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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended August 31, 2021

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes    No 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

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

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates on February 28, 2021 was $914,573,020.

The registrant had 27,332,353 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 October 19, 2021.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the January 2022 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

 


 

 

 

SCHNITZER STEEL INDUSTRIES, INC.

FORM 10-K

TABLE OF CONTENTS

 

 

 

 

 

PAGE

 

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

1

 

 

 

 

PART I

 

 

 

 

 

 

 

 

 

Item 1

 

Business

 

2

 

 

 

 

 

Item 1A

 

Risk Factors

 

14

 

 

 

 

 

Item 1B

 

Unresolved Staff Comments

 

28

 

 

 

 

 

Item 2

 

Properties

 

29

 

 

 

 

 

Item 3

 

Legal Proceedings

 

30

 

 

 

 

 

Item 4

 

Mine Safety Disclosures

 

31

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

Item 5

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

 

32

 

 

 

 

 

Item 6

 

[Reserved]

 

33

 

 

 

 

 

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

34

 

 

 

 

 

Item 7A

 

Quantitative and Qualitative Disclosures about Market Risk

 

50

 

 

 

 

 

Item 8

 

Financial Statements and Supplementary Data

 

51

 

 

 

 

 

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

90

 

 

 

 

 

Item 9A

 

Controls and Procedures

 

90

 

 

 

 

 

Item 9B

 

Other Information

 

90

 

 

 

 

 

Item 9C

 

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 

90

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

Item 10

 

Directors, Executive Officers and Corporate Governance

 

91

 

 

 

 

 

Item 11

 

Executive Compensation

 

91

 

 

 

 

 

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

91

 

 

 

 

 

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

 

91

 

 

 

 

 

Item 14

 

Principal Accountant Fees and Services

 

91

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

Item 15

 

Exhibits and Financial Statement Schedules

 

92

 

 

 

 

 

Item 16

 

Form 10-K Summary

 

95

 

 

 

SIGNATURES

 

96

 

 

 


 

 

 

FORWARD-LOOKING STATEMENTS

Statements and information included in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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; 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 this Form 10-K. Examples of these risks include: the impact of pandemics, epidemics or other public health emergencies, such as the COVID-19 pandemic; the impact of equipment upgrades, equipment failures and facility damage on production; potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the cyclicality and impact of general economic conditions; changing conditions in global markets including the impact of sanctions and tariffs, quotas and other trade actions and import restrictions; volatile supply and demand conditions affecting prices and volumes in the markets for raw materials and other inputs we purchase; significant decreases in 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 foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under the agreement governing our bank credit facilities; the impact of consolidation in the steel industry; product liability claims; the impact of legal proceedings and legal compliance; the adverse impact of climate change; the impact of not realizing deferred tax assets; the impact of tax increases and changes in tax rules; the impact of one or more cybersecurity incidents; environmental compliance costs and potential environmental liabilities; compliance with climate change and greenhouse gas emission laws and regulations; the impact of labor shortages or increased labor costs; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.

 

 

1 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

 

 

 

PART I

ITEM 1. BUSINESS

General

Founded in 1906, Schnitzer Steel Industries, Inc. is one of North America’s largest recyclers of ferrous and nonferrous metal, including end-of-life vehicles, and a manufacturer of finished steel products. As a vertically integrated organization, we offer a range of products and services to meet global demand through our network that includes 50 retail self-service auto parts stores, 52 metals recycling facilities and an electric arc furnace (“EAF”) steel mill.

Worldwide demand for recycled ferrous and nonferrous metal is driven primarily by production levels for finished steel and for products using nonferrous metal. Recycled ferrous metal is the primary feedstock for steel mill production using EAF technology and one of the raw materials utilized for steel manufacturing using blast furnace technology. Steel mills around the world, including those in the North American domestic market in which our own steel mill operates, are the primary end markets for our recycled ferrous metal products. Specialty steelmakers, foundries, refineries, smelters, wholesalers, and other recycled metal processors globally are the primary end markets for our recycled nonferrous metal products. Our steel mill produces finished steel products using internally sourced recycled ferrous metal as the primary raw material and sells to customers located primarily in the Western United States and Western Canada.

We believe long-term demand for recycled metals will continue to be driven by factors including global economic growth and an increased focus on environmental policies promoting natural resource conservation, lower greenhouse gas emissions, and lower energy usage. We believe the significant environmental benefits and production efficiencies associated with steelmaking that maximizes the use of recycled metal as a raw material, compared to iron ore mined from natural resources, will positively contribute to worldwide long-term demand for recycled ferrous metal. Further, we believe decarbonization efforts by companies, industries, and governments around the world, including investments in low carbon technologies that are more metal intensive and minimize carbon dioxide emissions from the use of fossil fuels, among other factors, support global long-term demand for recycled nonferrous metal such as aluminum and copper.

Segment Reporting

Prior to the first quarter of fiscal 2021, our internal organizational and reporting structure included two operating and reportable segments: the Auto and Metals Recycling (“AMR”) business and the Cascade Steel and Scrap (“CSS”) business. In the first quarter of fiscal 2021, in accordance with our plan announced in April 2020, we completed the transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model (“One Schnitzer”), supporting a single segment. We consolidated our operations, sales, services, and other functional capabilities at an enterprise level reflecting enhanced focus by management on optimizing our vertically integrated value chain. This change in structure has resulted in a more agile organization and solidified achievement of recent productivity improvements and cost efficiency initiatives. We began reporting on this new single-segment structure in the first quarter of fiscal 2021.

Revenue-Generating Activities

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 where geographically more economical. At our metals recycling facilities, we process mixed and large pieces of scrap metal into smaller pieces by crushing, torching, shearing, shredding, 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.

2 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

 

 

We operate seven deepwater port locations, six of which are equipped with large-scale shredders. Our largest port facilities in Everett, Massachusetts; Portland, Oregon; Oakland, California; and Tacoma, Washington each operate a mega-shredder with 7,000 to 9,000 horsepower. Our port facilities in Salinas, Puerto Rico, and Kapolei, Hawaii operate shredders with 1,500 and 4,000 horsepower, respectively. Our port facility in Providence, Rhode Island does not operate a shredder, but exports recycled ferrous metal acquired in the regional market. Our shredders are designed to provide a denser product and, in conjunction with advanced separation equipment, a more refined form of recycled ferrous metal which can be used efficiently by steel mills in the production of new steel. The shredding process reduces auto bodies and other scrap metal into fist-size pieces of shredded recycled metal. The shredded material is then carried by conveyor under magnetized drums that attract the ferrous metal and separate it from the mixed nonferrous metal and other residue, resulting in a consistent and high-quality shredded ferrous product. The mixed nonferrous metal and residue then pass through a series of additional mechanical systems designed to recover and separate the nonferrous metal from the residue. The remaining mixed nonferrous metal is then further sorted by product and size grade before being sold as joint products, which include mainly zorba (primarily aluminum), zurik (primarily stainless steel), and shredded insulated wire (primarily copper and aluminum). We sell further separated products with higher metal content such as twitch (light gauge recycled aluminum) and shredded copper and brass. 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.

We invest in nonferrous metal extraction and separation technologies in order to maximize the recoverability of valuable nonferrous metal and to meet the metal purity requirements of customers. We have a major strategic initiative currently underway and partially complete to replace, upgrade and add to our existing nonferrous metal recovery technologies that is expected to increase metal recovery yields, provide for additional product optionality, create higher quality furnace-ready products, and reduce the metallic portion of shredder residue disposed in landfills. The rollout of these new technologies is anticipated to be completed in fiscal 2022, with total capital expenditures estimated to be $115 million, of which $77 million has been incurred, including $36 million during fiscal 2021.

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 melt shop includes an EAF, a ladle refining furnace with enhanced steel chemistry refining capabilities, and a five-strand continuous billet caster, permitting the mill to produce special alloy grades of steel not currently produced by other mills on the West Coast of the U.S. The substantial majority of billets produced are reheated in a natural gas-fueled furnace and are then hot-rolled through the rolling mill to produce finished steel long products. The rolling mill has an effective annual production capacity under current conditions of approximately 580 thousand tons of finished steel products.

Products and Services

Recycled ferrous metal is a key feedstock used in the production of finished steel and is largely categorized into heavy melting steel (“HMS”), plate and structural (“bonus”), and shredded scrap (“shred”), although there are various grades of each category depending on metal content and the size and consistency of individual pieces. These attributes affect the product’s relative value.

Our nonferrous products include mixed metal joint products recovered from the shredding process, as well as aluminum, copper, stainless steel, nickel, brass, titanium, lead, and high temperature alloys. We also sell catalytic converters to specialty processors that extract the nonferrous precious metals including platinum, palladium and rhodium.

We provide recycling and related services involving scrap metal and other recyclable materials to a range of customers, including large retailers, industrial manufacturers, original equipment manufacturers and owners of end-of-life railcars. These services include primarily scrap brokerage, certified destruction, automotive parts recycling, railcar dismantling, and reverse logistics.

Each retail self-service auto parts store offers an extensive selection of vehicles (including domestic and foreign cars, vans, and light trucks) from which customers can remove and purchase parts. We employ proprietary information technology systems to centrally manage and operate the geographically diverse network of auto parts stores, and we regularly rotate the inventory to provide customers with greater access to parts. Our used auto parts inventory is also searchable on our Pick-n-Pull public website. We enter into limited duration contracts with public entities and other third parties for vehicle dismantling and asset recovery services, which provide a source of low-cost salvage vehicles.

3 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

 

 

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. Semi-finished goods are predominantly used for the manufacturing of finished products. Rebar is produced in either straight length steel bars or coils and used to increase the strength of poured concrete. Coiled rebar is preferred by some manufacturers because it reduces the waste generated by cutting individual lengths to meet customer specifications and, therefore, improves yield. Wire rod is steel rod, delivered in coiled form, used by manufacturers to produce a variety of products such as chain link fencing, nails, wire, stucco netting, and pre-stressed concrete strand. Merchant bar consists of rounds and square steel bars used by manufacturers to produce a wide variety of products, including bolts, threaded bars, and dowel bars. Our steel mill is also an approved supplier of high-quality rebar to support nuclear power plant construction and has a license to produce certain patented high-strength specialty steels.

Active Facilities

Tabular presentation of our active facilities by geographic region is as follows:

 

 

Auto Parts

Stores

 

 

Metals Recycling

Facilities(1)

 

 

Total Recycling

Facilities

 

 

Large-Scale

Shredders(2)

 

 

Deepwater

Ports

 

 

Steel

Facilities(3)

 

Northwest

(WA, OR, MT)

 

 

7

 

 

 

8

 

 

 

15

 

 

 

2

 

 

 

2

 

 

 

1

 

Southwest and Hawaii

(CA, NV, UT, HI)

 

 

22

 

 

 

7

 

 

 

29

 

 

 

2

 

 

 

2

 

 

 

1

 

Midwest and South

(AR, IL, IN, OH, MO, KS, TX)

 

 

13

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

Northeast

(MA, ME, NH, RI)

 

 

2

 

 

 

9

 

 

 

11

 

 

 

1

 

 

 

2

 

 

 

 

Southeast and Puerto Rico

(GA, AL, TN, FL, VA, KY, MS, PR)

 

 

2

 

 

 

24

 

 

 

26

 

 

 

1

 

 

 

1

 

 

 

 

Western Canada

(BC, AB)

 

 

4

 

 

 

4

 

 

 

8

 

 

 

 

 

 

 

 

 

 

Total

 

 

50

 

 

 

52

 

 

 

102

 

 

 

6

 

 

 

7

 

 

 

2

 

 

(1)

Excludes joint venture facilities. Includes eight metals recycling facilities located in the Southeast which we acquired on October 1, 2021. See “Acquisition of Columbus Recycling” below in this Item 1 for further detail.

(2)

All large-scale shredding operations employ nonferrous extraction and separation equipment.

(3)

Includes one steel mill in Oregon and one distribution center in California.

Pricing

Domestic and foreign prices for recycled ferrous and nonferrous metal are generally based on prevailing market rates, which differ by region, and are subject to market cycles that are influenced by worldwide demand from steel and other metal producers, the availability of materials that can be processed into saleable recycled metal, and regulatory policies, among other factors. Sanctions, trade actions, and licensing and inspection requirements can also impact pricing for the affected products. Recycled ferrous and nonferrous metal sales contracts generally provide for shipment within 30 to 60 days after the price is agreed to which, in most cases, includes freight.

We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating income. The spread between selling prices and the cost of purchased scrap metal (metal spread) is subject to a number of factors, including differences in the market conditions between the domestic regions where scrap metal is acquired and the areas in the world to which the processed metals are sold, market volatility from the time the selling price is agreed upon with the customer until the time the scrap metal is purchased, and changes in transportation costs. We generally benefit from sustained periods of stable or rising recycled metal selling prices, which allow us to better maintain or increase both operating income 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.

The sales prices for auto parts from salvaged vehicles are deeply discounted from prevailing national new and refurbished sales prices offered at full-service auto dismantlers, retail auto parts stores, and car dealerships. Our stores provide a list price, available at each location and online. Prices for auto bodies sold to third parties and for major component parts, such as engines, transmissions, and alternators sold to wholesalers, are based on prevailing recycled metal market rates which differ by region and are subject to market cycles. Prices for catalytic converters sold to third-party processors are based on prevailing market rates for the extracted precious metals including platinum, palladium, and rhodium. By consolidating shipments of auto bodies and component parts, we are able to optimize prices by focusing on larger wholesale customers that pay a premium for volume and consistency of shipments.

4 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

 

 

Our finished steel product prices differ by product size and grade. Selling prices are influenced by the price of raw materials, including the cost of recycled ferrous metal and required consumables including graphite electrodes and alloys, as well as regional demand in the West Coast and Western Canadian markets. Selling prices for our finished steel products may also be affected by the price and availability of steel imports.

Customers and Markets

Approximately 95% of our consolidated revenues are derived from sales of recycled ferrous and nonferrous metal products and finished steel products. We sell our recycled ferrous and nonferrous metal products globally to steel mills, foundries, refineries, smelters, wholesalers, and other recycled metal processors. Our finished steel customers are primarily steel service centers, construction industry subcontractors, steel fabricators, wire drawers, and major farm and wood products suppliers. We had no external customers that accounted for 10% or more of our consolidated revenues in fiscal 2021, 2020, or 2019.

Recycled Ferrous Metal

The table below sets forth, on a revenue and volume basis, the amount of recycled ferrous metal sold to foreign and domestic customers, during the last three fiscal years ended August 31:

 

 

For the Year Ended August 31,

 

 

% Increase (Decrease)

 

($ in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2021 vs. 2020

 

 

2020 vs. 2019

 

Ferrous revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

289,742

 

 

$

167,060

 

 

$

288,641

 

 

 

73

%

 

 

(42

)%

Foreign

 

 

1,268,149

 

 

 

695,430

 

 

 

876,078

 

 

 

82

%

 

 

(21

)%

Total ferrous revenues

 

$

1,557,891

 

 

$

862,490

 

 

$

1,164,719

 

 

 

81

%

 

 

(26

)%

Ferrous volumes (LT, in thousands)(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic(2)

 

 

1,500

 

 

 

1,429

 

 

 

1,699

 

 

 

5

%

 

 

(16

)%

Foreign

 

 

2,908

 

 

 

2,525

 

 

 

2,621

 

 

 

15

%

 

 

(4

)%

Total ferrous volumes (LT, in thousands)(3)

 

 

4,408

 

 

 

3,954

 

 

 

4,319

 

 

 

11

%

 

 

(8

)%

 

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

(1)

Ferrous volumes sold externally and delivered to our steel mill for finished steel production.

