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. (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, 2018
. The results for the
three and six
months ended
February 28, 2019
and
2018
are not necessarily indicative of the results of operations for the entire fiscal year.
Accounting Changes
As of the beginning of the first quarter of fiscal 2019, the Company adopted an accounting standards update initially issued in May 2014 that clarifies the principles for recognizing revenue from contracts with customers. The core principle of the new guidance is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company adopted the new revenue accounting standard using the modified retrospective approach, which requires recognition of the cumulative effect of initially applying the new requirements as an adjustment to the opening balance of retained earnings in the period of initial application. Adoption of the new requirements did not change the timing of revenue recognition for the Company compared to the previous guidance, and the Company recorded
no
cumulative-effect adjustment to the opening balance of retained earnings as of September 1, 2018. The Company identified certain scrap purchase and sale arrangements for which it recognized revenue for the gross amount of consideration it expected to be entitled to from the customer (as principal) under the previous revenue guidance, but for which under the new revenue standard it recognizes revenue as the net amount of consideration that it expects to retain after paying the scrap metal supplier (as agent). The foregoing change in the classification of the cost of scrap metal purchased under such arrangements has the effect of reducing the amount of revenue and cost of goods sold reported in the financial statements, while having no impact on net income. If the Company had continued using the accounting guidance in effect before the adoption of the new revenue accounting standard, its consolidated revenues for the
three and six
months ended
February 28, 2019
would have been higher by approximately
$7 million
and
$13 million
, respectively, or
1%
for each period, and its consolidated cost of goods sold would have been higher by the same amounts, respectively. No other line items in the consolidated financial statements were materially impacted by adoption of the new requirements. Comparative prior period amounts and disclosures continue to be reported in accordance with guidance in effect prior to the date of adoption. See
Note 7
- Revenue for the disclosures required under the new standard.
As of the beginning of the first quarter of fiscal 2019, the Company adopted an accounting standards update that amends certain aspects of the reporting model for financial instruments. The most pertinent amendment to the Company is that an entity may choose to measure certain equity investments that do not have readily determinable fair values at cost minus impairment, plus or minus changes resulting from observable price changes. The amendments also require a qualitative assessment to identify impairment of equity investments without readily determinable fair values. Adoption of the requirements had no impact on the Company’s consolidated financial position, results of operations and cash flows.
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
$27 million
and
$28 million
as of
February 28, 2019
and
August 31, 2018
, 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 doubtful accounts, 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
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SCHNITZER STEEL INDUSTRIES, INC.
|
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
within 30 days of shipment. Nonferrous export sales typically require a deposit prior to shipment. Historically, almost all of the Company’s ferrous export sales have been made with letters of credit. Domestic ferrous metal sales, nonferrous metal sales and finished steel sales are generally made on open account, and the majority 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 credit insurance is in place. In cases where management is aware of circumstances that may impair a customer’s ability to meet its financial obligations, management records a specific allowance against amounts due and reduces the receivable to the amount the Company believes will be collected. For all other customers, the Company maintains an allowance that considers the total receivables outstanding, historical collection rates and economic trends. Accounts are written off when all efforts to collect have been exhausted.
Also included in accounts receivable are short-term advances to scrap metal suppliers used as a mechanism to acquire unprocessed scrap metal. The advances are generally repaid with scrap metal, as opposed to cash. Repayments of advances with scrap metal are treated as noncash operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows and totaled
$8 million
and
$6 million
for the six months ended
February 28, 2019
and 2018, respectively.
Prepaid Expenses
The Company’s prepaid expenses totaled
$14 million
and
$22 million
as of
February 28, 2019
and
August 31, 2018
, respectively, and consisted primarily of deposits on capital purchases, prepaid services and prepaid insurance.
Other Assets
The Company’s other assets, exclusive of prepaid expenses, consist primarily of receivables from insurers, 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 totaled
$15 million
and
$36 million
as of
February 28, 2019
and
August 31, 2018
, respectively, with the decrease in the first half of fiscal 2019 resulting from the settlement of a contingent loss recorded during fiscal 2018 in connection with lawsuits arising from a motor vehicle collision for which the Company had insurance coverage. See “Contingencies – Other” in
Note 5
– Commitments and Contingencies for further discussion of the contingent loss and subsequent settlements in fiscal
2019
.
The Company previously invested
$6 million
in a privately-held waste and recycling entity. The 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 presented as part of the Auto and Metals Recycling (“AMR”) reportable segment and reported within other assets in the Unaudited Condensed Consolidated Balance Sheets. The carrying value of the investment was
$6 million
as of
February 28, 2019
and
August 31, 2018
. The Company has not recorded any impairments or upward or downward adjustments to the carrying value of the investment since acquisition.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, and notes and other contractual receivables. 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
$250,000
as of
February 28, 2019
. 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, limits, insurance, letters of credit or other collateral, cash deposits and monitoring procedures. The Company is exposed to a residual credit risk with respect to open letters of credit by virtue of the possibility of the failure of a bank providing a letter of credit. The Company had
$60 million
and
$58 million
of open letters of credit as of
February 28, 2019
and
August 31, 2018
, respectively.
