UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically 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).
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.
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Large accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
The registrant had
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-Q
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 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; the impact of sanctions and tariffs, quotas and other trade actions and import restrictions; the realization of deferred tax assets; planned capital expenditures; liquidity positions; our 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 sanctions and tariffs, quotas and other trade actions and import restrictions; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials 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; inability to realize or delays in realizing expected benefits from investments in technology; inability to renew facility leases; difficulties associated with acquisitions and integration of acquired businesses; customer fulfillment of their contractual obligations; increases in the relative value of the U.S. dollar; the impact of foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under our bank credit agreement; the impact of consolidation in the steel industry; 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; 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)
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November 30, 2019 |
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August 31, 2019 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net of allowance for doubtful accounts of $ and $ |
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Inventories |
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Refundable income taxes |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net of accumulated depreciation of $ |
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Operating lease right-of-use assets |
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— |
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Investments in joint ventures |
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Goodwill |
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Intangibles, net of accumulated amortization of $ |
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Deferred income taxes |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Equity |
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Current liabilities: |
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Short-term borrowings |
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$ |
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$ |
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Accounts payable |
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Accrued payroll and related liabilities |
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Environmental liabilities |
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Operating lease liabilities |
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— |
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Other accrued liabilities |
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Total current liabilities |
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Deferred income taxes |
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Long-term debt, net of current maturities |
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Environmental liabilities, net of current portion |
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Operating lease liabilities, net of current maturities |
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— |
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Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 5) |
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Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity: |
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Preferred stock – |
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Class A common stock – |
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Class B common stock – |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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( |
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Total SSI shareholders’ equity |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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The accompanying Notes to the Unaudited Condensed Consolidated Financial Statement are an integral part of these statements.
4
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
(Currency - U.S. Dollar)
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Three Months Ended November 30, |
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2019 |
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2018 |
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Revenues |
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$ |
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$ |
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Operating expense: |
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Cost of goods sold |
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Selling, general and administrative |
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(Income) from joint ventures |
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( |
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Asset impairment charges |
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Restructuring charges and other exit-related activities |
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Operating (loss) income |
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( |
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Interest expense |
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( |
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( |
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Other income, net |
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(Loss) income from continuing operations before income taxes |
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( |
) |
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Income tax benefit (expense) |
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( |
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(Loss) income from continuing operations |
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( |
) |
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Income (loss) from discontinued operations, net of tax |
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( |
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Net (loss) income |
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( |
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Net income attributable to noncontrolling interests |
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( |
) |
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( |
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Net (loss) income attributable to SSI shareholders |
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$ |
( |
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$ |
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Net (loss) income per share attributable to SSI shareholders: |
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Basic: |
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(Loss) income per share from continuing operations |
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$ |
( |
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$ |
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Income (loss) per share from discontinued operations |
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— |
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— |
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Net (loss) income per share(1) |
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$ |
( |
) |
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$ |
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Diluted: |
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(Loss) income per share from continuing operations |
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$ |
( |
) |
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$ |
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Income (loss) per share from discontinued operations |
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— |
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— |
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Net (loss) income per share(1) |
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$ |
( |
) |
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$ |
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Weighted average number of common shares: |
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Basic |
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Diluted |
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(1) |
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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 (LOSS) INCOME
(Unaudited, in thousands)
(Currency - U.S. Dollar)
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Three Months Ended November 30, |
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2019 |
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2018 |
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Net (loss) income |
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$ |
( |
) |
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$ |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
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( |
) |
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Pension obligations, net |
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Total other comprehensive income (loss), net of tax |
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( |
) |
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Comprehensive (loss) income |
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( |
) |
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Less comprehensive income attributable to noncontrolling interests |
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( |
) |
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( |
) |
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Comprehensive (loss) income attributable to SSI shareholders |
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$ |
( |
) |
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$ |
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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, except per share amounts)
(Currency - U.S. Dollar)
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Common Stock |
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Accumulated |
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Class A |
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Class B |
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Additional |
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Other |
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Total SSI |
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Three Months Ended November 30, 2018 |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-in Capital |
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Retained Earnings |
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Comprehensive Loss |
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Shareholders' Equity |
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Noncontrolling Interests |
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Total Equity |
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Balance as of September 1, 2018 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive loss, net of tax |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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— |
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( |
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Distributions to noncontrolling interests |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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Share repurchases |
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( |
) |
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( |
) |
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— |
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— |
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( |
) |
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— |
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— |
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( |
) |
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— |
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( |
) |
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Restricted stock withheld for taxes |
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( |
) |
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( |
) |
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— |
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— |
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( |
) |
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— |
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— |
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( |
) |
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— |
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( |
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Issuance of restricted stock |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Share-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Dividends ($ |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
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— |
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( |
) |
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Balance as of November 30, 2018 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
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Common Stock |
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Accumulated |
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Class A |
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Class B |
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Additional |
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Other |
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Total SSI |
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Three Months Ended November 30, 2019 |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-in Capital |
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Retained Earnings |
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Comprehensive Loss |
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Shareholders' Equity |
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Noncontrolling Interests |
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Total Equity |
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Balance as of August 31, 2019 |
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$ |
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$ |
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$ |
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|
$ |
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$ |
( |
) |
|
$ |
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$ |
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$ |
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Cumulative effect on adoption of new accounting guidance for leases, net of tax |
|
|
— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
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— |
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( |
) |
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Balance as of September 1, 2019 |
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( |
) |
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Net (loss) income |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
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( |
) |
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Other comprehensive income, net of tax |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Distributions to noncontrolling interests |
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— |
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— |
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— |
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— |
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— |
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— |
|
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|
— |
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|
|
— |
|
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|
( |
) |
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( |
) |
|
Restricted stock withheld for taxes |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Issuance of restricted stock |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Share-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Dividends ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Balance as of November 30, 2019 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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 CASH FLOWS
(Unaudited, in thousands)
(Currency - U.S. Dollar)
|
|
|
Three Months Ended November 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
|
Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
Asset impairment charges |
|
|
|
|
|
|
|
|
|
Exit-related asset impairments |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
( |
) |
|
|
( |
) |
|
Undistributed equity in earnings of joint ventures |
|
|
( |
) |
|
|
( |
) |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
(Gain) loss on the disposal of assets, net |
|
|
( |
) |
|
|
|
|
|
Unrealized foreign exchange gain, net |
|
|
( |
) |
|
|
— |
|
|
Bad debt expense (recoveries), net |
|
|
|
|
|
|
( |
) |
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
( |
) |
|
Inventories |
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
( |
) |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
( |
) |
|
Other long-term assets |
|
|
( |
) |
|
|
|
|
|
Operating lease assets and liabilities |
|
|
|
|
|
|
— |
|
|
Accounts payable |
|
|
( |
) |
|
|
( |
) |
|
Accrued payroll and related liabilities |
|
|
( |
) |
|
|
( |
) |
|
Other accrued liabilities |
|
|
|
|
|
|
( |
) |
|
Environmental liabilities |
|
|
( |
) |
|
|
( |
) |
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
|
Distributed equity in earnings of joint ventures |
|
|
— |
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
|
|
|
|
( |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
( |
) |
|
|
( |
) |
|
Joint venture receipts, net |
|
|
— |
|
|
|
|
|
|
Proceeds from sale of assets |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Borrowings from long-term debt |
|
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
( |
) |
|
|
( |
) |
|
Payment of debt issuance costs |
|
|
— |
|
|
|
( |
) |
|
Repurchase of Class A common stock |
|
|
— |
|
|
|
( |
) |
|
Taxes paid related to net share settlement of share-based payment awards |
|
|
( |
) |
|
|
( |
) |
|
Distributions to noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
Dividends paid |
|
|
( |
) |
|
|
( |
) |
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
|
|
|
|
( |
) |
|
Net (decrease) increase in cash and cash equivalents |
|
|
( |
) |
|
|
|
|
|
Cash and cash equivalents as of beginning of period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of period |
|
$ |
|
|
|
$ |
|
|
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)
|
|
|
Three Months Ended November 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
|
Cash paid (refunded) during the period for: |
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
|
|
|
$ |
|
|
|
Income taxes paid (refunded), net |
|
$ |
|
|
|
$ |
( |
) |
|
Schedule of noncash investing and financing transactions: |
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment included in current liabilities |
|
$ |
|
|
|
$ |
|
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
9
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, 2019. The results for the three months ended November 30, 2019 and 2018 are not necessarily indicative of the results of operations for the entire fiscal year.
