscal 2023 requiring an interim goodwill impairment test.
Impairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is required to be identified as a reporting unit if the component is a business for which discrete financial information is available and segment management regularly reviews its operating results. The Company most recently performed the quantitative impairment test for goodwill carried by two of its reporting units, consisting of a regional metals recycling operation and its network of auto parts stores, as of July 1, 2022. For the metals recycling and autos reporting units subject to the quantitative impairment test, the estimated fair value of the reporting unit exceeded its carrying amount by approximately 32% and 44%, respectively, as of July 1, 2022.
The determination of fair value of the reporting units used to perform the impairment test requires judgment and involves significant estimates and assumptions about the expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact management's assumptions used to estimate the reporting units’ fair value. Although the Company believes the assumptions used in testing its reporting units’ goodwill for impairment are reasonable, a lack of recovery or further deterioration in market conditions from current levels, a trend of weaker than anticipated financial performance for the reporting units with allocated goodwill, a decline in the Company's share price from current levels for a sustained period of time, or an increase in the weighted average cost of capital, among other factors, could significantly impact the Company's impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on its financial condition and results of operations.
The gross change in the carrying amount of goodwill for the threesix months ended November 30, 2017February 28, 2023 was as follows (in thousands):
|
| Goodwill |
| |
August 31, 2022 |
| $ | 255,198 |
|
Additions(1) |
|
| 14,759 |
|
Measurement period adjustments(2) |
|
| (725 | ) |
Foreign currency translation adjustment |
|
| (735 | ) |
February 28, 2023 |
| $ | 268,497 |
|
AMR | |||
August 31, 2017 | $ | 167,835 | |
Foreign currency translation adjustment | (632 | ) | |
November 30, 2017 | $ | 167,203 |
Note 5
- Commitments and ContingenciesContingencies - Environmental
The Company evaluates the adequacy of its environmental liabilities on a quarterly basis. Adjustments to the liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or expenditures are made for which liabilities were established.
16
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Changes in the Company’s environmental liabilities in aggregate for the threesix months ended November 30, 2017February 28, 2023 were as follows (in thousands):
Balance as of |
|
| Liabilities |
|
| Payments and |
|
| Balance as of |
|
| Short-Term |
|
| Long-Term |
| ||||||
$ | 68,500 |
|
| $ | 1,608 |
|
| $ | (6,633 | ) |
| $ | 63,475 |
|
| $ | 8,495 |
|
| $ | 54,980 |
|
Balance as of August 31, 2017 | Liabilities Established (Released), Net | Payments and Other | Balance as of November 30, 2017 | Short-Term | Long-Term | |||||||||||||||||
$ | 48,398 | $ | 7,021 | $ | (761 | ) | $ | 54,658 | $ | 7,214 | $ | 47,444 |
As of November 30, 2017February 28, 2023 and August 31, 2017,2022, the Company's recycling operationsCompany had environmental liabilities of $55$63 million and $48$69 million, respectively, for the potential remediation of locations where it has conducted business or has environmental liabilities from historical or recent activities. TheThese liabilities relate to the investigation and potential future remediation of waterways and soil contamination,and groundwater contamination storm water runoff issues and othermay also involve natural resource damages.damages, governmental fines and penalties, and claims by third parties for personal injury and property damage. Except for Portland Harbor and certain liabilities discussed under Other“Other Legacy Environmental Loss Contingencies immediatelyContingencies” below, such liabilities were not individually material at any site.
Portland Harbor
In December 2000, the Company was notified by the United States Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it is one of the potentially responsible parties (“PRPs”) that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”(“Portland Harbor”).
The precise nature and extent of any cleanup of the Site,any specific areas within Portland Harbor, the parties to be involved, the timing of any specific remedial action and the allocation of the costs for any cleanup among responsible parties have not yet been determined.
From 2000 to the consent order entered into by2017, the EPA with certain other PRPs, referred to as the “Lower Willamette Group” (“LWG”), foroversaw a remedial investigation/feasibility study (“RI/FS”). During fiscal 2007, at Portland Harbor. The Company was not among the Company and certain other parties agreedthat performed the RI/FS, but it contributed to the costs through an interim settlement with the LWG under which the Company made a cash contribution to the LWG RI/FS.performing parties. The LWG hasperforming parties have indicated that it hadthey incurred over $115more than $155 million in investigation-related costs over an approximately 10 year period working on the RI/FS. Following submittal of draft RI and FS documents which the EPA largely rejected, the EPA took over the RI/FS process.
In January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for the Site. The selected remedy is a modified version of one of the alternative remedies evaluated in the EPA’s FS that was expanded to include additional work at a greater cost.Portland Harbor. The EPA has estimated the total cost of the selected remedy at $1.7$1.7 billion with a net present value cost of $1.05$1.05 billion (at a 7%7% discount rate) and an estimated construction period of 13 years following completion of the remedial designs. In the ROD, the EPA stated that the cost estimate is an order-of-magnitude engineering estimate that is expected to be within +50%+50% to -30%-30% of the actual project cost and that changes in the cost elements are likely to occur as a result of new information and data collected during the engineering design. The Company has identified a number of concerns regarding the remedy described in the ROD, which is based on data that is more than a decade15 years old, and the EPA'sEPA’s estimates for the costs and time required to implement the selected remedy. Because of ongoing questions regarding cost effectiveness, technical feasibility, and the use of stale data, it is uncertain whetherMoreover, the ROD will be implemented as issued.provided only site-wide cost estimates and did not provide sufficient detail to estimate costs for specific sediment management areas within Portland Harbor. In addition, the ROD did not determine or allocate the responsibility for remediation costs among the PRPs.
In the ROD, the EPA acknowledged that much of the data used in preparing the ROD was more than a decade old at that time and would need to be updated with a new round of “baseline” sampling to be conducted prior to the remedial design phase. Accordingly, the ROD provided for additional pre-remedial design investigative work and baseline sampling to be conducted in order to provide a baseline of current conditions and delineate particular remedial actions for specific areas within the Site. This additional sampling needs to occur prior to proceeding with the next phase in the process which is the remedial design. The remedial design phase is an engineering phase during which additional technical information and data will beare collected, identified, and incorporated into
In December 2017, the Company and three other PRPs entered into a newan Administrative Settlement Agreement and Order on Consent with the EPA to perform such pre-remedial design investigation and baseline sampling over a two-year period. The report analyzing the results concluded that Portland Harbor conditions have improved substantially since the data forming the basis of the ROD was collected. The EPA found with a few limited corrections that the new baseline data is of suitable quality and stated that such data will be used, in addition to existing and forthcoming design-level data, to inform implementation of the ROD. However, the EPA did not agree that the data or the analysis warranted a change to the remedy at this time and reaffirmed its commitment to proceed with remedial design. The Company estimatesand other PRPs disagree with the EPA’s position on use of the more recent data and will continue to pursue limited, but critical, changes to the selected remedy for Portland Harbor during the remedial design phase.
17
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The EPA encouraged PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design in various project areas covering Portland Harbor. While certain PRPs executed consent agreements for remedial design work, because of the EPA’s refusal to date to modify the remedy to reflect the most current data on Portland Harbor conditions and because of concerns with the terms of the consent agreement, the Company elected not to enter into a consent agreement. In April 2020, the EPA issued a unilateral administrative order (“UAO”) to the Company and MMGL, LLC (“MMGL”), an unaffiliated company, for the remedial design work in a portion of Portland Harbor designated as the River Mile 3.5 East Project Area. As required by the UAO, the Company notified the EPA of its intent to comply while reserving all of its sufficient cause defenses. Failure to comply with a UAO, without sufficient cause, could subject the Company to significant penalties or treble damages. Pursuant to the optimized remedial design timeline set forth in the UAO, the EPA’s expected schedule for completion of the remedial design work was four years. At the time it issued the UAO in April 2020, the EPA estimated the cost of the work at approximately $4 million. The Company has agreed with the other respondent to the UAO, MMGL, that its sharethe Company will lead the performance and be responsible for a portion of the costs of performingthe work for remedial design under the UAO and also entered into an agreement with another PRP pursuant to which such work will be approximately $2other PRP has agreed to fund a portion of the costs of such work. These agreements are not an allocation of liability or claims associated with Portland Harbor between the respondents or with respect to any third party. As of each of February 28, 2023 and August 31, 2022, the Company had $3 million in environmental reserves related to this matter. The Company has insurance policies and Qualified Settlement Funds (“QSFs”) pursuant to which the Company is being reimbursed for the costs it recorded to environmental liabilitieshas incurred for remedial design. See further discussion of the QSFs below in this Note. As of both February 28, 2023 and selling, generalAugust 31, 2022, the Company had insurance and administrative expenseother receivables in the consolidated financial statementssame amount as the environmental reserves for such remedial design work under the UAO. See “Other Assets” in Note 1 - Summary of Significant Accounting Policies for further discussion of insurance and other related receivables. The Company also expects to pursue in the first quarterfuture allocation or contribution from other PRPs for a portion of fiscal 2018. The Company believessuch remedial design costs. In February 2021, the EPA announced that such costs will be fully covered by existing insurance coverage and, thus, has also recorded an insurance receivable for $2 million100 percent of Portland Harbor’s areas requiring active cleanup are in the first quarterremedial design phase of fiscal 2018, resulting in no net impact to the Company's consolidated results of operations.
Except for certain early action projects in which the Company is not involved, remediation activities at Portland Harbor are not expected to commence for a number of years. Moreover, those activities are expected to be sequenced, and the order and timing of such sequencing has not been determined. In addition, as discussednoted above, responsibility for implementing and funding the remedy will be determinedROD does not determine the allocation of costs among PRPs.
The Company has joined with approximately 100 other PRPs, including the RI/FS performing parties, in a separatevoluntary process to establish an allocation process.of costs at Portland Harbor, including the costs incurred in the RI/FS, ongoing remedial design costs, and future remedial action costs. The Company does not expectexpects the next major stage of the allocation process to proceed until afterin parallel with the additional pre-remedialremedial design dataprocess.
