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Schnitzer Steel Industries (SCHN)

Filed: 29 Jun 22, 3:51pm

Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended May 31, 2022

or

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from __________ to __________

Commission File Number 000-22496

 

img6095288_0.jpg 

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

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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.

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). Yes No ☒

The registrant had 27,247,009 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 June 27, 2022.

 

 


 

SCHNITZER STEEL INDUSTRIES, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

PAGE

FORWARD-LOOKING STATEMENTS

3

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

4

 

 

Unaudited Condensed Consolidated Balance Sheets as of May 31, 2022 and August 31, 2021

4

 

 

Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended May 31, 2022 and 2021

5

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended May 31, 2022 and 2021

6

 

 

Unaudited Condensed Consolidated Statements of Equity for the Three and Nine Months Ended May 31, 2022 and 2021

7

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 2022 and 2021

9

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

11

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

38

 

 

Item 4. Controls and Procedures

39

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

40

 

 

Item 1A. Risk Factors

42

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

Item 5. Other Information

42

 

 

Item 6. Exhibits

43

 

 

SIGNATURES

44

 

 

 

 


Table of Contents

 

 

FORWARD-LOOKING STATEMENTS

Statements and information included in this Quarterly Report on Form 10-Q by Schnitzer Steel Industries, Inc. 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 Schnitzer 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 the impact of pandemics, epidemics, or other public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic; the impact of equipment upgrades, equipment failures, and facility damage on production, including timing of repairs and resumption of operations; the realization of insurance recoveries; the Company’s outlook, growth initiatives, or expected results or objectives, including pricing, margins, sales volumes, and profitability; completion of acquisitions and integration of acquired businesses; the impacts of supply chain disruptions and inflation; 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; the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; the potential impact of adopting new accounting pronouncements; the impact of labor shortages or increased labor costs; obligations under our retirement plans; benefits, savings, or additional costs from business realignment, cost containment, and productivity improvement programs; 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” of Part I of our most recent Annual Report on Form 10-K, as supplemented by our subsequently filed Quarterly Reports 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; the impact of equipment upgrades, equipment failures, and facility damage on production; potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the cyclicality and impact of general economic conditions; changing conditions in global markets including the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; economic and geopolitical instability including as a result of military conflict; volatile supply and demand conditions affecting prices and volumes in the markets for raw materials and other inputs we purchase; significant decreases in recycled metal prices; imbalances in supply and demand conditions in the global steel industry; difficulties associated with acquisitions and integration of acquired businesses; supply chain disruptions; reliance on third-party shipping companies, including with respect to freight rates and the availability of transportation; inability to obtain or renew business licenses and permits; the impact of goodwill impairment charges; the impact of long-lived asset and equity 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; customer fulfillment of their contractual obligations; increases in the relative value of the U.S. dollar; the impact of inflation and 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 facilities; the impact of consolidation in the steel industry; product liability claims; the impact of legal proceedings and legal compliance; the adverse impact of climate change; the impact of not realizing deferred tax assets; the impact of tax increases and changes in tax rules; the impact of one or more cybersecurity incidents; environmental compliance costs and potential environmental liabilities; increased environmental regulations and enforcement; compliance with climate change and greenhouse gas emission laws and regulations; the impact of labor shortages or increased labor costs; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

 

 

May 31, 2022

 

 

August 31, 2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,125

 

 

$

27,818

 

Accounts receivable, net of allowance for credit losses of $1,556
   and $
1,566

 

 

283,819

 

 

 

214,098

 

Inventories

 

 

439,704

 

 

 

256,427

 

Refundable income taxes

 

 

1,285

 

 

 

837

 

Prepaid expenses and other current assets

 

 

46,992

 

 

 

43,934

 

Total current assets

 

 

787,925

 

 

 

543,114

 

Property, plant and equipment, net of accumulated depreciation of $847,366 and $837,293

 

 

629,104

 

 

 

562,674

 

Operating lease right-of-use assets

 

 

127,311

 

 

 

131,221

 

Investments in joint ventures

 

 

13,461

 

 

 

12,844

 

Goodwill

 

 

254,511

 

 

 

170,304

 

Intangibles, net of accumulated amortization of $6,219 and $3,846

 

 

26,199

 

 

 

3,980

 

Deferred income taxes

 

 

24,988

 

 

 

27,561

 

Other assets

 

 

48,942

 

 

 

42,665

 

Total assets

 

$

1,912,441

 

 

$

1,494,363

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Short-term borrowings

 

$

5,764

 

 

$

3,654

 

Accounts payable

 

 

223,816

 

 

 

179,917

 

Accrued payroll and related liabilities

 

 

56,681

 

 

 

69,622

 

Environmental liabilities

 

 

11,600

 

 

 

24,743

 

Operating lease liabilities

 

 

21,964

 

 

 

21,417

 

Accrued income taxes

 

 

10,140

 

 

 

3,521

 

Other accrued liabilities

 

 

50,898

 

 

 

49,976

 

Total current liabilities

 

 

380,863

 

 

 

352,850

 

Deferred income taxes

 

 

62,133

 

 

 

40,593

 

Long-term debt, net of current maturities

 

 

316,108

 

 

 

71,299

 

Environmental liabilities, net of current portion

 

 

54,950

 

 

 

52,385

 

Operating lease liabilities, net of current maturities

 

 

106,745

 

 

 

113,165

 

Other long-term liabilities

 

 

23,772

 

 

 

24,292

 

Total liabilities

 

 

944,571

 

 

 

654,584

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

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,
   
27,247 and 27,332 shares issued and outstanding

 

 

27,247

 

 

 

27,332

 

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

 

 

34,426

 

 

 

49,074

 

Retained earnings

 

 

936,060

 

 

 

793,712

 

Accumulated other comprehensive loss

 

 

(34,245

)

 

 

(34,554

)

Total SSI shareholders’ equity

 

 

963,688

 

 

 

835,764

 

Noncontrolling interests

 

 

4,182

 

 

 

4,015

 

Total equity

 

 

967,870

 

 

 

839,779

 

Total liabilities and equity

 

$

1,912,441

 

 

$

1,494,363

 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statement are an integral part of these statements.

4


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenues

 

$

1,010,087

 

 

$

820,718

 

 

$

2,591,403

 

 

$

1,912,936

 

Operating expense:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

834,375

 

 

 

678,297

 

 

 

2,188,158

 

 

 

1,585,416

 

Selling, general and administrative

 

 

77,672

 

 

 

61,887

 

 

 

194,020

 

 

 

165,935

 

(Income) from joint ventures

 

 

(762

)

 

 

(950

)

 

 

(1,589

)

 

 

(2,131

)

Asset impairment charges

 

 

932

 

 

 

 

 

 

932

 

 

 

 

Restructuring charges and other exit-related activities

 

 

26

 

 

 

104

 

 

 

52

 

 

 

982

 

Operating income

 

 

97,844

 

 

 

81,380

 

 

 

209,830

 

 

 

162,734

 

Interest expense

 

 

(2,223

)

 

 

(1,383

)

 

 

(5,496

)

 

 

(4,387

)

Other loss, net

 

 

(34

)

 

 

(114

)

 

 

(136

)

 

 

(521

)

Income from continuing operations before income taxes

 

 

95,587

 

 

 

79,883

 

 

 

204,198

 

 

 

157,826

 

Income tax expense

 

 

(20,037

)

 

 

(14,401

)

 

 

(43,207

)

 

 

(31,589

)

Income from continuing operations

 

 

75,550

 

 

 

65,482

 

 

 

160,991

 

 

 

126,237

 

Loss from discontinued operations, net of tax

 

 

(46

)

 

 

(46

)

 

 

(46

)

 

 

(58

)

Net income

 

 

75,504

 

 

 

65,436

 

 

 

160,945

 

 

 

126,179

 

Net income attributable to noncontrolling interests

 

 

(870

)

 

 

(1,801

)

 

 

(2,497

)

 

 

(3,852

)

Net income attributable to SSI shareholders

 

$

74,634

 

 

$

63,635

 

 

$

158,448

 

 

$

122,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to SSI shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income per share from continuing operations

 

$

2.65

 

 

$

2.27

 

 

$

5.63

 

 

$

4.38

 

Net income per share

 

$

2.65

 

 

$

2.27

 

 

$

5.63

 

 

$

4.38

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income per share from continuing operations

 

$

2.52

 

 

$

2.16

 

 

$

5.33

 

 

$

4.23

 

Net income per share

 

$

2.52

 

 

$

2.15

 

 

$

5.33

 

 

$

4.22

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

28,143

 

 

 

28,047

 

 

 

28,161

 

 

 

27,948

 

Diluted

 

 

29,625

 

 

 

29,543

 

 

 

29,741

 

 

 

28,963

 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

5


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

 

$

75,504

 

 

$

65,436

 

 

$

160,945

 

 

$

126,179

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

153

 

 

 

4,514

 

 

 

(240

)

 

 

6,325

 

Pension obligations, net

 

 

40

 

 

 

37

 

 

 

549

 

 

 

(185

)

Total other comprehensive income, net of tax

 

 

193

 

 

 

4,551

 

 

 

309

 

 

 

6,140

 

Comprehensive income

 

 

75,697

 

 

 

69,987

 

 

 

161,254

 

 

 

132,319

 

Less comprehensive income attributable to noncontrolling interests

 

 

(870

)

 

 

(1,801

)

 

 

(2,497

)

 

 

(3,852

)

Comprehensive income attributable to SSI shareholders

 

$

74,827

 

 

$

68,186

 

 

$

158,757

 

 

$

128,467

 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

6


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

 

Common Stock

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Additional

 

 

 

 

 

Other

 

 

Total SSI

 

 

 

 

 

 

 

Three Months Ended May 31, 2021

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in
Capital

 

 

Retained
Earnings

 

 

Comprehensive
Loss

 

 

Shareholders’
Equity

 

 

Noncontrolling
Interests

 

 

Total
Equity

 

Balance as of March 1, 2021

 

 

27,263

 

 

$

27,263

 

 

 

200

 

 

$

200

 

 

$

39,695

 

 

$

697,966

 

 

$

(35,282

)

 

$

729,842

 

 

$

4,197

 

 

$

734,039

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63,635

 

 

 

 

 

 

63,635

 

 

 

1,801

 

 

 

65,436

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,551

 

 

 

4,551

 

 

 

 

 

 

4,551

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,446

)

 

 

(1,446

)

Issuance of restricted stock

 

 

91

 

 

 

91

 

 

 

 

 

 

 

 

 

(91

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock withheld for taxes

 

 

(31

)

 

 

(31

)

 

 

 

 

 

 

 

 

(1,433

)

 

 

 

 

 

 

 

 

(1,464

)

 

 

 

 

 

(1,464

)

Share-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,806

 

 

 

 

 

 

 

 

 

6,806

 

 

 

 

 

 

6,806

 

Dividends ($0.1875 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,339

)

 

 

 

 

 

(5,339

)

 

 

 

 

 

(5,339

)

Balance as of May 31, 2021

 

 

27,323

 

 

$

27,323

 

 

 

200

 

 

$

200

 

 

$

44,977

 

 

$

756,262

 

 

$

(30,731

)

 

$

798,031

 

 

$

4,552

 

 

$

802,583

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Additional

 

 

 

 

 

Other

 

 

Total SSI

 

 

 

 

 

 

 

Three Months Ended May 31, 2022

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in
Capital

 

 

Retained
Earnings

 

 

Comprehensive
Loss

 

 

Shareholders'
Equity

 

 

Noncontrolling
Interests

 

 

Total
Equity

 

Balance as of March 1, 2022

 

 

27,433

 

 

$

27,433

 

 

 

200

 

 

$

200

 

 

$

40,821

 

 

$

866,776

 

 

$

(34,438

)

 

$

900,792

 

 

$

3,857

 

 

$

904,649

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74,634

 

 

 

 

 

 

74,634

 

 

 

870

 

 

 

75,504

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

193

 

 

 

193

 

 

 

 

 

 

193

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(545

)

 

 

(545

)

Share repurchases

 

 

(244

)

 

 

(244

)

 

 

 

 

 

 

 

 

(9,749

)

 

 

 

 

 

 

 

 

(9,993

)

 

 

 

 

 

(9,993

)

Issuance of restricted stock

 

 

89

 

 

 

89

 

 

 

 

 

 

 

 

 

(89

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock withheld for taxes

 

 

(31

)

 

 

(31

)

 

 

 

 

 

 

 

 

(1,395

)

 

 

 

 

 

 

 

 

(1,426

)

 

 

 

 

 

(1,426

)

Share-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,838

 

 

 

 

 

 

 

 

 

4,838

 

 

 

 

 

 

4,838

 

Dividends ($0.1875 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,350

)

 

 

 

 

 

(5,350

)

 

 

 

 

 

(5,350

)

Balance as of May 31, 2022

 

 

27,247

 

 

$

27,247

 

 

 

200

 

 

$

200

 

 

$

34,426

 

 

$

936,060

 

 

$

(34,245

)

 

$

963,688

 

 

$

4,182

 

 

$

967,870

 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

 

7


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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Additional

 

 

 

 

 

Other

 

 

Total SSI

 

 

 

 

 

 

 

Nine Months Ended May 31, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

122,327

 

 

 

 

 

 

122,327

 

 

 

3,852

 

 

 

126,179

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,140

 

 

 

6,140

 

 

 

 

 

 

6,140

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,029

)

 

 

(3,029

)

Share repurchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of restricted stock

 

 

644

 

 

 

644

 

 

 

 

 

 

 

 

 

(644

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock withheld for taxes

 

 

(220

)

 

 

(220

)

 

 

 

 

 

 

 

 

(5,215

)

 

 

 

 

 

 

 

 

(5,435

)

 

 

 

 

 

(5,435

)

Share-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,220

 

 

 

 

 

 

 

 

 

14,220

 

 

 

 

 

 

14,220

 

Dividends ($0.5625 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,928

)

 

 

 

 

 

(15,928

)

 

 

 

 

 

(15,928

)

Balance as of May 31, 2021

 

 

27,323

 

 

$

27,323

 

 

200

 

 

$

200

 

 

$

44,977

 

 

$

756,262

 

 

$

(30,731

)

 

$

798,031

 

 

$

4,552

 

 

$

802,583

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Additional

 

 

 

 

 

