Form 10-Q SCHNITZER STEEL INDUSTRI For: May 31

Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

 

For the Quarterly Period Ended May 31, 2022

or

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

 

For the Transition Period from __________ to __________

Commission File Number 000-22496

 

 

SCHNITZER STEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Oregon		93-0341923
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
299 SW Clay Street, Suite 350, Portland, Oregon		97201
(Address of principal executive offices)		(Zip Code)

(503) 224-9900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Class A Common Stock, $1.00 par value		SCHN		The Nasdaq Stock Market LLC

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐

 

Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had 27,247,009 shares of Class A common stock, par value of $1.00 per share, and 200,000 shares of Class B common stock, par value of $1.00 per share, outstanding as of June 27, 2022.

 

 

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SCHNITZER STEEL INDUSTRIES, INC.

FORM 10-Q

TABLE OF CONTENTS

 

	PAGE
FORWARD-LOOKING STATEMENTS	3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	4
Unaudited Condensed Consolidated Balance Sheets as of May 31, 2022 and August 31, 2021	4
Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended May 31, 2022 and 2021	5
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended May 31, 2022 and 2021	6
Unaudited Condensed Consolidated Statements of Equity for the Three and Nine Months Ended May 31, 2022 and 2021	7
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 2022 and 2021	9
Notes to the Unaudited Condensed Consolidated Financial Statements	11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures about Market Risk	38
Item 4. Controls and Procedures	39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	40
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 5. Other Information	42
Item 6. Exhibits	43
SIGNATURES	44

 

 

 

 

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FORWARD-LOOKING STATEMENTS

Statements and information included in this Quarterly Report on Form 10-Q by Schnitzer Steel Industries, Inc. that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Except as noted herein or as the context may otherwise require, all references to “we,” “our,” “us,” “the Company,” and “SSI” refer to Schnitzer Steel Industries, Inc. and its consolidated subsidiaries.

Forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding future events or our expectations, intentions, beliefs, and strategies regarding the future, which may include statements regarding the impact of pandemics, epidemics, or other public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic; the impact of equipment upgrades, equipment failures, and facility damage on production, including timing of repairs and resumption of operations; the realization of insurance recoveries; the Company’s outlook, growth initiatives, or expected results or objectives, including pricing, margins, sales volumes, and profitability; completion of acquisitions and integration of acquired businesses; the impacts of supply chain disruptions and inflation; liquidity positions; our ability to generate cash from continuing operations; trends, cyclicality, and changes in the markets we sell into; strategic direction or goals; targets; changes to manufacturing and production processes; the realization of deferred tax assets; planned capital expenditures; the cost of and the status of any agreements or actions related to our compliance with environmental and other laws; expected tax rates, deductions, and credits; the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; the potential impact of adopting new accounting pronouncements; the impact of labor shortages or increased labor costs; obligations under our retirement plans; benefits, savings, or additional costs from business realignment, cost containment, and productivity improvement programs; and the adequacy of accruals.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “outlook,” “target,” “aim,” “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “will,” “should,” “could,” “opinions,” “forecasts,” “projects,” “plans,” “future,” “forward,” “potential,” “probable,” and similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.

We may make other forward-looking statements from time to time, including in reports filed with the Securities and Exchange Commission, press releases, presentations, and on public conference calls. All forward-looking statements we make are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements, except as may be required by law. Our business is subject to the effects of changes in domestic and global economic conditions and a number of other risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in “Item 1A. Risk Factors” of Part I of our most recent Annual Report on Form 10-K, as supplemented by our subsequently filed Quarterly Reports on Form 10-Q. Examples of these risks include: the impact of pandemics, epidemics, or other public health emergencies, such as the COVID-19 pandemic; the impact of equipment upgrades, equipment failures, and facility damage on production; potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the cyclicality and impact of general economic conditions; changing conditions in global markets including the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; economic and geopolitical instability including as a result of military conflict; volatile supply and demand conditions affecting prices and volumes in the markets for raw materials and other inputs we purchase; significant decreases in recycled metal prices; imbalances in supply and demand conditions in the global steel industry; difficulties associated with acquisitions and integration of acquired businesses; supply chain disruptions; reliance on third-party shipping companies, including with respect to freight rates and the availability of transportation; inability to obtain or renew business licenses and permits; the impact of goodwill impairment charges; the impact of long-lived asset and equity investment impairment charges; failure to realize or delays in realizing expected benefits from investments in processing and manufacturing technology improvements; inability to achieve or sustain the benefits from productivity, cost savings, and restructuring initiatives; inability to renew facility leases; customer fulfillment of their contractual obligations; increases in the relative value of the U.S. dollar; the impact of inflation and foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under the agreement governing our bank credit facilities; the impact of consolidation in the steel industry; product liability claims; the impact of legal proceedings and legal compliance; the adverse impact of climate change; the impact of not realizing deferred tax assets; the impact of tax increases and changes in tax rules; the impact of one or more cybersecurity incidents; environmental compliance costs and potential environmental liabilities; increased environmental regulations and enforcement; compliance with climate change and greenhouse gas emission laws and regulations; the impact of labor shortages or increased labor costs; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

