0000912603-19-000039.txt : 20190404 0000912603-19-000039.hdr.sgml : 20190404 20190404151302 ACCESSION NUMBER: 0000912603-19-000039 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 66 CONFORMED PERIOD OF REPORT: 20190228 FILED AS OF DATE: 20190404 DATE AS OF CHANGE: 20190404 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHNITZER STEEL INDUSTRIES, INC. CENTRAL INDEX KEY: 0000912603 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISC DURABLE GOODS [5090] IRS NUMBER: 930341923 STATE OF INCORPORATION: OR FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22496 FILM NUMBER: 19731999 BUSINESS ADDRESS: STREET 1: 299 SW CLAY ST. CITY: PORTLAND STATE: OR ZIP: 97201 BUSINESS PHONE: 5032249900 MAIL ADDRESS: STREET 1: P O BOX 10047 CITY: PORTLAND STATE: OR ZIP: 97296 FORMER COMPANY: FORMER CONFORMED NAME: SCHNITZER STEEL INDUSTRIES INC DATE OF NAME CHANGE: 19930927 10-Q 1 a2019-q22282019.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended February 28, 2019
Or
o
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 0-22496
SCHNITZER STEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
OREGON
 
93-0341923
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
299 SW Clay Street, Suite 350
Portland, Oregon
 
97201
(Address of principal executive offices)
 
(Zip Code)
 (503) 224-9900
(Registrants telephone number, including area code)
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  x    No  o
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  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
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.  o   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  x
The Registrant had 26,576,489 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 April 2, 2019.
 
 
 
 
 



SCHNITZER STEEL INDUSTRIES, INC.
INDEX
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



FORWARD-LOOKING STATEMENTS
Statements and information included in this Quarterly Report on Form 10-Q by Schnitzer Steel Industries, Inc. (the “Company”) that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Except as noted herein or as the context may otherwise require, all references to “we,” “our,” “us,” and “SSI” refer to the Company and its consolidated subsidiaries.
Forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding future events or our expectations, intentions, beliefs and strategies regarding the future, which may include statements regarding trends, cyclicality and changes in the markets we sell into; the Company’s outlook, growth initiatives or expected results or objectives, including pricing, margins, sales volumes and profitability; strategic direction or goals; targets; changes to manufacturing and production processes; 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 and the impact of federal tax reform; the impact of tariffs, quotas and other trade actions; the realization of deferred tax assets; planned capital expenditures; liquidity positions; ability to generate cash from continuing operations; the potential impact of adopting new accounting pronouncements; 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: 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 tariffs, quotas and other trade actions; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials we purchase; imbalances in supply and demand conditions in the global steel industry; the impact of goodwill impairment charges; the impact of long-lived asset and equity investment impairment charges; inability to achieve or sustain the benefits from productivity, cost savings and restructuring initiatives; difficulties associated with acquisitions and integration of acquired businesses; customer fulfillment of their contractual obligations; increases in the relative value of the U.S. dollar; the impact of foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under our bank credit agreement; the impact of consolidation in the steel industry; inability to realize expected benefits from investments in technology; freight rates and the availability of transportation; the impact of equipment upgrades, equipment failures and facility damage on production; product liability claims; the impact of legal proceedings and legal compliance; the adverse impact of climate change; the impact of not realizing deferred tax assets; the impact of tax increases and changes in tax rules; the impact of one or more cybersecurity incidents; environmental compliance costs and potential environmental liabilities; inability to obtain or renew business licenses and permits or renew facility leases; compliance with climate change and greenhouse gas emission laws and regulations; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.


