Form 10-Q SCHNITZER STEEL INDUSTRI For: Nov 30

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 November 30, 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 27,165,180 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 January 3, 2023.

 

 

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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 November 30, 2022 and August 31, 2022	4
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended November 30, 2022 and 2021	5
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended November 30, 2022 and 2021	6
Unaudited Condensed Consolidated Statements of Equity for the Three Months Ended November 30, 2022 and 2021	7
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended November 30, 2022 and 2021	8
Notes to the Unaudited Condensed Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures about Market Risk	37
Item 4. Controls and Procedures	38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	39
Item 1A. Risk Factors	39
Item 5. Other Information	39
Item 6. Exhibits	40
SIGNATURES	41

 

 

 

 

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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 equipment upgrades, equipment failures, and facility damage on production, including timing of repairs and resumption of operations; the realization of insurance recoveries; the impact of pandemics, epidemics, or other public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic; 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, inflation, and rising interest rates; 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 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; the potential impact of adopting new accounting pronouncements; 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. Examples of these risks include: potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the impact of equipment upgrades, equipment failures, and facility damage on production; failure to realize or delays in realizing expected benefits from capital projects, including investments in processing and manufacturing technology improvements; the cyclicality and impact of general economic conditions; the impact of inflation, rising interest rates, and foreign currency fluctuations; changing conditions in global markets including the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; increases in the relative value of the U.S. dollar; 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; the impact of goodwill impairment charges; the impact of long-lived asset and equity investment impairment charges; the impact of pandemics, epidemics, or other public health emergencies, such as the COVID-19 pandemic; 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; 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; translation risks associated with fluctuation in foreign exchange rates; inability to obtain or renew business licenses and permits; 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)

 

		November 30, 2022				August 31, 2022
Assets
Current assets:
Cash and cash equivalents		$	3,539			$	43,803
Accounts receivable, net of allowance for credit losses of $1,531    and $1,566			218,189				237,654
Inventories			345,198				315,189
Refundable income taxes			1,642				1,696
Prepaid expenses and other current assets			65,996				73,044
Total current assets			634,564				671,386
Property, plant and equipment, net of accumulated depreciation of $867,979 and $855,032			682,738				664,120
Operating lease right-of-use assets			117,806				122,413
Investments in joint ventures			11,246				12,841
Goodwill			270,349				255,198
Intangibles, net of accumulated amortization of $8,281 and $7,256			35,440				26,155
Deferred income taxes			23,105				24,598
Other assets			47,371				49,886
Total assets		$	1,822,619			$	1,826,597
Liabilities and Equity
Current liabilities:
Short-term borrowings		$	6,379			$	6,041
Accounts payable			185,170				217,689
Accrued payroll and related liabilities			30,581				59,702
Environmental liabilities			10,919				13,031
Operating lease liabilities			21,538				21,660
Accrued income taxes			4,190				3,856
Other accrued liabilities			50,230				59,594
Total current liabilities			309,007				381,573
Deferred income taxes			57,028				63,328
Long-term debt, net of current maturities			351,200				242,521
Environmental liabilities, net of current portion			55,066				55,469
Operating lease liabilities, net of current maturities			97,536				101,651
Other long-term liabilities			24,278				23,581
Total liabilities			894,115				868,123
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,    27,165 and 26,747 shares issued and outstanding			27,165				26,747
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			18,582				22,975
Retained earnings			918,094				941,146
Accumulated other comprehensive loss			(39,302	)			(37,089	)
Total SSI shareholders’ equity			924,739				953,979
Noncontrolling interests			3,765				4,495
Total equity			928,504				958,474
Total liabilities and equity		$	1,822,619			$	1,826,597

