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Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

 

For the Quarterly Period Ended November 30, 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

 

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

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

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

The registrant had 27,623,708 shares of Class A common stock, par value of $1.00 per share, and 200,000 shares of Class B common stock, par value of $1.00 per share, outstanding as of January 4, 2022.

 

 

 

 


Table of Contents

 

 

SCHNITZER STEEL INDUSTRIES, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

PAGE

FORWARD-LOOKING STATEMENTS

3

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

4

 

 

Unaudited Condensed Consolidated Balance Sheets as of November 30, 2021 and August 31, 2021

4

 

 

Unaudited Condensed Consolidated Statements of Income for the Three Months Ended November 30, 2021 and 2020

5

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended November 30, 2021 and 2020

6

 

 

Unaudited Condensed Consolidated Statements of Equity for the Three Months Ended November 30, 2021 and 2020

7

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended November 30, 2021 and 2020

8

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

10

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

34

 

 

Item 4. Controls and Procedures

35

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

36

 

 

Item 1A. Risk Factors

36

 

 

Item 5. Other Information

36

 

 

Item 6. Exhibits

37

 

 

SIGNATURES

38

 

 

 

 


Table of Contents

 

 

 

FORWARD-LOOKING STATEMENTS

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

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

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

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

 

 

3


Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

 

 

November 30, 2021

 

 

August 31, 2021

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,081

 

 

$

27,818

 

Accounts receivable, net of allowance for credit losses of $1,551

   and $1,566

 

 

303,541

 

 

 

214,098

 

Inventories

 

 

313,872

 

 

 

256,427

 

Refundable income taxes

 

 

638

 

 

 

837

 

Prepaid expenses and other current assets

 

 

35,296

 

 

 

43,934

 

Total current assets

 

 

672,428

 

 

 

543,114

 

Property, plant and equipment, net of accumulated depreciation of $844,961 and $837,293

 

 

579,872

 

 

 

562,674

 

Operating lease right-of-use assets

 

 

127,865

 

 

 

131,221

 

Investments in joint ventures

 

 

13,261

 

 

 

12,844

 

Goodwill

 

 

232,367

 

 

 

170,304

 

Intangibles, net of accumulated amortization of $4,467 and $3,846

 

 

23,100

 

 

 

3,980

 

Deferred income taxes

 

 

26,575

 

 

 

27,561

 

Other assets

 

 

44,300

 

 

 

42,665

 

Total assets

 

$

1,719,768

 

 

$

1,494,363

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

3,501

 

 

$

3,654

 

Accounts payable

 

 

196,847

 

 

 

179,917

 

Accrued payroll and related liabilities

 

 

30,660

 

 

 

69,622

 

Environmental liabilities

 

 

21,568

 

 

 

24,743

 

Operating lease liabilities

 

 

21,695

 

 

 

21,417

 

Accrued income taxes

 

 

2,869

 

 

 

3,521

 

Other accrued liabilities

 

 

71,498

 

 

 

49,976

 

Total current liabilities

 

 

348,638

 

 

 

352,850

 

Deferred income taxes

 

 

51,272

 

 

 

40,593

 

Long-term debt, net of current maturities

 

 

256,215

 

 

 

71,299

 

Environmental liabilities, net of current portion

 

 

55,089

 

 

 

52,385

 

Operating lease liabilities, net of current maturities

 

 

109,191

 

 

 

113,165

 

Other long-term liabilities

 

 

24,607

 

 

 

24,292

 

Total liabilities

 

 

845,012

 

 

 

654,584

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock – 20,000 shares $1.00 par value authorized, none issued

 

 

 

 

 

 

Class A common stock – 75,000 shares $1.00 par value authorized,

   27,624 and 27,332 shares issued and outstanding

 

 

27,624

 

 

 

27,332

 

Class B common stock – 25,000 shares $1.00 par value authorized,

   200 and 200 shares issued and outstanding

 

 

200

 

 

 

200

 

Additional paid-in capital

 

 

43,641

 

 

 

49,074

 

Retained earnings

 

 

834,504

 

 

 

793,712

 

Accumulated other comprehensive loss

 