		May 31, 2022				August 31, 2021
Assets
Current assets:
Cash and cash equivalents		$	16,125			$	27,818
Accounts receivable, net of allowance for credit losses of $1,556    and $1,566			283,819				214,098
Inventories			439,704				256,427
Refundable income taxes			1,285				837
Prepaid expenses and other current assets			46,992				43,934
Total current assets			787,925				543,114
Property, plant and equipment, net of accumulated depreciation of $847,366 and $837,293			629,104				562,674
Operating lease right-of-use assets			127,311				131,221
Investments in joint ventures			13,461				12,844
Goodwill			254,511				170,304
Intangibles, net of accumulated amortization of $6,219 and $3,846			26,199				3,980
Deferred income taxes			24,988				27,561
Other assets			48,942				42,665
Total assets		$	1,912,441			$	1,494,363
Liabilities and Equity
Current liabilities:
Short-term borrowings		$	5,764			$	3,654
Accounts payable			223,816				179,917
Accrued payroll and related liabilities			56,681				69,622
Environmental liabilities			11,600				24,743
Operating lease liabilities			21,964				21,417
Accrued income taxes			10,140				3,521
Other accrued liabilities			50,898				49,976
Total current liabilities			380,863				352,850
Deferred income taxes			62,133				40,593
Long-term debt, net of current maturities			316,108				71,299
Environmental liabilities, net of current portion			54,950				52,385
Operating lease liabilities, net of current maturities			106,745				113,165
Other long-term liabilities			23,772				24,292
Total liabilities			944,571				654,584
Commitments and contingencies (Note 5)
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:
Preferred stock – 20,000 shares $1.00 par value authorized, none issued			—				—
Class A common stock – 75,000 shares $1.00 par value authorized,    27,247 and 27,332 shares issued and outstanding			27,247				27,332
Class B common stock – 25,000 shares $1.00 par value authorized,    200 and 200 shares issued and outstanding			200				200
Additional paid-in capital			34,426				49,074
Retained earnings			936,060				793,712
Accumulated other comprehensive loss			(34,245	)			(34,554	)
Total SSI shareholders’ equity			963,688				835,764
Noncontrolling interests			4,182				4,015
Total equity			967,870				839,779
Total liabilities and equity		$	1,912,441			$	1,494,363

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

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

		Three Months Ended May 31,								Nine Months Ended May 31,
		2022				2021				2022				2021
Revenues		$	1,010,087			$	820,718			$	2,591,403			$	1,912,936
Operating expense:
Cost of goods sold			834,375				678,297				2,188,158				1,585,416
Selling, general and administrative			77,672				61,887				194,020				165,935
(Income) from joint ventures			(762	)			(950	)			(1,589	)			(2,131	)
Asset impairment charges			932				—				932				—
Restructuring charges and other exit-related activities			26				104				52				982
Operating income			97,844				81,380				209,830				162,734
Interest expense			(2,223	)			(1,383	)			(5,496	)			(4,387	)
Other loss, net			(34	)			(114	)			(136	)			(521	)
Income from continuing operations before income taxes			95,587				79,883				204,198				157,826
Income tax expense			(20,037	)			(14,401	)			(43,207	)			(31,589	)
Income from continuing operations			75,550				65,482				160,991				126,237
Loss from discontinued operations, net of tax			(46	)			(46	)			(46	)			(58	)
Net income			75,504				65,436				160,945				126,179
Net income attributable to noncontrolling interests			(870	)			(1,801	)			(2,497	)			(3,852	)
Net income attributable to SSI shareholders		$	74,634			$	63,635			$	158,448			$	122,327
Net income per share attributable to SSI shareholders:
Basic:
Income per share from continuing operations		$	2.65			$	2.27			$	5.63			$	4.38
Net income per share		$	2.65			$	2.27			$	5.63			$	4.38
Diluted:
Income per share from continuing operations		$	2.52			$	2.16			$	5.33			$	4.23
Net income per share		$	2.52			$	2.15			$	5.33			$	4.22
Weighted average number of common shares:
Basic			28,143				28,047				28,161				27,948
Diluted			29,625				29,543				29,741				28,963

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

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

		Three Months Ended May 31,								Nine Months Ended May 31,
		2022				2021				2022				2021
Net income		$	75,504			$	65,436			$	160,945			$	126,179
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			153				4,514				(240	)			6,325
Pension obligations, net			40				37				549				(185	)
Total other comprehensive income, net of tax			193				4,551				309				6,140
Comprehensive income			75,697				69,987				161,254				132,319
Less comprehensive income attributable to noncontrolling interests			(870	)			(1,801	)			(2,497	)			(3,852	)
Comprehensive income attributable to SSI shareholders		$	74,827			$	68,186			$	158,757			$	128,467