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 OPERATIONS

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

		Three Months Ended November 30,
		2022				2021
Revenues		$	598,730			$	798,118
Operating expense:
Cost of goods sold			550,011				683,244
Selling, general and administrative			64,228				55,267
(Income) from joint ventures			(790	)			(236	)
Restructuring charges and other exit-related activities			1,592				22
Operating (loss) income			(16,311	)			59,821
Interest expense			(3,324	)			(1,372	)
Other loss, net			(3,884	)			(47	)
(Loss) income from continuing operations before income taxes			(23,519	)			58,402
Income tax benefit (expense)			6,032				(11,097	)
(Loss) income from continuing operations			(17,487	)			47,305
Loss from discontinued operations, net of tax			(69	)			(29	)
Net (loss) income			(17,556	)			47,276
Net income attributable to noncontrolling interests			(232	)			(1,077	)
Net (loss) income attributable to SSI shareholders		$	(17,788	)		$	46,199
Net (loss) income per share attributable to SSI shareholders:
Basic:
(Loss) income per share from continuing operations		$	(0.64	)		$	1.64
Net (loss) income per share		$	(0.64	)		$	1.64
Diluted:
(Loss) income per share from continuing operations		$	(0.64	)		$	1.55
Net (loss) income per share		$	(0.64	)		$	1.55
Weighted average number of common shares:
Basic			27,723				28,159
Diluted			27,723				29,885

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 (LOSS) INCOME

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

		Three Months Ended November 30,
		2022				2021
Net (loss) income		$	(17,556	)		$	47,276
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments			(2,246	)			(1,115	)
Pension obligations, net			33				390
Total other comprehensive loss, net of tax			(2,213	)			(725	)
Comprehensive (loss) income			(19,769	)			46,551
Less comprehensive income attributable to noncontrolling interests			(232	)			(1,077	)
Comprehensive (loss) income attributable to SSI shareholders		$	(20,001	)		$	45,474

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 November 30, 2021		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			—				—				—				—				—				46,199				—				46,199				1,077				47,276
Other comprehensive loss, net of tax			—				—				—				—				—				—				(725	)			(725	)			—				(725	)
Distributions to noncontrolling interests			—				—				—				—				—				—				—				—				(1,026	)			(1,026	)
Issuance of restricted stock			470				470				—				—				(470	)			—				—				—				—				—
Restricted stock withheld for taxes			(178	)			(178	)			—				—				(9,399	)			—				—				(9,577	)			—				(9,577	)
Share-based compensation cost			—				—				—				—				4,436				—				—				4,436				—				4,436
Dividends ($0.1875 per common share)			—				—				—				—				—				(5,407	)			—				(5,407	)			—				(5,407	)
Balance as of November 30, 2021			27,624			$	27,624				200			$	200			$	43,641			$	834,504			$	(35,279	)		$	870,690			$	4,066			$	874,756

 

		Common Stock																								Accumulated
		Class A								Class B								Additional								Other				Total SSI
Three Months Ended November 30, 2022		Shares				Amount				Shares				Amount				Paid-in Capital				Retained Earnings				Comprehensive Loss				Shareholders' Equity				Noncontrolling Interests				Total Equity
Balance as of September 1, 2022			26,747			$	26,747				200			$	200			$	22,975			$	941,146			$	(37,089	)		$	953,979			$	4,495			$	958,474
Net (loss) income			—				—				—				—				—				(17,788	)			—				(17,788	)			232				(17,556	)
Other comprehensive loss, net of tax			—				—				—				—				—				—				(2,213	)			(2,213	)			—				(2,213	)
Distributions to noncontrolling interests			—				—				—				—				—				—				—				—				(962	)			(962	)
Issuance of restricted stock			672				672				—				—				(672	)			—				—				—				—				—
Restricted stock withheld for taxes			(254	)			(254	)			—				—				(6,553	)			—				—				(6,807	)			—				(6,807	)
Share-based compensation cost			—				—				—				—				2,832				—				—				2,832				—				2,832
Dividends ($0.1875 per common share)			—				—				—				—				—				(5,264	)			—				(5,264	)			—				(5,264	)
Balance as of November 30, 2022			27,165			$	27,165				200			$	200			$	18,582			$	918,094			$	(39,302	)		$	924,739			$	3,765			$	928,504

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)

 