 

(35,279

)

 

 

(34,554

)

Total SSI shareholders’ equity

 

 

870,690

 

 

 

835,764

 

Noncontrolling interests

 

 

4,066

 

 

 

4,015

 

Total equity

 

 

874,756

 

 

 

839,779

 

Total liabilities and equity

 

$

1,719,768

 

 

$

1,494,363

 

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

 

4


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

 

 

Three Months Ended November 30,

 

 

 

2021

 

 

2020

 

Revenues

 

$

798,118

 

 

$

492,107

 

Operating expense:

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

683,244

 

 

 

420,094

 

Selling, general and administrative

 

 

55,267

 

 

 

49,906

 

(Income) from joint ventures

 

 

(236

)

 

 

(727

)

Restructuring charges and other exit-related activities

 

 

22

 

 

 

64

 

Operating income

 

 

59,821

 

 

 

22,770

 

Interest expense

 

 

(1,372

)

 

 

(1,780

)

Other loss, net

 

 

(47

)

 

 

(165

)

Income from continuing operations before income taxes

 

 

58,402

 

 

 

20,825

 

Income tax expense

 

 

(11,097

)

 

 

(5,719

)

Income from continuing operations

 

 

47,305

 

 

 

15,106

 

Loss from discontinued operations, net of tax

 

 

(29

)

 

 

(42

)

Net income

 

 

47,276

 

 

 

15,064

 

Net income attributable to noncontrolling interests

 

 

(1,077

)

 

 

(960

)

Net income attributable to SSI shareholders

 

$

46,199

 

 

$

14,104

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to SSI shareholders:

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

Income per share from continuing operations

 

$

1.64

 

 

$

0.51

 

Net income per share

 

$

1.64

 

 

$

0.51

 

Diluted:

 

 

 

 

 

 

 

 

Income per share from continuing operations

 

$

1.55

 

 

$

0.50

 

Net income per share

 

$

1.55

 

 

$

0.50

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

Basic

 

 

28,159

 

 

 

27,807

 

Diluted

 

 

29,885

 

 

 

28,485

 

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

5


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

 

 

Three Months Ended November 30,

 

 

 

2021

 

 

2020

 

Net income

 

$

47,276

 

 

$

15,064

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,115

)

 

 

239

 

Pension obligations, net

 

 

390

 

 

 

(260

)

Total other comprehensive loss, net of tax

 

 

(725

)

 

 

(21

)

Comprehensive income

 

 

46,551

 

 

 

15,043

 

Less comprehensive income attributable to noncontrolling interests

 

 

(1,077

)

 

 

(960

)

Comprehensive income attributable to SSI shareholders

 

$

45,474

 

 

$

14,083

 

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

 

6


Table of Contents

 

 

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total SSI

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Shareholders'

 

 

Noncontrolling

 

 

Total

 

Three Months Ended November 30, 2020

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

 

Interests

 

 

Equity

 

Balance as of September 1, 2020

 

 

26,899

 

 

$

26,899

 

 

 

200

 

 

$

200

 

 

$

36,616

 

 

$

649,863

 

 

$

(36,871

)

 

$

676,707

 

 

$

3,729

 

 

$

680,436

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,104

 

 

 

 

 

 

14,104

 

 

 

960

 

 

 

15,064

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21

)

 

 

(21

)

 

 

 

 

 

(21

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(723

)

 

 

(723

)

Issuance of restricted stock

 

 

543

 

 

 

543

 

 

 

 

 

 

 

 

 

(543

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock withheld for taxes

 

 

(188

)

 

 

(188

)

 

 

 

 

 

 

 

 

(3,782

)

 

 

 

 

 

 

 

 

(3,970

)

 

 

 

 

 

(3,970

)

Share-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,019

 

 

 

 

 

 

 

 

 

3,019

 

 

 

 

 

 

3,019

 

Dividends ($0.1875 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,257

)

 

 

 

 

 

(5,257

)

 

 

 

 

 

(5,257

)

Balance as of November 30, 2020

 

 

27,254

 

 

$

27,254

 

 

 

200

 

 

$

200

 

 

$

35,310

 

 