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

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

		Common Stock																								Accumulated
		Class A								Class B								Additional								Other				Total SSI
Three Months Ended May 31, 2021		Shares				Amount				Shares				Amount				Paid-in Capital				Retained Earnings				Comprehensive Loss				Shareholders’ Equity				Noncontrolling Interests				Total Equity
Balance as of March 1, 2021			27,263			$	27,263				200			$	200			$	39,695			$	697,966			$	(35,282	)		$	729,842			$	4,197			$	734,039
Net income			—				—				—				—				—				63,635				—				63,635				1,801				65,436
Other comprehensive income, net of tax			—				—				—				—				—				—				4,551				4,551				—				4,551
Distributions to noncontrolling interests			—				—				—				—				—				—				—				—				(1,446	)			(1,446	)
Issuance of restricted stock			91				91				—				—				(91	)			—				—				—				—				—
Restricted stock withheld for taxes			(31	)			(31	)			—				—				(1,433	)			—				—				(1,464	)			—				(1,464	)
Share-based compensation cost			—				—				—				—				6,806				—				—				6,806				—				6,806
Dividends ($0.1875 per common share)			—				—				—				—				—				(5,339	)			—				(5,339	)			—				(5,339	)
Balance as of May 31, 2021			27,323			$	27,323				200			$	200			$	44,977			$	756,262			$	(30,731	)		$	798,031			$	4,552			$	802,583

 

		Common Stock																								Accumulated
		Class A								Class B								Additional								Other				Total SSI
Three Months Ended May 31, 2022		Shares				Amount				Shares				Amount				Paid-in Capital				Retained Earnings				Comprehensive Loss				Shareholders' Equity				Noncontrolling Interests				Total Equity
Balance as of March 1, 2022			27,433			$	27,433				200			$	200			$	40,821			$	866,776			$	(34,438	)		$	900,792			$	3,857			$	904,649
Net income			—				—				—				—				—				74,634				—				74,634				870				75,504
Other comprehensive income, net of tax			—				—				—				—				—				—				193				193				—				193
Distributions to noncontrolling interests			—				—				—				—				—				—				—				—				(545	)			(545	)
Share repurchases			(244	)			(244	)			—				—				(9,749	)			—				—				(9,993	)			—				(9,993	)
Issuance of restricted stock			89				89				—				—				(89	)			—				—				—				—				—
Restricted stock withheld for taxes			(31	)			(31	)			—				—				(1,395	)			—				—				(1,426	)			—				(1,426	)
Share-based compensation cost			—				—				—				—				4,838				—				—				4,838				—				4,838
Dividends ($0.1875 per common share)			—				—				—				—				—				(5,350	)			—				(5,350	)			—				(5,350	)
Balance as of May 31, 2022			27,247			$	27,247				200			$	200			$	34,426			$	936,060			$	(34,245	)		$	963,688			$	4,182			$	967,870

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

 

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

		Common Stock																								Accumulated
		Class A								Class B								Additional								Other				Total SSI
Nine Months Ended May 31, 2021		Shares				Amount				Shares				Amount				Paid-in Capital				Retained Earnings				Comprehensive Loss				Shareholders' Equity				Noncontrolling Interests				Total Equity
Balance as of September 1, 2020			26,899			$	26,899				200			$	200				36,616			$	649,863			$	(36,871	)		$	676,707			$	3,729			$	680,436
Net income			—				—				—				—				—				122,327				—				122,327				3,852				126,179
Other comprehensive income, net of tax			—				—				—				—				—				—				6,140				6,140				—				6,140
Distributions to noncontrolling interests			—				—				—				—				—				—				—				—				(3,029	)			(3,029	)
Share repurchases			—				—				—				—				—				—				—				—				—				—
Issuance of restricted stock			644				644				—				—				(644	)			—				—				—				—				—
Restricted stock withheld for taxes			(220	)			(220	)			—				—				(5,215	)			—				—				(5,435	)			—				(5,435	)
Share-based compensation cost			—				—				—				—				14,220				—				—				14,220				—				14,220
Dividends ($0.5625 per common share)			—				—				—				—				—				(15,928	)			—				(15,928	)			—				(15,928	)
Balance as of May 31, 2021			27,323			$	27,323			200				$	200			$	44,977			$	756,262			$	(30,731	)		$	798,031			$	4,552			$	802,583

 

