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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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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Non-accelerated filer |
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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 the impact of pandemics, epidemics or other public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic; the impact of equipment upgrades, equipment failures and facility damage on production, including timing of repairs and resumption of operations; the Company’s outlook, growth initiatives or expected results or objectives, including pricing, margins, sales volumes and profitability; liquidity positions; our ability to generate cash from continuing operations; trends, cyclicality and changes in the markets we sell into; strategic direction or goals; targets; changes to manufacturing and production processes; the realization of insurance recoveries; the realization of deferred tax assets; planned capital expenditures; the cost of and the status of any agreements or actions related to our compliance with environmental and other laws; expected tax rates, deductions and credits; the impact of sanctions and tariffs, quotas and other trade actions and import restrictions; the potential impact of adopting new accounting pronouncements; the impact of labor shortages or increased labor costs; obligations under our retirement plans; benefits, savings or additional costs from business realignment, cost containment and productivity improvement programs; and the adequacy of accruals.
Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “outlook,” “target,” “aim,” “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “will,” “should,” “could,” “opinions,” “forecasts,” “projects,” “plans,” “future,” “forward,” “potential,” “probable,” and similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.
We may make other forward-looking statements from time to time, including in reports filed with the Securities and Exchange Commission, press releases, presentations and on public conference calls. All forward-looking statements we make are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements, except as may be required by law. Our business is subject to the effects of changes in domestic and global economic conditions and a number of other risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in “Item 1A. Risk Factors” of Part I of our most recent Annual Report on Form 10-K, as supplemented by our subsequently filed Quarterly Reports on Form 10-Q. Examples of these risks include: the impact of pandemics, epidemics or other public health emergencies, such as the COVID-19 pandemic; the impact of equipment upgrades, equipment failures and facility damage on production; potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the cyclicality and impact of general economic conditions; changing conditions in global markets including the impact of sanctions and tariffs, quotas and other trade actions and import restrictions; volatile supply and demand conditions affecting prices and volumes in the markets for raw materials and other inputs we purchase; significant decreases in scrap metal prices; imbalances in supply and demand conditions in the global steel industry; reliance on third party shipping companies, including with respect to freight rates and the availability of transportation; inability to obtain or renew business licenses and permits; the impact of goodwill impairment charges; the impact of long-lived asset and equity investment impairment charges; failure to realize or delays in realizing expected benefits from investments in processing and manufacturing technology improvements; inability to achieve or sustain the benefits from productivity, cost savings and restructuring initiatives; inability to renew facility leases; difficulties associated with acquisitions and integration of acquired businesses; customer fulfillment of their contractual obligations; increases in the relative value of the U.S. dollar; the impact of foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under the agreement governing our bank credit facilities; the impact of consolidation in the steel industry; product liability claims; the impact of legal proceedings and legal compliance; the adverse impact of climate change; the impact of not realizing deferred tax assets; the impact of tax increases and changes in tax rules; the impact of property tax increases or property tax rate changes; the impact of one or more cybersecurity incidents; environmental compliance costs and potential environmental liabilities; compliance with climate change and greenhouse gas emission laws and regulations; the impact of labor shortages or increased labor costs; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.
3
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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May 31, 2021 |
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August 31, 2020 |
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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 credit losses 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 $ and $ |
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Operating lease right-of-use assets |
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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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Accrued income taxes |
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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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Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 4) |
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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 Statements 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 May 31, |
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Nine Months Ended May 31, |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenues |
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$ |
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$ |
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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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( |
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( |
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( |
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Asset impairment charges (recoveries), net |
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— |
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— |
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Restructuring charges and other exit-related activities |
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Operating income (loss) |
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( |
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( |
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Interest expense |
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( |
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( |
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( |
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( |
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Other (loss) income, net |
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( |
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( |
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( |
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Income (loss) from continuing operations before income taxes |
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( |
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( |
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Income tax (expense) benefit |
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( |
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( |
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Income (loss) from continuing operations |
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( |
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( |
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Loss from discontinued operations, net of tax |
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( |
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( |
) |
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( |
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( |
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Net income (loss) |
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( |
) |
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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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( |
) |
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( |
) |
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Net income (loss) attributable to SSI shareholders |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
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Net income (loss) per share attributable to SSI shareholders: |
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Basic: |
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Income (loss) per share from continuing operations |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
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Net income (loss) per share |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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Diluted: |
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Income (loss) per share from continuing operations |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
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Net income (loss) per share |
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$ |
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$ |
( |
) |
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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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The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
5
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
(Currency - U.S. Dollar)
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Three Months Ended May 31, |
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Nine Months Ended May 31, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net income (loss) |
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$ |
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$ |
( |
) |
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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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( |
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Pension obligations, net |
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( |
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Total other comprehensive income (loss), net of tax |
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( |
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( |
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Comprehensive income (loss) |
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( |
) |
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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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( |
) |
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( |
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Comprehensive income (loss) attributable to SSI shareholders |
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$ |
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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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Additional |
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Accumulated Other |
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Total SSI |
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Class A |
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Class B |
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Paid-in |
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Retained |
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Comprehensive |
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Shareholders’ |
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Noncontrolling |
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Total |
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Three Months Ended May 31, 2020 |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Interests |
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Equity |
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Balance as of March 1, 2020 |
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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 (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 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-based compensation cost |
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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 May 31, 2020 |
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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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Additional |
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Accumulated Other |
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Total SSI |
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Class A |
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Class B |
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Paid-in |
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Retained |
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Comprehensive |
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Shareholders’ |
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Noncontrolling |
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Total |
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Three Months Ended May 31, 2021 |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Interests |
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Equity |
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Balance as of March 1, 2021 |
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$ |
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$ |
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$ |
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$ |
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|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Distributions to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Issuance of restricted stock |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Restricted stock withheld for taxes |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Share-based compensation cost |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Dividends ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Balance as of May 31, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
7
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands, except per share amounts)
(Currency - U.S. Dollar)
|
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
Accumulated Other |
|
|
Total SSI |
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
Class A |
|
|
Class B |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Shareholders’ |
|
|
Noncontrolling |
|
|
Total |
|
||||||||||||||||
|
Nine Months Ended May 31, 2020 |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Equity |
|
|
Interests |
|
|
Equity |
|
||||||||||
|
Balance as of August 31, 2019 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Cumulative effect on adoption of new accounting guidance for leases, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Balance as of September 1, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Other comprehensive loss, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Distributions to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Share repurchases |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Issuance of restricted stock |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Restricted stock withheld for taxes |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Share-based compensation cost |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Dividends ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Balance as of May 31, 2020 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
Accumulated Other |
|
|
Total SSI |
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
Class A |
|
|
Class B |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Shareholders’ |
|
|
Noncontrolling |
|
|
Total |
|
||||||||||||||||
|
Nine Months Ended May 31, 2021 |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Equity |
|
|
Interests |
|
|
Equity |
|
||||||||||
|
Balance as of September 1, 2020 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Distributions to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Issuance of restricted stock |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Restricted stock withheld for taxes |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Share-based compensation cost |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Dividends ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Balance as of May 31, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
Nine Months Ended May 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
|
|
|
$ |
( |
) |
|
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Asset impairment charges (recoveries), net |
|
|
— |
|
|
|
|
|
|
Exit-related asset impairments |
|
|
— |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
Undistributed equity in earnings of joint ventures |
|
|
( |
) |
|
|
( |
) |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
Gain on the disposal of assets, net |
|
|
( |
) |
|
|
( |
) |
|
Unrealized foreign exchange loss (gain), net |
|
|
|
|
|
|
( |
) |
|
Credit loss, 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 operating activities |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from sale of assets |
|
|
|
|
|
|
|
|
|
Deposit on land option |
|
|
|
|
|
|
|
|
|
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 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.
9
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
(Currency - U.S. Dollar)
|
|
|
Nine Months Ended May 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
|
|
|
$ |
|
|
|
Income taxes paid, 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.
10
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements of Schnitzer Steel Industries, Inc. and its majority-owned and wholly-owned subsidiaries (the “Company”) have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for Form 10-Q, including Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all normal, recurring adjustments considered necessary for a fair statement have been included. Management suggests that these Unaudited Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2020. The results for the three and nine months ended May 31, 2021 and 2020 are not necessarily indicative of the results of operations for the entire fiscal year.