Other

 

 

Total SSI

 

 

 

 

 

 

 

Nine Months Ended May 31, 2022

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in
Capital

 

 

Retained
Earnings

 

 

Comprehensive
Loss

 

 

Shareholders'
Equity

 

 

Noncontrolling
Interests

 

 

Total
Equity

 

Balance as of September 1, 2021

 

 

27,332

 

 

$

27,332

 

 

 

200

 

 

$

200

 

 

$

49,074

 

 

$

793,712

 

 

$

(34,554

)

 

$

835,764

 

 

$

4,015

 

 

$

839,779

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

158,448

 

 

 

 

 

 

158,448

 

 

 

2,497

 

 

 

160,945

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

309

 

 

 

309

 

 

 

 

 

 

309

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,330

)

 

 

(2,330

)

Share repurchases

 

 

(444

)

 

 

(444

)

 

 

 

 

 

 

 

 

(17,414

)

 

 

 

 

 

 

 

 

(17,858

)

 

 

 

 

 

(17,858

)

Issuance of restricted stock

 

 

568

 

 

 

568

 

 

 

 

 

 

 

 

 

(568

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock withheld for taxes

 

 

(209

)

 

 

(209

)

 

 

 

 

 

 

 

 

(10,794

)

 

 

 

 

 

 

 

 

(11,003

)

 

 

 

 

 

(11,003

)

Share-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,128

 

 

 

 

 

 

 

 

 

14,128

 

 

 

 

 

 

14,128

 

Dividends ($0.5625 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,100

)

 

 

 

 

 

(16,100

)

 

 

 

 

 

(16,100

)

Balance as of May 31, 2022

 

 

27,247

 

 

$

27,247

 

 

 

200

 

 

$

200

 

 

$

34,426

 

 

$

936,060

 

 

$

(34,245

)

 

$

963,688

 

 

$

4,182

 

 

$

967,870

 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

 

 

Nine Months Ended May 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

160,945

 

 

$

126,179

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

Asset impairment charges

 

 

932

 

 

 

 

Depreciation and amortization

 

 

54,566

 

 

 

43,621

 

Inventory write-downs

 

 

3,199

 

 

 

 

Deferred income taxes

 

 

23,851

 

 

 

11,393

 

Undistributed equity in earnings of joint ventures

 

 

(1,589

)

 

 

(2,131

)

Share-based compensation expense

 

 

14,046

 

 

 

13,987

 

Loss (gain) on disposal of assets, net

 

 

1,192

 

 

 

(48

)

Unrealized foreign exchange loss, net

 

 

193

 

 

 

137

 

Credit loss, net

 

 

17

 

 

 

21

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

(43,340

)

 

 

(133,164

)

Inventories

 

 

(164,196

)

 

 

(92,114

)

Income taxes

 

 

8,843

 

 

 

18,932

 

Prepaid expenses and other current assets

 

 

(14,771

)

 

 

(9,671

)

Other long-term assets

 

 

(1,068

)

 

 

(4,524

)

Operating lease assets and liabilities

 

 

(2,049

)

 

 

(696

)

Accounts payable

 

 

44,874

 

 

 

56,394

 

Accrued payroll and related liabilities

 

 

(16,890

)

 

 

14,269

 

Other accrued liabilities

 

 

1,747

 

 

 

1,208

 

Environmental liabilities

 

 

(14,744

)

 

 

2,055

 

Other long-term liabilities

 

 

650

 

 

 

3,496

 

Distributed equity in earnings of joint ventures

 

 

1,600

 

 

 

1,250

 

Net cash provided by operating activities

 

 

58,008

 

 

 

50,594

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(97,972

)

 

 

(76,730

)

Acquisitions, net of acquired cash

 

 

(177,070

)

 

 

 

Proceeds from insurance and sale of assets

 

 

18,244

 

 

 

462

 

Purchase of equity investment

 

 

(5,000

)

 

 

 

Deposit on land option

 

 

(80

)

 

 

630

 

Net cash used in investing activities

 

 

(261,878

)

 

 

(75,638

)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings from long-term debt

 

 

895,175

 

 

 

445,829

 

Repayment of long-term debt

 

 

(655,440

)

 

 

(396,810

)

Payment of debt issuance costs

 

 

 

 

 

(23

)

Repurchase of Class A common stock

 

 

(17,858

)

 

 

 

Taxes paid related to net share settlement of share-based payment awards

 

 

(11,003

)

 

 

(5,435

)

Distributions to noncontrolling interests

 

 

(2,330

)

 

 

(3,029

)

Dividends paid

 

 

(16,172

)

 

 

(16,067

)

Net cash provided by financing activities

 

 

192,372

 

 

 

24,465

 

Effect of exchange rate changes on cash

 

 

(195

)

 

 

619

 

Net (decrease) increase in cash and cash equivalents

 

 

(11,693

)

 

 

40

 

Cash and cash equivalents as of beginning of period

 

 

27,818

 

 

 

17,887

 

Cash and cash equivalents as of end of period

 

$

16,125

 

 

$

17,927

 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

 

 

Nine Months Ended May 31,

 

 

 

2022

 

 

2021

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

3,249

 

 

$

2,454

 

Income taxes paid, net

 

$

10,502

 

 

$

1,267

 

Schedule of noncash investing and financing transactions:

 

 

 

 

 

 

Purchases of property, plant and equipment included in liabilities

 

$

19,868

 

 

$

10,572

 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Table of Contents

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, 2021. The results for the three and nine months ended May 31, 2022 and 2021 are not necessarily indicative of the results of operations for the entire fiscal year.

Segment Reporting

The Company acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors, and brokers, and it procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores. Most of these auto parts stores supply the Company’s shredding facilities with auto bodies that are processed into saleable recycled metal products. In addition to the sale of recycled metal products processed at its facilities, the Company provides a variety of recycling and related services. The Company also produces a range of finished steel long products at its electric arc furnace (“EAF”) steel mill using recycled ferrous metal sourced internally from its recycling and joint venture operations and other raw materials.

The accounting standards for reporting information about operating segments define an operating segment as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses for which discrete financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s internal organizational and reporting structure includes a single operating and reportable segment.

Cash and Cash Equivalents

Cash and cash equivalents include short-term securities that are not restricted by third parties and have an original maturity date of 90 days or less. Included in accounts payable are book overdrafts representing outstanding checks in excess of funds on deposit of $62 million and $47 million as of May 31, 2022 and August 31, 2021, respectively.

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 the Company’s ferrous export sales have been made with letters of credit. Ferrous and nonferrous metal sales to domestic customers and finished steel sales are generally made on open account, and a portion of these sales are covered by credit insurance.

The Company evaluates the collectibility of its accounts receivable based on a combination of factors, including whether sales were made pursuant to letters of credit or required deposits prior to shipment, the aging of customer receivable balances, the financial condition of the Company’s customers, historical collection rates, and economic trends. Management uses this evaluation to estimate the amount of customer receivables that may not be collected in the future and records a provision for expected credit losses. Accounts are written off when all efforts to collect have been exhausted.

Also included in accounts receivable are short-term advances to scrap metal suppliers used as a mechanism to acquire unprocessed scrap metal. The advances are generally repaid with scrap metal, as opposed to cash. Repayments of advances with scrap metal are treated as noncash operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows and totaled $9 million and $7 million for the nine months ended May 31, 2022 and 2021, respectively.

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Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Prepaid Expenses

The Company’s prepaid expenses, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets, totaled $33 million and $22 million as of May 31, 2022 and August 31, 2021, respectively, and consisted primarily of prepaid insurance, deposits on capital projects, prepaid services, and prepaid property taxes.

Other Assets

The Company’s other assets, exclusive of prepaid expenses and assets relating to certain employee benefit plans, consisted primarily of receivables from insurers, two equity investments, capitalized implementation costs for cloud computing arrangements, major spare parts and equipment, cash held in a client trust account relating to a legal settlement, debt issuance costs, and notes and other contractual receivables. Other assets are reported within either prepaid expenses and other current assets or other assets in the Unaudited Condensed Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle of one year from the reporting date.

Receivables from insurers represent the portion of insured losses expected to be recovered from the Company’s insurers. The receivable is recorded at an amount not to exceed the recorded loss and only if the terms of legally enforceable insurance contracts support that the insurance recovery will not be disputed and is deemed collectible. Receivables from insurers totaled $14 million and $21 million as of May 31, 2022 and August 31, 2021, respectively. Receivables from insurers as of May 31, 2022 comprised primarily $4 million relating to property loss and damage and other claims in connection with the December 2021 fire at the Company’s shredder facility in Everett, Massachusetts, $5 million relating to environmental claims, and $4 million relating to workers’ compensation claims. Receivables from insurers as of August 31, 2021 comprised primarily $10 million relating to property loss and damage and other claims in connection with the May 2021 fire at the Company’s melt shop operations in McMinnville, Oregon, $6 million relating to environmental claims, and $4 million relating to workers’ compensation claims. See “Accounting for Impacts of Involuntary Events” below in this Note for further discussion of receivables and advance payments from insurers relating to property damage and business interruption claims.

Other assets as of May 31, 2022 and August 31, 2021 also included approximately $7 million and $8 million, respectively, in connection with cash deposited into a client trust account in the second quarter of fiscal 2021 to fund the remediation of a site, a portion of which was previously leased to and operated by an indirect, wholly-owned subsidiary. The cash was deposited into the client trust account by other potentially liable parties in connection with settlement of a lawsuit relating to allocation of the remediation costs, including agreement by the Company’s subsidiary to perform certain remedial actions. See “Other Legacy Environmental Loss Contingencies” within “Contingencies – Environmental” in Note 5 - Commitments and Contingencies for further discussion of this matter.

The Company invested $6 million in the equity of a privately-held U.S. waste and recycling entity in fiscal 2017, and in May 2022, the Company invested $5 million in the equity of an unrelated privately-held Canadian recycling entity. The Company's influence over the operating and financial policies of each entity is not significant, and, thus, the investments are accounted for under the guidance for investments in equity securities. The equity investments do not have readily determinable fair values and, therefore, are carried at cost and adjusted for impairments and observable price changes. The investments are reported within other assets in the Unaudited Condensed Consolidated Balance Sheets. As of May 31, 2022 and August 31, 2021, the aggregate carrying value of the investments was $11 million and $6 million, respectively. The Company has not recorded any impairments or upward or downward adjustments to the carrying value of the investments since their respective acquisition.

Accounting for Impacts of Involuntary Events

Assets destroyed or damaged as a result of involuntary events are written off or reduced in carrying value to their salvage value. When recovery of all or a portion of the amount of property damage loss or other covered expenses through insurance proceeds is demonstrated to be probable, a receivable is recorded and offsets the loss or expense up to the amount of the total loss or expense. No gain is recorded until all contingencies related to the insurance claim have been resolved.

12


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On May 22, 2021, the Company experienced a fire at its steel mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. As a result of the fire, the rolling mill production ceased in early June 2021. In August 2021, the steel mill began ramping up operations following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. The Company experienced the loss of business income during the shutdown of the steel mill and the subsequent ramp-up phase which was substantially completed during the second quarter of fiscal 2022. The Company filed initial insurance claims for the physical loss and damage experienced at the mill’s melt shop and business income losses resulting from the matter. As of August 31, 2021, prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets included an initial $10 million insurance receivable recognized in the fourth quarter of fiscal 2021, primarily offsetting applicable losses including capital purchases of $10 million that had been incurred by the Company as of August 31, 2021. In the first nine months of fiscal 2022, the Company increased the amount of this insurance receivable to $25 million and recognized a related $15 million insurance recovery gain, $3 million recorded in the first quarter and $12 million recorded in the second quarter, within cost of goods sold in the Unaudited Condensed Consolidated Statements of Income, reflecting recovery of applicable losses incurred as a result of the fire to date. In addition, during the first nine months of fiscal 2022, the Company received advance payments from insurers totaling approximately $30 million towards the Company’s claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the $25 million insurance receivable to 0 with the remaining amount of advance payments of $5 million reported within other accrued liabilities in the Unaudited Condensed Consolidated Balance Sheets as of May 31, 2022.

On December 8, 2021, the Company experienced a fire at its metals recycling facility in Everett, Massachusetts. Direct physical loss or damage to property from the incident was limited to the facility’s shredder building and equipment, with no bodily injuries and no physical loss or damage to property reported at other buildings or equipment. As a result of the fire, shredding operations ceased, while all non-shredding operations at the facility continued, including torching, shearing, separating, and sorting purchased non-shreddable recycled ferrous metals. On January 28, 2022, shredding operations at the facility began ramping up following the replacement and repairs to shredder equipment that had been damaged. Completion of the remainder of repair and replacement of property that experienced physical loss or damage, primarily buildings and improvements, will occur over a longer period and impacts on business income may continue. For example, as of June 18, 2022, shredder operations temporarily ceased at the facility pending completion of discussions with the Massachusetts Department of Environmental Protection and the Massachusetts Attorney General’s office regarding installation and operation of temporary emission capture and controls that would allow operation of the shredder prior to completion of the repair and replacement of the shredder enclosure building. Non-shredding operations at the facility continue. The Company filed initial insurance claims for the property that experienced physical loss or damage and anticipated business income losses resulting from the matter. In the second quarter of fiscal 2022, the Company recognized an initial $10 million insurance receivable and related insurance recovery gain, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets and within cost of goods sold in the Unaudited Condensed Consolidated Statements of Income, respectively, reflecting recovery of applicable losses including impairment charges of $6 million related to the carrying value of plant and equipment assets lost in or damaged by the fire and initial capital purchases and other costs totaling $4 million that had been incurred by the Company as of February 28, 2022. In the third quarter of fiscal 2022, the Company increased the amount of this insurance receivable to $11 million and recognized a related $1 million insurance recovery gain, reflecting recovery of applicable losses incurred as a result of the fire to date. Also in the third quarter of fiscal 2022, the Company received advance payments from insurers totaling approximately $7 million towards the Company's claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the insurance receivable to $4 million as of May 31, 2022.

Business Acquisitions

The Company recognizes the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. Within one year from the date of acquisition, the Company may update the value allocated to the assets acquired and liabilities assumed, and the resulting goodwill balance, based on information received regarding the valuation of such assets and liabilities that was not available at the time of purchase. Measuring assets and liabilities at fair value requires the Company to determine the price that would be paid by a third-party market participant based on the highest and best use of the assets or interests acquired. Acquisition costs are expensed as incurred.