In addition to the remedial action process overseen by the EPA, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) is collected.
On January 30, 2017, one of the Trustees, the Confederated Tribes and Bands of the Yakama Nation, which withdrew from the council in 2009, filed a suit against approximately 30 parties, including the Company, seeking reimbursement of certain past and future response costs in connection with remedial action at Portland Harbor and recovery of assessment costs related to natural resources damages from releases at and from Portland Harbor to the Multnomah Channel and the Lower Columbia River. The parties filed various motions to dismiss or stay this suit, and in August 2019, the court issued an order denying the motions to dismiss and staying the action. The Company intends to defend against the claims in this suit and does not have sufficient information to determine the likelihood of a loss in this matter or to estimate the amount of damages being sought or the amount of such damages that could be allocated to the Company.
18
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s environmental liabilities as of February 28, 2023 and August 31, 2022included $5 million and $6 million, respectively, relating to the Portland Harbor matters described above.
Because the final remedial actions have not yet been designed and there has not been a determination of the specific remediation actions that will be required,allocation among the amount of natural resource damages or the allocationPRPs of costs of the investigations and any remedy and natural resource damages among the PRPs,or remedial action costs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it is likely to or which it is reasonably possible that it will incur in connection with the Site,Portland Harbor, although such costs could be material to the Company’s financial position, results of operations, cash flows, and liquidity. Among the facts currently being developedevaluated are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on each property within the Site,Portland Harbor, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs.
The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense, (including the pre-remedial design investigative activities), remediation, and mitigation for or settlement of natural resource damages claims in connection with the Site,Portland Harbor, although there isare no assuranceassurances that those policies will cover all of the costs which the Company may incur. AsMost of November 30, 2017,these policies jointly insure the Company's total liability for its estimated shareCompany and MMGL, as the successor to a former subsidiary of the Company. The Company and MMGL have negotiated the settlement with certain insurers of claims against them related to Portland Harbor, continue to seek settlements with other insurers, and formed two QSFs which became operative in fiscal 2020 and the second quarter of fiscal 2023, respectively, to hold such settlement amounts until funds are needed to pay or reimburse costs incurred by the Company and MMGL in connection with Portland Harbor. These insurance policies and the funds in the QSFs may not cover all of the costs which the Company may incur. Each QSF is an unconsolidated variable interest entity (“VIE”) with no primary beneficiary. Two managers unrelated to each other, one appointed by the Company and one appointed by MMGL, share equally the power to direct the activities of each VIE that most significantly impact its economic performance. The Company’s appointee to co-manage each VIE is an executive officer of the investigation was $3 million.
The Oregon Department of Environmental Quality is separately providing oversight of voluntary investigations and source control activities by the Company involving the Company’sat various sites adjacent to the Portland Harbor whichthat are focused on controlling any current “uplands” releases of contaminants into the Willamette River. The Company has accrued liabilities for source control and related work at two sites, reflecting estimated costs of primarily investigation and design, which costs have not been material in the aggregate to date. No liabilities have been established in connection with these investigations for any other sites because the extent of contamination, (if any)required source control work, and the Company’s responsibility for the contamination (if any)and source control work, in each case if any, have not yet been determined.
Other Legacy Environmental Loss Contingencies
The Company’s environmental loss contingencies as of November 30, 2017February 28, 2023 and August 31, 2017,2022, other than Portland Harbor, include actual or possible investigation and cleanupremediation costs from historical contamination at sites currently or formerly owned or formerly operated by the Company or at other sites where the Company may have responsibility for such costs due to past disposal or other activities ("(“legacy environmental loss contingencies"contingencies”). These legacy environmental loss contingencies relate to the potential remediation of waterways and soil and groundwater contamination and may also involve natural resource damages, governmental fines and penalties, and claims by third parties for personal injury and property damage. The Company has been notified that it is or may be a potentially responsible party at certain of these sites, and investigation and cleanupremediation activities are ongoing or may be required in the future. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. WhereWhen investigation, allocation, and cleanupremediation activities are ongoing or where the Company has not yet been identified as having responsibility or the contamination has not yet been identified, it is reasonably possible that the Company may need to recognize additional liabilities in connection with such sites but the Company cannot currently reasonably estimate the possible loss or range of loss absent additional information or developments. Such additional liabilities, individually or in the aggregate, may have a material adverse effect on the Company'sCompany’s results of operations, financial condition, or cash flows.
19
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 2018, the Company accrued $4$4 million in expense at its Corporate division for the estimated costs related to remediation of shredder residue disposed of in or around the 1970s at third-party sites located near each other. Investigation activities have been conducted under oversight of the applicable state regulatory agency. As of each of February 28, 2023 and August 31, 2022, the Company had $4 million accrued for this matter. It is reasonably possible that the Company may recognize additional liabilities in connection with this matter at the time such losses are probable and can be reasonably estimated. The Company estimatespreviously estimated a range of reasonably possible losses related to this matter in excess of current accruals at between zero and $28$28 million based on a range of remedial alternatives and subject to development and approval by regulators of a specific remedy implementation plan.plans. However, subsequent to the development of those remedial alternatives, the Company performed additional investigative activities under new state requirements that are likely to impact the required remedial actions and associated cost estimates, but the scope of such impacts and the amount or the range of the additional associated costs are not reasonably estimable at this time and are subject to further investigation, analysis, and discussion by the Company and regulators. The Company is investigating whether a portion or all of the current and future losses related to this matter, if incurred, are covered by existing insurance coverage or may be offset by contributions from other responsible parties.
In addition, the Company’s loss contingencies as of November 30, 2017February 28, 2023 and August 31, 2017.
In addition, the Company’s loss contingencies as of each of February 28, 2023 and August 31, 2022 included $7 million for the ultimate disposalestimated costs related to remediation of a site a portion of which was previously leased to and operated by an indirect, wholly-owned subsidiary. In connection with settlement of a lawsuit relating to allocation of the EAF dust.
Summary - Environmental Contingencies
With respect to environmental contingencies other than the Portland Harbor Superfund site and legacy environmental loss contingencies,the Other Legacy Environmental Loss Contingencies, which are discussed separately above, management currently believes that adequate provision has been made for the potential impact of these issues and that the ultimate outcomes will not have a material adverse effect on the Company's consolidated financial statements as a whole.its environmental contingencies. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material in any given period.
Contingencies -– Other
In addition to legal proceedings relating to the contingencies described above, the Company is a party to various legal proceedings arising in the normal course of business. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. Legal proceedings include those arising from accidents involving Company-owned vehicles, including Company tractor trailers. In some instances, such accidents and the related litigation involve accidents that have resulted in third party fatalities. It is reasonably possible that the Company may recognize additional losses in connection with such lawsuits at the time such losses are probable and can be reasonably estimated. Such losses may be material to the Company's consolidated financial statements. At this time, the amount of such additional reasonably possible losses cannot be reasonably estimated. To the extent that circumstances change and the Company determines that a loss is reasonably possible, can be reasonably estimated, and is material, the Company would then disclose an estimate of the possible loss or range of loss. The Company believes that such losses, if incurred, would be substantially covered by existing insurance coverage. The Company does not anticipate that the resolution ofliabilities arising from such legal proceedings arising in the normal course of business, after taking into consideration expected insurance recoveries, will have a material adverse effect on its results of operations, financial condition, or cash flows.