Segment Reporting
The Company acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors and brokers, and it procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores. Most of these auto parts stores supply the Company’s shredding facilities with auto bodies that are processed into saleable recycled scrap metal. The Company also produces a range of finished steel long products at its steel mini-mill using ferrous recycled scrap metal primarily sourced internally from its recycling and joint venture operations and other raw materials.
The accounting standards for reporting information about operating segments define an 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.
Prior to the first quarter of fiscal 2021, the Company’s internal organizational and reporting structure included
Accounting Changes
As of the beginning of the first quarter of fiscal 2020, the Company adopted an accounting standards update 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 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 less than $
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 $
11
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable, net
Accounts receivable represent amounts primarily due from customers on product and other sales. These accounts receivable, which are reduced by an allowance for credit losses, are recorded at the invoiced amount and do not bear interest. The Company extends credit to customers under contracts containing customary and explicit payment terms, and payment is generally required within 30 to 60 days of shipment. Nonferrous export sales typically require a deposit prior to shipment. Historically, almost all of the Company’s ferrous export sales have been made with letters of credit. Ferrous and nonferrous metal sales to domestic customers and finished steel sales are generally made on open account, and a portion of these sales are covered by credit insurance.
The Company evaluates the collectibility of its accounts receivable based on a combination of factors, including whether sales were made pursuant to letters of credit or credit insurance is in place. Management evaluates the aging of customer receivable balances, the financial condition of the Company’s customers, historical collection rates and economic trends to estimate the amount of customer receivables that may not be collected in the future and records a provision for expected credit losses. Accounts are written off when all efforts to collect have been exhausted.
Also included in accounts receivable are short-term advances to scrap metal suppliers used as a mechanism to acquire unprocessed scrap metal. The advances are generally repaid with scrap metal, as opposed to cash. Repayments of advances with scrap metal are treated as noncash operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows and totaled $
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 and assets relating to certain retirement plans, consisted primarily of receivables from insurers, capitalized implementation costs for cloud computing arrangements, cash held in a client trust account relating to a legal settlement, major spare parts and equipment, an equity investment, debt issuance costs and notes and other contractual receivables. Other assets are reported within either prepaid expenses and other current assets or other assets in the Unaudited Condensed Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle of one year from the reporting date.
Other assets as of May 31, 2021 and August 31, 2020 included $
Other assets as of May 31, 2021 also included approximately $
The Company invested $
Accounting for Impacts of Steel Mill Fire
Assets destroyed or damaged as a result of involuntary events are written off or reduced in carrying value to their salvage value. When recovery of all or a portion of the amount of property damage loss or other covered expenses through insurance proceeds is demonstrated
12
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
to be probable, a receivable is recorded and offsets the loss or expense up to the amount of the total loss or expense. No gain is recorded until all contingencies related to the insurance claim have been resolved.
On May 22, 2021, the Company experienced a fire at its Cascade Steel Rolling Mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. The Company filed insurance claims for the property that experienced physical loss or damage and business income losses resulting from the matter, and it recognized losses of $
Other Asset Impairment Charges
During the nine months ended May 31, 2020, the Company recognized asset impairment charges of $
Long-Lived Assets
The Company tests long-lived tangible and intangible assets for impairment at the asset group level, which is determined based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The segment realignment completed in the first quarter of fiscal 2021 described above in this Note under “Segment Reporting” did not significantly impact the composition of the Company’s asset groups.
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 $
Recent Accounting Pronouncements
The Company does not expect that its adoption in the future of any recently issued accounting pronouncements will have a material impact on its consolidated financial statements.
Note 2 - Inventories
Inventories consisted of the following (in thousands):
|
|
|
May 31, 2021 |
|
|
August 31, 2020 |
|
||
|
Processed and unprocessed scrap metal |
|
$ |
|
|
|
$ |
|
|
|
Semi-finished goods |
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
Supplies |
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
|
|
|
$ |
|
|
Note 3 - Goodwill
The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. Impairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is required to be identified as a reporting unit if the component is a business for which discrete financial information is available and segment management regularly reviews its operating results. There were no triggering events identified
13
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
during the first nine months of fiscal 2021 requiring an interim goodwill impairment test, and the Company did
As of August 31, 2020, the balance of the Company’s goodwill was $
In connection with the segment realignment and redefinition of the Company's reporting units effective as of September 1, 2020, management evaluated if it was more likely than not that the fair value of any of the either legacy or new reporting units with allocated goodwill was below its carrying value as of September 1, 2020, which would indicate a triggering event requiring a goodwill impairment test. Based on management's assessment as of September 1, 2020, it was not more likely than not that the fair value of each reporting unit with allocated goodwill was below its carrying value.
The gross change in the carrying amount of goodwill for the nine months ended May 31, 2021 was as follows (in thousands):
|
|
|
Goodwill |
|
|
|
September 1, 2020 |
|
$ |
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
May 31, 2021 |
|
$ |
|
|
Accumulated goodwill impairment charges were $
Note 4 - Commitments and Contingencies
Contingencies - Environmental
The Company evaluates the adequacy of its environmental liabilities on a quarterly basis. Adjustments to the liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or expenditures are made for which liabilities were established.
Changes in the Company’s environmental liabilities for the nine months ended May 31, 2021 were as follows (in thousands):
|
Balance as of September 1, 2020 |
|
|
Liabilities Established (Released), Net |
|
|
Payments and Other |
|
|
Balance as of May 31, 2021 |
|
|
Short-Term |
|
|
Long-Term |
|
||||||
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
As of May 31, 2021 and August 31, 2020, the Company had environmental liabilities of $
14
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Portland Harbor
In December 2000, the Company was notified by the United States Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it is one of the potentially responsible parties (“PRPs”) that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”). The precise nature and extent of cleanup of any specific areas within the Site, the parties to be involved, the timing of any specific remedial action and the allocation of the costs for any cleanup among responsible parties have not yet been determined. The process of site investigation, remedy selection, identification of additional PRPs and allocation of costs has been underway for a number of years, but significant uncertainties remain. It is unclear to what extent the Company will be liable for environmental costs or third party contribution or damage claims with respect to the Site.
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. The Company has established an environmental reserve of approximately $
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 ranged from approximately $
15
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for the Site. The 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 are collected, identified and incorporated into technical drawings and specifications developed for the subsequent remedial action. 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 warrants a change to the remedy at this time and reaffirmed its commitment to proceed with remedial design. The Company and other PRPs disagree with EPA’s position on use of the more recent data and will continue to pursue limited, but critical, changes to the selected remedy for the Site during the remedial design phase.
16
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EPA encouraged PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design covering the entire Site and proposed dividing the Site into
The Company’s environmental liabilities as of May 31, 2021 and August 31, 2020 included $
Except for certain early action projects in which the Company is not involved, remediation activities are not expected to commence for a number of years. Moreover, remediation activities at the Site are expected to be sequenced, and the order and timing of such sequencing has not been determined. In addition, as discussed above, responsibility for implementing and funding the remedy will be determined in a separate allocation process, which is on-going. The Company expects the next major stage of the allocation process to proceed in parallel with the remedial design process.
Because the final remedial actions have not yet been designed and there has not been a determination of the allocation among the PRPs of costs of the investigations, or remedial action costs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it is likely to or which it is reasonably possible that it will incur in connection with the Site, although such costs could be material to the Company’s financial position, results of operations, cash flows and liquidity. Among the facts being evaluated are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on each property within the Site, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs.
The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense, remedial design, remedial action and mitigation for or settlement of natural resource damages claims in connection with the Site. Most of these policies jointly insure the Company and MMGL, as the successor to a former subsidiary of the Company. The Company and MMGL have negotiated the settlement with certain insurers of claims against them related to the Site, continue to seek settlements with other insurers and formed a Qualified Settlement Fund (“QSF”) which became operative in the fourth quarter of fiscal 2020 to hold such settlement amounts until funds are needed to pay or reimburse costs incurred by the Company and MMGL in connection with the Site. These insurance policies and the funds in the QSF may not cover all of the costs which the Company may incur. The QSF is an unconsolidated variable interest entity (“VIE”) with no primary beneficiary. Two parties unrelated to each other, one appointed by the Company and one appointed by MMGL, share equally the power to direct the activities of the VIE that most significantly impact its economic performance. The Company’s appointee to co-manage the VIE is an executive officer of the Company. Neither MMGL nor its appointee to co-manage the VIE is a related party of the Company for the purpose of the primary beneficiary assessment or otherwise.