Segments
The Company’s internal organizational and reporting structure includes
Accounting Changes
As of the beginning of the first quarter of fiscal 2020, the Company adopted an accounting standards update, initially issued in February 2016, that requires a lessee to recognize a lease liability and a lease right-of-use asset on its balance sheet for all leases greater than 12 months, including those classified as operating leases. The update supersedes the previous lease accounting standard. The Company adopted the new lease accounting standard using the modified retrospective transition method, whereby it applied the new requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings as of September 1, 2019. Such cumulative-effect adjustment for the Company was not material. Adoption using the modified retrospective transition method did not have an impact on any prior period earnings of the Company, and no comparative prior periods were adjusted for the new guidance. The Company elected a package of practical expedients permitted under the transition guidance within the new lease accounting standard, which among other things, permit carrying forward the historical lease classification. The Company also elected the practical expedient exempting short-term leases from balance sheet recognition, whereby payments for such leases are recognized in the income statement on a straight-line basis over the lease term. In addition, the Company elected the practical expedient to not separate lease and non-lease components, which the Company elected to apply to all classes of underlying assets. Adoption of the new standard resulted in recognition of $
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 $
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 within 30 to 60 days of shipment. Nonferrous export sales typically require a deposit prior to shipment. Historically, almost all of the Company’s ferrous export sales have been made with letters of credit. 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.
10
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
Prepaid Expenses
The Company’s prepaid expenses, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets, totaled $
Other Assets
The Company’s other assets, exclusive of prepaid expenses, consist primarily of receivables from insurers, spare parts, 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 $
The Company invested $
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 $
Note 2 - Inventories
Inventories consisted of the following (in thousands):
|
|
|
November 30, 2019 |
|
|
August 31, 2019 |
|
||
|
Processed and unprocessed scrap metal |
|
$ |
|
|
|
$ |
|
|
|
Semi-finished goods |
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
Supplies |
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
|
|
|
$ |
|
|
11
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Leases
The Company enters into leases to obtain access to real property, machinery and equipment assets. Most of the Company’s lease obligations relate to real property leases for AMR operating sites, including the substantial majority of its auto parts stores, and for the Company’s administrative offices. The Company determines whether an arrangement contains a lease at inception by assessing whether it receives the right to direct the use of and obtain substantially all of the economic benefit from use of the underlying asset. Lease classification, measurement, and recognition are determined at lease commencement, which is the date the underlying asset is available for use by the Company. The accounting classification of a lease is based on whether the arrangement is effectively a financed purchase of the underlying asset (finance lease) or not (operating lease). Leases that, at lease commencement, have a non-cancellable lease term of
For leases other than short-term leases, the Company recognizes right-of-use assets and lease liabilities based primarily on the present value of future minimum lease payments over the lease term at lease commencement. Right-of-use assets represent the Company’s right to use the underlying asset during the lease term, while lease liabilities represent the Company’s obligation to make future lease payments. The lease term is the non-cancellable period of the lease, together with periods covered by renewal (or termination) options which the Company is reasonably certain to exercise (or not to exercise). Lease payments are discounted to present value using the Company’s incremental borrowing rate, unless the discount rate implicit in the lease is readily determinable. The Company’s incremental borrowing rate for each lease is the estimated rate of interest that the Company would have to pay to borrow the aggregate lease payments on a collateralized basis over the lease term. Estimation of the incremental borrowing rate requires judgment by management and reflects an assessment of the Company’s credit standing to derive an implied secured credit rating and corresponding yield curve. The Company used the incremental borrowing rate to recognize all operating lease right-of-use assets and liabilities as of the new lease accounting standard application date. Right-of-use assets and lease liabilities are subject to remeasurement after lease commencement when certain events or changes in circumstances arise, such as a change in the lease term due to reassessment of whether the Company is reasonably certain to exercise a renewal or termination option.
For operating leases, lease expense is recognized on a straight-line basis over the lease term. For finance leases, the lease right-of-use asset is amortized on a straight-line basis and interest expense is recognized on the lease liability using the effective interest rate method. Many of the Company’s real property leases contain variable lease payments that depend on an index or a rate, which are included in the measurement of the right-of-use asset and lease liability using the index or rate at lease commencement, or with respect to the Company’s transition to the new lease accounting standard the index or rate at the application date. Subsequent changes in variable lease payments are recorded as variable lease expenses during the period in which they are incurred. The Company elected a practical expedient to not separate lease and related non-lease components for accounting purposes and, thus, costs related to such non-lease components are disclosed as lease expense. Payments for short-term leases are recognized in the income statement on a straight-line basis over the lease term.
The Company’s operating leases for real property underlying its auto parts stores, metals recycling facilities, and administrative offices generally have non-cancellable lease terms of
For the three months ended November 30, 2019, the Company’s total lease cost was $
12
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Finance lease-related assets and liabilities consisted of the following (in thousands):
|
|
|
Balance Sheet Classification |
|
November 30, 2019 |
|
|
|
Assets: |
|
|
|
|
|
|
|
Finance lease right-of-use assets(1) |
|
Property, plant and equipment, net |
|
$ |
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Finance lease liabilities - current |
|
Short-term borrowings |
|
$ |
|
|
|
Finance lease liabilities - non-current |
|
Long-term debt, net of current maturities |
|
|
|
|
|
Total finance lease liabilities |
|
|
|
$ |
|
|
|
(1) |
Presented net of accumulated amortization of less than $ |
The weighted average remaining lease terms and weighted average discount rates for the Company’s leases as of November 30, 2019 were as follows:
|
|
|
November 30, 2019 |
|
|||||
|
|
|
Weighted Average Remaining Lease Term (Years) |
|
|
Weighted Average Discount Rate |
|
||
|
Operating leases |
|
|
|
|
|
|
|
% |
|
Finance leases |
|
|
|
|
|
|
|
% |
Maturities of lease liabilities by fiscal year as of November 30, 2019 were as follows (in thousands):
|
Year Ending August 31, |
|
Finance Leases |
|
|
Operating Leases |
|
||
|
2020 (for the remainder of fiscal 2020) |
|
$ |
|
|
|
$ |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
Total lease payments |
|
$ |
|
|
|
$ |
|
|
|
Less amounts representing interest |
|
|
( |
) |
|
|
( |
) |
|
Total lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
Less current maturities |
|
|
( |
) |
|
|
( |
) |
|
Lease liabilities, net of current maturities |
|
$ |
|
|
|
$ |
|
|
Supplemental cash flow information and non-cash activity related to leases are as follows (in thousands):
|
|
|
Three Months Ended November 30, 2019 |
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
Operating cash flows for operating leases |
|
$ |
|
|
|
Operating cash flows for finance leases |
|
$ |
|
|
|
Financing cash flows for finance leases |
|
$ |
|
|
|
Lease liabilities arising from obtaining right-of-use assets: |
|
|
|
|
|
Operating leases |
|
$ |
|
|
|
Finance leases |
|
$ |
|
|
13
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As a result of adopting the new lease accounting guidance on September 1, 2019 using the modified retrospective transition method, the Company is required to present future minimum lease commitments for capital leases and operating leases that were previously disclosed in the Company’s 2019 Annual Report on Form 10-K and accounted for under previous lease guidance.
Principal payments on capital lease obligations during the next five fiscal years and thereafter as of August 31, 2019 are as follows (in thousands):
|
Year Ending August 31, |
|
Capital Lease Obligations |
|
|
|
2020 |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total |
|
|
|
|
|
Amounts representing interest |
|
|
( |
) |
|
Total less interest |
|
$ |
|
|
The table below sets forth the Company’s future minimum obligations under non-cancelable operating leases as of August 31, 2019 (in thousands):
|
Year Ending August 31, |
|
Operating Leases |
|
|
|
2020 |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total |
|
$ |
|
|
Note 4 - Goodwill
The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. There were no triggering events identified during the first three months of fiscal 2020 requiring an interim goodwill impairment test. As of November 30, 2019 and August 31, 2019, all but $
The gross change in the carrying amount of goodwill for the three months ended November 30, 2019 was as follows (in thousands):
|
|
|
Goodwill |
|
|
|
August 31, 2019 |
|
$ |
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
November 30, 2019 |
|
$ |
|
|
Accumulated goodwill impairment charges were $
14
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 three months ended November 30, 2019 were as follows (in thousands):
|
Balance as of September 1, 2019 |
|
|
Liabilities Established (Released), Net |
|
|
Payments and Other |
|
|
Balance as of November 30, 2019 |
|
|
Short-Term |
|
|
Long-Term |
|
||||||
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Recycling Operations
As of November 30, 2019 and August 31, 2019, the Company’s recycling operations had environmental liabilities of $
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 natural resource damage claims or third party contribution or damage claims with respect to the Site.
