UNITED STATES
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 | |
For the Quarterly Period Ended February 28, 2021
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 incorporation or organization) | (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 | NASDAQ Global Select Market |
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 27,003,29127,264,633 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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39 |
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, cyclicality and changes in the markets we sell into;impact of pandemics, epidemics or other public health emergencies, such as the Company'scoronavirus disease 2019 (“COVID-19”) pandemic; the Company’s outlook, growth initiatives or expected results or objectives, including pricing, margins, sales volumes and profitability; 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 the recently enacted federal tax reform; the realization of deferred tax assets; planned capital expenditures; liquidity positions; ability to generate cash from continuing operations;sanctions and tariffs, quotas and other trade actions and import restrictions; the potential impact of adopting new accounting pronouncements; obligations under our retirement plans; benefits, savings or additional costs from business realignment, cost containment and productivity improvement programs; 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 thisas supplemented by our subsequently filed Quarterly ReportReports on Form 10-Q. Examples of these risks include: the impact of pandemics, epidemics or other public health emergencies, such as the COVID-19 pandemic; potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the cyclicality and impact of general economic conditions; instabilitychanging conditions in international markets;global markets including the impact of sanctions and tariffs, quotas and other trade actions and import restrictions; 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 scrap metal prices; imbalances in supply and demand conditions in the global steel industry; reliance on third party shipping companies, including with respect to freight rates and the availability of transportation; inability to obtain or renew business licenses and permits; the impact of goodwill impairment charges; the impact of long-lived asset and cost and equity method investment impairment charges; failure to realize or delays in realizing expected benefits from investments in processing and manufacturing technology improvements; inability to achieve or sustain the benefits from productivity, cost savings and restructuring initiatives; inability to renew facility leases; difficulties associated with acquisitions and integration of acquired businesses; 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 property tax increases or property tax rate changes; the impact of one or more cybersecurity incidents; environmental compliance costs and potential environmental liabilities; inability to obtain or renew business licenses and permits or renew facility leases; compliance with climate change and greenhouse gas emission laws and regulations; 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)
(Currency - U.S. Dollar)
|
| February 28, 2021 |
|
| August 31, 2020 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 11,326 |
|
| $ | 17,887 |
|
Accounts receivable, net of allowance for credit losses of $1,633 and $1,593 |
|
| 210,480 |
|
|
| 139,147 |
|
Inventories |
|
| 252,268 |
|
|
| 157,269 |
|
Refundable income taxes |
|
| 6,538 |
|
|
| 18,253 |
|
Prepaid expenses and other current assets |
|
| 34,621 |
|
|
| 30,075 |
|
Total current assets |
|
| 515,233 |
|
|
| 362,631 |
|
Property, plant and equipment, net of accumulated depreciation of $835,799 and $811,623 |
|
| 502,484 |
|
|
| 487,004 |
|
Operating lease right-of-use assets |
|
| 136,278 |
|
|
| 140,584 |
|
Investments in joint ventures |
|
| 10,382 |
|
|
| 10,057 |
|
Goodwill |
|
| 170,100 |
|
|
| 169,627 |
|
Intangibles, net of accumulated amortization of $3,543 and $3,528 |
|
| 4,283 |
|
|
| 4,585 |
|
Deferred income taxes |
|
| 26,201 |
|
|
| 27,152 |
|
Other assets |
|
| 40,368 |
|
|
| 28,287 |
|
Total assets |
| $ | 1,405,329 |
|
| $ | 1,229,927 |
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Short-term borrowings |
| $ | 2,372 |
|
| $ | 2,184 |
|
Accounts payable |
|
| 142,717 |
|
|
| 106,676 |
|
Accrued payroll and related liabilities |
|
| 41,203 |
|
|
| 41,436 |
|
Environmental liabilities |
|
| 12,975 |
|
|
| 6,302 |
|
Operating lease liabilities |
|
| 20,279 |
|
|
| 19,760 |
|
Other accrued liabilities |
|
| 44,936 |
|
|
| 47,306 |
|
Total current liabilities |
|
| 264,482 |
|
|
| 223,664 |
|
Deferred income taxes |
|
| 42,175 |
|
|
| 38,292 |
|
Long-term debt, net of current maturities |
|
| 168,441 |
|
|
| 102,235 |
|
Environmental liabilities, net of current portion |
|
| 53,965 |
|
|
| 47,162 |
|
Operating lease liabilities, net of current maturities |
|
| 119,751 |
|
|
| 125,001 |
|
Other long-term liabilities |
|
| 22,476 |
|
|
| 13,137 |
|
Total liabilities |
|
| 671,290 |
|
|
| 549,491 |
|
Commitments and contingencies (Note 4) |
|
|
|
|
|
|
|
|
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock – 20,000 shares $1.00 par value authorized, NaN issued |
|
| 0 |
|
|
| 0 |
|
Class A common stock – 75,000 shares $1.00 par value authorized, 27,263 and 26,899 shares issued and outstanding |
|
| 27,263 |
|
|
| 26,899 |
|
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 |
|
| 39,695 |
|
|
| 36,616 |
|
Retained earnings |
|
| 697,966 |
|
|
| 649,863 |
|
Accumulated other comprehensive loss |
|
| (35,282 | ) |
|
| (36,871 | ) |
Total SSI shareholders’ equity |
|
| 729,842 |
|
|
| 676,707 |
|
Noncontrolling interests |
|
| 4,197 |
|
|
| 3,729 |
|
Total equity |
|
| 734,039 |
|
|
| 680,436 |
|
Total liabilities and equity |
| $ | 1,405,329 |
|
| $ | 1,229,927 |
|
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 |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
(Currency - U.S. Dollar)
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| February 28, |
|
| February 29, |
|
| February 28, |
|
| February 29, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Revenues |
| $ | 600,111 |
|
| $ | 439,482 |
|
| $ | 1,092,218 |
|
| $ | 845,066 |
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 487,025 |
|
|
| 380,520 |
|
|
| 907,119 |
|
|
| 745,280 |
|
Selling, general and administrative |
|
| 54,142 |
|
|
| 46,426 |
|
|
| 104,048 |
|
|
| 93,200 |
|
(Income) from joint ventures |
|
| (454 | ) |
|
| (190 | ) |
|
| (1,181 | ) |
|
| (389 | ) |
Asset impairment charges |
|
| — |
|
|
| 402 |
|
|
| — |
|
|
| 2,094 |
|
Restructuring charges and other exit-related activities |
|
| 814 |
|
|
| 4,633 |
|
|
| 878 |
|
|
| 5,100 |
|
Operating income (loss) |
|
| 58,584 |
|
|
| 7,691 |
|
|
| 81,354 |
|
|
| (219 | ) |
Interest expense |
|
| (1,224 | ) |
|
| (1,320 | ) |
|
| (3,004 | ) |
|
| (2,743 | ) |
Other (loss) income, net |
|
| (242 | ) |
|
| (98 | ) |
|
| (407 | ) |
|
| 108 |
|
Income (loss) from continuing operations before income taxes |
|
| 57,118 |
|
|
| 6,273 |
|
|
| 77,943 |
|
|
| (2,854 | ) |
Income tax (expense) benefit |
|
| (11,469 | ) |
|
| (1,770 | ) |
|
| (17,188 | ) |
|
| 764 |
|
Income (loss) from continuing operations |
|
| 45,649 |
|
|
| 4,503 |
|
|
| 60,755 |
|
|
| (2,090 | ) |
Income (loss) from discontinued operations, net of tax |
|
| 30 |
|
|
| 1 |
|
|
| (12 | ) |
|
| 29 |
|
Net income (loss) |
|
| 45,679 |
|
|
| 4,504 |
|
|
| 60,743 |
|
|
| (2,061 | ) |
Net income attributable to noncontrolling interests |
|
| (1,091 | ) |
|
| (621 | ) |
|
| (2,051 | ) |
|
| (1,051 | ) |
Net income (loss) attributable to SSI shareholders |
| $ | 44,588 |
|
| $ | 3,883 |
|
| $ | 58,692 |
|
| $ | (3,112 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share from continuing operations |
| $ | 1.59 |
|
| $ | 0.14 |
|
| $ | 2.10 |
|
| $ | (0.11 | ) |
Net income (loss) per share |
| $ | 1.59 |
|
| $ | 0.14 |
|
| $ | 2.10 |
|
| $ | (0.11 | ) |
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share from continuing operations |
| $ | 1.54 |
|
| $ | 0.14 |
|
| $ | 2.05 |
|
| $ | (0.11 | ) |
Net income (loss) per share |
| $ | 1.54 |
|
| $ | 0.14 |
|
| $ | 2.05 |
|
| $ | (0.11 | ) |
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 27,991 |
|
|
| 27,721 |
|
|
| 27,899 |
|
|
| 27,618 |
|
Diluted |
|
| 28,862 |
|
|
| 28,139 |
|
|
| 28,673 |
|
|
| 27,618 |
|
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 |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
(Currency - U.S. Dollar)
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| February 28, |
|
| February 29, |
|
| February 28, |
|
| February 29, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Net income (loss) |
| $ | 45,679 |
|
| $ | 4,504 |
|
| $ | 60,743 |
|
| $ | (2,061 | ) |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 1,572 |
|
|
| (630 | ) |
|
| 1,811 |
|
|
| (419 | ) |
Pension obligations, net |
|
| 38 |
|
|
| 115 |
|
|
| (222 | ) |
|
| 142 |
|
Total other comprehensive income (loss), net of tax |
|
| 1,610 |
|
|
| (515 | ) |
|
| 1,589 |
|
|
| (277 | ) |
Comprehensive income (loss) |
|
| 47,289 |
|
|
| 3,989 |
|
|
| 62,332 |
|
|
| (2,338 | ) |
Less comprehensive income attributable to noncontrolling interests |
|
| (1,091 | ) |
|
| (621 | ) |
|
| (2,051 | ) |
|
| (1,051 | ) |
Comprehensive income (loss) attributable to SSI shareholders |
| $ | 46,198 |
|
| $ | 3,368 |
|
| $ | 60,281 |
|
| $ | (3,389 | ) |
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 | ) |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)thousands, except per share amounts)
(Currency - U.S. Dollar)
|
| Common Stock |
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Class A |
|
| Class B |
|
| Additional |
|
|
|
|
|
| Other |
|
| Total SSI |
|
|
|
|
|
|
|
|
| |||||||||||||
Three Months Ended February 29, 2020 |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Paid-in Capital |
|
| Retained Earnings |
|
| Comprehensive Loss |
|
| Shareholders' Equity |
|
| Noncontrolling Interests |
|
| Total Equity |
| ||||||||||
Balance as of December 1, 2019 |
|
| 26,943 |
|
| $ | 26,943 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 29,528 |
|
| $ | 662,707 |
|
| $ | (38,525 | ) |
| $ | 680,853 |