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Table of Contents

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 and accounts receivable. The majority of cash and cash equivalents is maintained with major financial institutions. Balances with these and certain other institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250 thousand as of May 31, 2022. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up the Company’s customer base. The Company controls credit risk through credit approvals, credit limits, credit insurance, letters of credit or other collateral, cash deposits, and monitoring procedures.

Recent Accounting Pronouncements

The Company does not expect that its adoption in the future of any recently issued accounting pronouncements will have a material impact on its consolidated financial statements.

Note 2 - Inventories

Inventories consisted of the following (in thousands):

 

 

May 31, 2022

 

 

August 31, 2021

 

Processed and unprocessed scrap metal

 

$

299,681

 

 

$

164,960

 

Semi-finished goods

 

 

18,457

 

 

 

7,671

 

Finished goods

 

 

69,949

 

 

 

39,368

 

Supplies

 

 

51,617

 

 

 

44,428

 

Inventories

 

$

439,704

 

 

$

256,427

 

 

Note 3 - Business Acquisitions

Columbus Recycling

On October 1, 2021, the Company used cash on hand and borrowings under existing credit facilities to acquire 8 metals recycling facilities across Mississippi, Tennessee, and Kentucky from Columbus Recycling, a provider of recycled ferrous and nonferrous metal products and recycling services. The transaction qualified as a business combination for accounting purposes, which involves application of the acquisition method described in Accounting Standards Codification Topic 805, Business Combinations, and summarized in “Business Acquisitions” in Note 1 - Summary of Significant Accounting Policies. The cash purchase price was approximately $107 million, subject to adjustment for acquired net working capital relative to an agreed-upon benchmark, as well as other adjustments. The Company paid at closing an additional $7 million for estimated net working capital in excess of the benchmark, which is still subject to adjustment as of the date of this report, resulting in total purchase consideration measured as of the end of the third quarter of fiscal 2022 of approximately $114 million. As of the date of this report, measurement of actual acquired net working capital, as well as the fair values of certain other acquired assets and assumed liabilities, is still preliminary and subject to change based on the completion of valuation procedures. The acquired Columbus Recycling operations purchase and process scrap metal from industrial manufacturers, local recycling companies, and individuals, and sell the recycled products to regional foundries and steel mills. Combined with the Company’s regional metals recycling facilities in Georgia, Alabama, and Tennessee, the acquired operations offer additional recycling products, services, and logistics solutions to customers and suppliers across the Southeast, giving rise to expected benefits supporting the amount of acquired goodwill.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed by the Company as of the October 1, 2021 acquisition date (in thousands):

Cash

 

$

325

 

Accounts receivable

 

 

22,763

 

Inventories

 

 

10,060

 

Other current assets

 

 

255

 

Property, plant and equipment

 

 

13,491

 

Operating lease right-of-use assets

 

 

254

 

Goodwill(1)

 

 

62,552

 

Intangibles and other assets

 

 

19,741

 

Total assets acquired

 

 

129,441

 

Current liabilities

 

 

11,828

 

Other liabilities

 

 

3,350

 

Total liabilities assumed

 

 

15,178

 

Net assets acquired

 

$

114,263

 

 

(1)
Approximately $59 million of the provisional amount of acquired goodwill is tax deductible.

The following table summarizes the provisional purchase price allocation to the identifiable intangible assets and their estimated useful lives as of the October 1, 2021 acquisition date (in thousands):

 

 

 

 

 

Useful Life

Supplier relationships

 

$

17,245

 

 

7

Customer relationships

 

 

2,496

 

 

7

 

 

$

19,741

 

 

 

The results of operations for the acquired Columbus Recycling business beginning as of the October 1, 2021 acquisition date are included in the accompanying financial statements. For each of the three and nine months ended May 31, 2022, the revenues of the acquired Columbus Recycling business contributed 5% or less of the Company’s consolidated revenues reported in the Unaudited Condensed Consolidated Statements of Income, and the amount of net income contributed by the acquired Columbus Recycling business was 3% or less of the Company’s consolidated net income reported in the Unaudited Condensed Consolidated Statements of Income.

Encore Recycling

On April 29, 2022, the Company used cash on hand and borrowings under existing credit facilities to acquire 2 recycling facilities in the greater Atlanta, Georgia metropolitan area, including a metal shredding operation and recycled auto-parts center from the previous owners of Encore Recycling. The acquired Encore Recycling operations purchase and process scrap metal and end-of life vehicles from industrial manufacturers, local recycling companies, and individuals, and sell the recycled products to regional foundries and steel mills. Combined with the Company’s existing regional metals recycling facilities and recycled auto-parts centers, the acquired operations offer additional recycling products, services, and logistics solutions to customers and suppliers across portions of the Southeast, giving rise to expected benefits supporting the amount of acquired goodwill. The transaction qualified as a business combination for accounting purposes. The cash purchase price was approximately $55 million, subject to adjustment for acquired net working capital relative to an agreed-upon benchmark, as well as other adjustments. The Company paid at closing an additional $8 million for estimated net working capital in excess of the benchmark, which is still subject to adjustment as of the date of this report, resulting in total purchase consideration measured as of the end of the third quarter of fiscal 2022 of approximately $63 million. As of the date of this report, measurement of actual acquired net working capital, as well as the fair values of certain other acquired assets and assumed liabilities, is still preliminary and subject to change based on the completion of valuation procedures.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company is in the process of completing a fair valuation of the assets acquired and liabilities assumed by the Company as of the April 29, 2022 acquisition date. The following table summarizes the provisional fair values of the assets acquired and liabilities assumed by the Company as of the April 29, 2022 acquisition date (in thousands):

Accounts receivable

 

$

10,464

 

Inventories

 

 

4,270

 

Other current assets

 

 

65

 

Property, plant and equipment

 

 

24,937

 

Operating lease right-of-use assets

 

 

402

 

Goodwill(1)

 

 

21,715

 

Intangibles and other assets(2)

 

 

3,816

 

Total assets acquired

 

 

65,669

 

Current liabilities

 

 

1,447

 

Other liabilities

 

 

1,091

 

Total liabilities assumed

 

 

2,538

 

Net assets acquired

 

$

63,131

 

 

(1)
Approximately $21 million of the provisional amount of acquired goodwill is tax deductible.
(2)
Provisional acquired intangibles comprised supplier and customer relationships with preliminary expected useful lives of 7 years.

The results of operations for the acquired Encore Recycling business beginning as of the April 29, 2022 acquisition date are included in the accompanying financial statements. For each of the three and nine months ended May 31, 2022, the revenues and net income contributed by the acquired Encore Recycling business and reported in the Unaudited Condensed Consolidated Statements of Income were not material to the financial statements taken as a whole.

The following unaudited pro forma information presents the effect on the consolidated financial results of the Company of the Columbus Recycling and Encore Recycling businesses acquired during the first nine months of fiscal 2022 as though the businesses had been acquired as of the beginning of fiscal 2021 (in thousands):

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenues

 

$

1,029,000

 

 

$

887,500

 

 

$

2,671,500

 

 

$

2,073,500

 

Net income

 

$

79,000

 

 

$

68,000

 

 

$

173,000

 

 

$

131,500

 

Net income attributable to SSI shareholders

 

$

78,000

 

 

$

66,500

 

 

$

170,500

 

 

$

127,500

 

 

There are no individually material, nonrecurring pro forma adjustments directly attributable to the business combinations included in these pro forma revenues and earnings.

The information included in the pro forma amounts is derived from historical information obtained from the sellers of the businesses. These pro forma results are not necessarily indicative of what actual results would have been had these acquisitions occurred for the periods presented. In addition, the pro forma results are not intended to be a projection of future results and do not reflect any synergies that may be achieved from combining operations.

Note 4 - Goodwill

The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. 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 first nine months of fiscal 2022 requiring an interim goodwill impairment test, and the Company did not record a goodwill impairment charge in any of the periods presented.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The gross change in the carrying amount of goodwill for the nine months ended May 31, 2022 was as follows (in thousands):

 

 

Goodwill

 

August 31, 2021

 

$

170,304

 

Additions(1)

 

 

84,040

 

Measurement period adjustments

 

 

227

 

Foreign currency translation adjustment

 

 

(60

)

May 31, 2022

 

$

254,511

 

 

(1)
Additions to goodwill relate to the acquired Columbus Recycling business (approximately $62 million) and the Encore Recycling business (approximately $22 million) and are exclusive of measurement period adjustments presented separately. The amount of acquired goodwill in each acquisition was provisional as of May 31, 2022. See Note 3 - Business Acquisitions.

Accumulated goodwill impairment charges were $471 million as of both May 31, 2022 and August 31, 2021.

Note 5 - Commitments and Contingencies

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 for the nine months ended May 31, 2022 were as follows (in thousands):

 

Balance as of
September 1, 2021

 

 

Liabilities
Established
(Released), Net

 

 

Payments and
Other

 

 

Balance as of
May 31, 2022

 

 

Short-Term

 

 

Long-Term

 

$

77,128

 

 

$

7,577

 

 

$

(18,155

)

 

$

66,550

 

 

$

11,600

 

 

$

54,950

 

The Company had environmental liabilities of $67 million and $77 million as of May 31, 2022 and August 31, 2021, 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 “Other Legacy Environmental Loss Contingencies” 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 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. The process of site investigation, remedy selection, identification of additional PRPs, and allocation of costs has been underway for a number of years, but significant uncertainties remain. It is unclear to what extent the Company will be liable for environmental costs or third-party contribution or damage claims with respect to the Site.

From 2000 to 2017, the EPA oversaw a remedial investigation/feasibility study (“RI/FS”) at the Site. The Company was not among the parties that performed the RI/FS, but it contributed to the costs through an interim settlement with the performing parties. The performing parties have indicated that they incurred more than $155 million in that effort.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for the Site. 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 15 years old, and the EPA’s estimates for the costs and time required to implement the selected remedy. Moreover, the ROD provided only Site-wide cost estimates and did not provide sufficient detail to estimate costs for specific sediment management areas within the Site. 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 was more than a decade old at that time and would need to be updated with a new round of “baseline” sampling to be conducted prior to the remedial design phase. The remedial design phase is an engineering phase during which additional technical information and data are collected, identified, and incorporated into technical drawings and specifications developed for the subsequent remedial action. Following issuance of the ROD, the EPA proposed that the PRPs, or a subgroup of PRPs, perform the additional investigative work in advance of remedial design.

In December 2017, the Company and 3 other PRPs entered into an Administrative Settlement Agreement and Order on Consent with the EPA to perform such pre-remedial design investigation and baseline sampling over a two-year period. The report analyzing the results concluded that Site conditions have improved substantially since the data forming the basis of the ROD was collected. The EPA found with a few limited corrections that the data is of suitable quality and stated that such data will be used, in addition to existing and forthcoming design-level data, to inform implementation of the ROD. However, the EPA did not agree that the data or the analysis warranted a change to the remedy at this time and reaffirmed its commitment to proceed with remedial design. The Company and other PRPs disagree with the EPA’s position on use of the more recent data and will continue to pursue limited, but critical, changes to the selected remedy for the Site during the remedial design phase.

The EPA encouraged PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design in various project areas covering the entire Site. While certain PRPs executed consent agreements for remedial design work, because of the EPA’s refusal to date to modify the remedy to reflect the most current data on Site conditions and because of concerns with the terms of the consent agreement, the Company elected not to enter into a consent agreement. In April 2020, the EPA issued a unilateral administrative order (“UAO”) to the Company and MMGL, LLC (“MMGL”), an unaffiliated company, for the remedial design work in a portion of the Site designated as the River Mile 3.5 East Project Area. As required by the UAO, the Company notified the EPA of its intent to comply while reserving all of its sufficient cause defenses. Failure to comply with a UAO, without sufficient cause, could subject the Company to significant penalties or treble damages. Pursuant to the optimized remedial design timeline set forth in the UAO, the EPA’s expected schedule for completion of the remedial design work is four years. The 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 third quarter of fiscal 2020. The Company has insurance policies pursuant to which the Company is being reimbursed for the costs it has incurred for remedial design. 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 approximately $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 future allocation or contribution from other PRPs for a portion of such remedial design costs. In February 2021, the EPA announced that 100 percent of the Site’s areas requiring active cleanup are in the remedial design phase of the process.

Except for certain early action projects in which the Company is not involved, remediation activities at the Site are not expected to commence for a number of years. Moreover, those activities are expected to be sequenced, and the order and timing of such sequencing has not been determined. In addition, as noted above, the ROD does not determine the allocation of costs among PRPs.

The Company has joined with approximately 100 other PRPs, including the RI/FS performing parties, in a voluntary process to establish an allocation of costs at the Site, including the costs incurred in the RI/FS, ongoing remedial design costs, and future remedial action costs. The Company expects the next major stage of the allocation process to proceed in parallel with the remedial design process.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In addition to the remedial action process overseen by the EPA, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) is assessing natural resource damages at the Site. In 2008, the Trustee Council invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. The Company and other participating PRPs ultimately agreed to fund the first two phases of the three-phase assessment, which included the development of the Natural Resource Damage Assessment Plan (“AP”) and 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 will involve the full implementation of the AP and the final injury and damage determination. The Company is proceeding with the process established by the Trustee Council regarding early settlements under Phase 2. The Company has established an environmental reserve of approximately $2.3 million for this alleged natural resource damages liability as it continues to work with the Trustee Council to finalize an early settlement. The Company has insurance policies that it believes will provide reimbursement for costs related to this matter. As of May 31, 2022 and August 31, 2021, the Company had an insurance receivable in the same amount as the environmental reserve. See “Other Assets” in Note 1 - Summary of Significant Accounting Policies for further discussion of receivables from insurers.

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 the claims in this suit and does not have sufficient information to determine the likelihood of a loss in this matter or to estimate the amount of damages being sought or the amount of such damages that could be allocated to the Company.

The Company’s environmental liabilities as of May 31, 2022 and August 31, 2021 included $4 million and $6 million, respectively, relating to the Portland Harbor matters described above.