		Common Stock																								Accumulated
		Class A								Class B								Additional								Other				Total SSI
Nine Months Ended May 31, 2022		Shares				Amount				Shares				Amount				Paid-in Capital				Retained Earnings				Comprehensive Loss				Shareholders' Equity				Noncontrolling Interests				Total Equity
Balance as of September 1, 2021			27,332			$	27,332				200			$	200			$	49,074			$	793,712			$	(34,554	)		$	835,764			$	4,015			$	839,779
Net income			—				—				—				—				—				158,448				—				158,448				2,497				160,945
Other comprehensive income, net of tax			—				—				—				—				—				—				309				309				—				309
Distributions to noncontrolling interests			—				—				—				—				—				—				—				—				(2,330	)			(2,330	)
Share repurchases			(444	)			(444	)			—				—				(17,414	)			—				—				(17,858	)			—				(17,858	)
Issuance of restricted stock			568				568				—				—				(568	)			—				—				—				—				—
Restricted stock withheld for taxes			(209	)			(209	)			—				—				(10,794	)			—				—				(11,003	)			—				(11,003	)
Share-based compensation cost			—				—				—				—				14,128				—				—				14,128				—				14,128
Dividends ($0.5625 per common share)			—				—				—				—				—				(16,100	)			—				(16,100	)			—				(16,100	)
Balance as of May 31, 2022			27,247			$	27,247				200			$	200			$	34,426			$	936,060			$	(34,245	)		$	963,688			$	4,182			$	967,870

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

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

		Nine Months Ended May 31,
		2022				2021
Cash flows from operating activities:
Net income		$	160,945			$	126,179
Adjustments to reconcile net income to cash provided by operating activities:
Asset impairment charges			932				—
Depreciation and amortization			54,566				43,621
Inventory write-downs			3,199				—
Deferred income taxes			23,851				11,393
Undistributed equity in earnings of joint ventures			(1,589	)			(2,131	)
Share-based compensation expense			14,046				13,987
Loss (gain) on disposal of assets, net			1,192				(48	)
Unrealized foreign exchange loss, net			193				137
Credit loss, net			17				21
Changes in assets and liabilities, net of acquisitions:
Accounts receivable			(43,340	)			(133,164	)
Inventories			(164,196	)			(92,114	)
Income taxes			8,843				18,932
Prepaid expenses and other current assets			(14,771	)			(9,671	)
Other long-term assets			(1,068	)			(4,524	)
Operating lease assets and liabilities			(2,049	)			(696	)
Accounts payable			44,874				56,394
Accrued payroll and related liabilities			(16,890	)			14,269
Other accrued liabilities			1,747				1,208
Environmental liabilities			(14,744	)			2,055
Other long-term liabilities			650				3,496
Distributed equity in earnings of joint ventures			1,600				1,250
Net cash provided by operating activities			58,008				50,594
Cash flows from investing activities:
Capital expenditures			(97,972	)			(76,730	)
Acquisitions, net of acquired cash			(177,070	)			—
Proceeds from insurance and sale of assets			18,244				462
Purchase of equity investment			(5,000	)			—
Deposit on land option			(80	)			630
Net cash used in investing activities			(261,878	)			(75,638	)
Cash flows from financing activities:
Borrowings from long-term debt			895,175				445,829
Repayment of long-term debt			(655,440	)			(396,810	)
Payment of debt issuance costs			—				(23	)
Repurchase of Class A common stock			(17,858	)			—
Taxes paid related to net share settlement of share-based payment awards			(11,003	)			(5,435	)
Distributions to noncontrolling interests			(2,330	)			(3,029	)
Dividends paid			(16,172	)			(16,067	)
Net cash provided by financing activities			192,372				24,465
Effect of exchange rate changes on cash			(195	)			619
Net (decrease) increase in cash and cash equivalents			(11,693	)			40
Cash and cash equivalents as of beginning of period			27,818				17,887
Cash and cash equivalents as of end of period		$	16,125			$	17,927

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

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

		Nine Months Ended May 31,
		2022				2021
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest		$	3,249			$	2,454
Income taxes paid, net		$	10,502			$	1,267
Schedule of noncash investing and financing transactions:
Purchases of property, plant and equipment included in liabilities		$	19,868			$	10,572

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

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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SCHNITZER STEEL INDUSTRIES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