(2)

Domestic includes volumes delivered to our steel mill for finished steel production.

(3)

May not foot due to rounding.

We export recycled ferrous metal primarily to countries in Asia, the Mediterranean region, and North, Central, and South America. Ferrous exports made up 66%, 64%, and 61% of our total ferrous volumes in fiscal 2021, 2020, and 2019, respectively. In fiscal 2021, the three countries from which we derived our largest ferrous export revenues from external customers were Bangladesh, Turkey, and Vietnam which collectively accounted for 63% of our total ferrous export revenues. In fiscal 2020 and 2019, the three countries from which we derived our largest ferrous export revenues from external customers accounted for 69% and 64%, respectively, of our total ferrous export revenues. We generally attribute revenues from external customers to individual countries based on the country in which the customer is located. Our three largest external recycled ferrous metal customers accounted for 25% of total ferrous revenues in fiscal 2021, compared to 32% and 29% in fiscal 2020 and 2019, respectively.

5 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

 

 

Recycled Nonferrous Metal

The table below sets forth, on a revenue and volume basis, the amount of recycled nonferrous metal sold to foreign and domestic customers during the last three fiscal years ended August 31:

 

 

For the Year Ended August 31,

 

 

% Increase (Decrease)

 

($ in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2021 vs. 2020

 

 

2020 vs. 2019

 

Nonferrous revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

367,744

 

 

$

195,880

 

 

$

216,992

 

 

 

88

%

 

 

(10

)%

Foreign

 

 

317,118

 

 

 

194,418

 

 

 

251,031

 

 

 

63

%

 

 

(23

)%

Total nonferrous revenues

 

$

684,862

 

 

$

390,298

 

 

$

468,023

 

 

 

75

%

 

 

(17

)%

Nonferrous volumes (pounds, in thousands)(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

219,126

 

 

 

194,554

 

 

 

262,024

 

 

 

13

%

 

 

(26

)%

Foreign

 

 

374,252

 

 

 

356,012

 

 

 

405,310

 

 

 

5

%

 

 

(12

)%

Total nonferrous volumes (pounds, in thousands)(2)

 

 

593,378

 

 

 

550,566

 

 

 

667,334

 

 

 

8

%

 

 

(17

)%

 

(1)

All nonferrous volumes sold externally.

(2)

May not foot due to rounding.

Nonferrous exports made up 63%, 65%, and 61% of our total nonferrous sales volumes in fiscal 2021, 2020, and 2019, respectively. The substantial majority of our nonferrous joint products recovered from the shredding process are sold to the export market currently and made up 44%, 47%, and 43% of our total nonferrous sales volumes in fiscal 2021, 2020, and 2019, respectively. In fiscal 2021, the three countries from which we derived our largest nonferrous export revenues from external customers were India, Malaysia, and China which collectively accounted for 69% of our total nonferrous export revenues. In fiscal 2020 and 2019, the three countries from which we derived our largest nonferrous export revenues from external customers accounted for 58% and 68%, respectively, of our total nonferrous export revenues.

Finished Steel Products

The table below sets forth, on a revenue and volume basis, the amount of finished steel products sold during the last three fiscal years ended August 31:

 

 

For the Year Ended August 31,

 

 

% Increase (Decrease)

 

($ in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2021 vs. 2020

 

 

2020 vs. 2019

 

Steel revenues(1)

 

$

379,203

 

 

$

336,980

 

 

$

367,956

 

 

 

13

%

 

 

(8

)%

Finished steel sales volumes (ST, in thousands)

 

 

488

 

 

 

505

 

 

 

478

 

 

 

(3

)%

 

 

6

%

 

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

(1)

Steel revenues include predominantly sales of finished steel products, in addition to sales of semi-finished goods (billets) and steel manufacturing scrap.

We sell finished steel products to customers located primarily in the Western United States and Western Canada. Customers in California accounted for 52%, 55%, and 54% of our steel revenues in fiscal 2021, 2020, and 2019, respectively.

Distribution

We deliver recycled ferrous and nonferrous metal to foreign customers by ship and to domestic customers by barge, rail, and road transportation networks. Cost efficiencies are achieved by operating deepwater terminal facilities in Everett, Massachusetts; Portland, Oregon; Oakland, California; Tacoma, Washington; and Providence, Rhode Island, all of which are owned, except for the Providence, Rhode Island facility which is operated under a long-term lease. We also have access to deepwater terminal facilities at Kapolei, Hawaii and Salinas, Puerto Rico through public docks. The use of deepwater terminals enables us to load ferrous material in large vessels capable of holding up to 50,000 tons for trans-oceanic shipments. We believe the use of our owned and leased terminal facilities is advantageous because it allows us to more effectively manage loading costs and minimize the berthing delays often experienced by users of unaffiliated terminals. From time to time, we may enter into contracts of affreightment, which guarantee the availability of ocean-going vessels, in order to manage the risks associated with ship availability and freight costs.

Our nonferrous products are shipped in 20- to 30-ton capacity containers from ports and rail ramps located in close proximity to our recycling facilities. Containerized shipments are exported by marine vessels to customers globally, and domestic shipments are typically shipped to customers by rail or by truck.

6 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

We sell used auto parts from our self-service retail stores. Both before and after retail customers have removed desired parts from acquired salvaged vehicles, we extract and consolidate certain valuable ferrous and nonferrous components from auto bodies for shipment by truck primarily to wholesale customers. We also remove and collect catalytic converters from salvaged vehicles for shipment by truck to specialty processers which extract the nonferrous precious metals. The salvaged auto bodies are crushed and shipped by truck to our metals recycling facilities where geographically feasible, or to third-party recyclers, for shredding.

We sell finished steel products directly from our steel mill in McMinnville, Oregon and our distribution center in City of Industry, California (Los Angeles area). Finished steel products are shipped from the mill to the distribution center primarily by rail. The distribution center facilitates sales by maintaining an inventory of products close to major customers for just-in-time delivery. We communicate regularly with major customers to determine their anticipated needs and plan our rolling mill production schedule accordingly. Finished steel shipments to customers are made by common carrier, primarily truck or rail.

Sources of Unprocessed Metal

The most common forms of purchased unprocessed metal are obsolete machinery and equipment, such as automobiles, railroad cars, railroad tracks, home appliances and other consumer goods, scrap metal from manufacturing operations and retailers, and demolition metal from buildings and other infrastructure. Unprocessed metal is acquired from a diverse base of suppliers who unload at our facilities, from drop boxes at suppliers’ industrial sites, and through negotiated purchases from other large suppliers, including railroads, manufacturers, automobile salvage facilities, metal dealers, various government entities, and individuals. We typically seek to locate our retail auto parts stores in major population centers with convenient road access. Our auto parts store network spans 15 states in the U.S. and two provinces in Western Canada, with a majority of the stores concentrated in regions where our large shredders are located. Through our network of auto parts stores, we seek to obtain salvaged vehicles from five primary sources: private parties, tow companies, charities, auto auctions, and municipal and other contracts. We have a program to purchase vehicles from private parties called “Cash for Junk Cars” which is advertised in local markets. Private parties either call a toll-free number and receive a quote for their vehicle or obtain an instant online quote. The private party can either deliver the vehicle to one of our retail locations or arrange for the vehicle to be picked up. We also employ car buyers who travel to vendors and bid on vehicles. Further, we enter into limited duration contracts with public entities and other third parties for vehicle dismantling and asset recovery services, which provide a source of low-cost salvage vehicles. The expiration of such contracts may lead us to seek alternative sources of vehicles, potentially at a higher cost. We also source scrap metal and other recyclable materials through our recycling services from a range of customers including large retailers, industrial manufacturers, original equipment manufacturers, and railcar owners.

The majority of our metal collection and processing facilities receive unprocessed metal via major railroad routes, waterways, or highways. Metals recycling facilities situated near industrial manufacturing and major transportation routes have the competitive advantage of reduced freight costs because of the significant cost of freight relative to the cost of metal. The locations of our West Coast facilities provide access to sources of unprocessed metal in the Northern California region, northward to Western Canada and Alaska, and to the East, including Idaho, Montana, Utah, Colorado, and Nevada. The locations of our East Coast facilities provide access to sources of unprocessed metal in New York, Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, Eastern Canada, and, from time to time, the Midwest. The locations of our facilities in Hawaii and Puerto Rico provide access to sources of unprocessed metal in the respective local markets. In the Southeastern U.S., approximately half of our ferrous and nonferrous unprocessed metal volume is purchased from industrial companies, including auto manufacturers, with the remaining volume being purchased from smaller dealers and individuals. These industrial companies provide us with metals that are by-products of their manufacturing processes.

The supply of scrap metal from these various sources can fluctuate with the level of economic activity in the U.S. and can be sensitive to variability in recycled metal prices, particularly in the short term. The supply of scrap metal can also fluctuate, to a lesser degree, due to seasonal factors, such as severe weather conditions, which can inhibit scrap metal collections at our facilities and production levels in our facilities. Severe weather conditions can also adversely impact the timing of shipments of our products, the level of manufacturing activity utilizing our products, and retail admissions at our auto parts stores.

We believe we operate the only EAF steel mill in the Western U.S. that obtains substantially all its recycled metal requirements from integrated metals recycling and joint venture operations. Our metals recycling operations provide our steel mill with a mix of recycled metal grades, which allow the mill to achieve optimum efficiency in its melting operations.

7 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

Energy Supply

We require electricity to run our steel manufacturing operations, primarily its EAF. We purchase electricity under a long-term contract with McMinnville Water & Light (“MW&L”), which in turn relies on the Bonneville Power Administration. We entered into our current contract with MW&L in October 2011 that will expire in September 2028. Our steel manufacturing operations also need natural gas to operate the reheat furnace, which is used to reheat billets prior to running them through the rolling mill. We meet this demand through a natural gas agreement with a utility provider that obligates us at each month-end to purchase a volume of gas based on our projected needs for the immediately subsequent month on a take-or-pay basis priced using published natural gas indices. The combined electricity and natural gas costs for our steel mill represented approximately 1% of our consolidated cost of goods sold in each of fiscal 2021, 2020, and 2019.

Competition

We compete in the U.S. and in Western Canada for the purchase of scrap metal with large, well-financed recyclers of scrap metal, steel mills that own metal recycling facilities, and with smaller metals facilities and dealers. Our auto stores compete for the purchase of end-of-life vehicles with other auto dismantlers, used car dealers, auto auctions, and metals recyclers. In general, the competitive factors impacting the purchase of scrap metal and end-of-life vehicles are the price offered by the purchaser, the proximity of the purchaser to the source of scrap metal and end-of-life vehicles, and the purchaser’s ability to efficiently collect the scrap metal and end-of-life vehicles from certain suppliers’ locations. We also compete with brokers that buy scrap or recycled metal on behalf of domestic and foreign steel mills.

Demand for our products is cyclical in nature and sensitive to general economic conditions, structural and cyclical changes in markets, and other factors. We compete globally for the sale of processed recycled metal to finished steel and other metal product producers. The predominant competitive factors that impact recycled metal sales are price (including duties and shipping cost), reliability of service, product quality, the relative value of the U.S. dollar, and the availability and price of raw material alternatives, including recycled metal substitutes, such as pig iron, direct reduced iron, and hot briquetted iron (all three derived from iron ore), and semi-finished products, such as steel billets. Our ability to compete in certain export markets may be impacted by sanctions and trade actions, such as tariffs, quotas, and other import restrictions, and by licensing and inspection requirements. Further, our ability to sell into certain countries may be subject to product quality requirements. Such restrictions may require us to perform additional processing and packaging of certain recycled nonferrous metal products, as well as engage in increased inspection and certification activities, in order to continue selling into the affected markets.

We also compete for the sale of used auto parts to retail customers with other self-service and full-service auto dismantlers. The auto parts industry is characterized by diverse and fragmented competition and comprises a large number of aftermarket and used auto parts suppliers of all sizes, ranging from large, multinational corporations which serve both original equipment manufacturers and the aftermarket on a worldwide basis to small, local entities which have more limited supply. The main competitive factors impacting the retail sale of auto parts are price, availability and visibility of product, quality, and convenience of the retail stores to customers.

Our ability to process substantial volumes of recycled metal products, our use of advanced processing and separation equipment, the number and geographic dispersion of our locations, our access to a variety of different modes of transportation, and the operating synergies of our integrated platform provide our business with the ability to compete successfully in varying market conditions.

Our primary domestic competitors for the sale of finished steel products include Nucor Corporation’s manufacturing facilities in Arizona, Utah, and Washington, and Commercial Metals Company’s manufacturing facility in Arizona. In addition to domestic competition, we compete with foreign steel producers, principally located in Asia, Canada, Mexico, and Central and South America, primarily in shorter length rebar and certain wire rod grades. The principal competitive factors in the steel market currently are price, quality, service, product availability, and the relative value of the U.S. dollar.

For more than a decade, our steel manufacturing operation, as part of a U.S. industry coalition, petitioned the U.S. Government under our international trade laws for relief in the form of antidumping and countervailing duties against wire rod and rebar products from a number of foreign countries. Many of those cases were successful and led to a decrease in finished steel imports into our domestic markets from the peak reached in fiscal 2016. During fiscal 2021, antidumping and countervailing duty orders were in effect related to imports of rebar and wire rod from many countries. The duties imposed as part of these orders are periodically reassessed through the administrative review process. In addition, every five years the U.S. Government conducts sunset reviews to determine whether revocation of the orders would likely lead to resumption of dumping and subsidization and negatively impact the U.S. domestic industry. Affirmative decisions allow the orders to continue for an additional five years, and all current orders have completed at least one sunset review.

8 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

There are also a number of antidumping and countervailing duty orders in effect in Canada covering rebar from many countries that we expect will continue to lead to a reduction in the volume of imports into Canada from these countries.

The long-term effectiveness of existing antidumping and countervailing duty orders related to imports of wire rod and rebar products is largely uncertain and is impacted by the level and pricing of imports and the U.S. Government’s assessment of antidumping and countervailing duty margins as well as its assessment of continued injury to the U.S. industry as part of the sunset review process.

In March 2018, the United States imposed tariffs in the amount of 25 percent and 10 percent on imports of certain steel and aluminum products, respectively. The imposition of the tariffs was the conclusion of an investigation started in April 2017 under Section 232 of the Trade Expansion Act of 1962 that allows for an exemption from normal international trade rules if imports of a product are harming national security. Currently, imports from Argentina, Australia, Brazil, Canada, Mexico, and South Korea are exempt from these duties pursuant to various agreements, including quotas. The Department of Commerce also implemented an exclusion process whereby U.S. entities can request that certain products be excluded from the Section 232 tariffs. We review any exclusion requests relevant to our product line to determine whether an objection might be appropriate. To date, the Biden Administration has allowed all Section 232 duties and procedures to remain in place.