		Three Months Ended November 30,
		2022				2021
Cash flows from operating activities:
Net (loss) income		$	(17,556	)		$	47,276
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Asset impairment charges			4,000				—
Exit-related asset impairments			143				—
Depreciation and amortization			21,451				17,220
Inventory write-downs			575				192
Deferred income taxes			(5,741	)			11,227
Undistributed equity in earnings of joint ventures			(790	)			(236	)
Share-based compensation expense			2,816				4,392
Loss on disposal of assets, net			300				307
Unrealized foreign exchange loss (gain), net			141				(10	)
Credit loss, net			(18	)			(4	)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable			16,925				(68,490	)
Inventories			(27,846	)			(45,581	)
Income taxes			(293	)			(59	)
Prepaid expenses and other current assets			1,839				546
Other long-term assets			(1,212	)			(488	)
Operating lease assets and liabilities			313				(337	)
Accounts payable			(18,692	)			20,509
Accrued payroll and related liabilities			(28,902	)			(38,642	)
Other accrued liabilities			(8,709	)			21,327
Environmental liabilities			(2,452	)			(3,628	)
Other long-term liabilities			1,556				210
Net cash used in operating activities			(62,152	)			(34,269	)
Cash flows from investing activities:
Capital expenditures			(47,520	)			(39,719	)
Acquisitions, net of acquired cash			(26,902	)			(113,939	)
Proceeds from insurance and sale of assets			2,219				10,643
Net cash used in investing activities			(72,203	)			(143,015	)
Cash flows from financing activities:
Borrowings from long-term debt			186,356				271,091
Repayment of long-term debt			(78,781	)			(86,314	)
Payment of debt issuance costs			(135	)			—
Taxes paid related to net share settlement of share-based payment awards			(6,807	)			(9,577	)
Distributions to noncontrolling interests			(962	)			(1,026	)
Dividends paid			(5,540	)			(5,568	)
Net cash provided by financing activities			94,131				168,606
Effect of exchange rate changes on cash			(40	)			(59	)
Net decrease in cash and cash equivalents			(40,264	)			(8,737	)
Cash and cash equivalents as of beginning of period			43,803				27,818
Cash and cash equivalents as of end of period		$	3,539			$	19,081

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)

 

		Three Months Ended November 30,
		2022				2021
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest		$	2,703			$	611
Income taxes (refunded), net		$	(16	)		$	(80	)
Schedule of noncash investing and financing transactions:
Purchases of property, plant and equipment included in liabilities		$	17,134			$	12,417

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 months ended November 30, 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, 2022, 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 51 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 ship bulk cargoes of processed recycled ferrous metal 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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SCHNITZER STEEL INDUSTRIES, INC.

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

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. The rolling mill production ceased in early June 2021. In August 2021, our 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 our 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 included an initial $10 million insurance receivable recognized in fiscal 2021, primarily offsetting applicable losses including capital purchases of $10 million that we had incurred as of August 31, 2021. In fiscal 2022, we increased the amount of this insurance receivable to $25 million and recognized a related $15 million insurance recovery gain within cost of goods sold, $3 million of which was recognized in the first quarter of fiscal 2022 and included within the Unaudited Condensed Consolidated Statements of Operations, reflecting recovery of applicable losses incurred as a result of the fire to date. In addition, during 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 on the Unaudited Condensed Consolidated Balance Sheets as of November 30, 2022 and August 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, shredding operations temporarily ceased at the facility on June 18, 2022 and, following discussions with the Massachusetts Department of Environmental Protection and the Massachusetts Attorney General’s office, we installed a temporary emission capture system and controls that allowed for us to resume shredding operations on November 11, 2022 and continue shredding operations while the repair and replacement of the shredder enclosure building is completed. Non-shredding operations at the facility continued during this period. 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 fiscal 2022, after the fire, we recognized an aggregate $17 million insurance receivable and related insurance recovery gain, reported within prepaid expenses and other current assets and within cost of goods sold, respectively, reflecting recovery of applicable losses including impairment charges of $7 million related to the carrying value of plant and equipment assets damaged by the fire and initial capital purchases and other costs totaling $10 million that we had incurred as of August 31, 2022. Also during 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 $10 million as of November 30, 2022 and August, 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.

Coronavirus Disease 2019 (“COVID-19”)

We continue to monitor the impact of COVID-19 on all aspects of our business. 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 beginning in fiscal 2021 and continued to improve through most of fiscal 2022. However, there are ongoing global impacts resulting directly or indirectly from the pandemic including labor shortages, logistical challenges, and increases in costs for certain goods and services including due to the impact of inflation, which have negatively impacted our sales volumes, operating costs, and financial results to varying degrees. The ongoing effects of the COVID-19 pandemic could negatively impact our results of operations, cash flows, and financial position in the future.