General

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

We sell recycled ferrous and nonferrous metal in both foreign and domestic markets. We also sell a range of finished steel long products produced at our steel mill. We acquire, process, and recycle end-of-life (salvaged) vehicles, rail cars, home appliances, industrial machinery, manufacturing scrap, and construction and demolition scrap through our facilities. Our retail self-service auto parts stores located across the United States (“U.S.”) and Western Canada, which operate under the commercial brand-name Pick-n-Pull, procure the significant majority of our salvaged vehicles and sell serviceable used auto parts from these vehicles. Upon acquiring a salvaged vehicle, we remove catalytic converters, aluminum wheels, and batteries for separate processing and sale prior to placing the vehicle in our retail lot. After retail customers have removed desired parts from a vehicle, we may remove remaining major component parts containing ferrous and nonferrous metals, which are primarily sold to wholesalers. The remaining auto bodies are crushed and shipped to our metals recycling facilities to be shredded or sold to third parties when geographically more economical. At our metals recycling facilities, we process mixed and large pieces of scrap metal into smaller pieces by crushing, torching, shearing, shredding, separating, and sorting, resulting in recycled ferrous, nonferrous, and mixed metal pieces of a size, density, and metal content required by customers to meet their production needs. Each of our shredding, nonferrous processing, and separation systems is designed to optimize the recovery of valuable recycled metal. We also purchase nonferrous metal directly from industrial vendors and other suppliers and aggregate and prepare this metal for shipment to customers by ship, rail, or truck. In addition to the sale of recycled metal processed at our facilities, we also provide a variety of recycling and related services including brokering the sale of ferrous and nonferrous scrap metal generated by industrial entities and demolition projects to customers in the domestic market, among other services. Our steel mill produces semi-finished goods (billets) and finished goods, consisting of rebar, coiled rebar, wire rod, merchant bar, and other specialty products, using recycled ferrous metal sourced internally from our recycling and joint venture operations and other raw materials.

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

Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. Our results of operations also depend substantially on our operating leverage from processing and selling higher volumes of recycled metal as well as our ability to efficiently extract ferrous and nonferrous metals from the shredding process. We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating results. We believe we generally benefit from sustained periods of stable or rising recycled metal selling prices, which allow us to better maintain or increase both operating results and unprocessed scrap metal flow into our facilities. When recycled metal selling prices decline, either sharply or for a sustained period, our operating margins typically compress. With respect to finished steel products produced at our steel mill, our results of operations are impacted by demand and prices for these products, which are sold to customers located primarily in the Western U.S. and Western Canada.

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

Coronavirus Disease 2019 (“COVID-19”)

We continue to monitor the impact of COVID-19 on all aspects of our business. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Ensuring the health and safety of our employees, and all who visit our sites, is our top priority, and we are following all U.S. Centers for Disease Control and Prevention and state and local health department guidelines. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our fiscal 2020 results, global economic conditions improved during fiscal 2021, resulting in increased demand for our products. Beginning in our second quarter of fiscal 2021 and continuing through the third quarter of fiscal 2022, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on individual, business, and government activities. The existence of new or enduring variant strains of COVID-19 may lead to a rise in infections, which could cause delays in the easing of restrictions previously in place and the implementation of new restrictions and mandates, and there are ongoing global impacts resulting directly or indirectly from the pandemic including labor shortages, logistical challenges such as increased port congestion, and increases in costs for certain goods and services, which have negatively impacted our sales volumes and operating results to varying degrees. While the ongoing effects of the COVID-19 pandemic could negatively impact our results of operations, cash flows, and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time.

Steel Mill Fire

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

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Everett Facility Shredder Fire

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

Use of Non-GAAP Financial Measures

In this management’s discussion and analysis, we use supplemental measures of our performance, liquidity, and capital structure which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We believe that providing these non-GAAP financial measures adds a meaningful presentation of our operating and financial performance, liquidity, and capital structure. For example, we use adjusted EBITDA as one of the measures to compare and evaluate financial performance. Adjusted EBITDA is the sum of our net income before results from discontinued operations, interest expense, income taxes, depreciation and amortization, asset impairment charges, business development costs not related to ongoing operations including pre-acquisition expenses, charges related to non-ordinary course legal settlements, charges for legacy environmental matters (net of recoveries), restructuring charges and other exit-related activities, and other items which are not related to underlying business operational performance. See the reconciliations of supplemental financial measures, including adjusted EBITDA, in Non-GAAP Financial Measures at the end of this Item 2.

Our non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable GAAP measures. Although we find these non-GAAP financial measures useful in evaluating the performance of our business, our reliance on these measures is limited because they often materially differ from our consolidated financial statements presented in accordance with GAAP. Therefore, we typically use these adjusted amounts in conjunction with our GAAP results to address these limitations. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

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SCHNITZER STEEL INDUSTRIES, INC.