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. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our third quarter fiscal 2020 results, global economic conditions improved during fiscal 2021, resulting in increased demand for our products and services, which led to our earnings for fiscal 2021 substantially exceeding the results for fiscal 2020.

Acquisition of Columbus Recycling

On August 12, 2021, we entered into a definitive agreement with Columbus Recycling, a leading provider of recycled ferrous and nonferrous metal products and recycling services, to acquire eight metals recycling facilities across several states in the Southeast, including Mississippi, Tennessee, and Kentucky. The transaction closed on October 1, 2021, during the first quarter of our fiscal 2022. The acquired Columbus Recycling operations purchase and process scrap metal from industrial manufacturers, local recycling companies, and individuals, and sell the recycled products to regional foundries and steel mills. Combined with our twelve existing metals recycling facilities in Georgia, Alabama, and Tennessee, the acquired operations offer additional recycling products, services, and logistics solutions to customers and suppliers across the Southeast, a region that is expected to see a significant increase in EAF steelmaking capacity in the coming years. The cash purchase price was approximately $107 million, subject to adjustment for acquired net working capital relative to an agreed-upon benchmark, as well as other adjustments. We funded the business acquisition using cash on hand and borrowings under our existing credit facilities.

Regulatory Matters

Impact of Legislation and Regulation

Compliance with environmental laws and regulations is a significant factor in our operations. Our businesses are subject to extensive local, state, and federal environmental protection, health, safety, and transportation laws and regulations relating to, among others:

 

Remediation under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”);

 

The discharge of materials and emissions into the air;

 

The prevention and remediation of soil and groundwater contamination;

 

The management, treatment and discharge of wastewater and storm water;

 

Climate change;

 

The generation, discharge, storage, handling and disposal of hazardous materials and secondary materials; and

 

The protection of our employees’ health and safety.

9 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

 

These environmental laws regulate, among other things, the release and discharge of hazardous materials into the air, water, and ground; exposure to hazardous materials; and the identification, storage, treatment, handling and disposal of hazardous materials.

Concern over climate change, including the impact of global warming, has led to significant U.S. and international regulatory and legislative initiatives to limit greenhouse gas (“GHG”) emissions. In 2007, the U.S. Supreme Court ruled that the United States Environmental Protection Agency (“EPA”) was authorized to regulate carbon dioxide under the U.S. Clean Air Act. The EPA subsequently initiated a series of regulatory efforts aimed at addressing GHGs as pollutants, including finding that GHG emissions endanger public health, implementing mandatory GHG emission reporting requirements, and setting carbon emission standards for light-duty vehicles.

Environmental legislation and regulations have changed rapidly in recent years, and it is likely that we will be subject to even more stringent environmental standards in the future. Legislation has been proposed in the U.S. Congress to address GHG emissions and global climate change, including “cap and trade” programs, and some form of federal climate change legislation or additional federal regulation is possible. A number of states, including states in which we have operations and facilities, have considered, are considering, or have already enacted legislation or executive action to develop information or address climate change and GHG emissions, including state-level “cap and trade” programs. Currently, we are required to annually report GHG emissions from our steel mill to the State of Oregon Department of Environmental Quality (“ODEQ”) and the EPA, and in March 2020, the Governor of Oregon issued an executive order directing state agencies to take certain actions to reduce and regulate GHG emissions. Pursuant to this executive order, ODEQ issued a notice of proposed rulemaking in August 2021 that would establish a new Climate Protection Program to limit GHG emissions in the state including from large stationary sources such as our steel mill. In addition, the ODEQ Cleaner Air Oregon (“CAO”) program regulates toxic air emissions from manufacturing facilities located in Oregon. The ODEQ has published a prioritization list of the facilities within the state subject to the CAO program based on emissions inventories that facilities submitted to the ODEQ. The prioritization list established four tiers of risk groups. Our steel mill has been assigned to the first-tier risk group and was selected into the CAO program in 2020. To comply with the CAO program rules, including as they may be revised in the future, facilities may incur expenses to evaluate the risk to the public and may be required to incur additional operating or capital expenditures to mitigate any significant identified risks.

Federal, state, and local regulators have increased their focus on metals recycling and auto dismantling facilities that has or could lead to new or expanding regulatory requirements. In July 2021, the EPA issued an enforcement alert reflecting a national enforcement initiative in conjunction with state regulators focused on Clean Air Act compliance at metal recycling facilities that operate auto and scrap metal shredders. While we believe we are an industry leader in emission controls and have been working with state and local regulators on compliance and permitting matters, we have in the past and may in the future be subject to enforcement actions or litigation by regulators or private parties that could result in additional penalties, compliance requirements, or capital investments. See “Legal Proceedings” in Part I, Item 3 of this report. In addition, on October 15, 2021, the California State Department of Toxic Substance Control (DTSC) submitted proposed emergency regulations to the Office of Administrative Law (OAL) that would require metal shredding facilities in California, including our Oakland facility, to operate under state hazardous waste facility permits. OAL has 10 calendar days within which to review and make a decision on the proposed emergency rulemaking. If the emergency regulations are approved, metal shredding facilities in California would have 30 days to file to obtain “interim status” that, according to DTSC, is necessary for facilities to continue operating through the permit application process, which could take as long as five years. The California metal recycling industry is working with DTSC to identify an alternative regulatory framework and permitting regime under existing law that could accommodate the unique aspects of metal shredding facility operations. Operating under DTSC’s hazardous waste permitting requirements, including under interim status regulations, or under an alternative permitting structure could require substantial additional capital expenditures, impose financial assurance obligations, subject us to increased compliance and penalty risks, severely limit operational flexibility and increase operating costs, or adversely impact our ability to acquire or sell materials at our California facilities.

The Biden Administration and state and local regulators are also emphasizing efforts to strengthen environmental compliance and enforcement, including with respect to clean-up actions under superfund and hazardous waste laws, in overburdened communities that may be disproportionately impacted by adverse health and environmental effects. On September 10, 2021, U.S. EPA Region 9 and the California Environmental Protection Agency announced a joint effort to expand environmental enforcement in overburdened California communities. These initiatives could result in increased enforcement, compliance, and clean-up costs, including increased capital expenditures, at our facilities located at or near such communities.

10 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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Although our objective is to maintain compliance with applicable environmental laws and regulations, we have, in the past, been found to be not in compliance with certain environmental laws and regulations and have incurred liabilities, expenditures, fines, and penalties associated with such violations. In December 2000, we were notified by the EPA that we are one of the potentially responsible parties that owns or operates, or formerly owned or operated, sites which are part of or adjacent to the Portland Harbor Superfund site. Further, we have been notified that we are or may be a potentially responsible party at sites other than Portland Harbor currently or formerly owned or operated by us or at other sites where we may have responsibility for such costs due to past disposal or other activities.

See further discussion of the Portland Harbor Superfund and other environmental-related matters in Part I, Item 1A. Risk Factors and Note 9 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.

We incurred capital expenditures related to environmental projects of $21 million, $10 million, and $36 million in fiscal 2021, 2020, and 2019, respectively, and we expect to spend in the range of $30 million to $40 million on capital expenditures related to environmental projects in fiscal 2022.

Our steel mill has an operating permit issued under Title V of the Clean Air Act Amendments of 1990, which governs certain air quality standards. The permit is based on an annual production capacity of approximately 950 thousand tons. The permit was first issued in 1998 and has since been renewed multiple times, most recently in April 2020 extending the permit through April 1, 2025.

Indirect Consequences of Future Legislation and Regulation

Future legislation or increased regulation regarding climate change and GHG emissions could impose significant costs on our business and our customers and suppliers, including increased energy, capital equipment, emissions controls, environmental monitoring and reporting, and other costs in order to comply with laws and regulations concerning and limitations imposed on climate change and GHG emissions. The potential costs of allowances, taxes, fees, offsets, or credits that may be part of “cap and trade” programs or similar future legislative or regulatory measures are still uncertain, and the future of these programs or measures is unknown. Any adopted future climate change and GHG laws or regulations could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to or complying with such requirements. Furthermore, even without such laws or regulations, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the metals recycling and steel manufacturing industries could harm our reputation and reduce customer demand for our products.

GHG legislation and regulation are expected to have an effect on the future price of transportation fuels, natural gas used in the manufacturing process, and electricity, especially electricity generated using carbon-based fuels. Since the electricity supply for our steel mill includes a significant element of hydro-generated production which is not subject to GHG legislation and regulation, its energy costs are less likely to be impacted than those of competitors using electricity generated by carbon-based fuels. In addition, demand for recycled metal may increase from mills with blast furnaces as they seek to maximize the recycled metal component of raw material infeed, which requires less energy than melting iron ore.

Because the use of recycled iron and steel instead of iron ore to make new steel results in savings in the consumption of energy, virgin materials, and water and reduces mining wastes, we believe our recycled metal products position us to be more competitive in the future for business from companies wishing to reduce their carbon footprint and impact on the environment. In addition, the EAF at our steel mill generates significantly less GHG emissions than traditional blast furnaces.

Physical Impacts of Climate Change on Our Costs and Operations

There has been public discussion that climate change may be associated with higher temperatures, lower snowpack, drier forests, rising sea levels as well as extreme weather events and conditions such as more intense hurricanes, thunderstorms, tornadoes, wildfires, and snow or ice storms. Extreme weather conditions may increase our costs or cause damage to our facilities, and any damage resulting from extreme weather may not be fully insured. As many of our recycling facilities are located near deepwater ports, rising sea levels may disrupt our ability to receive scrap metal, process the scrap metal through our shredders, and ship products to our customers. Periods of extended adverse weather conditions may inhibit construction activity utilizing our products, scrap metal inflows to our recycling facilities, and retail admissions and parts sales at our auto parts stores. Potential adverse impacts from climate change, including rising temperatures and extreme weather events and conditions, may create health and safety issues for employees operating at our facilities and may lead to an inability to maintain standard operating hours.

11 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

Human Capital Resources

Employees

We hire employees from across the United States, Puerto Rico, and Canada and have employees residing in all states, territories, and provinces in which we operate. We aim to offer a competitive compensation package and suite of benefits that align our employees with the interests of our strategic long-term growth and our customers, communities, and shareholders. As of August 31, 2021, we had 3,167 full-time employees, 691 of whom were covered by collective bargaining agreements. Of our full-time employees as of August 31, 2021, approximately 93% resided in the United States.

Engagement

We believe employee engagement contributes significantly to our operational performance, achievement of our strategic goals, and the growth and development of our employees. Our leaders sponsor and, in many cases, lead employee engagement initiatives focusing on diversity, equity, inclusion, volunteering, community involvement, and job satisfaction. For example, our numerous Employee Resource Groups aim to broaden awareness of the diverse characteristics of our workforce and others, and we often survey our employees to gain feedback about our culture, employee experience, and leadership behaviors. In fiscal 2021, we became a certified Great Place to Work®. Achieving this prominent designation followed an all-employee Trust Index Survey process which had requested the views and beliefs of our employees.

Health & Safety

Safety is one of our core values. Our approach to safety is proactive and focuses on active leadership, risk and hazard identification, training, frequent checks of high-risk processes, and other monitoring activities. Creating a positive health and safety culture takes time and visible leadership that demonstrate care and concern for the health and safety of our employees.

We regularly track and evaluate numerous leading indicators, which are proactive, preventive, and predictive measures that provide information about the effective performance of our health and safety systems and processes, and which allow us to take preventive action to address failures or hazards before they turn into an incident. Leading indicators that we use in connection with our health and safety programs include among others employee training and attendance, workplace inspections, corrective action closure rates, hazard response time analysis, and frequency and quality of layered safety observations conducted at all levels of the organization.

We also track health and safety performance using industry-standard metrics including but not limited to the following:

 

Total Case Incident Rate (“TCIR”)

 

Days Away, Restricted, or Transferred (“DART”) Rate

 

Lost Time Incident Rate (“LTIR”)

We work continuously to improve all aspects of our health and safety performance. Our safety strategy emphasizes prevention of serious injuries and fatalities, works toward achievement of zero injuries, and empowers employees to cultivate personal safety leadership. With zero injuries as our ultimate aspiration, we are working toward a near-term goal of a 1.00 TCIR by the end of fiscal 2025 (one recordable injury per 200,000 working hours). We recorded the lowest TCIR in our history in fiscal 2021. We attribute our continued improved performance to the work we have done over the past several years to engage leaders and front-line employees in proactively preventing workplace injuries and illnesses through training, education, and monitoring programs, in identifying and addressing the root causes of health and safety incidents, and in optimizing overall health and safety performance.

12 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

Our TCIR, DART Rate and LTIR for the fiscal years ended August 31, 2019, 2020 and 2021 are as follows:

 

COVID-19 cases for which contact tracing could not identify a source of exposure outside of work are included in OHSA reporting in accordance with OHSA reporting requirements using a designated special code for the nature of the illness. These cases are excluded from the TCIR and LTIR metrics shown above.

COVID-19

We implemented and managed a wide range of controls and other protective measures at our sites to detect and prevent the transmission of COVID-19. A key control established as part of our COVID-19 response is monitoring employee health. We utilize an independent 24-hour telemedicine service that allows any employee who exhibits COVID-like symptoms, who has been exposed to a confirmed COVID-19 case, or who tests positive for COVID-19, to be connected with a licensed medical professional who will perform an assessment, offer direction for quarantining as appropriate and access to testing facilities, and establish a connection to healthcare providers. We provide six hours of paid time for our employees to receive the vaccination and booster. In addition, we cover time away for any complications arising from being vaccinated or the booster.

Throughout the COVID-19 health crisis, we compensated employees who tested positive at their regular rate of pay while also retaining health and welfare benefits during their recovery, and until returning to their work schedule. At our facilities, we have instituted a range of safety practices and COVID-19 prevention controls, such as temperature screening, symptom checks, wearing face coverings, hygiene and sanitation procedures, social and physical distancing, installing touchless equipment, and other physical contact reduction processes. We have also supported work-from-home when feasible. To monitor the effectiveness of these controls, our Health and Safety team created a protocol for auditing facilities on their performance against our COVID-19 controls. The results of these audits are reported to senior leadership and used to make any necessary performance improvements. Regular and transparent employee communication also has been critical to our response, including weekly messages of support to help keep safe behaviors top of mind.

Ethics

Our employees, both union and non-union, participate in annual training on our Company’s Core Values, which includes instruction on our Code of Conduct and ethical behavior. The training includes important topics such as reporting misconduct, prohibition against retaliation, unconscious bias, and diversity, equity, and inclusion. We empower employees to raise issues and concerns regarding compliance with our Code of Conduct, Company policies, and the law by offering multiple reporting channels, including a third-party, confidential, multi-lingual misconduct hotline where employees may choose to remain anonymous. We investigate all reports. In addition to our Code of Conduct and related training, we have a comprehensive Anticorruption Program, inclusive of an overarching Anticorruption Policy available to all employees that details prohibitions against bribery, money laundering, and engaging with terrorists or other sanctioned entities, as well as internal controls, a third-party vetting and monitoring system, and employee engagement and training.