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 (loss) income before results from discontinued operations, interest expense, income taxes, depreciation and amortization, asset impairment charges, restructuring charges and other exit-related activities, charges for legacy environmental matters (net of recoveries), business development costs not related to ongoing operations including pre-acquisition expenses, and other items which are not related to underlying business operational performance.

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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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Financial Highlights of Results of Operations for the First Quarter of Fiscal 2023

Market conditions for recycled metals were weaker in the first quarter of fiscal 2023 compared to the prior year quarter, leading to significantly lower average net selling prices for our ferrous and nonferrous products and a significant compression in metal spreads. In the first quarter of fiscal 2023, the average net selling prices for our ferrous and nonferrous products decreased by 24% and 14%, respectively, and ferrous sales volumes decreased by 26%, compared to the prior year quarter. The reduction in ferrous sales volumes was primarily due to disruptions related to an extended shredder outage at our Everett metals recycling facility and a regulatory issue limiting operations at our shredder facility in California, both of which were resolved by mid-November, tight supply flows in the lower price environment, and the delay of several bulk shipments to December 2022, partially offset by the impact on our quarterly sales volumes of business acquisitions completed during the first and third quarters of fiscal 2022. Market conditions for our finished steel products were robust in the first quarter of fiscal 2023, with finished steel average selling prices increasing 4% compared to the prior year quarter which contributed to expanded metal spreads, while finished steel sales volumes increased 19%, in part due to the impact on the prior year quarterly volumes of the ramp up of steel mill operations following the May 2021 fire. Our results in the first quarter of fiscal 2023 also reflected an unfavorable impact from average inventory accounting compared to a favorable impact in the prior year quarter, lower year-over-year platinum group metals (PGM) prices, an impairment charge related to an equity investment, and the impact of inflation. We achieved a benefit of approximately $14 million from productivity and cost reduction initiatives, including from measures announced in October 2022 and implemented during the first quarter of fiscal 2023, which helped to partially offset the effects of inflationary pressure on operating costs.

Selling, general, and administrative (“SG&A”) expense in the first quarter of fiscal 2023 increased by 16% compared to the prior year quarter primarily due to higher employee-related, professional services, and travel expenses, partially from higher costs resulting from our acquisitions and other growth-related initiatives, increased legacy environmental charges, and the impact of inflation.

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 November 30,
($ in thousands, except for prices and per share amounts)		2022				2021				%
Ferrous revenues		$	261,729			$	465,856				(44	)%
Nonferrous revenues			177,675				194,429				(9	)%
Steel revenues(1)			124,515				103,238				21	%
Retail and other revenues			34,811				34,595				1	%
Total revenues			598,730				798,118				(25	)%
Cost of goods sold			550,011				683,244				(20	)%
Gross margin (total revenues less cost of goods sold)		$	48,719			$	114,874				(58	)%
Gross margin (%)			8.1	%			14.4	%			(44	)%
Selling, general and administrative expense		$	64,228			$	55,267				16	%
Diluted (loss) earnings per share from continuing operations attributable to SSI shareholders:
Reported		$	(0.64	)		$	1.55			NM
Adjusted(2)		$	(0.44	)		$	1.58			NM
Net (loss) income		$	(17,556	)		$	47,276			NM
Adjusted EBITDA(2)		$	8,362			$	78,086				(89	)%
Average ferrous recycled metal sales prices ($/LT)(3):
Domestic		$	313			$	431				(27	)%
Foreign		$	356			$	450				(21	)%
Average		$	340			$	446				(24	)%
Ferrous volumes (LT, in thousands):
Domestic(4)			432				430				(—	)%
Foreign			418				718				(42	)%
Total ferrous volumes (LT, in thousands)(4)(8)			851				1,148				(26	)%
Average nonferrous sales price ($/pound)(3)(5)		$	0.90			$	1.05				(14	)%
Nonferrous volumes (pounds, in thousands)(4)(5)			162,720				153,227				6	%
Finished steel average sales price ($/ST)(3)		$	1,015			$	979				4	%
Finished steel sales volumes (ST, in thousands)			118				99				19	%
Cars purchased (in thousands)(6)			69				80				(14	)%
Number of auto parts stores at period end			51				50				2	%
Rolling mill utilization(7)			81	%			78	%			4	%

 