17
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Oregon Department of Environmental Quality is separately providing oversight of investigations and source control activities by the Company at various sites adjacent to Portland Harbor that are focused on controlling any current “uplands” releases of contaminants into the Willamette River. No liabilities have been established in connection with these investigations beyond the costs of investigation and design, which costs have not been material to date, because the extent of contamination, required source control work and the Company’s responsibility for the contamination and source control work, in each case if any, have not yet been determined. In addition, pursuant to its insurance policies, the Company is being reimbursed for the costs it incurs for required source control evaluation and remediation work.
Other Legacy Environmental Loss Contingencies
The Company’s environmental loss contingencies as of May 31, 2021 and August 31, 2020, other than Portland Harbor, include actual or possible investigation and cleanup costs from historical contamination at sites currently or formerly owned or formerly operated by the Company or at other sites where the Company may have responsibility for such costs due to past disposal or other activities (“legacy environmental loss contingencies”). 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 $
In addition, the Company’s loss contingencies as of each of May 31, 2021 and August 31, 2020 included $
18
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company’s loss contingencies as of May 31, 2021 and August 31, 2020 included $
Summary - Environmental Contingencies
With respect to environmental contingencies other than the Portland Harbor Superfund site and the Other Legacy Environmental Loss Contingencies, which are discussed separately above, management currently believes that adequate provision has been made for the potential impact of its environmental contingencies. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material in any given period, but there can be no assurance that such amounts paid will not be material in the future.
Contingencies - Other
In addition to legal proceedings relating to the contingencies described above, the Company is a party to various legal proceedings arising in the normal course of business. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. The Company does not anticipate that the liabilities arising from such legal proceedings in the normal course of business, after taking into consideration expected insurance recoveries, will have a material adverse effect on its results of operations, financial condition, or cash flows.
19
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss, net of tax, comprise the following (in thousands):
|
|
|
Three Months Ended May 31, 2021 |
|
|
Three Months Ended May 31, 2020 |
|
||||||||||||||||||
|
|
|
Foreign Currency Translation Adjustments |
|
|
Pension Obligations, Net |
|
|
Total |
|
|
Foreign Currency Translation Adjustments |
|
|
Pension Obligations, Net |
|
|
Total |
|
||||||
|
Balances - March 1 (Beginning of period) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 - May 31 (End of period) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
Nine Months Ended May 31, 2021 |
|
|
Nine Months Ended May 31, 2020 |
|
||||||||||||||||||
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 - May 31 (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 in all periods presented.
20
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Revenue
Disaggregation of Revenues
The table below illustrates the Company’s revenues disaggregated by major product and sales destination (in thousands):
|
|
|
Three Months Ended May 31, |
|
|
Nine Months Ended May 31, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
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 steel manufacturing scrap. |
Receivables from Contracts with Customers
The revenue accounting standard defines a receivable as an entity’s right to consideration that is unconditional, meaning that only the passage of time is required before payment is due. As of May 31, 2021 and August 31, 2020, receivables from contracts with customers, net of an allowance for credit losses, 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 $
Note 7 - Share-Based Compensation
In the first quarter of fiscal 2021, 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
21
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The performance share awards comprise two separate and distinct awards with different vesting conditions. Awards vest if the threshold level under the specified metric is met at the end of the approximately performance period. For awards granted in the first quarter of fiscal 2021, the performance metrics were the Company’s total shareholder return (“TSR”) relative to a designated peer group and the Company’s return on capital employed (“ROCE"). Award share payouts depend on the extent to which the performance goals have been achieved. The number of shares that a participant receives is equal to the number of performance shares granted multiplied by a payout factor, which ranges from a threshold 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, 2023.
In the second quarter of fiscal 2021, the Company granted deferred stock units (“DSUs”) to each of its non-employee directors under the Company’s SIP. Each DSU gives the director the right to receive
Note 8 - Income Taxes
Effective Tax Rate
The Company’s effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2021 was an expense on pre-tax income of
22
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company typically measures the provision for income taxes for interim reporting periods by applying the projected annual effective tax rate to the quarterly results. For the third quarter and first nine months of fiscal 2020, based on the Company’s projection of full-year results at the time, as well as the projected impact of permanent tax differences and other items that are generally not proportional to full-year results, small changes in the projections would have led to significant changes in the projected annual effective tax rate. Therefore, applying the Company’s typical method would not have provided a reliable estimate of the provision for income taxes for the fiscal 2020 interim reporting periods presented in this report. Accordingly, the Company measured the year-to-date fiscal 2020 tax benefit based on year-to-date results, referred to as the discrete method, and it measured the third quarter fiscal 2020 tax benefit as the foregoing year-to-date fiscal 2020 tax benefit less the tax benefit recognized previously in the first half of fiscal 2020.
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 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 2014 to 2020 remain subject to examination under the statute of limitations.
Note 9 - Restructuring Charges and Other Exit-Related Activities
In fiscal 2020, the Company implemented restructuring initiatives aimed at further reducing its annual operating expenses, primarily selling, general and administrative, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses and other non-headcount measures. Additionally, in April 2020, the Company announced its intention to modify its internal organizational and reporting structure to the One Schnitzer functionally-based, integrated model, which it completed in the first quarter of fiscal 2021. During the first nine months of fiscal 2020, the Company incurred severance costs of $
Note 10 - Net Income (Loss) Per Share
The following table sets forth the information used to compute basic and diluted net income (loss) per share attributable to SSI shareholders (in thousands):
|
|
|
Three Months Ended May 31, |
|
|
Nine Months Ended May 31, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Income (loss) from continuing operations |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Net income attributable to noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Income (loss) from continuing operations attributable to SSI shareholders |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Loss from discontinued operations, net of tax |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net income (loss) 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Related Party Transactions
The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $
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 and nine months ended May 31, 2021 and 2020. The following discussion and analysis provide information which management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, 2020, 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. As a vertically integrated organization, we offer a range of products and services to meet global demand through our network that includes 50 retail self-service auto parts stores, 44 metals recycling facilities and a steel mini-mill in Oregon.
Prior to the first quarter of fiscal 2021, our internal organizational and reporting structure included two operating and reportable segments: the Auto and Metals Recycling (“AMR”) business and the Cascade Steel and Scrap (“CSS”) business. In the first quarter of fiscal 2021, in accordance with our plan announced in April 2020, we completed the transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model, supporting a single segment. We consolidated our operations, sales, services and other functional capabilities at an enterprise level reflecting enhanced focus by management on optimizing our vertically integrated value chain. We began reporting on this new single-segment structure in the first quarter of fiscal 2021 as reflected in our Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2020.
We sell ferrous and nonferrous recycled scrap metal in both foreign and domestic markets. We also sell a range of finished steel long products produced at our steel mini-mill. We acquire, process and recycle auto bodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap through our recycling facilities. Our retail self-service auto parts stores located across the United States and Western Canada, which operate under the commercial brand-name Pick-n-Pull, procure the significant majority of our salvaged vehicles and sell serviceable used auto parts from these vehicles. Upon acquiring a salvaged vehicle, we remove catalytic converters, aluminum wheels and batteries for separate processing and sale prior to placing the vehicle in our retail lot. After retail customers have removed desired parts from a vehicle, we may remove remaining major component parts containing ferrous and nonferrous metals, which are primarily sold to wholesalers. The remaining auto bodies are crushed and shipped to our metals recycling facilities to be shredded or sold to third parties where geographically more economical. At our metals recycling facilities, we process mixed and large pieces of scrap metal into smaller pieces by crushing, torching, shearing, shredding and sorting, resulting in scrap metal pieces of a size, density and metal content required by customers to meet their production needs. The manufacturing process includes physical separation and processing 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. We use a variety of shredding and separation systems to efficiently process and sort recycled scrap metal. Our steel mini-mill produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar and other specialty products using ferrous recycled scrap metal primarily sourced internally from our recycling and joint venture operations and other raw materials.
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.
25
SCHNITZER STEEL INDUSTRIES, INC.
Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating results. We believe we generally benefit from sustained periods of stable or rising recycled scrap metal selling prices, which allow us to better maintain or increase both operating results and unprocessed scrap metal flow into our facilities. When recycled scrap metal selling prices decline, either sharply or for a sustained period, our operating margins typically compress. Our results of operations also depend on the demand and prices for our finished steel products, which are sold to customers located primarily in the Western U.S. and Western Canada.
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 and production levels at our facilities, 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.