3


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)
 
February 28, 2019
 
August 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
13,173

 
$
4,723

Accounts receivable, net of allowance for doubtful accounts of $2,560 and $2,586
165,307

 
169,418

Inventories
198,565

 
205,877

Refundable income taxes
5,184

 
4,668

Prepaid expenses and other current assets
36,724

 
63,673

Total current assets
418,953

 
448,359

Property, plant and equipment, net of accumulated depreciation of $750,949 and $731,561
428,777

 
415,711

Investments in joint ventures
10,703

 
11,532

Goodwill
169,439

 
168,065

Intangibles, net of accumulated amortization of $2,867 and $3,476
4,117

 
4,358

Deferred income taxes
29,548

 
30,333

Other assets
25,715

 
26,459

Total assets
$
1,087,252

 
$
1,104,817

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
1,215

 
$
1,139

Accounts payable
95,730

 
128,495

Accrued payroll and related liabilities
20,303

 
46,410

Environmental liabilities
9,908

 
6,682

Other accrued liabilities
43,794

 
71,951

Total current liabilities
170,950

 
254,677

Deferred income taxes
16,137

 
11,742

Long-term debt, net of current maturities
161,866

 
106,237

Environmental liabilities, net of current portion
43,306

 
47,150

Other long-term liabilities
14,146

 
14,901

Total liabilities
406,405

 
434,707

Commitments and contingencies (Note 5)

 

Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:
 
 
 
Preferred stock – 20,000 shares $1.00 par value authorized, none issued

 

Class A common stock – 75,000 shares $1.00 par value authorized, 26,575 and 26,502 shares issued and outstanding
26,575

 
26,502

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
29,135

 
36,929

Retained earnings
658,424

 
639,684

Accumulated other comprehensive loss
(37,727
)
 
(37,237
)
Total SSI shareholders’ equity
676,607

 
666,078

Noncontrolling interests
4,240

 
4,032

Total equity
680,847

 
670,110

Total liabilities and equity
$
1,087,252

 
$
1,104,817

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

4


SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)
(Currency - U.S. Dollar)
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
2019
 
2018
 
2019
 
2018
Revenues
$
473,565

 
$
559,443

 
$
1,037,585

 
$
1,042,722

Operating expense:
 
 
 
 
 
 
 
Cost of goods sold
414,688

 
472,462

 
904,820

 
878,713

Selling, general and administrative
39,489

 
53,638

 
90,908

 
104,681

(Income) from joint ventures
(184
)
 
(106
)
 
(669
)
 
(556
)
Asset impairment charges (recoveries), net

 

 
63

 
(88
)
Restructuring charges and other exit-related activities
536

 
91

 
738

 
191

Operating income
19,036

 
33,358

 
41,725

 
59,781

Interest expense
(2,067
)
 
(2,281
)
 
(3,973
)
 
(4,340
)
Other income, net
321

 
101

 
344

 
950

Income from continuing operations before income taxes
17,290

 
31,178

 
38,096

 
56,391

Income tax (expense) benefit
(3,855
)
 
10,577

 
(7,971
)
 
4,620

Income from continuing operations
13,435

 
41,755

 
30,125

 
61,011

Income (loss) from discontinued operations, net of tax
(138
)
 
164

 
(210
)
 
129

Net income
13,297

 
41,919

 
29,915

 
61,140

Net income attributable to noncontrolling interests
(405
)
 
(903
)
 
(835
)
 
(1,760
)
Net income attributable to SSI
$
12,892

 
$
41,016

 
$
29,080

 
$
59,380

 
 
 
 
 
 
 
 
Net income per share attributable to SSI:
 
 
 
 
 
 
 
Basic:


 
 
 
 
 
 
Income per share from continuing operations attributable to SSI
$
0.47

 
$
1.47

 
$
1.06

 
$
2.14

Income (loss) per share from discontinued operations attributable to SSI

 
0.01

 
(0.01
)
 

Net income per share attributable to SSI
$
0.47

 
$
1.48

 
$
1.05

 
$
2.14

Diluted:
 
 
 
 
 
 
 
Income per share from continuing operations attributable to SSI
$
0.46

 
$
1.42

 
$
1.04

 
$
2.06

Income (loss) per share from discontinued operations attributable to SSI

 
0.01

 
(0.01
)
 

Net income per share attributable to SSI(1)
$
0.46

 
$
1.42

 
$
1.03

 
$
2.07

Weighted average number of common shares:
 
 
 
 
 
 
 
Basic
27,630

 
27,797

 
27,568

 
27,745

Diluted
28,114

 
28,805

 
28,239

 
28,737

Dividends declared per common share
$
0.1875

 
$
0.1875

 
$
0.3750

 
$
0.3750


 ____________________________
(1)
May not foot due to rounding.
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
are an integral part of these statements.