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 first quarter of fiscal 2023 decreased by 25% compared to the prior year quarter primarily due to significantly lower average net selling prices for our ferrous and nonferrous products driven by weaker market conditions for recycled metals globally. In the first quarter of fiscal 2023, the average net selling prices for our ferrous and nonferrous products decreased by 24% and 14%, respectively, compared to the prior year quarter. Ferrous sales volumes in the first quarter of fiscal 2023 decreased by 26% compared to the prior year quarter primarily due to extended operational disruptions at our Everett and Oakland metals recycling facilities that were resolved by mid-November, tight supply flows in the lower price environment, and the delay of several bulk shipments to December 2022, partially offset by the impact on our quarterly sales volumes of our fiscal 2022 business acquisitions. Our ferrous and nonferrous sales volumes in the first quarter of fiscal 2023 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 conditions for our finished steel products were robust in the first quarter of fiscal 2023, with finished steel average selling prices increasing 4% compared to the prior year quarter, while finished steel sales volumes increased 19%, in part due to the impact on the prior year quarterly volumes of the ramp up of steel mill operations following the May 2021 fire.

Operating Performance

Net loss in the first quarter of fiscal 2023 was $18 million, compared to net income of $47 million in the prior year quarter. Adjusted EBITDA in the first quarter of fiscal 2023 was $8 million, compared to $78 million in the prior year quarter. The lower price environment for recycled metals, as well as significantly decreased ferrous sales volumes primarily due to the extended operational disruptions, tight supply flows, and several bulk shipment delays, had a significant adverse impact on our operating margins and overall operating results in the first quarter of fiscal 2023. Ferrous metal spreads in the first quarter of fiscal 2023 decreased by approximately 20%, and average net selling prices for our nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, decreased by approximately 10%, compared to the prior year quarter. Finished steel metal spreads and sales volumes were significantly higher in the first quarter of fiscal 2023, benefiting operating results compared to the prior year quarter. Our results in the first quarter of fiscal 2023 also reflected an unfavorable impact from average inventory accounting compared to a favorable impact in the prior year quarter, lower year-over-year PGM prices, an impairment charge related to an equity investment, and the impact of inflation.

SG&A expense in the first quarter of fiscal 2023 increased by 16% compared to the prior year quarter primarily due to higher employee-related, professional services, and travel expenses, partially resulting from our acquisitions and other growth-related initiatives, increased legacy environmental charges, and the impact of inflation. These higher expenses in the first quarter of fiscal 2023 were partially offset by benefits from productivity and cost reduction initiatives when compared to the prior year quarter.

In October 2022, we announced and began implementing productivity and cost reduction initiatives with a targeted annual benefit of approximately $40 million, the vast majority of which is expected to be achieved in fiscal 2023. In addition, in January 2023, we announced incremental initiatives aiming to reduce SG&A costs by approximately $20 million annually, of which approximately two-thirds is expected to be achieved in fiscal 2023. These initiatives aim to improve profitability through a combination of increased yields, efficiencies in processing, procurement, and pricing, and reduced costs including from headcount reductions, decreased lease costs, professional and outside services, and implementation of operational efficiencies. In the first quarter of fiscal 2023, we achieved a benefit from these initiatives, and others implemented during fiscal 2022, of approximately $14 million, which helped to partially offset the effects of inflationary pressure on operating costs.

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

Income Tax

The effective tax rate from continuing operations for the first quarter of fiscal 2023 was a benefit on pre-tax loss of 25.6% compared to an expense on pre-tax income of 19.0% for the comparable prior year quarter. Our effective tax rate from continuing operations for the first quarter of fiscal 2023 was higher than the U.S. federal statutory rate of 21% primarily due to discrete tax benefits resulting from vesting of share-based awards in the quarter, as well as the impact of permanent differences from non-deductible expenses on the projected annual effective tax rate applied to the quarterly results. For the first quarter of fiscal 2022, the effective tax rate from continuing operations was lower than the U.S. federal statutory rate primarily due to discrete tax benefits resulting from vesting of share-based awards in the quarter, which more than offset the aggregate impact of state taxes and permanent differences from non-deductible expenses on the projected annual effective tax rate applied to the quarterly results.