Coronavirus Disease 2019 (COVID-19)
We continue to monitor the impact of COVID-19 on all aspects of our business. The COVID-19 outbreak, which the World Health Organization characterized as a pandemic in March 2020, has resulted in governments around the world implementing measures with various levels of stringency to help control the spread of the virus as well as vaccination programs to build levels of immunity among the population. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Ensuring the health and welfare of our employees, and all who visit our sites, is our top priority, and we are following all U.S. Centers for Disease Control and Prevention and state and local health department guidelines. Further, we implemented infection control measures at all our sites and put in place travel and in-person meeting restrictions and other physical distancing measures. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our third quarter fiscal 2020 results, global economic conditions improved during the first nine months of our fiscal 2021, resulting in increased demand for our products, which led to our earnings for the third quarter and first nine months of our fiscal 2021 substantially exceeding the results for the comparable prior periods. Beginning in our second quarter of fiscal 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on individual, business and government activities. The easing of restrictions and the existence of variant strains of COVID-19 may lead to a rise in infections, which could result in the reinstatement of some of the restrictions previously in place, and there are ongoing global impacts resulting from the pandemic including labor shortages, logistical challenges such as increased port congestion, and increases in costs for certain goods and services. While the ongoing effects of the COVID-19 pandemic could negatively impact our results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time.
26
SCHNITZER STEEL INDUSTRIES, INC.
Steel Mill Fire
On May 22, 2021, we experienced a fire at our Cascade Steel Rolling Mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. Given that the incident occurred near the end of our third quarter of fiscal 2021, the matter did not have a significant impact on our results of operations for that quarter. Based on our current schedule, we expect to substantially complete the repair and replacement of property that experienced physical loss or damage and resume operations in the melt shop by the end of the fourth quarter of fiscal 2021 or by early September, with rolling mill production which ceased in early June expected to ramp up thereafter. Impacts on business income are expected to continue during the ramp-up phases and may continue thereafter. We have insurance that we believe is fully applicable to the losses and have filed insurance claims, which are subject to deductibles and various conditions, exclusions and limits, for the property damage and business income losses resulting from the matter. The property damage deductible under the policies insuring the Company’s assets is $1 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. The insurance claims resolution process may extend significantly beyond completion of repair and replacement of the physical plant property that experienced physical loss or damage at the melt shop and the restart of production activities, which themselves are subject to significant uncertainty for a variety of reasons. For further discussion of the accounting for this matter, see “Accounting for Impacts of Steel Mill Fire” in Note 1 - Summary of Significant Accounting Policies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
Use of Non-GAAP Financial Measures
In this management’s discussion and analysis, we use supplemental measures of our performance, liquidity and capital structure which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We believe that providing these non-GAAP financial measures adds a meaningful presentation of our operating and financial performance, liquidity and capital structure. For example, following the modification of our internal organizational and reporting structure completed in the first quarter of fiscal 2021, we use adjusted EBITDA as one of the measures to compare and evaluate financial performance. Adjusted EBITDA is the sum of our net income before results from discontinued operations, interest expense, income taxes, depreciation and amortization, business development costs not related to ongoing operations, charges related to non-ordinary course legal settlements, charges for legacy environmental matters (net of recoveries), restructuring charges and other exit-related activities, asset impairment charges (net of recoveries) and other items which are not related to underlying business operational performance. See the reconciliations of supplemental financial measures, including adjusted EBITDA, in Non-GAAP Financial Measures at the end of this Item 2.
Our non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable U.S. GAAP measures. Although we find these non-GAAP financial measures useful in evaluating the performance of our business, our reliance on these measures is limited because they often materially differ from our consolidated financial statements presented in accordance with GAAP. Therefore, we typically use these adjusted amounts in conjunction with our GAAP results to address these limitations. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Financial Highlights of Results of Operations for the Third Quarter of Fiscal 2021
|
|
• |
Diluted earnings per share from continuing operations attributable to SSI shareholders in the third quarter of fiscal 2021 was $2.16, compared to a loss per share of $(0.18) in the prior year quarter. |
|
|
• |
Adjusted diluted earnings per share from continuing operations attributable to SSI shareholders in the third quarter of fiscal 2021 was $2.20, compared to $0.05 in the prior year quarter. |
|
|
• |
Net income in the third quarter of fiscal 2021 was $65 million, compared to a loss of $(5) million in the prior year quarter. |
|
|
• |
Adjusted EBITDA in the third quarter of fiscal 2021 was $97 million, compared to $19 million in the prior year quarter. |
27
SCHNITZER STEEL INDUSTRIES, INC.
Market conditions for recycled metals improved in the third quarter of fiscal 2021, with selling prices for many recycled metal commodities reaching multi-year highs during the quarter. Average net selling prices for our ferrous and nonferrous products increased significantly compared to the prior year quarter which was negatively impacted by the effects of the COVID-19 pandemic. In the third quarter of fiscal 2021, the average net selling prices for our ferrous and nonferrous products increased by 72% and 80%, respectively, and sales volumes for these products increased by 31% and 27%, respectively, compared to the prior year period. Market conditions for our finished steel products also improved in the third quarter of fiscal 2021, which contributed to finished steel average selling prices and sales volumes increasing by 27% and 23%, respectively, compared to the prior year period. Our results in the third quarter of fiscal 2021 reflected substantial benefits from the higher price environment for most of our products including a significant expansion in our ferrous metal spreads, increased sales volumes supported by strong demand and improved supply flows, greater contributions from sales of nonferrous products and a favorable impact from average inventory accounting, compared to the prior year period.
The following items further highlight selected liquidity and capital structure metrics:
|
|
• |
For the first nine months of fiscal 2021, net cash provided by operating activities was $51 million, compared to $56 million in the prior year comparable period. |
|
|
• |
Debt was $154 million as of May 31, 2021, compared to $104 million as of August 31, 2020. |
|
|
• |
Debt, net of cash, was $136 million as of May 31, 2021, compared to $87 million as of August 31, 2020. |
See the reconciliations of adjusted diluted earnings (loss) per share from continuing operations attributable to SSI shareholders, adjusted EBITDA, and debt, net of cash in Non-GAAP Financial Measures at the end of this Item 2.
28
SCHNITZER STEEL INDUSTRIES, INC.
