Form 10-Q SCHNITZER STEEL INDUSTRI For: Feb 28
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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For the Quarterly Period Ended
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For the Transition Period from to
Commission File Number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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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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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The registrant had
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Statements and information included in this Quarterly Report on Form 10-Q by Schnitzer Steel Industries, Inc. that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Except as noted herein or as the context may otherwise require, all references to “we,” “our,” “us,” “the Company,” and “SSI” refer to Schnitzer Steel Industries, Inc. and its consolidated subsidiaries.
Forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding future events or our expectations, intentions, beliefs, and strategies regarding the future, which may include statements regarding the impact of pandemics, epidemics, or other public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic; the impact of equipment upgrades, equipment failures, and facility damage on production, including timing of repairs and resumption of operations; the realization of insurance recoveries; the Company’s outlook, growth initiatives, or expected results or objectives, including pricing, margins, sales volumes, and profitability; completion of acquisitions and integration of acquired businesses; the impacts of supply chain disruptions and inflation; liquidity positions; our ability to generate cash from continuing operations; trends, cyclicality, and changes in the markets we sell into; strategic direction or goals; targets; changes to manufacturing and production processes; the realization of deferred tax assets; planned capital expenditures; the cost of and the status of any agreements or actions related to our compliance with environmental and other laws; expected tax rates, deductions, and credits; the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; the potential impact of adopting new accounting pronouncements; the impact of labor shortages or increased labor costs; obligations under our retirement plans; benefits, savings, or additional costs from business realignment, cost containment, and productivity improvement programs; and the adequacy of accruals.
Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “outlook,” “target,” “aim,” “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “will,” “should,” “could,” “opinions,” “forecasts,” “projects,” “plans,” “future,” “forward,” “potential,” “probable,” and similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.
We may make other forward-looking statements from time to time, including in reports filed with the Securities and Exchange Commission, press releases, presentations, and on public conference calls. All forward-looking statements we make are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements, except as may be required by law. Our business is subject to the effects of changes in domestic and global economic conditions and a number of other risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in “Item 1A. Risk Factors” of Part I of our most recent Annual Report on Form 10-K, as supplemented by our subsequently filed Quarterly Reports on Form 10-Q. Examples of these risks include: the impact of pandemics, epidemics, or other public health emergencies, such as the COVID-19 pandemic; the impact of equipment upgrades, equipment failures, and facility damage on production; potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the cyclicality and impact of general economic conditions; changing conditions in global markets including the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; economic and geopolitical instability including as a result of military conflict; volatile supply and demand conditions affecting prices and volumes in the markets for raw materials and other inputs we purchase; significant decreases in recycled metal prices; imbalances in supply and demand conditions in the global steel industry; difficulties associated with acquisitions and integration of acquired businesses; supply chain disruptions; reliance on third-party shipping companies, including with respect to freight rates and the availability of transportation; inability to obtain or renew business licenses and permits; the impact of goodwill impairment charges; the impact of long-lived asset and equity investment impairment charges; failure to realize or delays in realizing expected benefits from investments in processing and manufacturing technology improvements; inability to achieve or sustain the benefits from productivity, cost savings, and restructuring initiatives; inability to renew facility leases; customer fulfillment of their contractual obligations; increases in the relative value of the U.S. dollar; the impact of inflation and foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under the agreement governing our bank credit facilities; the impact of consolidation in the steel industry; product liability claims; the impact of legal proceedings and legal compliance; the adverse impact of climate change; the impact of not realizing deferred tax assets; the impact of tax increases and changes in tax rules; the impact of one or more cybersecurity incidents; environmental compliance costs and potential environmental liabilities; 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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February 28, 2022 |
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August 31, 2021 |
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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 $ |
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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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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 5) |
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Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity: |
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Preferred stock – |
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Class A common stock – |
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Class B common stock – |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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( |
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Total SSI shareholders’ equity |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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The accompanying Notes to the Unaudited Condensed Consolidated Financial Statement are an integral part of these statements.
4
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)
(Currency - U.S. Dollar)
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Three Months Ended February 28, |
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Six Months Ended February 28, |
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2022 |
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2021 |
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2022 |
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2021 |
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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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Restructuring charges and other exit-related activities |
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Operating income |
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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, net |
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( |
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( |
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( |
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( |
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Income from continuing operations before income taxes |
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Income tax expense |
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( |
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( |
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( |
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( |
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Income from continuing operations |
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Income (loss) from discontinued operations, net of tax |
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— |
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( |
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Net income |
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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 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 per share attributable to SSI shareholders: |
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Basic: |
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Income 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 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 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 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
(Unaudited, in thousands)
(Currency - U.S. Dollar)
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Three Months Ended February 28, |
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Six Months Ended February 28, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
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( |
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Pension obligations, net |
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( |
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Total other comprehensive income, net of tax |
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Comprehensive income |
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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 attributable to SSI shareholders |
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$ |
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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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Accumulated |
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Class A |
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Class B |
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Additional |
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Other |
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Total SSI |
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Three Months Ended February 28, 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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Paid-in Capital |
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Retained Earnings |
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Comprehensive Loss |
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Shareholders’ Equity |
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Noncontrolling Interests |
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Total Equity |
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Balance as of December 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 income |
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— |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive income, net of tax |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Distributions to noncontrolling interests |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Issuance of restricted stock |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Restricted stock withheld for taxes |
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( |
) |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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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 February 28, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Common Stock |
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Accumulated |
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|
|
|
Class A |
|
|
Class B |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total SSI |
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Three Months Ended February 28, 2022 |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Paid-in Capital |
|
|
Retained Earnings |
|
|
Comprehensive Loss |
|
|
Shareholders' Equity |
|
|
Noncontrolling Interests |
|
|
Total Equity |
|
||||||||||
|
Balance as of December 1, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, 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 February 28, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
|
|
Class A |
|
|
Class B |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total SSI |
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Six Months Ended February 28, 2021 |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Paid-in Capital |
|
|
Retained Earnings |
|
|
Comprehensive Loss |
|
|
Shareholders’ Equity |
|
|
Noncontrolling Interests |
|
|
Total Equity |
|
||||||||||
|
Balance as of September 1, 2020 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
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 February 28, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
|
|
Class A |
|
|
Class B |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total SSI |
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Six Months Ended February 28, 2022 |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Paid-in Capital |
|
|
Retained Earnings |
|
|
Comprehensive Loss |
|
|
Shareholders' Equity |
|
|
Noncontrolling Interests |
|
|
Total Equity |
|
||||||||||
|
Balance as of September 1, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Net 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 February 28, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
8
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
(Currency - U.S. Dollar)
|
|
|
Six Months Ended February 28, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to cash used in operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Inventory write-downs |
|
|
|
|
|
|
— |
|
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
Undistributed equity in earnings of joint ventures |
|
|
( |
) |
|
|
( |
) |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of assets, net |
|
|
|
|
|
|
( |
) |
|
Unrealized foreign exchange loss, 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 (used in) operating activities |
|
|
|
|
|
|
( |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
( |
) |
|
|
( |
) |
|
Acquisitions, net of acquired cash |
|
|
( |
) |
|
|
— |
|
|
Proceeds from insurance and 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 decrease 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)
|
|
|
Six Months Ended February 28, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
|
|
|
$ |
|
|
|
Income taxes paid (refunded), net |
|
$ |
|
|
|
$ |
( |
) |
|
Schedule of noncash investing and financing transactions: |
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment included in 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, 2021. The results for the three and six months ended February 28, 2022 and 2021 are not necessarily indicative of the results of operations for the entire fiscal year.
Segment Reporting
The Company acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors, and brokers, and it procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores. Most of these auto parts stores supply the Company’s shredding facilities with auto bodies that are processed into saleable recycled metal products. In addition to the sale of recycled metal products processed at its facilities, the Company provides a variety of recycling and related services. The Company also produces a range of finished steel long products at its electric arc furnace (“EAF”) steel mill using recycled ferrous metal sourced internally from its recycling and joint venture operations and other raw materials.
The accounting standards for reporting information about operating segments define an operating segment as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses for which discrete financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s internal organizational and reporting structure includes a single operating and reportable segment.
Cash and Cash Equivalents
Cash and cash equivalents include short-term securities that are not restricted by third parties and have an original maturity date of 90 days or less. Included in accounts payable are book overdrafts representing outstanding checks in excess of funds on deposit of $
Accounts Receivable, net
Accounts receivable represent amounts primarily due from customers on product and other sales. These accounts receivable, which are reduced by an allowance for credit losses, are recorded at the invoiced amount and do not bear interest. The Company extends credit to customers under contracts containing customary and explicit payment terms, and payment is generally required within 30 to 60 days of shipment. Nonferrous export sales typically require a deposit prior to shipment. Historically, almost all the Company’s ferrous export sales have been made with letters of credit. Ferrous and nonferrous metal sales to domestic customers and finished steel sales are generally made on open account, and a portion of these sales are covered by credit insurance.
The Company evaluates the collectibility of its accounts receivable based on a combination of factors, including whether sales were made pursuant to letters of credit or required deposits prior to shipment, the aging of customer receivable balances, the financial condition of the Company’s customers, historical collection rates, and economic trends. Management uses this evaluation to estimate the amount of customer receivables that may not be collected in the future and records a provision for expected credit losses. Accounts are written off when all efforts to collect have been exhausted.