Liquidity and Capital Resources

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

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Sources and Uses of Cash

We had cash balances of $4 million and $44 million as of November 30, 2022 and August 31, 2022, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of November 30, 2022, debt was $358 million compared to $249 million as of August 31, 2022, and debt, net of cash, was $354 million as of November 30, 2022, compared to $205 million as of August 31, 2022, which increases were primarily due to increased borrowings from our credit facilities to fund higher net working capital needs, capital expenditures, and the acquisition of the ScrapSource business on November 18, 2022. See the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2.

Operating Activities

Net cash used in operating activities in the first three months of fiscal 2023 was $62 million, compared to $34 million in the first three months of fiscal 2022.

Uses of cash in the first three months of fiscal 2023 included a $29 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation previously accrued under our fiscal 2022 plans, a $28 million increase in inventory primarily due to the delay of several bulk shipments to December 2022, and a $19 million decrease in accounts payable due to the timing of purchases and payments. Sources of cash in the first three months of fiscal 2023 included a $17 million decrease in accounts receivable primarily due to a decrease in selling prices for recycled metals and the timing of sales and collections.

Uses of cash in the first three months of fiscal 2022 included a $68 million increase in accounts receivable primarily due to higher selling prices and higher sales volumes for recycled metals, as well as the timing of sales and collections, a $46 million increase in inventories due to higher raw material purchase costs and the timing of purchases and sales, and a $39 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation previously accrued under our fiscal 2021 plans. Sources of cash in the first three months of fiscal 2022 included a $21 million increase in other accrued liabilities primarily reflecting the portion of advance payments from insurance carriers received in the period towards our claims arising from the May 2021 steel mill fire deemed attributable to operating activities, and a $21 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of purchases and payments. The sources and uses of cash related to operating activities described above also reflect higher net working capital needs in the first quarter 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.

Investing Activities

Net cash used in investing activities was $72 million in the first three months of fiscal 2023, compared to $143 million in the first three months of fiscal 2022.

Cash used in investing activities in the first three months of fiscal 2023 included $25 million paid to acquire the assets of the ScrapSource business on November 18, 2022. We funded the acquisition 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 also included capital expenditures of $48 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, compared to $40 million in the prior year period.

Cash used in investing activities in the first three months of fiscal 2022 included $114 million paid to acquire the assets of the Columbus Recycling business on October 1, 2021. We funded the acquisition 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 flows from investing activities in the first three months of fiscal 2022 also included proceeds of $10 million representing the portion of advance payments from insurance carriers deemed a recovery of capital purchases incurred for repair and replacement of damaged property arising from the May 2021 steel mill fire.

Financing Activities

Net cash provided by financing activities in the first three months of fiscal 2023 was $94 million, compared to $169 million in the first three months of fiscal 2022.

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Cash flows from financing activities in the first three months of fiscal 2023 included $108 million in net borrowings of debt, compared to $185 million in the prior year period (refer to Non-GAAP Financial Measures at the end of this Item 2). Uses of cash in the first three months of fiscal 2023 and 2022 included $7 million and $10 million, respectively, for payment of employee tax withholdings resulting from vesting of share-based awards and $6 million in each period for the payment of dividends.

Debt

Our senior secured revolving credit facilities, which provide for revolving loans of $800 million and C$15 million, mature in August 2027 pursuant to a credit agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the Secured Overnight Financing Rate (“SOFR”) (or the Canadian Dollar Offered Rate, "CDOR" for C$ loans), plus a spread of between 1.25% and 2.00%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated net 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 Term SOFR plus 1.00%, in each case, plus a spread of between 0.25% and 1.00% based on a pricing grid tied to our consolidated net funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.175% and 0.30% based on a pricing grid tied to our ratio of consolidated net funded debt to EBITDA.

Under the credit agreement, we may establish one or more key performance indicators (“KPIs”) to measure our performance with respect to certain of our environmental, social and governance targets. Subject to the terms and conditions of the credit agreement, we may propose to amend the credit agreement to modify (i) the pricing spread and (ii) the commitment fee rate. Such modifications would be tied to our performance against the KPIs and would allow for (i) the pricing spread to be increased or decreased by no more than (a) 0.025% per KPI and (b) 0.05% for all KPIs, and (ii) the commitment fee rate to be increased or decreased by no more than 0.005% for all KPIs. Such adjustments would be determined on an annual basis and would not be cumulative.