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

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

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

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

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

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Results of Operations

Selected Financial Measures and Operating Statistics

		Three Months Ended May 31,												Nine Months Ended May 31,
($ in thousands, except for prices and per share amounts)		2022				2021				%				2022				2021				%
Ferrous revenues		$	530,303			$	448,684				18	%		$	1,434,473			$	1,023,569				40	%
Nonferrous revenues			272,208				204,512				33	%			662,779				471,543				41	%
Steel revenues(1)			165,210				129,057				28	%			384,644				316,662				21	%
Retail and other revenues			42,366				38,465				10	%			109,507				101,162				8	%
Total revenues			1,010,087				820,718				23	%			2,591,403				1,912,936				35	%
Cost of goods sold			834,375				678,297				23	%			2,188,158				1,585,416				38	%
Gross margin (total revenues less cost of goods sold)		$	175,712			$	142,421				23	%		$	403,245			$	327,520				23	%
Gross margin (%)			17.4	%			17.4	%			(—	)%			15.6	%			17.1	%			(9	)%
Selling, general and administrative expense		$	77,672			$	61,887				26	%		$	194,020			$	165,935				17	%
Diluted earnings per share from continuing operations attributable to SSI shareholders:
Reported		$	2.52			$	2.16				17	%		$	5.33			$	4.23				26	%
Adjusted(2)		$	2.59			$	2.20				18	%		$	5.54			$	4.31				29	%
Net income		$	75,504			$	65,436				15	%		$	160,945			$	126,179				28	%
Adjusted EBITDA(2)		$	119,090			$	97,254				22	%		$	272,435			$	208,920				30	%
Average ferrous recycled metal sales prices ($/LT)(3):
Domestic		$	516			$	395				31	%		$	458			$	332				38	%
Foreign		$	552			$	401				38	%		$	484			$	360				34	%
Average		$	541			$	400				35	%		$	477			$	354				35	%
Ferrous volumes (LT, in thousands):
Domestic(4)			490				412				19	%			1,329				1,191				12	%
Foreign			639				803				(20	)%			2,020				2,054				(2	)%
Total ferrous volumes (LT, in thousands)(4)(8)			1,129				1,215				(7	)%			3,349				3,245				3	%
Average nonferrous sales price ($/pound)(3)(5)		$	1.12			$	0.97				15	%		$	1.10			$	0.82				34	%
Nonferrous volumes (pounds, in thousands)(4)(5)			201,413				155,657				29	%			501,785				429,792				17	%
Finished steel average sales price ($/ST)(3)		$	1,129			$	802				41	%		$	1,059			$	709				49	%
Finished steel sales volumes (ST, in thousands)		135					153				(12	)%			340				423				(20	)%
Cars purchased (in thousands)(6)		84					91				(8	)%			237				249				(5	)%
Number of auto parts stores at period end		50					50				(—	)%			50				50				(—	)%
Rolling mill utilization(7)			96	%			98	%			(2	)%			87	%			94	%			(7	)%

 

NM = Not Meaningful

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

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Revenues

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

Operating Performance

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

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

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

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

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

Income Tax

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

Liquidity and Capital Resources

We rely on cash provided by operating activities as a primary source of liquidity, supplemented by current cash on hand and borrowings under our existing credit facilities.

Sources and Uses of Cash

We had cash balances of $16 million and $28 million as of May 31, 2022 and August 31, 2021, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of May 31, 2022, debt was $322 million compared to $75 million as of August 31, 2021, and debt, net of cash, was $306 million as of May 31, 2022, compared to $47 million as of August 31, 2021, which increases were primarily due to increased borrowings from our credit facilities to fund the acquisitions of the assets of the Columbus Recycling business on October 1, 2021 and the Encore Recycling business on April 29, 2022, and higher net working capital needs. See the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2.

Operating Activities

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

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

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

Investing Activities

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

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

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

Financing Activities

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

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

Debt

Our senior secured revolving credit facilities, which provide for revolving loans of $700 million and C$15 million, mature in August 2023 pursuant to a credit agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the London Interbank Offered Rate (“LIBOR”) (or the Canadian equivalent for C$ loans), plus a spread of between 1.25% and 3.50%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA (as defined by the credit agreement), or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50%, or (c) the daily rate equal to one-month LIBOR plus 1.75%, in each case, plus a spread of between 0.00% and 2.50% based on a pricing grid tied to our consolidated funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.20% and 0.50% based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA. The credit facility provides that LIBOR or any LIBOR successor rate is subject to a 0.50% floor and contains mechanics by which the parties may replace the benchmark interest rate used in the agreement from LIBOR to one or more rates based on the secured overnight financing rate administered by the Federal Reserve Bank of New York or another alternative benchmark rate.

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

We use the credit facilities to fund working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. Our credit agreement contains various representations and warranties, events of default, and financial and other customary covenants which limit (subject to certain exceptions) our ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of our business, engage in transactions with affiliates, and enter into restrictive agreements, including agreements that restrict the ability of our subsidiaries to make distributions. The financial covenants under the credit agreement include (a) a consolidated fixed charge coverage ratio, defined as the four-quarter rolling sum of consolidated EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges, and (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness.

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

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Our obligations under our credit agreement are guaranteed by substantially all of our subsidiaries. The credit facilities and the related guarantees are secured by senior first priority liens on certain of our and our subsidiaries’ assets, including equipment, inventory, and accounts receivable.