While the Company participated in certain preliminary Site study efforts, it was not party to the consent order entered into by the EPA with certain other PRPs, referred to as the “Lower Willamette Group” (“LWG”), for a remedial investigation/feasibility study (“RI/FS”). During fiscal 2007, the Company and certain other parties agreed to an interim settlement with the LWG under which the Company made a cash contribution to the LWG RI/FS. The LWG has indicated that it had incurred over $
The Company has joined with approximately
In January 2008, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. Following meetings among the Trustee Council and the PRPs, funding and participation agreements were negotiated under which the participating PRPs, including the Company, agreed to fund the first phase of the three-phase natural resource damage assessment. Phase 1, which included the development of the Natural Resource Damage Assessment Plan (“AP”) and implementation of several early studies, was substantially completed in 2010. In December 2017, the Company joined with other participating PRPs in agreeing to fund Phase 2 of the natural resource damage assessment, which includes the implementation of the AP to develop information sufficient to facilitate early settlements between the Trustee Council and Phase 2 participants and the identification of restoration projects to be funded by the settlements. In late May 2018, the Trustee Council published notice of its intent to proceed with Phase 3, which 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. It is uncertain whether the Company will enter into an early settlement for natural resource damages or what costs it may incur in any such early settlement.
15
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
Estimates of the cost of remedial action for the cleanup of the in-river portion of the Site have varied widely in various drafts of the FS and in the EPA’s final FS issued in June 2016 ranging from approximately $
In January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for the Site. The selected remedy is a modified version of one of the alternative remedies evaluated in the EPA’s FS that was expanded to include additional work at a greater cost. The EPA has estimated the total cost of the selected remedy at $
In the ROD, the EPA acknowledged that much of the data used in preparing the ROD was more than a decade old and would need to be updated with a new round of “baseline” sampling to be conducted prior to the remedial design phase. Accordingly, the ROD provided for additional pre-remedial design investigative work and baseline sampling to be conducted in order to provide a baseline of current conditions and delineate particular remedial actions for specific areas within the Site. This additional sampling was required prior to proceeding with the next phase in the process which is the remedial design. The remedial design phase is an engineering phase during which additional technical information and data will be collected, identified and incorporated into technical drawings and specifications developed for the subsequent remedial action. 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. Following issuance of the ROD, EPA proposed that the PRPs, or a subgroup of PRPs, perform the additional investigative work identified in the ROD under a new consent order.
In December 2017, the Company and
The pre-remedial design investigation and baseline sampling work has been completed, and the report evaluating the data was submitted to EPA on June 17, 2019. The evaluation report concludes that Site conditions have improved substantially since the data forming the basis of the ROD was collected over a decade ago. The analysis contained in the report has significant implications for remedial design and remedial action at the Site. EPA has reviewed the report, finding with a few limited corrections that the data is of suitable quality and generally acceptable and stating that such data will be used, in addition to existing and forthcoming design-level data, to inform implementation of the ROD. However, EPA did not agree that the data or the analysis support the conclusions presented in the report. The Company and other PRPs disagree with EPA’s position on use of the more recent data and are reviewing EPA’s comments and the Company’s options.
16
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EPA has stated that it wants PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design covering the entire Site and has proposed dividing the Site into
Except for certain early action projects in which the Company is not involved, remediation activities are not expected to commence for a number of years. In addition, as discussed above, responsibility for implementing and funding the remedy will be determined in a separate allocation process, which is on-going. The Company would expect the next major stage of the allocation process to proceed in parallel with the remedial design process.
Because there has not been a determination of the specific remediation actions that will be required, the amount of natural resource damages or the allocation of costs of the investigations and any remedy and natural resource damages among the PRPs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it is likely to or which it is reasonably possible that it will incur in connection with the Site, although such costs could be material to the Company’s financial position, results of operations, cash flows and liquidity. Among the facts currently being developed are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on each property within the Site, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs. The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense (including the pre-remedial design investigative activities), remedial design, remedial action and mitigation for natural resource damages claims in connection with the Site, although there is no assurance that those policies will cover all of the costs which the Company may incur.
The Oregon Department of Environmental Quality is separately providing oversight of voluntary investigations and source control activities by the Company involving the Company’s sites adjacent to the Portland Harbor which are focused on controlling any current “uplands” releases of contaminants into the Willamette River. No liabilities have been established in connection with these investigations because the extent of contamination (if any) and the Company’s responsibility for the contamination (if any) have not yet been determined.
Other Legacy Environmental Loss Contingencies
The Company’s environmental loss contingencies as of November 30, 2019 and August 31, 2019, other than Portland Harbor, include actual or possible investigation and cleanup costs from historical contamination at sites currently or formerly owned or formerly operated by the Company or at other sites where the Company may have responsibility for such costs due to past disposal or other activities (“legacy environmental loss contingencies”). These legacy environmental loss contingencies relate to the potential remediation of waterways and soil and groundwater contamination and may also involve natural resource damages, governmental fines and penalties and claims by third parties for personal injury and property damage. The Company has been notified that it is or may be a potentially responsible party at certain of these sites, and investigation and cleanup activities are ongoing or may be required in the future. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. When investigation and cleanup activities are ongoing or where the Company has not yet been identified as having responsibility or the contamination has not yet been identified, it is reasonably possible that the Company may need to recognize additional liabilities in connection with such sites but the Company cannot currently reasonably estimate the possible loss or range of loss absent additional information or developments. Such additional liabilities, individually or in the aggregate, may have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
During fiscal 2018, the Company accrued $
17
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
investigating whether a portion or all of the current and future losses related to this matter, if incurred, are covered by existing insurance coverage or may be offset by contributions from other responsible parties.
In addition, the Company’s loss contingencies as of November 30, 2019 and August 31, 2019 include $
Steel Manufacturing Operations
The Company’s steel manufacturing operations had
The steel mill’s electric arc furnace generates dust (“EAF dust”) that is classified as hazardous waste by the EPA because of its zinc and lead content. As a result, the Company captures the EAF dust and ships it in specialized rail cars to firms that apply treatments that allow for the ultimate disposal of the EAF dust.
The Company’s steel mill has an operating permit issued under Title V of the Clean Air Act Amendments of 1990, which governs certain air quality standards. The permit is based on an annual production capacity of approximately
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 loss 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
Schnitzer Southeast, LLC (a wholly-owned subsidiary of the Company, “SSE”), an SSE employee, the Company and one of the Company’s insurance carriers had been named as defendants in
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 resolution of such legal proceedings arising in the normal course of business, after taking into consideration expected insurance recoveries, will have a material adverse effect on its results of operations, financial condition, or cash flows.
18
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss, net of tax, comprise the following (in thousands):
|
|
|
Three Months Ended November 30, 2019 |
|
|
Three Months Ended November 30, 2018 |
|
||||||||||||||||||
|
|
|
Foreign Currency Translation Adjustments |
|
|
Pension Obligations, Net |
|
|
Total |
|
|
Foreign Currency Translation Adjustments |
|
|
Pension Obligations, Net |
|
|
Total |
|
||||||
|
Balances - September 1 (Beginning of period) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Other comprehensive income (loss) before reclassifications, net of tax |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Balances - November 30 (End of period) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
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 Operations for all periods presented.
Note 7 - Revenue
Disaggregation of Revenues
The table below illustrates the Company’s revenues disaggregated by major product and sales destination for each reportable segment (in thousands):
|
|
|
Three Months Ended November 30, 2019 |
|
|||||||||||||
|
|
|
AMR |
|
|
CSS |
|
|
Intercompany Revenue Eliminations |
|
|
Total |
|
||||
|
Major product information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ferrous revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Nonferrous revenues |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Steel revenues(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and other revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Revenues based on sales destination: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Domestic |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
19
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Three Months Ended November 30, 2018 |
|
|||||||||||||
|
|
|
AMR |
|
|
CSS |
|
|
Intercompany Revenue Eliminations |
|
|
Total |
|
||||
|
Major product information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ferrous revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Nonferrous revenues |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Steel revenues(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and other revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Revenues based on sales destination: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Domestic |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
(1) |
Steel revenues include primarily sales of finished steel products, semi-finished goods (billets) and manufacturing scrap. |
Receivables from Contracts with Customers
The revenue accounting standard defines a receivable as an entity’s right to consideration that is unconditional, meaning that only the passage of time is required before payment is due. As of November 30, 2019 and August 31, 2019, receivables from contracts with customers, net of an allowance for doubtful accounts, totaled $
Contract Liabilities
Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company’s contract liabilities consist almost entirely of customer deposits for recycled scrap metal sales contracts, which are reported within accounts payable on the Unaudited Condensed Consolidated Balance Sheets and totaled $
20
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Share-Based Compensation
In the first quarter of fiscal 2020, 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
Awards vest if the threshold level under the specified metric is met at the end of the approximately performance period. For awards granted in the first quarter of fiscal 2020, the performance metrics were the Company’s total shareholder return (“TSR”) relative to a designated peer group of
The Company granted
|
|
|
Percentage |
|
|
|
Expected share price volatility (SSI) |
|
|
|
% |
|
Expected share price volatility (Peer group) |
|
|
|
% |
|
Expected correlation to peer group companies |
|
|
|
% |
|
Risk-free rate of return |
|
|
|
% |
The estimated fair value of the TSR awards at the date of grant was $
The Company granted
The Company accrues compensation cost for ROCE 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. If, upon reassessment, it is no longer probable that the actual performance results will exceed the stated target performance conditions, or that it is no longer probable that the target performance conditions will be achieved, the Company reverses any recognized compensation cost for shares no longer probable of being issued. If the performance conditions are not achieved at the end of the service period, all related compensation cost previously recognized is reversed.