We had borrowings outstanding under our credit facilities of $338 million as of November 30, 2022 and $230 million as of August 31, 2022. The weighted average interest rate on amounts outstanding under our credit facilities was 5.34% and 3.65% as of November 30, 2022 and August 31, 2022, 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 November 30, 2022, we were in compliance with the financial covenants under our credit agreement. The consolidated fixed charge coverage ratio was required to be no less than 1.50 to 1.00 and was 5.02 to 1.00 as of November 30, 2022. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.28 to 1.00 as of November 30, 2022.

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

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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 as of each of November 30, 2022 and August 31, 2022, 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.

Capital Expenditures

Capital expenditures totaled $48 million for the first three months of fiscal 2023, compared to $40 million for the prior year period. Capital expenditures in the first three months of fiscal 2023 included approximately $10 million for investments in growth. We currently plan to invest in the range of $130 million to $140 million in capital expenditures in fiscal 2023, which range excludes capital expenditures associated with the ongoing repair and replacement of the shredder enclosure building damaged by the fire at our Everett facility, as these expenditures are expected to be substantially recovered through insurance. 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. Supply chain disruptions, including those created directly or indirectly by the COVID-19 pandemic, have 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 such disruptions 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 $6 million in capital expenditures for environmental projects in the first three months of fiscal 2023, and we currently plan to invest in the range of $40 million to $50 million for such projects in fiscal 2023. 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 (“Portland Harbor”). 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 Portland Harbor, although such costs could be material to our financial position, results of operations, cash flows, and liquidity. We have insurance policies and a Qualified Settlement Fund (“QSF”) that we believe will provide reimbursement for costs we incur for defense, remediation, and mitigation for natural resource damages claims in connection with Portland Harbor, although there are no assurances that those policies and the QSF will cover all of the costs which we may incur. Significant cash outflows in the future related to Portland Harbor, 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 October 24, 2022, our Board of Directors declared a dividend for the first quarter of fiscal 2023 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend was paid on November 29, 2022.

Share Repurchase Program

As of November 30, 2022, pursuant to our board-authorized share repurchase programs, we had remaining authorization to repurchase up to 2.8 million shares of our Class A common stock when we deem such repurchases to be appropriate. We may repurchase our common stock for a variety of reasons, such as to optimize our capital structure and to offset dilution related to share-based compensation arrangements. We consider several factors in determining whether to make share repurchases including, among other things, our cash needs, the availability of funding, our future business plans, and the market price of our stock. We did not repurchase any of our common stock during the first quarter of fiscal 2023 or 2022.

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, 2022.

We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. As of November 30, 2022, we had $8 million outstanding under these arrangements.

Critical Accounting Estimates

There were no material changes to our critical accounting estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended August 31, 2022.

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):

		November 30, 2022				August 31, 2022
Short-term borrowings		$	6,379			$	6,041
Long-term debt, net of current maturities			351,200				242,521
Total debt			357,579				248,562
Less cash and cash equivalents			3,539				43,803
Total debt, net of cash		$	354,040			$	204,759

 

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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):

 

		Three Months Ended November 30,
		2022				2021
Borrowings from long-term debt		$	186,356			$	271,091
Repayments of long-term debt			(78,781	)			(86,314	)
Net borrowings (repayments) of debt		$	107,575			$	184,777

 

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Adjusted EBITDA, adjusted selling, general, and administrative expense, adjusted (loss) income from continuing operations attributable to SSI shareholders, and adjusted diluted (loss) earnings per share from continuing operations attributable to SSI shareholders

Management believes that providing these non-GAAP financial measures adds a meaningful presentation of our results from business operations excluding adjustments for asset impairment charges, restructuring charges and other exit-related activities, charges for legacy environmental matters (net of recoveries), business development costs not related to ongoing operations including pre-acquisition expenses, 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 (loss) income to adjusted EBITDA and adjusted selling, general, and administrative expense (in thousands):

 