Also included in accounts receivable are short-term advances to scrap metal suppliers used as a mechanism to acquire unprocessed scrap metal. The advances are generally repaid with scrap metal, as opposed to cash. Repayments of advances with scrap metal are treated as noncash operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows and totaled $
11
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Prepaid Expenses
The Company’s prepaid expenses, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets, totaled $
Other Assets
The Company’s other assets, exclusive of prepaid expenses and assets relating to certain employee benefit plans, consisted primarily of receivables from insurers, capitalized implementation costs for cloud computing arrangements, major spare parts and equipment, cash held in a client trust account relating to a legal settlement, an equity investment, debt issuance costs, and notes and other contractual receivables. Other assets are reported within either prepaid expenses and other current assets or other assets in the Unaudited Condensed Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle of one year from the reporting date.
Receivables from insurers represent the portion of insured losses expected to be recovered from the Company’s insurers. The receivable is recorded at an amount not to exceed the recorded loss and only if the terms of legally enforceable insurance contracts support that the insurance recovery will not be disputed and is deemed collectible. Receivables from insurers totaled $
Other assets as of both February 28, 2022 and August 31, 2021 also included approximately $
The Company invested $
Accounting for Impacts of Involuntary Events
Assets destroyed or damaged as a result of involuntary events are written off or reduced in carrying value to their salvage value. When recovery of all or a portion of the amount of property damage loss or other covered expenses through insurance proceeds is demonstrated to be probable, a receivable is recorded and offsets the loss or expense up to the amount of the total loss or expense. No gain is recorded until all contingencies related to the insurance claim have been resolved.
12
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On May 22, 2021, the Company experienced a fire at its steel mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. As a result of the fire, the rolling mill production ceased in early June 2021. In August 2021, the steel mill began ramping up operations following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. The Company experienced the loss of business income during the shutdown of the steel mill and the subsequent ramp-up phase which was substantially completed during the second quarter of fiscal 2022. The Company filed initial insurance claims for the physical loss and damage experienced at the mill’s melt shop and business income losses resulting from the matter. As of August 31, 2021, prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets included an initial $
On December 8, 2021, the Company experienced a fire at its metals recycling facility in Everett, Massachusetts. Direct physical loss or damage to property from the incident was limited to the facility’s shredder building and equipment, with no bodily injuries and no physical loss or damage to property reported at other buildings or equipment. As a result of the fire, shredding operations ceased, while all non-shredding operations at the facility continued, including torching, shearing, separating, and sorting purchased non-shreddable recycled ferrous metals. On January 28, 2022, shredding operations at the facility began ramping up following the replacement and repairs to shredder equipment that had been damaged. Completion of the remainder of repair and replacement of property that experienced physical loss or damage, primarily buildings and improvements, will occur over a longer period and impacts on business income may continue. The Company filed initial insurance claims for the property that experienced physical loss or damage and anticipated business income losses resulting from the matter. In the second quarter of fiscal 2022, the Company recognized an initial $
Business Acquisitions
The Company recognizes the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. Within one year from the date of acquisition, the Company may update the value allocated to the assets acquired and liabilities assumed, and the resulting goodwill balance, based on information received regarding the valuation of such assets and liabilities that was not available at the time of purchase. Measuring assets and liabilities at fair value requires the Company to determine the price that would be paid by a third-party market participant based on the highest and best use of the assets or interests acquired. Acquisition costs are expensed as incurred.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The majority of cash and cash equivalents is maintained with major financial institutions. Balances with these and certain other institutions exceeded the Federal Deposit Insurance Corporation insured amount of $
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.
13
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Inventories
Inventories consisted of the following (in thousands):
|
|
|
February 28, 2022 |
|
|
August 31, 2021 |
|
||
|
Processed and unprocessed scrap metal |
|
$ |
|
|
|
$ |
|
|
|
Semi-finished goods |
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
Supplies |
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
|
|
|
$ |
|
|
Note 3 - Business Acquisition
On
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed by the Company as of the October 1, 2021 acquisition date (in thousands):
|
Cash |
|
$ |
|
|
|
Accounts receivable |
|
|
|
|
|
Inventories |
|
|
|
|
|
Other current assets |
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
Operating lease right-of-use assets |
|
|
|
|
|
Goodwill(1) |
|
|
|
|
|
Intangibles and other assets |
|
|
|
|
|
Total assets acquired |
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Other liabilities |
|
|
|
|
|
Total liabilities assumed |
|
|
|
|
|
Net assets acquired |
|
$ |
|
|
|
(1) |
Approximately $ |
The following table summarizes the provisional purchase price allocation to the identifiable intangible assets and their estimated useful lives as of the October 1, 2021 acquisition date (in thousands):
|
|
|
|
|
|
|
Useful Life |
|
Supplier relationships |
|
$ |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
14
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The results of operations for the acquired Columbus Recycling business beginning as of the October 1, 2021 acquisition date are included in the accompanying financial statements. For each of the three and six months ended February 28, 2022 and 2021, the unaudited amount of revenues of the acquired Columbus Recycling business equaled
Note 4 - Goodwill
The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. Impairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is required to be identified as a reporting unit if the component is a business for which discrete financial information is available and segment management regularly reviews its operating results. There were no triggering events identified during the first half of fiscal 2022 requiring an interim goodwill impairment test, and the Company did not record a goodwill impairment charge in any of the periods presented.
The gross change in the carrying amount of goodwill for the six months ended February 28, 2022 was as follows (in thousands):
|
|
|
Goodwill |
|
|
|
August 31, 2021 |
|
$ |
|
|
|
Additions(1) |
|
|
|
|
|
Foreign currency translation adjustment |
|
|
( |
) |
|
February 28, 2022 |
|
$ |
|
|
|
(1) |
Additions relate entirely to the acquired Columbus Recycling business, and the amount of acquired goodwill is provisional as of February 28, 2022. See Note 3 – Business Acquisitions. |
Accumulated goodwill impairment charges were $
Note 5 - Commitments and Contingencies
Contingencies - Environmental
The Company evaluates the adequacy of its environmental liabilities on a quarterly basis. Adjustments to the liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or expenditures are made for which liabilities were established.
Changes in the Company’s environmental liabilities for the six months ended February 28, 2022 were as follows (in thousands):
|
Balance as of September 1, 2021 |
|
|
Liabilities Established (Released), Net |
|
|
Payments and Other |
|
|
Balance as of February 28, 2022 |
|
|
Short-Term |
|
|
Long-Term |
|
||||||
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company had environmental liabilities of $
15
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.
From 2000 to 2017, the EPA oversaw a remedial investigation/feasibility study (“RI/FS”) at the Site. The Company was not among the parties that performed the RI/FS, but it contributed to the costs through an interim settlement with the performing parties. The performing parties have indicated that they incurred more than $
In January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for the Site. The EPA has estimated the total cost of the selected remedy at $
In the ROD, the EPA acknowledged that much of the data was more than a decade old at that time and would need to be updated with a new round of “baseline” sampling to be conducted prior to the remedial design phase. The remedial design phase is an engineering phase during which additional technical information and data are collected, identified, and incorporated into technical drawings and specifications developed for the subsequent remedial action. Following issuance of the ROD, the EPA proposed that the PRPs, or a subgroup of PRPs, perform the additional investigative work in advance of remedial design.
In December 2017, the Company and
16
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The EPA encouraged PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design in various project areas covering the entire Site. While certain PRPs executed consent agreements for remedial design work, because of the EPA’s refusal to date to modify the remedy to reflect the most current data on Site conditions and because of concerns with the terms of the consent agreement, the Company elected not to enter into a consent agreement. In April 2020, the EPA issued a unilateral administrative order (“UAO”) to the Company and MMGL, LLC (“MMGL”), an unaffiliated company, for the remedial design work in a portion of the Site designated as the River Mile 3.5 East Project Area. As required by the UAO, the Company notified the EPA of its intent to comply while reserving all of its sufficient cause defenses. Failure to comply with a UAO, without sufficient cause, could subject the Company to significant penalties or treble damages. Pursuant to the optimized remedial design timeline set forth in the UAO, the EPA’s expected schedule for completion of the remedial design work is
Except for certain early action projects in which the Company is not involved, remediation activities at the Site are not expected to commence for a number of years. Moreover, those activities are expected to be sequenced, and the order and timing of such sequencing has not been determined. In addition, as noted above, the ROD does not determine the allocation of costs among PRPs.
The Company has joined with approximately
In addition to the remedial action process overseen by the EPA, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) is assessing natural resource damages at the Site. In 2008, the Trustee Council invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. The Company and other participating PRPs ultimately agreed to fund the first two phases of the three-phase assessment, which included the development of the Natural Resource Damage Assessment Plan (“AP”) and implementation of the AP to develop information sufficient to facilitate early settlements between the Trustee Council and Phase 2 participants and the identification of restoration projects to be funded by the settlements. In late May 2018, the Trustee Council published notice of its intent to proceed with Phase 3, which will involve the full implementation of the AP and the final injury and damage determination. The Company is proceeding with the process established by the Trustee Council regarding early settlements under Phase 2. The Company has established an environmental reserve of approximately $
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
17
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s environmental liabilities as of February 28, 2022 and August 31, 2021 included $
Because the final remedial actions have not yet been designed and there has not been a determination of the allocation among the PRPs of costs of the investigations or remedial action costs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it is likely to or which it is reasonably possible that it will incur in connection with the Site, although such costs could be material to the Company’s financial position, results of operations, cash flows, and liquidity. Among the facts being evaluated are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on each property within the Site, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs.