|
| $ | 4,183 |
|
| $ | 685,036 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,883 |
|
|
| — |
|
|
| 3,883 |
|
|
| 621 |
|
|
| 4,504 |
|
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (515 | ) |
|
| (515 | ) |
|
| — |
|
|
| (515 | ) |
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (507 | ) |
|
| (507 | ) |
Share repurchases |
|
| (53 | ) |
|
| (53 | ) |
|
| — |
|
|
| — |
|
|
| (861 | ) |
|
| — |
|
|
| — |
|
|
| (914 | ) |
|
| — |
|
|
| (914 | ) |
Issuance of restricted stock |
|
| 9 |
|
|
| 9 |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,516 |
|
|
| — |
|
|
| — |
|
|
| 2,516 |
|
|
| — |
|
|
| 2,516 |
|
Dividends ($0.1875 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,172 | ) |
|
| — |
|
|
| (5,172 | ) |
|
| — |
|
|
| (5,172 | ) |
Balance as of February 29, 2020 |
|
| 26,899 |
|
| $ | 26,899 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 31,174 |
|
| $ | 661,418 |
|
| $ | (39,040 | ) |
| $ | 680,651 |
|
| $ | 4,297 |
|
| $ | 684,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Class A |
|
| Class B |
|
| Additional |
|
|
|
|
|
| Other |
|
| Total SSI |
|
|
|
|
|
|
|
|
| |||||||||||||
Three Months Ended February 28, 2021 |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Paid-in Capital |
|
| Retained Earnings |
|
| Comprehensive Loss |
|
| Shareholders' Equity |
|
| Noncontrolling Interests |
|
| Total Equity |
| ||||||||||
Balance as of December 1, 2020 |
|
| 27,254 |
|
| $ | 27,254 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 35,310 |
|
| $ | 658,710 |
|
| $ | (36,892 | ) |
| $ | 684,582 |
|
| $ | 3,966 |
|
| $ | 688,548 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 44,588 |
|
|
| — |
|
|
| 44,588 |
|
|
| 1,091 |
|
|
| 45,679 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,610 |
|
|
| 1,610 |
|
|
| — |
|
|
| 1,610 |
|
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (860 | ) |
|
| (860 | ) |
Issuance of restricted stock |
|
| 10 |
|
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock withheld for taxes |
|
| (1 | ) |
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| (1 | ) |
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,395 |
|
|
| — |
|
|
| — |
|
|
| 4,395 |
|
|
| — |
|
|
| 4,395 |
|
Dividends ($0.1875 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,332 | ) |
|
| — |
|
|
| (5,332 | ) |
|
| — |
|
|
| (5,332 | ) |
Balance as of February 28, 2021 |
|
| 27,263 |
|
| $ | 27,263 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 39,695 |
|
| $ | 697,966 |
|
| $ | (35,282 | ) |
| $ | 729,842 |
|
| $ | 4,197 |
|
| $ | 734,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
7
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands, except per share amounts)
(Currency - U.S. Dollar)
|
| Common Stock |
|
| Additional |
|
|
|
|
|
| Accumulated Other |
|
| Total SSI |
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Class A |
|
| Class B |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Shareholders’ |
|
| Noncontrolling |
|
| Total |
| ||||||||||||||||
Six Months Ended February 29, 2020 |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Equity |
|
| Interests |
|
| Equity |
| ||||||||||
Balance as of August 31, 2019 |
|
| 26,464 |
|
| $ | 26,464 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 33,700 |
|
| $ | 675,363 |
|
| $ | (38,763 | ) |
| $ | 696,964 |
|
| $ | 4,332 |
|
| $ | 701,296 |
|
Cumulative effect on adoption of new accounting guidance for leases, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (463 | ) |
|
| — |
|
|
| (463 | ) |
|
| — |
|
|
| (463 | ) |
Balance as of September 1, 2019 |
|
| 26,464 |
|
|
| 26,464 |
|
|
| 200 |
|
|
| 200 |
|
|
| 33,700 |
|
|
| 674,900 |
|
|
| (38,763 | ) |
|
| 696,501 |
|
|
| 4,332 |
|
|
| 700,833 |
|
Net (loss) income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,112 | ) |
|
| — |
|
|
| (3,112 | ) |
|
| 1,051 |
|
|
| (2,061 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (277 | ) |
|
| (277 | ) |
|
| — |
|
|
| (277 | ) |
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,086 | ) |
|
| (1,086 | ) |
Share repurchases |
|
| (53 | ) |
|
| (53 | ) |
|
| — |
|
|
| — |
|
|
| (861 | ) |
|
| — |
|
|
| — |
|
|
| (914 | ) |
|
| — |
|
|
| (914 | ) |
Issuance of restricted stock |
|
| 762 |
|
|
| 762 |
|
|
| — |
|
|
| — |
|
|
| (762 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock withheld for taxes |
|
| (274 | ) |
|
| (274 | ) |
|
| — |
|
|
| — |
|
|
| (5,571 | ) |
|
| — |
|
|
| — |
|
|
| (5,845 | ) |
|
| — |
|
|
| (5,845 | ) |
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,668 |
|
|
| — |
|
|
| — |
|
|
| 4,668 |
|
|
| — |
|
|
| 4,668 |
|
Dividends ($0.375 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10,370 | ) |
|
| — |
|
|
| (10,370 | ) |
|
| — |
|
|
| (10,370 | ) |
Balance as of February 29, 2020 |
|
| 26,899 |
|
| $ | 26,899 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 31,174 |
|
| $ | 661,418 |
|
| $ | (39,040 | ) |
| $ | 680,651 |
|
| $ | 4,297 |
|
| $ | 684,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Class A |
|
| Class B |
|
| Additional |
|
|
|
|
|
| Other |
|
| Total SSI |
|
|
|
|
|
|
|
|
| |||||||||||||
Six Months Ended February 28, 2021 |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Paid-in Capital |
|
| Retained Earnings |
|
| Comprehensive Loss |
|
| Shareholders' Equity |
|
| Noncontrolling Interests |
|
| Total Equity |
| ||||||||||
Balance as of September 1, 2020 |
|
| 26,899 |
|
| $ | 26,899 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 36,616 |
|
| $ | 649,863 |
|
| $ | (36,871 | ) |
| $ | 676,707 |
|
| $ | 3,729 |
|
| $ | 680,436 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 58,692 |
|
|
| — |
|
|
| 58,692 |
|
|
| 2,051 |
|
|
| 60,743 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,589 |
|
|
| 1,589 |
|
|
| — |
|
|
| 1,589 |
|
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,583 | ) |
|
| (1,583 | ) |
Issuance of restricted stock |
|
| 553 |
|
|
| 553 |
|
|
| — |
|
|
| — |
|
|
| (553 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock withheld for taxes |
|
| (189 | ) |
|
| (189 | ) |
|
| — |
|
|
| — |
|
|
| (3,782 | ) |
|
| — |
|
|
| — |
|
|
| (3,971 | ) |
|
| — |
|
|
| (3,971 | ) |
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,414 |
|
|
| — |
|
|
| — |
|
|
| 7,414 |
|
|
| — |
|
|
| 7,414 |
|
Dividends ($0.375 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10,589 | ) |
|
| — |
|
|
| (10,589 | ) |
|
| — |
|
|
| (10,589 | ) |
Balance as of February 28, 2021 |
|
| 27,263 |
|
| $ | 27,263 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 39,695 |
|
| $ | 697,966 |
|
| $ | (35,282 | ) |
| $ | 729,842 |
|
| $ | 4,197 |
|
| $ | 734,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
8
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
(Currency - U.S. Dollar)
|
| Six Months Ended |
| |||||
|
| February 28, |
|
| February 29, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 60,743 |
|
| $ | (2,061 | ) |
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Asset impairment charges |
|
| — |
|
|
| 2,094 |
|
Exit-related asset impairments |
|
| — |
|
|
| 971 |
|
Depreciation and amortization |
|
| 29,295 |
|
|
| 28,472 |
|
Deferred income taxes |
|
| 5,544 |
|
|
| (1,057 | ) |
Undistributed equity in earnings of joint ventures |
|
| (1,181 | ) |
|
| (389 | ) |
Share-based compensation expense |
|
| 7,276 |
|
|
| 4,639 |
|
Gain on the disposal of assets, net |
|
| (81 | ) |
|
| (274 | ) |
Unrealized foreign exchange loss (gain), net |
|
| 93 |
|
|
| (12 | ) |
Credit loss, net |
|
| 66 |
|
|
| 53 |
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (75,961 | ) |
|
| (18,339 | ) |
Inventories |
|
| (90,151 | ) |
|
| 9,067 |
|
Income taxes |
|
| 16,097 |
|
|
| 28 |
|
Prepaid expenses and other current assets |
|
| 1,266 |
|
|
| 3,056 |
|
Other long-term assets |
|
| (3,765 | ) |
|
| 258 |
|
Operating lease assets and liabilities |
|
| (430 | ) |
|
| (144 | ) |
Accounts payable |
|
| 45,050 |
|
|
| (8,298 | ) |
Accrued payroll and related liabilities |
|
| (85 | ) |
|
| (6,655 | ) |
Other accrued liabilities |
|
| (3,618 | ) |
|
| 4,943 |
|
Environmental liabilities |
|
| 2,488 |
|
|
| (740 | ) |
Other long-term liabilities |
|
| 3,494 |
|
|
| 41 |
|
Distributed equity in earnings of joint ventures |
|
| 1,250 |
|
|
| 1,000 |
|
Net cash (used in) provided by operating activities |
|
| (2,610 | ) |
|
| 16,653 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (55,084 | ) |
|
| (37,100 | ) |
Proceeds from sale of assets |
|
| 317 |
|
|
| 608 |
|
Deposit on land option |
|
| 630 |
|
|
| 630 |
|
Net cash used in investing activities |
|
| (54,137 | ) |
|
| (35,862 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings from long-term debt |
|
| 265,645 |
|
|
| 244,382 |
|
Repayment of long-term debt |
|
| (199,229 | ) |
|
| (208,614 | ) |
Payment of debt issuance costs |
|
| (23 | ) |
|
| — |
|
Repurchase of Class A common stock |
|
| — |
|
|
| (914 | ) |
Taxes paid related to net share settlement of share-based payment awards |
|
| (3,971 | ) |
|
| (5,845 | ) |
Distributions to noncontrolling interests |
|
| (1,583 | ) |
|
| (1,086 | ) |
Dividends paid |
|
| (10,828 | ) |
|
| (10,734 | ) |
Net cash provided by financing activities |
|
| 50,011 |
|
|
| 17,189 |
|
Effect of exchange rate changes on cash |
|
| 175 |
|
|
| (31 | ) |
Net decrease in cash and cash equivalents |
|
| (6,561 | ) |
|
| (2,051 | ) |
Cash and cash equivalents as of beginning of period |
|
| 17,887 |
|
|
| 12,377 |
|
Cash and cash equivalents as of end of period |
| $ | 11,326 |
|
| $ | 10,326 |
|
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, |
|
| February 29, |
| ||
|
| 2021 |
|
| 2020 |
| ||
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
| $ | 1,827 |
|
| $ | 1,698 |
|
Income taxes (refunded) paid, net |
| $ | (4,525 | ) |
| $ | 196 |
|
Schedule of noncash investing and financing transactions: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment included in current liabilities |
| $ | 11,338 |
|
| $ | 7,642 |
|
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 scrap metal. The Company also produces a range of finished steel long products at its steel mini-mill using ferrous recycled scrap metal primarily 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,chief operating decision-maker in deciding how to allocate resources and in assessing performance.