Because the final remedial actions have not yet been designed and there has not been a determination of the allocation among the PRPs of costs of the investigations or remedial action costs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it is likely to or which it is reasonably possible that it will incur in connection with the Site, although such costs could be material to the Company’s financial position, results of operations, cash flows, and liquidity. Among the facts being evaluated 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.

The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense, remedial design, remedial 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, continue to seek settlements with other insurers, and formed a Qualified Settlement Fund (“QSF”) which became operative in 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 and the funds in the QSF may not cover all of the costs which the Company may incur. The QSF is an unconsolidated variable interest entity (“VIE”) with no primary beneficiary. Two parties unrelated to each other, one appointed by the Company and one appointed by MMGL, share equally the power to direct the activities of the VIE that most significantly impact its economic performance. The Company’s appointee to co-manage the VIE is an executive officer of the Company. Neither MMGL nor its appointee to co-manage the VIE is a related party of the Company for the purpose of the primary beneficiary assessment or otherwise.

The Oregon Department of Environmental Quality is separately providing oversight of investigations and source control activities by the Company at various sites adjacent to Portland Harbor that are focused on controlling any current “uplands” releases of contaminants into the Willamette River. The Company has accrued liabilities for source control and related work at two sites, reflecting estimated costs of primarily investigation and design, which costs have not been material in the aggregate to date. No liabilities have been established in connection with these investigations for any other sites because the extent of contamination, required source control work, and the Company’s responsibility for the contamination and source control work, in each case if any, have not yet been determined. In addition, pursuant to its insurance policies, the Company is being reimbursed for the costs it incurs for required source control evaluation and remediation work. As of each of May 31, 2022 and August 31, 2021, the Company had an insurance receivable in the same amount as the environmental reserve for such source control work.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other Legacy Environmental Loss Contingencies

The Company’s environmental loss contingencies as of May 31, 2022 and August 31, 2021, other than Portland Harbor, include actual or possible investigation and remediation 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”). 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 remediation 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. When investigation, allocation, and remediation 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’s results of operations, financial condition, or cash flows.

In fiscal 2018, the Company accrued an initial $4 million 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 both May 31, 2022 and August 31, 2021, 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 previously estimated a range of reasonably possible losses related to this matter in excess of current accruals at between 0 and $28 million based on a range of remedial alternatives and subject to development and approval by regulators of specific remedy implementation plans. However, subsequent to the development of those remedial alternatives, the Company performed additional investigative activities under new state requirements that are likely to impact the required remedial actions and associated cost estimates, but the scope of such impacts and the amount or the range of the additional associated costs are not reasonably estimable at this time and are subject to further investigation, analysis, and discussion by the Company and regulators. The Company is investigating whether a portion or all of the current and future losses related to this matter, if incurred, are covered by existing insurance coverage or may be offset by contributions from other responsible parties.

In addition, the Company’s loss contingencies as of May 31, 2022 and August 31, 2021 included $8 million and $19 million, respectively, for the estimated costs related to environmental matters in connection with a closed facility owned and previously operated by an indirect, wholly-owned subsidiary, including monitoring and remediation of soil and groundwater conditions and funding for wellhead treatment facilities. In the first nine months of fiscal 2022, the Company accrued $3 million for certain soil remediation activities based on additional information related to estimated costs to complete. Investigation and remediation activities have been conducted under the oversight of the applicable state regulatory agency and are on-going, and the Company’s subsidiary has also been working with state and local officials with respect to the protection of public and private water supplies. As part of its activities relating to the protection of public water supplies, the Company’s subsidiary agreed to reimburse the municipality for certain studies and plans and to provide funding for the construction and operation by the municipality of wellhead treatment facilities, which agreement resulted in payment by the Company to the municipality of $11 million in the second quarter of fiscal 2022. It is reasonably possible that the Company may recognize additional liabilities in connection with this matter at the time such additional losses are probable and can be reasonably estimated. However, the Company cannot reasonably estimate at this time the possible additional loss or range of possible additional losses associated with this matter pending the on-going implementation of the approved remediation plan for soil and groundwater conditions and completion and operation of the wellhead treatment facilities.

In addition, the Company’s loss contingencies as of both May 31, 2022 and August 31, 2021 included $8 million for the estimated 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 remediation costs, the Company’s subsidiary agreed to perform the remedial action related to metals contamination on the site estimated to cost approximately $7.9 million, and another potentially liable party agreed to perform the remedial action related to creosote contamination at the site. As part of the settlement, other potentially liable parties agreed to make payments totaling approximately $7.6 million to fund the remediation of the metals contamination at the site in exchange for a release and indemnity. This amount was fully funded into a client trust account for the Company’s subsidiary in December 2020. See “Other Assets” in Note 1 - Summary of Significant Accounting Policies for further discussion of this client trust account. It is reasonably possible that the Company may recognize additional liabilities in connection with this matter at the time such additional losses are probable and can be reasonably estimated. However, the Company cannot reasonably estimate at this time the possible additional loss or range of possible additional losses associated with this matter pending completion, approval, and implementation of the remediation action plan.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Summary - Environmental Contingencies

With respect to environmental contingencies other than the Portland Harbor Superfund site and 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 its environmental contingencies. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material in any given period, but there can be no assurance that such amounts paid will not be material in the future.

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. The Company does not anticipate that the liabilities arising from such legal proceedings 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.

Note 6 - Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss, net of tax, comprise the following (in thousands):

 

 

 

Three Months Ended May 31, 2022

 

 

Three Months Ended May 31, 2021

 

 

 

Foreign Currency
Translation
Adjustments

 

 

Pension Obligations,
Net

 

 

Total

 

 

Foreign Currency
Translation
Adjustments

 

 

Pension Obligations,
Net

 

 

Total

 

Balances - March 1 (Beginning of period)

 

$

(32,002

)

 

$

(2,436

)

 

$

(34,438

)

 

$

(32,373

)

 

$

(2,909

)

 

$

(35,282

)

Other comprehensive income before reclassifications

 

 

153

 

 

 

0

 

 

 

153

 

 

 

4,514

 

 

 

0

 

 

 

4,514

 

Income tax (expense)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Other comprehensive income before reclassifications, net of tax

 

 

153

 

 

 

0

 

 

 

153

 

 

 

4,514

 

 

 

0

 

 

 

4,514

 

Amounts reclassified from accumulated other comprehensive loss

 

 

0

 

 

 

52

 

 

 

52

 

 

 

0

 

 

 

49

 

 

 

49

 

Income tax (benefit)

 

 

0

 

 

 

(12

)

 

 

(12

)

 

 

0

 

 

 

(12

)

 

 

(12

)

Amounts reclassified from accumulated other comprehensive loss, net of tax

 

 

0

 

 

 

40

 

 

 

40

 

 

 

0

 

 

 

37

 

 

 

37

 

Net periodic other comprehensive income

 

 

153

 

 

 

40

 

 

 

193

 

 

 

4,514

 

 

 

37

 

 

 

4,551

 

Balances - May 31 (End of period)

 

$

(31,849

)

 

$

(2,396

)

 

$

(34,245

)

 

$

(27,859

)

 

$

(2,872

)

 

$

(30,731

)

 

 

 

Nine Months Ended May 31, 2022

 

 

Nine Months Ended May 31, 2021

 

 

 

Foreign Currency
Translation
Adjustments

 

 

Pension Obligations,
Net

 

 

Total

 

 

Foreign Currency
Translation
Adjustments

 

 

Pension Obligations,
Net

 

 

Total

 

Balances - September 1 (Beginning of period)

 

$

(31,609

)

 

$

(2,945

)

 

$

(34,554

)

 

$

(34,184

)

 

$

(2,687

)

 

$

(36,871

)

Other comprehensive (loss) income before reclassifications

 

 

(240

)

 

 

451

 

 

 

211

 

 

 

6,325

 

 

 

(385

)

 

 

5,940

 

Income tax (expense) benefit

 

 

0

 

 

 

(101

)

 

 

(101

)

 

 

0

 

 

 

87

 

 

 

87

 

Other comprehensive (loss) income before reclassifications, net of tax

 

 

(240

)

 

 

350

 

 

 

110

 

 

 

6,325

 

 

 

(298

)

 

 

6,027

 

Amounts reclassified from accumulated other comprehensive loss

 

 

0

 

 

 

257

 

 

 

257

 

 

 

0

 

 

 

147

 

 

 

147

 

Income tax (benefit)

 

 

0

 

 

 

(58

)

 

 

(58

)

 

 

0

 

 

 

(34

)

 

 

(34

)

Amounts reclassified from accumulated other comprehensive loss, net of tax

 

 

0

 

 

 

199

 

 

 

199

 

 

 

0

 

 

 

113

 

 

 

113

 

Net periodic other comprehensive (loss) income

 

 

(240

)

 

 

549

 

 

 

309

 

 

 

6,325

 

 

 

(185

)

 

 

6,140

 

Balances - May 31 (End of period)

 

$

(31,849

)

 

$

(2,396

)

 

$

(34,245

)

 

$

(27,859

)

 

$

(2,872

)

 

$

(30,731

)

 

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Reclassifications from accumulated other comprehensive loss to earnings, both individually and in the aggregate, were not material to the impacted captions in the Unaudited Condensed Consolidated Statements of Income in all periods presented.

Note 7 - Revenue

Disaggregation of Revenues

The table below illustrates the Company’s revenues disaggregated by major product and sales destination (in thousands):

 

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Major product information:

 

 

 

 

 

 

 

 

 

 

 

 

Ferrous revenues

 

$

530,303

 

 

$

448,684

 

 

$

1,434,473

 

 

$

1,023,569

 

Nonferrous revenues

 

 

272,208

 

 

 

204,512

 

 

 

662,779

 

 

 

471,543

 

Steel revenues(1)

 

 

165,210

 

 

 

129,057

 

 

 

384,644

 

 

 

316,662

 

Retail and other revenues

 

 

42,366

 

 

 

38,465

 

 

 

109,507

 

 

 

101,162

 

Total revenues

 

$

1,010,087

 

 

$

820,718

 

 

$

2,591,403

 

 

$

1,912,936

 

Revenues based on sales destination:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

$

533,087

 

 

$

466,739

 

 

$

1,439,731

 

 

$

1,067,335

 

Domestic

 

 

477,000

 

 

 

353,979

 

 

 

1,151,672

 

 

 

845,601

 

Total revenues

 

$

1,010,087

 

 

$

820,718

 

 

$

2,591,403

 

 

$

1,912,936

 

 

(1)
Steel revenues include predominantly sales of finished steel products, in addition to sales of semi-finished goods (billets) and steel 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 May 31, 2022 and August 31, 2021, receivables from contracts with customers, net of an allowance for credit losses, totaled $278 million and $210 million, respectively, representing 98% of total accounts receivable reported on the Unaudited Condensed Consolidated Balance Sheets at each reporting date.

Contract Liabilities

Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company’s contract liabilities, which consist almost entirely of customer deposits for recycled metal and finished steel sales contracts, are reported within accounts payable in the Unaudited Condensed Consolidated Balance Sheets and totaled $10 million and $8 million as of May 31, 2022 and August 31, 2021, respectively. Unsatisfied performance obligations reflected in these contract liabilities relate to contracts with original expected durations of one year or less and, therefore, are not disclosed. During the three and nine months ended May 31, 2022, the Company reclassified less than $1 million and $7 million, respectively, in contract liabilities as of August 31, 2021 to revenues as a result of satisfying performance obligations during the period. During the three and nine months ended May 31, 2021, the Company reclassified less than $1 million and $7 million, respectively, in contract liabilities as of August 31, 2020 to revenues as a result of satisfying performance obligations during the period.

Note 8 - Share-Based Compensation

In the first quarter of fiscal 2022, as part of the annual awards under the Company’s Long-Term Incentive Plan, the Compensation Committee of the Company’s Board of Directors granted 158,656 restricted stock units (“RSUs”) and 153,080 performance share awards to the Company’s key employees and officers under the Company’s 1993 Amended and Restated Stock Incentive Plan.

The RSUs have a five-year term and vest 20% per year commencing October 31, 2022. The aggregate fair value of all the RSUs granted was based on the market closing price of the underlying Class A common stock on the grant date and totaled $8 million. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures, which for participants who were retirement eligible as of the grant date or who will become retirement eligible during the five-year term of the awards is the longer of two years or the period ending on the date retirement eligibility is achieved.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The performance share awards comprise two separate and distinct awards with different vesting conditions. Awards vest if the threshold level under the specified metric is met at the end of the approximately three-year performance period. For awards granted in the first quarter of fiscal 2022, the performance metrics are the Company’s recycled metal volume growth and its return on capital employed (“ROCE”). Award share payouts depend on the extent to which the performance goals have been achieved, which performance-based payout factors are adjusted by a total shareholder return (“TSR”) modifier based on the Company’s average TSR percentile rank relative to a designated peer group. The number of shares that a participant receives is equal to the number of performance shares granted multiplied by an initial payout factor based on recycled metal volume growth and ROCE, which ranges from a threshold of 50% to a maximum of 200%. The final payout factor is then determined by applying the TSR modifier to the initial payout factor within a certain range, with a maximum increase or decrease of 20%.

 

The Company granted 76,540 performance share awards based on its recycled metal volume growth metric with TSR modifier and 76,540 performance share awards based on its ROCE metric with TSR modifier over a three-year performance period consisting of the Company’s 2022, 2023, and 2024 fiscal years. The Company estimated the fair value of performance share awards granted in the first quarter of fiscal 2022 using a Monte-Carlo simulation model utilizing several key assumptions, including the following:

 

 

 

Percentage

 

Expected share price volatility (SSI)

 

 

51.6

%

Expected share price volatility (Peer group)

 

 

58.5

%

Expected correlation to peer group companies

 

 

46.0

%

Risk-free rate of return

 

 

0.61

%

The estimated aggregate fair value of these performance share awards at the date of grant was $8 million. The Company accrues compensation cost for these performance share awards based on the probable outcome of achieving specified performance conditions, net of estimated forfeitures, over the requisite service period (or to the date a qualifying employment termination event entitles the recipient to a prorated award, if before the end of the service period). The Company reassesses whether achievement of the performance conditions is probable at each reporting date. If it is probable that the actual performance results will exceed the stated target performance conditions, the Company accrues additional compensation cost for the additional performance shares to be awarded irrespective of the TSR modifier, the effects of which are incorporated in the grant-date fair value of the awards. If, upon reassessment, it is no longer probable that the actual performance results will exceed the stated target performance conditions, or that it is no longer probable that the target performance conditions will be achieved, the Company reverses any recognized compensation cost for shares no longer probable of being issued. If the performance conditions are not achieved at the end of the performance period, all related compensation cost previously recognized is reversed. Performance share awards will be paid in Class A common stock as soon as practicable after the end of the requisite service period and vesting date of October 31, 2024.