The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense, remedial design, remedial action, and mitigation for or settlement of natural resource damages claims in connection with the Site. Most of these policies jointly insure the Company and MMGL, as the successor to a former subsidiary of the Company. The Company and MMGL have negotiated the settlement with certain insurers of claims against them related to the Site, continue to seek settlements with other insurers, and formed a Qualified Settlement Fund (“QSF”) which became operative in fiscal 2020 to hold such settlement amounts until funds are needed to pay or reimburse costs incurred by the Company and MMGL in connection with the Site. These insurance policies and the funds in the QSF may not cover all of the costs which the Company may incur. The QSF is an unconsolidated variable interest entity (“VIE”) with no primary beneficiary. Two parties unrelated to each other, one appointed by the Company and one appointed by MMGL, share equally the power to direct the activities of the VIE that most significantly impact its economic performance. The Company’s appointee to co-manage the VIE is an executive officer of the Company. Neither MMGL nor its appointee to co-manage the VIE is a related party of the Company for the purpose of the primary beneficiary assessment or otherwise.
The Oregon Department of Environmental Quality is separately providing oversight of investigations and source control activities by the Company at various sites adjacent to Portland Harbor that are focused on controlling any current “uplands” releases of contaminants into the Willamette River. 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 February 28, 2022 and August 31, 2021, other than Portland Harbor, include actual or possible investigation and remediation costs from historical contamination at sites currently or formerly owned or formerly operated by the Company or at other sites where the Company may have responsibility for such costs due to past disposal or other activities (“legacy environmental loss contingencies”). These legacy environmental loss contingencies relate to the potential remediation of waterways and soil and groundwater contamination and may also involve natural resource damages, governmental fines and penalties, and claims by third parties for personal injury and property damage. The Company has been notified that it is or may be a potentially responsible party at certain of these sites, and investigation and remediation activities are ongoing or may be required in the future. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. When investigation, allocation, and remediation activities are ongoing or where the Company has not yet been identified as having responsibility or the contamination has not yet been identified, it is reasonably possible that the Company may need to recognize additional liabilities in connection with such sites but the Company cannot currently reasonably estimate the possible loss or range of loss absent additional information or developments. Such additional liabilities, individually or in the aggregate, may have a material adverse effect on the Company’s results of operations, financial condition, or cash flows.
18
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 2018, the Company accrued an initial $
In addition, the Company’s loss contingencies as of February 28, 2022 and August 31, 2021 included $
In addition, the Company’s loss contingencies as of both February 28, 2022 and August 31, 2021 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 6 - Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss, net of tax, comprise the following (in thousands):
|
|
|
Three Months Ended February 28, 2022 |
|
|
Three Months Ended February 28, 2021 |
|
||||||||||||||||||
|
|
|
Foreign Currency Translation Adjustments |
|
|
Pension Obligations, Net |
|
|
Total |
|
|
Foreign Currency Translation Adjustments |
|
|
Pension Obligations, Net |
|
|
Total |
|
||||||
|
Balances - December 1 (Beginning of period) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income before reclassifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances - February 28 (End of period) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
Six Months Ended February 28, 2022 |
|
|
Six Months Ended February 28, 2021 |
|
||||||||||||||||||
|
|
|
Foreign Currency Translation Adjustments |
|
|
Pension Obligations, Net |
|
|
Total |
|
|
Foreign Currency Translation Adjustments |
|
|
Pension Obligations, Net |
|
|
Total |
|
||||||
|
Balances - September 1 (Beginning of period) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive (loss) income before reclassifications |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Income tax (expense) benefit |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income 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 (loss) income |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Balances - February 28 (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 Income in all periods presented.
20
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Revenue
Disaggregation of Revenues
The table below illustrates the Company’s revenues disaggregated by major product and sales destination (in thousands):
|
|
|
Three Months Ended February 28, |
|
|
Six Months Ended February 28, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
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 predominantly sales of finished steel products, in addition to sales of semi-finished goods (billets) and steel manufacturing scrap. |
Receivables from Contracts with Customers
The revenue accounting standard defines a receivable as an entity’s right to consideration that is unconditional, meaning that only the passage of time is required before payment is due. As of February 28, 2022 and August 31, 2021, 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, which consist almost entirely of customer deposits for recycled metal and finished steel sales contracts, are reported within accounts payable in the Unaudited Condensed Consolidated Balance Sheets and totaled $
Note 8 - Share-Based Compensation
In the first quarter of fiscal 2022, as part of the annual awards under the Company’s Long-Term Incentive Plan, the Compensation Committee of the Company’s Board of Directors granted
The RSUs have a term and vest
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 2022, the performance metrics are the Company’s recycled metal volume growth and its return on capital employed (“ROCE”). Award share payouts depend on the extent to which the performance goals have been achieved, which performance-based payout factors are adjusted by a total shareholder return (“TSR”) modifier based on the Company’s average TSR percentile rank relative to a designated peer group. The number of shares that a participant receives is equal to the number of performance shares granted multiplied by an initial payout factor based on recycled metal volume growth and ROCE, which ranges from a threshold of
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 aggregate fair value of these performance share awards at the date of grant was $
In the second quarter of fiscal 2022, the Company granted deferred stock units (“DSUs”) to each of its non-employee directors under the Company’s 1993 Stock Incentive Plan, as amended. Each DSU gives the director the right to receive
Note 9 - Income Taxes
Effective Tax Rate
22
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s effective tax rate from continuing operations for the second quarter and first six months of fiscal 2022 was an expense on pre-tax income of
Valuation Allowances
The Company assesses the realizability of its deferred tax assets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies, and forecasts of taxable income. The Company considers all negative and positive evidence, including the weight of the evidence, to determine if valuation allowances against deferred tax assets are required. The Company continues to maintain valuation allowances against certain state and Canadian deferred tax assets. Canadian deferred tax assets against which the Company continues to maintain a valuation allowance relate to indefinite-lived assets.
The Company files federal and state income tax returns in the U.S. and foreign tax returns in Puerto Rico and Canada. For U.S. federal income tax returns, fiscal years 2014 to 2021 remain subject to examination under the statute of limitations.
Note 10 - Net Income Per Share
The following table sets forth the information used to compute basic and diluted net income per share attributable to SSI shareholders (in thousands):
|
|
|
Three Months Ended February 28, |
|
|
Six Months Ended February 28, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Income from continuing operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Net income attributable to noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Income from continuing operations attributable to SSI shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
Net income attributable to SSI shareholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Computation of shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental common shares attributable to dilutive performance share awards, restricted stock units and deferred stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalent shares of
Note 11 - Related Party Transactions
The Company purchases recycled metal from one of its joint venture operations at prices that approximate fair market value. These purchases totaled $
23
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section includes a discussion of our operations for the three and six months ended February 28, 2022 and 2021. The following discussion and analysis provide information which management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, 2021, and the Unaudited Condensed Consolidated Financial Statements and the related Notes thereto included in Part I, Item 1 of this report.
General
Founded in 1906, Schnitzer Steel Industries, Inc. is one of North America’s largest recyclers of ferrous and nonferrous metal, including end-of-life vehicles, and a manufacturer of finished steel products. As a vertically integrated organization, we offer a range of products and services to meet global demand through our network that includes 50 retail self-service auto parts stores, 52 metals recycling facilities, and an electric arc furnace (“EAF”) steel mill.
We sell recycled ferrous and nonferrous metal in both foreign and domestic markets. We also sell a range of finished steel long products produced at our steel mill. We acquire, process, and recycle end-of-life (salvaged) vehicles, rail cars, home appliances, industrial machinery, manufacturing scrap, and construction and demolition scrap through our facilities. Our retail self-service auto parts stores located across the United States (“U.S.”) and Western Canada, which operate under the commercial brand-name Pick-n-Pull, procure the significant majority of our salvaged vehicles and sell serviceable used auto parts from these vehicles. Upon acquiring a salvaged vehicle, we remove catalytic converters, aluminum wheels, and batteries for separate processing and sale prior to placing the vehicle in our retail lot. After retail customers have removed desired parts from a vehicle, we may remove remaining major component parts containing ferrous and nonferrous metals, which are primarily sold to wholesalers. The remaining auto bodies are crushed and shipped to our metals recycling facilities to be shredded or sold to third parties when geographically more economical. At our metals recycling facilities, we process mixed and large pieces of scrap metal into smaller pieces by crushing, torching, shearing, shredding, separating, and sorting, resulting in recycled ferrous, nonferrous, and mixed metal pieces of a size, density, and metal content required by customers to meet their production needs. Each of our shredding, nonferrous processing, and separation systems is designed to optimize the recovery of valuable recycled metal. We also purchase nonferrous metal directly from industrial vendors and other suppliers and aggregate and prepare this metal for shipment to customers by ship, rail, or truck. In addition to the sale of recycled metal processed at our facilities, we also provide a variety of recycling and related services including brokering the sale of ferrous and nonferrous scrap metal generated by industrial entities and demolition projects to customers in the domestic market, among other services. Our steel mill produces semi-finished goods (billets) and finished goods, consisting of rebar, coiled rebar, wire rod, merchant bar, and other specialty products, using recycled ferrous metal sourced internally from our recycling and joint venture operations and other raw materials.