$

658,710

 

 

$

(36,892

)

 

$

684,582

 

 

$

3,966

 

 

$

688,548

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total SSI

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

 

Noncontrolling

 

 

Total

 

Three Months Ended November 30, 2021

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

 

Interests

 

 

Equity

 

Balance as of September 1, 2021

 

 

27,332

 

 

$

27,332

 

 

 

200

 

 

$

200

 

 

$

49,074

 

 

$

793,712

 

 

$

(34,554

)

 

$

835,764

 

 

$

4,015

 

 

$

839,779

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46,199

 

 

 

 

 

 

46,199

 

 

 

1,077

 

 

 

47,276

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(725

)

 

 

(725

)

 

 

 

 

 

(725

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,026

)

 

 

(1,026

)

Issuance of restricted stock

 

 

470

 

 

 

470

 

 

 

 

 

 

 

 

 

(470

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock withheld for taxes

 

 

(178

)

 

 

(178

)

 

 

 

 

 

 

 

 

(9,399

)

 

 

 

 

 

 

 

 

(9,577

)

 

 

 

 

 

(9,577

)

Share-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,436

 

 

 

 

 

 

 

 

 

4,436

 

 

 

 

 

 

4,436

 

Dividends ($0.1875 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,407

)

 

 

 

 

 

(5,407

)

 

 

 

 

 

(5,407

)

Balance as of November 30, 2021

 

 

27,624

 

 

$

27,624

 

 

 

200

 

 

$

200

 

 

$

43,641

 

 

$

834,504

 

 

$

(35,279

)

 

$

870,690

 

 

$

4,066

 

 

$

874,756

 

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

 

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

 

 

Three Months Ended November 30,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

47,276

 

 

$

15,064

 

Adjustments to reconcile net income to cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

17,220

 

 

 

14,826

 

Inventory write-downs

 

 

192

 

 

 

 

Deferred income taxes

 

 

11,227

 

 

 

4,770

 

Undistributed equity in earnings of joint ventures

 

 

(236

)

 

 

(727

)

Share-based compensation expense

 

 

4,392

 

 

 

2,984

 

Loss (gain) on disposal of assets, net

 

 

307

 

 

 

(61

)

Unrealized foreign exchange (gain) loss, net

 

 

(10

)

 

 

82

 

Credit loss (recoveries), net

 

 

(4

)

 

 

33

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(68,490

)

 

 

(29,116

)

Inventories

 

 

(45,581

)

 

 

(25,928

)

Income taxes

 

 

(59

)

 

 

5,324

 

Prepaid expenses and other current assets

 

 

546

 

 

 

738

 

Other long-term assets

 

 

(488

)

 

 

(737

)

Operating lease assets and liabilities

 

 

(337

)

 

 

(375

)

Accounts payable

 

 

20,509

 

 

 

19,015

 

Accrued payroll and related liabilities

 

 

(38,642

)

 

 

(12,529

)

Other accrued liabilities

 

 

21,327

 

 

 

(5,204

)

Environmental liabilities

 

 

(3,628

)

 

 

1,252

 

Other long-term liabilities

 

 

210

 

 

 

3,158

 

Net cash used in operating activities

 

 

(34,269

)

 

 

(7,431

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(39,719

)

 

 

(31,827

)

Acquisitions, net of acquired cash

 

 

(113,939

)

 

 

 

Proceeds from insurance and sale of assets

 

 

10,643

 

 

 

80

 

Net cash used in investing activities

 

 

(143,015

)

 

 

(31,747

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings from long-term debt

 

 

271,091

 

 

 

92,714

 

Repayment of long-term debt

 

 

(86,314

)

 

 

(53,781

)

Taxes paid related to net share settlement of share-based payment awards

 

 

(9,577

)

 

 

(3,970

)

Distributions to noncontrolling interests

 

 

(1,026

)

 

 

(723

)

Dividends paid

 

 

(5,568

)

 

 

(5,680

)

Net cash provided by financing activities

 

 

168,606

 

 

 

28,560

 

Effect of exchange rate changes on cash

 

 

(59

)

 

 

(11

)