In the second quarter of fiscal 2022, the Company granted deferred stock units (“DSUs”) to each of its non-employee directors under the Company’s 1993 Stock Incentive Plan, as amended. Each DSU gives the director the right to receive 1 share of Class A common stock at a future date. The grant included an aggregate of 18,924 shares that will vest in full on the day before the Company’s 2023 annual meeting of shareholders, subject to continued Board service. The total fair value of these awards at the grant date was $1 million.

Note 9 - Income Taxes

Effective Tax Rate

The Company’s effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2022 was an expense on pre-tax income of 21.0% and 21.2%, respectively, compared to 18.0% and 20.0%, respectively, for the comparable prior year periods. The Company’s effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2022 approximated the U.S. federal statutory rate of 21%, reflecting primarily the aggregate impact of state taxes and permanent differences from non-deductible expenses on the projected annual effective tax rate applied to the quarterly results, offset by discrete tax benefits resulting from vesting of share-based awards in the periods and the favorable effects of other discrete items. The Company’s effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2021 was lower than the U.S. federal statutory rate primarily due to the benefit from the foreign derived intangible income deduction in fiscal 2021 and the impacts of research and development credits and other discrete items.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Valuation Allowances

The Company assesses the realizability of its deferred tax assets 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 weight of the evidence, to determine if valuation allowances against deferred tax assets are required. The Company continues to maintain valuation allowances against certain state and Canadian deferred tax assets. Canadian deferred tax assets against which the Company continues to maintain a valuation allowance relate to indefinite-lived assets.

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 2014 to 2021 remain subject to examination under the statute of limitations.

Note 10 - Net Income Per Share

The following table sets forth the information used to compute basic and diluted net income per share attributable to SSI shareholders (in thousands):

 

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Income from continuing operations

 

$

75,550

 

 

$

65,482

 

 

$

160,991

 

 

$

126,237

 

Net income attributable to noncontrolling interests

 

 

(870

)

 

 

(1,801

)

 

 

(2,497

)

 

 

(3,852

)

Income from continuing operations attributable to SSI shareholders

 

$

74,680

 

 

$

63,681

 

 

$

158,494

 

 

$

122,385

 

(Loss) income from discontinued operations, net of tax

 

 

(46

)

 

 

(46

)

 

 

(46

)

 

 

(58

)

Net income attributable to SSI shareholders

 

$

74,634

 

 

$

63,635

 

 

$

158,448

 

 

$

122,327

 

Computation of shares:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

28,143

 

 

 

28,047

 

 

 

28,161

 

 

 

27,948

 

Incremental common shares attributable to dilutive performance share awards, restricted stock units and deferred stock units

 

 

1,482

 

 

 

1,496

 

 

 

1,580

 

 

 

1,015

 

Weighted average common shares outstanding, diluted

 

 

29,625

 

 

 

29,543

 

 

 

29,741

 

 

 

28,963

 

Common stock equivalent shares of 47,095 and 172,288 were considered antidilutive and were excluded from the calculation of diluted net income per share for the three and nine months ended May 31, 2022, respectively. NaN common stock equivalent shares were considered antidilutive for the three and nine months ended May 31, 2021.

Note 11 - Related Party Transactions

The Company purchases recycled metal from one of its joint venture operations at prices that approximate fair market value. These purchases totaled $10 million and $6 million for the three months ended May 31, 2022 and 2021, respectively, and $21 million and $14 million for the nine months ended May 31, 2022 and 2021, respectively.

 

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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 nine months ended May 31, 2022 and 2021. The following discussion and analysis provide information which management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, 2021, and the Unaudited Condensed Consolidated Financial Statements and the related Notes thereto included in Part I, Item 1 of this report.

General

Founded in 1906, Schnitzer Steel Industries, Inc. is one of North America’s largest recyclers of ferrous and nonferrous metal, including end-of-life vehicles, and a manufacturer of finished steel products. As a vertically integrated organization, we offer a range of products and services to meet global demand through our network that includes 50 retail self-service auto parts stores, 54 metals recycling facilities, and an electric arc furnace (“EAF”) steel mill.

We sell recycled ferrous and nonferrous metal in both foreign and domestic markets. We also sell a range of finished steel long products produced at our steel mill. We acquire, process, and recycle end-of-life (salvaged) vehicles, rail cars, home appliances, industrial machinery, manufacturing scrap, and construction and demolition scrap through our facilities. Our retail self-service auto parts stores located across the United States (“U.S.”) and Western Canada, 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 major component parts containing ferrous and nonferrous metals, which are primarily sold to wholesalers. The remaining auto bodies are crushed and shipped to our metals recycling facilities to be shredded or sold to third parties when 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, separating, and sorting, resulting in recycled ferrous, nonferrous, and mixed metal pieces of a size, density, and metal content required by customers to meet their production needs. Each of our shredding, nonferrous processing, and separation systems is designed to optimize the recovery of valuable recycled metal. We also purchase nonferrous metal directly from industrial vendors and other suppliers and aggregate and prepare this metal for shipment to customers by ship, rail, or truck. In addition to the sale of recycled metal processed at our facilities, we also provide a variety of recycling and related services including brokering the sale of ferrous and nonferrous scrap metal generated by industrial entities and demolition projects to customers in the domestic market, among other services. Our steel mill produces semi-finished goods (billets) and finished goods, consisting of rebar, coiled rebar, wire rod, merchant bar, and other specialty products, using recycled ferrous metal sourced internally from our recycling and joint venture operations and other raw materials.

We operate seven deepwater port locations, six of which are equipped with large-scale shredders. Our deepwater port facilities on both the East and West Coasts of the U.S. (in Everett, Massachusetts; Providence, Rhode Island; Oakland, California; Tacoma, Washington; and Portland, Oregon) and access to public deepwater port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) allow us to meet the global demand for recycled ferrous metal by enabling us to ship bulk cargoes to steel manufacturers located in Europe, Africa, the Middle East, Asia, North America, Central America, and South America. Our exports of nonferrous recycled metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers, wire and cable producers, wholesalers, and other recycled metal processors globally. We also transport both ferrous and nonferrous metals by truck, rail, and barge in order to transfer scrap metal between our facilities for further processing, to load shipments at our export facilities, and to meet regional domestic demand.

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. Our results of operations also depend substantially on our operating leverage from processing and selling higher volumes of recycled metal as well as our ability to efficiently extract ferrous and nonferrous metals from the shredding process. 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 results. We believe we generally benefit from sustained periods of stable or rising recycled metal selling prices, which allow us to better maintain or increase both operating results and unprocessed scrap metal flow into our facilities. When recycled metal selling prices decline, either sharply or for a sustained period, our operating margins typically compress. With respect to finished steel products produced at our steel mill, our results of operations are impacted by demand and prices for these products, which are sold to customers located primarily in the Western U.S. and Western Canada.

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SCHNITZER STEEL INDUSTRIES, INC.

Our quarterly operating results fluctuate based on a variety of factors including, but not limited to, changes in market conditions for recycled ferrous and nonferrous metal and finished steel products, the supply of scrap metal in our domestic markets, varying demand for used auto parts from our self-service retail stores, the efficiency of our supply chain, and variations in production and other operating costs. Certain 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 and production levels at our facilities, and retail admissions and parts sales at our auto parts stores. Further, sanctions, trade actions, and licensing, product quality, and inspection requirements can impact the level of profitability on sales of our products and, in certain cases, impede or restrict our ability to sell to certain export markets or require us to direct our sales to alternative market destinations, which can cause our quarterly operating results to fluctuate.

Coronavirus Disease 2019 (“COVID-19”)

We continue to monitor the impact of COVID-19 on all aspects of our business. 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 safety 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. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our fiscal 2020 results, global economic conditions improved during fiscal 2021, resulting in increased demand for our products. Beginning in our second quarter of fiscal 2021 and continuing through the third quarter of fiscal 2022, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on individual, business, and government activities. The existence of new or enduring variant strains of COVID-19 may lead to a rise in infections, which could cause delays in the easing of restrictions previously in place and the implementation of new restrictions and mandates, and there are ongoing global impacts resulting directly or indirectly from the pandemic including labor shortages, logistical challenges such as increased port congestion, and increases in costs for certain goods and services, which have negatively impacted our sales volumes and operating results to varying degrees. While the ongoing effects of the COVID-19 pandemic could negatively impact our results of operations, cash flows, and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time.

Steel Mill Fire

On May 22, 2021, we experienced a fire at our steel mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. As a result of the fire, the rolling mill production ceased in early June 2021. In August 2021, the steel mill began ramping up operations following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. We experienced the loss of business income during the shutdown of the steel mill and the subsequent ramp-up phase which was substantially completed during the second quarter of fiscal 2022. We have insurance that we believe is fully applicable to the losses and have filed initial insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property that experienced physical loss or damage and business income losses resulting from the matter. The property damage deductible under the policies insuring the Company’s assets in this matter is $1 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. As of August 31, 2021, prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets included an initial $10 million insurance receivable recognized in the fourth quarter of fiscal 2021, primarily offsetting applicable losses including capital purchases of $10 million that we had incurred as of August 31, 2021. In the first nine months of fiscal 2022, we increased the amount of this insurance receivable to $25 million and recognized a related $15 million insurance recovery gain, $3 million recorded in the first quarter and $12 million recorded in the second quarter, within cost of goods sold in the Unaudited Condensed Consolidated Statements of Income, reflecting recovery of applicable losses incurred as a result of the fire to date. In addition, during the first nine months of fiscal 2022, we received advance payments from insurers totaling approximately $30 million towards our claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the $25 million insurance receivable to zero with the remaining amount of advance payments of $5 million reported within other accrued liabilities in the Unaudited Condensed Consolidated Balance Sheets as of May 31, 2022. These amounts do not reflect potential additional recoveries of business income losses resulting from this matter that may be recognized in the future when settlements of the business interruption claims are resolved.

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SCHNITZER STEEL INDUSTRIES, INC.

Everett Facility Shredder Fire

On December 8, 2021, we experienced a fire at our metals recycling facility in Everett, Massachusetts. Direct physical loss or damage to property from the incident was limited to the facility’s shredder building and equipment, with no bodily injuries and no physical loss or damage to property reported at other buildings or equipment. As a result of the fire, shredding operations ceased, while all non-shredding operations at the facility continued, including torching, shearing, separating, and sorting purchased non-shreddable recycled ferrous metals. On January 28, 2022, shredding operations at the facility began ramping up following the replacement and repairs to shredder equipment that had been damaged. Completion of the remainder of repair and replacement of property that experienced physical loss or damage, primarily buildings and improvements, will occur over a longer period and impacts on business income may continue. For example, as of June 18, 2022, shredder operations temporarily ceased at the facility pending completion of discussions with the Massachusetts Department of Environmental Protection and the Massachusetts Attorney General's office regarding installation and operation of temporary emission capture and controls that would allow operation of the shredder prior to completion of the repair and replacement of the shredder enclosure building. Non-shredding operations at the facility continue. We have insurance that we believe is fully applicable to the losses, including but not limited to the costs of installing the temporary capture and controls system and any associated loss of business income, and have filed initial insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property damage or loss and business income losses resulting from the matter. The property damage deductible under the policies insuring our assets in this matter is $0.5 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. The insurance claims resolution process may extend significantly beyond completion of repair and replacement of the physical plant property that experienced physical loss or damage and the restart of production activities. In the second quarter of fiscal 2022, we recognized an initial $10 million insurance receivable and related insurance recovery gain, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets and within cost of goods sold in the Unaudited Condensed Consolidated Statements of Income, respectively, reflecting recovery of applicable losses including impairment charges of $6 million related to the carrying value of plant and equipment assets damaged by the fire and initial capital purchases and other costs totaling $4 million that we had incurred as of February 28, 2022. In the third quarter of fiscal 2022, we increased the amount of this insurance receivable to $11 million and recognized a related $1 million insurance recovery gain, reflecting recovery of applicable losses incurred as a result of the fire to date. Also in the third quarter of fiscal 2022, we received advance payments from insurers totaling approximately $7 million towards our claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the insurance receivable to $4 million as of May 31, 2022. These amounts do not reflect potential additional recoveries of costs for the repair and replacement of property that experienced physical loss or damage or of business income losses resulting from this matter that may be recognized in the future when settlements of the claims are resolved.

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 believe that providing these non-GAAP financial measures adds a meaningful presentation of our operating and financial performance, liquidity, and capital structure. For example, we use adjusted EBITDA as one of 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, asset impairment charges, business development costs not related to ongoing operations including pre-acquisition expenses, charges related to non-ordinary course legal settlements, charges for legacy environmental matters (net of recoveries), restructuring charges and other exit-related activities, 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 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.

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SCHNITZER STEEL INDUSTRIES, INC.

Financial Highlights of Results of Operations for the Third Quarter of Fiscal 2022

Diluted earnings per share from continuing operations attributable to SSI shareholders in the third quarter of fiscal 2022 was $2.52, compared to $2.16 per share in the prior year quarter.
Adjusted diluted earnings per share from continuing operations attributable to SSI shareholders in the third quarter of fiscal 2022 was $2.59, compared to $2.20 per share in the prior year quarter.
Net income in the third quarter of fiscal 2022 was $76 million, compared to $65 million in the prior year quarter.
Adjusted EBITDA in the third quarter of fiscal 2022 was $119 million, compared to $97 million in the prior year quarter.