Performance share awards will be paid in Class A common stock as soon as practicable after the end of the requisite service period and vesting date of October 31, 2022.
Note 9 - Income Taxes
Effective Tax Rate
The Company’s effective tax rate from continuing operations for the first quarter of fiscal 2020 was a benefit of
21
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 maintains valuation allowances against certain U.S. federal, state, Canadian and all Puerto Rican deferred tax 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 2013 to 2019 remain subject to examination under the statute of limitations.
Note 10 - Restructuring Charges and Other Exit-Related Activities
On January 8, 2020, subsequent to the end of the first quarter of fiscal 2020, the Company committed to certain restructuring initiatives aimed at further reducing its annual operating expenses, primarily SG&A, at Corporate, AMR and CSS, primarily through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses and other non-headcount measures. The Company expects to incur aggregate estimated restructuring charges, as defined in ASC 420, Exit or Disposal Cost Obligations, and other exit-related costs of approximately $
Note 11 - Net (Loss) Income Per Share
The following table sets forth the information used to compute basic and diluted net (loss) income per share attributable to SSI shareholders (in thousands):
|
|
|
Three Months Ended November 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
(Loss) income from continuing operations |
|
$ |
( |
) |
|
$ |
|
|
|
Net income attributable to noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
(Loss) income from continuing operations attributable to SSI shareholders |
|
|
( |
) |
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
|
|
|
|
|
( |
) |
|
Net (loss) income attributable to SSI shareholders |
|
$ |
( |
) |
|
$ |
|
|
|
Computation of shares: |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic |
|
|
|
|
|
|
|
|
|
Incremental common shares attributable to dilutive performance share awards, restricted stock units and deferred stock units |
|
|
— |
|
|
|
|
|
|
Weighted average common shares outstanding, diluted |
|
|
|
|
|
|
|
|
Common stock equivalent shares of
Note 12 - Related Party Transactions
The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $
22
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Segment Information
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
AMR acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors and brokers, and procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores. These auto parts stores also supply the Company’s shredding facilities with auto bodies that are processed into saleable recycled scrap metal.
CSS operates a steel mini-mill that produces a range of finished steel long products using recycled scrap metal and other raw materials. CSS’s steel mill obtains substantially all of its recycled scrap metal raw material requirements from its integrated metals recycling and joint venture operations. CSS’s metals recycling operations also sell recycled metal to external customers primarily in export markets.
The Company holds noncontrolling ownership interests in joint ventures, which are either in the metals recycling business or are suppliers of unprocessed metal. The Company’s allocable portion of the results of these joint ventures is reported within the segment results. As of November 30, 2019 and August 31, 2019, the Company had
Intersegment sales from AMR to CSS are made at prices that approximate local market rates. These intercompany sales tend to produce intercompany profit which is not recognized until the finished products are ultimately sold to third parties.
The information provided below is obtained from internal information that is provided to the Company’s chief operating decision maker for the purpose of corporate management. The Company uses segment operating income to measure segment performance. The Company does not allocate corporate interest income and expense, income taxes and other income and expense to its reportable segments. Certain expenses related to shared services that support operational activities and transactions are allocated from Corporate to the segments. Unallocated Corporate expense consists primarily of expense for management and certain administrative services that benefit both reportable segments. In addition, the Company does not allocate certain items to segment operating income because management does not include the information in its measurement of the performance of the operating segments. Such unallocated items include restructuring charges and other exit-related activities, charges (net of recoveries) related to legacy environmental matters, and provisions for certain legal matters. Because of the unallocated income and expense, the operating income of each reportable segment does not reflect the operating income the reportable segment would report as a stand-alone business. The results of discontinued operations are excluded from segment operating income and are presented separately, net of tax, from the results of ongoing operations for all periods presented.
See Note 7 - Revenue in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for presentation of the Company’s revenues by reportable segment.
23
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below illustrates the reconciliation of the Company’s segment operating (loss) income to (loss) income from continuing operations before income taxes (in thousands):
|
|
|
Three Months Ended November 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
AMR |
|
$ |
( |
) |
|
$ |
|
|
|
CSS |
|
|
|
|
|
|
|
|
|
Segment operating (loss) income |
|
|
|
|
|
|
|
|
|
Restructuring charges and other exit-related activities |
|
|
( |
) |
|
|
( |
) |
|
Corporate and eliminations |
|
|
( |
) |
|
|
( |
) |
|
Operating (loss) income |
|
|
( |
) |
|
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
Other income, net |
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes |
|
$ |
( |
) |
|
$ |
|
|
The following is a summary of the Company’s total assets by reportable segment (in thousands):
|
|
|
November 30, 2019 |
|
|
August 31, 2019 |
|
||
|
AMR(1) |
|
$ |
|
|
|
$ |
|
|
|
CSS(1) |
|
|
|
|
|
|
|
|
|
Total segment assets |
|
|
|
|
|
|
|
|
|
Corporate and eliminations(2) |
|
|
( |
) |
|
|
( |
) |
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
(1) |
AMR total assets include $ |
|
(2) |
The substantial majority of Corporate and eliminations total assets consist of Corporate intercompany payables to the Company’s operating segments and intercompany eliminations. |
24
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 months ended November 30, 2019 and 2018. The following discussion and analysis provides 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, 2019, 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. (“SSI”), an Oregon corporation, is one of North America’s largest recyclers of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products.
Our internal organizational and reporting structure includes two operating and reportable segments: the Auto and Metals Recycling (“AMR”) business and the Cascade Steel and Scrap (“CSS”) business.
AMR sells ferrous and nonferrous recycled scrap metal in both foreign and domestic markets. AMR acquires, processes and recycles auto bodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap through its 90 auto and metals recycling facilities. Our largest source of auto bodies is our own network of retail auto parts stores, which operate under the commercial brand-name Pick-n-Pull. AMR procures salvaged vehicles and sells serviceable used auto parts from these vehicles through its 51 self-service auto parts stores located across the United States and Western Canada. 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 where geographically more economical. AMR then processes mixed and large pieces of scrap metal into smaller pieces by crushing, torching, shearing, shredding and sorting, resulting in scrap metal pieces of a size, density and metal content required by customers to meet their production needs. The manufacturing process includes physical separation of ferrous and nonferrous materials through automated and manual processes into various sub-classifications, each of which has a value and metal content used by our customers for their end products. AMR uses a variety of shredding and separation systems to efficiently process and sort recycled scrap metal.
CSS operates a steel mini-mill in McMinnville, Oregon that produces a range of finished steel long products such as reinforcing bar (rebar) and wire rod. The primary feedstock for the manufacture of its products is ferrous recycled scrap metal. CSS’s steel mill obtains substantially all of its scrap metal raw material requirements from its integrated metals recycling and joint venture operations. CSS’s metals recycling operations comprise a collection, shredding and export operation in Portland, Oregon, four feeder yard operations located in Oregon and Southern Washington, and one metals recycling joint venture ownership interest. Additionally, CSS purchases small volumes of ferrous scrap metal from AMR and sells ferrous and nonferrous recycled scrap metal primarily into the export market.
We use segment operating income to measure our segment performance. We do not allocate corporate interest income and expense, income taxes and other income and expense to our reportable segments. Certain expenses related to shared services that support operational activities and transactions are allocated from Corporate to the segments. Unallocated Corporate expense consists primarily of expense for management and certain administrative services that benefit both reportable segments. In addition, we do not allocate certain items to segment operating income because management does not include the information in its measurement of the performance of the operating segments. Such unallocated items include restructuring charges and other exit-related activities, charges (net of recoveries) related to legacy environmental matters, and provisions for certain legal matters. Because of the unallocated income and expense, the operating income of each reportable segment does not reflect the operating income the reportable segment would report as a stand-alone business. The results of discontinued operations are excluded from segment operating income and are presented separately, net of tax, from the results of ongoing operations for all periods presented.
For further information regarding our reportable segments, see Note 13 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating income. We believe we generally benefit from sustained periods of stable or rising recycled scrap metal selling prices, which allow us to better maintain or increase both operating income and unprocessed scrap metal flow into our facilities. When recycled scrap metal selling prices decline, either sharply or for a sustained period, our operating margins typically compress.
25
SCHNITZER STEEL INDUSTRIES, INC.