While we currently expect to remain in compliance with the financial covenants under the credit agreement, we may not be able to do so in the event market conditions, COVID-19, or other negative factors have a significant adverse impact on our results of operations and financial position. If we do not maintain compliance with our financial covenants and are unable to obtain an amendment or waiver from our lenders, a breach of a financial covenant would constitute an event of default and allow the lenders to exercise remedies under the agreements, the most severe of which is the termination of the credit facility under our committed bank credit agreement and acceleration of the amounts owed under the agreement. In such case, we would be required to evaluate available alternatives and take appropriate steps to obtain alternative funds. We cannot assure that any such alternative funds, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.

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

Capital Expenditures

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

Environmental Compliance

Building on our commitment to recycling and operating our business in an environmentally responsible manner, we continue to invest in facilities that improve our environmental presence in the communities in which we operate. As part of our capital expenditures discussed in the prior paragraph, we invested approximately $13 million in capital expenditures for environmental projects in the first nine months of fiscal 2022, and we currently plan to invest in the range of $25 million to $35 million for such projects in fiscal 2022. These projects include investments in equipment to ensure ongoing compliance with air quality and other environmental regulations and storm water systems.

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

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Dividends

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

Share Repurchase Program

Pursuant to our share repurchase program as amended in 2001, 2006 and 2008, we were authorized to repurchase up to 9 million shares of our Class A common stock. As of May 31, 2022, we had repurchased approximately 8.7 million shares under the program and had authorization to repurchase up to a remaining 262 thousand shares of our Class A common stock when we deem such repurchases to be appropriate. On June 27, 2022, the Company's Board of Directors authorized the repurchase of up to an additional 3.0 million shares of our Class A common stock. We may repurchase our common stock for a variety of reasons, such as to optimize our capital structure and to offset dilution related to share-based compensation arrangements. We consider several factors in determining whether to make share repurchases including, among other things, our cash needs, the availability of funding, our future business plans and the market price of our stock. In the third quarter and first nine months of fiscal 2022, we repurchased 244 thousand and 444 thousand shares, respectively, of our Class A common stock in open-market transactions for a total of $10 million and $18 million, respectively.

Assessment of Liquidity and Capital Resources

Historically, our available cash resources, internally generated funds, credit facilities, and equity offerings have financed our acquisitions, capital expenditures, working capital, and other financing needs.

We generally believe our current cash resources, internally generated funds, existing credit facilities, and access to the capital markets will provide adequate short-term and long-term liquidity needs for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions, joint ventures, debt service requirements, environmental obligations, and other contingencies. However, in the event of a sustained market deterioration, we may need additional liquidity which would require us to evaluate available alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurances that any such supplemental funding, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.

Contractual Obligations

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

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

Critical Accounting Estimates

There were no material changes to our critical accounting estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended August 31, 2021, other than the following.

Business Acquisitions

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

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Recently Issued Accounting Standards

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

Non-GAAP Financial Measures

Debt, net of cash

Debt, net of cash is the difference between (i) the sum of long-term debt and short-term borrowings (i.e., total debt) and (ii) cash and cash equivalents. We believe that presenting debt, net of cash is useful to investors as a measure of our leverage, as cash and cash equivalents can be used, among other things, to repay indebtedness.

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

 

		May 31, 2022				August 31, 2021
Short-term borrowings		$	5,764			$	3,654
Long-term debt, net of current maturities			316,108				71,299
Total debt			321,872				74,953
Less cash and cash equivalents			16,125				27,818
Total debt, net of cash		$	305,747			$	47,135

 

Net borrowings (repayments) of debt

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

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

 

		Nine Months Ended May 31,
		2022				2021
Borrowings from long-term debt		$	895,175			$	445,829
Repayments of long-term debt			(655,440	)			(396,810	)
Net borrowings (repayments) of debt		$	239,735			$	49,019

 

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

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

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

 

		Three Months Ended May 31,								Nine Months Ended May 31,
		2022				2021				2022				2021
Reconciliation of adjusted EBITDA:
Net income		$	75,504			$	65,436			$	160,945			$	126,179
Loss from discontinued operations, net of tax			46				46				46				58
Interest expense			2,223				1,383				5,496				4,387
Income tax expense			20,037				14,401				43,207				31,589
Depreciation and amortization			18,750				14,326				54,566				43,621
Asset impairment charges			932				—				932				—
Business development costs			920				805				2,079				805
Charges related to legal settlements(1)			590				400				590				400
Charges (recoveries) for legacy environmental matters, net(2)			62				353				4,522				899
Restructuring charges and other exit-related activities			26				104				52				982
Adjusted EBITDA		$	119,090			$	97,254			$	272,435			$	208,920

 

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

 