We operate seven deepwater port locations, six of which are equipped with large-scale shredders. Our deepwater port facilities on both the East and West Coasts of the U.S. (in Everett, Massachusetts; Providence, Rhode Island; Oakland, California; Tacoma, Washington; and Portland, Oregon) and access to public deepwater port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) allow us to meet the global demand for recycled ferrous metal by enabling us to ship bulk cargoes to steel manufacturers located in Europe, Africa, the Middle East, Asia, North America, Central America, and South America. Our exports of nonferrous recycled metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers, wire and cable producers, wholesalers, and other recycled metal processors globally. We also transport both ferrous and nonferrous metals by truck, rail, and barge in order to transfer scrap metal between our facilities for further processing, to load shipments at our export facilities, and to meet regional domestic demand.
Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. Our results of operations also depend substantially on our operating leverage from processing and selling higher volumes of recycled metal as well as our ability to efficiently extract ferrous and nonferrous metals from the shredding process. We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating results. We believe we generally benefit from sustained periods of stable or rising recycled metal selling prices, which allow us to better maintain or increase both operating results and unprocessed scrap metal flow into our facilities. When recycled metal selling prices decline, either sharply or for a sustained period, our operating margins typically compress. With respect to finished steel products produced at our steel mill, our results of operations are impacted by demand and prices for these products, which are sold to customers located primarily in the Western U.S. and Western Canada.
24
SCHNITZER STEEL INDUSTRIES, INC.
Our quarterly operating results fluctuate based on a variety of factors including, but not limited to, changes in market conditions for recycled ferrous and nonferrous metal and finished steel products, the supply of scrap metal in our domestic markets, varying demand for used auto parts from our self-service retail stores, the efficiency of our supply chain, and variations in production and other operating costs. Certain of these factors are influenced, to a degree, by the impact of seasonal changes including severe weather conditions, which can impact the timing of shipments and inhibit construction activity utilizing our products, scrap metal collection and production levels at our facilities, and retail admissions and parts sales at our auto parts stores. Further, sanctions, trade actions, and licensing, product quality, and inspection requirements can impact the level of profitability on sales of our products and, in certain cases, impede or restrict our ability to sell to certain export markets or require us to direct our sales to alternative market destinations, which can cause our quarterly operating results to fluctuate.
Coronavirus Disease 2019 (“COVID-19”)
We continue to monitor the impact of COVID-19 on all aspects of our business. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Ensuring the health and safety of our employees, and all who visit our sites, is our top priority, and we are following all U.S. Centers for Disease Control and Prevention and state and local health department guidelines. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our fiscal 2020 results, global economic conditions improved during fiscal 2021, resulting in increased demand for our products. Beginning in our second quarter of fiscal 2021 and continuing through the second quarter of fiscal 2022, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on individual, business, and government activities. The existence of new or enduring variant strains of COVID-19 may lead to a rise in infections, which could cause delays in the easing of restrictions previously in place and the implementation of new restrictions and mandates, and there are ongoing global impacts resulting directly or indirectly from the pandemic including labor shortages, logistical challenges such as increased port congestion, and increases in costs for certain goods and services, which have negatively impacted our sales volumes and operating results to varying degrees. While the ongoing effects of the COVID-19 pandemic could negatively impact our results of operations, cash flows, and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time.
Steel Mill Fire
On May 22, 2021, we experienced a fire at our steel mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. As a result of the fire, the rolling mill production ceased in early June 2021. In August 2021, the steel mill began ramping up operations following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. We experienced the loss of business income during the shutdown of the steel mill and the subsequent ramp-up phase which was substantially completed during the second quarter of fiscal 2022. We have insurance that we believe is fully applicable to the losses and have filed initial insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property that experienced physical loss or damage and business income losses resulting from the matter. The property damage deductible under the policies insuring the Company’s assets in this matter is $1 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. As of August 31, 2021, prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets included an initial $10 million insurance receivable recognized in the fourth quarter of fiscal 2021, primarily offsetting applicable losses including capital purchases of $10 million that we had incurred as of August 31, 2021. In the first half of fiscal 2022, we increased the amount of this insurance receivable to $25 million and recognized a related $15 million insurance recovery gain, $3 million recorded in the first quarter and $12 million recorded in the second quarter, within cost of goods sold in the Unaudited Condensed Consolidated Statements of Income , reflecting recovery of applicable losses incurred as a result of the fire to date. In addition, during the first half of fiscal 2022, we received advance payments from insurers totaling approximately $30 million towards our claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the $25 million insurance receivable to zero with the remaining amount of advance payments of $5 million reported within other accrued liabilities in the Unaudited Condensed Consolidated Balance Sheets as of February 28, 2022.
25
SCHNITZER STEEL INDUSTRIES, INC.
Everett Facility Shredder Fire
On December 8, 2021, we experienced a fire at our metals recycling facility in Everett, Massachusetts. Direct physical loss or damage to property from the incident was limited to the facility’s shredder building and equipment, with no bodily injuries and no physical loss or damage to property reported at other buildings or equipment. As a result of the fire, shredding operations ceased, while all non-shredding operations at the facility continued, including torching, shearing, separating, and sorting purchased non-shreddable recycled ferrous metals. On January 28, 2022, shredding operations at the facility began ramping up following the replacement and repairs to shredder equipment that had been damaged. Completion of the remainder of repair and replacement of property that experienced physical loss or damage, primarily buildings and improvements, will occur over a longer period and impacts on business income may continue. We have insurance that we believe is fully applicable to the losses and have filed initial insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property damage or loss and business income losses resulting from the matter. The property damage deductible under the policies insuring our assets in this matter is $0.5 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. The insurance claims resolution process may extend significantly beyond completion of repair and replacement of the physical plant property that experienced physical loss or damage and the restart of production activities. In the second quarter of fiscal 2022, we recognized an initial $10 million insurance receivable and related insurance recovery gain, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets and within cost of goods sold in the Unaudited Condensed Consolidated Statements of Income, respectively, reflecting recovery of applicable losses including impairment charges of $6 million related to the carrying value of plant and equipment assets damaged by the fire and initial capital purchases and other costs totaling $4 million that we had incurred as of February 28, 2022.
Use of Non-GAAP Financial Measures
In this management’s discussion and analysis, we use supplemental measures of our performance, liquidity, and capital structure which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We believe that providing these non-GAAP financial measures adds a meaningful presentation of our operating and financial performance, liquidity, and capital structure. For example, we use adjusted EBITDA as one of the measures to compare and evaluate financial performance. Adjusted EBITDA is the sum of our net income before results from discontinued operations, interest expense, income taxes, depreciation and amortization, business development costs not related to ongoing operations including pre-acquisition expenses, charges for legacy environmental matters (net of recoveries), restructuring charges and other exit-related activities, and other items which are not related to underlying business operational performance. See the reconciliations of supplemental financial measures, including adjusted EBITDA, in Non-GAAP Financial Measures at the end of this Item 2.
Our non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable GAAP measures. Although we find these non-GAAP financial measures useful in evaluating the performance of our business, our reliance on these measures is limited because they often materially differ from our consolidated financial statements presented in accordance with GAAP. Therefore, we typically use these adjusted amounts in conjunction with our GAAP results to address these limitations. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
26
SCHNITZER STEEL INDUSTRIES, INC.
Financial Highlights of Results of Operations for the Second Quarter of Fiscal 2022
|
|
• |
Diluted earnings per share from continuing operations attributable to SSI shareholders in the second quarter of fiscal 2022 was $1.27, compared to $1.54 per share in the prior year quarter. |
|
|
• |
Adjusted diluted earnings per share from continuing operations attributable to SSI shareholders in the second quarter of fiscal 2022 was $1.38, compared to $1.51 per share in the prior year quarter. |
|
|
• |
Net income in the second quarter of fiscal 2022 was $38 million, compared to $46 million in the prior year quarter. |
|
|
• |
Adjusted EBITDA in the second quarter of fiscal 2022 was $75 million, compared to $71 million in the prior year quarter. |
Market demand for recycled metals was strong in the second quarter of fiscal 2022, leading to significantly higher average net selling prices and increased sales volumes for our ferrous and nonferrous products compared to the prior year quarter. In the second quarter of fiscal 2022, the average net selling prices for our ferrous and nonferrous products increased by 15% and 33%, respectively, and sales volumes for these products increased by 10% and 8%, respectively, compared to the prior year quarter. The increased sales volumes in part reflected additional volumes arising from the Columbus Recycling business acquired on October 1, 2021. Market demand for our finished steel products also improved in the second quarter of fiscal 2022, which contributed to finished steel average selling prices increasing by 51% compared to the prior year quarter. Finished steel sales volumes were 22% lower in the second quarter of fiscal 2022 compared to the prior year quarter in part due to the impact of supply chain disruptions on current volumes, including delays to construction projects related to a concrete industry strike in the Pacific Northwest. Our results for the second quarter of fiscal 2022 reflected benefits from the higher price environment for most of our products and increased ferrous and nonferrous sales volumes driven by strong demand compared to the prior year quarter, as well as recognition of insurance recoveries. Our results in the second quarter of fiscal 2022 also reflected the impact of compressed metal spreads on contracted ferrous sales for February shipments due to a surge in market prices in the second half of the quarter, a less favorable impact from average inventory accounting compared to the prior year quarter, and the effects of supply chain disruptions, lower year-over-year platinum group metals (PGM) prices, inflationary pressure on operating costs, and the adverse impact of the Everett shredder downtime.