Market demand for recycled metals was strong in the third quarter of fiscal 2022, leading to significantly higher average net selling prices for our ferrous and nonferrous products. In the third quarter of fiscal 2022, the average net selling prices for our ferrous and nonferrous products increased by 35% and 15%, respectively, compared to the prior year quarter. Sales volumes for our nonferrous products in the third quarter of fiscal 2022 increased by 29% compared to the prior year quarter, while quarterly sales volumes for our ferrous products decreased by 7% year-over-year primarily due to the impact of slower export demand in the second half of the third quarter of fiscal 2022, which resulted in delays in contracting and shipping bulk cargoes. Our ferrous and nonferrous sales volumes in the third quarter of fiscal 2022 included additional volumes arising from the Columbus Recycling business acquired on October 1, 2021 and the Encore Recycling business acquired on April 29, 2022. Market demand for our finished steel products also improved in the third quarter of fiscal 2022, which contributed to finished steel average selling prices increasing by 41% compared to the prior year quarter. Finished steel sales volumes, however, were 12% lower in the third quarter of fiscal 2022 compared to the prior year quarter in part due to the impact of supply chain disruptions on current quarter volumes, including logistics constraints and delays to construction projects related to a four-month concrete industry strike in the Pacific Northwest that ended in April 2022. Our results for the third quarter of fiscal 2022 reflected benefits from the higher price environment for most of our products including a significant expansion in our ferrous and finished steel spreads and increased nonferrous sales volumes driven by strong demand compared to the prior year quarter. Our results in the third quarter of fiscal 2022 also reflected a lower benefit from average inventory accounting compared to the prior year quarter, the effects of ongoing supply chain disruptions, lower year-over-year platinum group metals (PGM) prices, and the impact of inflation. Contributions from recent acquisitions and productivity initiatives helped to partially offset the effects of inflationary pressure on operating costs.

Selling, general, and administrative expense in the third quarter of fiscal 2022 increased by 26% compared to the prior year quarter primarily due to higher employee-related expenses, including from increased competition for employees in a tight labor market and higher incentive compensation accruals aligned with business performance, increased outside and professional services and travel expenses, including from higher costs resulting from our acquisitions and other growth-related initiatives, as well as the impact of inflation partially offset by benefits from productivity initiatives.

The following items further highlight selected liquidity and capital structure metrics:

For the first nine months of fiscal 2022, net cash provided by operating activities was $58 million, compared to $51 million in the prior year comparable period.
Debt was $322 million as of May 31, 2022, compared to $75 million as of August 31, 2021, which increase was primarily due to increased borrowings from our credit facilities to fund the acquisition of the assets of the Columbus Recycling and Encore Recycling businesses and higher net working capital needs.
Debt, net of cash, was $306 million as of May 31, 2022, compared to $47 million as of August 31, 2021.
Repurchase of 444 thousand shares of Class A common stock totaling $18 million in the first nine months of fiscal 2022, compared to none in the prior year comparable period.

See the reconciliations of adjusted diluted earnings per share from continuing operations attributable to SSI shareholders, adjusted EBITDA, and debt, net of cash in Non-GAAP Financial Measures at the end of this Item 2.

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SCHNITZER STEEL INDUSTRIES, INC.

Results of Operations

Selected Financial Measures and Operating Statistics

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

($ in thousands, except for prices and per share amounts)

 

2022

 

 

2021

 

 

%

 

 

2022

 

 

2021

 

 

%

 

Ferrous revenues

 

$

530,303

 

 

$

448,684

 

 

 

18

%

 

$

1,434,473

 

 

$

1,023,569

 

 

 

40

%

Nonferrous revenues

 

 

272,208

 

 

 

204,512

 

 

 

33

%

 

 

662,779

 

 

 

471,543

 

 

 

41

%

Steel revenues(1)

 

 

165,210

 

 

 

129,057

 

 

 

28

%

 

 

384,644

 

 

 

316,662

 

 

 

21

%

Retail and other revenues

 

 

42,366

 

 

 

38,465

 

 

 

10

%

 

 

109,507

 

 

 

101,162

 

 

 

8

%

Total revenues

 

 

1,010,087

 

 

 

820,718

 

 

 

23

%

 

 

2,591,403

 

 

 

1,912,936

 

 

 

35

%

Cost of goods sold

 

 

834,375

 

 

 

678,297

 

 

 

23

%

 

 

2,188,158

 

 

 

1,585,416

 

 

 

38

%

Gross margin (total revenues less cost of goods sold)

 

$

175,712

 

 

$

142,421

 

 

 

23

%

 

$

403,245

 

 

$

327,520

 

 

 

23

%

Gross margin (%)

 

 

17.4

%

 

 

17.4

%

 

 

(—

)%

 

 

15.6

%

 

 

17.1

%

 

 

(9

)%

Selling, general and administrative expense

 

$

77,672

 

 

$

61,887

 

 

 

26

%

 

$

194,020

 

 

$

165,935

 

 

 

17

%

Diluted earnings per share from continuing operations attributable to SSI shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported

 

$

2.52

 

 

$

2.16

 

 

 

17

%

 

$

5.33

 

 

$

4.23

 

 

 

26

%

Adjusted(2)

 

$

2.59

 

 

$

2.20

 

 

 

18

%

 

$

5.54

 

 

$

4.31

 

 

 

29

%

Net income

 

$

75,504

 

 

$

65,436

 

 

 

15

%

 

$

160,945

 

 

$

126,179

 

 

 

28

%

Adjusted EBITDA(2)

 

$

119,090

 

 

$

97,254

 

 

 

22

%

 

$

272,435

 

 

$

208,920

 

 

 

30

%

Average ferrous recycled metal sales prices ($/LT)(3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

516

 

 

$

395

 

 

 

31

%

 

$

458

 

 

$

332

 

 

 

38

%

Foreign

 

$

552

 

 

$

401

 

 

 

38

%

 

$

484

 

 

$

360

 

 

 

34

%

Average

 

$

541

 

 

$

400

 

 

 

35

%

 

$

477

 

 

$

354

 

 

 

35

%

Ferrous volumes (LT, in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic(4)

 

 

490

 

 

 

412

 

 

 

19

%

 

 

1,329

 

 

 

1,191

 

 

 

12

%

Foreign

 

 

639

 

 

 

803

 

 

 

(20

)%

 

 

2,020

 

 

 

2,054

 

 

 

(2

)%

Total ferrous volumes (LT, in thousands)(4)(8)

 

 

1,129

 

 

 

1,215

 

 

 

(7

)%

 

 

3,349

 

 

 

3,245

 

 

 

3

%

Average nonferrous sales price ($/pound)(3)(5)

 

$

1.12

 

 

$

0.97

 

 

 

15

%

 

$

1.10

 

 

$

0.82

 

 

 

34

%

Nonferrous volumes (pounds, in thousands)(4)(5)

 

 

201,413

 

 

 

155,657

 

 

 

29

%

 

 

501,785

 

 

 

429,792

 

 

 

17

%

Finished steel average sales price ($/ST)(3)

 

$

1,129

 

 

$

802

 

 

 

41

%

 

$

1,059

 

 

$

709

 

 

 

49

%

Finished steel sales volumes (ST, in thousands)

 

135

 

 

 

153

 

 

 

(12

)%

 

 

340

 

 

 

423

 

 

 

(20

)%

Cars purchased (in thousands)(6)

 

84

 

 

 

91

 

 

 

(8

)%

 

 

237

 

 

 

249

 

 

 

(5

)%

Number of auto parts stores at period end

 

50

 

 

 

50

 

 

 

(—

)%

 

 

50

 

 

 

50

 

 

 

(—

)%

Rolling mill utilization(7)

 

 

96

%

 

 

98

%

 

 

(2

)%

 

 

87

%

 

 

94

%

 

 

(7

)%

 

NM = Not Meaningful

LT = Long Ton, which is equivalent to 2,240 pounds. ST = Short Ton, which is equivalent to 2,000 pounds.

(1)
Steel revenues include predominantly sales of finished steel products, in addition to sales of 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 PGMs in catalytic converters.
(6)
Cars purchased by auto parts stores only.
(7)
Rolling mill utilization is based on effective annual production capacity under current conditions of 580 thousand tons of finished steel products.
(8)
May not foot due to rounding.

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Revenues

Revenues in the third quarter and first nine months of fiscal 2022 increased by 23% and 35%, 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 driven by strong market demand for recycled metals globally. In each of the third quarter and first nine months of fiscal 2022, the average net selling prices for our ferrous products increased by 35%, and the average net selling prices for our nonferrous products increased by 15% and 34%, respectively, compared to the prior year periods. In the third quarter and first nine months of fiscal 2022, nonferrous sales volumes increased by 29% and 17%, respectively, compared to the prior year periods, reflecting strong demand for these products globally. Ferrous sales volumes in the third quarter of fiscal 2022 decreased by 7% compared to the prior year quarter primarily due to the impact of slower export demand in the second half of the third quarter of fiscal 2022, which resulted in delays in contracting and shipping bulk cargoes. Our ferrous and nonferrous sales volumes in the third quarter and first nine months of fiscal 2022 included additional volumes arising from the Columbus Recycling business acquired on October 1, 2021 and the Encore Recycling business acquired on April 29, 2022. Finished steel average selling prices were significantly higher in the third quarter and first nine months of fiscal 2022 compared to the prior year periods, reflecting robust market demand for these products. The impact of the higher average selling prices on steel revenues in the third quarter and first nine months of fiscal 2022 was partially offset by lower sales volumes compared to the prior year periods. For the first nine months of fiscal 2022, finished steel sales volumes were lower compared to the same period in the prior year primarily due to the impact of the ramp-up of steel mill operations that began in August 2021 and which was substantially completed during the second quarter, as well as the impact of supply chain disruptions on current volumes, including logistics constraints and delays to construction projects related to a four-month concrete industry strike in the Pacific Northwest that ended in April 2022. The ramp-up of steel mill operations followed completion of repair and replacement of damaged property arising from the May 2021 steel mill fire.

Operating Performance

Net income in the third quarter and first nine months of fiscal 2022 was $76 million and $161 million, respectively, compared to $65 million and $126 million in the prior year periods. Adjusted EBITDA in the third quarter and first nine months of fiscal 2022 was $119 million and $272 million, respectively, compared to $97 million and $209 million, respectively, in the prior year periods. Our results for the third quarter and first nine months of fiscal 2022 reflected benefits from the higher price environment for most of our products and increased nonferrous sales volumes supported by strong demand compared to the prior year periods. Ferrous metal spreads in the third quarter and first nine months of fiscal 2022 increased by approximately 45% and 30%, respectively, and average net selling prices for our nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, increased by approximately 15% and 30%, respectively, compared to the prior year periods. The expansion in ferrous metal spreads compared to the prior year periods in part reflected higher spreads on certain ferrous sales contracted prior to a decline in market selling prices that occurred during the latter part of the third quarter of fiscal 2022. Finished steel spreads also expanded significantly in the third quarter and first nine months of fiscal 2022, compared to the prior year periods. Our results in the third quarter and first nine months of fiscal 2022 also reflected the adverse impact of lower third quarter ferrous sales volumes year-over-year, a lower benefit from average inventory accounting compared to the prior year period, the effects of ongoing supply chain disruptions, lower year-over-year PGM prices, the impact of inflation, and the adverse impact of the Everett shredder downtime in the first half of fiscal 2022. Contributions from recent acquisitions and productivity initiatives helped to partially offset the effects of inflationary pressure on operating costs.

In the first nine months of fiscal 2022, we recognized insurance recoveries of $15 million in connection with the May 2021 fire at our steel mill in McMinnville, Oregon, reflecting recovery of applicable costs incurred by the mill operations following the incident. In the third quarter and first nine months of fiscal 2022, we also recognized insurance recoveries of $1 million and $11 million, respectively, in connection with the December 2021 fire at our Everett shredder facility, reflecting recovery of applicable losses including asset impairment charges, initial capital purchases, and other costs incurred in the periods. These amounts do not reflect potential additional recoveries of business income losses due to the interruptions that may be recognized in the future when settlements of the business interruption claims are resolved.

Selling, general, and administrative expense in the third quarter and first nine months of fiscal 2022 increased by 26% and 17%, respectively, compared to the prior year periods primarily due to higher employee-related expenses, including from increased competition for employees in a tight labor market, and increased outside and professional services and travel expenses, including from higher costs resulting from our acquisitions and other growth-related initiatives, as well as the impact of inflation partially offset by benefits from productivity initiatives. Accruals in connection with our annual incentive compensation plans were higher in the third quarter of fiscal 2022, compared to the prior year quarter, but lower for the nine-month period year-over-year. We also incurred higher legacy environmental charges during the first nine months of fiscal 2022, compared to the prior year period.

See the reconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the end of this Item 2.

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Because of the sharp decline in market selling prices that occurred during the latter part of the third quarter of fiscal 2022, which has continued through the date of this report, we expect our net selling prices for primarily ferrous recycled metal products in the fourth quarter of fiscal 2022 to be lower than the average net selling prices for the third quarter of fiscal 2022. While we aim to respond to changes in selling prices by seeking to adjust purchase prices for unprocessed scrap metal, we may not be able to reduce our purchase prices to fully offset the reduction in selling prices, which may negatively impact our operating margins.

Income Tax

The effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2022 was an expense on pre-tax income of 21.0% and 21.2%, respectively, compared to 18.0% and 20.0%, respectively, for the comparable prior year periods. Our effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2022 approximated the U.S. federal statutory rate of 21%, reflecting primarily the aggregate impact of state taxes and permanent differences from non-deductible expenses on the projected annual effective tax rate applied to the quarterly results, offset by discrete tax benefits resulting from vesting of share-based awards in the periods and the favorable effects of other discrete items. Our effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2021 was lower than the U.S. federal statutory rate primarily due to the benefit from the foreign derived intangible income deduction in fiscal 2021 and the impacts of research and development credits and other discrete items.

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 $16 million and $28 million as of May 31, 2022 and August 31, 2021, 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 May 31, 2022, debt was $322 million compared to $75 million as of August 31, 2021, and debt, net of cash, was $306 million as of May 31, 2022, compared to $47 million as of August 31, 2021, which increases were primarily due to increased borrowings from our credit facilities to fund the acquisitions of the assets of the Columbus Recycling business on October 1, 2021 and the Encore Recycling business on April 29, 2022, and higher net working capital needs. See the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2.

Operating Activities

Net cash provided by operating activities in the first nine months of fiscal 2022 was $58 million, compared to net cash provided by operating activities of $51 million in the first nine months of fiscal 2021.