For the seventh consecutive year, we were named one of the 2021 World’s Most Ethical Companies by the Ethisphere Institute. This award is given to companies that foster a culture of ethics and transparency at every level of the company by demonstrating leadership across five key categories: ethics and compliance programs; environmental and societal impacts; culture of ethics; governance; and leadership and reputation. Through the annual process of applying for this award and analyzing our scores across all categories, we gain significant insight into current best practices and can plan and implement improvements to our Company-wide communications, training programs, and other initiatives.

13 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

Executive Officers of the Company

The executive officers of the Company are elected each year at the organizational meeting of the Board of Directors, which follows the annual meeting of the shareholders, and at other Board of Directors meetings, as appropriate. Each of the executive officers has been employed by the Company for more than five years.

At October 21, 2021, the executive officers of the Company were as follows:

 

Name

 

Age

 

Office

Tamara L. Lundgren

 

64

 

Chairman, President and Chief Executive Officer(1)

Richard D. Peach

 

58

 

Executive Vice President, Chief Financial Officer and Chief Strategy Officer(2)

Michael R. Henderson

 

62

 

Senior Vice President and President, Operations(3)

Steven G. Heiskell

 

52

 

Senior Vice President and President, Recycling Products & Services(4)

Peter B. Saba

 

60

 

Senior Vice President, General Counsel and Corporate Secretary(5)

Erich D. Wilson

 

53

 

Senior Vice President, Chief Human Resources Officer and Chief of Corporate Operations(6)

Stefano R. Gaggini

 

50

 

Vice President, Deputy Chief Financial Officer and Chief Accounting Officer(7)

 

(1)

Ms. Lundgren was appointed President and Chief Executive Officer in December 2008 and was appointed Chairman of the Board of Directors in March 2020.

(2)

Mr. Peach was appointed Senior Vice President and Chief Financial Officer in December 2007. Mr. Peach also served as Chief of Corporate Operations from September 2016 until March 2020 and was appointed Executive Vice President, Chief Financial Officer and Chief Strategy Officer in March 2020.

(3)

Mr. Henderson served as Senior Vice President and Co-President of the Auto and Metals Recycling business from April 2015 until March 2020, and also served as Co-President of the Cascade Steel and Scrap business from June 2017 until March 2020. Mr. Henderson was appointed Senior Vice President and President, Operations in March 2020.

(4)

Mr. Heiskell served as Senior Vice President and Co-President of the Auto and Metals Recycling business from April 2015 until March 2020. Mr. Heiskell was appointed Senior Vice President and President, Recycling Products & Services in March 2020.

(5)

Mr. Saba was appointed Senior Vice President, General Counsel and Corporate Secretary in July 2015.

(6)

Mr. Wilson served as Director, Human Resource Operations from August 2015 until March 2020. Mr. Wilson was appointed Senior Vice President, Chief Human Resources Officer and Chief of Corporate Operations in March 2020.

(7)

Mr. Gaggini served as Vice President, Corporate Controller and Principal Accounting Officer from December 2013 until September 2018. Since September 2018, Mr. Gaggini has served as Vice President, Deputy Chief Financial Officer and Chief Accounting Officer.

Available Information

Our Internet website address is www.schnitzersteel.com. We make available on our website, free of charge, under the caption “Investors – SEC Filings” our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after electronically filing with or furnishing such materials to the Securities and Exchange Commission (“SEC”) pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. Also available on our website are our definitive Proxy Statements and ownership reports pursuant to Section 16(a) of the Securities Act of 1933. Copies of these filings may also be obtained from the SEC’s website (www.sec.gov).

We may use our website as a channel for distributing material Company information. Financial and other material information regarding our Company is routinely posted on and accessible at www.schnitzersteel.com/investors.aspx. You may register your e-mail under the caption “Investors – E-mail Alerts” to receive e-mail notifications of new company information.

The content of our website is not incorporated by reference into this Annual Report on Form 10-K.

ITEM 1A. RISK FACTORS

Described below are risks, which are categorized as “Risk Factors Relating to Our Business,” “Risk Factors Relating to the Regulatory Environment,” and “Risk Factors Relating to Our Employees,” that could have a material adverse effect on our results of operations, financial condition, and cash flows or could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report. See “Forward-Looking Statements” that precedes Part I of this report. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may in the future have a material adverse effect on our results of operations, financial condition, and cash flows.

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Risk Factors Relating to Our Business

The coronavirus disease 2019 (COVID-19) pandemic has had, and may continue to have, an adverse effect on our business, results of operations, financial condition, and cash flows. Future epidemics or other public health emergencies could have similar effects.

Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the COVID-19 outbreak which the World Health Organization characterized as a pandemic in March 2020. The outbreak has resulted in governments around the world implementing measures with various levels of stringency to help control the spread of the virus as well as vaccination programs to build levels of immunity among the population. In addition, governments and central banks globally have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Beginning in our second quarter of fiscal 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on individual, business, and government activities. The easing of restrictions and the existence of variant strains of COVID-19 has and may lead to a further rise in infections, which could result in the reinstatement of some of the restrictions previously in place and the implementation of new restrictions and mandates. There are also 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. 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.

Equipment upgrades, equipment failures, and facility damage may lead to production curtailments or shutdowns

Our business operations and recycling and manufacturing processes depend on critical pieces of equipment, including information technology equipment, shredders, nonferrous sorting technology, furnaces, and a rolling mill, which may be out of service occasionally for scheduled upgrades or maintenance or as a result of unanticipated failures or events. Our facilities are subject to equipment failures and the risk of catastrophic loss due to unanticipated events such as mechanical failures, fires, earthquakes, accidents, or violent weather conditions. For instance, although the impact on our operations was not significant, certain facilities in California, Oregon, and Washington were briefly closed in September 2020 due to poor air quality as a result of wildfires. Additionally, in May 2021, we experienced a fire at our Cascade Steel Rolling Mills 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. While we carry insurance that we anticipate will cover repair and replacement of property that experienced physical loss or damage and business income losses resulting from the fire at the mill, as discussed in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, our insurance coverage is subject to deductibles, and various conditions, exclusions, and limits. Moreover, our insurance coverage may be unavailable or insufficient to protect us against losses in the case of future events. In addition, insurance may not continue to be available in the future on acceptable terms or at acceptable costs. Interruptions in our processing and production capabilities and shutdowns resulting from unanticipated events also could disrupt customer and supplier relationships and could have a material adverse effect on our financial condition, results of operations, and cash flows.

Potential costs related to the environmental cleanup of Portland Harbor may be material to our financial position and liquidity

In December 2000, we were notified by the United States Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that we are one of the potentially responsible parties (“PRPs”) that owns or operates or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”).

The precise nature and extent of cleanup of any specific areas within the Site, the parties to be involved, the timing of any specific remedial action and the allocation of the costs for any cleanup among responsible parties have not yet been determined. The process of site investigation, remedy selection, identification of additional PRPs, and allocation of costs has been underway for a number of years, but significant uncertainties remain. It is unclear to what extent we will be liable for environmental costs or third-party contribution or damage claims with respect to the Site.

From 2000 to 2017, the EPA oversaw a remedial investigation/feasibility study (“RI/FS”) at the Site. We were not among the parties that performed the RI/FS, but we contributed to the costs through an interim settlement with the performing parties. The performing parties have indicated that they incurred more than $155 million in that effort.

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In January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for the Site. The EPA has estimated the total cost of the selected remedy at $1.7 billion with a net present value cost of $1.05 billion (at a 7% discount rate) and an estimated construction period of 13 years following completion of the remedial designs. In the ROD, the EPA stated that the cost estimate is an order-of-magnitude engineering estimate that is expected to be within +50% to -30% of the actual project cost and that changes in the cost elements are likely to occur as a result of new information and data collected during the engineering design. We have identified a number of concerns regarding the remedy described in the ROD, which is based on data that is more than 15 years old, and the EPA’s estimates for the costs and time required to implement the selected remedy. Moreover, the ROD provided only Site-wide cost estimates and did not provide sufficient detail to estimate costs for specific sediment management areas within the Site. In addition, the ROD did not determine or allocate the responsibility for remediation costs among the PRPs.

In the ROD, the EPA acknowledged that much of the data was more than a decade old at that time and would need to be updated with a new round of “baseline” sampling to be conducted prior to the remedial design phase. The remedial design phase is an engineering phase during which additional technical information and data are collected, identified, and incorporated into technical drawings and specifications developed for the subsequent remedial action. Following issuance of the ROD, the EPA proposed that the PRPs, or a subgroup of PRPs, perform the additional investigative work in advance of remedial design.

In December 2017, we and three other PRPs entered into an Administrative Settlement Agreement and Order on Consent with the EPA to perform such pre-remedial design investigation and baseline sampling over a two-year period. The report analyzing the results concluded that Site conditions have improved substantially since the data forming the basis of the ROD was collected. The EPA found with a few limited corrections that the data is of suitable quality and stated that such data will be used, in addition to existing and forthcoming design-level data, to inform implementation of the ROD. However, the EPA did not agree that the data or the analysis warranted a change to the remedy at this time and reaffirmed its commitment to proceed with remedial design. We and other PRPs disagree with the EPA’s position on use of the more recent data and will continue to pursue limited, but critical, changes to the selected remedy for the Site during the remedial design phase.

The EPA encouraged PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design in various project areas covering the entire Site. While certain PRPs executed consent agreements for remedial design work, because of the EPA’s refusal to date to modify the remedy to reflect the most current data on Site conditions and because of concerns with the terms of the consent agreement, we elected not to enter into a consent agreement. In April 2020, the EPA issued a unilateral administrative order (“UAO”) to us and MMGL, LLC (“MMGL”), an unaffiliated company, for the remedial design work in a portion of the Site designated as the River Mile 3.5 East Project Area. As required by the UAO, we notified the EPA of our intent to comply while reserving all of our sufficient cause defenses. Failure to comply with a UAO, without sufficient cause, could subject us to significant penalties or treble damages. Pursuant to the optimized remedial design timeline set forth in the UAO, the EPA’s expected schedule for completion of the remedial design work is four years. The EPA has estimated the cost of the work at approximately $4 million. We have agreed with the other respondent to the UAO, MMGL, that we will lead the performance and be responsible for a portion of the costs of the work for remedial design under the UAO and also entered into an agreement with another PRP pursuant to which such other PRP has agreed to fund a portion of the costs of such work. These agreements are not an allocation of liability or claims associated with the Site as between the respondents or with respect to any third party. We estimated that our share of the costs of performing such work under the UAO would be approximately $3 million, which we recorded to environmental liabilities and selling, general, and administrative expense in the consolidated financial statements in the third quarter of fiscal 2020. We have insurance policies pursuant to which we are being reimbursed for the costs we have incurred for remedial design. In the second quarter of fiscal 2021, we recorded an insurance receivable and a related insurance recovery to selling, general, and administrative expense for approximately $3 million. We also expect to pursue in the future allocation or contribution from other PRPs for a portion of such remedial design costs. In February 2021, the EPA announced that 100 percent of the Site’s areas requiring active cleanup are in the remedial design phase of the process.

Except for certain early action projects in which we are not involved, remediation activities at the Site are not expected to commence for a number of years. Moreover, those activities are expected to be sequenced, and the order and timing of such sequencing has not been determined. In addition, as noted above, the ROD does not determine the allocation of costs among PRPs.

We have joined with approximately 100 other PRPs, including the RI/FS performing parties, in a voluntary process to establish an allocation of costs at the Site, including the costs incurred in the RI/FS, ongoing remedial design costs, and future remedial action costs. We expect the next major stage of the allocation process to proceed in parallel with the remedial design process.

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In addition to the remedial action process overseen by the EPA, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) is assessing natural resource damages at the Site. In 2008, the Trustee Council invited us and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. We and other participating PRPs ultimately agreed to fund the first two phases of the three-phase assessment, which included the development of the Natural Resource Damage Assessment Plan (“AP”) and implementation of the AP to develop information sufficient to facilitate early settlements between the Trustee Council and Phase 2 participants and the identification of restoration projects to be funded by the settlements. In late May 2018, the Trustee Council published notice of its intent to proceed with Phase 3, which will involve the full implementation of the AP and the final injury and damage determination. We are proceeding with the process established by the Trustee Council regarding early settlements under Phase 2. We have established an environmental reserve of approximately $2.3 million for this alleged natural resource damages liability as we continue to work with the Trustee Council to finalize an early settlement. We have insurance policies that we believe will provide reimbursement for costs related to this matter. As of August 31, 2021, we had an insurance receivable in the same amount as the environmental reserve.

On January 30, 2017, one of the Trustees, the Confederated Tribes and Bands of the Yakama Nation, which withdrew from the council in 2009, filed a suit against approximately 30 parties, including us, seeking reimbursement of certain past and future response costs in connection with remedial action at the Site and recovery of assessment costs related to natural resources damages from releases at and from the Site to the Multnomah Channel and the Lower Columbia River. The parties filed various motions to dismiss or stay this suit, and in August 2019, the court issued an order denying the motions to dismiss and staying the action. We intend to defend against the claims in this suit and do not have sufficient information to determine the likelihood of a loss in this matter or to estimate the amount of damages being sought or the amount of such damages that could be allocated to us.

Our environmental liabilities as of August 31, 2021 and 2020 included $6 million and $4 million, respectively, relating to the Portland Harbor matters described above.

Because the final remedial actions have not yet been designed and there has not been a determination of the allocation among the PRPs of costs of the investigations or remedial action costs, 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. Among the facts being evaluated are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on each property within the Site, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs.

We have insurance policies that we believe will provide reimbursement for costs we incur for defense, remedial design, remedial action, and mitigation for or settlement of natural resource damages claims in connection with the Site. Most of these policies jointly insure us and MMGL, as the successor to a former subsidiary. We and MMGL have negotiated the settlement with certain insurers of claims against us related to the Site, continue to seek settlements with other insurers, and formed a Qualified Settlement Fund (“QSF”) which became operative in fiscal 2020 to hold such settlement amounts until funds are needed to pay or reimburse costs incurred by us and MMGL in connection with the Site. These insurance policies and the funds in the QSF may not cover all of the costs which we may incur.

The Oregon Department of Environmental Quality is separately providing oversight of our investigations and source control activities at various sites adjacent to Portland Harbor that are focused on controlling any current “uplands” releases of contaminants into the Willamette River. No liabilities have been established in connection with these investigations beyond the costs of investigation and design, which costs have not been material to date, because the extent of contamination, required source control work, and our responsibility for the contamination and source control work, in each case if any, have not yet been determined. In addition, pursuant to our insurance policies, we are being reimbursed for the costs we incur for required source control evaluation and remediation work.

Significant cash outflows in the future related to the Site could reduce the amount of our borrowing capacity that could otherwise be used for investment in capital expenditures, dividends, share repurchases, and acquisitions. Any material liabilities incurred in the future related to the Site could result in our failure to maintain compliance with certain covenants in our debt agreements. See “Contingencies – Environmental” in Note 9 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.

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We operate in industries that are cyclical and sensitive to general economic conditions, which could have a material adverse effect on our operating results, financial condition, and cash flows

Demand for most of our products is cyclical in nature and sensitive to general economic conditions. The timing and magnitude of the cycles in the industries in which our products are used, including global steel manufacturing and nonresidential and infrastructure construction in the U.S., are difficult to predict. The cyclical nature of our operations tends to reflect and be amplified by changes in economic conditions, both domestically and internationally, the effects of inflation, and foreign currency exchange fluctuations. Economic downturns or a prolonged period of slow growth in the U.S. and foreign markets or any of the industries in which we operate could have a material adverse effect on our results of operations, financial condition, and cash flows.