Our deep water 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 deep water port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) allow us to efficiently meet the global demand for recycled ferrous metal by enabling us to ship bulk cargoes to steel manufacturers located in 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 also depend on the demand and prices for our finished steel products, the manufacture of which uses internally sourced ferrous recycled scrap metal as the primary feedstock, as well as other raw materials. Our steel mill in Oregon sells to industrial customers primarily in North America.
Our quarterly operating results fluctuate based on a variety of factors including, but not limited to, changes in market conditions for ferrous and nonferrous recycled metal and finished steel products, the supply of scrap metal in our domestic markets, and varying demand for used auto parts from our self-service retail stores. 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 at our facilities and production levels in our yards, and retail admissions and parts sales at our auto parts stores. Further, trade actions, including tariffs and any retaliation by affected countries, and licensing 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.
26
SCHNITZER STEEL INDUSTRIES, INC.
Executive Overview of Financial Results for the First Quarter of Fiscal 2020
We generated consolidated revenues of $406 million in the first quarter of fiscal 2020, a decrease of 28% from the $564 million of consolidated revenues in the first quarter of fiscal 2019, primarily due to significantly lower average net selling prices for our ferrous and nonferrous products, in both export and domestic markets, and reduced sales volumes compared to the prior year quarter. These decreases were driven by weaker market conditions for recycled metals globally primarily due to softer demand for finished steel and structural changes to the market for certain recycled nonferrous products resulting from Chinese import restrictions and tariffs. Market selling prices for ferrous recycled metal declined sharply by approximately $60 per ton, or approximately 20%, between the beginning of August and October 2019, before partially recovering in November. Compared to the prior year quarter, average net selling prices for our ferrous products at AMR decreased by 28% and ferrous sales volumes at AMR decreased by 10%, reflecting weaker demand globally and reduced supply of raw materials including end-of-life vehicles due to the lower price environment. Nonferrous revenues at AMR in the first quarter of fiscal 2020 decreased by 14% compared to the prior year quarter, as nonferrous average net selling prices and sales volumes at AMR decreased by 8% and 14%, respectively. Steel revenues in the first quarter of fiscal 2020 decreased by 24% compared to the prior year quarter primarily reflecting the impact of significantly lower average net selling prices for our finished steel products and decreased sales volumes.
Consolidated operating loss was $(8) million in the first quarter of fiscal 2020, compared to income of $23 million in the first quarter of fiscal 2019. Adjusted consolidated operating loss was $(4) million in the first quarter of fiscal 2020, compared to income of $23 million in the first quarter of fiscal 2019. Adjusted consolidated operating (loss) income for each period excludes the impact of charges for legacy environmental matters, net of recoveries, asset impairment charges, and restructuring charges and other exit-related activities. See the reconciliation of adjusted consolidated operating (loss) income in Non-GAAP Financial Measures at the end of this Item 2.
AMR reported an operating loss in the first quarter of fiscal 2020 of $(2) million, compared to income of $23 million in the prior year period. The sharply declining price environment during most of the first quarter of fiscal 2020 had a significant adverse impact on operating margins and overall operating results at AMR for the period. Ferrous metal spreads at AMR in the first quarter of fiscal 2020 declined by approximately 20% and average net selling prices for AMR’s nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, decreased by 12%, compared to the prior year quarter. In the sharply declining commodity price environment, average inventory costs did not decrease as quickly as purchase costs for scrap metal, resulting in an adverse effect on cost of goods sold and overall operating results at AMR. In addition, the lower price environment adversely impacted the supply of scrap metal including end-of-life vehicles, which resulted in lower processed volumes compared to the prior year quarter. The adverse effects of the market conditions on AMR’s operating results in the first quarter of fiscal 2020 were partially offset by the benefits from productivity initiatives implemented subsequent to the prior year quarter.
CSS reported operating income of $4 million in the first quarter of fiscal 2020, compared to $12 million in the prior year quarter, with the decrease primarily reflecting the impact of the declining price environment for finished steel during the first quarter of fiscal 2020. Finished steel average net selling prices declined $104 per ton, or 14%, compared to the prior year quarter, which led to a compression of finished steel margins as decreases in selling prices outpaced the reduction in raw material purchase prices and other input costs. The effects of finished steel margin compression were partially offset by benefits from productivity initiatives. CSS operating results in the first quarter of fiscal 2019 reflected higher finished steel margins compared to the current quarter, supported by the higher and rising price environment at the time.
Consolidated selling, general and administrative (“SG&A”) expense in the first quarter of fiscal 2020 decreased by $5 million, or 9%, compared to the prior year quarter primarily due to a $6 million decrease in employee-related expenses, including from lower incentive compensation accruals, partially offset by a $1 million charge related to an environmental matter at AMR.
In the first quarter of fiscal 2020, we invested $24 million in capital expenditures, including towards the implementation of advanced metals recovery technology at several of our major export facilities consistent with our strategic plan, which we expect will deliver benefits to our profitability beginning in the second half of fiscal 2020. We currently plan to invest up to $125 million in capital expenditures in fiscal 2020, including $60 million for investments in growth, including advanced metals recovery technology and to support volume initiatives and other growth projects.
27
SCHNITZER STEEL INDUSTRIES, INC.
Net loss from continuing operations attributable to SSI shareholders in the first quarter of fiscal 2020 was $(7) million, or $(0.26) per diluted share, compared to net income of $16 million, or $0.57 per diluted share, in the prior year quarter. Adjusted net loss from continuing operations attributable to SSI shareholders in the first quarter of fiscal 2020 was $(5) million, or $(0.17) per diluted share, compared to net income of $17 million, or $0.59 per diluted share, in the prior year quarter. See the reconciliation of adjusted net (loss) income from continuing operations attributable to SSI shareholders and adjusted diluted (loss) earnings per share from continuing operations attributable to SSI shareholders in Non-GAAP Financial Measures at the end of this Item 2.
The following items further highlight selected liquidity and capital structure metrics:
|
|
• |
For the first three months of fiscal 2020, net cash provided by operating activities of $11 million, compared to net cash used in operating activities of $12 million in the prior year comparable period; |
|
|
• |
Debt of $128 million as of November 30, 2019, compared to $105 million as of August 31, 2019; and |
|
|
• |
Debt, net of cash, of $119 million as of November 30, 2019, compared to $93 million as of August 31, 2019 (see the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2). |
28
SCHNITZER STEEL INDUSTRIES, INC.
Results of Operations
|
|
|
Three Months Ended November 30, |
|
|||||||||
|
($ in thousands) |
|
2019 |
|
|
2018 |
|
|
% Change |
|
|||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto and Metals Recycling |
|
$ |
312,757 |
|
|
$ |
436,412 |
|
|
|
(28 |
)% |
|
Cascade Steel and Scrap |
|
|
94,266 |
|
|
|
130,386 |
|
|
|
(28 |
)% |
|
Intercompany revenue eliminations(1) |
|
|
(1,439 |
) |
|
|
(2,778 |
) |
|
|
(48 |
)% |
|
Total revenues |
|
|
405,584 |
|
|
|
564,020 |
|
|
|
(28 |
)% |
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto and Metals Recycling |
|
|
280,129 |
|
|
|
378,736 |
|
|
|
(26 |
)% |
|
Cascade Steel and Scrap |
|
|
86,244 |
|
|
|
114,335 |
|
|
|
(25 |
)% |
|
Intercompany cost of goods sold eliminations(1) |
|
|
(1,613 |
) |
|
|
(2,939 |
) |
|
|
(45 |
)% |
|
Total cost of goods sold |
|
|
364,760 |
|
|
|
490,132 |
|
|
|
(26 |
)% |
|
Selling, general and administrative expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto and Metals Recycling |
|
|
33,519 |
|
|
|
34,766 |
|
|
|
(4 |
)% |
|
Cascade Steel and Scrap |
|
|
3,945 |
|
|
|
4,448 |
|
|
|
(11 |
)% |
|
Corporate(2) |
|
|
9,310 |
|
|
|
12,205 |
|
|
|
(24 |
)% |
|
Total selling, general and administrative expense |
|
|
46,774 |
|
|
|
51,419 |
|
|
|
(9 |
)% |
|
Income from joint ventures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto and Metals Recycling |
|
|
(39 |
) |
|
|
(170 |
) |
|
|
(77 |
)% |
|
Cascade Steel and Scrap |
|
|
(160 |
) |
|
|
(315 |
) |
|
|
(49 |
)% |
|
Total income from joint ventures |
|
|
(199 |
) |
|
|
(485 |
) |
|
|
(59 |
)% |
|
Asset impairment charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto and Metals Recycling |
|
|
1,580 |
|
|
|
63 |
|
|
NM |
|
|
|
Corporate |
|
|
112 |
|
|
|
— |
|
|
NM |
|
|
|
Total asset impairment charges |
|
|
1,692 |
|
|
|
63 |
|
|
NM |
|
|
|
Operating (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto and Metals Recycling |
|
|
(2,432 |
) |
|
|
23,017 |
|
|
NM |
|
|
|
Cascade Steel and Scrap |
|
|
4,237 |
|
|
|
11,918 |
|
|
|
(64 |
)% |
|
Segment operating income |
|
|
1,805 |
|
|
|
34,935 |
|
|
NM |
|
|
|
Restructuring charges and other exit-related activities(3) |
|
|
(467 |
) |
|
|
(202 |
) |
|
|
131 |
% |
|
Corporate expense(2) |
|
|
(9,422 |
) |
|
|
(12,205 |
) |
|
|
(23 |
)% |
|
Change in intercompany profit elimination(4) |
|
|
174 |
|
|
|
161 |
|
|
|
8 |
% |
|
Total operating (loss) income |
|
$ |
(7,910 |
) |
|
$ |
22,689 |
|
|
NM |
|
|
NM = Not Meaningful
|
(1) |
AMR sells a small portion of its recycled ferrous metal to CSS at prices that approximate local market rates. These intercompany revenues and cost of goods sold are eliminated in consolidation. |
|
(2) |
Corporate expense consists primarily of unallocated expenses for management and certain administrative services that benefit both reportable segments. |
|
(3) |
Restructuring charges consist of expense for severance, contract termination and other restructuring costs that management does not include in its measurement of the performance of the reportable segments. Other exit-related activities consist primarily of asset impairments and accelerated depreciation, net of gains on exit-related disposals, related to site closures. |
|
(4) |
Intercompany profits are not recognized until the finished products are sold to third parties; therefore, intercompany profit is eliminated while the products remain in inventories. |
We operate our business across two reportable segments: AMR and CSS. Additional financial information relating to these reportable segments is contained in Note 13 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
29
SCHNITZER STEEL INDUSTRIES, INC.