Selling, general, and administrative expense in the second quarter of fiscal 2022 increased by 13% compared to the prior year quarter primarily due to higher legacy environmental charges, employee salary and wage expenses, and outside and professional services expenses, including from higher costs resulting from our acquisition and other growth-related activities, increased competition for employees in a tight labor market, and the impacts of inflation. These higher expenses in the second quarter of fiscal 2022 were partially offset by lower accruals in connection with our annual incentive compensation plans compared to the prior year quarter.
The following items further highlight selected liquidity and capital structure metrics:
|
|
• |
For the first six months of fiscal 2022, net cash provided by operating activities was $13 million, compared to net cash used in operating activities of $3 million in the prior year comparable period. |
|
|
• |
Debt was $262 million as of February 28, 2022, compared to $75 million as of August 31, 2021, which increase was primarily due to increased borrowings from our credit facilities to fund the acquisition of the assets of the Columbus Recycling business and higher net working capital needs. |
|
|
• |
Debt, net of cash, was $244 million as of February 28, 2022, compared to $47 million as of August 31, 2021. |
|
|
• |
Repurchase of 200,000 shares of Class A common stock totaling $8 million in the first six months of fiscal 2022, compared to none in the prior year comparable period. |
See the reconciliations of adjusted diluted earnings per share from continuing operations attributable to SSI shareholders, adjusted EBITDA, and debt, net of cash in Non-GAAP Financial Measures at the end of this Item 2.
27
SCHNITZER STEEL INDUSTRIES, INC.
Results of Operations
Selected Financial Measures and Operating Statistics
|
|
|
Three Months Ended February 28, |
|
|
Six Months Ended February 28, |
|
||||||||||||||||||
|
($ in thousands, except for prices and per share amounts) |
|
2022 |
|
|
2021 |
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
% |
|
||||||
|
Ferrous revenues |
|
$ |
438,314 |
|
|
$ |
322,679 |
|
|
|
36 |
% |
|
$ |
904,170 |
|
|
$ |
574,885 |
|
|
|
57 |
% |
|
Nonferrous revenues |
|
|
196,142 |
|
|
|
147,322 |
|
|
|
33 |
% |
|
|
390,571 |
|
|
|
267,031 |
|
|
|
46 |
% |
|
Steel revenues(1) |
|
|
116,196 |
|
|
|
99,191 |
|
|
|
17 |
% |
|
|
219,434 |
|
|
|
187,605 |
|
|
|
17 |
% |
|
Retail and other revenues |
|
|
32,546 |
|
|
|
30,919 |
|
|
|
5 |
% |
|
|
67,141 |
|
|
|
62,697 |
|
|
|
7 |
% |
|
Total revenues |
|
|
783,198 |
|
|
|
600,111 |
|
|
|
31 |
% |
|
|
1,581,316 |
|
|
|
1,092,218 |
|
|
|
45 |
% |
|
Cost of goods sold |
|
|
670,539 |
|
|
|
487,025 |
|
|
|
38 |
% |
|
|
1,353,783 |
|
|
|
907,119 |
|
|
|
49 |
% |
|
Gross margin (total revenues less cost of goods sold) |
|
$ |
112,659 |
|
|
$ |
113,086 |
|
|
|
(— |
)% |
|
$ |
227,533 |
|
|
$ |
185,099 |
|
|
|
23 |
% |
|
Gross margin (%) |
|
|
14.4 |
% |
|
|
18.8 |
% |
|
|
(23 |
)% |
|
|
14.4 |
% |
|
|
16.9 |
% |
|
|
(15 |
)% |
|
Selling, general and administrative expense |
|
$ |
61,081 |
|
|
$ |
54,142 |
|
|
|
13 |
% |
|
$ |
116,348 |
|
|
$ |
104,048 |
|
|
|
12 |
% |
|
Diluted earnings per share from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
$ |
1.27 |
|
|
$ |
1.54 |
|
|
|
(18 |
)% |
|
$ |
2.81 |
|
|
$ |
2.05 |
|
|
|
37 |
% |
|
Adjusted(2) |
|
$ |
1.38 |
|
|
$ |
1.51 |
|
|
|
(9 |
)% |
|
$ |
2.96 |
|
|
$ |
2.09 |
|
|
|
42 |
% |
|
Net income |
|
$ |
38,165 |
|
|
$ |
45,679 |
|
|
|
(16 |
)% |
|
$ |
85,441 |
|
|
$ |
60,743 |
|
|
|
41 |
% |
|
Adjusted EBITDA(2) |
|
$ |
75,259 |
|
|
$ |
71,411 |
|
|
|
5 |
% |
|
$ |
153,345 |
|
|
$ |
111,666 |
|
|
|
37 |
% |
|
Average ferrous recycled metal sales prices ($/LT)(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
418 |
|
|
$ |
349 |
|
|
|
20 |
% |
|
$ |
424 |
|
|
$ |
297 |
|
|
|
43 |
% |
|
Foreign |
|
$ |
455 |
|
|
$ |
399 |
|
|
|
14 |
% |
|
$ |
452 |
|
|
$ |
334 |
|
|
|
35 |
% |
|
Average |
|
$ |
445 |
|
|
$ |
387 |
|
|
|
15 |
% |
|
$ |
446 |
|
|
$ |
326 |
|
|
|
37 |
% |
|
Ferrous volumes (LT, in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic(4) |
|
|
408 |
|
|
|
391 |
|
|
|
4 |
% |
|
|
839 |
|
|
|
779 |
|
|
|
8 |
% |
|
Foreign |
|
|
663 |
|
|
|
586 |
|
|
|
13 |
% |
|
|
1,381 |
|
|
|
1,251 |
|
|
|
10 |
% |
|
Total ferrous volumes (LT, in thousands)(4)(8) |
|
|
1,071 |
|
|
|
977 |
|
|
|
10 |
% |
|
|
2,219 |
|
|
|
2,030 |
|
|
|
9 |
% |
|
Average nonferrous sales price ($/pound)(3)(5) |
|
$ |
1.10 |
|
|
$ |
0.83 |
|
|
|
33 |
% |
|
$ |
1.08 |
|
|
$ |
0.74 |
|
|
|
46 |
% |
|
Nonferrous volumes (pounds, in thousands)(4)(5) |
|
|
147,145 |
|
|
|
135,899 |
|
|
|
8 |
% |
|
|
300,373 |
|
|
|
274,135 |
|
|
|
10 |
% |
|
Finished steel average sales price ($/ST)(3) |
|
$ |
1,045 |
|
|
$ |
690 |
|
|
|
51 |
% |
|
$ |
1,013 |
|
|
$ |
656 |
|
|
|
54 |
% |
|
Finished steel sales volumes (ST, in thousands) |
|
|
106 |
|
|
|
136 |
|
|
|
(22 |
)% |
|
|
205 |
|
|
|
270 |
|
|
|
(24 |
)% |
|
Cars purchased (in thousands)(6) |
|
|
73 |
|
|
|
80 |
|
|
|
(9 |
)% |
|
|
153 |
|
|
|
158 |
|
|
|
(3 |
)% |
|
Number of auto parts stores at period end |
|
|
50 |
|
|
|
50 |
|
|
|
(— |
)% |
|
|
50 |
|
|
|
50 |
|
|
|
(— |
)% |
|
Rolling mill utilization(7) |
|
|
86 |
% |
|
|
88 |
% |
|
|
(2 |
)% |
|
|
82 |
% |
|
|
93 |
% |
|
|
(12 |
)% |
NM = Not Meaningful
LT = Long Ton, which is equivalent to 2,240 pounds. ST = Short Ton, which is equivalent to 2,000 pounds.
|
(1) |
Steel revenues include predominantly sales of finished steel products, in addition to sales of semi-finished goods (billets) and steel manufacturing scrap. |
|
(2) |
See the reconciliations of Non-GAAP Financial Measures at the end of this Item 2. |
|
(3) |
Price information is shown after netting the cost of freight incurred to deliver the product to the customer. |
|
(4) |
Ferrous and nonferrous volumes sold externally and delivered to our steel mill for finished steel production. |
|
(5) |
Average sales price and volume information excludes PGMs in catalytic converters. |
|
(6) |
Cars purchased by auto parts stores only. |
|
(7) |
Rolling mill utilization is based on effective annual production capacity under current conditions of 580 thousand tons of finished steel products. |
|
(8) |
May not foot due to rounding. |
28
SCHNITZER STEEL INDUSTRIES, INC.