Changing conditions in global markets including the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions may adversely affect our operating results, financial condition, and cash flows

We generate a substantial portion of our revenues from sales to customers located outside the U.S., including countries in Asia, the Mediterranean region, and North, Central, and South America. In each of the last three years, exports comprised approximately 61 to 66 percent of our ferrous sales volumes and 61 to 65 percent of our nonferrous sales volumes. Our ability to sell our products profitably, or at all, into international markets is subject to a number of risks including adverse impacts of political, economic, military, terrorist, or major pandemic events; labor and social issues; legal and regulatory requirements or limitations imposed by foreign governments including quotas, tariffs, or other protectionist trade barriers, sanctions, adverse tax law changes, nationalization, currency restrictions, or import restrictions for certain types of products we export; and disruptions or delays in shipments caused by customs compliance or other actions of government agencies. The occurrence of such events and conditions may adversely affect our operating results, financial condition, and cash flows.

For example, in fiscal 2017, regulators in China began implementing the National Sword initiative involving inspections of Chinese industrial enterprises, including recyclers, in order to identify rules violations with respect to discharge of pollutants or illegally transferred scrap imports. Restrictions resulting from the National Sword initiative include a ban on certain imported recycled products, lower contamination limits for permitted recycled materials, and more comprehensive pre- and post-shipment inspection requirements. Disruptions in pre-inspection certifications and stringent inspection procedures at certain Chinese destination ports have limited access to these destinations and resulted in the renegotiation or cancellation of certain nonferrous customer contracts in connection with the redirection of such shipments to alternate destinations. Commencing July 1, 2019, China imposed further restrictions in the form of import license requirements and quotas on certain scrap products, including certain nonferrous products we sell. Chinese import licenses and quotas are issued to Chinese scrap consumers on a quarterly basis for the importation of scrap products. Since the implementation of this program, the size of import quotas has been steadily reduced on a quarter-over-quarter basis. We have continued to sell our recycled metal products into China; however, additional or modified license requirements and quotas, as well as additional product quality requirements, may be issued in the future. We believe that the potential impact on our recycling operations of the Chinese regulatory actions described above could include requirements that would necessitate additional processing and packaging of certain recycled nonferrous metal products, increased inspection and certification activities with respect to exports to China, or a change in the use of our sales channels in the event of delays in the issuance of licenses, restrictive quotas, or an outright ban on certain or all of our recycled metals products by China. As regulatory developments progress, we may need to make further investments in nonferrous processing equipment beyond existing planned investments where economically justified, incur additional costs in order to comply with new inspection requirements, or seek alternative markets for the impacted products, which may result in lower sales prices or higher costs and may adversely impact our business or results of operations.

In March 2018, the U.S. imposed a 25 percent tariff on certain imported steel products and a 10 percent tariff on certain imported aluminum products under Section 232 of the Trade Expansion Act of 1962. Currently, imports from Argentina, Australia, Brazil, Canada, Mexico, and South Korea are exempt from these duties pursuant to various agreements, including quotas. These tariffs, along with other U.S. trade actions, have triggered retaliatory actions by certain affected countries, and other foreign governments have initiated or are considering imposing trade measures on other U.S. goods. For example, China has imposed a series of retaliatory tariffs on certain U.S. products, including a 25 percent tariff on all grades of U.S. scrap and an additional 25 percent tariff on U.S. aluminum scrap. These tariffs and other trade actions could result in a decrease in international steel demand and negatively impact demand for our products, which would adversely impact our business. Given the uncertainty regarding the scope and duration of these trade actions by the U.S. or other countries, the impact of the trade actions on our operations or results remains uncertain, but this impact could be material.

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Changes in the availability or price of inputs such as raw materials and end-of-life vehicles could reduce our sales

Our businesses require certain materials that are sourced from third-party suppliers. Although the synergies from our integrated operations allow us to be our own source for some raw materials, particularly with respect to recycled metal for our steel manufacturing operations, we rely on other suppliers for most of our raw material and other input needs, including inputs to steel production such as graphite electrodes, alloys, and other required consumables. Industry supply conditions generally involve risks, including the possibility of shortages of raw materials, increases in raw material and other input costs, and reduced control over delivery schedules. We procure our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metal to us. In periods of declining or lower recycled metal prices suppliers may elect to hold scrap metal to wait for higher prices or intentionally slow their metal collection activities, tightening supply. If a substantial number of suppliers cease selling scrap metal to us, we will be unable to recycle metal at desired levels, and our results of operations and financial condition could be materially adversely affected. For instance, in the third quarter of fiscal 2020, a lower price environment for recycled metals in combination with economic and other restrictions on suppliers relating to COVID-19 severely constricted the supply of scrap metal including end-of-life vehicles, which resulted in significantly reduced processed volumes. A slowdown of industrial production in the U.S. may also reduce the supply of industrial grades of metal to the metals recycling industry, resulting in less recyclable metal available to process and market. Increased competition for domestic scrap metal, including as a result of overcapacity in the metal recycling industry in the U.S. and Canada, may also reduce the supply of scrap metal available to us. Failure to obtain a steady supply of recyclable material could both adversely impact our ability to meet sales commitments and reduce our operating margins. Failure to obtain an adequate supply of end-of-life vehicles, including due to increasing trends over time in the proportion of electric vehicles sold to total vehicles sold, the pace of and the auto recycling industry response to which are uncertain, could adversely impact our ability to attract customers and charge admission fees and reduce our parts sales. Failure to obtain raw materials and other inputs to steel production, such as graphite electrodes, alloys, and other required consumables, could adversely impact our ability to make steel to the specifications of our customers.

Significant decreases in recycled metal prices may adversely impact our operating results

The timing and magnitude of the cycles in the industries in which we operate are difficult to predict and are influenced by different economic conditions in the domestic market, where we typically acquire our raw materials, and foreign markets, where we typically sell the majority of our products. Purchase prices for scrap metal including end-of-life vehicles and selling prices for recycled metal are subject to market forces beyond our control. While we attempt to respond to changing recycled metal selling prices through adjustments to our metal purchase prices, our ability to do so is limited by competitive and other market factors. As a result, we may not be able to reduce our metal purchase prices to fully offset a sharp reduction in recycled metal sales prices, which may adversely impact our operating income and cash flows. In addition, a rapid decrease in selling prices may compress our operating margins due to the impact of average inventory cost accounting, which causes cost of goods sold recognized in the Consolidated Statements of Operations to decrease at a slower rate than metal purchase prices. For instance, in fiscal 2020, weaker market conditions for recycled metals, including as a result of the sharp decline in global economic conditions during the third quarter of fiscal 2020 in large part due to the impacts of the COVID-19 pandemic, and structural changes to the market for certain recycled nonferrous products primarily from Chinese import restrictions and tariffs, resulted in periods of sharply declining commodity prices and lower average net selling prices for our recycled ferrous and nonferrous metal products compared to fiscal 2019. As a result, operating margins in fiscal 2020 compressed as the decline in average net selling prices for our recycled metal products outpaced the reduction in purchase costs for raw materials.

Imbalances in supply and demand conditions in the global steel industry may reduce demand for our products

Economic expansions and contractions in global economies can result in supply and demand imbalances in the global steel industry that can significantly affect the price of commodities used and sold by our business, as well as the price of and demand for finished steel products. In a number of foreign countries, such as China, steel producers are generally government-owned and may therefore make production decisions based on political or other factors that do not reflect free market conditions. In the past, overcapacity and excess steel production in these foreign countries resulted in the export of aggressively priced semi-finished and finished steel products. This led to disruptions in steel-making operations within other countries, negatively impacting demand for our recycled metal products used by EAF mills globally as their primary feedstock. Further, the import of foreign steel products into the U.S. at similarly aggressive prices have in the past adversely impacted finished steel sales prices and sales volumes. Existing or new trade laws and regulations may cause or be inadequate to prevent disadvantageous trade practices, which could have a material adverse effect on our financial condition and results of operations. Although trade regulations restrict or impose duties on the importation of certain products, if foreign steel production significantly exceeds consumption in those countries, global demand for our recycled metal products could decline and imports of steel products into the U.S. could increase, resulting in lower volumes and selling prices for our recycled metal products and finished steel products.

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Acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences

We have made and may continue to make acquisitions of or expand into complementary businesses to enable us to expand our customer and supplier base and grow our revenues. Execution of any past or potential future acquisition or expansion involves several risks, including:

 

Difficulty integrating the acquired businesses’ personnel and operations;

 

Challenges in obtaining permits or meeting other regulatory requirements;

 

Potential loss of key employees, customers, or suppliers of the acquired business;

 

Difficulties in realizing anticipated cost savings, efficiencies, and synergies;

 

Unexpected costs;

 

Inaccurate assessment of or undisclosed liabilities;

 

Inability to maintain uniform standards, controls, and procedures;

 

Disruption to existing businesses; and

 

Difficulty in managing growth.

If we do not successfully execute on acquisitions or expansions and the acquired or expanded businesses do not perform as projected, our financial condition and results of operations could be materially adversely affected.

Supply chain disruptions affecting our customers, end users of our recycled products, or our suppliers could adversely impact the demand for our products or the availability of inputs, increase our costs, or otherwise adversely impact our business

Supply chain disruptions as a result of the COVID-19 pandemic and related labor shortages and logistics constraints have and could continue to impact our customers, end users of our recycled products, and our suppliers and adversely impact our business. Direct and indirect impacts on our business of such supply chain disruptions could include reduction in the demand for and price of certain of our products, slowdown in flows of scrap metal from certain supply channels, and reduced availability or increases in costs of other inputs, consumables, supplies, and capital equipment. Disruptions within our logistics or supply chain network could adversely affect our ability to produce or deliver our products in a timely manner, which could impair our ability to meet customer demand for products and result in reduced volumes and sales, increased supply chain costs, or damage to our reputation. Such disruptions in the future may result from a number of factors beyond our control. Supply chain disruptions due to any of those factors could negatively impact our financial performance or financial condition.

Reliance on third-party shipping companies may restrict our ability to ship our products

We significantly rely on third parties to handle and transport raw materials to our production facilities and products to customers. Despite our practice of utilizing a diversified group of suppliers of transportation, factors beyond our control, including changes in fuel prices, political events, governmental regulation of transportation, changes in market rates, carrier availability, carrier bankruptcy, labor shortages, shipping industry consolidation, and disruptions in transportation routes and infrastructure, may adversely impact our ability to ship our products and our operating margins. These impacts could include delays or other disruptions in shipments in transit, including as a result of congested seaports and travel routes, or third-party shipping companies increasing their charges for transportation services or otherwise reducing or eliminating the availability of their containers, vehicles, rail cars, barges, or ships. For example, during fiscal 2021, worldwide demand for logistical services increased sharply, which led to a global shortage of available shipping containers, congested seaports, and higher freight rates, impacting the timing of certain shipments and resulting in reductions in sales volumes of certain products. The delays in container shipping for U.S. exports have been exacerbated by the backlog of containerized imports at U.S. seaports and the March 2021 disruption in transit through the Suez Canal. While we aim to pass on the majority of shipping and related charges to our customers, there can be no assurance that we will be able to do so into the future. As a result, we may not be able to transport our products in a timely and cost-effective manner, which could have a material adverse effect on our financial condition and results of operations and may harm our reputation.

Goodwill impairment charges may adversely affect our operating results

Goodwill represents the excess purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. As of August 31, 2021, we had $170 million of goodwill on our balance sheet. We test the goodwill balances allocated to our reporting units for impairment on an annual basis and when events occur or circumstances change that indicate that the fair value of one or more of our reporting units with allocated goodwill may be below its carrying amount. When testing goodwill for impairment, we may be required to measure the fair value of the reporting units in order to determine the amount of impairment, if

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any. Fair value determinations require considerable judgment and are sensitive to inherent uncertainties and changes in estimates and assumptions regarding revenue growth rates, operating margins, capital expenditures, working capital requirements, discount rates, tax rates, terminal growth rates, benefits associated with a taxable transaction, and synergistic benefits available to market participants. A lack of recovery or further deterioration in market conditions, a trend of weaker than anticipated financial performance for one of our reporting units with allocated goodwill, a decline in our share price for a sustained period of time, or an increase in the market-based weighted average cost of capital, among other factors, are indicators that the carrying value of our goodwill may not be recoverable. We may be required to record a goodwill impairment charge that, if incurred, could have a material adverse effect on our financial condition and results of operations. See Note 7 - Goodwill and Other Intangible Assets, net in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.

Impairment of long-lived assets and equity investments may adversely affect our operating results

Our long-lived asset groups are subject to an impairment assessment when certain triggering events or circumstances indicate that their carrying value may be impaired. If the carrying value exceeds our estimate of future undiscounted cash flows of the operations related to the asset group, an impairment is recorded for the difference between the carrying amount and the fair value of the asset group. The results of these tests for potential impairment may be adversely affected by unfavorable market conditions, our financial performance trends, or an increase in interest rates, among other factors. If, as a result of the impairment test, we determine that the fair value of any of our long-lived asset groups is less than its carrying amount, we may incur an impairment charge that could have a material adverse effect on our financial condition and results of operations. We recorded impairment charges of $6 million on long-lived tangible and lease right-of-use assets associated with certain regional metals recycling operations and auto parts stores in fiscal 2020. With respect to our investments in unconsolidated entities accounted for under the equity method, a loss in value of an investment is recognized when the decline is other than temporary. With respect to our $6 million equity investment in a privately-held waste and recycling entity that does not have a readily determinable fair value, we would recognize an impairment charge if our qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying value. Impairment of our equity investments could have a material adverse effect on our results of operations. See Note 2 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further detail on long-lived asset and joint venture investment impairment charges.

Failure to realize or delays in realizing expected benefits from investments in processing and manufacturing technology improvements may impact our operating results and cash flows

We make significant investments in processing and manufacturing technology improvements aimed at increasing the efficiency and capabilities of our businesses and to maximize our economies of scale. Such improvements may be subject to many factors including, but not limited to, permitting, construction, equipment delivery, commissioning, and technology performance risks, some of which are outside our control and could result in further delays in such projects or require us to incur additional costs. 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. Failure to realize or delays in realizing the anticipated benefits and to generate adequate returns on such capital improvement projects may have a material adverse effect on our results of operations and cash flows.

Inability to achieve or sustain the benefits from productivity, cost savings, and restructuring initiatives may adversely impact our operating results

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During the past several years, we implemented a number of productivity improvement, cost savings, and restructuring initiatives designed to reduce operating expenses and improve profitability and to achieve further integration and synergistic cost efficiencies in our operating platform. These initiatives included idling underutilized assets and closing facilities to more closely align our business to market conditions, implementing productivity initiatives to increase production efficiency and material recovery, and further reducing our annual operating expenses through headcount reductions, reducing organizational layers, consolidating shared service functions, savings from procurement activities, streamlining of administrative and supporting services functions, and other non-headcount measures. In fiscal 2019, we implemented productivity initiatives targeted to achieve $35 million in annual benefits through a combination of production cost efficiencies, reductions in selling, general, and administrative expenses, and increases in retail sales. In fiscal 2020, we implemented productivity initiatives targeted to achieve $20 million in realized benefits in fiscal 2020 by further reducing our annual operating expenses, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses, and other non-headcount measures. We may undertake similar or additional productivity initiatives in the future in the normal course or in response to market conditions. Our ability to achieve or sustain the anticipated cost reductions and other benefits from these initiatives within the expected time frame is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive, and other uncertainties, some of which are beyond our control. We incurred restructuring charges and other exit-related activities as a result of these initiatives and may incur such charges in the future. Failure to achieve or sustain the expected cost reductions and other benefits related to these productivity improvements, cost savings, and restructuring initiatives could have a material adverse effect on our results of operations and cash flows.