Results of Operations
|
|
|
Three Months Ended May 31, |
|
|
Nine Months Ended May 31, |
|
||||||||||||||||||
|
($ in thousands, except for prices and per share amounts) |
|
2021 |
|
|
2020 |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
% |
|
||||||
|
Ferrous revenues |
|
$ |
448,684 |
|
|
$ |
201,972 |
|
|
|
122 |
% |
|
$ |
1,023,569 |
|
|
$ |
633,936 |
|
|
|
61 |
% |
|
Nonferrous revenues |
|
|
204,512 |
|
|
|
85,506 |
|
|
|
139 |
% |
|
|
471,543 |
|
|
|
277,869 |
|
|
|
70 |
% |
|
Steel revenues(1) |
|
|
129,057 |
|
|
|
83,414 |
|
|
|
55 |
% |
|
|
316,662 |
|
|
|
246,278 |
|
|
|
29 |
% |
|
Retail and other revenues |
|
|
38,465 |
|
|
|
31,791 |
|
|
|
21 |
% |
|
|
101,162 |
|
|
|
89,666 |
|
|
|
13 |
% |
|
Total revenues |
|
|
820,718 |
|
|
|
402,683 |
|
|
|
104 |
% |
|
|
1,912,936 |
|
|
|
1,247,749 |
|
|
|
53 |
% |
|
Cost of goods sold |
|
|
678,297 |
|
|
|
356,217 |
|
|
|
90 |
% |
|
|
1,585,416 |
|
|
|
1,101,497 |
|
|
|
44 |
% |
|
Gross margin (total revenues less cost of goods sold) |
|
$ |
142,421 |
|
|
$ |
46,466 |
|
|
|
207 |
% |
|
$ |
327,520 |
|
|
$ |
146,252 |
|
|
|
124 |
% |
|
Gross margin (%) |
|
|
17.4 |
% |
|
|
11.5 |
% |
|
|
50 |
% |
|
|
17.1 |
% |
|
|
11.7 |
% |
|
|
46 |
% |
|
Selling, general and administrative expense |
|
$ |
61,887 |
|
|
$ |
45,544 |
|
|
|
36 |
% |
|
$ |
165,935 |
|
|
$ |
138,744 |
|
|
|
20 |
% |
|
Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
$ |
2.16 |
|
|
$ |
(0.18 |
) |
|
NM |
|
|
$ |
4.23 |
|
|
$ |
(0.29 |
) |
|
NM |
|
||
|
Adjusted(2) |
|
$ |
2.20 |
|
|
$ |
0.05 |
|
|
NM |
|
|
$ |
4.31 |
|
|
$ |
0.19 |
|
|
NM |
|
||
|
Net income (loss) |
|
$ |
65,436 |
|
|
$ |
(4,717 |
) |
|
NM |
|
|
$ |
126,179 |
|
|
$ |
(6,778 |
) |
|
NM |
|
||
|
Adjusted EBITDA(2) |
|
$ |
97,254 |
|
|
$ |
18,826 |
|
|
|
417 |
% |
|
$ |
208,920 |
|
|
$ |
56,926 |
|
|
|
267 |
% |
|
Average ferrous recycled metal sales prices ($/LT)(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
395 |
|
|
$ |
222 |
|
|
|
78 |
% |
|
$ |
332 |
|
|
$ |
221 |
|
|
|
50 |
% |
|
Foreign |
|
$ |
401 |
|
|
$ |
236 |
|
|
|
70 |
% |
|
$ |
360 |
|
|
$ |
241 |
|
|
|
49 |
% |
|
Average |
|
$ |
400 |
|
|
$ |
233 |
|
|
|
72 |
% |
|
$ |
354 |
|
|
$ |
237 |
|
|
|
49 |
% |
|
Ferrous volumes (LT, in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic(4) |
|
|
412 |
|
|
|
312 |
|
|
|
32 |
% |
|
|
1,191 |
|
|
|
1,054 |
|
|
|
13 |
% |
|
Foreign |
|
|
803 |
|
|
|
616 |
|
|
|
30 |
% |
|
|
2,054 |
|
|
|
1,837 |
|
|
|
12 |
% |
|
Total ferrous volumes (LT, in thousands)(4)(5) |
|
|
1,215 |
|
|
|
927 |
|
|
|
31 |
% |
|
|
3,245 |
|
|
|
2,891 |
|
|
|
12 |
% |
|
Average nonferrous sales price ($/pound)(3)(6) |
|
$ |
0.97 |
|
|
$ |
0.54 |
|
|
|
80 |
% |
|
$ |
0.82 |
|
|
$ |
0.54 |
|
|
|
51 |
% |
|
Nonferrous volumes (pounds, in thousands)(4)(6) |
|
|
155,657 |
|
|
|
122,913 |
|
|
|
27 |
% |
|
|
429,792 |
|
|
|
391,431 |
|
|
|
10 |
% |
|
Finished steel average sales price ($/ST)(3) |
|
$ |
802 |
|
|
$ |
633 |
|
|
|
27 |
% |
|
$ |
709 |
|
|
$ |
633 |
|
|
|
12 |
% |
|
Finished steel sales volumes (ST, in thousands) |
|
|
153 |
|
|
|
124 |
|
|
|
23 |
% |
|
|
423 |
|
|
|
366 |
|
|
|
15 |
% |
|
Cars purchased (in thousands)(7) |
|
|
91 |
|
|
|
74 |
|
|
|
23 |
% |
|
|
249 |
|
|
|
242 |
|
|
|
3 |
% |
|
Number of auto parts stores at period end |
|
|
50 |
|
|
|
49 |
|
|
|
2 |
% |
|
|
50 |
|
|
|
49 |
|
|
|
2 |
% |
|
Rolling mill utilization(8) |
|
|
98 |
% |
|
|
91 |
% |
|
|
8 |
% |
|
|
94 |
% |
|
|
83 |
% |
|
|
13 |
% |
NM = Not Meaningful
LT = Long Ton, which is equivalent to 2,240 pounds. ST = Short Ton, which is equivalent to 2,000 pounds.
|
(1) |
Steel revenues include primarily sales of finished steel products, semi-finished goods (billets) and steel manufacturing scrap. |
|
(2) |
See the reconciliations of Non-GAAP Financial Measures at the end of this Item 2. |
|
(3) |
Price information is shown after netting the cost of freight incurred to deliver the product to the customer. |
|
(4) |
Ferrous and nonferrous volumes sold externally and delivered to our steel mill for finished steel production. |
|
(5) |
May not foot due to rounding. |
|
(6) |
Average sales price and volume information excludes platinum group metals (“PGMs”) in catalytic converters. |
|
(7) |
Cars purchased by auto parts stores only. |
|
(8) |
Rolling mill utilization is based on effective annual production capacity under current conditions of 580 thousand tons of finished steel products. |
29
SCHNITZER STEEL INDUSTRIES, INC.
Revenues
Revenues in the third quarter and first nine months of fiscal 2021 increased by 104% and 53%, respectively, compared to the same periods in the prior year primarily due to significantly higher average net selling prices and increased sales volumes for our ferrous and nonferrous products in both export and domestic markets. These increases were driven by stronger market conditions for recycled metals globally, with selling prices for many recycled metal commodities reaching multi-year highs during the third quarter of fiscal 2021. In the third quarter and first nine months of fiscal 2021, the average net selling price for our ferrous products increased by 72% and 49%, respectively, and the average net selling price for our nonferrous products increased by 80% and 51%, respectively, compared to the prior year periods. Ferrous sales volumes increased by 31% and 12%, respectively, and nonferrous sales volumes increased by 27% and 10%, respectively, for the third quarter and first nine months of fiscal 2021 compared to the prior year periods. Ferrous and nonferrous sales volumes in the third quarter of fiscal 2021 benefited from recognition of shipments that had been delayed at the end of the second quarter of fiscal 2021. Market conditions for our finished steel products also improved in the third quarter and first nine months of fiscal 2021, which contributed to higher finished steel average selling prices and sales volumes compared to the prior year periods, reflecting robust demand in West Coast construction markets and higher rolling mill utilization.
Operating Performance
Net income in the third quarter and first nine months of fiscal 2021 was $65 million and $126 million, respectively, compared to net loss of $5 million and $7 million, respectively, in the prior year periods. Adjusted EBITDA in the third quarter and first nine months of fiscal 2021 was $97 million and $209 million, respectively, compared to $19 million and $57 million, respectively, in the prior year periods. The improvement in our results for the third quarter and first nine months of fiscal 2021 reflected substantial benefits from the higher price environment for most of our products including a significant expansion in our ferrous metal spreads, increased sales volumes supported by strong demand and improved supply flows, greater contributions from sales of nonferrous products and a favorable impact from average inventory accounting, compared to the prior year periods. Ferrous metal spreads in the third quarter and first nine months of fiscal 2021 increased by approximately 40% and 30%, respectively, and average net selling prices for our nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, increased by approximately 66% and 53%, respectively, compared to the prior year periods. Our results in the third quarter and first nine months of fiscal 2021 also reflected substantially increased contributions from sales of higher priced PGM products compared to the prior year periods and achievement of the full run rate of benefits from productivity initiatives implemented throughout fiscal 2020. In comparison, our results in the third quarter and first nine months of fiscal 2020 reflected periods of sharply declining commodity prices and constrained supply of scrap metal, especially during the third quarter of fiscal 2020 due in large part to the effects of the COVID-19 pandemic, which had a significant negative impact on operating margins and overall operating results for the fiscal 2020 periods. Selling, general and administrative expense in the third quarter and first nine months of fiscal 2021 increased by 36% and 20%, respectively, compared to the prior year periods primarily due to an increase in employee-related expenses, primarily from higher incentive compensation accruals aligned with improved business performance, and increased legal and professional services costs, partially offset by lower environmental-related expense relating primarily to legacy environmental matters. See the reconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the end of this Item 2.
In fiscal 2020, we implemented productivity initiatives aimed at reducing our annual operating expenses, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses and other non-headcount measures. We targeted $20 million in annual benefits from these initiatives, and we achieved the full quarterly run rate of benefits in the third quarter of fiscal 2020. We achieved approximately $15 million and $12 million in realized benefits in the first nine months of fiscal 2021 and fiscal 2020, respectively. Additionally, in April 2020, we announced our intention to modify our internal organizational and reporting structure to the One Schnitzer functionally-based, integrated model, which we completed in the first quarter of fiscal 2021. This change in structure has resulted in a more agile organization and solidified achievement of recent productivity improvements and cost reduction initiatives. During the first nine months of fiscal 2020, we incurred severance costs of $2 million, exit-related costs associated with a lease contract termination of $1 million, and professional services costs related to these initiatives of $5 million.