20
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6
Three Months Ended November 30, 2017 | Three Months Ended November 30, 2016 | ||||||||||||||||||||||
SSI Shareholders’ Equity | Noncontrolling Interests | Total Equity | SSI Shareholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||
Balance - September 1 (Beginning of period) | $ | 533,586 | $ | 3,907 | $ | 537,493 | $ | 497,721 | $ | 3,711 | $ | 501,432 | |||||||||||
Net income (loss) | 18,364 | 857 | 19,221 | (1,326 | ) | 618 | (708 | ) | |||||||||||||||
Other comprehensive loss, net of tax | (1,627 | ) | — | (1,627 | ) | (1,099 | ) | — | (1,099 | ) | |||||||||||||
Distributions to noncontrolling interests | — | (331 | ) | (331 | ) | — | (522 | ) | (522 | ) | |||||||||||||
Restricted stock withheld for taxes | (2,851 | ) | — | (2,851 | ) | (3,301 | ) | — | (3,301 | ) | |||||||||||||
Share-based compensation | 5,004 | — | 5,004 | 3,408 | — | 3,408 | |||||||||||||||||
Dividends | (5,292 | ) | — | (5,292 | ) | (5,143 | ) | — | (5,143 | ) | |||||||||||||
Balance - November 30 (End of period) | $ | 547,184 | $ | 4,433 | $ | 551,617 | $ | 490,260 | $ | 3,807 | $ | 494,067 |
Changes in accumulated other comprehensive loss, net of tax, were comprised ofcomprise the following (in thousands):
|
| Three Months Ended February 28, 2023 |
|
| Three Months Ended February 28, 2022 |
| ||||||||||||||||||
|
| Foreign Currency |
|
| Pension Obligations, |
|
| Total |
|
| Foreign Currency |
|
| Pension Obligations, |
|
| Total |
| ||||||
Balances - December 1 (Beginning of period) |
| $ | (36,925 | ) |
| $ | (2,377 | ) |
| $ | (39,302 | ) |
| $ | (32,724 | ) |
| $ | (2,555 | ) |
| $ | (35,279 | ) |
Other comprehensive (loss) income before reclassifications |
|
| (1,361 | ) |
|
| — |
|
|
| (1,361 | ) |
|
| 722 |
|
|
| — |
|
|
| 722 |
|
Income tax benefit (expense) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Other comprehensive (loss) income before reclassifications, net of tax |
|
| (1,361 | ) |
|
| — |
|
|
| (1,361 | ) |
|
| 722 |
|
|
| — |
|
|
| 722 |
|
Amounts reclassified from accumulated other comprehensive loss |
|
| — |
|
|
| 75 |
|
|
| 75 |
|
|
| — |
|
|
| 154 |
|
|
| 154 |
|
Income tax (benefit) |
|
| — |
|
|
| (17 | ) |
|
| (17 | ) |
|
| — |
|
|
| (35 | ) |
|
| (35 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax |
|
| — |
|
|
| 58 |
|
|
| 58 |
|
|
| — |
|
|
| 119 |
|
|
| 119 |
|
Net periodic other comprehensive (loss) income |
|
| (1,361 | ) |
|
| 58 |
|
|
| (1,303 | ) |
|
| 722 |
|
|
| 119 |
|
|
| 841 |
|
Balances - February 28 (End of period) |
| $ | (38,286 | ) |
| $ | (2,319 | ) |
| $ | (40,605 | ) |
| $ | (32,002 | ) |
| $ | (2,436 | ) |
| $ | (34,438 | ) |
|
| Six Months Ended February 28, 2023 |
|
| Six Months Ended February 28, 2022 |
| ||||||||||||||||||
|
| Foreign Currency |
|
| Pension Obligations, |
|
| Total |
|
| Foreign Currency |
|
| Pension Obligations, |
|
| Total |
| ||||||
Balances - September 1 (Beginning of period) |
| $ | (34,679 | ) |
| $ | (2,410 | ) |
| $ | (37,089 | ) |
| $ | (31,609 | ) |
| $ | (2,945 | ) |
| $ | (34,554 | ) |
Other comprehensive (loss) income before reclassifications |
|
| (3,607 | ) |
|
| (34 | ) |
|
| (3,641 | ) |
|
| (393 | ) |
|
| 451 |
|
|
| 58 |
|
Income tax benefit (expense) |
|
| — |
|
|
| 8 |
|
|
| 8 |
|
|
| — |
|
|
| (101 | ) |
|
| (101 | ) |
Other comprehensive (loss) income before reclassifications, net of tax |
|
| (3,607 | ) |
|
| (26 | ) |
|
| (3,633 | ) |
|
| (393 | ) |
|
| 350 |
|
|
| (43 | ) |
Amounts reclassified from accumulated other comprehensive loss |
|
| — |
|
|
| 151 |
|
|
| 151 |
|
|
| — |
|
|
| 205 |
|
|
| 205 |
|
Income tax (benefit) |
|
| — |
|
|
| (34 | ) |
|
| (34 | ) |
|
| — |
|
|
| (46 | ) |
|
| (46 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax |
|
| — |
|
|
| 117 |
|
|
| 117 |
|
|
| — |
|
|
| 159 |
|
|
| 159 |
|
Net periodic other comprehensive (loss) income |
|
| (3,607 | ) |
|
| 91 |
|
|
| (3,516 | ) |
|
| (393 | ) |
|
| 509 |
|
|
| 116 |
|
Balances - February 28 (End of period) |
| $ | (38,286 | ) |
| $ | (2,319 | ) |
| $ | (40,605 | ) |
| $ | (32,002 | ) |
| $ | (2,436 | ) |
| $ | (34,438 | ) |
Three Months Ended November 30, 2017 | Three Months Ended November 30, 2016 | ||||||||||||||||||||||
Foreign Currency Translation Adjustments | Pension Obligations, net | Total | Foreign Currency Translation Adjustments | Pension Obligations, net | Total | ||||||||||||||||||
Balances - September 1 (Beginning of period) | $ | (31,828 | ) | $ | (3,465 | ) | $ | (35,293 | ) | $ | (34,539 | ) | $ | (5,576 | ) | $ | (40,115 | ) | |||||
Other comprehensive income (loss) before reclassifications | (1,709 | ) | (185 | ) | (1,894 | ) | (1,034 | ) | 49 | (985 | ) | ||||||||||||
Income tax expense | — | 227 | 227 | — | (194 | ) | (194 | ) | |||||||||||||||
Other comprehensive income (loss) before reclassifications, net of tax | (1,709 | ) | 42 | (1,667 | ) | (1,034 | ) | (145 | ) | (1,179 | ) | ||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | 63 | 63 | — | 125 | 125 | |||||||||||||||||
Income tax benefit | — | (23 | ) | (23 | ) | — | (45 | ) | (45 | ) | |||||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | — | 40 | 40 | — | 80 | 80 | |||||||||||||||||
Net periodic other comprehensive income (loss) | (1,709 | ) | 82 | (1,627 | ) | (1,034 | ) | (65 | ) | (1,099 | ) | ||||||||||||
Balances - November 30 (End of period) | $ | (33,537 | ) | $ | (3,383 | ) | $ | (36,920 | ) | $ | (35,573 | ) | $ | (5,641 | ) | $ | (41,214 | ) |
Reclassifications from accumulated other comprehensive loss to earnings, both individually and in the aggregate, were immaterialnot material to the impacted captions in the Unaudited Condensed Consolidated Statements of Operations forin all periods presented.
21
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Revenue
Disaggregation of Revenues
The table below illustrates the Company’s revenues disaggregated by major product and sales destination (in thousands):
|
| Three Months Ended February 28, |
|
| Six Months Ended February 28, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Major product information: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Ferrous revenues |
| $ | 434,122 |
|
| $ | 438,314 |
|
| $ | 695,851 |
|
| $ | 904,170 |
|
Nonferrous revenues |
|
| 179,655 |
|
|
| 196,142 |
|
|
| 357,330 |
|
|
| 390,571 |
|
Steel revenues(1) |
|
| 107,825 |
|
|
| 116,196 |
|
|
| 232,340 |
|
|
| 219,434 |
|
Retail and other revenues |
|
| 34,351 |
|
|
| 32,546 |
|
|
| 69,162 |
|
|
| 67,141 |
|
Total revenues |
| $ | 755,953 |
|
| $ | 783,198 |
|
| $ | 1,354,683 |
|
| $ | 1,581,316 |
|
Revenues based on sales destination: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign |
| $ | 436,219 |
|
| $ | 435,471 |
|
| $ | 708,903 |
|
| $ | 906,644 |
|
Domestic |
|
| 319,734 |
|
|
| 347,727 |
|
|
| 645,780 |
|
|
| 674,672 |
|
Total revenues |
| $ | 755,953 |
|
| $ | 783,198 |
|
| $ | 1,354,683 |
|
| $ | 1,581,316 |
|
Receivables from Contracts with Customers
The revenue accounting standard defines a receivable as an entity’s right to consideration that is unconditional, meaning that only the passage of time is required before payment is due. As of February 28, 2023 and August 31, 2022, receivables from contracts with customers, net of an allowance for credit losses, totaled $238 million and $230 million, respectively, representing 99% and 97%, respectively, of total accounts receivable reported in the Unaudited Condensed Consolidated Balance Sheets at each reporting date.
Contract Liabilities
Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company’s contract liabilities, which consist almost entirely of customer deposits for recycled metal and finished steel sales contracts, are reported within accounts payable in the Unaudited Condensed Consolidated Balance Sheets and totaled $9 million and $8 million as of February 28, 2023 and August 31, 2022, respectively. Unsatisfied performance obligations reflected in these contract liabilities relate to contracts with original expected durations of one year or less and, therefore, are not disclosed. The substantial majority of outstanding contract liabilities are reclassified to revenues within three months of the reporting date as a result of satisfying performance obligations.
Note 9
In the first quarter of fiscal 2018,2023, as part of the annual awards under the Company'sCompany’s Long-Term Incentive Plan, the Compensation Committee of the Company'sCompany’s Board of Directors ("Compensation Committee") granted 252,865213,080 restricted stock units ("RSUs"(“RSUs”) and 246,161211,046 performance share awards to the Company'sCompany’s key employees and officers under the Company'sCompany’s 1993 Amended and Restated Stock Incentive Plan ("SIP"). Plan.
The RSUs have a five-year term and vest 20%20% per year commencing October 31, 2018.2023. The aggregate fair value of all of the RSUs granted was based on the market closing price of the underlying Class A common stock on the grant date and totaled $7$7 million. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures.
22
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The performance share awards are comprised ofcomprise two separate and distinct awards with different vesting conditions.
Half of the performance share awards granted by the Company during the first quarter of fiscal 2023 were based on the relative rankingCompany's recycled metal volume growth metric and half were based on its ROCE metric, in each case subject to a TSR modifier with performance measured over a three-year period consisting of the Company's TSR among a designated peer group of 16 companies. The TSR award stipulates certain limitations to the payout in the event the payout reaches a defined ceiling level or the Company's TSR is negative. The TSR awards contain a market conditionCompany’s 2023, 2024, and therefore, once the award recipients complete the requisite service period, the related compensation expense based on the grant-date fair value is not changed, regardless of whether the market condition has been satisfied. The estimated fair value of the TSR awards at the date of grant was $3 million. 2025 fiscal years. The Company estimated the fair value of performance share awards granted in the TSR awardsfirst quarter of fiscal 2023 using a Monte-Carlo simulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features.
Percentage | ||||
Expected share price volatility (SSI) | 56.1 | % | ||
Expected share price volatility (Peer group) | 60.5 | % | ||
Expected correlation to peer group companies | 48.1 | % | ||
Risk-free rate of return | 4.16 | % |
The compensation expense associated withestimated aggregate fair value of these performance share awards is recognizedat the date of grant was $7 million. The Company accrues compensation cost for these performance share awards based on the probable outcome of achieving specified performance conditions, net of estimated forfeitures, over the requisite service period net(or to the date a qualifying employment termination event entitles the recipient to a prorated award, if before the end of forfeitures.the service period). The Company reassesses whether achievement of the performance conditions is probable at each reporting date. If it is probable that the actual performance results will exceed the stated target performance conditions, the Company accrues additional compensation cost for the additional performance shares to be awarded irrespective of the TSR modifier, the effects of which are incorporated in the grant-date fair value of the awards. If, upon reassessment, it is no longer probable that the actual performance results will exceed the stated target performance conditions, or that it is no longer probable that the target performance conditions will be achieved, the Company reverses any recognized compensation cost for shares no longer probable of being issued. If the performance conditions are not achieved at the end of the performance period, all related compensation cost previously recognized is reversed. Performance share awards will be paid in Class A common stock as soon as practicable after the end of the requisite service period and vesting date of October 31, 2020.2025.