Revenues
Revenues in the second quarter and first six months of fiscal 2022 increased by 31% and 45%, 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 driven by strong market demand for recycled metals globally. In the second quarter and first six months of fiscal 2022, the average net selling prices for our ferrous products increased by 15% and 37%, respectively, and the average net selling prices for our nonferrous products increased by 33% and 46%, respectively, compared to the prior year periods. In the second quarter and first six months of fiscal 2022, ferrous sales volumes increased by 10% and 9%, respectively, and nonferrous sales volumes increased by 8% and 10%, respectively, compared to the prior year periods. The expansion in recycled metal sales volumes compared to the prior year periods reflected strong demand for these products globally, the effects of which were partially offset by the impact of logistics constraints including ship and container delays for ferrous and nonferrous sales to customers. The increased ferrous and nonferrous sales volumes in part reflected additional volumes arising from the Columbus Recycling business acquired on October 1, 2021. Finished steel average selling prices were significantly higher in the second quarter and first six months of fiscal 2022 compared to the prior year periods, reflecting robust market demand for these products. The impact of these higher average selling prices on steel revenues in the second quarter and first six months of fiscal 2022 was partially offset by lower sales volumes and rolling mill utilization compared to the prior year periods, which were primarily due to the impact of the ramp-up of steel mill operations that began in August 2021 and which was substantially completed during the second quarter, as well as the impact of supply chain disruptions on current volumes, including delays to construction projects related to a concrete industry strike in the Pacific Northwest experienced in the second quarter of fiscal 2022. The ramp-up of steel mill operations followed completion of repair and replacement of damaged property arising from the May 2021 steel mill fire.
Operating Performance
Net income in the second quarter and first six months of fiscal 2022 was $38 million and $85 million, respectively, compared to $46 million and $61 million in the prior year periods. Adjusted EBITDA in the second quarter and first six months of fiscal 2022 was $75 million and $153 million, respectively, compared to $71 million and $112 million, respectively, in the prior year periods. Our results for the second quarter of fiscal 2022 reflected benefits from the higher price environment for most of our products and increased ferrous and nonferrous sales volumes supported by strong demand compared to the prior year quarter, as well as recognition of insurance recoveries. Our results in the second quarter of fiscal 2022 also reflected the impact of compressed metal spreads on contracted ferrous sales for February shipments due to a surge in market prices in the second half of the quarter, a less favorable impact from average inventory accounting compared to the prior year quarter, and the effects of supply chain disruptions, lower year-over-year PGM prices, inflationary pressure on operating costs, and the adverse impact of the Everett shredder downtime. Our results for the first six months of fiscal 2022 benefited from a significant expansion in our ferrous metal spreads primarily during the first quarter of fiscal 2022 and increased finished steel metal margins, greater contributions from sales of nonferrous products, and increased ferrous and nonferrous sales volumes driven by strong demand, compared to the prior year period.
In the second quarter and first six months of fiscal 2022, we recognized insurance recoveries of $12 million and $15 million, respectively, in connection with the May 2021 fire at our steel mill in McMinnville, Oregon, reflecting recovery of applicable costs incurred by the mill operations following the incident. In the second quarter of fiscal 2022, we also recognized insurance recoveries of $10 million in connection with the December 2021 fire at our Everett shredder facility, reflecting recovery of applicable losses including asset impairment charges, initial capital purchases, and other costs incurred in the period. These amounts do not reflect potential additional recoveries of business income losses due to the interruptions that may be recognized in the future when settlements of the business interruption claims are resolved.
Selling, general, and administrative expense in the second quarter and first six months of fiscal 2022 increased by 13% and 12%, respectively, compared to the prior year periods primarily due to higher legacy environmental charges, employee salary and wage expenses, and outside and professional services expenses, including from higher costs resulting from our acquisition and other growth-related activities, increased competition for employees in a tight labor market, and the impacts of inflation. These higher expenses in the second quarter and first six months of fiscal 2022 were partially offset by lower accruals in connection with our annual incentive compensation plans compared to the prior year periods.
See the reconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the end of this Item 2.
29
SCHNITZER STEEL INDUSTRIES, INC.
Income Tax
The effective tax rate from continuing operations for the second quarter and first six months of fiscal 2022 was an expense on pre-tax income of 24.0% and 21.3%, respectively, compared to 20.1% and 22.1%, respectively, for the comparable prior year periods. For the second quarter of fiscal 2022, the effective tax rate from continuing operations was higher than the U.S. federal statutory rate of 21% primarily due to the aggregate impact of state taxes and permanent differences from non-deductible expenses on the projected annual effective tax rate applied to the quarterly results.
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 and $28 million as of February 28, 2022 and August 31, 2021, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of February 28, 2022, debt was $262 million compared to $75 million as of August 31, 2021, and debt, net of cash, was $244 million as of February 28, 2022, compared to $47 million as of August 31, 2021, which increases were primarily due to increased borrowings from our credit facilities to fund the acquisition of the assets of the Columbus Recycling business on October 1, 2021, and higher net working capital needs. See the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2.
Operating Activities
Net cash provided by operating activities in the first six months of fiscal 2022 was $13 million, compared to net cash used in operating activities of $3 million in the first six months of fiscal 2021.
Sources of cash other than from earnings in the first six months of fiscal 2022 included a $12 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of purchases and payments and an $8 million increase in other accrued liabilities primarily reflecting the portion of advance payments from insurance carriers received in the period towards our claims arising from the May 2021 steel mill fire deemed attributable to operating activities. Uses of cash in the first six months of fiscal 2022 included a $53 million increase in inventories due to higher raw material purchase costs and the timing of purchases and sales, a $48 million increase in accounts receivable primarily due to higher selling prices and higher sales volumes for recycled metals, as well as the timing of sales and collections, a $40 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation in the first quarter of fiscal 2022 previously accrued under our fiscal 2021 plans, and a $12 million decrease in environmental liabilities primarily due to payments in connection with legacy environmental matters. The sources and uses of cash related to operating activities described above also reflect higher net working capital needs during the ramp-up of steel mill operations that began in August 2021 following completion of repair and replacement of damaged property arising from the May 2021 steel mill fire.
Uses of cash in the first six months of fiscal 2021 included a $90 million increase in inventories due to higher raw material purchase prices, higher volumes on hand, and the timing of purchases and sales, and a $76 million increase in accounts receivable primarily due to increases in selling prices for recycled metals and finished steel as well as the timing of sales and collections. Sources of cash other than from earnings in the first six months of fiscal 2021 included a $45 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of payments, and a $16 million increase in income tax accruals.
Investing Activities
Net cash used in investing activities was $172 million in the first six months of fiscal 2022, compared to $54 million in the first six months of fiscal 2021.
Cash used in investing activities in the first six months of fiscal 2022 included $114 million paid to acquire the assets of the Columbus Recycling business on October 1, 2021, which amount included $7 million paid at closing for estimated net working capital in excess of an agreed-upon benchmark. We funded the acquisition using cash on hand and borrowings under our existing credit facilities. See Note 3 - Business Acquisition in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further detail.
30
SCHNITZER STEEL INDUSTRIES, INC.
Cash used in investing activities in the first six months of fiscal 2022 also included capital expenditures of $69 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, compared to $55 million in the prior year period. Cash flows from investing activities in the first six months of fiscal 2022 included proceeds of $10 million representing the portion of advance payments from insurance carriers deemed a recovery of capital purchases incurred for repair and replacement of damaged property arising from the May 2021 steel mill fire.
Financing Activities
Net cash provided by financing activities in the first six months of fiscal 2022 was $150 million, compared to $50 million in the first six months of fiscal 2021.
Cash flows from financing activities in the first six months of fiscal 2022 included $180 million in net borrowings of debt, compared to $66 million in the prior year period (refer to Non-GAAP Financial Measures at the end of this Item 2). Uses of cash in the first six months of fiscal 2022 and 2021 included $10 million and $4 million, respectively, for payment of employee tax withholdings resulting from vesting of share-based awards and $11 million in each period for the payment of dividends. Cash used in financing activities for the first six months of fiscal 2022 also included $8 million for share repurchases.
Debt
Our senior secured revolving credit facilities, which provide for revolving loans of $700 million and C$15 million, mature in August 2023 pursuant to a credit agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the London Interbank Offered Rate (“LIBOR”) (or the Canadian equivalent for C$ loans), plus a spread of between 1.25% and 3.50%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA (as defined by the credit agreement), or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50%, or (c) the daily rate equal to one-month LIBOR plus 1.75%, in each case, plus a spread of between 0.00% and 2.50% based on a pricing grid tied to our consolidated funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.20% and 0.50% based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA. The credit facility provides that LIBOR or any LIBOR successor rate is subject to a 0.50% floor and contains mechanics by which the parties may replace the benchmark interest rate used in the agreement from LIBOR to one or more rates based on the secured overnight financing rate administered by the Federal Reserve Bank of New York or another alternative benchmark rate.
We had borrowings outstanding under our credit facilities of $240 million as of February 28, 2022 and $60 million as of August 31, 2021. The weighted average interest rate on amounts outstanding under our credit facilities was 2.03% and 1.75% as of February 28, 2022 and August 31, 2021, respectively.