5


SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
(Currency - U.S. Dollar)
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
2019
 
2018
 
2019
 
2018
Net income
$
13,297

 
$
41,919

 
$
29,915

 
$
61,140

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
632

 
117

 
(732
)
 
(1,592
)
Pension obligations, net
40

 
(226
)
 
242

 
(144
)
Total other comprehensive income (loss), net of tax
672

 
(109
)
 
(490
)
 
(1,736
)
Comprehensive income
13,969

 
41,810

 
29,425

 
59,404

Less comprehensive income attributable to noncontrolling interests
(405
)
 
(903
)
 
(835
)
 
(1,760
)
Comprehensive income attributable to SSI
$
13,564

 
$
40,907

 
$
28,590

 
$
57,644


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


6


SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands)
(Currency - U.S. Dollar)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total SSI
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Class A
 
Class B
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of November 30, 2017
27,003

 
$
27,003

 
200

 
$
200

 
$
40,059

 
$
516,842

 
$
(36,920
)
 
$
547,184

 
$
4,433

 
$
551,617

Net income

 

 

 

 

 
41,016

 

 
41,016

 
903

 
41,919

Other comprehensive loss, net of tax

 

 

 

 

 

 
(109
)
 
(109
)
 

 
(109
)
Reclassification of stranded tax effects of the Tax Cuts and Jobs Act

 

 

 

 

 
517

 

 
517

 

 
517

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(486
)
 
(486
)
Share repurchases
(100
)
 
(100
)
 

 

 
(3,501
)
 

 

 
(3,601
)
 

 
(3,601
)
Issuance of restricted stock
3

 
3

 

 

 
(3
)
 

 

 

 

 

Restricted stock withheld for taxes

 

 

 

 
(37
)
 

 

 
(37
)
 

 
(37
)
Share-based compensation expense

 

 

 

 
3,091

 

 

 
3,091

 

 
3,091

Purchase of noncontrolling interest

 

 

 

 

 
(183
)
 

 
(183
)
 
(417
)
 
(600
)
Cash dividends

 

 

 

 

 
(5,215
)
 

 
(5,215
)
 

 
(5,215
)
Balance as of February 28, 2018
26,906

 
$
26,906

 
200

 
$
200

 
$
39,609

 
$
552,977

 
$
(37,029
)
 
$
582,663

 
$
4,433

 
$
587,096

 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total SSI
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Class A
 
Class B
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of November 30, 2018
26,826

 
$
26,826

 
200

 
$
200

 
$
32,592

 
$
650,695

 
$
(38,399
)
 
$
671,914

 
$
4,069

 
$
675,983

Net income

 

 

 

 

 
12,892

 

 
12,892

 
405

 
13,297

Other comprehensive income, net of tax

 

 

 

 

 

 
672

 
672

 

 
672

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(234
)
 
(234
)
Share repurchases
(263
)
 
(263
)
 

 

 
(5,729
)
 

 

 
(5,992
)
 

 
(5,992
)
Issuance of restricted stock
13

 
13

 

 

 
(13
)
 

 

 

 

 

Restricted stock withheld for taxes
(1
)
 
(1
)
 

 

 
(119
)
 

 

 
(120
)
 

 
(120
)
Share-based compensation expense

 

 

 

 
2,404

 

 

 
2,404

 

 
2,404

Cash dividends

 

 

 

 

 
(5,163
)
 

 
(5,163
)
 

 
(5,163
)
Balance as of February 28, 2019
26,575

 
$
26,575

 
200

 
$
200

 
$
29,135

 
$
658,424

 
$
(37,727
)
 
$
676,607

 
$
4,240

 
$
680,847

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



7


SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands)
(Currency - U.S. Dollar)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total SSI
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Class A
 
Class B
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of August 31, 2017
26,859

 
$
26,859

 
200

 
$
200

 
$
38,050

 
$
503,770

 
$
(35,293
)
 