Prior to the first out ("FIFO"quarter of fiscal 2021, the Company’s internal organizational and reporting structure included 2 operating and reportable segments: the Auto and Metals Recycling (“AMR”) or average cost method, atbusiness and the lowerCascade Steel and Scrap (“CSS”) business. In the first quarter of costfiscal 2021, in accordance with its plan announced in April 2020, the Company completed its transition to a new internal organizational and net realizable value. 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.reporting structure reflecting a functionally-based, integrated model. The Company adoptedconsolidated its operations, sales, services and other functional capabilities at an enterprise level reflecting enhanced focus by management on optimizing the Company’s vertically integrated value chain. This change resulted in a realignment of how the Chief Executive Officer, who is considered the Company’s chief operating decision-maker, reviews performance and makes decisions on resource allocation, supporting a single segment. The Company began reporting on this new requirement, which is to be applied prospectively,single-segment structure in the first quarter of fiscal 2021 as reflected in its Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2020.
Accounting Changes
As of the beginning of the first quarter of fiscal 2018 with no impact to2020, the Unaudited Condensed Consolidated Financial Statements.
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 checks in excess of funds on deposit of $30of $43 million and $21$20 million as of
11
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 credit insurance is in place. Management evaluates the aging of customer receivable balances, the financial condition of the Company’s customers, historical collection rates and economic trends 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 $5 million for each of the six months ended February 28, 2021 and February 29, 2020.
Prepaid Expenses
The Company’s prepaid expenses, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets, totaled $23 million as of each of February 28, 2021 and August 31, 2020, 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 retirement plans, consist primarily of receivables from insurers, cash held in a client trust account relating to a legal settlement, spare parts, capitalized implementation costs for cloud computing arrangements, an equity investment, 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.
Other assets as of February 28, 2021 and August 31, 2020 included $12 million and $5 million, respectively, in receivables from insurers, comprising $7 million and less than $1 million, respectively, relating to environmental claims and $4 million as of each reporting date relating to workers’ compensation claims.
Other assets as of February 28, 2021 also included approximately $7.6 million in cash deposited into a client trust account in the second quarter of fiscal 2017,2021 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 4 – Commitments and Contingencies for further discussion of this matter.
The Company invested $6 million in the equity of a privately-held waste and recycling entity.entity in fiscal 2017. The Company's influence over the operatingequity investment does not have a readily determinable fair value and, financial policies of the entity is not significant and, thus, the investment is accounted for under the cost method. Under the cost method, the investmenttherefore, is carried at cost and adjusted only for other-than-temporary impairments certain distributions and additional investments.observable price changes. The investment is presented as part of the Auto and Metals Recycling ("AMR") reportable segment and reported within other assets in the Unaudited Condensed Consolidated Balance Sheets. The Company does not hold any other cost-method investments. The carrying value of the investment was $6$6 million as of November 30, 2017February 28, 2021 and August 31, 2017. As of November 30, 2017,2020. The Company has not recorded any impairments or upward or downward adjustments to the Company had not identified any events or changes in circumstances that may have a significant adverse effect on the faircarrying value of the investment or indicators of other-than-temporary impairment.
Long-Lived Assets
The Company tests long-lived tangible and intangible assets for impairment at the estimated useful lives or salvage values of individual long-lived assets,asset group level, which are accounted for prospectively in the period of change. For such assets, the useful life is shorteneddetermined based on the Company's plans to disposelowest level for which identifiable cash flows are largely independent of or abandon the asset before the endcash flows of its original useful lifeother groups of assets and depreciation is accelerated beginning when that determination is made. During the three months ended November 30, 2017 and 2016, the Company recognized accelerated depreciation of $1 million and less than $1 million, respectively, due to shortening the useful lives of decommissioned machinery and equipment assetsliabilities. The segment realignment completed in the Cascade Steel and Scrap ("CSS") reportable segment, which are reported within other asset impairment charges (recoveries), net in the Unaudited Condensed Consolidated Statements of Operations.
12
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, and notes and other contractual receivables from suppliers.receivables. 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):
|
| February 28, 2021 |
|
| August 31, 2020 |
| ||
Processed and unprocessed scrap metal |
| $ | 142,342 |
|
| $ | 63,058 |
|
Semi-finished goods |
|
| 12,411 |
|
|
| 6,909 |
|
Finished goods |
|
| 53,637 |
|
|
| 44,476 |
|
Supplies |
|
| 43,878 |
|
|
| 42,826 |
|
Inventories |
| $ | 252,268 |
|
| $ | 157,269 |
|
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 |
Note 43 - 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. 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. There were no triggering events identified during the three months ended November 30, 2017first half of fiscal 2021 requiring an interim goodwill impairment test, and the Company did 0t record a goodwill impairment charge in any of the periods presented.
As of August 31, 2020, the balance of the Company’s goodwill was $170 million, and all but $1 million of such balance was carried by a single reporting unit within the AMR operating segment that existed at the time. The Company had last performed the quantitative impairment test of goodwill carried by this reporting unit in the fourth quarter of fiscal 2020 using a measurement date of July 1, 2020. The estimated fair value of the reporting unit exceeded its carrying amount by approximately 29% as of July 1, 2020. In the first quarter of fiscal 2021, the Company completed its transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model, resulting in a single operating segment, replacing the AMR and CSS operating segments. The change in structure led to the identification of components within the single operating segment based on disaggregation of financial information regularly reviewed by segment management. In accordance with the accounting guidance, the Company then reassigned the Company's goodwill to the reporting units affected based on the relative fair values of the elements transferred and the elements remaining within the original reporting units as of the date of the reassessment, September 1, 2020. The Company measured the relative fair values of such elements under the market approach based on earnings multiple data. Beginning on the date of reassessment of September 1, 2020, the Company's goodwill is carried by 3 reporting units comprising 2 separate regional groups of metals recycling operations and the Company’s retail auto parts stores.
In connection with the segment realignment and redefinition of the Company's reporting units effective as of September 1, 2020, management evaluated if it was more likely than not that the fair value of any of the either legacy or new reporting units with allocated goodwill was below its carrying value as of September 1, 2020, which would indicate a triggering event requiring a goodwill impairment test.
13
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The gross change in the carrying amount of goodwill for the threesix months ended November 30, 2017February 28, 2021 was as follows (in thousands):
|
| Goodwill |
| |
September 1, 2020 |
| $ | 169,627 |
|
Foreign currency translation adjustment |
|
| 473 |
|
February 28, 2021 |
| $ | 170,100 |
|
AMR | |||
August 31, 2017 | $ | 167,835 | |
Foreign currency translation adjustment | (632 | ) | |
November 30, 2017 | $ | 167,203 |
Accumulated goodwill impairment charges were $471$471 million as of November 30, 2017February 28, 2021 and August 31, 2017.
Note 5
Contingencies - 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.
Changes in the Company’s environmental liabilities in aggregate for the threesix months ended November 30, 2017February 28, 2021 were as follows (in thousands):
Balance as of September 1, 2020 |
|
| Liabilities Established (Released), Net |
|
| Payments and Other |
|
| Balance as of February 28, 2021 |
|
| Short-Term |
|
| Long-Term |
| ||||||
$ | 53,464 |
|
| $ | 14,974 |
|
| $ | (1,498 | ) |
| $ | 66,940 |
|
| $ | 12,975 |
|
| $ | 53,965 |
|
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, 2021 and August 31, 2017,2020, the Company's recycling operationsCompany had environmental liabilities of $55$67 million and $48$53 million, respectively, for the potential remediation of locations where it has conducted business or has environmental liabilities from historical or recent activities. The liabilities relate to the investigation and potential future remediation of contaminated sediments and riverbanks, soil contamination, groundwater contamination, storm water runoff issues and other natural resource damages. Except for Portland Harbor and certain liabilities discussed under Otherunder “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”). The precise nature and extent of any cleanup of any specific areas within the Site, 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.
While the Company participated in certain preliminary Site study efforts, it was not party to the consent order entered into by the EPA with certain other PRPs, referred to as the “Lower Willamette Group” (“LWG”), for a remedial investigation/feasibility study (“RI/FS”). During fiscal 2007, the Company and certain other parties agreed to an interim settlement with the LWG under which the Company made a cash contribution to the LWG RI/FS. The LWG has indicated that it had incurred over $115$155 million in investigation-related costs over an approximately 1018 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.
The Company has joined with approximately 100 other PRPs, including the LWG members, in a voluntary process to establish an allocation of costs at the Site, including the costs incurred by the LWG in the RI/FS process. The LWG members have also commenced federal court litigation, which has been stayed, seeking to bring additional parties into the allocation process.
14
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In January 2008, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. Following meetings among the Trustee Council and the PRPs, funding and participation agreements were negotiated under which the participating PRPs, including the Company, agreed to fund the first phase of the three-phase natural resource damage assessment. Phase 1, which included the development of the Natural Resource Damage Assessment Plan ("AP"(“AP”) and implementation of several early studies, was substantially completed in 2010. TheIn December 2017, the Company recently joined with other participating PRPs in agreeing to fund Phase 2 of the natural resource damage assessment, which includes the implementation of the AP to develop information sufficient to facilitate early settlements between the Trustee Council and Phase 2 participants and the identification of restoration projects to be funded by the settlements. In late May 2018, the Trustee Council published notice of its intent to proceed with Phase 3, which has not yet commenced, will involve the full implementation of the AP and the final injury and damage determination. The Company has not yet commenced discussionsis proceeding with the process established by the Trustee Council regarding early settlements under Phase 2, and therefore it is uncertain whether it will enter into an early settlement for natural resource damages or what costs it may incur in any such early settlement.
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 the Site and recovery of assessment costs related to natural resources damages from releases at and from the Site 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 suchthe 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.
Estimates of the cost of remedial action for the cleanup of the in-river portion of the Site have varied widely in various drafts of the FS and in the EPA’s final FS issued in June 2016 ranging from approximately $170 million to over $2.5 billion (net present value), depending on the remedial alternative and a number of other factors. In comments submitted to the EPA, the Company and certain other stakeholders identified a number of serious concerns regarding the EPA'sEPA’s risk and remedial alternatives assessments, cost estimates, scheduling assumptions and conclusions regarding the feasibility and effectiveness of remediation technologies.
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. The EPA has estimated the total cost of the selected remedy at $1.7 billion with a net present value cost of $1.05 billion (at a 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% to -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 decade 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 whether the ROD will be implemented as issued. 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 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 occurwas required 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 three3 other PRPs entered into a new Administrative Settlement Agreement and Order on Consent with EPA to perform such pre-remedial design investigation and baseline sampling over a two-year period. The Company estimatesestimated that its share of the costs of performing such work willwould be approximately $2 million, which it accrued in fiscal 2018. Such costs were fully covered by existing insurance coverage and, thus, the Company also recorded an insurance receivable for $2 million in fiscal 2018, resulting in no net impact to the Company’s consolidated results of operations.