Steel Mill Fire Impact on Third Quarter Results
On May 22, 2021, we experienced a fire at our Cascade Steel Rolling Mill in McMinnville, Oregon. In the third quarter of fiscal 2021, we recognized losses of $1 million related to the carrying value of plant, equipment and inventory assets that experienced physical loss or damage as a result of the fire, as well as an insurance receivable and a related insurance recovery in the same amount. See the “Steel Mill Fire” section above within this Item 2 for further discussion of this matter.
30
SCHNITZER STEEL INDUSTRIES, INC.
Income Tax
The effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2021 was an expense on pre-tax income of 18.0% and 20.0%, respectively, compared to a benefit on pre-tax loss of 28.0% and 27.6%, respectively, for the comparable prior year periods. The effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2021 was lower than that for the comparable prior year periods primarily due to the effects of higher pre-tax income compared to the prior year periods, and was lower than the U.S. federal statutory rate of 21% primarily due to the benefit from the foreign derived intangible income deduction in fiscal 2021 and the impacts of research and development credits and other discrete items.
Liquidity and Capital Resources
We rely on cash provided by operating activities as a primary source of liquidity, supplemented by current cash on hand and borrowings under our existing credit facilities.
Sources and Uses of Cash
We had cash balances of $18 million as of each of May 31, 2021 and August 31, 2020. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of May 31, 2021, debt was $154 million compared to $104 million as of August 31, 2020, and debt, net of cash, was $136 million as of May 31, 2021 compared to $87 million as of August 31, 2020 (refer to Non-GAAP Financial Measures at the end of this Item 2).
Operating Activities
Net cash provided by operating activities in the first nine months of fiscal 2021 was $51 million, compared to $56 million in the first nine months of fiscal 2020.
Sources of cash other than from earnings in the first nine months of fiscal 2021 included a $56 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of payments, a $19 million increase in income tax accruals, and a $14 million increase in accrued payroll and related liabilities primarily due to increased incentive compensation liabilities. Uses of cash in the first nine months of fiscal 2021 included a $133 million increase in accounts receivable primarily due to increases in selling prices for recycled metals and finished steel and higher sales volumes, as well as the timing of sales and collections, and a $92 million increase in inventories due to higher raw material purchase prices, higher volumes on hand and the timing of purchases and sales.
Sources of cash in the first nine months of fiscal 2020 included a $33 million decrease in inventories due to lower raw material purchase prices and volumes and the timing of purchases and sales. Uses of cash in the first nine months of fiscal 2020 included a $32 million decrease in accounts payable primarily due to lower raw material purchase prices and volumes and the timing of payments.
Investing Activities
Net cash used in investing activities was $76 million in the first nine months of fiscal 2021, compared to $58 million in the first nine months of fiscal 2020.
Cash used in investing activities in the first nine months of fiscal 2021 included capital expenditures of $77 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, compared to $59 million in the prior year period.
Financing Activities
Net cash provided by financing activities in the first nine months of fiscal 2021 was $24 million, compared to $298 million in the first nine months of fiscal 2020.
Cash flows from financing activities in the first nine months of fiscal 2021 included $49 million in net borrowings of debt, compared to $322 million in the prior year period (refer to Non-GAAP Financial Measures at the end of this Item 2). During the third quarter of fiscal 2020, we borrowed an incremental $250 million under our credit facilities in order to increase our cash position and preserve financial flexibility in light of the COVID-19 outbreak. We repaid the $250 million of additional borrowings in the fourth quarter of fiscal 2020. Uses of cash in the first nine months of fiscal 2021 and 2020 included $16 million for the payment of dividends. Cash used in financing activities in the first nine months of fiscal 2020 included $1 million for share repurchases.
31
SCHNITZER STEEL INDUSTRIES, INC.
Debt
Our senior secured revolving credit facilities, which provide for revolving loans of $700 million and C$15 million, mature in August 2023 pursuant to a credit agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the London Interbank Offered Rate (“LIBOR”) (or the Canadian equivalent for C$ loans), plus a spread of between 1.25% and 3.50%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA (as defined by the credit agreement), or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50% or (c) the daily rate equal to one-month LIBOR plus 1.75%, in each case, plus a spread of between 0.00% and 2.50% based on a pricing grid tied to our consolidated funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.20% and 0.50% based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA.
We had borrowings outstanding under our credit facilities of $140 million as of May 31, 2021 and $90 million as of August 31, 2020, with the increase relating primarily to funding working capital and capital expenditures. The weighted average interest rate on amounts outstanding under our credit facilities was 2.00% and 4.59% as of May 31, 2021 and August 31, 2020, respectively.
We use the credit facilities to fund working capital, capital expenditures, dividends, share repurchases, investments and acquisitions. Our credit agreement contains various representations and warranties, events of default and financial and other customary covenants which limit (subject to certain exceptions) our ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of our business, engage in transactions with affiliates and enter into restrictive agreements, including agreements that restrict the ability of our subsidiaries to make distributions. The financial covenants under the credit agreement include (a) a consolidated fixed charge coverage ratio, defined as the four-quarter rolling sum of consolidated EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges, (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness, and (c) a consolidated asset coverage ratio, defined as consolidated asset values divided by consolidated funded indebtedness.
As of May 31, 2021, we were in compliance with the financial covenants under our credit agreement. The consolidated fixed charge coverage ratio was required to be no less than 1.10 to 1.00 and was 6.61 to 1.00 as of May 31, 2021. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.17 to 1.00 as of May 31, 2021. The consolidated asset coverage ratio was required to be no less than 1.00 to 1.00 and was 2.98 to 1.00 as of May 31, 2021.
Our obligations under our credit agreement are guaranteed by substantially all of our subsidiaries. The credit facilities and the related guarantees are secured by senior first priority liens on certain of our and our subsidiaries’ assets, including equipment, inventory and accounts receivable.
While we currently expect to remain in compliance with the financial covenants under the credit agreement, we may not be able to do so in the event market conditions, COVID-19 or other negative factors have a significant adverse impact on our results of operations and financial position. If we do not maintain compliance with our financial covenants and are unable to obtain an amendment or waiver from our lenders, a breach of a financial covenant would constitute an event of default and allow the lenders to exercise remedies under the agreements, the most severe of which is the termination of the credit facility under our committed bank credit agreement and acceleration of the amounts owed under the agreement. In such case, we would be required to evaluate available alternatives and take appropriate steps to obtain alternative funds. We cannot assure that any such alternative funds, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
Other debt obligations, which totaled $7 million as of each of May 31, 2021 and August 31, 2020, primarily relate to an equipment purchase, the contract consideration for which includes an obligation to make future monthly payments to the vendor in the form of licensing fees. For accounting purposes, such obligation is treated as a partial financing of the purchase price by the equipment vendor. Monthly payments commence when the equipment is placed in service and continue for a period of four years thereafter.
32
SCHNITZER STEEL INDUSTRIES, INC.
Capital Expenditures
Capital expenditures totaled $77 million for the first nine months of fiscal 2021, compared to $59 million for the prior year period. We currently plan to invest up to $110 million in capital expenditures in fiscal 2021, including approximately $45 million for investments in growth, including new nonferrous processing technologies, support for volume initiatives and other growth projects, using cash generated from operations and available credit facilities. The COVID-19 pandemic has contributed to some delays in construction activities and equipment deliveries related to our capital projects, and to the time required to obtain permits from government agencies, resulting in the deferral of certain capital expenditures. Given the continually evolving nature of the COVID-19 pandemic and other factors impacting the timing of project completion, the extent to which forecasted capital expenditures could be deferred is uncertain.
Environmental Compliance
Building on our commitment to recycling and operating our business in an environmentally responsible manner, we continue to invest in facilities that improve our environmental presence in the communities in which we operate. As part of our capital expenditures discussed in the prior paragraph, we invested approximately $10 million in capital expenditures for environmental projects in the first nine months of fiscal 2021, and we currently plan to invest up to $20 million for such projects in fiscal 2021. These projects include investments in storm water systems and equipment to ensure ongoing compliance with air quality and other environmental regulations.