We use the credit facilities to fund working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. Our credit agreement contains various representations and warranties, events of default, and financial and other customary covenants which limit (subject to certain exceptions) our ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of our business, engage in transactions with affiliates, and enter into restrictive agreements, including agreements that restrict the ability of our subsidiaries to make distributions. The financial covenants under the credit agreement include (a) a consolidated fixed charge coverage ratio, defined as the four-quarter rolling sum of consolidated EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges, and (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness.
As of February 28, 2022, we were in compliance with the financial covenants under our credit agreement. The consolidated fixed charge coverage ratio was required to be no less than 1.50 to 1.00 and was 5.84 to 1.00 as of February 28, 2022. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.23 to 1.00 as of February 28, 2022.
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.
31
SCHNITZER STEEL INDUSTRIES, INC.
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 $15 million and $8 million as of February 28, 2022 and August 31, 2021, respectively, primarily relate to equipment purchases, the contract consideration for which includes an obligation to make future monthly payments to the vendor in the form of licensing fees. For accounting purposes, such obligations are treated as a partial financing of the purchase price by the equipment vendor. Monthly payments commence when the equipment is placed in service and achieves specified minimum operating metrics, with payments continuing for a period of four years thereafter. In the second quarter of fiscal 2022, we recorded $7 million of additional debt obligations with these terms generally.
Capital Expenditures
Capital expenditures totaled $69 million for the first six months of fiscal 2022, compared to $55 million for the prior year period. Capital expenditures in the first six months of fiscal 2022 included approximately $21 million for investments in growth. We currently plan to invest in the range of $130 million to $160 million in capital expenditures in fiscal 2022. These capital expenditures include investments in growth, including new nonferrous processing technologies, and to support volume initiatives as well as post-acquisition and other growth projects, and investments to upgrade our equipment and infrastructure and for environmental and safety-related assets, using cash generated from operations and available credit facilities. The COVID-19 pandemic has contributed to some delays in construction activities and equipment deliveries related to our capital projects, and to the time required to obtain permits from government agencies, resulting in the deferral of certain capital expenditures. Given the continually evolving nature of the COVID-19 pandemic and other factors impacting the timing of project completion, the extent to which forecasted capital expenditures could be deferred is uncertain.
Environmental Compliance
Building on our commitment to recycling and operating our business in an environmentally responsible manner, we continue to invest in facilities that improve our environmental presence in the communities in which we operate. As part of our capital expenditures discussed in the prior paragraph, we invested approximately $10 million in capital expenditures for environmental projects in the first six months of fiscal 2022, and we currently plan to invest in the range of $30 million to $40 million for such projects in fiscal 2022. These projects include investments in equipment to ensure ongoing compliance with air quality and other environmental regulations and storm water systems.
We have been identified by the United States Environmental Protection Agency as one of the potentially responsible parties that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”). See Note 5 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of this matter, as well as other legacy environmental loss contingencies. We believe it is not possible to reasonably estimate the amount or range of costs which we are likely to or which it is reasonably possible that we will incur in connection with the Site, although such costs could be material to our financial position, results of operations, cash flows, and liquidity. We have insurance policies that we believe will provide reimbursement for costs we incur for defense, remediation, and mitigation for natural resource damages claims in connection with the Site, although there are no assurances that those policies will cover all of the costs which we may incur. Significant cash outflows in the future related to the Site, as well as related to other legacy environmental loss contingencies, could reduce the amounts available for borrowing that could otherwise be used for working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions and could result in our failure to maintain compliance with certain covenants in our debt agreements, and could adversely impact our liquidity.
32
SCHNITZER STEEL INDUSTRIES, INC.
Dividends
On January 6, 2022, our Board of Directors declared a dividend for the second quarter of fiscal 2022 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend was paid on February 14, 2022.
Share Repurchase Program
Pursuant to our share repurchase program as amended in 2001, 2006 and 2008, we were authorized to repurchase up to nine million shares of our Class A common stock. As of February 28, 2022, we had authorization to repurchase up to a remaining 506 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. In the second quarter of fiscal 2022, we repurchased 200 thousand shares of our Class A common stock in open-market transactions for a total of $8 million.
Assessment of Liquidity and Capital Resources
Historically, our available cash resources, internally generated funds, credit facilities, and equity offerings have financed our acquisitions, capital expenditures, working capital, and other financing needs.
We generally believe our current cash resources, internally generated funds, existing credit facilities, and access to the capital markets will provide adequate short-term and long-term liquidity needs for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions, joint ventures, debt service requirements, environmental obligations, and other contingencies. However, in the event of a sustained market deterioration, we may need additional liquidity which would require us to evaluate available alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurances that any such supplemental funding, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
Contractual Obligations
There were no material changes related to contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021.
We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. As of February 28, 2022, we had $8 million outstanding under these arrangements.
Critical Accounting Estimates
There were no material changes to our critical accounting estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended August 31, 2021, other than the following.
Business Acquisitions
We recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. Within one year from the date of acquisition, we may update the value allocated to the assets acquired and liabilities assumed, and the resulting goodwill balance, based on information received regarding the valuation of such assets and liabilities that was not available at the time of purchase. Measuring assets and liabilities at fair value requires us to determine the price that would be paid by a third-party market participant based on the highest and best use of the assets or interests acquired. See Note 3 - Business Acquisition in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for disclosure of our acquisition of the assets of the Columbus Recycling business on October 1, 2021. As of the date of this report, measurement of actual acquired net working capital, as well as the fair values of certain other acquired assets and assumed liabilities, is still preliminary and subject to change based on the completion of valuation procedures.
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.
33
SCHNITZER STEEL INDUSTRIES, INC.
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):
|
|
|
February 28, 2022 |
|
|
August 31, 2021 |
|
||
|
Short-term borrowings |
|
$ |
7,451 |
|
|
$ |
3,654 |
|
|
Long-term debt, net of current maturities |
|
|
254,126 |
|
|
|
71,299 |
|
|
Total debt |
|
|
261,577 |
|
|
|
74,953 |
|
|
Less cash and cash equivalents |
|
|
17,823 |
|
|
|
27,818 |
|
|
Total debt, net of cash |
|
$ |
243,754 |
|
|
$ |
47,135 |
|
Net borrowings (repayments) of debt
Net borrowings (repayments) of debt is the sum of borrowings from long-term debt and repayments of long-term debt. We present this amount as the net change in our borrowings (repayments) for the period because we believe it is useful for investors as a meaningful presentation of the change in debt.
The following is a reconciliation of net borrowings (repayments) of debt (in thousands):
|
|
|
Six Months Ended February 28, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Borrowings from long-term debt |
|
$ |
405,094 |
|
|
$ |
265,645 |
|
|
Repayments of long-term debt |
|
|
(225,395 |
) |
|
|
(199,229 |
) |
|
Net borrowings (repayments) of debt |
|
$ |
179,699 |
|
|
$ |
66,416 |
|
34
SCHNITZER STEEL INDUSTRIES, INC.
Adjusted EBITDA, adjusted income from continuing operations attributable to SSI shareholders, and adjusted diluted earnings per share from continuing operations attributable to SSI shareholders
Management believes that providing these non-GAAP financial measures adds a meaningful presentation of our results from business operations excluding adjustments for business development costs not related to ongoing operations including pre-acquisition expenses, legacy environmental matters (net of recoveries), restructuring charges and other exit-related activities, and the income tax benefit allocated to these adjustments, items which are not related to underlying business operational performance, and improves the period-to-period comparability of our results from business operations.
Following are reconciliations of net income to adjusted EBITDA (in thousands):
|
|
|
Three Months Ended February 28, |
|
|
Six Months Ended February 28, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Reconciliation of adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
38,165 |
|
|
$ |
45,679 |
|
|
$ |
85,441 |
|
|
$ |
60,743 |
|
|
(Income) loss from discontinued operations, net of tax |
|
|
(29 |
) |
|
|
(30 |
) |
|
|
— |
|
|
|
12 |
|
|
Interest expense |
|
|
1,901 |
|
|
|
1,224 |
|
|
|
3,273 |
|
|
|
3,004 |
|
|
Income tax expense |
|
|
12,073 |
|
|
|
11,469 |
|
|
|
23,170 |
|
|
|
17,188 |
|
|
Depreciation and amortization |
|
|
18,596 |
|
|
|
14,469 |
|
|
|
35,816 |
|
|
|
29,295 |
|
|
Charges (recoveries) for legacy environmental matters, net(1) |
|
|
4,004 |
|
|
|
(2,214 |
) |
|
|
4,460 |
|
|
|
546 |
|
|
Business development costs |
|
|
545 |
|
|
|
— |
|
|
|
1,159 |
|
|
|
— |
|
|
Restructuring charges and other exit-related activities |
|
|
4 |
|
|
|
814 |
|
|
|
26 |
|
|
|
878 |
|
|
Adjusted EBITDA |
|
$ |
75,259 |
|
|
$ |
71,411 |
|
|
$ |
153,345 |
|
|
$ |
111,666 |
|
|
(1) |
Legal and environmental charges, net of recoveries, for legacy environmental matters including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 5 - Commitments and Contingencies, “Portland Harbor” and “Other Legacy Environmental Loss Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report. |
35
SCHNITZER STEEL INDUSTRIES, INC.