15
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The pre-remedial design investigation and baseline sampling work has been completed, and the report evaluating the data was submitted to EPA on June 17, 2019. The evaluation report concludes that Site conditions have improved substantially since the data forming the basis of the ROD was collected over a decade ago. The analysis contained in the report has significant implications for remedial design and remedial action at the Site. EPA has reviewed the report, finding with a few limited corrections that the data is of suitable quality and generally acceptable and stating that such data will be used, in addition to existing and forthcoming design-level data, to inform implementation of the ROD. However, EPA did not agree that the data or the analysis warrants a change to the remedy at this time and reaffirmed its commitment to proceed with remedial design. The Company and other PRPs disagree with EPA’s position on use of the more recent data and will continue to pursue limited, but critical, changes to the selected remedy for the Site during the remedial design phase.
EPA encouraged PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design covering the entire Site and proposed dividing the Site into 8 to 10 subareas for remedial design. While certain PRPs executed consent agreements for remedial design work, because of EPA’s refusal to date to modify the remedy to reflect the most current data on Site conditions and because of concerns with the terms of the consent agreement, the Company elected not to enter into a consent agreement for remedial design with respect to any of the subareas at the Site. On March 26, 2020, EPA issued a unilateral administrative order (UAO) to the Company and MMGL, LLC (“MMGL”), an unaffiliated company, for the remedial design work in the portion of one of the EPA identified subareas within the Site designated as the River Mile 3.5 East Project Area. Following a conference with the Company to discuss the UAO and written comments submitted by the Company, EPA made limited modifications to the UAO and issued an amendment to the UAO on April 27, 2020 with an effective date of May 4, 2020. As required by the UAO, the Company notified EPA of its intent to comply with the UAO on the effective date 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, EPA’s expected schedule for completion of the remedial design work is four years. EPA has estimated the cost of the work at approximately $4 million. The Company has agreed with the other respondent to the UAO, MMGL, that the Company will lead the performance and be responsible for a portion of the costs of the work for remedial design under the UAO and also entered into an agreement with another PRP pursuant to which such other 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 the Site as between the respondents or with respect to any third party. The Company estimated that its share of the costs of performing such work under the UAO would be approximately $3 million, which it recorded to environmental liabilities and selling, general and administrative expense in the consolidated financial statements in the firstthird quarter of fiscal 2018.2020. The Company has insurance policies that it believes that suchwill provide reimbursement for costs will be fully covered by existing insurance coverage and, thus, has alsoit incurs for remedial design, but not for any penalties. In the second quarter of fiscal 2021, the Company recorded an insurance receivable and a related insurance recovery to selling, general and administrative expense for $2 millionapproximately $3 million. See “Other Assets” in Note 1 – Summary of Significant Accounting Policies for further discussion of receivables from insurers. The Company also expects to pursue in the first quarterfuture allocation or contribution from other PRPs for a portion of fiscal 2018, resultingsuch remedial design costs. In February 2021, EPA announced that 100 percent of the Site’s areas requiring active cleanup are in no net impactthe remedial design phase of the process.
The Company’s environmental liabilities as of February 28, 2021 and August 31, 2020 included $6 million and $4 million, respectively, relating to the Company's consolidated results of operations.
Except for certain early action projects in which the Company is not involved, remediation activities are not expected to commence for a number of years. Moreover, remediation activities at the Site are expected to be sequenced, and the order and timing of such sequencing has not been determined. In addition, as discussed above, responsibility for implementing and funding the remedy will be determined in a separate allocation process.process, which is on-going. The Company does not expectexpects the next major stage of the allocation process to proceed until afterin parallel with the additional pre-remedialremedial design data is collected.
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, the amount of natural resource damages or of the allocation among the PRPs of costs of the investigations, and any remedy andremedial action costs or natural resource damages, among the PRPs, 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, although such costs could be material to the Company’s financial position, results of operations, cash flows and liquidity. Among the facts currently being developed 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, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs.
16
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense, (including the pre-remedialremedial design, investigative activities), remediationremedial action and mitigation for or settlement of natural resource damages claims in connection with the Site. Most of these policies jointly insure the Company 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 the Site, although there is no assurance that thosecontinue to seek settlements with other insurers and formed a Qualified Settlement Fund (“QSF”) which became operative in the fourth quarter of fiscal 2020 to hold such settlement amounts until funds are needed to pay or reimburse costs incurred by the Company and MMGL in connection with the Site. These insurance policies willand the funds in the QSF may not cover all of the costs which the Company may incur. As of November 30, 2017,The QSF is an unconsolidated variable interest entity (“VIE”) with no primary beneficiary. Two parties unrelated to each other, one appointed by the Company's total liability for its estimatedCompany and one appointed by MMGL, share equally the power to direct the activities of the costsVIE that most significantly impact its economic performance. The Company’s appointee to co-manage the 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. No liabilities have been established in connection with these investigations beyond the costs of investigation and design, which costs have not been material to date, 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, 2021 and August 31, 2017,2020, other than Portland Harbor, include actual or possible investigation and cleanup 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 cleanup 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 and cleanup 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.
During the first quarter of fiscal 2018, the Company accrued $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 February 28, 2021 and August 31, 2020, 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 zero0 and $28 million based on a range of remedial alternatives and subject to development and approval by regulators of a specific remedy implementation plan. However, subsequent to the development of those remedial alternatives, the Company performed additional investigative activities under new state requirements that have the potential to impact the required remedial actions and associated cost estimates pending further 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.
17
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company’s loss contingencies as of November 30, 2017February 28, 2021 and August 31, 2017.
In addition, the Company’s loss contingencies as of February 28, 2021 and August 31, 2020 included $8 million and less than $1 million, respectively, 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.
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, 2021 |
|
| Three Months Ended February 29, 2020 |
| ||||||||||||||||||
|
| Foreign Currency Translation Adjustments |
|
| Pension Obligations, Net |
|
| Total |
|
| Foreign Currency Translation Adjustments |
|
| Pension Obligations, Net |
|
| Total |
| ||||||
Balances - December 1 (Beginning of period) |
| $ | (33,945 | ) |
| $ | (2,947 | ) |
| $ | (36,892 | ) |
| $ | (35,478 | ) |
| $ | (3,047 | ) |
| $ | (38,525 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 1,572 |
|
|
| 0 |
|
|
| 1,572 |
|
|
| (630 | ) |
|
| 0 |
|
|
| (630 | ) |
Income tax benefit |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Other comprehensive income (loss) before reclassifications, net of tax |
|
| 1,572 |
|
|
| 0 |
|
|
| 1,572 |
|
|
| (630 | ) |
|
| 0 |
|
|
| (630 | ) |
Amounts reclassified from accumulated other comprehensive loss |
|
| 0 |
|
|
| 49 |
|
|
| 49 |
|
|
| 0 |
|
|
| 148 |
|
|
| 148 |
|
Income tax (benefit) |
|
| 0 |
|
|
| (11 | ) |
|
| (11 | ) |
|
| 0 |
|
|
| (33 | ) |
|
| (33 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax |
|
| 0 |
|
|
| 38 |
|
|
| 38 |
|
|
| 0 |
|
|
| 115 |
|
|
| 115 |
|
Net periodic other comprehensive income (loss) |
|
| 1,572 |
|
|
| 38 |
|
|
| 1,610 |
|
|
| (630 | ) |
|
| 115 |
|
|
| (515 | ) |
Balances - February 28 and 29, respectively (End of period) |
| $ | (32,373 | ) |
| $ | (2,909 | ) |
| $ | (35,282 | ) |
| $ | (36,108 | ) |
| $ | (2,932 | ) |
| $ | (39,040 | ) |
|
| Six Months Ended February 28, 2021 |
|
| Six Months Ended February 29, 2020 |
| ||||||||||||||||||
|
| Foreign Currency Translation Adjustments |
|
| Pension Obligations, Net |
|
| Total |
|
| Foreign Currency Translation Adjustments |
|
| Pension Obligations, Net |
|
| Total |
| ||||||
Balances - September 1 (Beginning of period) |
| $ | (34,184 | ) |
| $ | (2,687 | ) |
| $ | (36,871 | ) |
| $ | (35,689 | ) |
| $ | (3,074 | ) |
| $ | (38,763 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 1,811 |
|
|
| (385 | ) |
|
| 1,426 |
|
|
| (419 | ) |
|
| (17 | ) |
|
| (436 | ) |
Income tax benefit |
|
| — |
|
|
| 87 |
|
|
| 87 |
|
|
| — |
|
|
| 4 |
|
|
| 4 |
|
Other comprehensive income (loss) before reclassifications, net of tax |
|
| 1,811 |
|
|
| (298 | ) |
|
| 1,513 |
|
|
| (419 | ) |
|
| (13 | ) |
|
| (432 | ) |
Amounts reclassified from accumulated other comprehensive loss |
|
| — |
|
|
| 98 |
|
|
| 98 |
|
|
| — |
|
|
| 200 |
|
|
| 200 |
|
Income tax (benefit) |
|
| — |
|
|
| (22 | ) |
|
| (22 | ) |
|
| — |
|
|
| (45 | ) |
|
| (45 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax |
|
| — |
|
|
| 76 |
|
|
| 76 |
|
|
| — |
|
|
| 155 |
|
|
| 155 |
|
Net periodic other comprehensive income (loss) |
|
| 1,811 |
|
|
| (222 | ) |
|
| 1,589 |
|
|
| (419 | ) |
|
| 142 |
|
|
| (277 | ) |
Balances - February 28 and 29, respectively (End of period) |
| $ | (32,373 | ) |
| $ | (2,909 | ) |
| $ | (35,282 | ) |
| $ | (36,108 | ) |
| $ | (2,932 | ) |
| $ | (39,040 | ) |
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.
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 9
Disaggregation of Revenues
The table below illustrates the Company’s revenues disaggregated by major product and sales destination (in thousands):
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| February 28, |
|
| February 29, |
|
| February 28, |
|
| February 29, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Major product information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ferrous revenues |
| $ | 322,679 |
|
| $ | 232,066 |
|
| $ | 574,885 |
|
| $ | 431,964 |
|
Nonferrous revenues |
|
| 147,322 |
|
|
| 94,522 |
|
|
| 267,031 |
|
|
| 192,363 |
|
Steel revenues(1) |
|
| 99,191 |
|
|
| 85,539 |
|
|
| 187,605 |
|
|
| 162,864 |
|
Retail and other revenues |
|
| 30,919 |
|
|
| 27,355 |
|
|
| 62,697 |
|
|
| 57,875 |
|
Total revenues |
| $ | 600,111 |
|
| $ | 439,482 |
|
| $ | 1,092,218 |
|
| $ | 845,066 |
|
Revenues based on sales destination: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
| $ | 332,197 |
|
| $ | 224,503 |
|
| $ | 600,596 |
|
| $ | 442,985 |
|
Domestic |
|
| 267,914 |
|
|
| 214,979 |
|
|
| 491,622 |
|
|
| 402,081 |
|
Total revenues |
| $ | 600,111 |
|
| $ | 439,482 |
|
| $ | 1,092,218 |
|
| $ | 845,066 |
|
(1) | Steel revenues include primarily sales of finished steel products, semi-finished goods (billets) and manufacturing scrap. |
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, 2021 and August 31, 2020, receivables from contracts with customers, net of an allowance for credit losses, totaled $208 million and $135 million, respectively, representing 99% and 97%, respectively, of total accounts receivable reported on the Unaudited Condensed Consolidated Balance Sheets.