Note 2
- Recent Accounting Pronouncements
In February 2016, an accounting standard was issued that will supersede the existing lease standard and require a lessee to recognize a lease liability and a lease asset on its balance sheet for all leases, including those classified as operating leases under the existing lease standard. The update also expands the required quantitative and qualitative disclosures surrounding leases. Additional updates have been issued since February 2016 amending aspects of the initial update, including providing an additional and optional transition method for adoption. This standard is effective for the Company beginning in fiscal 2020, including interim periods within that fiscal year. The Company expects to initially apply the requirements by recognizing a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the period of adoption. The Company is in the process of analyzing its population of leases within the scope of the new accounting standard and documenting salient lease terms to support the initial
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SCHNITZER STEEL INDUSTRIES, INC.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
and subsequent measurement of lease liabilities and lease assets. The Company is also assessing and implementing changes to its processes, systems, and internal controls as a result of the new guidance. The Company is evaluating the impact of adopting this standard on its financial position, results of operations, cash flows and disclosures, and it expects to recognize a material amount of lease assets and liabilities on its consolidated balance sheet upon adoption.
Note 3
- Inventories
Inventories consisted of the following (in thousands):
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|
February 28, 2019
|
|
August 31, 2018
|
|
Processed and unprocessed scrap metal
|
$
|
86,120
|
|
|
$
|
111,658
|
|
|
Semi-finished goods
|
16,948
|
|
|
15,551
|
|
|
Finished goods
|
52,886
|
|
|
39,809
|
|
|
Supplies
|
42,611
|
|
|
38,859
|
|
|
Inventories
|
$
|
198,565
|
|
|
$
|
205,877
|
|
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. There were no triggering events identified during the first half of fiscal
2019
requiring an interim goodwill impairment test. As of
February 28, 2019
and
August 31, 2018
, all but
$1 million
of the Company’s goodwill was carried by a single reporting unit within AMR.
The gross change in the carrying amount of goodwill for the
six
months ended
February 28, 2019
was as follows (in thousands):
|
|
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|
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|
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Goodwill
|
|
August 31, 2018
|
$
|
168,065
|
|
|
Acquisition
|
1,575
|
|
|
Foreign currency translation adjustment
|
(201
|
)
|
|
February 28, 2019
|
$
|
169,439
|
|
In the second quarter of fiscal 2019, the Company acquired certain assets of an auto recycling business in northern California for
$2 million
. The acquisition qualified as a business combination under the accounting rules and resulted in the recognition of
$2 million
of goodwill during the second quarter of fiscal 2019. The Company allocated the acquired goodwill to the reporting unit within the AMR operating segment which carries nearly all of the Company’s goodwill.
Accumulated goodwill impairment charges were
$471 million
as of
February 28, 2019
and
August 31, 2018
.
Note 5
- Commitments and Contingencies
Contingencies - Environmental
The Company evaluates the adequacy of its environmental liabilities on a quarterly basis. Adjustments to the liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or expenditures are made for which liabilities were established.
Changes in the Company’s environmental liabilities for the
six
months ended
February 28, 2019
were as follows (in thousands):
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|
|
|
|
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Balance as of August 31, 2018
|
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Liabilities Established (Released), Net
|
|
Payments and Other
|
|
Balance as of February 28, 2019
|
|
Short-Term
|
|
Long-Term
|
|
$
|
53,832
|
|
|
$
|
1,487
|
|
|
$
|
(2,105
|
)
|
|
$
|
53,214
|
|
|
$
|
9,908
|
|
|
$
|
43,306
|
|
|
|
|
|
|
|
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SCHNITZER STEEL INDUSTRIES, INC.
|
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|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
Recycling Operations
As of
February 28, 2019
and
August 31, 2018
, the Company’s recycling operations had environmental liabilities of
$53 million
and
$54 million
, respectively, for the potential remediation of locations where it has conducted business or has environmental liabilities from historical or recent activities. The liabilities relate to the investigation and potential future remediation of soil contamination, groundwater contamination, storm water runoff issues and other natural resource damages. Except for Portland Harbor and certain liabilities discussed under Other Legacy Environmental Loss Contingencies immediately below, such liabilities were not individually material at any site.