In the second quarter of fiscal 2023, the Company granted deferred stock units (“DSUs”) to each of its non-employee directors under the Company’s 1993 Stock Incentive Plan, as amended. Each DSU gives the director the right to receive one share of Class A common stock at a future date. The grant reflected an aggregate of 21,438 DSUs that will vest in full on the day before the Company’s 2024 annual meeting of shareholders, subject to continued Board service. The total fair value of these awards at the grant date was $1 million.
Note 10
Effective Tax Rate
The effective tax rate for the Company’s continuing operations for the three months ended November 30, 2017 was an expense of 23.6% compared to a benefit of 8.6% for the three months ended November 30, 2016.
Three Months Ended November 30, | |||||
2017 | 2016 | ||||
Federal statutory rate | 35.0 | % | 35.0 | % | |
State taxes, net of credits | 0.1 | 2.1 | |||
Foreign income taxed at different rates | (1.2 | ) | (3.4 | ) | |
Valuation allowance on deferred tax assets | (6.8 | ) | (25.0 | ) | |
Unrecognized tax benefits | 0.6 | 1.9 | |||
Non-deductible officers’ compensation | 1.5 | 2.7 | |||
Research and development credits | (0.5 | ) | (1.4 | ) | |
Section 199 deduction | (1.9 | ) | — | ||
Other non-deductible expenses | — | 1.3 | |||
Other | (1.3 | ) | (0.2 | ) | |
Noncontrolling interests | (1.9 | ) | (4.4 | ) | |
Effective tax rate(1) | 23.6 | % | 8.6 | % |
23
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Valuation Allowances
The lower projected annual effectiveCompany assesses the realizability of its deferred tax rate isassets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies, and forecasts of taxable income. The Company considers all negative and positive evidence, including the resultweight of the Company’s fullevidence, to determine if valuation allowances against deferred tax assets are required. The Company continues to maintain valuation allowances against certain state and Canadian deferred tax assets. Canadian deferred tax assets against which the Company continues to maintain a valuation allowance positions partially offset by increases in deferred tax liabilities fromrelate to indefinite-lived assets in all jurisdictions.
The Company files federal and state income tax returns in the U.S. and foreign tax returns in Puerto Rico and Canada. For U.S. federal income tax returns, fiscal years 20132014 to 20172022 remain subject to examination under the statute of limitations. The Company's U.S. federal income tax return for fiscal 2015 is currently under examination.
Note 11
The following table sets forth the information used to compute basic and diluted net income (loss) per share attributable to SSI shareholders (in thousands):
|
| Three Months Ended February 28, |
|
| Six Months Ended February 28, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Income (loss) from continuing operations |
| $ | 4,048 |
|
| $ | 38,136 |
|
| $ | (13,439 | ) |
| $ | 85,441 |
|
Net loss (income) attributable to noncontrolling interests |
|
| 81 |
|
|
| (550 | ) |
|
| (151 | ) |
|
| (1,627 | ) |
Income (loss) from continuing operations attributable to SSI shareholders |
| $ | 4,129 |
|
| $ | 37,586 |
|
| $ | (13,590 | ) |
| $ | 83,814 |
|
Income from discontinued operations, net of tax |
|
| 224 |
|
|
| 29 |
|
|
| 155 |
|
|
| — |
|
Net income (loss) attributable to SSI shareholders |
| $ | 4,353 |
|
| $ | 37,615 |
|
| $ | (13,435 | ) |
| $ | 83,814 |
|
Computation of shares: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding, basic |
|
| 28,081 |
|
|
| 28,231 |
|
|
| 27,912 |
|
|
| 28,195 |
|
Incremental common shares attributable to dilutive performance share awards, restricted stock units and deferred stock units |
|
| 536 |
|
|
| 1,481 |
|
|
| — |
|
|
| 1,603 |
|
Weighted average common shares outstanding, diluted |
|
| 28,617 |
|
|
| 29,712 |
|
|
| 27,912 |
|
|
| 29,798 |
|
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Income (loss) from continuing operations | $ | 19,256 | $ | (655 | ) | ||
Net income attributable to noncontrolling interests | (857 | ) | (618 | ) | |||
Income (loss) from continuing operations attributable to SSI | 18,399 | (1,273 | ) | ||||
Loss from discontinued operations, net of tax | (35 | ) | (53 | ) | |||
Net income (loss) attributable to SSI | $ | 18,364 | $ | (1,326 | ) | ||
Computation of shares: | |||||||
Weighted average common shares outstanding, basic | 27,695 | 27,372 | |||||
Incremental common shares attributable to dilutive performance share, RSU and DSU awards | 967 | — | |||||
Weighted average common shares outstanding, diluted | 28,662 | 27,372 |
Common stock equivalent shares of 1,086,33556,520 and 796,877 were considered antidilutive and were excluded from the calculation of diluted net lossincome (loss) per share for the three and six months ended November 30, 2016. No common stock equivalent shares were considered antidilutiveFebruary 28, 2023, respectively, compared to 311,736 and 199,786 for the three and six months ended November 30, 2017.February 28, 2022, respectively.
Note 12
The Company purchases recycled metal from one of its joint venture operations at prices that approximate fair market value. These purchases totaled $3$4 million and $5 million for the three months ended November 30, 2017February 28, 2023 and 2016, respectively.
24
29
SCHNITZER STEEL INDUSTRIES, INC.
Results of Operations
Three Months Ended November 30, | ||||||||||
($ in thousands) | 2017 | 2016 | % Change | |||||||
Revenues: | ||||||||||
Auto and Metals Recycling | $ | 398,054 | $ | 271,773 | 46 | % | ||||
Cascade Steel and Scrap | 89,984 | 66,023 | 36 | % | ||||||
Intercompany revenue eliminations(1) | (4,759 | ) | (3,635 | ) | 31 | % | ||||
Total revenues | 483,279 | 334,161 | 45 | % | ||||||
Cost of goods sold: | ||||||||||
Auto and Metals Recycling | 331,949 | 233,855 | 42 | % | ||||||
Cascade Steel and Scrap | 78,580 | 65,464 | 20 | % | ||||||
Intercompany cost of goods sold eliminations(1) | (4,278 | ) | (3,427 | ) | 25 | % | ||||
Total cost of goods sold | 406,251 | 295,892 | 37 | % | ||||||
Selling, general and administrative expense: | ||||||||||
Auto and Metals Recycling | 30,933 | 25,547 | 21 | % | ||||||
Cascade Steel and Scrap | 3,466 | 2,963 | 17 | % | ||||||
Corporate(2) | 16,644 | 8,982 | 85 | % | ||||||
Total selling, general and administrative expense | 51,043 | 37,492 | 36 | % | ||||||
(Income) from joint ventures: | ||||||||||
Auto and Metals Recycling | — | (235 | ) | (100 | )% | |||||
Cascade Steel and Scrap | (450 | ) | (177 | ) | 154 | % | ||||
Total (income) from joint ventures | (450 | ) | (412 | ) | 9 | % | ||||
Other asset impairment charges (recoveries), net: | ||||||||||
Cascade Steel and Scrap | (88 | ) | 401 | NM | ||||||
Total other asset impairment charges (recoveries), net | (88 | ) | 401 | NM | ||||||
Operating income (loss): | ||||||||||
Auto and Metals Recycling | 35,172 | 12,606 | 179 | % | ||||||
Cascade Steel and Scrap | 8,476 | (2,628 | ) | NM | ||||||
Segment operating income | 43,648 | 9,978 | 337 | % | ||||||
Restructuring charges and other exit-related activities(3) | (100 | ) | (201 | ) | (50 | )% | ||||
Corporate expense(2) | (16,644 | ) | (8,982 | ) | 85 | % | ||||
Change in intercompany profit elimination(4) | (481 | ) | (208 | ) | 131 | % | ||||
Total operating income | $ | 26,423 | $ | 587 | 4,401 | % |
Selected Financial Measures and Operating Statistics
|
| Three Months Ended February 28, |
|
| Six Months Ended February 28, |
| ||||||||||||||||||
($ in thousands, except for prices and per share amounts) |
| 2023 |
|
| 2022 |
|
| % |
|
| 2023 |
|
| 2022 |
|
| % |
| ||||||
Ferrous revenues |
| $ | 434,122 |
|
| $ | 438,314 |
|
|
| (1 | )% |
| $ | 695,851 |
|
| $ | 904,170 |
|
|
| (23 | )% |
Nonferrous revenues |
|
| 179,655 |
|
|
| 196,142 |
|
|
| (8 | )% |
|
| 357,330 |
|
|
| 390,571 |
|
|
| (9 | )% |
Steel revenues(1) |
|
| 107,825 |
|
|
| 116,196 |
|
|
| (7 | )% |
|
| 232,340 |
|
|
| 219,434 |
|
|
| 6 | % |
Retail and other revenues |
|
| 34,351 |
|
|
| 32,546 |
|
|
| 6 | % |
|
| 69,162 |
|
|
| 67,141 |
|
|
| 3 | % |
Total revenues |
|
| 755,953 |
|
|
| 783,198 |
|
|
| (3 | )% |
|
| 1,354,683 |
|
|
| 1,581,316 |
|
|
| (14 | )% |
Cost of goods sold |
|
| 682,937 |
|
|
| 670,539 |
|
|
| 2 | % |
|
| 1,232,948 |
|
|
| 1,353,783 |
|
|
| (9 | )% |
Gross margin (total revenues less cost of goods sold) |
| $ | 73,016 |
|
| $ | 112,659 |
|
|
| (35 | )% |
| $ | 121,735 |
|
| $ | 227,533 |
|