Auto and Metals Recycling (AMR)
|
|
|
Three Months Ended November 30, |
|
|||||||||
|
($ in thousands, except for prices) |
|
2019 |
|
|
2018 |
|
|
% Change |
|
|||
|
Ferrous revenues |
|
$ |
192,472 |
|
|
$ |
298,812 |
|
|
|
(36 |
)% |
|
Nonferrous revenues |
|
|
89,812 |
|
|
|
104,181 |
|
|
|
(14 |
)% |
|
Retail and other revenues |
|
|
30,473 |
|
|
|
33,419 |
|
|
|
(9 |
)% |
|
Total segment revenues |
|
|
312,757 |
|
|
|
436,412 |
|
|
|
(28 |
)% |
|
Segment operating (loss) income |
|
$ |
(2,432 |
) |
|
$ |
23,017 |
|
|
NM |
|
|
|
Average ferrous recycled metal sales prices ($/LT)(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
195 |
|
|
$ |
290 |
|
|
|
(33 |
)% |
|
Foreign |
|
$ |
229 |
|
|
$ |
314 |
|
|
|
(27 |
)% |
|
Average |
|
$ |
221 |
|
|
$ |
306 |
|
|
|
(28 |
)% |
|
Ferrous sales volume (LT, in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
247 |
|
|
|
340 |
|
|
|
(27 |
)% |
|
Foreign |
|
|
583 |
|
|
|
579 |
|
|
|
1 |
% |
|
Total ferrous sales volume (LT, in thousands) |
|
|
830 |
|
|
|
919 |
|
|
|
(10 |
)% |
|
Average nonferrous sales price ($/pound)(1)(2) |
|
$ |
0.54 |
|
|
$ |
0.59 |
|
|
|
(8 |
)% |
|
Nonferrous sales volume (pounds, in thousands)(2) |
|
|
131,501 |
|
|
|
152,869 |
|
|
|
(14 |
)% |
|
Cars purchased (in thousands)(3) |
|
|
83 |
|
|
|
94 |
|
|
|
(12 |
)% |
|
Number of auto parts stores at period end |
|
|
51 |
|
|
|
51 |
|
|
|
(— |
)% |
LT = Long Ton, which is equivalent to 2,240 pounds
|
(1) |
Price information is shown after netting the cost of freight incurred to deliver the product to the customer. |
|
(2) |
Average sales price and volume information excludes platinum group metals (“PGMs”) in catalytic converters. |
|
(3) |
Cars purchased by auto parts stores only. |
AMR Segment Revenues
Revenues in the first quarter of fiscal 2020 decreased by 28% compared to the prior year quarter primarily due to significantly lower average net selling prices for our ferrous and nonferrous products, in both export and domestic markets, and reduced sales volumes compared to the prior year quarter. These decreases were driven by weaker market conditions for recycled metals globally primarily due to softer demand for finished steel and structural changes to the market for certain recycled nonferrous products. Market selling prices for ferrous recycled metal declined sharply by approximately $60 per ton, or approximately 20%, between the beginning of August and early October 2019, before partially recovering in November. Compared to the prior year quarter, average net selling prices for shipments of ferrous products at AMR decreased by 28% and ferrous sales volumes decreased by 10%, reflecting weaker demand globally and reduced supply of raw materials including end-of-life vehicles due to the lower price environment. Nonferrous revenues in the first quarter of fiscal 2020 decreased by 14% compared to the prior year quarter, as nonferrous average net selling prices and sales volumes decreased by 8% and 14%, respectively.
AMR Segment Operating (Loss) Income
Operating (loss) income in the first quarter of fiscal 2020 was $(2) million compared to $23 million in the prior year quarter. The sharply declining price environment during most of the first quarter of fiscal 2020 had a significant adverse impact on operating margins and overall operating results at AMR for the period. Ferrous metal spreads at AMR in the first quarter of fiscal 2020 declined by approximately 20% and average net selling prices for AMR’s nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, decreased by 12%, compared to the prior year quarter. In the sharply declining commodity price environment, average inventory costs did not decrease as quickly as purchase costs for scrap metal, resulting in an adverse effect on cost of goods sold and overall operating results at AMR. In addition, the lower price environment adversely impacted the supply of scrap metal including end-of-life vehicles, which resulted in lower processed volumes compared to the prior year quarter. The adverse effects of the market conditions on AMR’s operating results in the first quarter of fiscal 2020 were partially offset by the benefits from productivity initiatives implemented subsequent to the prior year quarter. Operating results at AMR in the first quarter of fiscal 2019 included $8 million in positive contributions from a limited-duration contract, which was substantially complete at the end of fiscal 2019, and which had provided a high margin source of supply.
30
SCHNITZER STEEL INDUSTRIES, INC.
Cascade Steel and Scrap (CSS)
|
|
|
Three Months Ended November 30, |
|
|||||||||
|
($ in thousands, except for price) |
|
2019 |
|
|
2018 |
|
|
% Change |
|
|||
|
Steel revenues(1) |
|
$ |
77,325 |
|
|
$ |
101,337 |
|
|
|
(24 |
)% |
|
Recycling revenues(2) |
|
|
16,941 |
|
|
|
29,049 |
|
|
|
(42 |
)% |
|
Total segment revenues |
|
|
94,266 |
|
|
|
130,386 |
|
|
|
(28 |
)% |
|
Segment operating income |
|
$ |
4,237 |
|
|
$ |
11,918 |
|
|
|
(64 |
)% |
|
Finished steel average sales price ($/ST)(3) |
|
$ |
643 |
|
|
$ |
747 |
|
|
|
(14 |
)% |
|
Finished steel sales volume (ST, in thousands) |
|
|
114 |
|
|
|
119 |
|
|
|
(5 |
)% |
|
Rolling mill utilization(4) |
|
|
85 |
% |
|
|
87 |
% |
|
|
(2 |
)% |
ST = Short Ton, which is equivalent to 2,000 pounds
|
(1) |
Steel revenues include primarily sales of finished steel products, semi-finished goods (billets) and steel manufacturing scrap. |
|
(2) |
Recycling revenues include primarily sales of ferrous and nonferrous recycled scrap metal to export markets. |
|
(3) |
Price information is shown after netting the cost of freight incurred to deliver the product to the customer. |
|
(4) |
Rolling mill utilization is based on effective annual production capacity under current conditions of 580 thousand tons of finished steel products. |
CSS Segment Revenues
Revenues in the first quarter of fiscal 2020 decreased by $36 million, or 28% compared to the prior year quarter reflecting significantly lower average net selling prices for our finished steel products, lower finished steel sales volumes and decreased sales of ferrous recycled scrap metal.
CSS Segment Operating Income
Operating income in the first quarter of fiscal 2020 was $4 million compared to $12 million in the prior year quarter, with the decrease primarily reflecting the impact of the declining price environment for finished steel during the first quarter of fiscal 2020. Finished steel average net selling prices declined $104 per ton, or 14%, compared to the prior year quarter, which led to a compression of finished steel margins as decreases in selling prices outpaced the reduction in raw material purchase prices and other input costs. The effects of finished steel margin compression were partially offset by benefits from productivity initiatives. CSS operating results in the first quarter of fiscal 2019 reflected higher finished steel margins compared to the current quarter, supported by the higher and rising price environment at the time.