$
533,586

 
$
3,907

 
$
537,493

Net income

 

 

 

 

 
59,380

 

 
59,380

 
1,760

 
61,140

Other comprehensive loss, net of tax

 

 

 

 

 

 
(1,736
)
 
(1,736
)
 

 
(1,736
)
Reclassification of stranded tax effects of the Tax Cuts and Jobs Act

 

 

 

 

 
517

 

 
517

 

 
517

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(817
)
 
(817
)
Share repurchases
(100
)
 
(100
)
 

 

 
(3,501
)
 

 

 
(3,601
)
 

 
(3,601
)
Issuance of restricted stock
244

 
244

 

 

 
(244
)
 

 

 

 

 

Restricted stock withheld for taxes
(97
)
 
(97
)
 

 

 
(2,791
)
 

 

 
(2,888
)
 

 
(2,888
)
Share-based compensation expense

 

 

 

 
8,095

 

 

 
8,095

 

 
8,095

Purchase of noncontrolling interest

 

 

 

 

 
(183
)
 

 
(183
)
 
(417
)
 
(600
)
Cash dividends

 

 

 

 

 
(10,507
)
 

 
(10,507
)
 

 
(10,507
)
Balance as of February 28, 2018
26,906

 
$
26,906

 
200

 
$
200

 
$
39,609

 
$
552,977

 
$
(37,029
)
 
$
582,663

 
$
4,433

 
$
587,096

 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total SSI
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Class A
 
Class B
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of August 31, 2018
26,502

 
$
26,502

 
200

 
$
200

 
$
36,929

 
$
639,684

 
$
(37,237
)
 
$
666,078

 
$
4,032

 
$
670,110

Net income

 

 

 

 

 
29,080

 

 
29,080

 
835

 
29,915

Other comprehensive loss, net of tax

 

 

 

 

 

 
(490
)
 
(490
)
 

 
(490
)
Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(627
)
 
(627
)
Share repurchases
(413
)
 
(413
)
 

 

 
(9,674
)
 

 

 
(10,087
)
 

 
(10,087
)
Issuance of restricted stock
763

 
763

 

 

 
(763
)
 

 

 

 

 

Restricted stock withheld for taxes
(277
)
 
(277
)
 

 

 
(7,165
)
 

 

 
(7,442
)
 

 
(7,442
)
Share-based compensation expense


 

 

 

 
9,808

 

 

 
9,808

 

 
9,808

Cash dividends

 

 

 

 

 
(10,340
)
 

 
(10,340
)
 

 
(10,340
)
Balance as of February 28, 2019
26,575

 
$
26,575

 
200

 
$
200

 
$
29,135

 
$
658,424

 
$
(37,727
)
 
$
676,607

 
$
4,240

 
$
680,847

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

8


SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
(Currency - U.S. Dollar)
 
Six Months Ended February 28,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
29,915

 
$
61,140

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
26,490

 
24,682

Asset impairment charges (recoveries), net
63

 
(88
)
Exit-related asset impairments
23

 

Inventory write-down

 
38

Share-based compensation expense
9,808

 
8,095

Deferred income taxes
4,888

 
(14,014
)
Undistributed equity in earnings of joint ventures
(669
)
 
(556
)
Loss on disposal of assets, net
24

 
252

Unrealized foreign exchange (gain) loss, net
70

 
(297
)
Bad debt expense (recoveries), net
(15
)
 
15

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(3,324
)
 
(62,049
)
Inventories
15,795

 
(49,432
)
Income taxes
(517
)
 
1,692

Prepaid expenses and other current assets
(2,503
)
 
2,947

Other long-term assets
430

 
(82
)
Accounts payable
(23,617
)
 
15,186

Accrued payroll and related liabilities
(26,091
)
 
(8,507
)
Other accrued liabilities
(8,229
)
 
4,534

Environmental liabilities
(784
)
 
3,620

Other long-term liabilities
78

 
1,673

Distributed equity in earnings of joint ventures
1,492

 
520

Net cash provided by (used in) operating activities
23,327

 
(10,631
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(41,295
)
 