|
| (46 | )% |
Gross margin (%) |
|
| 9.7 | % |
|
| 14.4 | % |
|
| (33 | )% |
|
| 9.0 | % |
|
| 14.4 | % |
|
| (38 | )% |
Selling, general and administrative expense |
| $ | 63,957 |
|
| $ | 61,081 |
|
|
| 5 | % |
| $ | 128,185 |
|
| $ | 116,348 |
|
|
| 10 | % |
Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Reported |
| $ | 0.14 |
|
| $ | 1.27 |
|
|
| (89 | )% |
| $ | (0.49 | ) |
| $ | 2.81 |
|
| NM |
| |
Adjusted(2) |
| $ | 0.14 |
|
| $ | 1.38 |
|
|
| (90 | )% |
| $ | (0.30 | ) |
| $ | 2.96 |
|
| NM |
| |
Net income (loss) |
| $ | 4,272 |
|
| $ | 38,165 |
|
|
| (89 | )% |
| $ | (13,284 | ) |
| $ | 85,441 |
|
| NM |
| |
Adjusted EBITDA(2) |
| $ | 31,850 |
|
| $ | 75,259 |
|
|
| (58 | )% |
| $ | 40,212 |
|
| $ | 153,345 |
|
|
| (74 | )% |
Average ferrous recycled metal sales prices ($/LT)(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Domestic |
| $ | 359 |
|
| $ | 418 |
|
|
| (14 | )% |
| $ | 336 |
|
| $ | 424 |
|
|
| (21 | )% |
Foreign |
| $ | 368 |
|
| $ | 455 |
|
|
| (19 | )% |
| $ | 364 |
|
| $ | 452 |
|
|
| (19 | )% |
Average |
| $ | 367 |
|
| $ | 445 |
|
|
| (18 | )% |
| $ | 357 |
|
| $ | 446 |
|
|
| (20 | )% |
Ferrous volumes (LT, in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Domestic(4) |
|
| 444 |
|
|
| 408 |
|
|
| 9 | % |
|
| 876 |
|
|
| 839 |
|
|
| 4 | % |
Foreign |
|
| 819 |
|
|
| 663 |
|
|
| 24 | % |
|
| 1,238 |
|
|
| 1,381 |
|
|
| (10 | )% |
Total ferrous volumes (LT, in thousands)(4)(8) |
|
| 1,263 |
|
|
| 1,071 |
|
|
| 18 | % |
|
| 2,114 |
|
|
| 2,219 |
|
|
| (5 | )% |
Average nonferrous sales price ($/pound)(3)(5) |
| $ | 0.99 |
|
| $ | 1.10 |
|
|
| (10 | )% |
| $ | 0.94 |
|
| $ | 1.08 |
|
|
| (13 | )% |
Nonferrous volumes (pounds, in thousands)(4)(5) |
|
| 164,796 |
|
|
| 147,145 |
|
|
| 12 | % |
|
| 327,516 |
|
|
| 300,373 |
|
|
| 9 | % |
Finished steel average sales price ($/ST)(3) |
| $ | 943 |
|
| $ | 1,045 |
|
|
| (10 | )% |
| $ | 980 |
|
| $ | 1,013 |
|
|
| (3 | )% |
Finished steel sales volumes (ST, in thousands) |
|
| 109 |
|
|
| 106 |
|
|
| 3 | % |
|
| 227 |
|
|
| 205 |
|
|
| 11 | % |
Cars purchased (in thousands)(6) |
|
| 72 |
|
|
| 73 |
|
|
| (1 | )% |
|
| 141 |
|
|
| 153 |
|
|
| (8 | )% |
Number of auto parts stores at period end |
|
| 50 |
|
|
| 50 |
|
|
| (— | )% |
|
| 50 |
|
|
| 50 |
|
|
| (— | )% |
Rolling mill utilization(7) |
|
| 75 | % |
|
| 86 | % |
|
| (13 | )% |
|
| 78 | % |
|
| 82 | % |
|
| (5 | )% |
NM = Not Meaningful
Three Months Ended November 30, | ||||||||||
($ in thousands, except for prices) | 2017 | 2016 | % Change | |||||||
Ferrous revenues | $ | 254,983 | $ | 157,178 | 62 | % | ||||
Nonferrous revenues | 110,343 | 84,386 | 31 | % | ||||||
Retail and other revenues | 32,728 | 30,209 | 8 | % | ||||||
Total segment revenues | 398,054 | 271,773 | 46 | % | ||||||
Segment operating income | $ | 35,172 | $ | 12,606 | 179 | % | ||||
Average ferrous recycled metal sales prices ($/LT):(1) | ||||||||||
Domestic | $ | 259 | $ | 169 | 53 | % | ||||
Foreign | $ | 306 | $ | 203 | 51 | % | ||||
Average | $ | 292 | $ | 194 | 51 | % | ||||
Ferrous sales volume (LT, in thousands): | ||||||||||
Domestic | 238 | 197 | 21 | % | ||||||
Foreign | 559 | 520 | 8 | % | ||||||
Total ferrous sales volume (LT, in thousands) | 797 | 717 | 11 | % | ||||||
Average nonferrous sales price ($/pound)(1)(2) | $ | 0.73 | $ | 0.58 | 26 | % | ||||
Nonferrous sales volumes (pounds, in thousands)(3) | 129,137 | 125,817 | 3 | % | ||||||
Cars purchased (in thousands)(3) | 108 | 94 | 15 | % | ||||||
Number of auto parts stores at period end | 53 | 52 | 2 | % | ||||||
Outbound freight in cost of goods sold | 25,745 | 21,529 | 20 | % |
LT = Long Ton, which is equivalent to 2,240 poundspounds. ST = Short Ton, which is equivalent to 2,000 pounds.
30
SCHNITZER STEEL INDUSTRIES, INC.
Revenues
Revenues in the second quarter and first quartersix months of fiscal 2018 increased2023 decreased by 46%3% and 14%, respectively, compared to the prior year periodperiods primarily due to strongerlower average net selling prices for our ferrous and nonferrous products driven by weaker market conditions for recycled metals inglobally. In the domesticsecond quarter and export markets resulting in higherfirst six months of fiscal 2023, the average net selling prices for our ferrous products decreased by 18% and increased sales volumes20%, respectively, and for our nonferrous products decreased by 10% and 13%, respectively, compared to the prior year period. Average net selling prices for shipments of ferrous scrap metalperiods. Ferrous sales volumes in the second quarter and first quartersix months of fiscal 20182023 increased by 51%18% and decreased by 5%, respectively, and nonferrous sales volumes increased by 12% and 9%, respectively, compared to the prior year period. Ferrousperiods. Our ferrous and nonferrous sales volumes in the second quarter and first six months of fiscal 2023 in part reflectedadditional volumes arising from the Columbus Recycling business acquired on October 1, 2021, the Encore Recycling business acquired on April 29, 2022, and the ScrapSource business acquired on November 18, 2022, as well as the adverse impact on sales volumes in the prior year periods of the initial Everett shredder downtime. Our ferrous sales volumes in the first quartersix months of fiscal 2018 increased2023 were adversely impacted by 11% compareddisruptions related to an extended shredder outage at the prior year period. Additionally, nonferrousEverett facility and a regulatory issue limiting operations at our shredder facility in California, both of which were resolved by mid-November 2022, as well as tight supply flows in the lower price environment. Market conditions for our finished steel products were softer in the second quarter and first six months of fiscal 2023, leading to finished steel average net selling prices and sales volumes in the first quarter of fiscal 2018 were higher by 26%decreasing 10% and 3%, respectively, compared to the prior year period.
Operating Performance
Net income (loss) in the second quarter and first six months of fiscal 2023 was $4 million and $(13) million, respectively, compared to higher employee-related expensesnet income of $38 million and other expenses related$85 million, respectively, in the prior year periods. Adjusted EBITDA in the second quarter and first six months of fiscal 2023 was $32 million and $40 million, respectively, compared to higher volumes.
Three Months Ended November 30, | ||||||||||
($ in thousands, except for price) | 2017 | 2016 | % Change | |||||||
Steel revenues(1) | $ | 80,446 | $ | 52,596 | 53 | % | ||||
Recycling revenues(2) | $ | 9,538 | $ | 13,427 | (29 | )% | ||||
Total segment revenues | $ | 89,984 | $ | 66,023 | 36 | % | ||||
Segment operating income (loss) | $ | 8,476 | $ | (2,628 | ) | NM | ||||
Finished steel average sales price ($/ST)(3) | $ | 599 | $ | 492 | 22 | % | ||||
Finished steel products sold (ST, in thousands) | 127 | 101 | 26 | % | ||||||
Rolling mill utilization(4) | 95 | % | 65 | % | 46 | % |
SG&A expense in the second quarter and first six months of fiscal 2023 increased by 5% and 10%, respectively, compared to the prior year periods primarily due to higher salaries and wages, outside and professional services, insurance, and travel expenses, partially resulting from our acquisitions and other growth-related initiatives, and the impact of inflation, partially offset by lower selling prices for finished steel productsshare-based compensation expense and legacy environmental charges. The higher expenses in the second quarter and first six months of fiscal 2023 were partially offset by benefits from productivity and cost reduction initiatives when compared to the prior year periods.
In October 2022, we announced and began implementing productivity and cost reduction initiatives with a targeted annual benefit of approximately $40 million, the vast majority of which is expected to be achieved in fiscal 2023. In addition, in January 2023, we announced incremental initiatives aiming to reduce SG&A costs by approximately $20 million annually, of which approximately two-thirds is expected to be achieved in fiscal 2023. These initiatives aim to improve profitability through a combination of increased yields, efficiencies in processing, procurement, and pricing, and reduced sales volumes reflecting competitioncosts including from lower-priced rebar importsheadcount reductions, decreased lease costs, professional and customer de-stocking.