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 consist almost entirely of customer deposits for recycled scrap metal sales contracts, which are reported within accounts payable on the Unaudited Condensed Consolidated Balance Sheets and totaled $8 million as of each of February 28, 2021 and August 31, 2020. 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. During the three and six months ended February 28, 2021, the Company reclassified $1 million and $6 million, respectively, in customer deposits as of August 31, 2020 to revenues as a result of satisfying performance obligations during the respective periods. During the three and six months ended February 29, 2020, the Company reclassified less than $1 million and $2 million, respectively, in customer deposits as of August 31, 2019 to revenues as a result of satisfying performance obligations during the respective periods.
Note 7 - Share-Based Compensation
In the first quarter of fiscal 2018,2021, 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 252,865317,760 restricted stock units ("RSUs"(“RSUs”) and 246,161316,649 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% per year commencing October 31, 2018.2021. 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 million. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures.
20
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.
The Company granted 157,791 performance share awards based on its relative TSR metric over a performance period spanning November 9, 2020 to August 31, 2023. The Company estimates the fair value of TSR awards containusing a market condition and, therefore, onceMonte-Carlo simulation model utilizing several key assumptions, including the award recipients complete the requisite service period, the related compensation expense basedfollowing for TSR awards granted on the grant-date fair value is not changed, regardless of whether the market condition has been satisfied. November 9, 2020:
Percentage | ||||
Expected share price volatility (SSI) | 48.5 | % | ||
Expected share price volatility (Peer group) | 54.9 | % | ||
Expected correlation to peer group companies | 44.5 | % | ||
Risk-free rate of return | 0.23 | % |
The estimated fair value of the TSR awards at the date of grant was $3$4 million. The Company estimated the fair value ofcompensation expense for the TSR awards usingbased on the grant-date fair value, net of estimated forfeitures, is recognized over the requisite service period (or to the date a Monte-Carlo simulation model utilizing several key assumptions including expectedqualifying employment termination event entitles the recipient to a prorated award, if before the end of the service period), regardless of whether the market condition has been or will be satisfied.
The 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.
The Company accrues compensation expense associated withcost for ROCE awards based on the probable outcome of achieving specified performance share awards is recognizedconditions, 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. 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 service 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.
In the second quarter of fiscal 2021, the Company granted deferred stock units (“DSUs”) to each of its non-employee directors under the Company’s SIP. Each DSU gives the director the right to receive 1 share of Class A common stock at a future date. The grant included an aggregate of 28,042 shares that will vest in full on the day before the Company’s 2022 annual meeting of shareholders, subject to continued Board service. The total fair value of these awards at the grant date was $1 million.
21
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 | % |
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 allowance positions partially offset by increases inallowances against deferred tax liabilities from indefinite-lived assets inare required. The Company maintains valuation allowances against certain state, Canadian and 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 20172020 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 |
|
| Six Months Ended |
| ||||||||||
|
| February 28, |
|
| February 29, |
|
| February 28, |
|
| February 29, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Income (loss) from continuing operations |
| $ | 45,649 |
|
| $ | 4,503 |
|
| $ | 60,755 |
|
| $ | (2,090 | ) |
Net income attributable to noncontrolling interests |
|
| (1,091 | ) |
|
| (621 | ) |
|
| (2,051 | ) |
|
| (1,051 | ) |
Income (loss) from continuing operations attributable to SSI shareholders |
|
| 44,558 |
|
|
| 3,882 |
|
|
| 58,704 |
|
|
| (3,141 | ) |
Income (loss) from discontinued operations, net of tax |
|
| 30 |
|
|
| 1 |
|
|
| (12 | ) |
|
| 29 |
|
Net income (loss) attributable to SSI shareholders |
| $ | 44,588 |
|
| $ | 3,883 |
|
| $ | 58,692 |
|
| $ | (3,112 | ) |
Computation of shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic |
|
| 27,991 |
|
|
| 27,721 |
|
|
| 27,899 |
|
|
| 27,618 |
|
Incremental common shares attributable to dilutive performance share awards, restricted stock units and deferred stock units |
|
| 871 |
|
|
| 418 |
|
|
| 774 |
|
|
| — |
|
Weighted average common shares outstanding, diluted |
|
| 28,862 |
|
|
| 28,139 |
|
|
| 28,673 |
|
|
| 27,618 |
|
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 |
NaN common stock equivalent shares were considered antidilutive for the three months ended February 28, 2021. Common stock equivalent shares of 1,086,335103,566 were considered antidilutive and were excluded from the calculation of diluted net lossincome (loss) per share attributable to SSI shareholders for the six months ended February 28, 2021, compared to 531,305 and 687,247 for the three and six months ended November 30, 2016. No common stock equivalent shares were considered antidilutive for the three months ended November 30, 2017.
Note 12
The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $3$5 million and $3 millionfor the three months ended November 30, 2017February 28, 2021 and 2016, respectively.
22
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Revenues: | |||||||
Auto and Metals Recycling: | |||||||
Revenues | $ | 398,054 | $ | 271,773 | |||
Less: Intersegment revenues | (4,759 | ) | (3,635 | ) | |||
AMR external customer revenues | 393,295 | 268,138 | |||||
Cascade Steel and Scrap | |||||||
Revenues | 89,984 | 66,023 | |||||
Total revenues | $ | 483,279 | $ | 334,161 |
Three Months Ended November 30, | |||||||
2017 | 2016 | ||||||
Auto and Metals Recycling | $ | 35,172 | $ | 12,606 | |||
Cascade Steel and Scrap | 8,476 | (2,628 | ) | ||||
Segment operating income | 43,648 | 9,978 | |||||
Restructuring charges and other exit-related activities | (100 | ) | (201 | ) | |||
Corporate and eliminations | (17,125 | ) | (9,190 | ) | |||
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 | ) |
November 30, 2017 | August 31, 2017 | ||||||
Auto and Metals Recycling(1) | $ | 1,331,468 | $ | 1,298,757 | |||
Cascade Steel and Scrap(1) | 703,262 | 696,269 | |||||
Total segment assets | 2,034,730 | 1,995,026 | |||||
Corporate and eliminations(2) | (1,048,817 | ) | (1,061,271 | ) | |||
Total assets | $ | 985,913 | $ | 933,755 |
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section includes a discussion of our operations for the
three and six months endedGeneral
Founded in 1906, Schnitzer Steel Industries, Inc. ("SSI"(“SSI”), an Oregon corporation, is one of North America'sAmerica’s largest recyclers of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products.
Prior to the first quarter of fiscal 2021, our internal organizational and reporting structure supportsincluded two operating and reportable segments: the Auto and Metals Recycling ("AMR"(“AMR”) business and the Cascade Steel and Scrap business ("CSS"(“CSS”).
We sell ferrous recycled scrap metal (containing iron) to foreign and domestic steel producers and nonferrous recycled scrap metal (not containing iron) toin both foreign and domestic markets. AMR procures scrap supply from salvaged vehicles,We also sell a range of finished steel long products produced at our steel mini-mill. We acquire, process and recycle auto bodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap through its 92 auto and metalsour recycling facilities. Our largest source of autobodies is our own network of auto parts stores, which operate under the commercial brand-name Pick-n-Pull. AMR procures salvaged vehicles and sells serviceable used auto parts from these vehicles through 53retail self-service auto parts stores located across the United States and Western Canada. TheCanada, which operate under the commercial brand-name Pick-n-Pull, procure the significant majority of our salvaged vehicles and sell serviceable used auto parts from these vehicles. Upon acquiring a salvaged vehicle, we remove catalytic converters, aluminum wheels and batteries for separate processing and sale prior to placing the vehicle in our retail lot. After retail customers have removed desired parts from a vehicle, we may remove remaining portions of the vehicles, primarily autobodies and major component parts containing ferrous and nonferrous materials,metals, which are primarily sold to wholesalers. The remaining auto bodies are crushed and shipped to our metalmetals recycling facilities to be shredded or sold to wholesalers when economically advantageous. AMR then processesthird parties where geographically more economical. At our metals recycling facilities, we process mixed and large pieces of scrap metal into smaller pieces by crushing, torching, shearing, shredding and sorting, resulting in scrap metal pieces of a size, density and metal content required by customers to meet their production needs.
Our deep water port facilities on both the East and West Coasts of a collection, shreddingthe U.S. (in Everett, Massachusetts; Providence, Rhode Island; Oakland, California; Tacoma, Washington; and export operation in Portland, Oregon, four feeder yard operationsOregon) and access to public deep water port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) allow us to efficiently meet the global demand for recycled ferrous metal by enabling us to ship bulk cargoes to steel manufacturers located in OregonEurope, Africa, the Middle East, Asia, North America, Central America and Southern Washington,South America. Our exports of nonferrous recycled metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and one metals recycling joint venture ownership interest. Additionally, CSS purchases small volumes of ferrous scrapingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers, wire and cable producers, wholesalers, and other recycled metal from AMR and sellsprocessors globally. We also transport both ferrous and nonferrous recycledmetals by truck, rail and barge in order to transfer scrap metal into thebetween our facilities for further processing, to load shipments at our export market.
23
SCHNITZER STEEL INDUSTRIES, INC.
Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating income.results. We believe we generally benefit from sustained periods of stable or rising recycled scrap metal selling prices, which allow us to better maintain or increase both operating incomeresults and unprocessed scrap metal flow into our facilities. When recycled scrap metal selling prices decline, either sharply or for a sustained period, our operating margins typically compress.
Our quarterly operating results fluctuate based on a variety of factors including, but not limited to, changes in market conditions for ferrous and nonferrous recycled metal and finished steel products, the supply of scrap metal in our domestic markets, and varying demand for used auto parts from our self-service retail stores. TheseCertain of these factors are influenced, to a degree, by the impact of seasonal changes including severe weather conditions, which can impact the timing of shipments and inhibit construction activity utilizing our products, scrap metal collection at our facilities and production levels in our yards, and retail admissions and parts sales at our auto parts stores.
Coronavirus Disease 2019 (COVID-19)
We continue to monitor the impact of COVID-19 on all aspects of our business. The COVID-19 outbreak, which the World Health Organization characterized as a pandemic in March 2020, has resulted in governments around the world implementing measures with various levels of stringency to help control the spread of the virus. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Ensuring the health and welfare of our employees, and all who visit our sites, is our top priority, and we are following all U.S. Centers for Disease Control and Prevention and state and local health department guidelines. Further, we implemented infection control measures at all our sites and put in place travel and in-person meeting restrictions and other physical distancing measures. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our third quarter fiscal 2020 results, global economic conditions improved during the first half of our fiscal 2021, resulting in increased demand for our products, which led to our earnings for the First Quartersecond quarter and first six months of Fiscal 2018
Use of Non-GAAP Financial Measures
In this management’s discussion and analysis, we use supplemental measures of our performance, liquidity and capital structure which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We generated consolidated revenuesbelieve that providing these non-GAAP financial measures adds a meaningful presentation of $483 millionour operating and financial performance, liquidity and capital structure. For example, following the modification of our internal organizational and reporting structure completed in the first quarter of fiscal 2018, an increase2021, we use adjusted EBITDA as one of 45%the measures to compare and evaluate financial performance. Adjusted EBITDA is the sum of our net income before results from discontinued operations, interest expense, income taxes, depreciation and amortization, restructuring charges and other exit-related activities, charges for legacy environmental matters (net of recoveries), business development costs, asset impairment charges (net of recoveries) and other items which are not related to underlying business operational performance. See the reconciliations of supplemental financial measures, including adjusted EBITDA, in Non-GAAP Financial Measures at the end of this Item 2.