Sources of cash other than from earnings in the first nine months of fiscal 2022 included a $45 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of purchases and payments and a $9 million increase in income tax accruals. Uses of cash in the first nine months of fiscal 2022 included a $164 million increase in inventories due to higher raw material purchase costs and the timing of purchases and sales, a $43 million increase in accounts receivable primarily due to higher selling prices for most of our products, as well as the timing of sales and collections, a $17 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation in the first quarter of fiscal 2022 previously accrued under our fiscal 2021 plans, and a $15 million decrease in environmental liabilities primarily due to payments in connection with legacy environmental matters. The sources and uses of cash related to operating activities described above also reflect higher net working capital needs during the ramp-up of steel mill operations that began in August 2021 following completion of repair and replacement of damaged property arising from the May 2021 steel mill fire.

Sources of cash other than from earnings in the first nine months of fiscal 2021 included a $56 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of payments, a $19 million increase in income tax accruals, and a $14 million increase in accrued payroll and related liabilities primarily due to increased incentive compensation liabilities. Uses of cash in the first nine months of fiscal 2021 included a $133 million increase in accounts receivable primarily due to increases in selling prices for recycled metals and finished steel and higher sales volumes, as well as the timing of sales and collections, and a $92 million increase in inventories due to higher raw material purchase prices, higher volumes on hand and the timing of purchases and sales.

Investing Activities

Net cash used in investing activities was $262 million in the first nine months of fiscal 2022, compared to $76 million in the first nine months of fiscal 2021.

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Cash used in investing activities in the first nine months of fiscal 2022 included $114 million paid to acquire the assets of the Columbus Recycling business on October 1, 2021, which amount included $7 million paid at closing for estimated net working capital in excess of an agreed-upon benchmark, and also included $63 million paid to acquire the assets of the Encore Recycling business on April 29, 2022, which amount included $8 million paid at closing for estimated net working capital in excess of an agreed-upon benchmark. We funded these acquisitions using cash on hand and borrowings under our existing credit facilities. See Note 3 - Business Acquisitions in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further detail.

Cash used in investing activities in the first nine months of fiscal 2022 also included capital expenditures of $98 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, compared to $77 million in the prior year period. Cash flows from investing activities in the first nine months of fiscal 2022 included proceeds of $17 million representing the portion of advance payments from insurance carriers deemed a recovery of capital purchases incurred for repair and replacement of damaged property arising from the May 2021 steel mill fire and the December 2021 Everett facility shredder fire. Cash used in investing activities in the first nine months of fiscal 2022 also included the purchase of an investment in the equity of a privately-held Canadian recycling entity for $5 million.

Financing Activities

Net cash provided by financing activities in the first nine months of fiscal 2022 was $192 million, compared to $24 million in the first nine months of fiscal 2021.

Cash flows from financing activities in the first nine months of fiscal 2022 included $240 million in net borrowings of debt, compared to $49 million in the prior year period (refer to Non-GAAP Financial Measures at the end of this Item 2). Uses of cash in the first nine months of fiscal 2022 and 2021 included $11 million and $5 million, respectively, for payment of employee tax withholdings resulting from vesting of share-based awards and $16 million in each period for the payment of dividends. Cash used in financing activities for the first nine months of fiscal 2022 also included $18 million for share repurchases.

Debt

Our senior secured revolving credit facilities, which provide for revolving loans of $700 million and C$15 million, mature in August 2023 pursuant to a credit agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the London Interbank Offered Rate (“LIBOR”) (or the Canadian equivalent for C$ loans), plus a spread of between 1.25% and 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 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 0.00% and 2.50% based on a pricing grid tied to our 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 0.50% based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA. The credit facility provides that LIBOR or any LIBOR successor rate is subject to a 0.50% floor and contains mechanics by which the parties may replace the benchmark interest rate used in the agreement from LIBOR to one or more rates based on the secured overnight financing rate administered by the Federal Reserve Bank of New York or another alternative benchmark rate.

We had borrowings outstanding under our credit facilities of $303 million as of May 31, 2022 and $60 million as of August 31, 2021. The weighted average interest rate on amounts outstanding under our credit facilities was 2.53% and 1.75% as of May 31, 2022 and August 31, 2021, respectively.

We use the credit facilities to fund working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. Our 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 EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges, and (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness.

As of May 31, 2022, we were in compliance with the financial covenants under our credit agreement. The consolidated fixed charge coverage ratio was required to be no less than 1.50 to 1.00 and was 6.67 to 1.00 as of May 31, 2022. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.25 to 1.00 as of May 31, 2022.

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Our obligations under our 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, we may not be able to do so in the event market conditions, COVID-19, or other negative factors have a significant adverse impact on our results of operations and financial 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. We cannot assure that any such alternative funds, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.

Other debt obligations, which totaled $13 million and $8 million as of May 31, 2022 and August 31, 2021, respectively, primarily relate to equipment purchases, the contract consideration for which includes an obligation to make future monthly payments to the vendor in the form of licensing fees. For accounting purposes, such obligations are treated as a partial financing of the purchase price by the equipment vendor. Monthly payments commence when the equipment is placed in service and achieves specified minimum operating metrics, with payments continuing for a period of four years thereafter. In the first nine months of fiscal 2022, we recorded $7 million of additional debt obligations with these terms generally.

Capital Expenditures

Capital expenditures totaled $98 million for the first nine months of fiscal 2022, compared to $77 million for the prior year period. Capital expenditures in the first nine months of fiscal 2022 included approximately $34 million for investments in growth. We currently plan to invest in the range of $130 million to $150 million in capital expenditures in fiscal 2022. These capital expenditures include investments in growth, including new nonferrous processing technologies, and to support volume initiatives as well as post-acquisition and other growth projects, and investments to upgrade our equipment and infrastructure and for environmental and safety-related assets, using cash generated from operations and available credit facilities. The COVID-19 pandemic has contributed to some delays in construction activities and equipment deliveries related to our capital projects, and to the time required to obtain permits from government agencies, resulting in the deferral of certain capital expenditures. Given the continually evolving nature of the COVID-19 pandemic and other factors impacting the timing of project completion, the extent to which forecasted capital expenditures could be deferred is uncertain.

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 approximately $13 million in capital expenditures for environmental projects in the first nine months of fiscal 2022, and we currently plan to invest in the range of $25 million to $35 million for such projects in fiscal 2022. These projects include investments in equipment to ensure ongoing compliance with air quality and other environmental regulations and storm water systems.

We have been identified by the United States Environmental Protection Agency 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”). See Note 5 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of this matter, as well as other legacy environmental loss contingencies. We believe it is not possible to reasonably estimate the amount or range of costs which we are likely to or which it is reasonably possible that we will incur in connection with the Site, although such costs could be material to our financial position, results of operations, cash flows, and liquidity. We have insurance policies that we believe will provide reimbursement for costs we incur for defense, remediation, and mitigation for natural resource damages claims in connection with the Site, although there are no assurances that those policies will cover all of the costs which we may incur. Significant cash outflows in the future related to the Site, as well as related to other legacy environmental loss contingencies, could reduce the amounts available for borrowing that could otherwise be used for working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions and could result in our failure to maintain compliance with certain covenants in our debt agreements, and could adversely impact our liquidity.

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SCHNITZER STEEL INDUSTRIES, INC.

Dividends

On April 6, 2022, our Board of Directors declared a dividend for the third quarter of fiscal 2022 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend was paid on May 2, 2022.

Share Repurchase Program

Pursuant to our share repurchase program as amended in 2001, 2006 and 2008, we were authorized to repurchase up to 9 million shares of our Class A common stock. As of May 31, 2022, we had repurchased approximately 8.7 million shares under the program and had authorization to repurchase up to a remaining 262 thousand shares of our Class A common stock when we deem such repurchases to be appropriate. On June 27, 2022, the Company's Board of Directors authorized the repurchase of up to an additional 3.0 million shares of our Class A common stock. 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. In the third quarter and first nine months of fiscal 2022, we repurchased 244 thousand and 444 thousand shares, respectively, of our Class A common stock in open-market transactions for a total of $10 million and $18 million, respectively.

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, investments and acquisitions, joint ventures, debt service requirements, environmental obligations, and other contingencies. However, in the event of a sustained market deterioration, we may need additional liquidity which would require us to evaluate available alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurances that any such supplemental funding, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.

Contractual Obligations

There were no material changes related to contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021.

We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. As of May 31, 2022, we had $9 million outstanding under these arrangements.

Critical Accounting Estimates

There were no material changes to our critical accounting 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, 2021, other than the following.

Business Acquisitions

We recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. Within one year from the date of acquisition, we may update the value allocated to the assets acquired and liabilities assumed, and the resulting goodwill balance, based on information received regarding the valuation of such assets and liabilities that was not available at the time of purchase. Measuring assets and liabilities at fair value requires us to determine the price that would be paid by a third-party market participant based on the highest and best use of the assets or interests acquired. See Note 3 - Business Acquisitions in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for disclosure of our acquisition of the assets of the Columbus Recycling business on October 1, 2021 and our acquisition of the assets of the Encore Recycling business on April 29, 2022. As of the date of this report, measurement of actual acquired net working capital, as well as the fair values of certain other acquired assets and assumed liabilities for both acquisitions, is still preliminary and subject to change based on the completion of valuation procedures.

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Recently Issued Accounting Standards

We have not identified any recent accounting pronouncements that are expected to have a material impact on our financial condition, results of operations, or cash flows upon adoption.

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 measure of our leverage, as cash and cash equivalents can be used, among other things, to repay indebtedness.

The following is a reconciliation of debt, net of cash (in thousands):

 

 

 

May 31, 2022

 

 

August 31, 2021

 

Short-term borrowings

 

$

5,764

 

 

$

3,654

 

Long-term debt, net of current maturities

 

 

316,108

 

 

 

71,299

 

Total debt

 

 

321,872

 

 

 

74,953

 

Less cash and cash equivalents

 

 

16,125

 

 

 

27,818

 

Total debt, net of cash

 

$

305,747

 

 

$

47,135

 

 

Net borrowings (repayments) of debt

Net borrowings (repayments) of debt is the sum of borrowings from long-term debt and repayments of long-term debt. We present this amount as the net change in our borrowings (repayments) for the period because we believe it is useful for investors as a meaningful presentation of the change in debt.

The following is a reconciliation of net borrowings (repayments) of debt (in thousands):

 

 

 

Nine Months Ended May 31,

 

 

 

2022

 

 

2021

 

Borrowings from long-term debt

 

$

895,175

 

 

$

445,829

 

Repayments of long-term debt

 

 

(655,440

)

 

 

(396,810

)

Net borrowings (repayments) of debt

 

$

239,735

 

 

$

49,019

 

 

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SCHNITZER STEEL INDUSTRIES, INC.

Adjusted EBITDA, adjusted income from continuing operations attributable to SSI shareholders, and adjusted diluted earnings per share from continuing operations attributable to SSI shareholders

Management believes that providing these non-GAAP financial measures adds a meaningful presentation of our results from business operations excluding adjustments for charges for asset impairment charges, business development costs not related to ongoing operations including pre-acquisition expenses, charges related to non-ordinary course legal settlements, legacy environmental matters (net of recoveries), restructuring charges and other exit-related activities, and the income tax benefit allocated to these adjustments, items which are not related to underlying business operational performance, and improves the period-to-period comparability of our results from business operations.

Following are reconciliations of net income to adjusted EBITDA (in thousands):

 

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Reconciliation of adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

75,504

 

 

$

65,436

 

 

$

160,945

 

 

$

126,179

 

Loss from discontinued operations, net of tax

 

 

46

 

 

 

46

 

 

 

46

 

 

 

58

 

Interest expense

 

 

2,223

 

 

 

1,383

 

 

 

5,496

 

 

 

4,387

 

Income tax expense

 

 

20,037

 

 

 

14,401

 

 

 

43,207

 

 

 

31,589

 

Depreciation and amortization

 

 

18,750

 

 

 

14,326

 

 

 

54,566

 

 

 

43,621

 

Asset impairment charges

 

 

932

 

 

 

 

 

 

932

 

 

 

 

Business development costs

 

 

920

 

 

 

805

 

 

 

2,079

 

 

 

805

 

Charges related to legal settlements(1)

 

 

590

 

 

 

400

 

 

 

590

 

 

 

400

 

Charges (recoveries) for legacy environmental matters, net(2)

 

 

62

 

 

 

353

 

 

 

4,522

 

 

 

899

 

Restructuring charges and other exit-related activities

 

 

26

 

 

 

104

 

 

 

52

 

 

 

982

 

Adjusted EBITDA

 

$

119,090

 

 

$

97,254

 

 

$

272,435

 

 

$

208,920

 

 

(1)
Charges related to legal settlements in the three and nine months ended May 31, 2022 and 2021 relate to a claim with a utility provider for past charges.
(2)
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 5 - 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.

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Following are reconciliations of adjusted income from continuing operations attributable to SSI shareholders and adjusted diluted earnings per share from continuing operations attributable to SSI shareholders (in thousands, except per share data):

 

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Income from continuing operations attributable to SSI shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

74,680

 

 

$

63,681

 

 

$

158,494

 

 

$

122,385

 

Asset impairment charges

 

 

932

 

 

 

 

 

 

932

 

 

 

 

Business development costs

 

 

920

 

 

 

805

 

 

 

2,079

 

 

 

805

 

Charges related to legal settlements(1)

 

 

590

 

 

 

400

 

 

 

590

 

 

 

400

 

Charges (recoveries) for legacy environmental matters, net(2)

 

 

62

 

 

 

353

 

 

 

4,522

 

 

 

899

 

Restructuring charges and other exit-related activities

 

 

26

 

 

 

104

 

 

 

52

 

 

 

982

 

Income tax benefit allocated to adjustments(3)

 

 

(557

)

 

 

(340

)

 

 

(1,879

)

 

 

(655

)

Adjusted

 

$

76,653

 

 

$

65,003

 

 

$

164,790

 

 

$

124,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share from continuing operations attributable to SSI shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

2.52

 

 

$

2.16

 

 

$

5.33

 

 

$

4.23

 

Asset impairment charges, per share

 

 

0.03

 

 

 

 

 

 

0.03

 

 

 

 

Business development costs, per share

 

 

0.03

 

 

 

0.03

 

 

 

0.07

 

 

 

0.03

 

Charges related to legal settlements, per share(1)

 

 

0.02

 

 

 

0.01

 

 

 

0.02

 

 

 

0.01

 

Charges (recoveries) for legacy environmental matters, net, per share(2)

 

 

 

 

 

0.01

 

 

 

0.15

 

 

 

0.03

 

Restructuring charges and other exit-related activities, per share

 

 

 

 

 

 

 

 

 

 

 

0.03

 

Income tax benefit allocated to adjustments, per share(3)

 

 

(0.02

)

 

 

(0.01

)

 

 

(0.06

)

 

 

(0.02

)

Adjusted(4)

 

$

2.59

 

 

$

2.20

 

 

$

5.54

 

 

$

4.31

 

 

(1)
Charges related to legal settlements in the three and nine months ended May 31, 2022 and 2021 relate to a claim with a utility provider for past charges.
(2)
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 5 - 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.
(3)
Income tax allocated to the aggregate adjustments reconciling reported and adjusted income from continuing operations attributable to SSI shareholders and diluted earnings per share from continuing operations attributable to SSI shareholders is determined based on a tax provision calculated with and without the adjustments.
(4)
May not foot due to rounding.