See the reconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the end of this Item 2.
Interest Expense
Interest expense was $5 million and $8 million, respectively, for the second quarter and first six months of fiscal 2023, compared to operating loss of$2 million and $3 million for the same periods in the prior year period, reflecting steady demand for finished steel productsyear. The increase in the West Coast markets, a reduced impact from lower-priced rebar imports, and operational synergies gained through the integration of our steel manufacturing and Oregon metals recycling operations in the fourth quarter of fiscal 2017, forming the new CSS division. Operating margins at CSS in the first quarter of fiscal 2018 were also positively impacted by selling prices for finished steel products rising faster than cost of goods sold.
31
SCHNITZER STEEL INDUSTRIES, INC.
Income Tax
The effective tax rate from continuing operations for the second quarter and first six months of fiscal 2023 was a benefit on pre-tax income of 14.5% and a benefit on pre-tax loss of 32.8%, respectively, compared to an expense on pre-tax income of 24.0% and 21.3%, respectively, for the comparable prior year periods. Our effective tax rate from continuing operations for the firstsecond quarter of fiscal 20182023 was an expensesignificantly different than the U.S. federal statutory rate of 23.6%, compared21% primarily due to a benefitour financial performance and the effect of 8.6% fordiscrete items on intra-period allocation. For the prior year period.
Liquidity and Capital Resources
We rely on cash provided by operating activities as a primary source of liquidity, supplemented by current cash on hand and borrowings under our existing credit facilities.
Sources and Uses of Cash
We had cash balances of $9$11 million and $7$44 million as of November 30, 2017February 28, 2023 and August 31, 2017,2022, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of November 30, 2017,February 28, 2023, debt was $185$310 million compared to $145$249 million as of August 31, 2017,2022, and debt, net of cash, was $176$299 million as of February 28, 2023, compared to $138$205 million as of August 31, 2017 (refer2022, which increases were primarily due to increased borrowings from our credit facilities to fund higher net working capital needs, capital expenditures, and the acquisition of the ScrapSource business on November 18, 2022. See the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2). Debt, net of cash, increased by $38 million primarily due to increased investment in working capital related to higher sales and purchase volumes.
Operating Activities
Net cash used in provided byoperating activities in the first threesix months of fiscal 20182023 was $16$26 million, compared to net cash provided by operating activities of $6$13 million in the first threesix months of fiscal 2017.
Sources of cash in the first six months of fiscal 2023 included a $34 million decrease in inventory primarily due to lower raw material purchase costs and the timing of purchases and sales and a $12 million increase in accounts payable primarily due to the timing of purchases and payments. Uses of cash in the first threesix months of fiscal 20182023 included a $47$33 million increasedecrease in inventoryaccrued payroll and related liabilities primarily due to higher raw material purchase prices, higher volumes on handthe payment of incentive compensation in the first quarter of fiscal 2023 previously accrued under our fiscal 2022 plans and the impact of timing of purchases and sales, a $9$14 million increase in accounts receivable primarily due to increases in recycled metal selling prices and sales volumes and the timing of sales and collections, and a $18 million decrease in accrued payroll and related liabilities due to incentive compensation payments. collections.
Sources of cash other than from earnings in the first threesix months of fiscal 20182022 included a $9$12 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of payments.
Investing Activities
Net cash used in investing activities was $14$98 million in the first threesix months of fiscal 2018,2023, compared to $11$172 million in the first threesix months of fiscal 2017.
32
SCHNITZER STEEL INDUSTRIES, INC.
Cash used in investing activities in the first threesix months of fiscal 20182023 included $25 million paid to acquire the assets of the ScrapSource business on November 18, 2022. We funded the acquisition using cash on hand and borrowings under our existing credit facilities. See Note 3 - Business Acquisitions in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further detail. Cash used in investing activities also included capital expenditures of $15$75 million to upgrade our equipment and infrastructure and for additional investments in environmental-relatedadvanced metals recovery technology and environmental and safety-related assets, compared to $11$69 million in the prior year period.
Cash used in investing activities in the first six months of fiscal 2022 included $114 million paid to acquire the assets of the Columbus Recycling business on October 1, 2021. We funded the acquisition using cash on hand and borrowings under our existing credit facilities. See Note 3 - Business Acquisitions in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further detail. Cash flows from investing activities in the first six months of fiscal 2022 also included proceeds of $10 million representing the portion of advance payments from insurance carriers deemed a recovery of capital purchases incurred for repair and replacement of damaged property arising from the May 2021 steel mill fire.
Financing Activities
Net cash provided by financing activities in the first threesix months of fiscal 20182023 was $31$40 million, compared to net cash used in financing activities of $14$150 million in the first threesix months of fiscal 2017.
Cash flows from financing activities in the first threesix months of fiscal 20182023 included $40$59 million in net borrowingborrowings of debt, compared to $5$180 million in net repayment of debt in the prior year period (refer to Non-GAAP Financial Measures at the end of this Item 2). Uses of cash in the first threesix months of fiscal 20182023 and 2017 also2022 included $5$7 million and $10 million, respectively, for payment of employee tax withholdings resulting from vesting of share-based awards and $11 million in each period for the payment of dividends.
Debt
Our senior secured revolving credit facilities, which provide for revolving loans of $335$800 million and C$15 million, mature in April 2021August 2027 pursuant to a credit agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the London InterbankSecured Overnight Financing Rate (“SOFR”) (or the Canadian Dollar Offered Rate, ("LIBOR")"CDOR" for C$ loans), or the Canadian equivalent, plus a spread of between 1.75%1.25% and 2.75%2.00%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated net funded debt to EBITDA (as defined by the Company’s leverage ratio,credit agreement), or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50%, or (c) the daily rate equal to one-month LIBORTerm SOFR plus 1.75%1.00%, in each case, plus a spread of between zero0.25% and 1.00% based on a pricing grid tied to the Company's leverageour consolidated net funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.20%0.175% and 0.40%0.30% based on a pricing grid tied to our leverage ratio.
Under the credit agreement, we may establish one or more key performance indicators (“KPIs”) to measure our performance with respect to certain of our environmental, social and governance targets. Subject to the terms and conditions of the credit agreement, we may propose to amend the credit agreement to modify (i) the pricing spread and (ii) the commitment fee rate. Such modifications would be tied to our performance against the KPIs and would allow for (i) the pricing spread to be increased or decreased by no more than (a) 0.025% per KPI and (b) 0.05% for all KPIs, and (ii) the commitment fee rate to be increased or decreased by no more than 0.005% for all KPIs. Such adjustments would be determined on an annual basis and would not be cumulative.
We had borrowings outstanding under theour credit facilities of $180$290 million as of November 30, 2017February 28, 2023 and $140$230 million as of August 31, 2017.2022. The weighted average interest rate on amounts outstanding under this facilityour credit facilities was 3.26%6.20% and 3.48%3.65% as of November 30, 2017February 28, 2023 and August 31, 2017,2022, respectively.
We use the credit facilities to fund working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. TheOur credit agreement contains various representations and warranties, events of default, and financial and other customary covenants which limit (subject to certain exceptions) our ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of our business, engage in transactions with affiliates, and enter into restrictive agreements, including agreements that restrict the ability of our subsidiaries to make distributions. The financial covenants under the credit agreement include (a) a consolidated fixed charge coverage ratio, defined as the four-quarter rolling sum of consolidated adjusted EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges;charges, and (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness; and (c) a consolidated asset coverage ratio, defined as the consolidated asset valueindebtedness.
33
Table of eligible assets divided by the consolidated funded indebtedness.
SCHNITZER STEEL INDUSTRIES, INC.
As of November 30, 2017,February 28, 2023, we were in compliance with the financial covenants under theour credit agreement. The consolidated fixed charge coverage ratio was required to be no less than 1.50 to 1.00 and was 3.314.36 to 1.00 as of November 30, 2017.February 28, 2023. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.26 to 1.00 as of November 30, 2017. The asset coverage ratio was required to be no less than 1.00 to 1.00 and was 1.55 to 1.00 as of November 30, 2017.
Our obligations under theour credit agreement are guaranteed by substantially all of our subsidiaries. The credit facilities and the related guarantees are secured by senior first priority liens on certain of our and our subsidiaries’ assets, including equipment, inventory, and accounts receivable.
While we currently expect to remain in compliance with the financial covenants under the credit agreement, there can be no assurances that we willmay not be able to do so in the event market conditions, COVID-19, or other negative factors which adverselyhave a significant adverse impact on our results of operations and financial position lead to a trend of consolidated net losses.position. If we do not maintain compliance with our financial covenants and are unable to obtain an amendment or waiver from our lenders, a breach of a financial covenant would constitute an event of default and allow the lenders to exercise remedies under the agreements, the most severe of which is the termination of the credit facility under our committed bank credit agreement and acceleration of the amounts owed under the agreement. In such case, we would be required to evaluate available alternatives and take appropriate steps to obtain alternative funds. There can be no assurancesWe cannot assure that any such alternative funds, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
Other debt obligations, which totaled $13 million as of each of February 28, 2023 and August 31, 2022, respectively, primarily relate to equipment purchases, the contract consideration for which includes an obligation to make future monthly payments to the vendor in the form of licensing fees. For accounting purposes, such obligations are treated as a partial financing of the purchase price by the equipment vendor. Monthly payments commence when the equipment is placed in service and achieves specified minimum operating metrics, with payments continuing for a period of four years thereafter.
Capital Expenditures
Capital expenditures totaled $15$75 million for the first
Environmental Compliance
Building on our commitment to recycling and operating our business in an environmentally responsible manner, we continue to invest in facilities that improve our environmental presence in the communities in which we operate. As part of our capital expenditures discussed in the prior paragraph, we invested $2approximately $12 million in capital expenditures for environmental projects in the first threesix months of fiscal 2018,2023, and we currently plan to invest upin the range of $30 million to $20$40 million for such projects in fiscal 2018.2023. These projects include investments in storm water systems and equipment to ensure ongoing compliance with air quality and other environmental regulations.