We may be unable to renew facility leases, thus restricting our ability to operate

We lease a significant portion of our facilities, including the substantial majority of our auto parts facilities. The cost to renew such leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. Failure to renew these leases or find suitable alternative locations for our facilities may impact our ability to continue operations within certain geographic areas, which could have a material adverse effect on our financial condition, results of operations, and cash flows.

Changing economic conditions may result in customers not fulfilling their contractual obligations

We enter into export ferrous sales contracts preceded by negotiations that include fixing price, quantity, shipping terms, and other contractual terms. Upon finalization of these terms and satisfactory completion of other contractual contingencies, the customer typically opens a letter of credit to satisfy its payment obligation under the contract prior to our shipment of the cargo. In times of changing economic conditions, including during periods of sharply falling recycled metal prices, there is an increased risk that customers may not be willing or able to fulfill their contractual obligations or open letters of credit. As of August 31, 2021 and 2020, 30% and 40%, respectively, of our accounts receivable balance were covered by letters of credit.

Increases in the value of the U.S. dollar relative to other currencies may reduce the demand for our products

A significant portion of our recycled metal revenues is generated from sales to foreign customers, which are denominated in U.S. dollars, including customers located in Asia, the Mediterranean region and North, Central, and South America. A strengthening U.S. dollar makes our products more expensive for non-U.S. customers, which may negatively impact export sales. A strengthening U.S. dollar also makes imported metal products less expensive, which may result in an increase in imports of steel products into the U.S. As a result, our finished steel products, which are made in the U.S., may become more expensive for our U.S. customers relative to imported steel products thereby reducing demand for our products.

We are exposed to translation risks associated with fluctuations in foreign currency exchange rates

Our operations in Canada expose us to translation risks associated with fluctuations in foreign currency exchange rates as compared to the U.S. dollar, our reporting currency. As a result, we are subject to foreign currency exchange risks due to exchange rate movements in connection with the translation of the operating costs and the assets and liabilities of our foreign operations into our functional currency for inclusion in our Consolidated Financial Statements.

Potential limitations on our ability to access capital resources may restrict our ability to operate

Our operations are capital intensive. Our business also requires substantial expenditures for routine maintenance. While we expect that our cash requirements, including the funding of capital expenditures, debt service, dividends, share repurchases, and investments, will be financed by internally generated funds or from borrowings under our secured committed bank credit facilities, there can be no assurance that this will be the case. Additional acquisitions could require financing from external sources. Although we believe we have adequate access to contractually committed borrowings, we could be adversely affected if we are not able to meet the conditions required to incur such borrowing or if our banks ceased lending or were unable to honor their contractual commitments. Failure to access our credit facilities could restrict our ability to fund operations, make capital expenditures, or execute acquisitions.

22 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

The agreement governing our bank credit facilities imposes certain restrictions on our business and contains financial covenants

Our secured bank credit facilities contain certain restrictions on our business 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. These restrictions may affect our ability to operate our business or execute our strategy and may limit our ability to take advantage of potential business opportunities as they arise. Our bank credit agreement also requires that we maintain certain financial and other covenants, including a consolidated fixed charge coverage ratio and a consolidated leverage ratio. Our ability to comply with these covenants may also be affected by events beyond our control, including prevailing economic, financial, and industry conditions. Our failure to comply with any of these restrictions or financial covenants could result in an event of default under the bank credit agreement and permit our lenders to cease lending to us and declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. This could require us to refinance our bank facilities, which we may not be able to do at terms acceptable to us, or at all.

Consolidation in the steel industry may reduce demand for our products

There has been consolidation in the steel industry that has included steel mills acquiring steel fabricators to ensure demand for their products. If any of our steel mill’s significant remaining customers were to be acquired by competing steel mills, this could reduce the demand for our products and force us to lower our prices, reducing our revenues, or to reduce production, which could increase our unit costs and have a material adverse effect on our financial condition and results of operations.

Product liability claims may adversely impact our operating results

We could inadvertently acquire radioactive scrap metal that could potentially be included in recycled mixed metal shipped to consumers worldwide. Although we have invested in radiation detection equipment in the majority of our locations, including the facilities from which we ship directly to customers, failure to detect radioactive metal remains a possibility. Even though we maintain insurance to address the risk of this failure in detection, there can be no assurance that the insurance coverage would be adequate or will continue to be available on acceptable terms. In addition, if we fail to meet contractual requirements for a product, we may be subject to product warranty costs and claims. These costs and claims could both have a material adverse effect on our financial condition and results of operations and harm our reputation.

We are subject to legal proceedings and legal compliance risks that may adversely impact our financial condition, results of operations, and liquidity

We spend substantial resources ensuring that we comply with domestic and foreign regulations, contractual obligations and other legal standards. Notwithstanding this, we are subject to a variety of legal proceedings and compliance risks in respect of various matters, including regulatory, safety, environmental, employment, transportation, intellectual property, contractual, import/export, international trade, and governmental matters that arise in the course of our business and in our industry. For example, legal proceedings can include those arising from accidents involving Company-owned vehicles, including Company tractor trailers. In some instances, such accidents and the related litigation involve accidents that have resulted in third-party fatalities. An outcome in an unusual or significant legal proceeding or compliance investigation in excess of insurance recoveries could adversely affect our financial condition and results of operations. For information regarding our current significant legal proceedings and contingencies, see “Legal Proceedings” in Part I, Item 3 and “Contingencies – Other” in Note 9 - Commitments and Contingencies in Part II, Item 8 of this report.

Climate change may adversely impact our facilities and our ongoing operations

The potential physical impacts of climate change on our operations are highly uncertain and depend upon the unique geographic and environmental factors present, for example rising sea levels at our deepwater port facilities, changing storm patterns and intensities, and changing temperature levels. As many of our recycling facilities are located near deepwater ports, rising sea levels may disrupt our ability to receive scrap metal, process the metal through our shredders, and ship products to our customers. Extreme weather events and conditions, such as hurricanes, thunderstorms, tornadoes, wildfires, and snow or ice storms, may increase our costs or cause damage to our facilities, and any damage resulting from extreme weather may not be fully insured. Increased frequency and duration of adverse weather events and conditions may also inhibit construction activity utilizing our products, scrap metal inflows to our recycling facilities, and retail admissions and parts sales at our auto parts stores. Potential adverse impacts from climate change, including rising temperatures and extreme weather events and conditions, may create health and safety issues for employees operating at our facilities and may lead to an inability to maintain standard operating hours.

We may not realize our deferred tax assets in the future

23 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

The assessment of recoverability of our deferred tax assets is based on an evaluation of existing positive and negative evidence as to whether it is more-likely-than-not that they will be realized. If negative evidence outweighs positive evidence, a valuation allowance is required. Impairment of deferred tax assets may result from significant negative industry or economic trends, a decrease in earnings performance and projections of future taxable income, adverse changes in laws or regulations, and a variety of other factors. Impairment of deferred tax assets could have a material adverse impact on our results of operations and financial condition and could result in not realizing the deferred tax assets. In the past, we have recorded significant valuation allowances against our deferred tax assets. Deferred tax assets may require further valuation allowances if it is not more-likely-than-not that the deferred tax assets will be realized.

In fiscal 2018, we released valuation allowances against certain U.S. federal and state and Canadian deferred tax assets resulting in recognition of discrete tax benefits. The release of the valuation allowances was the result of sufficient positive evidence at the time, including cumulative income in recent years and projections of future taxable income from operations, that it is more-likely-than-not that the deferred tax assets will be realized. In the event that actual results differ from our projections or we adjust our estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations.

Tax increases and changes in tax rules may adversely affect our financial results

As a company conducting business on a global basis with physical operations throughout North America, we are exposed, both directly and indirectly, to the effects of changes in U.S., state, local, and foreign tax rules. Taxes for financial reporting purposes and cash tax liabilities in the future may be adversely affected by changes in such tax rules. In many cases, such changes put us at a competitive disadvantage compared to some of our major competitors, to the extent we are unable to pass the tax costs through to our customers.

On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”) was enacted into law. The effects of the Tax Act have been incorporated into our financial results beginning in the second quarter of fiscal 2018. There is a risk that certain aspects of the Tax Act could be repealed or otherwise modified or that states or foreign jurisdictions may amend their tax laws in response to the Tax Act, which could have a material impact on our future results of operations and cash flows. Further, the Biden administration has announced in 2021 a number of tax proposals to fund new government investments in infrastructure, healthcare, and education, among other things. Certain of these proposals involve an increase in the domestic corporate tax rate, which if implemented could have a material impact on our future results of operations and cash flows.

One or more cybersecurity incidents may adversely impact our financial condition, results of operations, and reputation

Our operations involve the use of multiple systems, some of which are outsourced to certain third-party service and hosting providers, that process, store, and transmit sensitive information about our customers, suppliers, employees, financial position, operating results, and strategies. We face global cybersecurity risks and threats on a continual and ongoing basis, which include, but are not limited to, attempts to access systems and information, computer viruses, or denial-of-service attacks. These risks and threats range from uncoordinated individual attempts to sophisticated and targeted measures. Increased numbers of employees working remotely increases our exposure to cyber-threats. While we are not aware of any material cyber-attacks or breaches of our systems to date, such attempts occur regularly and, thus, we have and continue to implement measures to safeguard our systems and information and mitigate potential risks, including employee training around phishing, malware, and other cyber risks, but there is no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches that manipulate or improperly use our systems, compromise sensitive information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events, including breaches of our security measures or those of our third-party service providers, could negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business due to disruption of operations and/or reputational damage, potential liability and increased remediation and protection costs, any of which could have a material adverse effect on our financial condition and results of operations. Additionally, as cybersecurity risks become more sophisticated, we may need to increase our investments in security measures which could have a material adverse effect on our financial condition and results of operations.

24 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

Risk Factors Relating to the Regulatory Environment

Governmental agencies may refuse to grant or renew our licenses and permits, thus restricting our ability to operate

We conduct certain of our operations subject to licenses, permits, and approvals from state and local governments. Governmental agencies often resist the establishment of certain types of facilities in their communities, including metal recycling and auto parts facilities. Changes in zoning and increased residential and mixed-use development near our facilities are reducing the buffer zones and creating land use conflicts with heavy industrial uses such as ours. This could result in increased complaints, increased inspections and enforcement including fines and penalties, operating restrictions, the need for additional capital expenditures, and increased opposition to maintaining or renewing required approvals, licenses, and permits. In addition, waste products from our operations are subject to classification and regulations that, among other things, determine how such materials may be handled, stored, transported, and disposed. Failure to obtain or maintain regulatory permits, approvals, or exemptions for such waste could materially increase our costs or limit our operations.

In March 2021, for example, a state court in California determined that the state regulatory agency had a mandatory duty under a 2014 law to rescind the regulatory determinations pursuant to which treated metal shredder residue from our and other metal recycling facilities in the state has been classified as non-hazardous and safely used as alternative daily cover at landfills for over 30 years. See “Legal Proceedings” in Part I, Item 3. While the court’s decision has been stayed and is being appealed, failure to overturn this decision on appeal or to put in place a workable alternative that will allow such material to continue to qualify as non-hazardous waste or to identify other cost-effective disposal options could limit our operations in the state and could have a material adverse effect on our results of operations and on the metal shredding industry in California in general.

Furthermore, from time to time, both the U.S. and foreign governments impose regulations and restrictions on trade in the markets in which we operate. In some countries, governments require us to apply for certificates or registration before allowing shipment of recycled metal to customers in those countries. There can be no assurance that future approvals, licenses, and permits will be granted or that we will be able to maintain and renew the approvals, licenses, and permits we currently hold. Failure to obtain these approvals could cause us to limit or discontinue operations in these locations or prevent us from developing or acquiring new facilities, which could have a material adverse effect on our financial condition and results of operations.

Environmental compliance costs and potential environmental liabilities may have a material adverse effect on our financial condition and results of operations

Compliance with environmental laws and regulations is a significant factor in our business. We are subject to local, state, and federal environmental laws and regulations in the U.S. and other countries relating to, among other matters:

 

Waste disposal;

 

Air emissions;

 

Waste water and storm water management, treatment, and discharge;

 

The use and treatment of groundwater;

 

Soil and groundwater contamination and remediation;

 

Climate change;

 

Generation, discharge, storage, handling, and disposal of hazardous materials and secondary materials; and

 

Employee health and safety.

We are also required to obtain environmental permits from governmental authorities for certain operations. Violation of or failure to obtain permits or comply with these laws or regulations could result in our business being fined or otherwise sanctioned by regulators or becoming subject to litigation by private parties. In recent years, capital expenditures for environmental projects have increased and have represented a significant share of our total capital expenditures. Future environmental compliance costs, including capital expenditures for environmental projects, may increase because of new laws and regulations, changing interpretations and stricter enforcement of current laws and regulations by regulatory authorities, expanding emissions, groundwater and other testing requirements, and new information on emission or contaminant levels including with respect to emerging contaminants such as per- and polyfluoroalkyl substances (PFAS), uncertainty regarding adequate pollution control levels, the future costs of pollution control technology, and issues related to climate change.

25 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

We have seen an increased focus by federal, state, and local regulators on metals recycling and auto dismantling facilities and new or expanding regulatory requirements. In July 2021, the EPA issued an enforcement alert reflecting a national enforcement initiative in conjunction with state regulators focused on Clean Air Act compliance at metal recycling facilities that operate auto and scrap metal shredders. While we believe we are an industry leader in emission controls and have been working with state and local regulators on compliance and permitting matters, we have in the past and may in the future be subject to enforcement actions or litigation by regulators or private parties that could result in additional penalties, compliance requirements, or capital investments. See “Legal Proceedings” in Part I, Item 3 of this report. In addition, on October 15, 2021, the California State Department of Toxic Substance Control (DTSC) submitted proposed emergency regulations to the Office of Administrative Law (OAL) that would require metal shredding facilities in California, including our Oakland facility, to operate under state hazardous waste facility permits. OAL has 10 calendar days within which to review and make a decision on the proposed emergency rulemaking. If the emergency regulations are approved, metal shredding facilities in California would have 30 days to file to obtain interim status” that, according to DTSC, is necessary for facilities to continue operating through the permit application process, which could take as long as five years. The California metal recycling industry is working with DTSC to identify an alternative regulatory framework and permitting regime under existing law that could accommodate the unique aspects of metal shredding facility operations. Operating under DTSC’s hazardous waste permitting requirements, including under interim status regulations, or under an alternative permitting structure could require substantial additional capital expenditures, impose financial assurance obligations, subject us to increased compliance and penalty risks, severely limit operational flexibility and increase operating costs, or adversely impact our ability to acquire or sell materials at our California facilities which could have a material adverse effect on our financial condition, results of operations, and cash flows.