We have been identified by the United States Environmental Protection Agency 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 4 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of this matter, as well as other legacy environmental loss contingencies. We believe it is not possible to reasonably estimate the amount or range of costs which we are likely to or which it is reasonably possible that we will incur in connection with the Site, although such costs could be material to our financial position, results of operations, cash flows and liquidity. We have insurance policies that we believe will provide reimbursement for costs we incur for defense, remediation and mitigation for natural resource damages claims in connection with the Site, although there are no assurances that those policies will cover all of the costs which we may incur. Significant cash outflows in the future related to the Site 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 April 7, 2021, our Board of Directors declared a dividend for the third quarter of fiscal 2021 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend totaling $5 million was paid on May 3, 2021.
Share Repurchase Program
Pursuant to our share repurchase program as amended in 2001, 2006 and 2008, we were authorized to repurchase up to nine million shares of our Class A common stock. As of May 31, 2021, we had authorization to repurchase up to a remaining 706 thousand shares of our Class A common stock when we deem such repurchases to be appropriate. We may repurchase our common stock for a variety of reasons, such as to optimize our capital structure and to offset dilution related to share-based compensation arrangements. We consider several factors in determining whether to make share repurchases including, among other things, our cash needs, the availability of funding, our future business plans and the market price of our stock. We did not repurchase our common stock during the first nine of fiscal 2021.
Assessment of Liquidity and Capital Resources
Historically, our available cash resources, internally generated funds, credit facilities and equity offerings have financed our acquisitions, capital expenditures, working capital and other financing needs.
33
SCHNITZER STEEL INDUSTRIES, INC.
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. While we expect the fire incident at our steel mill in May 2021 to impact our cash flows and liquidity needs, including related to working capital, capital expenditures and recoveries from insurance, we believe our available liquidity in the short- and long-term is adequate to meet our needs. See the “Steel Mill Fire” section above within this Item 2 for further discussion of this matter.
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, 2020.
We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. As of May 31, 2021, we had $8 million outstanding under these arrangements.
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies and estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended August 31, 2020.
Recently Issued Accounting Standards
We have not identified any recent accounting pronouncements that are expected to have a material impact on our financial condition, results of operations or cash flows upon adoption.
Non-GAAP Financial Measures
Debt, net of cash
Debt, net of cash is the difference between (i) the sum of long-term debt and short-term borrowings (i.e., total debt) and (ii) cash and cash equivalents. We believe that presenting debt, net of cash is useful to investors as a measure of our leverage, as cash and cash equivalents can be used, among other things, to repay indebtedness.
The following is a reconciliation of debt, net of cash (in thousands):
|
|
|
May 31, 2021 |
|
|
August 31, 2020 |
|
||
|
Short-term borrowings |
|
$ |
2,834 |
|
|
$ |
2,184 |
|
|
Long-term debt, net of current maturities |
|
|
150,939 |
|
|
|
102,235 |
|
|
Total debt |
|
|
153,773 |
|
|
|
104,419 |
|
|
Less cash and cash equivalents |
|
|
17,927 |
|
|
|
17,887 |
|
|
Total debt, net of cash |
|
$ |
135,846 |
|
|
$ |
86,532 |
|
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.
34
SCHNITZER STEEL INDUSTRIES, INC.
The following is a reconciliation of net borrowings (repayments) of debt (in thousands):
|
|
|
Nine Months Ended May 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Borrowings from long-term debt |
|
$ |
445,829 |
|
|
$ |
685,527 |
|
|
Repayments of long-term debt |
|
|
(396,810 |
) |
|
|
(363,470 |
) |
|
Net borrowings (repayments) of debt |
|
$ |
49,019 |
|
|
$ |
322,057 |
|
Adjusted EBITDA, adjusted selling, general and administrative expense, adjusted income (loss) from continuing operations attributable to SSI shareholders, and adjusted diluted earnings (loss) 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 business development costs not related to ongoing operations, charges related to non-ordinary course legal settlements, legacy environmental matters (net of recoveries), restructuring charges and other exit-related activities, asset impairment charges (recoveries), net, 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.
Following are reconciliations of net income (loss) to adjusted EBITDA, and adjusted selling, general and administrative expense (in thousands):
|
|
|
Three Months Ended May 31, |
|
|
Nine Months Ended May 31, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Reconciliation of adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
65,436 |
|
|
$ |
(4,717 |
) |
|
$ |
126,179 |
|
|
$ |
(6,778 |
) |
|
Loss from discontinued operations, net of tax |
|
|
46 |
|
|
|
69 |
|
|
|
58 |
|
|
|
40 |
|
|
Interest expense |
|
|
1,383 |
|
|
|
2,656 |
|
|
|
4,387 |
|
|
|
5,399 |
|
|
Income tax expense (benefit) |
|
|
14,401 |
|
|
|
(1,804 |
) |
|
|
31,589 |
|
|
|
(2,568 |
) |
|
Depreciation and amortization |
|
|
14,326 |
|
|
|
14,743 |
|
|
|
43,621 |
|
|
|
43,215 |
|
|
Business development costs |
|
|
805 |
|
|
|
791 |
|
|
|
805 |
|
|
|
1,592 |
|
|
Charges related to legal settlements(1) |
|
|
400 |
|
|
|
73 |
|
|
|
400 |
|
|
|
73 |
|
|
Charges for legacy environmental matters, net(2) |
|
|
353 |
|
|
|
2,078 |
|
|
|
899 |
|
|
|
3,822 |
|
|
Restructuring charges and other exit-related activities |
|
|
104 |
|
|
|
2,710 |
|
|
|
982 |
|
|
|
7,810 |
|
|
Asset impairment charges (recoveries), net |
|
|
— |
|
|
|
2,227 |
|
|
|
— |
|
|
|
4,321 |
|
|
Adjusted EBITDA |
|
$ |
97,254 |
|
|
$ |
18,826 |
|
|
$ |
208,920 |
|
|
$ |
56,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
61,887 |
|
|
$ |
45,544 |
|
|
$ |
165,935 |
|
|
$ |
138,744 |
|
|
Business development costs |
|
|
(805 |
) |
|
|
(791 |
) |
|
|
(805 |
) |
|
|
(1,592 |
) |
|
Charges for legacy environmental matters, net(2) |
|
|
(353 |
) |
|
|
(2,078 |
) |
|
|
(899 |
) |
|
|
(3,822 |
) |
|
Charges related to legal settlements(1) |
|
|
— |
|
|
|
(73 |
) |
|
|
— |
|
|
|
(73 |
) |
|
Adjusted |
|
$ |
60,729 |
|
|
$ |
42,602 |
|
|
$ |
164,231 |
|
|
$ |
133,257 |
|
|
(1) |
Charges related to legal settlements in the three and nine months ended May 31, 2021 relate to a claim by a utility provider for past charges, and in the three and nine months ended May 31, 2020 relate to the settlement of a wage and hour class action lawsuit. |
|
(2) |
Legal and environmental charges, net of recoveries, for legacy environmental matters including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 4 - Commitments and Contingencies, “Portland Harbor” and “Other Legacy Environmental Loss Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report. |
35
SCHNITZER STEEL INDUSTRIES, INC.