Corporate Expense
Corporate SG&A expense for the first quarter of fiscal 2020 decreased by $3 million, or 24%, compared to the prior year quarter primarily due to decreased employee-related expenses, including from lower incentive compensation accruals. The lower incentive compensation accruals primarily reflect the reduced expense attributable to share-based awards granted in the first quarter of fiscal 2020 compared to the prior year period.
Productivity Initiatives and Restructuring Charges
In order to mitigate the weaker price environment in the ferrous and nonferrous markets, in fiscal 2019 we implemented productivity initiatives aimed at delivering $35 million in annual benefits primarily through a combination of production cost efficiencies and reductions in SG&A expense. Of the total, approximately 75% of the targeted benefits are in AMR with the remainder split between CSS and Corporate. For fiscal 2019, we achieved approximately $30 million in benefits as a result of these initiatives, with the full amount expected to be achieved in fiscal 2020. Our first quarter fiscal 2020 performance reflects achievement of the full quarterly run rate of these initiatives. In addition, in fiscal 2020 we also initiated and are in the process of implementing additional productivity initiatives aimed at further reducing our annual operating expenses at Corporate, AMR and CSS, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses and other non-headcount measures. We are targeting $15 million in realized benefits in fiscal 2020 from these additional initiatives.
31
SCHNITZER STEEL INDUSTRIES, INC.
We expect to incur aggregate estimated restructuring charges and other exit-related costs of approximately $4 million in connection with these initiatives, the substantial majority of which are expected to be recognized in fiscal 2020 and to require the Company to make cash payments. The estimated charges consist primarily of employee termination benefits of $2 million, professional services costs of $1 million, and a loss associated with a lease contract termination of $1 million.
Income Tax
The effective tax rate from continuing operations for the first quarter of fiscal 2020 was a benefit of 27.8% compared to an expense of 19.8% for the comparable prior year period. The effective tax rate from continuing operations for the first quarter of fiscal 2020 was higher than the U.S. federal statutory rate of 21% primarily due to the impact of non-deductible officers’ compensation and other expenses, as well as the aggregate impact of state taxes, on the projected annual effective tax rate applied to the quarterly results.
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 $10 million and $12 million as of November 30, 2019 and August 31, 2019, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of November 30, 2019, debt was $128 million compared to $105 million as of August 31, 2019, and debt, net of cash, was $119 million as of November 30, 2019 compared to $93 million as of August 31, 2019 (refer to Non-GAAP Financial Measures at the end of this Item 2).
Operating Activities
Net cash provided by operating activities in the first three months of fiscal 2020 was $11 million, compared to net cash used in operating activities of $12 million in the first three months of fiscal 2019.
Sources of cash in the first three months of fiscal 2020 included a $28 million decrease in accounts receivable primarily due to the timing of sales and collections and a $12 million decrease in inventories due to lower raw material purchase prices and the timing of purchases and sales. Uses of cash in the first three months of fiscal 2020 included a $29 million decrease in accounts payable primarily due to lower raw material purchase prices and the timing of payments and a $11 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation previously accrued under our fiscal 2019 plans.
Uses of cash in the first three months of fiscal 2019 included a $28 million increase in accounts receivable primarily due to the timing of sales and collections and a $27 million decrease in accrued payroll and related liabilities due to the payment of incentive compensation previously accrued under our fiscal 2018 plans. Sources of cash other than from earnings in the first three months of fiscal 2019 included a $10 million decrease in inventories primarily due to lower raw material purchase prices and the impact of timing of purchases and sales.
Investing Activities
Net cash used in investing activities was $24 million in the first three months of fiscal 2020, compared to $25 million in the first three months of fiscal 2019.
Cash used in investing activities in the first three months of fiscal 2020 included capital expenditures of $24 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, compared to $27 million in the prior year period.
Financing Activities
Net cash provided by financing activities in the first three months of fiscal 2020 was $10 million, compared to $44 million in the first three months of fiscal 2019.
Cash flows from financing activities in the first three months of fiscal 2020 included $22 million in net borrowings of debt, compared to $61 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 three
32
SCHNITZER STEEL INDUSTRIES, INC.
months of fiscal 2020 and 2019 included $6 million for the payment of dividends. Cash used in financing activities in the first three months of fiscal 2019 also included $4 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 2.75%, with the amount of the spread based on a pricing grid tied to our consolidated funded debt to EBITDA ratio, 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 zero and 1.50% 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 0.15% and 0.45% based on a pricing grid tied to our consolidated funded debt to EBITDA ratio.
We had borrowings outstanding under our credit facilities of $119 million as of November 30, 2019 and $97 million as of August 31, 2019. The weighted average interest rate on amounts outstanding under our credit facilities was 3.25% and 3.78% as of November 30, 2019 and August 31, 2019, respectively.
We use the credit facilities to fund working capital, capital expenditures, dividends, share repurchases, investments and acquisitions. The credit agreement contains various representations and warranties, events of default and financial and other customary covenants which limit (subject to certain exceptions) our ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of our business, engage in transactions with affiliates and enter into restrictive agreements, including agreements that restrict the ability of our subsidiaries to make distributions. The financial covenants under the credit agreement include (a) a consolidated fixed charge coverage ratio, defined as the four-quarter rolling sum of consolidated adjusted EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges 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 November 30, 2019, we were in compliance with the financial covenants under the credit agreement. The consolidated fixed charge coverage ratio was required to be no less than 1.50 to 1.00 and was 2.74 to 1.00 as of November 30, 2019. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.18 to 1.00 as of November 30, 2019.
Our obligations under the 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 expect to remain in compliance with the financial covenants under the credit agreement, there can be no assurances that we will be able to do so in the event market conditions or other negative factors which adversely impact our results of operations and financial position lead to a trend of consolidated net losses. If we do not maintain compliance with our financial covenants and are unable to obtain an amendment or waiver from our lenders, a breach of a financial covenant would constitute an event of default and allow the lenders to exercise remedies under the agreements, the most severe of which is the termination of the credit facility under our committed bank credit agreement and acceleration of the amounts owed under the agreement. In such case, we would be required to evaluate available alternatives and take appropriate steps to obtain alternative funds. There can be no assurances that any such alternative funds, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
Capital Expenditures
Capital expenditures totaled $24 million for the first three months of fiscal 2020, compared to $27 million for the prior year period. We currently plan to invest up to $125 million in capital expenditures in fiscal 2020, including $60 million for investments in growth, including advanced metals recovery technology and to support volume initiatives and other growth projects, using cash generated from operations and available credit facilities.
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 $3 million in capital expenditures for environmental projects in the first three months of fiscal 2020,
33
SCHNITZER STEEL INDUSTRIES, INC.
and plan to invest up to $15 million for such projects in fiscal 2020. These projects include investments in storm water systems and equipment to ensure ongoing compliance with air quality and other environmental regulations.
We have been identified by the United States Environmental Protection Agency 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 (including pre-remedial design investigative activities), remedial design, remedial action 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 and other environmental matters 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.
Dividends
On November 6, 2019, our Board of Directors declared a dividend for the first quarter of fiscal 2020 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend was paid on November 29, 2019.
Share Repurchase Program
Pursuant to our amended share repurchase program, as of November 30, 2019, we have existing authorization remaining under the program to repurchase up to approximately 759 thousand shares of our Class A common stock when we deem such repurchases to be appropriate. We may repurchase our common stock for a variety of reasons, such as to optimize our capital structure and to offset dilution related to share-based compensation arrangements. We consider several factors in determining whether to make share repurchases including, among other things, our cash needs, the availability of funding, our future business plans and the market price of our stock.
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.
Off-Balance Sheet Arrangements
None requiring disclosure pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934.
Contractual Obligations
There were no material changes related to contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019.
We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. As of November 30, 2019, we had $10 million outstanding under these arrangements.
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies and estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended August 31, 2019, except for changes resulting from adoption of the new lease accounting standard in the first quarter of fiscal 2020. Refer to Note 3
34
SCHNITZER STEEL INDUSTRIES, INC.
- Leases in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for the disclosures required under the new lease accounting standard.
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 debt, net of cash is a useful measure for investors because, as cash and cash equivalents can be used, among other things, to repay indebtedness, netting this against total debt is a useful measure of our leverage.