In addition, previous operations by us, predecessor entities, or others at facilities that we currently or formerly owned, operated, or otherwise used may have caused contamination from hazardous substances. As a result, we are exposed to possible claims, including government fines and penalties, costs for investigation and clean-up activities, claims for natural resources damages, and claims by third parties for personal injury and property damage, under environmental laws and regulations, especially for the remediation of waterways and soil or groundwater contamination. These laws can impose liability for the cleanup of hazardous substances even if the owner or operator was neither aware of nor responsible for the release of the hazardous substances. We have, in the past, been found not to be in compliance with certain of these laws and regulations, and have incurred liabilities, expenditures, fines, and penalties associated with such violations. In December 2000, we were notified by the EPA that we are one of the potentially responsible parties that owns or operates, or formerly owned or operated, sites which are part of or adjacent to the Portland Harbor Superfund site. Further, we have been notified that we are or may be a potentially responsible party at sites other than Portland Harbor currently or formerly owned or operated by us or at other sites where we may have responsibility for such costs due to past disposal or other activities. Environmental compliance costs and potential environmental liabilities could have a material adverse effect on our financial condition, results of operations, and cash flows. See also the risk factor “Potential costs related to the environmental cleanup of Portland Harbor may be material to our financial position and liquidity” in this Item 1A and “Contingencies – Environmental” in Note 9 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.

The Biden Administration and state and local regulators are also emphasizing efforts to strengthen environmental compliance and enforcement, including with respect to clean-up actions under superfund and hazardous waste laws, in overburdened communities that may be disproportionately impacted by adverse health and environmental effects. On September 10, 2021, U.S. EPA Region 9 and the California Environmental Protection Agency announced a joint effort to expand environmental enforcement in overburdened California communities. These initiatives could result in increased enforcement, compliance, and clean-up costs, including increased capital expenditures, at our facilities located at or near such communities.

26 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

Compliance with existing and future climate change, greenhouse gas, and other air emission laws and regulations may adversely impact our operating results

Future legislation or increased regulation regarding climate change and GHG emissions could impose significant costs on our business and our customers and suppliers, including increased energy, capital equipment, emissions controls, environmental monitoring and reporting, and other costs in order to comply with laws and regulations concerning and limitations imposed on climate change and GHG emissions. The potential costs of allowances, taxes, fees, offsets, or credits that may be part of “cap and trade” programs or similar future legislative or regulatory measures are still uncertain and the future of these programs or measures is unknown. For example, in March 2020, the Governor of Oregon issued an executive order directing state agencies to take certain actions to reduce and regulate GHG emissions. Pursuant to this executive order, ODEQ issued a notice of proposed rulemaking in August 2021 that would establish a new Climate Protection Program to limit GHG emissions in the state including from large stationary sources such as our steel mill. In addition, the ODEQ Cleaner Air Oregon (“CAO”) program regulates toxic air emissions from manufacturing facilities located in Oregon. The ODEQ has published a prioritization list of the facilities within the state subject to the CAO program based on emissions inventories that facilities submitted to the ODEQ. The prioritization list established four tiers of risk groups. Our steel mill has been assigned to the first-tier risk group and was selected into the CAO program in 2020. To comply with the CAO program rules, including as they may be revised in the future, facilities may incur expenses to evaluate the risk to the public and may be required to incur additional operating or capital expenditures to mitigate any significant identified risks. Future climate change and GHG laws or regulations could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to such requirements. Until the timing, scope, and extent of any future laws or regulations becomes known, we cannot predict the effect on our financial condition, operating performance, or ability to compete. Furthermore, even without such laws or regulations, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the metals recycling and steel manufacturing industries could harm our reputation and reduce customer demand for our products.

Risk Factors Relating to Our Employees

Labor shortages or increased labor costs may adversely affect our operating results, financial condition, and cash flows

Our employees contribute to developing and meeting our business goals and objectives, and labor is a significant component of operating our business. The impact of labor shortages or increased labor costs because of increased competition for employees, unemployment levels and benefits, higher employee turnover rates, increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), may increase our costs or impede our ability to operate our facilities and could have a material adverse effect on our results of operations, financial condition, and cash flows. As a result of the tight labor markets we experienced during fiscal 2021, we have received fewer job applicants in certain local markets, which hindered our ability to reach full staffing levels at some of our facilities. Recruiting and retaining employees in sufficient numbers to optimally staff our facilities may result in increases in our labor costs. Labor shortages and increased labor costs may continue to be realized as a direct or indirect result of the COVID-19 pandemic, including related response measures implemented by governments, or due to other factors, which may adversely affect our operating results, financial condition, and cash flows.

Reliance on employees subject to collective bargaining may restrict our ability to operate

Approximately 22% of our full-time employees are represented by unions under collective bargaining agreements, including substantially all of the manufacturing employees at our steel manufacturing facility. As these agreements expire, we may not be able to negotiate extensions or replacements of such agreements on acceptable terms. Any failure to reach an agreement with one or more of our unions may result in strikes, lockouts, or other labor actions, including work slowdowns or stoppages, which could have a material adverse effect on our results of operations.

The underfunded status of our multiemployer pension plans may cause us to increase our contributions to the plans

As discussed in Note 12 - Employee Benefits in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report, we contribute to the Steelworkers Western Independent Shops Pension Plan (“WISPP”), a multiemployer plan benefiting union employees of our steel mill. Because we have no current intention of withdrawing from the WISPP, we have not recognized a withdrawal liability in our consolidated financial statements. However, if such a liability were triggered, it could have a material adverse effect on our results of operations, financial position, liquidity, and cash flows. Our contributions to the WISPP could also increase as a result of a diminished contribution base due to the insolvency or withdrawal of other employers who currently contribute to it, the inability or failure of withdrawing employers to pay their withdrawal liabilities, or other funding deficiencies, as we would need to fund the retirement obligations of these employers.

27 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

In 2004, the Internal Revenue Service (“IRS”) approved a seven-year extension of the period over which the WISPP may amortize unfunded liabilities, conditioned upon maintenance of certain minimum funding levels. In 2014, the WISPP obtained relief from the specified funding requirements from the IRS, which requires that the WISPP meet a minimum funded percentage on each valuation date and achieve a funded percentage of 100% as of October 1, 2029. Based on the most recent actuarial valuation for the WISPP, the funded percentage using the valuation method prescribed by the IRS satisfied the minimum funded percentage requirement.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

28 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

 

ITEM 2. PROPERTIES

Our facilities and administrative offices by division, type and location were as follows as of August 31, 2021:

 

 

 

Number of Facilities

 

 

Type

Location

 

Owned(1)

 

 

 

Leased

 

 

Administrative Offices

California

 

 

 

 

 

 

2

 

 

 

New Jersey

 

 

 

 

 

 

1

 

 

 

Oregon

 

 

 

 

 

 

1

 

 

 

Rhode Island

 

 

 

 

 

 

1

 

 

Auto Parts Stores

Alberta, Canada

 

 

 

 

 

 

3

 

 

 

Arkansas

 

 

 

 

 

 

1

 

 

 

British Columbia, Canada

 

 

 

 

 

 

1

 

 

 

California(2)

 

 

3

 

 

 

 

16

 

 

 

Florida

 

 

 

 

 

 

1

 

 

 

Illinois

 

 

 

 

 

 

1

 

 

 

Indiana

 

 

1

 

 

 

 

 

 

 

Kansas

 

 

 

 

 

 

1

 

 

 

Missouri

 

 

1

 

 

 

 

3

 

 

 

Nevada

 

 

 

 

 

 

2

 

 

 

Ohio

 

 

 

 

 

 

1

 

 

 

Oregon

 

 

 

 

 

 

2

 

 

 

Rhode Island

 

 

2

 

 

 

 

 

 

 

Texas

 

 

 

 

 

 

4

 

 

 

Utah

 

 

 

 

 

 

1

 

 

 

Virginia

 

 

 

 

 

 

1

 

 

 

Washington

 

 

1

 

 

 

 

4

 

 

Metals Recycling(3)

Alabama

 

 

3

 

 

 

 

 

 

 

British Columbia, Canada

 

 

 

 

 

 

4

 

 

 

California

 

 

4

 

[A]

[B]

 

 

 

 

Georgia

 

 

8

 

 

 

 

 

 

 

Hawaii

 

 

1

 

[A]

[B]

 

1

 

 

 

Maine

 

 

2

 

 

 

 

 

 

 

Massachusetts

 

 

2

 

[A]

[B]

 

1

 

 

 

Montana

 

 

1

 

 

 

 

 

 

 

Nevada

 

 

 

 

 

 

1

 

 

 

New Hampshire

 

 

2

 

 

 

 

 

 

 

Oregon

 

 

4

 

[A]

[B]

 

 

 

 

Puerto Rico

 

 

1

 

[A]

[B]

 

3

 

 

 

Rhode Island

 

 

1

 

 

 

 

1

 

[A]

 

Tennessee

 

 

1

 

 

 

 

 

 

 

Washington

 

 

3

 

[A]

[B]

 

 

 

Steel Mill

Oregon

 

 

1

 

 

 

 

 

 

Steel Distribution

California

 

 

1

 

 

 

 

 

 

 

Total Operating Facilities and Administrative Offices

 

 

43

 

 

 

 

58

 

 

 

Non-Operating(4)

 

 

10

 

 

 

 

12

 

 

 

 

 

 

53

 

 

 

 

70

 

 

 

[A]

Operation includes a deepwater port. Puerto Rico and Hawaii operations access deepwater ports through public docks.

[B]

Includes large-scale shredding operations.

(1)

Includes eight primarily owned facilities where an adjacent or supplementary parcel of the site is leased.

(2)

Three sites are jointly owned with minority interest partners.

(3)

Excludes eight metals recycling facilities located in the Southeast which we acquired on October 1, 2021. See “Acquisition of Columbus Recycling” above in Part I, Item 1. Business for further detail.

(4)

Non-operating sites consist of owned and leased real properties, some of which are sublet to external parties.

29 / Schnitzer Steel Industries, Inc. Form 10-K 2021


 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

 

We consider all operating properties, both owned and leased, to be well-maintained, in good operating condition, and suitable and adequate to carry on our business. For further discussion of our operating properties, see “Business,” and “Distribution” in Part I, Item 1 of this report.

From time to time, we are involved in various litigation matters that arise in the ordinary course of business involving normal and routine claims, including environmental compliance matters. Such proceedings include, but are not limited to, proceedings relating to our status as a potentially responsible party with respect to the Portland Harbor Superfund Site and proceedings relating to other legacy environmental issues. For additional information regarding such matters, see Note 9 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report. Except as described in such Note, we currently believe that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations, cash flows, or business.

In fiscal 2013, the Commonwealth of Massachusetts advised us of alleged violations of environmental requirements, including but not limited to those related to air emissions and hazardous waste management, at our operations in the Commonwealth. We actively engaged in discussions with the Commonwealth's representatives, which resulted in a settlement agreement to resolve the alleged violations. A consent judgment was jointly filed with and entered by the Superior Court for the County of Suffolk, Commonwealth of Massachusetts on September 24, 2015. The settlement involved a $450 thousand cash payment, an additional $450 thousand in suspended payments to be waived upon completion of a shredder emission control system and certain other specified milestones, and $350 thousand in supplemental environmental projects that we have completed. In fiscal 2021, the upgraded shredder emission control system became fully operational to design criteria, and the adjusted milestones for waiver of the suspended penalties were met.

On February 23, 2021, the California State Department of Toxic Substance Control (DTSC) issued a corrective action enforcement order with respect to our metal recycling facility in Oakland, California that would require us to submit a current conditions report, to undertake a facilities investigation, risk assessment, and corrective measures study, and to implement corrective measures selected by the DTSC based on those assessments and studies. We dispute DTSC’s alleged jurisdictional basis for the order, as well as the scope of work required by the order, which we believe is unwarranted and duplicative of ongoing assessments being conducted under the oversight of another state agency. We have filed a notice of defense that by law stays the effectiveness of the order and are challenging the order through the DTSC administrative process.

In addition, the DTSC issued a similar corrective action enforcement order on March 18, 2021 with respect to our metal recycling facility in Fresno, California based on inspections conducted by the DTSC in 2013. That 2013 inspection and subsequent issuance of a Summary of Violations in 2015 setting forth a number of alleged violations relating to hazardous waste management requirements were the basis for the enforcement matter brought by the California Office of the Attorney General (COAG), on behalf of DTSC, that was filed in the Superior Court of the State of California, County of Fresno on June 25, 2020 against Schnitzer Fresno, Inc., a wholly-owned subsidiary, which operates the facility, seeking a permanent injunction and civil penalties. Settlement discussions of the alleged violations had resulted in a tentative agreement in April 2018 among the COAG, DTSC, and Schnitzer Fresno, Inc. to settle the matter for $490 thousand, of which $368 thousand was to be paid as a civil penalty and $122 thousand was to be paid as reimbursement for agency investigation and enforcement costs. However, the parties were not able to reach agreement on the injunctive terms of the settlement agreement. While we plan to continue to pursue settlement discussions consistent with the previously agreed terms, we are vigorously defending against the enforcement action in State court. We do not believe the resolution of this matter will be material to our financial position, results of operations, cash flows, or liquidity. In addition, we dispute DTSC’s alleged jurisdictional basis for the March 2021 corrective action enforcement order, as well as the scope of work required by that order. We have also filed a notice of defense in this matter that by law stays the effectiveness of the order and are challenging the order through the DTSC administrative process.

In January 2018, the Company received a finding of violation letter from the United States Environmental Protection Agency (USEPA) 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 July 2017 and November 2017. Except with respect to a minor and now corrected non-compliance matter at one facility, we believe that we have fully complied with the relevant regulations. Nevertheless, in December 2017 and prior to receipt of the USEPA letter, we implemented improvements to our refrigerant recovery management program to further strengthen that program, including improvements to address concerns raised by USEPA during the inspections. We have conferred with USEPA and the United States Department of Justice (USDOJ) regarding the alleged violations and have reached agreement, subject to finalization of the Consent Decree including filing and approval by a Federal District Court, to 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.

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In February 2019, we received a letter sent on behalf of the District Attorneys for six counties in California notifying us of a joint investigation 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 and requesting a meeting to discuss the alleged violations. Consistent with its commitment to compliance with environmental requirements, Pick-N-Pull has implemented additional compliance measures at all operating Pick-n-Pull locations in the state and expects to finalize a state-wide settlement of this matter that will address the concerns raised in this joint investigation. Pick-n-Pull has 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. The settlement is subject to finalization and entry by a State court of a Final Stipulated Judgment.