Our non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable U.S. GAAP measures. Although we find these non-GAAP financial measures useful in evaluating the performance of our business, our reliance on these measures is limited because they often materially differ from our consolidated financial statements presented in accordance with GAAP. Therefore, we typically use these adjusted amounts in conjunction with our GAAP results to address these limitations. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
24
SCHNITZER STEEL INDUSTRIES, INC.
Financial Highlights of Results of Operations for the Second Quarter of Fiscal 2021
• | Diluted earnings per share from continuing operations attributable to SSI shareholders in the second quarter of fiscal 2021 was $1.54, compared to $0.14 in the prior year quarter. |
• | Adjusted diluted earnings per share from continuing operations attributable to SSI shareholders in the second quarter of fiscal 2021 was $1.51, compared to $0.31 in the prior year quarter. |
• | Net income in the second quarter of fiscal 2021 was $46 million, compared to $5 million in the prior year quarter. |
• | Adjusted EBITDA in the second quarter of fiscal 2021 was $71 million, compared to $28 million in the prior year quarter. |
Market conditions for recycled metals improved in the second quarter of fiscal 2021, including sharply rising selling prices that reached multi-year highs for certain recycled metal commodities. Average net selling prices for our ferrous and nonferrous products increased significantly compared to the prior year quarter. In the second quarter of fiscal 2021, the average net selling prices for our ferrous and nonferrous products increased by 52% and 51%, respectively, compared to the prior year period. Market conditions for our finished steel products also improved in the second quarter of fiscal 2021, which contributed to higher finished steel average selling prices and sales volumes compared to the prior year period. Our results in the second quarter of fiscal 2021 reflected substantial benefits from the $334 millionhigher price environment for most of consolidated revenuesour products including a significant expansion in our ferrous metal spreads and a favorable impact from average inventory accounting, as well as increased nonferrous and finished steel sales volumes, compared to the prior year period. We also benefited in the quarter from commercial initiatives and productivity improvements that were supported by the implementation of our One Schnitzer functionally-based organization model completed in the first quarter of fiscal 2017, reflecting significantly improved market conditions for recycled metals in the domestic and export markets, and for our finished steel products, compared to the prior year quarter. The improved conditions resulted in higher average net selling prices and increased sales volumes for AMR’s ferrous and nonferrous recycled metal products and for CSS’s finished steel products.
The following items further highlight selected liquidity and capital structure metrics formetrics:
• | For the first six months of fiscal 2021, net cash used in operating activities was $3 million, compared to net cash provided by operating activities of $17 million in the prior year comparable period. |
• | Debt was $171 million as of February 28, 2021, compared to $104 million as of August 31, 2020. |
• | Debt, net of cash, was $159 million as of February 28, 2021, compared to $87 million as of August 31, 2020. |
See the first quarterreconciliations of fiscal 2018:
25
SCHNITZER STEEL INDUSTRIES, INC.
Results of Operations
Three Months Ended November 30, | ||||||||||
($ 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 | % |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||
($ in thousands, except for prices |
| February 28, |
|
| February 29, |
|
| Change |
|
| February 28, |
|
| February 29, |
|
| Change |
| ||||||
and per share amounts) |
| 2021 |
|
| 2020 |
|
| % |
|
| 2021 |
|
| 2020 |
|
| % |
| ||||||
Ferrous revenues |
| $ | 322,679 |
|
| $ | 232,066 |
|
|
| 39 | % |
| $ | 574,885 |
|
| $ | 431,964 |
|
|
| 33 | % |
Nonferrous revenues |
|
| 147,322 |
|
|
| 94,522 |
|
|
| 56 | % |
|
| 267,031 |
|
|
| 192,363 |
|
|
| 39 | % |
Steel revenues(1) |
|
| 99,191 |
|
|
| 85,539 |
|
|
| 16 | % |
|
| 187,605 |
|
|
| 162,864 |
|
|
| 15 | % |
Retail and other revenues |
|
| 30,919 |
|
|
| 27,355 |
|
|
| 13 | % |
|
| 62,697 |
|
|
| 57,875 |
|
|
| 8 | % |
Total revenues |
|
| 600,111 |
|
|
| 439,482 |
|
|
| 37 | % |
|
| 1,092,218 |
|
|
| 845,066 |
|
|
| 29 | % |
Cost of goods sold |
|
| 487,025 |
|
|
| 380,520 |
|
|
| 28 | % |
|
| 907,119 |
|
|
| 745,280 |
|
|
| 22 | % |
Gross margin (total revenues less cost of goods sold) |
| $ | 113,086 |
|
| $ | 58,962 |
|
|
| 92 | % |
| $ | 185,099 |
|
| $ | 99,786 |
|
|
| 85 | % |
Gross margin (%) |
|
| 18.8 | % |
|
| 13.4 | % |
|
| 40 | % |
|
| 16.9 | % |
|
| 11.8 | % |
|
| 44 | % |
Selling, general and administrative expense |
| $ | 54,142 |
|
| $ | 46,426 |
|
|
| 17 | % |
| $ | 104,048 |
|
| $ | 93,200 |
|
|
| 12 | % |
Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
| $ | 1.54 |
|
| $ | 0.14 |
|
|
| 1,000 | % |
| $ | 2.05 |
|
| $ | (0.11 | ) |
| NM |
| |
Adjusted(2) |
| $ | 1.51 |
|
| $ | 0.31 |
|
|
| 387 | % |
| $ | 2.09 |
|
| $ | 0.14 |
|
|
| 1,393 | % |
Net income (loss) |
| $ | 45,679 |
|
| $ | 4,504 |
|
|
| 914 | % |
| $ | 60,743 |
|
| $ | (2,061 | ) |
| NM |
| |
Adjusted EBITDA(2) |
| $ | 71,411 |
|
| $ | 28,265 |
|
|
| 153 | % |
| $ | 111,666 |
|
| $ | 38,100 |
|
|
| 193 | % |
Average ferrous recycled metal sales prices ($/LT)(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 349 |
|
| $ | 244 |
|
|
| 43 | % |
| $ | 297 |
|
| $ | 222 |
|
|
| 34 | % |
Foreign |
| $ | 399 |
|
| $ | 258 |
|
|
| 55 | % |
| $ | 334 |
|
| $ | 243 |
|
|
| 37 | % |
Average |
| $ | 387 |
|
| $ | 255 |
|
|
| 52 | % |
| $ | 326 |
|
| $ | 235 |
|
|
| 39 | % |
Ferrous volumes (LT, in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic(4) |
|
| 391 |
|
|
| 379 |
|
|
| 3 | % |
|
| 779 |
|
|
| 743 |
|
|
| 5 | % |
Foreign |
|
| 586 |
|
|
| 609 |
|
|
| (4 | )% |
|
| 1,251 |
|
|
| 1,221 |
|
|
| 2 | % |
Total ferrous volumes (LT, in thousands)(4) |
|
| 977 |
|
|
| 988 |
|
|
| (1 | )% |
|
| 2,030 |
|
|
| 1,964 |
|
|
| 3 | % |
Average nonferrous sales price ($/pound)(3)(5) |
| $ | 0.83 |
|
| $ | 0.55 |
|
|
| 51 | % |
| $ | 0.74 |
|
| $ | 0.55 |
|
|
| 35 | % |
Nonferrous volumes (pounds, in thousands)(4)(5) |
|
| 135,899 |
|
|
| 124,342 |
|
|
| 9 | % |
|
| 274,135 |
|
|
| 268,518 |
|
|
| 2 | % |
Finished steel average sales price ($/ST)(3) |
| $ | 690 |
|
| $ | 627 |
|
|
| 10 | % |
| $ | 656 |
|
| $ | 635 |
|
|
| 3 | % |
Finished steel sales volumes (ST, in thousands) |
|
| 136 |
|
|
| 129 |
|
|
| 6 | % |
|
| 270 |
|
|
| 242 |
|
|
| 11 | % |
Cars purchased (in thousands)(6) |
|
| 80 |
|
|
| 85 |
|
|
| (6 | )% |
|
| 158 |
|
|
| 168 |
|
|
| (6 | )% |
Number of auto parts stores at period end |
|
| 50 |
|
|
| 51 |
|
|
| (2 | )% |
|
| 50 |
|
|
| 51 |
|
|
| (2 | )% |
Rolling mill utilization(7) |
|
| 88 | % |
|
| 72 | % |
|
| 22 | % |
|
| 93 | % |
|
| 79 | % |
|
| 18 | % |
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 pounds
(1) | Steel revenues include primarily sales of finished steel products, semi-finished goods (billets) and steel manufacturing scrap. |
(2) | See the reconciliations of Non-GAAP Financial Measures at the end of this Item 2. |
(3) | Price information is shown after netting the cost of freight incurred to deliver the product to the customer. |
(4) | Ferrous and nonferrous volumes sold externally and delivered to our steel mill for finished steel production. |
(5) | Average sales price and volume information excludes platinum group metals |
(6) | |
Cars purchased by auto parts stores only. |
(7) | ||
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 | % |
Rolling mill utilization is based on effective annual production capacity under current conditions of 580 thousand tons of finished steel products. |
26
SCHNITZER STEEL INDUSTRIES, INC.
Revenues
Revenues in the second quarter and first six months of fiscal 2021 increased by 37% and 29%, respectively, compared to the same periods in the prior year primarily due to significantly higher average net selling prices for our ferrous and nonferrous products in both export and domestic markets. These increases were driven by stronger market conditions for recycled metals globally, including periods of sharply rising selling prices that reached multi-year highs for certain recycled metal commodities during the second quarter of fiscal 2021. In the second quarter and first six months of fiscal 2021, the average net selling price for our ferrous products increased by 52% and 39%, respectively, and the average net selling price for our nonferrous products increased by 51% and 35%, respectively, compared to the prior year periods. Nonferrous sales volumes for the second quarter and first six months of fiscal 2021 increased by 9% and 2%, respectively, compared to the prior year periods reflecting stronger demand partially offset by the effects of a shortage of available shipping containers that impacted the timing of shipments. Ferrous sales volumes in the second quarter of fiscal 2021 declined marginally compared to the prior year quarter primarily due to weather-related delays that impacted the timing of shipments. Market conditions for our finished steel products also improved in the second quarter and first six months of fiscal 2021, which contributed to higher finished steel average selling prices and sales volumes compared to the prior year periods, and reflected steady demand in West Coast construction markets and higher rolling mill utilization.