The following is a reconciliation of debt, net of cash (in thousands):
|
|
|
November 30, 2019 |
|
|
August 31, 2019 |
|
||
|
Short-term borrowings |
|
$ |
1,431 |
|
|
$ |
1,321 |
|
|
Long-term debt, net of current maturities |
|
|
126,875 |
|
|
|
103,775 |
|
|
Total debt |
|
|
128,306 |
|
|
|
105,096 |
|
|
Less cash and cash equivalents |
|
|
9,624 |
|
|
|
12,377 |
|
|
Total debt, net of cash |
|
$ |
118,682 |
|
|
$ |
92,719 |
|
Net borrowings (repayments) of debt
Net borrowings (repayments) of debt is the sum of borrowings from long-term debt and repayments of long-term debt. We present this amount as the net change in borrowings (repayments) for the period because we believe it is useful to investors as a meaningful presentation of the change in debt.
The following is a reconciliation of net borrowings (repayments) of debt (in thousands):
|
|
|
Three Months Ended November 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Borrowings from long-term debt |
|
$ |
114,339 |
|
|
$ |
158,859 |
|
|
Repayments of long-term debt |
|
|
(92,190 |
) |
|
|
(97,699 |
) |
|
Net borrowings (repayments) of debt |
|
$ |
22,149 |
|
|
$ |
61,160 |
|
Adjusted consolidated operating (loss) income, adjusted AMR operating (loss) income, adjusted Corporate expense, adjusted net (loss) income from continuing operations attributable to SSI shareholders, and adjusted diluted (loss) 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 legacy environmental matters, net of recoveries, asset impairment charges, restructuring charges and other exit-related activities, and the income tax expense (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.
35
SCHNITZER STEEL INDUSTRIES, INC.
The following is a reconciliation of adjusted consolidated operating (loss) income, adjusted AMR operating (loss) income and adjusted Corporate expense (in thousands):
|
|
|
Three Months Ended November 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Consolidated operating (loss) income: |
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(7,910 |
) |
|
$ |
22,689 |
|
|
Charges for legacy environmental matters, net(1) |
|
|
1,293 |
|
|
|
471 |
|
|
Restructuring charges and other exit-related activities |
|
|
467 |
|
|
|
202 |
|
|
Asset impairment charges |
|
|
1,692 |
|
|
|
63 |
|
|
Adjusted |
|
$ |
(4,458 |
) |
|
$ |
23,425 |
|
|
|
|
|
|
|
|
|
|
|
|
AMR operating (loss) income: |
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(2,432 |
) |
|
$ |
23,017 |
|
|
Asset impairment charges |
|
|
1,580 |
|
|
|
63 |
|
|
Adjusted |
|
$ |
(852 |
) |
|
$ |
23,080 |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expense: |
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
9,422 |
|
|
$ |
12,205 |
|
|
Charges for legacy environmental matters, net(1) |
|
|
(1,293 |
) |
|
|
(471 |
) |
|
Asset impairment charges |
|
|
(112 |
) |
|
|
— |
|
|
Adjusted |
|
$ |
8,017 |
|
|
$ |
11,734 |
|
|
(1) |
Legal and environmental charges for legacy environmental matters, net of recoveries. The prior year period has been recast for comparability. Legacy environmental matters include charges (net of recoveries) 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. |
36
SCHNITZER STEEL INDUSTRIES, INC.
The following is a reconciliation of adjusted net (loss) income from continuing operations attributable to SSI shareholders and adjusted diluted (loss) earnings per share from continuing operations attributable to SSI shareholders (in thousands, except per share data):
|
|
|
Three Months Ended November 30, |
|
|||||
|
|
|
|
2019 |
|
|
|
2018 |
|
|
Net (loss) income from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(7,023 |
) |
|
$ |
16,260 |
|
|
Charges for legacy environmental matters, net(1) |
|
|
1,293 |
|
|
|
471 |
|
|
Restructuring charges and other exit-related activities |
|
|
467 |
|
|
|
202 |
|
|
Asset impairment charges |
|
|
1,692 |
|
|
|
63 |
|
|
Income tax benefit allocated to adjustments(2) |
|
|
(1,151 |
) |
|
|
(184 |
) |
|
Adjusted |
|
$ |
(4,722 |
) |
|
$ |
16,812 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.26 |
) |
|
$ |
0.57 |
|
|
Charges for legacy environmental matters, net, per share(1) |
|
|
0.05 |
|
|
|
0.02 |
|
|
Restructuring charges and other exit-related activities, per share |
|
|
0.02 |
|
|
|
0.01 |
|
|
Asset impairment charges, per share |
|
|
0.06 |
|
|
|
— |
|
|
Income tax benefit allocated to adjustments, per share(2) |
|
|
(0.04 |
) |
|
|
(0.01 |
) |
|
Adjusted |
|
$ |
(0.17 |
) |
|
$ |
0.59 |
|
|
(1) |
Legal and environmental charges for legacy environmental matters, net of recoveries. The prior year period has been recast for comparability. Legacy environmental matters include charges (net of recoveries) 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’ Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report. |
|
(2) |
Income tax allocated to the aggregate adjustments reconciling reported and adjusted net (loss) income from continuing operations attributable to SSI shareholders and diluted (loss) earnings per share from continuing operations attributable to SSI shareholders is determined based on a tax provision calculated with and without the adjustments. |
We believe that these non-GAAP financial measures allow for a better understanding of our operating and financial performance. These non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable U.S. GAAP measures. Although we find these non-GAAP financial measures useful in evaluating the performance of our business, our reliance on these measures is limited because the adjustments often have a material impact on 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.
37
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We are exposed to commodity price risk, mainly associated with variations in the market price for 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. 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. Based on contracted sales and estimates of future selling prices, a 10% decrease in the selling price of inventory would not have had a material NRV impact on any of our reportable segments as of November 30, 2019.
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, 2019.
Credit Risk
As of November 30, 2019 and August 31, 2019, 38% and 32%, respectively, of our accounts receivable balance was covered by letters of credit. Of the remaining balance, 97% and 96% was less than 60 days past due as of November 30, 2019 and August 31, 2019, 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 November 30, 2019 and August 31, 2019, we did not have any derivative contracts.
38
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of November 30, 2019, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
During the quarter ended November 30, 2019, we implemented changes to our processes, systems, and internal controls over financial reporting relating to our adoption of and ongoing compliance with the new lease accounting standard, ASC 842, which we adopted as of September 1, 2019. There were no other changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
39
SCHNITZER STEEL INDUSTRIES, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding reportable legal proceedings is contained in Part I, “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, 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 I, incorporated by reference herein.
With respect to the previously reported matter in which the Company has been in settlement discussions with the Alameda County District Attorney and the California Office of the Attorney General (COAG), the latter on behalf of certain state agencies, regarding alleged violations of environmental requirements at one of our operations in California stemming from investigations initiated in 2013 and inspections conducted in 2015, the Company has completed various facility upgrades that we believe resolve the underlying environmental concerns identified by the agencies and has agreed to settle the matter for $4.556 million, inclusive of civil penalties, reimbursement of the agencies’ enforcement costs and Supplemental Environmental Projects (SEPs), which amount includes a credit of $925 thousand for performance of a SEP to install additional emission controls at the facility. The settlement is subject to finalization of the stipulation and settlement agreement and final approval by the agencies of the settlement including the SEP credit.
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, 2019.
ITEM 5. OTHER INFORMATION
On January 8, 2020, subsequent to the end of our fiscal 2020 first quarter, we committed to certain restructuring initiatives aimed at further reducing our annual operating expenses, primarily SG&A, at Corporate, AMR and CSS, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses and other non-headcount measures. We expect to incur aggregate estimated restructuring charges, as defined in ASC 420, Exit or Disposal Cost Obligations, and other exit-related costs of approximately $4 million in connection with these initiatives. The estimated charges consist primarily of employee termination benefits of $2 million, professional services costs of $1 million, and a loss associated with a lease contract termination of $1 million. We expect the substantial majority of the restructuring charges to be recognized by the end of fiscal 2020 and to require the Company to make cash payments.
40
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 6.EXHIBITS
|
Exhibit Number |
|
Exhibit Description |
|
|
|
|
|
10.1* |
|
|
|
|
|
|
|
10.2* |
|
Fiscal 2020 Annual Performance Bonus Program for the Chief Executive Officer. |
|
|
|
|
|
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 |
|
|
|
|
|
|
|
32.2 |
|
|
|
|
|
|
|
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) |
*Management contract or compensatory plan or arrangement.
41
SCHNITZER STEEL INDUSTRIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
SCHNITZER STEEL INDUSTRIES, INC. |
||
|
|
|
|
|
(Registrant) |
||
|
|
|
|
|
|
|
|
|
Date: |
|
January 8, 2020 |
|
By: |
|
/s/ Tamara L. Lundgren |
|
|
|
|
|
|
|
Tamara L. Lundgren |
|
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
Date: |
|
January 8, 2020 |
|
By: |
|
/s/ Richard D. Peach |
|
|
|
|
|
|
|
Richard D. Peach |
|
|
|
|
|
|
|
Senior Vice President, Chief Financial Officer and Chief of Corporate Operations |
42