Portland Harbor
In December 2000, the Company was notified by the United States Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it is one of the potentially responsible parties (“PRPs”) that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”). The precise nature and extent of cleanup of any specific areas within the Site, the parties to be involved, the timing of any specific remedial action and the allocation of the costs for any cleanup among responsible parties have not yet been determined. The process of site investigation, remedy selection, identification of additional PRPs and allocation of costs has been underway for a number of years, but significant uncertainties remain. It is unclear to what extent the Company will be liable for environmental costs or natural resource damage claims or third party contribution or damage claims with respect to the Site.
While the Company participated in certain preliminary Site study efforts, it was not party to the consent order entered into by the EPA with certain other PRPs, referred to as the “Lower Willamette Group” (“LWG”), for a remedial investigation/feasibility study (“RI/FS”). During fiscal 2007, the Company and certain other parties agreed to an interim settlement with the LWG under which the Company made a cash contribution to the LWG RI/FS. The LWG has indicated that it had incurred over
$115 million
in investigation-related costs over an approximately
10 year
period working on the RI/FS. Following submittal of draft RI and FS documents which the EPA largely rejected, the EPA took over the RI/FS process.
The Company has joined with approximately
100
other PRPs, including the LWG members, in a voluntary process to establish an allocation of costs at the Site, including the costs incurred by the LWG in the RI/FS process. The LWG members have also commenced federal court litigation, which has been stayed, seeking to bring additional parties into the allocation process.
In January 2008, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. Following meetings among the Trustee Council and the PRPs, funding and participation agreements were negotiated under which the participating PRPs, including the Company, agreed to fund the first phase of the three-phase natural resource damage assessment. Phase 1, which included the development of the Natural Resource Damage Assessment Plan (“AP”) and implementation of several early studies, was substantially completed in 2010. In December 2017, the Company joined with other participating PRPs in agreeing to fund Phase 2 of the natural resource damage assessment, which includes the implementation of the AP to develop information sufficient to facilitate early settlements between the Trustee Council and Phase 2 participants and the identification of restoration projects to be funded by the settlements. In late May 2018, the Trustee Council published notice of its intent to proceed with Phase 3, which will involve the full implementation of the AP and the final injury and damage determination. The Company is proceeding with the process established by the Trustee Council regarding early settlements under Phase 2. It is uncertain whether the Company will enter into an early settlement for natural resource damages or what costs it may incur in any such early settlement.
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 the Company, 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 have filed various motions to dismiss or stay this suit, which motions are pending. The Company intends to defend against the claims in this suit and does 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 the Company.
Estimates of the cost of remedial action for the cleanup of the in-river portion of the Site have varied widely in various drafts of the FS and in the EPA’s final FS issued in June 2016 ranging from approximately
$170 million
to over
$2.5 billion
(net present value), depending on the remedial alternative and a number of other factors. In comments submitted to the EPA, the Company and certain other stakeholders identified a number of serious concerns regarding the EPA’s risk and remedial alternatives assessments, cost estimates, scheduling assumptions and conclusions regarding the feasibility and effectiveness of remediation technologies.
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SCHNITZER STEEL INDUSTRIES, INC.
|
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|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
In January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for the Site. The selected remedy is a modified version of one of the alternative remedies evaluated in the EPA’s FS that was expanded to include additional work at a greater cost. 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. The Company has identified a number of concerns regarding the remedy described in the ROD, which is based on data that is more than a decade old, and the EPA’s estimates for the costs and time required to implement the selected remedy. Because of ongoing questions regarding cost effectiveness, technical feasibility, and the use of stale data, it is uncertain whether the ROD will be implemented as issued. 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 used in preparing the ROD was more than a decade old and would need to be updated with a new round of “baseline” sampling to be conducted prior to the remedial design phase. Accordingly, the ROD provided for additional pre-remedial design investigative work and baseline sampling to be conducted in order to provide a baseline of current conditions and delineate particular remedial actions for specific areas within the Site. This additional sampling needs to occur prior to proceeding with the next phase in the process which is the remedial design. The remedial design phase is an engineering phase during which additional technical information and data will be collected, identified and incorporated into technical drawings and specifications developed for the subsequent remedial action. 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. Following issuance of the ROD, EPA proposed that the PRPs, or a subgroup of PRPs, perform the additional investigative work identified in the ROD under a new consent order.
In December 2017, the Company and
three
other PRPs entered into a new Administrative Settlement Agreement and Order on Consent with EPA to perform such pre-remedial design investigation and baseline sampling over a
two year
period. The Company estimates that its share of the costs of performing such work will be approximately
$2 million
, which it recorded to environmental liabilities and selling, general and administrative expense in the consolidated financial statements in the first quarter of fiscal 2018. The Company believes that such costs will be fully covered by existing insurance coverage and, thus, also recorded an insurance receivable for
$2 million
in the first quarter of fiscal 2018, resulting in no net impact to the Company’s consolidated results of operations in that period.