Operating Performance
Net income in the second quarter and first six months of fiscal 2021 was $46 million and $61 million, respectively, compared to net income of $5 million and net loss of $2 million, respectively, in the prior year periods. Adjusted EBITDA in the second quarter and first six months of fiscal 2021 was $71 million and $112 million, respectively, compared to $28 million and $38 million, respectively, in the prior year periods. The improvement in our results for the second quarter and first six months of fiscal 2021 reflected substantial benefits from the higher price environment for most of our products including a significant expansion in our ferrous metal spreads and a favorable impact from average inventory accounting, as well as increased nonferrous and finished steel sales volumes, compared to the prior year periods. Ferrous metal spreads in the second quarter and first six months of fiscal 2021 increased by approximately 45% and 25%, respectively, and average net selling prices for our nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, increased by approximately 60% and 45%, respectively, compared to the prior year periods. Our results in the second quarter and first six months of fiscal 2021 also reflected increased contributions from sales of higher priced PGM products compared to the prior year periods and achievement of the full run rate of benefits from productivity initiatives implemented throughout fiscal 2020. In comparison, the lower price environment in the first half of fiscal 2020, which included a sharp decline in commodity prices during most of the first quarter of fiscal 20182020 before recovering moderately in the second quarter, adversely impacted ferrous metal margins, the supply of scrap metal including end-of-life vehicles, processed volumes and overall operating results. Selling, general and administrative expense in the second quarter and first six months of fiscal 2021 increased by $24 million, or 36%17%and 12%, respectively, compared to the prior year periodperiods primarily due to higher average selling prices forincentive compensation accruals aligned with improved business performance. See the reconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the end of this Item 2.
In fiscal 2020, we implemented productivity initiatives aimed at reducing our finished steel products, reflectingannual operating expenses, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses and other non-headcount measures. We targeted $20 million in annual benefits from these initiatives, and we achieved the impactfull run rate of higher steel-making raw material costs, and higher sales volumes for our finished steel products due to steady demandbenefits in the West Coast marketssecond quarter and a reduced impact from rebar imports compared tofirst half of fiscal 2021. We achieved approximately $4 million and $6 million in realized benefits in the prior year quarter. Revenues insecond quarter and first six months of fiscal 2020, respectively.
In the first quarter of fiscal 2017 were adversely impacted by lower selling prices for finished steel products and reduced sales volumes reflecting competition from lower-priced rebar imports and customer de-stocking.
Income Tax
The effective tax rate from continuing operations for the second quarter and first quartersix months of fiscal 20182021 was an expense on pre-tax income of 20.1% and 22.1%, respectively, compared to an expense on pre-tax income of 28.2% and a benefit on pre-tax loss of 26.8%, respectively, for the comparable prior year periods. The effective tax rate from continuing operations for the second quarter and first six months of fiscal 2021 was lower than that for the comparable prior year periods primarily due to the benefit from the foreign derived intangible income deduction in fiscal 2021 and the effects of higher pre-tax income compared to the prior year periods. The effective tax rate from continuing operations for the second quarter and first six months of fiscal 2020 was higher than the U.S. federal statutory rate of 35%21% primarily due to the lowerimpact of non-deductible officers’ compensation and other expenses, as well as the aggregate impact of state taxes, on the projected annual effective tax rate applied to the quarterly results. The lower projected annual effective tax rate is the result
27
SCHNITZER STEEL INDUSTRIES, INC.
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$18 million as of November 30, 2017February 28, 2021 and August 31, 2017,2020, 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, 2021, debt was $185$171 million compared to $145$104 million as of August 31, 2017,2020, and debt, net of cash, was $176$159 million as of February 28, 2021 compared to $138$87 million as of August 31, 20172020 (refer to 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 operating activities in the first threesix months of fiscal 20182021 was $16$3 million, compared to net cash provided by operating activities of $6$17 million in the first threesix months of fiscal 2017.
Sources of cash other than from earnings in the first threesix months of fiscal 20182021 included a $47$45 million increase in inventory due to higher raw material purchase prices, higher volumes on hand and the impact of timing of purchases and sales, a $9 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. Sources of cash in the first three months of fiscal 2018 included a $9 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of payments.
Sources of cash in the first six months of fiscal 2020 included a $9 million decrease in inventories due to lower raw material purchase prices and the timing of purchases and sales. Uses of cash in the first six months of fiscal 2020 included a $18 million increase in accounts receivable primarily due to the timing of sales and collections, a $8 million decrease in accounts payable primarily due to lower raw material purchase prices and the timing of payments, and a $7 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation payments.
Investing Activities
Net cash used in investing activities was $14$54 million in the first threesix months of fiscal 2018,2021, compared to $11$36 million in the first threesix months of fiscal 2017.
Cash used in investing activities in the first threesix months of fiscal 20182021 included capital expenditures of $15$55 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$37 million in the prior year period.
Financing Activities
Net cash provided by financing activities in the first threesix months of fiscal 20182021 was $31$50 million, compared to net cash used in financing activities of $14$17 million in the first threesix months of fiscal 2017.
Cash flows from financing activities in the first threesix months of fiscal 20182021 included $40$66 million in net borrowingborrowings of debt, compared to $5$36 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 20182021 and 2017 also2020 included $5$11 million for the payment of dividends.
28
SCHNITZER STEEL INDUSTRIES, INC.
Debt
Our senior secured revolving credit facilities, which provide for revolving loans of $335$700 million and C$15 million, mature in April 2021August 2023 pursuant to a credit agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the London Interbank Offered Rate ("LIBOR"(“LIBOR”), or (or the Canadian equivalent for C$ loans), plus a spread of between 1.75%1.25% and 2.75%3.50%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated 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 LIBOR plus 1.75%, in each case, plus a spread of between zero0.00% and 1.00%2.50% based on a pricing grid tied to the Company's leverageour consolidated funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.20% and 0.40%0.50% based on a pricing grid tied to our leverage ratio.
We had borrowings outstanding under theour credit facilities of $180$157 million as of November 30, 2017February 28, 2021 and $140$90 million as of August 31, 2017.2020, with the increase relating primarily to funding working capital and capital expenditures. The weighted average interest rate on amounts outstanding under this facilityour credit facilities was 3.26%2.02% and 3.48%4.59% as of November 30, 2017February 28, 2021 and August 31, 2017,2020, 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, (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness;indebtedness, and (c) a consolidated asset coverage ratio, defined as the consolidated asset value of eligible assetsvalues divided by the consolidated funded indebtedness.
As of November 30, 2017,February 28, 2021, 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 1.501.10 to 1.00 and was 3.314.47 to 1.00 as of November 30, 2017.February 28, 2021. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.260.20 to 1.00 as of November 30, 2017.February 28, 2021. The consolidated asset coverage ratio was required to be no less than 1.00 to 1.00 and was 1.552.39 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 $7 million as of each of February 28, 2021 and August 31, 2020, primarily relate to an equipment purchase, 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 obligation is treated as a partial financing of the purchase price by the equipment vendor. Monthly payments commence when the equipment is placed in service and continue for a period of four years thereafter.
29
SCHNITZER STEEL INDUSTRIES, INC.
Capital Expenditures
Capital expenditures totaled $15$55 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 $7 million in capital expenditures for environmental projects in the first threesix months of fiscal 2018,2021, and we currently plan to invest up to $20$25 million for such projects in fiscal 2018.2021. 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”(the “Site”). See
Dividends
On January 7, 2021, our Board of Directors declared a dividend for the second quarter of fiscal 2021 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend totaling $5 million was paid on February 1, 2021.
Share Repurchase Program
Pursuant to our share repurchase program as amended in 2001, 2006 and 2008, we were authorized to repurchase up to nine million shares of our Class A common stock. As of February 28, 2021, we had authorization to repurchase up to a remaining 706 thousand 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 our common stock during the first half of fiscal 2021.
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, dividends, share repurchases, dividends,investments and acquisitions, joint ventures, debt service requirements, environmental obligations investments 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.
SCHNITZER STEEL INDUSTRIES, INC.
Off-Balance Sheet Arrangements
None requiring disclosure pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934.
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, 2021, 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):
|
| February 28, 2021 |
|
| August 31, 2020 |
| ||
Short-term borrowings |
| $ | 2,372 |
|
| $ | 2,184 |
|
Long-term debt, net of current maturities |
|
| 168,441 |
|
|
| 102,235 |
|
Total debt |
|
| 170,813 |
|
|
| 104,419 |
|
Less cash and cash equivalents |
|
| 11,326 |
|
|
| 17,887 |
|
Total debt, net of cash |
| $ | 159,487 |
|
| $ | 86,532 |
|
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 |
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 borrowings (repayments) for the period because we believe it is useful to investors as a meaningful presentation of the change in debt.
The following is a reconciliation of net borrowings (repayments) of debt (in thousands):
|
| Six Months Ended |
| |||||
|
| February 28, |
|
| February 29, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Borrowings from long-term debt |
| $ | 265,645 |
|
| $ | 244,382 |
|
Repayments of long-term debt |
|
| (199,229 | ) |
|
| (208,614 | ) |
Net borrowings (repayments) of debt |
| $ | 66,416 |
|
| $ | 35,768 |
|
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 | ) |
31
SCHNITZER STEEL INDUSTRIES, INC.
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, recoverieslegacy environmental matters (net of recoveries), business development costs not related to ongoing operations, asset impairment charges, and the resale or modification of previously contracted shipments, and income tax expense (benefit) associated withallocated 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 the impact from the resale or modification
Following are reconciliations of the terms, each at significantly lower prices duenet income (loss) to sharp declines inadjusted EBITDA, and adjusted selling, prices, of certain previously-contracted bulk shipments for delivery during fiscal 2015. Recoveries resulting from settlements with the original contract parties, which began in the third quarter of fiscal 2016, are reported within SG&Ageneral and administrative expense in the Unaudited Condensed Consolidated Statements of Operations and are also excluded from the measures.(in thousands):
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| February 28, |
|
| February 29, |
|
| February 28, |
|
| February 29, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Reconciliation of adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 45,679 |
|
| $ | 4,504 |
|
| $ | 60,743 |
|
| $ | (2,061 | ) |
(Income) loss from discontinued operations, net of tax |
|
| (30 | ) |
|
| (1 | ) |
|
| 12 |
|
|
| (29 | ) |
Interest expense |
|
| 1,224 |
|
|
| 1,320 |
|
|
| 3,004 |
|
|
| 2,743 |
|
Income tax expense (benefit) |
|
| 11,469 |
|
|
| 1,770 |
|
|
| 17,188 |
|
|
| (764 | ) |
Depreciation and amortization |
|
| 14,469 |
|
|
| 14,385 |
|
|
| 29,295 |
|
|
| 28,472 |
|
Restructuring charges and other exit-related activities |
|
| 814 |
|
|
| 4,633 |
|
|
| 878 |
|
|
| 5,100 |
|
(Recoveries) charges for legacy environmental matters, net(1) |
|
| (2,214 | ) |
|
| 451 |
|
|
| 546 |
|
|
| 1,744 |
|
Business development costs |
|
| — |
|
|
| 801 |
|
|
| — |
|
|
| 801 |
|
Asset impairment charges |
|
| — |
|
|
| 402 |
|
|
| — |
|
|
| 2,094 |
|
Adjusted EBITDA |
| $ | 71,411 |
|
| $ | 28,265 |
|
| $ | 111,666 |
|
| $ | 38,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
| $ | 54,142 |
|
| $ | 46,426 |
|
| $ | 104,048 |
|
| $ | 93,200 |
|
Recoveries (charges) for legacy environmental matters, net(1) |
|
| 2,214 |
|
|
| (451 | ) |
|
| (546 | ) |
|
| (1,744 | ) |
Business development costs |
|
| — |
|
|
| (801 | ) |
|
| — |
|
|
| (801 | ) |
Adjusted |
| $ | 56,356 |
|
| $ | 45,174 |
|
| $ | 103,502 |
|
| $ | 90,655 |
|
(1) | ||
recoveries, for legacy environmental matters including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 4 - Commitments and Contingencies, “Portland Harbor” and “Other Legacy Environmental Loss Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report. |
32
SCHNITZER STEEL INDUSTRIES, INC.