		Three Months Ended May 31,								Nine Months Ended May 31,
		2022				2021				2022				2021
Income from continuing operations attributable to SSI shareholders:
As reported		$	74,680			$	63,681			$	158,494			$	122,385
Asset impairment charges			932				—				932				—
Business development costs			920				805				2,079				805
Charges related to legal settlements(1)			590				400				590				400
Charges (recoveries) for legacy environmental matters, net(2)			62				353				4,522				899
Restructuring charges and other exit-related activities			26				104				52				982
Income tax benefit allocated to adjustments(3)			(557	)			(340	)			(1,879	)			(655	)
Adjusted		$	76,653			$	65,003			$	164,790			$	124,816
Diluted earnings per share from continuing operations attributable to SSI shareholders:
As reported		$	2.52			$	2.16			$	5.33			$	4.23
Asset impairment charges, per share			0.03				—				0.03				—
Business development costs, per share			0.03				0.03				0.07				0.03
Charges related to legal settlements, per share(1)			0.02				0.01				0.02				0.01
Charges (recoveries) for legacy environmental matters, net, per share(2)			—				0.01				0.15				0.03
Restructuring charges and other exit-related activities, per share			—				—				—				0.03
Income tax benefit allocated to adjustments, per share(3)			(0.02	)			(0.01	)			(0.06	)			(0.02	)
Adjusted(4)		$	2.59			$	2.20			$	5.54			$	4.31

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

We are exposed to commodity price risk, mainly associated with variations in the market price for ferrous and nonferrous metals, including scrap metal, finished steel products, auto bodies and other commodities. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions as well as other factors including political and military events. We respond to increases and decreases in forward selling prices by adjusting purchase prices. We actively manage our exposure to commodity price risk and monitor the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. Sales contracts are based on prices negotiated with our customers, and generally orders are placed 30 to 60 days ahead of the shipment date. However, financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter based upon contracted sales orders and estimated future selling prices. As a result of this assessment as of May 31, 2022, we recorded inventory write-downs of $3 million in the third quarter of fiscal 2022. Based on contracted sales and estimates of future selling prices, a 10% decrease in the estimated selling price of inventory would not have had a material NRV impact as of May 31, 2022.

Interest Rate Risk

There have been no material changes to our disclosure regarding interest rate risk set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended August 31, 2021.

Credit Risk

Credit risk relates to the risk of loss that might occur as a result of non-performance by counterparties of their contractual obligations to take delivery of scrap metal and finished steel products and to make financial settlements of these obligations, or to provide sufficient quantities of scrap metal or payment to settle advances, loans and other contractual receivables in connection with demolition and scrap extraction projects. We manage our exposure to credit risk through a variety of methods, including shipping ferrous scrap metal exports under letters of credit, collection of deposits prior to shipment for certain nonferrous export customers, establishment of credit limits for certain sales on open terms, credit insurance and designation of collateral and financial guarantees securing advances, loans, and other contractual receivables. As a result of COVID-19, we have experienced reductions in the availability of credit insurance that we have historically used to cover a portion of our recycled metal and finished steel sales to domestic customers, which reduced availability may increase our exposure to customer credit risk. In addition, in higher or rising commodity price environments, we have experienced proportionately lower credit insurance coverage of applicable customer credit limits, which may increase our exposure to customer credit risk.

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

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

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk, mainly associated with sales transactions and related accounts receivable denominated in the U.S. Dollar by our Canadian subsidiary with a functional currency of the Canadian Dollar. In certain instances, we may use derivatives to manage some portion of this risk. As of May 31, 2022 and August 31, 2021, we did not have any derivative contracts.

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended May 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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; and below in this Part II, “Item 1. Legal Proceedings” of this Quarterly Report on Form 10-Q. Also see Note 5 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, incorporated by reference herein.

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

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

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

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

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

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

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

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SCHNITZER STEEL INDUSTRIES, INC.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors reported or new risk factors identified since the filing of our Annual Report on Form 10-K for the year ended August 31, 2021, except for the changes disclosed in the subsequent Quarterly Reports on Form 10-Q for the quarterly periods ended November 30, 2021 and February 28, 2022.

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

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

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

		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number of Shares that may yet be Purchased under the Plans or Programs
March 1 - March 31, 2022			—			$	—				—				505,998
April 1 - April 30, 2022			15,000			$	47.56				15,000				490,998
May 1 - May 31, 2022			228,792			$	40.56				228,792				262,206
Total third quarter 2022			243,792								243,792

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

ITEM 5. OTHER INFORMATION

Share Repurchase Program

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

 

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SCHNITZER STEEL INDUSTRIES, INC.

ITEM 6. EXHIBITS

 

Exhibit Number		Exhibit Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

 

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SCHNITZER STEEL INDUSTRIES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				SCHNITZER STEEL INDUSTRIES, INC.
				(Registrant)
Date:		June 29, 2022		By:		/s/ Tamara L. Lundgren
						Tamara L. Lundgren
						Chairman, President and Chief Executive Officer
Date:		June 29, 2022		By:		/s/ Richard D. Peach
						Richard D. Peach
						Executive Vice President, Chief Financial Officer and Chief Strategy Officer

 

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