Following are reconciliations of adjusted income from continuing operations attributable to SSI shareholders and adjusted diluted earnings per share from continuing operations attributable to SSI shareholders (in thousands, except per share data):
|
|
|
Three Months Ended February 28, |
|
|
Six Months Ended February 28, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Income from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
37,586 |
|
|
$ |
44,558 |
|
|
$ |
83,814 |
|
|
$ |
58,704 |
|
|
Charges (recoveries) for legacy environmental matters, net(1) |
|
|
4,004 |
|
|
|
(2,214 |
) |
|
|
4,460 |
|
|
|
546 |
|
|
Business development costs |
|
|
545 |
|
|
|
— |
|
|
|
1,159 |
|
|
|
— |
|
|
Restructuring charges and other exit-related activities |
|
|
4 |
|
|
|
814 |
|
|
|
26 |
|
|
|
878 |
|
|
Income tax (benefit) expense allocated to adjustments(2) |
|
|
(1,073 |
) |
|
|
334 |
|
|
|
(1,322 |
) |
|
|
(315 |
) |
|
Adjusted |
|
$ |
41,066 |
|
|
$ |
43,492 |
|
|
$ |
88,137 |
|
|
$ |
59,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
1.27 |
|
|
$ |
1.54 |
|
|
$ |
2.81 |
|
|
$ |
2.05 |
|
|
Charges (recoveries) for legacy environmental matters, net, per share(1) |
|
|
0.13 |
|
|
|
(0.08 |
) |
|
|
0.15 |
|
|
|
0.02 |
|
|
Business development costs, per share |
|
|
0.02 |
|
|
|
— |
|
|
|
0.04 |
|
|
|
— |
|
|
Restructuring charges and other exit-related activities, per share |
|
|
— |
|
|
|
0.03 |
|
|
|
— |
|
|
|
0.03 |
|
|
Income tax (benefit) expense allocated to adjustments, per share(2) |
|
|
(0.04 |
) |
|
|
0.01 |
|
|
|
(0.04 |
) |
|
|
(0.01 |
) |
|
Adjusted(3) |
|
$ |
1.38 |
|
|
$ |
1.51 |
|
|
$ |
2.96 |
|
|
$ |
2.09 |
|
|
(1) |
Legal and environmental charges, net of recoveries, for legacy environmental matters including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 5 - Commitments and Contingencies, “Portland Harbor” and “Other Legacy Environmental Loss Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report. |
|
(2) |
Income tax allocated to the aggregate adjustments reconciling reported and adjusted income from continuing operations attributable to SSI shareholders and diluted earnings per share from continuing operations attributable to SSI shareholders is determined based on a tax provision calculated with and without the adjustments. |
|
(3) |
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 as well as other factors including political and military events. We respond to increases and decreases in forward selling prices by adjusting purchase prices. We actively manage our exposure to commodity price risk and monitor the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. Sales contracts are based on prices negotiated with our customers, and generally orders are placed 30 to 60 days ahead of the shipment date. However, financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter based upon contracted sales orders and estimated future selling prices. 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 February 28, 2022.
Interest Rate Risk
There have been no material changes to our disclosure regarding interest rate risk set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended August 31, 2021.
Credit Risk
Credit risk relates to the risk of loss that might occur as a result of non-performance by counterparties of their contractual obligations to take delivery of scrap metal and finished steel products and to make financial settlements of these obligations, or to provide sufficient quantities of scrap metal or payment to settle advances, loans and other contractual receivables in connection with demolition and scrap extraction projects. We manage our exposure to credit risk through a variety of methods, including shipping ferrous scrap metal exports under letters of credit, collection of deposits prior to shipment for certain nonferrous export customers, establishment of credit limits for certain sales on open terms, credit insurance and designation of collateral and financial guarantees securing advances, loans, and other contractual receivables. As a result of COVID-19, we have experienced reductions in the availability of credit insurance that we have historically used to cover a portion of our recycled metal and finished steel sales to domestic customers, which reduced availability may increase our exposure to customer credit risk. In addition, in higher or rising commodity price environments, we have experienced proportionately lower credit insurance coverage of applicable customer credit limits, which may increase our exposure to customer credit risk.
Historically, we have shipped almost all of our large shipments of ferrous scrap metal to foreign customers under contracts supported by letters of credit issued or confirmed by banks deemed creditworthy. The letters of credit ensure payment by the customer. As we generally sell export recycled ferrous metal under contracts or orders that generally provide for shipment within 30 to 60 days after the price is agreed, our customers typically do not have difficulty obtaining letters of credit from their banks in periods of rising ferrous prices, as the value of the letters of credit are collateralized by the value of the inventory on the ship. However, in periods of significantly declining prices, our customers may not be able to obtain letters of credit for the full sales value of the inventory to be shipped.
As of February 28, 2022 and August 31, 2021, 40% and 30%, respectively, of our accounts receivable balance was covered by letters of credit. Of the remaining balance, 99% and 97% was less than 60 days past due as of February 28, 2022 and August 31, 2021, respectively.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate risk, mainly associated with sales transactions and related accounts receivable denominated in the U.S. Dollar by our Canadian subsidiary with a functional currency of the Canadian Dollar. In certain instances, we may use derivatives to manage some portion of this risk. As of February 28, 2022 and August 31, 2021, 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. Consistent with guidance issued by the Securities and Exchange Commission that an assessment of internal controls over financial reporting of a recently acquired business may be omitted from management's evaluation of disclosure controls and procedures, management is excluding an assessment of the internal controls of the acquired Columbus Recycling business, which we acquired on October 1, 2021, from its evaluation of the effectiveness of our disclosure controls and procedures. The Columbus Recycling business represented approximately 8% of our consolidated total assets and 4% of our consolidated total revenues as of and for the six months ended February 28, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of February 28, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended February 28, 2022, 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, 2021; and in Part II, “Item 1. Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2021. Also see Note 5 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, incorporated by reference herein.
ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors reported or new risk factors identified since the filing of our Annual Report on Form 10-K for the year ended August 31, 2021, except for the changes disclosed in the subsequent Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2021, and the following.
Economic and geopolitical instability including as a result of military conflict could have a material adverse effect on our operating results, financial condition, and cash flows
In late February 2022, Russian military forces launched significant military action against Ukraine, which has continued through the date of this report. We do not have operations in Russia or Ukraine. Nevertheless, the outbreak of war between Russia and Ukraine and the resulting sanctions by U.S. and European governments, together with any additional future sanctions by them, could have a larger impact that expands into other geographies where we do business, including our supply chain, business partners, and customers in those markets, which could result in lost sales, supply shortages, commodity price fluctuations, increased manufacturing costs, transportation logistics challenges, customer credit and liquidity issues, and lost efficiencies. In addition, the U.S. has commenced certain trade actions as a result of the Russia-Ukraine conflict, which are expected to result in retaliatory measures or actions, including tariffs, by Russia. While significant uncertainty exists with respect to this matter, the Russia-Ukraine conflict and its broader impacts, including any increased trade barriers or restrictions on global trade imposed by the U.S. or further retaliatory trade measures taken by Russia or other countries in response, could have a material adverse effect on our operating results, financial condition, and cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Pursuant to a share repurchase program, as amended in 2001, 2006 and 2008, our Board of Directors has authorized the repurchase of 9 million shares of our Class A common stock when management deems such repurchases to be appropriate. We repurchased 200 thousand shares of our Class A common stock under the program in open-market transactions during the second quarter of fiscal 2022. As of February 28, 2022, we had existing authorization remaining under the program to repurchase up to approximately 506 thousand shares.
The table below presents a summary of our share repurchases during the quarter ended February 28, 2022:
|
|
|
Total Number of Shares Purchased |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Maximum Number of Shares that may yet be Purchased under the Plans or Programs |
|
||||
|
December 1 - December 31, 2021 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
705,998 |
|
|
January 1 - January 30, 2022 |
|
|
200,000 |
|
|
$ |
39.33 |
|
|
|
200,000 |
|
|
|
505,998 |
|
|
February 1 - February 28, 2022 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
505,998 |
|
|
Total second quarter 2022 |
|
|
200,000 |
|
|
|
|
|
|
|
200,000 |
|
|
|
|
|
The share repurchase program does not require us to acquire any specific number of shares. The program does not have a stated expiration date, and we may suspend, extend, or terminate the program at any time without prior notice. The program may be executed through open-market purchases, privately negotiated transactions, or utilizing Rule 10b5-1 programs.
ITEM 5. OTHER INFORMATION
None.
39
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 6.EXHIBITS
|
Exhibit Number |
|
Exhibit Description |
|
|
|
|
|
*10.1 |
|
|
|
|
|
|
|
*10.2 |
|
|
|
|
|
|
|
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. |
40
SCHNITZER STEEL INDUSTRIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
SCHNITZER STEEL INDUSTRIES, INC. |
||
|
|
|
|
|
(Registrant) |
||
|
|
|
|
|
|
|
|
|
Date: |
|
April 6, 2022 |
|
By: |
|
/s/ Tamara L. Lundgren |
|
|
|
|
|
|
|
Tamara L. Lundgren |
|
|
|
|
|
|
|
Chairman, President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
Date: |
|
April 6, 2022 |
|
By: |
|
/s/ Richard D. Peach |
|
|
|
|
|
|
|
Richard D. Peach |
|
|
|
|
|
|
|
Executive Vice President, Chief Financial Officer and Chief Strategy Officer |
41
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