Following are reconciliations of adjusted consolidated operating income, adjusted AMR operating income, 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 shareholders (in thousands, except per share data):
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| February 28, |
|
| February 29, |
|
| February 28, |
|
| February 29, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Income (loss) from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
| $ | 44,558 |
|
| $ | 3,882 |
|
| $ | 58,704 |
|
| $ | (3,141 | ) |
Restructuring charges and other exit-related activities |
|
| 814 |
|
|
| 4,633 |
|
|
| 878 |
|
|
| 5,100 |
|
(Recoveries) charges for legacy environmental matters, net(1) |
|
| (2,214 | ) |
|
| 451 |
|
|
| 546 |
|
|
| 1,744 |
|
Business development costs |
|
| — |
|
|
| 801 |
|
|
| — |
|
|
| 801 |
|
Asset impairment charges |
|
| — |
|
|
| 402 |
|
|
| — |
|
|
| 2,094 |
|
Income tax expense (benefit) allocated to adjustments(2) |
|
| 334 |
|
|
| (1,464 | ) |
|
| (315 | ) |
|
| (2,615 | ) |
Adjusted |
| $ | 43,492 |
|
| $ | 8,705 |
|
| $ | 59,813 |
|
| $ | 3,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
| $ | 1.54 |
|
| $ | 0.14 |
|
| $ | 2.05 |
|
| $ | (0.11 | ) |
Restructuring charges and other exit-related activities, per share |
|
| 0.03 |
|
|
| 0.16 |
|
|
| 0.03 |
|
|
| 0.18 |
|
(Recoveries) charges for legacy environmental matters, net, per share(1) |
|
| (0.08 | ) |
|
| 0.02 |
|
|
| 0.02 |
|
|
| 0.06 |
|
Business development costs, per share |
|
| — |
|
|
| 0.03 |
|
|
| — |
|
|
| 0.03 |
|
Asset impairment charges, per share |
|
| — |
|
|
| 0.01 |
|
|
| — |
|
|
| 0.08 |
|
Income tax expense (benefit) allocated to adjustments, per share(2) |
|
| 0.01 |
|
|
| (0.05 | ) |
|
| (0.01 | ) |
|
| (0.09 | ) |
Adjusted(3) |
| $ | 1.51 |
|
| $ | 0.31 |
|
| $ | 2.09 |
|
| $ | 0.14 |
|
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 | ) |
(1) | Legal and environmental charges, net of recoveries, for legacy environmental matters including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 4 - Commitments and Contingencies, “Portland Harbor” and “Other Legacy Environmental Loss Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report. |
(2) | Income tax allocated to the aggregate adjustments reconciling reported and adjusted |
(3) | |
May not foot due to rounding. |
33
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. 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 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.
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, 2017each of February 28, 2021 and August 31, 2017, 30% and 33%, respectively,2020, 40% of our trade accounts receivable balance was covered by letters of credit. Of the remaining balance, 94% and 88%, respectively,98% was less than 60 days past due as of November 30, 2017each of February 28, 2021 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 of this risk. Our derivatives are agreements with independent counterparties that provide for payments based on a notional amount. As of November 30, 2017February 28, 2021 and August 31, 2017,2020, we did not have any derivative contracts.
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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. 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, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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, 2017,2020; in Part II, “Item 1. Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2020; and below in this Part II, "Item“Item 1. Legal Proceedings"Proceedings” of this Quarterly Report on Form 10-Q. Also see Note 54 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item I, incorporated by reference herein.
As previously reported, we had reached agreement with the Company received a pre-filing negotiation letter fromAlameda County District Attorney and the United States Environmental Protection Agency (“EPA”) with respectCalifornia Office of the Attorney General (COAG), the latter on behalf of certain state agencies, to settle certain alleged violations of environmental requirements at one of our operations in California stemming from industrial stormwaterinvestigations initiated in 2013 and hazardous waste management inspections at twoconducted in 2015. The settlement provided for $2.05 million for civil penalties and reimbursement of ourthe agencies’ enforcement costs and $2.05 million to fund Supplemental Environmental Projects in the local community to promote public health and the environment. On February 3, 2021, a stipulation and consent order was filed in and approved by the Alameda County Superior Court of the State of California. The monetary payments pursuant to the settlement were made in March 2021. On February 23, 2021, the California State Department of Toxic Substance Control (DTSC), one of the state agencies involved in the investigations and settlement, issued a corrective action enforcement order that would require us to submit a current conditions report, to undertake a facilities in Kansas City.investigation, risk assessment and corrective measures study, and to implement corrective measures selected by the DTSC based on those assessments and studies. We dispute DTSC’s alleged jurisdictional basis for the order, as well as the scope of work required by the order, which we believe is unwarranted and duplicative of ongoing assessments being conducted under the oversight of another state agency. We have already completedfiled a notice of defense that by law stays the effectiveness of the order and are challenging the order through the DTSC administrative process.
In addition, the DTSC issued a similar corrective action enforcement order on March 18, 2021 with respect to our metal recycling facility improvementsin Fresno, California based on inspections conducted by the DTSC in 2013. That 2013 inspection is the basis for the previously reported enforcement matter brought by the COAG, on behalf of DTSC, that we believe address the concerns identifiedwas filed in the EPA inspection reports. Accordingly,Superior Court of the State of California, County of Fresno in June 2020. We dispute DTSC’s alleged jurisdictional basis for the recent order, as well as the scope of work required by that order. We have also filed a notice of defense in this matter that by law stays the effectiveness of the order and are challenging the order through the DTSC administrative process.
In addition, as previously reported, we have been in discussions with the District Attorneys for six counties in California in connection with a joint investigation into alleged violations of environmental requirements at various Pick-n-Pull locations within California. We have implemented additional compliance measures at all operating Pick-n-Pull locations in the state and expect to negotiate a state-wide settlement with EPAof this matter that will address the concerns raised in this joint investigation. Based on the settlement discussions to date and the program improvements we have implemented, we do not believe that the outcome of this matter will be material to our financial position, results of operations, cash flows or liquidity.
On March 23, 2021, the California Superior Court for the County of Alameda issued an order in a case filed on August 5, 2020 by The Athletics Investment Group LLC against the DTSC as Respondent and the Company as Real Party in Interest seeking a writ of mandate commanding the DTSC to rescind the “f letter” issued to the Company’s metal shredding facility in California. Pursuant to determinations under section 66260.200(f) of the state hazardous waste regulations issued in 1988 and 1989 (the “f letters”), the DTSC determined that treated shredder waste from the Company’s facility does not pose a significant hazard to human health, safety or the environment and therefore classified the waste as a “nonhazardous waste” which among other things permits its use as alternative daily cover at municipal landfills. The court in its order concluded that, under a law enacted by the legislature in 2014, the DTSC had a mandatory duty to rescind the “f letters” and granted the petition for writ of mandate. The court reached this decision despite a determination by DTSC in 2018 pursuant to the 2014 statute that treated shredder residue does not need to be managed as a hazardous waste in order to protect human health, safety or the environment. Separate orders implementing the court’s ruling have not yet been issued, and the timing and procedures for rescission of the “f letters,” as well as whether the DTSC will establish a workable alternative that will allow treated residue to continue to qualify as non-hazardous waste, remain uncertain. DTSC and the Company have 60 days from issuance of the order to provide a notice of appeal, which notice would result in an automatic stay of the order.
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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 Securities2020, except as follows:
Risk Factors Relating to Our Business
Reliance on third party shipping companies may restrict our ability to ship our products
We significantly rely on third parties to handle and Exchange Commission on October 24, 2017, except for the following:
Risk Factors Relating to the Regulatory Environment
Governmental agencies may refuse to grant or renew our licenses and permits, thus has also recorded an insurance receivablerestricting our ability to operate
We conduct certain of our operations subject to licenses, permits and approvals from state and local governments. Governmental agencies often resist the establishment of certain types of facilities in their communities, including metal recycling and auto parts facilities. Changes in zoning and increased residential and mixed-use development near our facilities are reducing the buffer zones and creating land use conflicts with heavy industrial uses such as ours. This could result in increased complaints, increased inspections and enforcement including fines and penalties, operating restrictions, the need for $2 millionadditional capital expenditures and increased opposition to maintaining or renewing required approvals, licenses and permits. In addition, waste products from our operations are subject to classification and regulation that, among other things, determine how such materials may be handled, stored, transported and disposed. Failure to obtain or maintain regulatory permits, approvals or exemptions for such waste could materially increase our costs or limit our operations.
In March 2021, for example, a state court in California determined that the state regulatory agency had a mandatory duty under a 2014 law to rescind the regulatory determinations pursuant to which treated metal shredder residue from our and other metal recycling facilities in the first quarterstate has been classified as non-hazardous and safely used as alternative daily cover at landfills for over 30 years. See Part II, “Item 1. Legal Proceedings” in this Quarterly Report on Form 10-Q for further discussion of fiscal 2018, resultingthis matter. While implementation of the court’s decision is unclear at this point, failure to put in no net impactplace a workable alternative that will allow such material to continue to qualify as non-hazardous waste or to identify other cost-effective disposal options or to overturn this decision on appeal could limit our consolidatedoperations in the state and could have a material adverse effect on our results of operations.
Furthermore, from time to time, both the U.S. and foreign governments impose regulations and restrictions on trade in the markets in which we are not involved, remediation activities are not expectedoperate. In some countries, governments require us to commenceapply for a numbercertificates or registration before allowing shipment of years. In addition, as discussed above, responsibility for implementingrecycled metal to customers in those countries. There can be no assurance that future approvals, licenses and funding the remedypermits will be determined in a separate allocation process. We do not expect the allocation process to proceed until after the additional pre-remedial design data is collected.
ITEM 5. OTHER INFORMATION
None.
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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.
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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, 2021 | By: | /s/ Tamara L. Lundgren | |||
Tamara L. Lundgren | ||||||
Chairman, President and Chief Executive Officer | ||||||
Date: | April 7, 2021 | By: | /s/ Richard D. Peach | |||
Richard D. Peach | ||||||
Executive Vice President, Chief Financial Officer and Chief |
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