We have been identified by the United States Environmental Protection Agency (“EPA”) as one of the potentially responsible parties that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (“the Site”Portland Harbor”). See
34
SCHNITZER STEEL INDUSTRIES, INC.
Dividends
On January 5, 2023, our Board of Directors declared a dividend for the second quarter of fiscal 2023 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend was paid on February 14, 2023.
Share Repurchase Program
As of February 28, 2023, pursuant to our board-authorized share repurchase programs, we had remaining authorization to repurchase up to 2.8 million shares of our Class A common stock when we deem such repurchases to be appropriate. We may repurchase our common stock for a variety of reasons, such as to optimize our capital structure and to offset dilution related to share-based compensation arrangements. We consider several factors in determining whether to make share repurchases including, among other things, our cash needs, the availability of funding, our future business plans, and the market price of our stock. We did not repurchase any of our common stock during the second quarter of fiscal 2023.
Assessment of Liquidity and Capital Resources
Historically, our available cash resources, internally generated funds, credit facilities, and equity offerings have financed our acquisitions, capital expenditures, working capital, and other financing needs.
We generally believe our current cash resources, internally generated funds, existing credit facilities, and access to the capital markets will provide adequate short-term and long-term liquidity needs for working capital, capital expenditures, share repurchases, dividends, investments and acquisitions, joint ventures, debt service requirements, environmental obligations, investmentsshare repurchases, and acquisitions.other contingencies. However, in the event of a sustained market deterioration, we may need additional liquidity which would require us to evaluate available alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurances that any such supplemental funding, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
Contractual Obligations
There were no material changes related to contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended
August 31,We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. As of November 30, 2017,February 28, 2023, we had $10$8 million outstanding under these arrangements.
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies and estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended August 31, 2017, except for the following:
Recently Issued Accounting Standards
We have not identified any recent accounting pronouncements that mayare expected to have ana material impact on our financial condition, results of operations, or cash flows see Note 2 - Recent Accounting Pronouncements in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
Non-GAAP Financial Measures
Debt, net of cash
Debt, net of cash is the difference between (i) the sum of long-term debt and short-term borrowings (i.e., total debt) and (ii) cash and cash equivalents. We believe that presenting debt, net of cash is useful to investors as a useful measure for investors because,of our leverage, as cash and cash equivalents can be used, among other things, to repay indebtedness, netting this against total debt is a useful measure of our leverage.
The following is a reconciliation of debt, net of cash (in thousands):
November 30, 2017 | August 31, 2017 | ||||||
Short-term borrowings | $ | 657 | $ | 721 | |||
Long-term debt, net of current maturities | 184,225 | 144,403 | |||||
Total debt | 184,882 | 145,124 | |||||
Less: cash and cash equivalents | 9,194 | 7,287 | |||||
Total debt, net of cash | $ | 175,688 | $ | 137,837 |
|
| February 28, 2023 |
|
| August 31, 2022 |
| ||
Short-term borrowings |
| $ | 6,527 |
|
| $ | 6,041 |
|
Long-term debt, net of current maturities |
|
| 303,552 |
|
|
| 242,521 |
|
Total debt |
|
| 310,079 |
|
|
| 248,562 |
|
Less cash and cash equivalents |
|
| 11,459 |
|
|
| 43,803 |
|
Total debt, net of cash |
| $ | 298,620 |
|
| $ | 204,759 |
|
35
SCHNITZER STEEL INDUSTRIES, INC.
Net borrowings (repayments) of debt
Net borrowings (repayments) of debt is the sum of borrowings from long-term debt and repayments of long-term debt. We present this amount as the net change in our borrowings (repayments) for the period because we believe it is useful tofor investors as a meaningful presentation of the change in debt.
The following is a reconciliation of net borrowings (repayments) of debt (in thousands):
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Borrowings from long-term debt | $ | 189,500 | $ | 102,631 | |||
Repayment of long-term debt | (149,713 | ) | (107,491 | ) | |||
Net borrowings (repayments) of debt | $ | 39,787 | $ | (4,860 | ) |
|
| Six Months Ended February 28, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Borrowings from long-term debt |
| $ | 333,242 |
|
| $ | 405,094 |
|
Repayments of long-term debt |
|
| (274,036 | ) |
|
| (225,395 | ) |
Net borrowings (repayments) of debt |
| $ | 59,206 |
|
| $ | 179,699 |
|
Adjusted consolidated operating income,EBITDA, adjusted AMR operating income,selling, general, and administrative expense, adjusted CSS operating income (loss), adjusted net income (loss) from continuing operations attributable to SSI shareholders, and adjusted diluted earnings (loss) per share from continuing operations attributable to SSI
Management believes that providing these non-GAAP financial measures providesadds a meaningful presentation of our results from business operations excluding adjustments for other asset impairment charges net of recoveries, restructuring charges and other exit-related activities, recoveriesbusiness development costs not related to the resale or modificationongoing operations including pre-acquisition expenses, charges for legacy environmental matters (net of previously contracted shipments,recoveries), asset impairment charges, and the income tax expense (benefit) associated withbenefit allocated to these adjustments, items which are not related to underlying business operational performance, and improves the period-to-period comparability of our results from business operations. Adjusted operating results in fiscal 2015 excluded
Following are reconciliations of net income (loss) to adjusted EBITDA and adjusted selling, general, and administrative expense (in thousands):
|
| Three Months Ended February 28, |
|
| Six Months Ended February 28, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Reconciliation of adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 4,272 |
|
| $ | 38,165 |
|
| $ | (13,284 | ) |
| $ | 85,441 |
|
(Income) from discontinued operations, net of tax |
|
| (224 | ) |
|
| (29 | ) |
|
| (155 | ) |
|
| — |
|
Interest expense |
|
| 4,908 |
|
|
| 1,901 |
|
|
| 8,232 |
|
|
| 3,273 |
|
Income tax (benefit) expense |
|
| (513 | ) |
|
| 12,073 |
|
|
| (6,545 | ) |
|
| 23,170 |
|
Depreciation and amortization |
|
| 22,399 |
|
|
| 18,596 |
|
|
| 43,850 |
|
|
| 35,816 |
|
Restructuring charges and other exit-related activities |
|
| 828 |
|
|
| 4 |
|
|
| 2,420 |
|
|
| 26 |
|
Business development costs |
|
| 103 |
|
|
| 545 |
|
|
| 338 |
|
|
| 1,159 |
|
Charges for legacy environmental matters, net(1) |
|
| 77 |
|
|
| 4,004 |
|
|
| 1,356 |
|
|
| 4,460 |
|
Asset impairment charges(2) |
|
| — |
|
|
| — |
|
|
| 4,000 |
|
|
| — |
|
Adjusted EBITDA |
| $ | 31,850 |
|
| $ | 75,259 |
|
| $ | 40,212 |
|
| $ | 153,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative expense: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
As reported |
| $ | 63,957 |
|
| $ | 61,081 |
|
| $ | 128,185 |
|
| $ | 116,348 |
|
Business development costs |
|
| (103 | ) |
|
| (545 | ) |
|
| (338 | ) |
|
| (1,159 | ) |
Charges for legacy environmental matters, net(1) |
|
| (77 | ) |
|
| (4,004 | ) |
|
| (1,356 | ) |
|
| (4,460 | ) |
Adjusted |
| $ | 63,777 |
|
| $ | 56,532 |
|
| $ | 126,491 |
|
| $ | 110,729 |
|
(2) For the six months ended February 28, 2023, asset impairment charges included $4 million reported within "Other loss, net" on the Unaudited Condensed Consolidated Statement of Operations. 36 SCHNITZER STEEL INDUSTRIES, INC. Following are reconciliations of |
|
| Three Months Ended February 28, |
|
| Six Months Ended February 28, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Income (loss) from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
As reported |
| $ | 4,129 |
|
| $ | 37,586 |
|
| $ | (13,590 | ) |
| $ | 83,814 |
|
Restructuring charges and other exit-related activities |
|
| 828 |
|
|
| 4 |
|
|
| 2,420 |
|
|
| 26 |
|
Business development costs |
|
| 103 |
|
|
| 545 |
|
|
| 338 |
|
|
| 1,159 |
|
Charges for legacy environmental matters, net(1) |
|
| 77 |
|
|
| 4,004 |
|
|
| 1,356 |
|
|
| 4,460 |
|
Asset impairment charges(2) |
|
| — |
|
|
| — |
|
|
| 4,000 |
|
|
| — |
|
Income tax benefit allocated to adjustments(3) |
|
| (1,151 | ) |
|
| (1,073 | ) |
|
| (2,865 | ) |
|
| (1,322 | ) |
Adjusted |
| $ | 3,986 |
|
| $ | 41,066 |
|
| $ | (8,341 | ) |
| $ | 88,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
As reported |
| $ | 0.14 |
|
| $ | 1.27 |
|
| $ | (0.49 | ) |
| $ | 2.81 |
|
Restructuring charges and other exit-related activities, per share |
|
| 0.03 |
|
|
| — |
|
|
| 0.09 |
|
|
| — |
|
Business development costs, per share |
|
| — |
|
|
| 0.02 |
|
|
| 0.01 |
|
|
| 0.04 |
|
Charges for legacy environmental matters, net, per share(1) |
|
| — |
|
|
| 0.13 |
|
|
| 0.05 |
|
|
| 0.15 |
|
Asset impairment charges, per share(2) |
|
| — |
|
|
| — |
|
|
| 0.14 |
|
|
| — |
|
Income tax benefit allocated to adjustments, per share(3) |
|
| (0.04 | ) |
|
| (0.04 | ) |
|
| (0.10 | ) |
|
| (0.04 | ) |
Adjusted(4) |
| $ | 0.14 |
|
| $ | 1.38 |
|
| $ | (0.30 | ) |
| $ | 2.96 |
|
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Consolidated operating income: | |||||||
As reported | $ | 26,423 | $ | 587 | |||
Other asset impairment charges (recoveries), net | (88 | ) | 401 | ||||
Restructuring charges and other exit-related activities | 100 | 201 | |||||
Recoveries related to the resale or modification of previously contracted shipments | (417 | ) | (139 | ) | |||
Adjusted | $ | 26,018 | $ | 1,050 | |||
AMR operating income: | |||||||
As reported | $ | 35,172 | $ | 12,606 | |||
Recoveries related to the resale or modification of previously contracted shipments | (417 | ) | (139 | ) | |||
Adjusted | $ | 34,755 | $ | 12,467 | |||
CSS operating income (loss): | |||||||
As reported | $ | 8,476 | $ | (2,628 | ) | ||
Other asset impairment charges (recoveries), net | (88 | ) | 401 | ||||
Adjusted | $ | 8,388 | $ | (2,227 | ) | ||
Net Income (loss) from continuing operations attributable to SSI: | |||||||
As reported | $ | 18,399 | $ | (1,273 | ) | ||
Other asset impairment charges (recoveries), net | (88 | ) | 401 | ||||
Restructuring charges and other exit-related activities | 100 | 201 | |||||