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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 ferrous and nonferrous metals, including scrap metal, finished 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 as well as other factors including political and military events. We respond to increases and decreases in forward selling prices by adjusting purchase 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. As a result of this assessment as of May 31, 2022, we recorded inventory write-downs of $3 million in the third quarter of fiscal 2022. Based on contracted sales and estimates of future selling prices, a 10% decrease in the estimated selling price of inventory would not have had a material NRV impact as of May 31, 2022.

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, 2021.

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. As a result of COVID-19, we have experienced reductions in the availability of credit insurance that we have historically used to cover a portion of our recycled metal and finished steel sales to domestic customers, which reduced availability may increase our exposure to customer credit risk. In addition, in higher or rising commodity price environments, we have experienced proportionately lower credit insurance coverage of applicable customer credit limits, which may increase our exposure to customer credit risk.

Historically, we have shipped almost all of our large shipments of ferrous scrap metal to foreign customers under contracts supported by letters of credit issued or confirmed by banks deemed creditworthy. The letters of credit ensure payment by the customer. As we generally sell export recycled ferrous metal under contracts or orders that generally provide for shipment within 30 to 60 days after the price is agreed, our customers typically do not have difficulty obtaining letters of credit from their banks in periods of rising ferrous prices, as the value of the letters of credit are collateralized by the value of the inventory on the ship. However, in periods of significantly declining prices, our customers may not be able to obtain letters of credit for the full sales value of the inventory to be shipped.

As of May 31, 2022 and August 31, 2021, 21% and 30%, respectively, of our accounts receivable balance was covered by letters of credit. Of the remaining balance, 99% and 97% was less than 60 days past due as of May 31, 2022 and August 31, 2021, respectively.

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. As of May 31, 2022 and August 31, 2021, we did not have any derivative contracts.

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SCHNITZER STEEL INDUSTRIES, INC.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Consistent with guidance issued by the Securities and Exchange Commission that an assessment of internal controls over financial reporting of a recently acquired business may be omitted from management's evaluation of disclosure controls and procedures, management is excluding an assessment of the internal controls of the acquired Columbus Recycling business, which we acquired on October 1, 2021, and the Encore Recycling business, which we acquired on April 29, 2022, from its evaluation of the effectiveness of our disclosure controls and procedures. Together, the Columbus Recycling and Encore Recycling businesses represented approximately 10% of our consolidated total assets and 5% of our consolidated total revenues as of and for the nine months ended May 31, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of May 31, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.

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 the quarter ended May 31, 2022, 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

Information regarding reportable legal proceedings is contained in Part I, “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021; and in Part II, “Item 1. Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2021; and below in this Part II, “Item 1. Legal Proceedings” of this Quarterly Report on Form 10-Q. Also see Note 5 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, incorporated by reference herein.

As previously disclosed, the Company had reached agreement with the United States Environmental Protection Agency (USEPA) and the United States Department of Justice (USDOJ) to settle a 2018 finding of violation letter with respect to alleged violations of environmental requirements stemming from refrigerant recovery management program inspections at 12 of our facilities in the New England and Pacific Northwest regions in 2017. On April 21, 2022, the USDOJ on behalf of the USEPA filed a Complaint and lodged a proposed Consent Decree with the United States District Court for the District of Massachusetts. Pursuant to the proposed Consent Decree, without admitting any liability with respect to the allegations in the Complaint and as previously disclosed, the Company would settle this matter for a civil penalty of $1.55 million, implementation of an approved enhanced refrigerant recovery management program, and execution of a R-12 refrigerant destruction mitigation project. The proposed Consent Decree was published in the Federal Register on April 27, 2022 for a 30-day public comment period. No public comments were received, and the Court entered the Consent Decree as a final judgment on June 23, 2022 (Effective Date). The Company has implemented the USEPA approved enhanced refrigerant recovery management program at its metals recycling facilities, and payment of the civil penalty is due within 30 days after the Effective Date.
 

As previously disclosed, the Company had reached agreement with the District Attorneys for six counties in California to settle a joint investigation which had commenced in or prior to 2019 into the alleged mishandling of hazardous materials and hazardous waste, including the commingling of nonhazardous and hazardous wastes, as well as alleged water pollution violations, at various Pick-n-Pull locations within California. On March 10, 2022, the Superior Court of the State of California, County of Santa Clara issued a Final Stipulated Judgment resolving this matter. Pursuant to the Final Stipulated Judgment, without admitting any violation of law and as previously disclosed, Pick-n-Pull agreed to settle this matter for a civil penalty of $1.85 million, plus payments of $300,000 for supplemental environmental projects and $350,000 for reimbursement of investigation and enforcement costs, and to comply with injunctive terms relating to the facilities’ waste management activities. Pick-N-Pull has implemented additional compliance measures at all operating Pick-n-Pull locations in the state and on April 4, 2022 made the payments required under the Final Stipulated Judgment.
 

As previously disclosed, the Company had received a Pre-Enforcement Notice (PEN) in September 2021 from the Oregon Department of Environmental Quality (ODEQ) alleging that the Company’s metal shredder facility in Portland, Oregon is in violation of Title V of the Clean Air Act (CAA) and stating that ODEQ had referred the matter to USEPA for review and possible formal enforcement. On April 25, 2022, the Company received an Information Request from USEPA, Region 10 under Section 114 of the CAA with respect to both the Portland shredder facility and the Tacoma metal shredder facility owned and operated by a subsidiary of the Company. The Company is responding to the Information Request. In a response letter, we identified why Title V does not apply to the Portland and Tacoma facilities, explained that we had submitted an application to ODEQ in December 2018 for an Air Contaminant Discharge Permit with plant site emission limits that would limit emissions to less than Title V thresholds, noted that the Tacoma facility operates pursuant to an Order of Approval issued by the Puget Sound Clean Air Agency, described that we were proactively enclosing the shredders and installing particulate and volatile organic compound controls at both facilities, and included information on the permit applications that had been submitted in connection with the enclosure and emission control projects. The Company does not believe that any enforcement action is warranted in this matter.
 

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As previously disclosed, the Company had reached agreement with the Alameda County District Attorney and the California Office of the Attorney General (COAG) to settle certain alleged violations of environmental requirements at our Oakland metals recycling facility pursuant to a Stipulation for Entry of Final Judgment and Order on Consent (Consent Order) issued by the Superior Court of the State of California, County of Alameda in February 2021. On March 30, 2022, the Company received a letter from the COAG alleging violations of the Consent Order and demanding that the Company take additional measures to address the off-site release and deposition of light fibrous material (LFM). The Company does not believe that it is in violation of the Consent Order and in a response letter detailed the additional control measures that the Company has implemented and continues to implement to reduce the potential for releases of LFM from its Oakland facility. The Company is in continuing discussions with the COAG, the Alameda County District Attorney’s office, and the California State Department of Toxic Substances Control (DTSC) regarding this matter and does not believe that enforcement action is warranted.
 

As previously disclosed in the matter filed by The Athletics Investment Group LLC (A’s) against the DTSC as Respondent and the Company as Real Party in Interest in the Superior Court of the State of California, County of Alameda, the A’s obtained an initial order requiring the DTSC to rescind the Company’s “f” letters pursuant to which DTSC classified treated shredder residue from the Company’s metal shredding facility in California as a “nonhazardous waste,” which among other things allows its use as alternative daily cover at municipal landfills. The DTSC rescinded the Company’s “f” letters on November 29, 2021 pursuant to such order. As an additional element of DTSC’s compliance with the order, DTSC adopted an emergency regulation (CTMSR Regulation) that allows metal shredding facilities to transport and dispose of treated shredder residue as non-hazardous waste under a conditional exclusion. The CTMSR Regulation became effective on December 10, 2021, and the Company resumed shipment of treated shredder residue for use as alternative daily cover at municipal landfills in California in late December 2021. On January 14, 2022, the A’s filed a motion to enforce the Court’s order, and on April 18, 2022, the Superior Court issued an order granting that motion and prohibiting the application of the CTMSR Regulation to the Company’s operations. Both the DTSC and the Company have filed a notice of appeal of the Superior Court’s most recent order to the California State Court of Appeals, First Appellate District, Division Three, which notice of appeal has the effect of automatically staying the order. On June 10, 2022, the A’s filed a “Second Motion to Enforce” the Superior Court’s order, effectively seeking to lift the automatic stay and seeking sanctions against the DTSC. In the meantime, the Company’s appeal of both the Superior Court’s initial order requiring rescission of the “f” letters and the Superior Court’s order lifting the initial stay remain pending before the same State Court of Appeals.
 

Following an inspection by the DTSC of the Company’s Oakland metal shredding facility on May 16 and 17, 2022, the Company in its compilation and review of records requested by the DTSC during that inspection discovered and promptly self-disclosed to the DTSC that it is unable to confirm that it was in compliance with certain aspects of the CTMSR Regulation for certain periods since the adoption of the emergency regulation. The Company reported the corrective actions it has taken and the numerous detailed procedures that are now in place to prevent recurrence. The Company is confident that any failure to comply with the CTMSR Regulation did not pose a risk to human health or the environment. On June 23, 2022, the DTSC issued an Amended Summary of Violations (SOV) alleging that the Company is treating and storing CTMSR without a permit or other grant of authorization in violation of the California Hazardous Waste Control Law and its implementing regulations and that without such authorization the Company cannot utilize the CTSMR Regulation. The Company had previously discussed with DTSC the various forms of authorization that would satisfy the CTMSR Regulation and had promptly obtained a Permit by Rule which it understood to be a satisfactory option. The Company disputes the allegations in the SOV and has filed an application for a different form of authorization (Interim Status) under a reservation of rights that allows the Company to continue treating, storing, transporting, and disposing of CTSMR.
 

On May 6, 2022, the A’s filed an action in the Superior Court of the State of California, County of Alameda against the Bay Area Air Quality Management District (BAAQMD) as Respondent and the Company as Real Party in Interest alleging that the BAAQMD has failed to properly regulate the Company’s Oakland shredder facility under the federal and California Clean Air Acts and seeking an order requiring the BAAQMD to revoke the Company’s Permit to Operate for the Oakland facility. On June 3, 2022, the BAAQMD with the consent of the Company removed this action to the United States District Court, Northern District of California, Oakland Division. The Company has filed a motion to relate this most recent A’s lawsuit to a substantially similar action filed by the A’s against the Company on July 7, 2021 in the United States District Court, Northern District of California, Oakland Division under the federal Clean Air Act’s citizen suit provision alleging violations by the Oakland facility of the federal Clean Air Act and permit conditions and seeking declaratory and injunctive relief, which action is currently in discovery with a trial, if any, currently scheduled for October 2023.
 

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SCHNITZER STEEL INDUSTRIES, INC.

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, 2021, except for the changes disclosed in the subsequent Quarterly Reports on Form 10-Q for the quarterly periods ended November 30, 2021 and February 28, 2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Pursuant to a share repurchase program, as amended in 2001, 2006, and 2008, our Board of Directors had previously authorized the repurchase of up to 9 million shares of our Class A common stock when management deems such repurchases to be appropriate. We repurchased 244 thousand shares of our Class A common stock under the program in open-market transactions during the third quarter of fiscal 2022. As of May 31, 2022, we had existing authorization remaining under the program to repurchase up to approximately 262 thousand shares.

The table below presents a summary of our share repurchases during the quarter ended May 31, 2022:

 

 

Total Number
of Shares
Purchased

 

 

Average
Price Paid
per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number of Shares that may yet be Purchased under the Plans or Programs

 

March 1 - March 31, 2022

 

 

 

 

$

 

 

 

 

 

 

505,998

 

April 1 - April 30, 2022

 

 

15,000

 

 

$

47.56

 

 

 

15,000

 

 

 

490,998

 

May 1 - May 31, 2022

 

 

228,792

 

 

$

40.56

 

 

 

228,792

 

 

 

262,206

 

Total third quarter 2022

 

 

243,792

 

 

 

 

 

 

243,792

 

 

 

 

On June 27, 2022, our Board of Directors authorized a new share repurchase program of up to three million shares of our Class A common stock for a total repurchase authority as of the date of this filing of 3,262,206 shares, reflecting the additional 262,206 shares available for repurchase pursuant to our previously authorized share repurchase program to repurchase up to an aggregate of nine million shares. The share repurchase program does not require us to acquire any specific number of shares. The program does not have a stated expiration date, and we may suspend, extend, or terminate the program at any time without prior notice. The program may be executed through open-market purchases, privately negotiated transactions, or utilizing Rule 10b5-1 programs.

ITEM 5. OTHER INFORMATION

Share Repurchase Program

For information regarding the authorization of a new share repurchase program by our Board of Directors on June 27, 2022, see “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” above in Part II of this report, incorporated by reference herein.

 

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ITEM 6. EXHIBITS

 

Exhibit Number

 

Exhibit Description

 

 

 

  31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

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 contained in Exhibit 101)

 

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Table of Contents

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:

 

June 29, 2022

 

By:

 

/s/ Tamara L. Lundgren

 

 

 

 

 

 

Tamara L. Lundgren

 

 

 

 

 

 

Chairman, President and Chief Executive Officer

 

 

 

 

 

 

 

Date:

 

June 29, 2022

 

By:

 

/s/ Richard D. Peach

 

 

 

 

 

 

Richard D. Peach

 

 

 

 

 

 

Executive Vice President, Chief Financial Officer and Chief Strategy Officer

 

44