Net decrease in cash and cash equivalents

 

 

(8,737

)

 

 

(10,629

)

Cash and cash equivalents as of beginning of period

 

 

27,818

 

 

 

17,887

 

Cash and cash equivalents as of end of period

 

$

19,081

 

 

$

7,258

 

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

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

 

 

Three Months Ended November 30,

 

 

 

2021

 

 

2020

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

611

 

 

$

1,364

 

Income taxes (refunded), net

 

$

(80

)

 

$

(4,389

)

Schedule of noncash investing and financing transactions:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in current liabilities

 

$

12,417

 

 

$

11,412

 

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

 

 

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SCHNITZER STEEL INDUSTRIES, INC.

 

 

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements of Schnitzer Steel Industries, Inc. and its majority-owned and wholly-owned subsidiaries (the “Company”) have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for Form 10-Q, including Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all normal, recurring adjustments considered necessary for a fair statement have been included. Management suggests that these Unaudited Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2021. The results for the three months ended November 30, 2021 and 2020 are not necessarily indicative of the results of operations for the entire fiscal year.

Segment Reporting

The Company acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors, and brokers, and it procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores. Most of these auto parts stores supply the Company’s shredding facilities with auto bodies that are processed into saleable recycled metal products. In addition to the sale of recycled metal products processed at its facilities, the Company provides a variety of recycling and related services. The Company also produces a range of finished steel long products at its electric arc furnace (“EAF”) steel mill using recycled ferrous metal sourced internally from its recycling and joint venture operations and other raw materials.

The accounting standards for reporting information about operating segments define an operating segment as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses for which discrete financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s internal organizational and reporting structure includes a single operating and reportable segment.

Cash and Cash Equivalents

Cash and cash equivalents include short-term securities that are not restricted by third parties and have an original maturity date of 90 days or less. Included in accounts payable are book overdrafts representing outstanding checks in excess of funds on deposit of $58 million and $47 million as of November 30, 2021 and August 31, 2021, respectively.

Accounts Receivable, net

Accounts receivable represent amounts primarily due from customers on product and other sales. These accounts receivable, which are reduced by an allowance for credit losses, are recorded at the invoiced amount and do not bear interest. The Company extends credit to customers under contracts containing customary and explicit payment terms, and payment is generally required within 30 to 60 days of shipment. Nonferrous export sales typically require a deposit prior to shipment. Historically, almost all the Company’s ferrous export sales have been made with letters of credit. Ferrous and nonferrous metal sales to domestic customers and finished steel sales are generally made on open account, and a portion of these sales are covered by credit insurance.

The Company evaluates the collectibility of its accounts receivable based on a combination of factors, including whether sales were made pursuant to letters of credit or required deposits prior to shipment, the aging of customer receivable balances, the financial condition of the Company’s customers, historical collection rates, and economic trends. Management uses this evaluation to estimate the amount of customer receivables that may not be collected in the future and records a provision for expected credit losses. Accounts are written off when all efforts to collect have been exhausted.

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SCHNITZER STEEL INDUSTRIES, INC.

Also included in accounts receivable are short-term advances to scrap metal suppliers used as a mechanism to acquire unprocessed scrap metal. The advances are generally repaid with scrap metal, as opposed to cash. Repayments of advances with scrap metal are treated as noncash operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows and totaled $3 million and $2 million for the three months ended November 30, 2021 and 2020, respectively.

Prepaid Expenses

The Company’s prepaid expenses, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets, totaled $23 million and $22 million as of November 30, 2021 and August 31, 2021, respectively, and consisted primarily of deposits on capital projects, prepaid services, prepaid insurance, and prepaid property taxes.

Other Assets

The Company’s other assets, exclusive of prepaid expenses and assets relating to certain employee benefit plans, consisted primarily of receivables from insurers, capitalized implementation costs for cloud computing arrangements, major spare parts and equipment, cash held in a client trust account relating to a legal settlement, an equity investment, debt issuance costs, and notes and other contractual receivables. Other assets are reported within either prepaid expenses and other current assets or other assets in the Unaudited Condensed Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle of one year from the reporting date.