In January 2020, the USEPA issued a Notice of Violation (NOV) based on its evaluation of data requested during a June 2019 inspection at one of our facilities in Oakland, California alleging the same violation of a Bay Area Air Quality Management District (BAAQMD) air emissions rule that was the subject of a Compliance and Settlement Agreement (CSA) with BAAQMD that was executed as of September 22, 2020 and also alleging violations of Title V Major Source permitting requirements. The Company maintains that our timely filing of a Title V Major Source permit application constitutes compliance with Title V Major Source rules and that USEPA’s Title V non-compliance allegations are erroneous. The Company has conveyed that position to USEPA and has provided USEPA with documentation requested by USEPA confirming our position. The Company also has requested that the alleged BAAQMD rule violation be addressed solely through the CSA with BAAQMD and that federal “overfiling” is unnecessary and inappropriate in the circumstances. Based on the discussions to date, we do not believe the outcome of this matter will be material to our financial position, results of operations, cash flows, or liquidity.

On September 3, 2021, the Oregon Department of Environmental Quality (ODEQ) issued a Pre-Enforcement Notice (PEN) alleging that the Company’s metal shredder facility in Portland, Oregon is in violation of Title V and stating that ODEQ had referred the matter to USEPA for review and possible formal enforcement. In a response letter, we identified why Title V does not apply to the Portland facility, 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, and requested that ODEQ withdraw the PEN. We also requested an opportunity to meet with ODEQ and USEPA regarding the permit delay and the Title V matter.

On August 5, 2020, The Athletics Investment Group LLC (A’s) filed an action in the California Superior Court for the County of Alameda against the DTSC as Respondent and the Company as Real Party in Interest, seeking recission of the “f letter” pursuant to which DTSC classified treated shredder waste from the Company’s metal shredding facility in California as a “nonhazardous waste” which among other things permits its use as alternative daily cover at municipal landfills. Pursuant to determinations under section 66260.200(f) of the state hazardous waste regulations issued in 1988 and 1989 (the “f letters”), the DTSC determined that treated shredder waste from the Company’s facility does not pose a significant hazard to human health, safety, or the environment. The Superior Court on April 16, 2021 issued an order and writ of mandate commanding the DTSC within 30 days to rescind the Company’s “f letter” concluding that, under a law enacted by the legislature in 2014, the DTSC had a mandatory duty to rescind the “f letters”. The Superior Court reached this decision despite a determination by DTSC in 2018 pursuant to the 2014 statute reconfirming that treated shredder residue does not need to be managed as a hazardous waste in order to protect human health, safety, or the environment. The Company filed a notice of appeal, which notice has the effect of automatically staying the order, as well as an appeal of a subsequent order of the Superior Court granting the A’s motion to lift the stay. The stay remains in place pending the appeal of that subsequent order. The appeals are pending before the California State Court of Appeals, First Appellate District, Division Three.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Class A common stock is listed on The Nasdaq Stock Market LLC (“NASDAQ”) under the symbol SCHN. There were 146 holders of record of Class A common stock on October 19, 2021. Our Class A common stock has been trading since November 16, 1993. There was one holder of record of Class B common stock on October 19, 2021. Our Class B common stock is not publicly traded.

We declared our 110th consecutive quarterly dividend in the fourth quarter of fiscal 2021. The payment of future dividends is subject to approval by our Board of Directors and continued compliance with the terms of our credit agreement. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this report for further discussion of our credit agreement.

Issuer Purchases of Equity Securities

Pursuant to a share repurchase program as amended in 2001, 2006, and 2008, we were authorized to repurchase up to nine million shares of our Class A common stock when management deems 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 factors, our cash needs, the availability of funding, our future business plans, and the market price of our stock. We did not repurchase our common stock in fiscal 2021. We repurchased approximately 53 thousand shares for a total of $0.9 million in open-market transactions in fiscal 2020, and we repurchased approximately 527 thousand shares for a total of $13 million in open-market transactions in fiscal 2019. As of August 31, 2021, there were approximately 706 thousand shares available for repurchase under the program.

The share repurchase program does not require us to acquire any specific number of shares, and we may suspend, extend, or terminate the program at any time without prior notice, and the program may be executed through open-market purchases, privately negotiated transactions, or utilizing Rule 10b5-1 programs.

 

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Performance Graph

The following graph and related information compare cumulative total shareholder return on our Class A common stock for the five-year period from September 1, 2016 through August 31, 2021, with the cumulative total return for the same period of (i) the S&P 500 Steel Index and (ii) the S&P 600 Metals & Mining Index. These comparisons assume an investment of $100 at the commencement of the five-year period and that all dividends are reinvested. The stock performance outlined in the performance graph below is not necessarily indicative of our future performance, and we do not endorse any predictions as to future stock performance.

 

 

 

 

Year Ended August 31,

 

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

Schnitzer Steel Industries(1)

 

$

100

 

 

$

148

 

 

$

149

 

 

$

129

 

 

$

120

 

 

$

294

 

S&P 500 Steel

 

$

100

 

 

$

114

 

 

$

129

 

 

$

101

 

 

$

94

 

 

$

242

 

S&P 600 Metals & Mining

 

$

100

 

 

$

133

 

 

$

138

 

 

$

91

 

 

$

89

 

 

$

161

 

 

(1)

Because of the composition of our major product categories, we have no direct market peer issuers.

ITEM 6. [RESERVED]

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section includes a discussion of our operations for the fiscal years ended August 31, 2021 and 2020. The following discussion and analysis provide information which management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included in Part II, Item 8 of this report.

For discussion of our results of operations for fiscal year 2019 including comparison to fiscal 2020, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended August 31, 2020.

Business

Founded in 1906, Schnitzer Steel Industries, Inc. is one of North America’s largest recyclers of ferrous and nonferrous metal, including end-of-life vehicles, and a manufacturer of finished steel products. As a vertically integrated organization, we offer a range of products and services to meet global demand through our network that includes 50 retail self-service auto parts stores, 52 metals recycling facilities, and an electric arc furnace (“EAF”) steel mill.

Prior to the first quarter of fiscal 2021, our internal organizational and reporting structure included two operating and reportable segments: the Auto and Metals Recycling (“AMR”) business and the Cascade Steel and Scrap (“CSS”) business. In the first quarter of fiscal 2021, in accordance with our plan announced in April 2020, we completed the transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model (“One Schnitzer”), supporting a single segment. We consolidated our operations, sales, services, and other functional capabilities at an enterprise level reflecting enhanced focus by management on optimizing our vertically integrated value chain. This change in structure has resulted in a more agile organization and solidified achievement of recent productivity improvements and cost efficiency initiatives. We began reporting on this new single-segment structure in the first quarter of fiscal 2021.

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. 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.

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, and varying demand for used auto parts from our self-service retail stores. Certain of these factors are influenced, to a degree, by the impact of seasonal changes including severe weather conditions, which can impact the timing of shipments and inhibit construction activity utilizing our products, scrap metal collection and production levels at our facilities, and retail admissions and parts sales at our auto parts stores. Further, sanctions, trade actions, and licensing and inspection requirements can impact the level of profitability on sales of our products and, in certain cases, impede or restrict our ability to sell to certain export markets or require us to direct our sales to alternative market destinations, which can cause our quarterly operating results to fluctuate.

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Strategic Priorities

As we continue to closely monitor economic conditions, we remain focused on the following core strategies and plans to meet our business goals and objectives:

 

Long-term expansion of ferrous and nonferrous scrap metal supply and processing, sales volumes, and operating margins;

 

Technology investments and process improvements to increase the separation and recovery of metal materials from our shredding process and to expand product optionality;

 

Development of new products and expansion of recycling services and capabilities to reach a broader market, enhance customer value, and increase operating margins;

 

Increase market share through initiatives to maximize volumes and through selective partnerships, alliances, and acquisitions;

 

Productivity and continuous improvement initiatives to ensure the safety of our employees, increase operating efficiency and effectiveness, advance sustainable business practices, improve natural resource stewardship, and reduce operating expense;

 

Use of our seven deepwater ports and ground-based logistics network to directly access customers domestically and internationally to meet demand for our products wherever it is greatest; and

 

Further optimization of our integrated recycling and steel manufacturing operating platforms to maximize opportunities for synergies, cost efficiencies, and volumes.

Key economic factors and trends affecting the industries in which we operate

We sell recycled metals to the global steel industry for the production of finished steel. Our financial results largely depend on supply of raw materials in the U.S. and Western Canada and demand for recycled metal in foreign and domestic markets and for finished steel products in the Western U.S. and Western Canada. Demand for most of our products is cyclical in nature and sensitive to changes in general economic conditions. The timing and magnitude of the economic cycles in the industries in which our products are used, including global steel manufacturing and nonresidential and infrastructure construction in the U.S., are difficult to predict. Global economic conditions, including impacts of the COVID-19 pandemic discussed below in this section, structural and cyclical changes in supply and demand conditions, the strength of the U.S. dollar, the availability and price of raw material alternatives, and trade actions such as tariffs affect market prices for and sales volumes of recycled ferrous and nonferrous metal in global markets and steel products in the Western U.S. and Western Canada and can have a significant impact on the results of operations for our reportable segments.

In fiscal 2021, market conditions for recycled metals improved globally, with selling prices for many recycled metal commodities reaching multi-year highs during the fiscal year. Selling prices for our ferrous and nonferrous products increased significantly compared to the prior fiscal year which was negatively impacted by the effects of the COVID-19 pandemic. In fiscal 2021, the average net selling prices for our ferrous and nonferrous products increased by 61% and 60%, respectively, compared to the prior fiscal year. The deterioration in global economic conditions that occurred in fiscal 2020 in large part due to the impacts of the COVID-19 pandemic reflected among other things the curtailment of many commercial and government-sponsored activities using steel and other metal materials, causing metal commodity prices to decrease sharply and widespread destocking of inventories. As global economies revived and commercial and investment activities resumed, including throughout fiscal 2021, demand for recycled metals and finished steel increased substantially, which contributed to periods of sharp increases in market selling prices for these products. Increased focus on decarbonization strategies by governments and businesses around the world, including investments in infrastructure and technologies that minimize carbon dioxide emissions from the use of fossil fuels, among other factors, also contributed to strong demand for most of our products in fiscal 2021 and support global long-term demand for recycled ferrous and nonferrous metal. In fiscal 2021, we observed a trend of increased use of recycled metals to manufacture new products, including greater use of EAF technology for steel production which uses recycled metal as a primary raw material. Average selling prices for our finished steel products, which are produced in our steel mill using EAF technology, increased by 17% compared to the prior fiscal year.

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Coronavirus Disease 2019 (COVID-19)

We continue to monitor the impact of COVID-19 on all aspects of our business. The COVID-19 outbreak, which the World Health Organization characterized as a pandemic in March 2020, has resulted in governments around the world implementing measures with various levels of stringency to help control the spread of the virus as well as vaccination programs to build levels of immunity among the population. In addition, governments and central banks globally have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Ensuring the health and 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. Further, we implemented infection control measures at all our sites and put in place travel and in-person meeting restrictions and other physical distancing measures. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our third quarter fiscal 2020 results, global economic conditions improved during fiscal 2021, resulting in increased demand for our products, which led to our earnings for our fiscal 2021 substantially exceeding the results for our fiscal 2020. Beginning in our second quarter of fiscal 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on individual, business, and government activities. The easing of restrictions and the existence of variant strains of COVID-19 may lead to a rise in infections, which could result in the reinstatement of some of the restrictions previously in place and 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. 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. The rolling mill production ceased in early June 2021. In August 2021, our steel mill began ramping up production ahead of the original schedule 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. This production ramp-up was initiated with a full workforce and included acceptance of orders for our complete range of finished steel products based on the rolling schedule. Impacts are expected to continue during the ramp-up phase and may continue thereafter. We have insurance that we believe is fully applicable to the losses and have filed initial insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property damage and business income losses resulting from the matter. The property damage deductible under the policies insuring the Company’s assets is $1 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. In the fourth quarter of fiscal 2021, we recognized an initial $10 million insurance receivable and related insurance recovery gain, reported within prepaid expenses and other current assets on the Consolidated Balance Sheets and within cost of goods sold on the Consolidated Statements of Operations, respectively, partially offsetting the detrimental effects of the incident primarily to our fourth quarter operating results. We incurred approximately $10 million in capital purchases in the fourth quarter to replace and repair property and equipment that had been lost or damaged by the fire. During the first quarter of fiscal 2022 through the date of this report, we received advance payments from insurance carriers totaling approximately $30 million towards our claims, and not reflecting any final or full settlement of claims with the carriers. The insurance claims resolution process may extend significantly beyond completion of repair and replacement of the physical plant property that experienced physical loss or damage at the melt shop and the restart of production activities.

Use of Non-GAAP Financial Measures

In this management’s discussion and analysis, we use supplemental measures of our performance, liquidity, and capital structure which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We believe that providing these non-GAAP financial measures adds a meaningful presentation of our operating and financial performance, liquidity, and capital structure. For example, following the modification of our internal organizational and reporting structure completed in the first quarter of fiscal 2021, we use adjusted EBITDA as one of the measures to compare and evaluate financial performance. Adjusted EBITDA is the sum of our net income before results from discontinued operations, interest expense, income taxes, depreciation and amortization, charges for legacy environmental matters (net of recoveries), business development costs not related to ongoing operations including pre-acquisition expenses, restructuring charges and other exit-related activities, charges related to non-ordinary course legal settlements, asset impairment charges, net 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 7.

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

Financial Highlights of Results of Operations for Fiscal 2021

 

Diluted earnings per share from continuing operations attributable to SSI shareholders in fiscal 2021 was $5.66, compared to a loss per share of $(0.15) in the prior fiscal year.

 

Adjusted diluted earnings per share from continuing operations attributable to SSI shareholders in fiscal 2021 was $6.13, compared to $0.43 in the prior fiscal year.

 

Net income in fiscal 2021 was $170 million, compared to a loss of $2 million in the prior fiscal year.

 

Adjusted EBITDA in fiscal 2021 was $289 million, compared to $85 million in the prior fiscal year.

Market conditions for recycled metals improved in fiscal 2021, with selling prices for many recycled metal commodities reaching multi-year highs during the year. Average net selling prices for our ferrous and nonferrous products increased significantly compared to the prior fiscal year which was negatively impacted by the economic effects of the COVID-19 pandemic. In fiscal 2021, the average net selling prices for our ferrous and nonferrous products increased by 61% and 60%, respectively, and sales volumes for these products increased by 11% and 8%, respectively, compared to the prior fiscal year. Market conditions for our finished steel products also improved in fiscal 2021, which contributed to finished steel average selling prices increasing by 17% compared to the prior fiscal year, the benefits of which were partially offset by the impact of lower finished steel sales volumes due to a business interruption at our steel mill caused by a fire in May 2021. Our results in fiscal 2021 reflected substantial benefits from the higher price environment for most of our products including a significant expansion in our ferrous metal spreads, increased ferrous and nonferrous sales volumes supported by strong demand and improved supply flows, greater contributions from sales of nonferrous products, and a favorable impact from average inventory accounting, compared to the prior fiscal year.

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

 

Net cash provided by operating activities of $190 million in fiscal 2021, compared to $125 million in the prior fiscal year.

 

Debt was $75 million as of August 31, 2021, compared to $104 million as of August 31, 2020.

 

Debt, net of cash, was $47 million as of August 31, 2021, compared to $87 million as of August 31, 2020.

See the reconciliations of adjusted diluted earnings (loss) per share from continuing operations attributable to SSI shareholders, adjusted EBITDA, and debt, net of cash in Non-GAAP Financial Measures at the end of this Item 7.

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