(26,762
)
Acquisitions
(1,553
)
 
(2,300
)
Joint venture receipts, net
641

 
3

Proceeds from sale of assets
1,396

 
1,639

Net cash used in investing activities
(40,811
)
 
(27,420
)
Cash flows from financing activities:
 
 
 
Borrowings from long-term debt
245,770

 
314,483

Repayment of long-term debt
(190,892
)
 
(249,916
)
Payment of debt issuance costs
(96
)
 

Repurchase of Class A common stock
(10,087
)
 
(3,601
)
Taxes paid related to net share settlement of share-based payment awards
(7,442
)
 
(2,888
)
Distributions to noncontrolling interests
(627
)
 
(817
)
Purchase of noncontrolling interest

 
(600
)
Dividends paid
(10,574
)
 
(10,633
)
Net cash provided by financing activities
26,052

 
46,028

Effect of exchange rate changes on cash
(118
)
 
(257
)
Net increase in cash and cash equivalents
8,450

 
7,720

Cash and cash equivalents as of beginning of period
4,723

 
7,287

Cash and cash equivalents as of end of period
$
13,173

 
$
15,007

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


9



 
Six Months Ended February 28,
 
2019
 
2018
SUPPLEMENTAL DISCLOSURES:
 
 
 
Cash paid during the year for:
 
 
 
Interest
$
3,384

 
$
3,703

Income taxes paid, net
$
3,398

 
$
5,523

Schedule of noncash investing and financing transactions:
 
 
 
Purchases of property, plant and equipment included in current liabilities
$
9,652

 
$
8,176

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

10



SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements of Schnitzer Steel Industries, Inc. (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, 2018. The results for the three and six months ended February 28, 2019 and 2018 are not necessarily indicative of the results of operations for the entire fiscal year.
Accounting Changes
As of the beginning of the first quarter of fiscal 2019, the Company adopted an accounting standards update initially issued in May 2014 that clarifies the principles for recognizing revenue from contracts with customers. The core principle of the new guidance is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company adopted the new revenue accounting standard using the modified retrospective approach, which requires recognition of the cumulative effect of initially applying the new requirements as an adjustment to the opening balance of retained earnings in the period of initial application. Adoption of the new requirements did not change the timing of revenue recognition for the Company compared to the previous guidance, and the Company recorded no cumulative-effect adjustment to the opening balance of retained earnings as of September 1, 2018. The Company identified certain scrap purchase and sale arrangements for which it recognized revenue for the gross amount of consideration it expected to be entitled to from the customer (as principal) under the previous revenue guidance, but for which under the new revenue standard it recognizes revenue as the net amount of consideration that it expects to retain after paying the scrap metal supplier (as agent). The foregoing change in the classification of the cost of scrap metal purchased under such arrangements has the effect of reducing the amount of revenue and cost of goods sold reported in the financial statements, while having no impact on net income. If the Company had continued using the accounting guidance in effect before the adoption of the new revenue accounting standard, its consolidated revenues for the three and six months ended February 28, 2019 would have been higher by approximately $7 million and $13 million, respectively, or 1% for each period, and its consolidated cost of goods sold would have been higher by the same amounts, respectively. No other line items in the consolidated financial statements were materially impacted by adoption of the new requirements. Comparative prior period amounts and disclosures continue to be reported in accordance with guidance in effect prior to the date of adoption. See Note 7 - Revenue for the disclosures required under the new standard.
As of the beginning of the first quarter of fiscal 2019, the Company adopted an accounting standards update that amends certain aspects of the reporting model for financial instruments. The most pertinent amendment to the Company is that an entity may choose to measure certain equity investments that do not have readily determinable fair values at cost minus impairment, plus or minus changes resulting from observable price changes. The amendments also require a qualitative assessment to identify impairment of equity investments without readily determinable fair values. Adoption of the requirements had no impact on the Company’s consolidated financial position, results of operations and cash flows.
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 $27 million and $28 million as of February 28, 2019 and August 31, 2018, 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 doubtful accounts, 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