Receivables from insurers represent the portion of insured losses expected to be recovered from the Company’s insurance carriers. The receivable is recorded at an amount not to exceed the recorded loss and only if the terms of legally enforceable insurance contracts support that the insurance recovery will not be disputed and is deemed collectible. Receivables from insurers totaled $10 million and $21 million as of November 30, 2021 and August 31, 2021, respectively. Receivables from insurers comprised primarily $6 million relating to environmental claims and $4 million relating to workers’ compensation claims as of each of November 30, 2021 and August 31, 2021, and $10 million as of August 31, 2021 relating to property damage and other claims in connection with the May 2021 fire at the Company’s melt shop operations. See “Accounting for Impacts of Involuntary Events” below in this Note for further discussion of receivables and advance payments from insurers relating to property damage and business interruption claims.

Other assets as of both November 30, 2021 and August 31, 2021 also included approximately $7.6 million in cash deposited into a client trust account in the second quarter of fiscal 2021 to fund the remediation of a site a portion of which was previously leased to and operated by an indirect, wholly-owned subsidiary. The cash was deposited into the client trust account by other potentially liable parties in connection with settlement of a lawsuit relating to allocation of the remediation costs, including agreement by the Company’s subsidiary to perform certain remedial actions. See “Other Legacy Environmental Loss Contingencies” within “Contingencies – Environmental” in Note 5 - Commitments and Contingencies for further discussion of this matter.

The Company invested $6 million in the equity of a privately-held waste and recycling entity in fiscal 2017. The equity investment does not have a readily determinable fair value and, therefore, is carried at cost and adjusted for impairments and observable price changes. The investment is reported within other assets in the Unaudited Condensed Consolidated Balance Sheets. The carrying value of the investment was $6 million as of November 30, 2021 and August 31, 2021. The Company has not recorded any impairments or upward or downward adjustments to the carrying value of the investment since acquisition.

Accounting for Impacts of Involuntary Events

Assets destroyed or damaged as a result of involuntary events are written off or reduced in carrying value to their salvage value. When recovery of all or a portion of the amount of property damage loss or other covered expenses through insurance proceeds is demonstrated to be probable, a receivable is recorded and offsets the loss or expense up to the amount of the total loss or expense. No gain is recorded until all contingencies related to the insurance claim have been resolved.

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SCHNITZER STEEL INDUSTRIES, INC.

On May 22, 2021, the Company experienced a fire at its steel mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. The rolling mill production ceased in early June 2021. In August 2021, the steel mill began ramping up operations following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. The ramp-up phase, while significantly advanced, continues through the date of this report. In addition to the loss of business income experienced during the shutdown of the steel mill, the Company continues to experience loss of business income as a result of the fire, including during the ramp-up phase and potentially beyond. The Company filed initial insurance claims for the property that experienced physical loss or damage and business income losses resulting from the matter. As of August 31, 2021, prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets included an initial $10 million insurance receivable recognized in the fourth quarter of fiscal 2021, primarily offsetting applicable losses including capital purchases of $10 million that had been incurred by the Company as of August 31, 2021. In the first quarter of fiscal 2022, the Company increased the amount of this insurance receivable to $14 million and recognized a related $3 million insurance recovery gain within cost of goods sold in the Unaudited Condensed Consolidated Statements of Income. In addition, during the first quarter of fiscal 2022, the Company received advance payments from insurance carriers totaling approximately $30 million towards the Company’s claims, and not reflecting any final or full settlement of claims with the carriers, which amount reduced the $14 million insurance receivable to zero with the remaining amount of advance payments of $16 million reported within other accrued liabilities in the Unaudited Condensed Consolidated Balance Sheets as of November 30, 2021.

See “Everett Facility Shredder Fire” in Note 12 – Subsequent Events for disclosure of a subsequent event related to a fire at the Company’s metals recycling facility in Everett, Massachusetts.