Recoveries related to the resale or modification of previously contracted shipments | (417 | ) | (139 | ) | |||
Income tax expense (benefit) allocated to adjustments(1) | 131 | (40 | ) | ||||
Adjusted | $ | 18,125 | $ | (850 | ) | ||
Diluted earnings (loss) per share from continuing operations attributable to SSI: | |||||||
As reported | $ | 0.64 | $ | (0.05 | ) | ||
Other asset impairment charges (recoveries), net, per share | — | 0.01 | |||||
Restructuring charges and other exit-related activities, per share | — | 0.01 | |||||
Recoveries related to the resale or modification of previously contracted shipments, per share | (0.01 | ) | (0.01 | ) | |||
Income tax expense (benefit) allocated to adjustments, per share(1) | — | — | |||||
Adjusted(2) | $ | 0.63 | $ | (0.03 | ) |
Income tax allocated to the aggregate adjustments reconciling reported and adjusted income (loss) from continuing operations attributable to SSI shareholders and diluted earnings (loss) per share from continuing operations attributable to SSI shareholders is determined based on a tax provision calculated with and without the adjustments. |
37
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We are exposed to commodity price risk, mainly associated with variations in the market price for finished steel products and ferrous and nonferrous metals, including scrap metal, end-of-life vehiclesfinished steel products, auto bodies and other commodities. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions.conditions as well as other factors including political and military events. We respond to increases and decreases in forward selling prices by adjusting purchase prices on a timely basis.prices. We actively manage our exposure to commodity price risk and monitor the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. Sales contracts are based on prices negotiated with our customers, and generally orders are placed 30 to 60 days ahead of the shipment date. However, financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter based upon contracted sales orders and estimated future selling prices. Based on contracted sales and estimates of future selling prices, at November 30, 2017, a 10% decrease in the estimated selling price of inventory would not have had a material NRV impact on any of our reportable segments as of November 30, 2017.
Interest Rate Risk
There have been no material changes to our disclosure regarding interest rate risk set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended August 31, 2017.
Credit Risk
Credit risk relates to the risk of loss that might occur as a result of non-performance by counterparties of their contractual obligations to take delivery of scrap metal and finished steel products and to make financial settlements of these obligations, or to provide sufficient quantities of scrap metal or payment to settle advances, loans and other contractual receivables in connection with demolition and scrap extraction projects. We manage our exposure to credit risk through a variety of methods, including shipping ferrous scrap metal exports under letters of credit, collection of deposits prior to shipment for certain nonferrous export customers, establishment of credit limits for certain sales on open terms, credit insurance and designation of collateral and financial guarantees securing advances, loans, and other contractual receivables. Due in part to the effects of COVID-19, we have experienced reductions in the availability of credit insurance that we have historically used to cover a portion of our recycled metal and finished steel sales to domestic customers, which reduced availability may increase our exposure to customer credit risk. In addition, in higher or rising commodity price environments, we have experienced proportionately lower credit insurance coverage of applicable customer credit limits, which may increase our exposure to customer credit risk.
Historically, we have shipped almost all of our large shipments of ferrous scrap metal to foreign customers under contracts supported by letters of credit issued or confirmed by banks deemed creditworthy. The letters of credit ensure payment by the customer. As we generally sell export recycled ferrous metal under contracts or orders that generally provide for shipment within 30 to 60 days after the price is agreed, our customers typically do not have difficulty obtaining letters of credit from their banks in periods of rising ferrous prices, as the value of the letters of credit are collateralized by the value of the inventory on the ship. However, in periods of significantly declining prices, our customers may not be able to obtain letters of credit for the full sales value of the inventory to be shipped.
As of November 30, 2017February 28, 2023 and August 31, 2017, 30%2022, 25% and 33%24%, respectively, of our trade accounts receivable balance was covered by letters of credit. Ofcredit, and the remaining balance, 94% and 88%, respectively, was less than 60 daysamount of past due as of November 30, 2017 and August 31, 2017.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate risk, mainly associated with sales transactions and related accounts receivable denominated in the U.S. Dollar by our Canadian subsidiary with a functional currency of the Canadian Dollar. In certain instances, we may use derivatives to manage some portion
38
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Consistent with guidance issued by the Securities and Exchange Commission that an assessment of internal controls over financial reporting of a recently acquired business may be omitted from management's evaluation of disclosure controls and procedures, management is excluding an assessment of the internal controls of the Encore Recycling business, which we acquired on April 29, 2022, and the ScrapSource business, which we acquired on November 18, 2022, from its evaluation of the effectiveness of our disclosure controls and procedures. Together, the Encore Recycling and ScrapSource businesses represented approximately 3% of our consolidated total assets and 3% of our consolidated total revenues as of and for the six months ended February 28, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscalthe quarter ended February 28, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
39
SCHNITZER STEEL INDUSTRIES, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding reportable legal proceedings is contained in Part I, "Item“Item 3. Legal Proceedings"Proceedings” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2017, and below in this Part II, "Item 1. Legal Proceedings" of this Quarterly Report on Form 10-Q. Also see2022, Note 5 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item I,1 of this Quarterly Report on Form 10-Q, incorporated by reference herein.
We previously disclosed a corrective action enforcement order issued by the California State Department of Toxic Substance Control (“DTSC”) on March 18, 2021 relating to our metal recycling facility in Fresno, California based on inspections conducted by the DTSC in 2013. The 2013 inspection resulted in the issuance of a Summary of Violations in 2015 setting forth a number of alleged violations relating to hazardous waste management requirements. While we dispute the alleged violations, we engaged in settlement discussions that had resulted in a tentative agreement in April 2018 to settle the matter for $490 thousand, of which $368 thousand was to be paid as a civil penalty and $122 thousand was to be paid as reimbursement for agency investigation and enforcement costs. However, the parties were not able to reach agreement on the injunctive terms of the settlement agreement, and the California Office of the Attorney General (“COAG”), on behalf of DTSC, filed suit in the Superior Court of the State of California, County of Fresno on June 25, 2020 against Schnitzer Fresno, Inc., a wholly-owned subsidiary, which operates the facility, seeking a permanent injunction and civil penalties. In November 2017,early 2022, the parties agreed to formal mediation of the dispute, which effort was unsuccessful. However, we were able to resume settlement negotiations with DTSC, and settlement was achieved in January 2023. A Stipulated Judgement resolving the case was entered by the Fresno County Superior Court on January 18, 2023. The settlement terms include payment of a penalty of $525 thousand, specified injunctive relief requirements, and completion of site investigation and remediation requirements depending on the outcome of the investigation and risk assessment.
We previously disclosed the September 30, 2022 reversal by the California State Court of Appeal of a lower court judgment and writ of mandate requiring the DTSC to rescind the Company’s “f letters” pursuant to which DTSC classified treated shredder waste from the Company’s metal shredding facility in Oakland, California as a “nonhazardous waste” that, among other things, permits its use as alternative daily cover at municipal landfills. Following the California Supreme Court’s denial of review of the Court of Appeal’s decision, the Company immediately sought reinstatement of its “f letters.” On April 3, 2023, the Company received a pre-filing negotiation letterconfirmation from the United States Environmental Protection Agency (“EPA”) with respect to alleged violations of environmental requirements stemming from industrial stormwater and hazardous waste management inspections at two of our facilities in Kansas City. We have already completed facility improvements that we believe address the concerns identified in the EPA inspection reports. Accordingly, we expect to negotiate a settlement with EPA and do not believeDTSC that the outcome of this matter will be material“f letters” are in effect, subject to our financial position, results of operations, cash flows or liquidity.
ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors reported or new risk factors identified since the filing of our Annual Report on Form 10-K for the year ended August 31, 2017, which was filed with the Securities and Exchange Commission on October 24, 2017, except for the following:
ITEM 5. OTHER INFORMATION
None.
40
Table of Portland Harbor may be material to our financial position and liquidity
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 6. EXHIBITS
Exhibit Number |
Exhibit Description | ||
10.1* |
10.2* | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document – the | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and |
* Management contract or compensatory plan or arrangement.
41
SCHNITZER STEEL INDUSTRIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SCHNITZER STEEL INDUSTRIES, INC. | ||||||
(Registrant) | ||||||
Date: | April 7, 2023 | By: | /s/ Tamara L. Lundgren | |||
Tamara L. Lundgren | ||||||
Chairman, President and Chief Executive Officer | ||||||
Date: | April 7, 2023 | By: | /s/ | |||
Stefano R. Gaggini | ||||||
Senior Vice President and Chief Financial Officer |
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