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SCHNITZER STEEL INDUSTRIES, INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


within 30 days of shipment. Nonferrous export sales typically require a deposit prior to shipment. Historically, almost all of the Company’s ferrous export sales have been made with letters of credit. Domestic ferrous metal sales, nonferrous metal sales and finished steel sales are generally made on open account, and the majority of these sales are covered by credit insurance.
The Company evaluates the collectibility of its accounts receivable based on a combination of factors, including whether sales were made pursuant to letters of credit or credit insurance is in place. In cases where management is aware of circumstances that may impair a customer’s ability to meet its financial obligations, management records a specific allowance against amounts due and reduces the receivable to the amount the Company believes will be collected. For all other customers, the Company maintains an allowance that considers the total receivables outstanding, historical collection rates and economic trends. 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 $8 million and $6 million for the six months ended February 28, 2019 and 2018, respectively.
Prepaid Expenses
The Company’s prepaid expenses totaled $14 million and $22 million as of February 28, 2019 and August 31, 2018, respectively, and consisted primarily of deposits on capital purchases, prepaid services and prepaid insurance.
Other Assets
The Company’s other assets, exclusive of prepaid expenses, consist primarily of receivables from insurers, an equity investment, debt issuance costs, and notes and other contractual receivables. Other assets are reported within either prepaid expenses and other current assets or other assets in the Unaudited Condensed Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle of one year from the reporting date. Receivables from insurers totaled $15 million and $36 million as of February 28, 2019 and August 31, 2018, respectively, with the decrease in the first half of fiscal 2019 resulting from the settlement of a contingent loss recorded during fiscal 2018 in connection with lawsuits arising from a motor vehicle collision for which the Company had insurance coverage. See “Contingencies – Other” in Note 5 – Commitments and Contingencies for further discussion of the contingent loss and subsequent settlements in fiscal 2019.
The Company previously invested $6 million in a privately-held waste and recycling entity. The investment does not have a readily determinable fair value and, therefore, is carried at cost and adjusted for impairments and observable price changes. The investment is presented as part of the Auto and Metals Recycling (“AMR”) reportable segment and reported within other assets in the Unaudited Condensed Consolidated Balance Sheets. The carrying value of the investment was $6 million as of February 28, 2019 and August 31, 2018. The Company has not recorded any impairments or upward or downward adjustments to the carrying value of the investment since acquisition.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, and notes and other contractual receivables. 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 $250,000 as of February 28, 2019. 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, limits, insurance, letters of credit or other collateral, cash deposits and monitoring procedures. The Company is exposed to a residual credit risk with respect to open letters of credit by virtue of the possibility of the failure of a bank providing a letter of credit. The Company had $60 million and $58 million of open letters of credit as of February 28, 2019 and August 31, 2018, respectively.

Note 2 - Recent Accounting Pronouncements

In February 2016, an accounting standard was issued that will supersede the existing lease standard and require a lessee to recognize a lease liability and a lease asset on its balance sheet for all leases, including those classified as operating leases under the existing lease standard. The update also expands the required quantitative and qualitative disclosures surrounding leases. Additional updates have been issued since February 2016 amending aspects of the initial update, including providing an additional and optional transition method for adoption. This standard is effective for the Company beginning in fiscal 2020, including interim periods within that fiscal year. The Company expects to initially apply the requirements by recognizing a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the period of adoption. The Company is in the process of analyzing its population of leases within the scope of the new accounting standard and documenting salient lease terms to support the initial

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SCHNITZER STEEL INDUSTRIES, INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


and subsequent measurement of lease liabilities and lease assets. The Company is also assessing and implementing changes to its processes, systems, and internal controls as a result of the new guidance. The Company is evaluating the impact of adopting this standard on its financial position, results of operations, cash flows and disclosures, and it expects to recognize a material amount of lease assets and liabilities on its consolidated balance sheet upon adoption.

Note 3 - Inventories

Inventories consisted of the following (in thousands):
 
February 28, 2019
 
August 31, 2018
Processed and unprocessed scrap metal
$
86,120

 
$
111,658

Semi-finished goods
16,948