Business Acquisitions

The Company recognizes the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. Within one year from the date of acquisition, the Company may update the value allocated to the assets acquired and liabilities assumed, and the resulting goodwill balance, based on information received regarding the valuation of such assets and liabilities that was not available at the time of purchase. Measuring assets and liabilities at fair value requires the Company to determine the price that would be paid by a third-party market participant based on the highest and best use of the assets or interests acquired. Acquisition costs are expensed as incurred.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The majority of cash and cash equivalents is maintained with major financial institutions. Balances with these and certain other institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250 thousand as of November 30, 2021. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up the Company’s customer base. The Company controls credit risk through credit approvals, credit limits, credit insurance, letters of credit or other collateral, cash deposits, and monitoring procedures.

Recent Accounting Pronouncements

The Company does not expect that its adoption in the future of any recently issued accounting pronouncements will have a material impact on its consolidated financial statements.

Note 2 - Inventories

Inventories consisted of the following (in thousands):

 

 

November 30, 2021

 

 

August 31, 2021

 

Processed and unprocessed scrap metal

 

$

203,477

 

 

$

164,960

 

Semi-finished goods

 

 

17,013

 

 

 

7,671

 

Finished goods

 

 

46,963

 

 

 

39,368

 

Supplies

 

 

46,419

 

 

 

44,428

 

Inventories

 

$

313,872

 

 

$

256,427

 

 

 

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SCHNITZER STEEL INDUSTRIES, INC.

 

Note 3 - Business Acquisition

On October 1, 2021, the Company used cash on hand and borrowings under existing credit facilities to acquire eight metals recycling facilities across Mississippi, Tennessee, and Kentucky from Columbus Recycling, a provider of recycled ferrous and nonferrous metal products and recycling services. The transaction qualified as a business combination for accounting purposes, which involves application of the acquisition method described in Accounting Standards Codification Topic 805, Business Combinations, and summarized in “Business Acquisitions” in Note 1 – Summary of Significant Accounting Policies. 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. The Company paid at closing an additional $7 million for estimated net working capital in excess of the benchmark, resulting in total purchase consideration measured as of the end of the first quarter of fiscal 2022 of approximately $114 million. As of the date of this report, measurement of actual acquired net working capital, as well as the fair values of certain other acquired assets and assumed liabilities, is still preliminary and subject to change based on the completion of valuation procedures. 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 the Company’s twelve existing regional 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, giving rise to expected benefits supporting the amount of acquired goodwill.

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed by the Company as of the October 1, 2021 acquisition date (in thousands):

Cash

 

$

325

 

Accounts receivable

 

 

22,763

 

Inventories

 

 

10,060

 

Other current assets

 

 

255

 

Property, plant and equipment

 

 

13,570

 

Operating lease right-of-use assets

 

 

254

 

Goodwill(1)

 

 

62,325

 

Intangibles and other assets

 

 

19,741

 

Total assets acquired

 

 

129,293

 

Current liabilities

 

 

11,680

 

Other liabilities

 

 

3,350

 

Total liabilities assumed

 

 

15,030

 

Net assets acquired

 

$

114,263

 

 

(1)

Approximately $59 million of the provisional amount of acquired goodwill is tax deductible.

 

The following table summarizes the provisional purchase price allocation to the identifiable intangible assets and their estimated useful lives as of the October 1, 2021 acquisition date (in thousands):

 

 

 

 

 

 

 

Useful Life

Supplier relationships

 

$

17,245

 

 

7

Customer relationships

 

 

2,496

 

 

7

 

 

$

19,741

 

 

 

The results of operations for the acquired Columbus Recycling business beginning as of the October 1, 2021 acquisition date are included in the accompanying financial statements. For each of the three months ended November 30, 2021 and 2020, the unaudited amount of revenues of the acquired Columbus Recycling business equaled approximately 6% of the Company’s consolidated revenues reported in the Unaudited Condensed Consolidated Statements of Income, and the unaudited amount of net income of the acquired Columbus Recycling business was not material to the financial statements taken as a whole. Because the pro forma results of operations of the Company for the periods presented in this report would not be materially different as a result of the acquisition, this information is not presented.

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SCHNITZER STEEL INDUSTRIES, INC.

Note 4 - Goodwill

The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. Impairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is required to be identified as a reporting unit if the component is a business for which discrete financial information is available and segment management regularly reviews its operating resul