		Three Months Ended November 30,
		2022				2021
Reconciliation of adjusted EBITDA:
Net (loss) income		$	(17,556	)		$	47,276
Loss from discontinued operations, net of tax			69				29
Interest expense			3,324				1,372
Income tax (benefit) expense			(6,032	)			11,097
Depreciation and amortization			21,451				17,220
Asset impairment charges(1)			4,000				—
Restructuring charges and other exit-related activities			1,592				22
Charges for legacy environmental matters, net(2)			1,279				456
Business development costs			235				614
Adjusted EBITDA		$	8,362			$	78,086
Selling, general and administrative expense:
As reported		$	64,228			$	55,267
Charges for legacy environmental matters, net(2)			(1,279	)			(456	)
Business development costs			(235	)			(614	)
Adjusted		$	62,714			$	54,197

 

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

 

		Three Months Ended November 30,
		2022				2021
(Loss) income from continuing operations attributable to SSI shareholders:
As reported		$	(17,719	)		$	46,228
Asset impairment charges(1)			4,000				—
Restructuring charges and other exit-related activities			1,592				22
Charges for legacy environmental matters, net(2)			1,279				456
Business development costs			235				614
Income tax benefit allocated to adjustments(3)			(1,714	)			(249	)
Adjusted		$	(12,327	)		$	47,071
Diluted (loss) earnings per share from continuing operations attributable to SSI shareholders:
As reported		$	(0.64	)		$	1.55
Asset impairment charges, per share(1)			0.14				—
Restructuring charges and other exit-related activities, per share			0.06				—
Charges for legacy environmental matters, net, per share(2)			0.05				0.02
Business development costs, per share			0.01				0.02
Income tax benefit allocated to adjustments, per share(3)			(0.06	)			(0.01	)
Adjusted		$	(0.44	)		$	1.58

 

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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. 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 November 30, 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, 2022.

Credit Risk

Credit risk relates to the risk of loss that might occur as a result of non-performance by counterparties of their contractual obligations to take delivery of scrap metal and finished steel products and to make financial settlements of these obligations, or to provide sufficient quantities of scrap metal or payment to settle advances, loans and other contractual receivables in connection with demolition and scrap extraction projects. We manage our exposure to credit risk through a variety of methods, including shipping ferrous scrap metal exports under letters of credit, collection of deposits prior to shipment for certain nonferrous export customers, establishment of credit limits for certain sales on open terms, credit insurance and designation of collateral and financial guarantees securing advances, loans, and other contractual receivables. Due in part to the effects of COVID-19, we have experienced reductions in the availability of credit insurance that we have historically used to cover a portion of our recycled metal and finished steel sales to domestic customers, which reduced availability may increase our exposure to customer credit risk. 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 November 30, 2022 and August 31, 2022, 34% and 24%, respectively, of our accounts receivable balance was covered by letters of credit. Of the remaining balance, 94% and 99% was less than 60 days past due as of November 30, 2022 and August 31, 2022, respectively.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk, mainly associated with sales transactions and related accounts receivable denominated in the U.S. Dollar by our Canadian subsidiary with a functional currency of the Canadian Dollar. In certain instances, we may use derivatives to manage some portion of this risk. As of November 30, 2022 and August 31, 2022, 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 Encore Recycling business, which we acquired on April 29, 2022, and the ScrapSource business, which we acquired on November 18, 2022, from its evaluation of the effectiveness of our disclosure controls and procedures. Together, the Encore Recycling and ScrapSource businesses represented approximately 5% of our consolidated total assets and 3% of our consolidated total revenues as of and for the three months ended November 30, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of November 30, 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 November 30, 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, 2022 and Note 5 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, incorporated by reference herein.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors reported or new risk factors identified since the filing of our Annual Report on Form 10-K for the year ended August 31, 2022.

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

Exhibit Number		Exhibit Description
10.1*		Form of Long-Term Incentive Award Agreement under the 1993 Stock Incentive Plan used for awards granted in fiscal 2023.
10.2*		Fiscal 2023 Annual Performance Bonus Program for the Chief Executive Officer.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		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)

* Management contract or compensatory plan or arrangement.

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SIGNATURES

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

 

				SCHNITZER STEEL INDUSTRIES, INC.
				(Registrant)
Date:		January 5, 2023		By:		/s/ Tamara L. Lundgren
						Tamara L. Lundgren
						Chairman, President and Chief Executive Officer
Date:		January 5, 2023		By:		/s/ Stefano R. Gaggini
						Stefano R. Gaggini
						Senior Vice President and Chief Financial Officer

 

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ATTACHMENTS / EXHIBITS

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EX-31.1

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EX-32.1

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