Following are reconciliations of adjusted income (loss) from continuing operations attributable to SSI shareholders and adjusted diluted earnings (loss) per share from continuing operations attributable to SSI shareholders (in thousands, except per share data):
|
|
|
Three Months Ended May 31, |
|
|
Nine Months Ended May 31, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Income (loss) from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
63,681 |
|
|
$ |
(4,926 |
) |
|
$ |
122,385 |
|
|
$ |
(8,067 |
) |
|
Business development costs |
|
|
805 |
|
|
|
791 |
|
|
|
805 |
|
|
|
1,592 |
|
|
Charges related to legal settlements(1) |
|
|
400 |
|
|
|
73 |
|
|
|
400 |
|
|
|
73 |
|
|
Charges for legacy environmental matters, net(2) |
|
|
353 |
|
|
|
2,078 |
|
|
|
899 |
|
|
|
3,822 |
|
|
Restructuring charges and other exit-related activities |
|
|
104 |
|
|
|
2,710 |
|
|
|
982 |
|
|
|
7,810 |
|
|
Asset impairment charges (recoveries), net |
|
|
— |
|
|
|
2,227 |
|
|
|
— |
|
|
|
4,321 |
|
|
Income tax benefit allocated to adjustments(3) |
|
|
(340 |
) |
|
|
(1,568 |
) |
|
|
(655 |
) |
|
|
(4,183 |
) |
|
Adjusted |
|
$ |
65,003 |
|
|
$ |
1,385 |
|
|
$ |
124,816 |
|
|
$ |
5,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
2.16 |
|
|
$ |
(0.18 |
) |
|
$ |
4.23 |
|
|
$ |
(0.29 |
) |
|
Business development costs, per share |
|
|
0.03 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
|
0.06 |
|
|
Charges related to legal settlements, per share(1) |
|
|
0.01 |
|
|
|
— |
|
|
|
0.01 |
|
|
|
— |
|
|
Charges for legacy environmental matters, net, per share(2) |
|
|
0.01 |
|
|
|
0.07 |
|
|
|
0.03 |
|
|
|
0.14 |
|
|
Restructuring charges and other exit-related activities, per share |
|
|
— |
|
|
|
0.10 |
|
|
|
0.03 |
|
|
|
0.28 |
|
|
Asset impairment charges (recoveries), net, per share |
|
|
— |
|
|
|
0.08 |
|
|
|
— |
|
|
|
0.16 |
|
|
Income tax benefit allocated to adjustments, per share(3) |
|
|
(0.01 |
) |
|
|
(0.06 |
) |
|
|
(0.02 |
) |
|
|
(0.15 |
) |
|
Adjusted(4) |
|
$ |
2.20 |
|
|
$ |
0.05 |
|
|
$ |
4.31 |
|
|
$ |
0.19 |
|
|
(1) |
Charges related to legal settlements in the three and nine months ended May 31, 2021 relate to a claim by a utility provider for past charges, and in the three and nine months ended May 31, 2020 relate to the settlement of a wage and hour class action lawsuit. |
|
(2) |
Legal and environmental charges, net of recoveries, for legacy environmental matters including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 4 - Commitments and Contingencies, “Portland Harbor” and “Other Legacy Environmental Loss Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report. |
|
(3) |
Income tax allocated to the aggregate adjustments reconciling reported and adjusted income (loss) from continuing operations attributable to SSI shareholders and diluted earnings (loss) per share from continuing operations attributable to SSI shareholders is determined based on a tax provision calculated with and without the adjustments. |
|
(4) |
May not foot due to rounding. |
36
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 as of May 31, 2021.
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, 2020.
Credit Risk
Credit risk relates to the risk of loss that might occur as a result of non-performance by counterparties of their contractual obligations to take delivery of scrap metal and finished steel products and to make financial settlements of these obligations, or to provide sufficient quantities of scrap metal or payment to settle advances, loans and other contractual receivables in connection with demolition and scrap extraction projects. We manage our exposure to credit risk through a variety of methods, including shipping ferrous scrap metal exports under letters of credit, collection of deposits prior to shipment for certain nonferrous export customers, establishment of credit limits for certain sales on open terms, credit insurance and designation of collateral and financial guarantees securing advances, loans and other contractual receivables. Due in part to the effects of COVID-19, we have experienced reductions in the availability of credit insurance that we have historically used to cover a portion of our recycled metal and finished steel sales to domestic customers, which reduced availability may increase our exposure to customer credit risk.
Historically, we have shipped almost all of our large shipments of ferrous scrap metal to foreign customers under contracts supported by letters of credit issued or confirmed by banks deemed creditworthy. The letters of credit ensure payment by the customer. As we generally sell export recycled ferrous metal under contracts or orders that generally provide for shipment within 30 to 60 days after the price is agreed, our customers typically do not have difficulty obtaining letters of credit from their banks in periods of rising ferrous prices, as the value of the letters of credit are collateralized by the value of the inventory on the ship. However, in periods of significantly declining prices, our customers may not be able to obtain letters of credit for the full sales value of the inventory to be shipped.
As of May 31, 2021 and August 31, 2020, 44% and 40%, respectively, of our accounts receivable balance was covered by letters of credit. Of the remaining balance, 98% was less than 60 days past due as of each of May 31, 2021 and August 31, 2020.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate risk, mainly associated with sales transactions and related accounts receivable denominated in the U.S. Dollar by our Canadian subsidiary with a functional currency of the Canadian Dollar. In certain instances, we may use derivatives to manage some portion of this risk. As of May 31, 2021 and August 31, 2020, we did not have any derivative contracts.
37
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 May 31, 2021, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended May 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
38
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, 2020; in Part II, “Item 1. Legal Proceedings” in our Quarterly Reports on Form 10-Q for the quarterly periods ended November 30, 2020 and February 28, 2021; and below in this Part II, “Item 1. Legal Proceedings” of this Quarterly Report on Form 10-Q. Also see Note 4 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item I, incorporated by reference herein.
In the previously reported matter filed by The Athletics Investment Group LLC (A’s) against the California State Department of Toxic Substance Control (DTSC) as Respondent and the Company as Real Party in Interest, seeking recission of the “f” letter pursuant to which DTSC classified treated shredder waste from the Company’s metal shredding facility in California as a “nonhazardous waste” which among other things permits its use as alternative daily cover at municipal landfills, the Court on April 16, 2021 issued an order and writ of mandate commanding the DTSC within 30 days to rescind the Company’s “f letter”. The Company filed a notice of appeal, which notice has the effect of automatically staying the order, and A’s have filed a motion to lift the stay.
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, 2020, except for the changes disclosed in the subsequent Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2021, and as follows:
Risk Factors Relating to Our Business
Equipment upgrades, equipment failures and facility damage may lead to production curtailments or shutdowns
Our business operations and recycling and manufacturing processes depend on critical pieces of equipment, including information technology equipment, shredders, nonferrous sorting technology, furnaces and a rolling mill, which may be out of service occasionally for scheduled upgrades or maintenance or as a result of unanticipated failures. Our facilities are subject to equipment failures and the risk of catastrophic loss due to unanticipated events such as mechanical failures, fires, earthquakes, accidents or violent weather conditions. For instance, certain facilities in California, Oregon and Washington were briefly closed in September 2020 due to poor air quality as a result of wildfires, although the impact on our operations was not significant. Additionally, in May 2021, we experienced a fire at our Cascade Steel Rolling Mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to property located at the mill’s melt shop. We expect to incur costs to repair and replace property that experienced physical loss or damage and business income losses associated with the interruption of production activities. We carry insurance that we anticipate will cover repair and replacement of property that experienced physical loss or damage and business income losses resulting from the fire at the mill. However, our insurance coverage is subject to deductibles, and various conditions, exclusions and limits. The deductible applicable to physical loss or damage to property is $1 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. Our insurance coverage may be unavailable or insufficient to protect us against losses in the case of future events. In addition, insurance may not continue to be available in the future on acceptable terms or at acceptable costs. Interruptions in our processing and production capabilities and shutdowns resulting from unanticipated events could disrupt customer and supplier relationships and could have a material adverse effect on our financial condition, results of operations and cash flows.
39
SCHNITZER STEEL INDUSTRIES, INC.
Risk Factors Relating to Our Employees
Labor shortages or increased labor costs may adversely affect our operating results, financial condition and cash flows
Our employees contribute to developing and meeting our business goals and objectives, and labor is a significant component of operating our business. The impact of labor shortages or increased labor costs because of increased competition for employees, unemployment levels and benefits, higher employee turnover rates, increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), may increase our costs or impede our ability to operate our facilities and could have a material adverse effect on our results of operations, financial condition and cash flows. As a result of the tight labor markets, we have experienced fewer job applicants in certain local markets, which hindered our ability to reach full staffing levels at some of our facilities. Recruiting and retaining employees in sufficient numbers to optimally staff our facilities may result in increases in our labor costs. Labor shortages and increased labor costs may continue to be realized as a direct or indirect result of the COVID-19 pandemic, including related response measures implemented by governments, or due to other factors, which may adversely affect our operating results, financial condition and cash flows.
ITEM 5. OTHER INFORMATION
None.
40
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 6.EXHIBITS
|
Exhibit Number |
|
Exhibit Description |
|
|
|
|
|
10.1* |
|
|
|
|
|
|
|
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: |
|
June 30, 2021 |
|
By: |
|
/s/ Tamara L. Lundgren |
|
|
|
|
|
|
|
Tamara L. Lundgren |
|
|
|
|
|
|
|
Chairman, President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
Date: |
|
June 30, 2021 |
|
By: |
|
/s/ Richard D. Peach |
|
|
|
|
|
|
|
Richard D. Peach |
|
|
|
|
|
|
|
Executive Vice President, Chief Financial Officer and Chief Strategy Officer |
42