Except for certain early action projects in which the Company is not involved, remediation activities are not expected to commence for a number of years. In addition, as discussed above, responsibility for implementing and funding the remedy will be determined in a separate allocation process. The Company does not expect the next major stage of the allocation process to proceed until after the additional pre-remedial design data is collected.
Because there has not been a determination of the specific remediation actions that will be required, the amount of natural resource damages or the allocation of costs of the investigations and any remedy and natural resource damages among the PRPs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it is likely to or which it is reasonably possible that it will incur in connection with the Site, although such costs could be material to the Company’s financial position, results of operations, cash flows and liquidity. Among the facts currently being developed are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on each property within the Site, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs. The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense (including the pre-remedial design investigative activities), remediation and mitigation for natural resource damages claims in connection with the Site, although there is no assurance that those policies will cover all of the costs which the Company may incur. As of
February 28, 2019
and
August 31, 2018
, the Company’s total liability for its estimated share of the costs of the investigation was
$1 million
and
$2 million
, respectively.
The Oregon Department of Environmental Quality is separately providing oversight of voluntary investigations by the Company involving the Company’s sites adjacent to the Portland Harbor which are focused on controlling any current “uplands” releases of contaminants into the Willamette River. No liabilities have been established in connection with these investigations because the extent of contamination (if any) and the Company’s responsibility for the contamination (if any) have not yet been determined.
Other Legacy Environmental Loss Contingencies
The Company’s environmental loss contingencies as of
February 28, 2019
and
August 31, 2018
, other than Portland Harbor, include actual or possible investigation and cleanup costs from historical contamination at sites currently or formerly owned or operated by the Company or at other sites where the Company may have responsibility for such costs due to past disposal or other activities (“legacy environmental loss contingencies”). These legacy environmental loss contingencies relate to the potential remediation
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SCHNITZER STEEL INDUSTRIES, INC.
|
|
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
of waterways and soil and groundwater contamination and may also involve natural resource damages, governmental fines and penalties and claims by third parties for personal injury and property damage. The Company has been notified that it is or may be a potentially responsible party at certain of these sites, and investigation and cleanup activities are ongoing or may be required in the future. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. Where investigation and cleanup activities are ongoing or where the Company has not yet been identified as having responsibility or the contamination has not yet been identified, it is reasonably possible that the Company may need to recognize additional liabilities in connection with such sites but the Company cannot currently reasonably estimate the possible loss or range of loss absent additional information or developments. Such additional liabilities, individually or in the aggregate, may have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
During the first quarter of fiscal 2018, the Company accrued
$4 million
in expense at its Corporate division for the estimated costs related to remediation of shredder residue disposed of in or around the 1970s at third-party sites located near each other. Investigation activities have been conducted under oversight of the applicable state regulatory agency. As of
February 28, 2019
and
August 31, 2018
, the Company had
$4 million
accrued for this matter. It is reasonably possible that the Company may recognize additional liabilities in connection with this matter at the time such losses are probable and can be reasonably estimated. The Company currently estimates a range of reasonably possible losses related to this matter in excess of current accruals at between
zero
and
$28 million
based on a range of remedial alternatives and subject to development and approval by regulators of a specific remedy implementation plan. The Company is investigating whether a portion or all of the current and future losses related to this matter, if incurred, are covered by existing insurance coverage or may be offset by contributions from other responsible parties.
In addition, the Company’s loss contingencies as of
February 28, 2019
and
August 31, 2018
include
$8 million
and
$6 million
, respectively, for the estimated costs related to remediation of soil and groundwater conditions, including penalties, in connection with a closed facility owned and previously operated by an indirect, wholly-owned subsidiary. Investigation activities have been conducted under the oversight of the applicable state regulatory agency, and the Company has also been working with local officials with respect to the protection of public water supplies. It is reasonably possible that the Company may recognize additional liabilities, including penalties, in connection with this matter at the time such additional losses are probable and can be reasonably estimated. However, the Company cannot reasonably estimate at this time the possible loss or range of possible losses associated with this matter pending completion of on-going studies and determination of remediation plans and pending further negotiations to settle the related enforcement matter.
Steel Manufacturing Operations
The Company’s steel manufacturing operations had
no
known environmental liabilities as of
February 28, 2019
and
August 31, 2018
.
The steel mill’s electric arc furnace generates dust (“EAF dust”) that is classified as hazardous waste by the EPA because of its zinc and lead content. As a result, the Company captures the EAF dust and ships it in specialized rail cars to firms that apply treatments that allow for the ultimate disposal of the EAF dust.
The Company’s 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
950 thousand
tons. The Company’s permit was first issued in 1998 and has since been renewed through February 1, 2018. The permit renewal process occurs every
five years
, and the renewal process is underway; however, the existing permit is extended by administrative rule until the current renewal process is finalized.
Summary - Environmental Contingencies
With respect to environmental contingencies other than the Portland Harbor Superfund site and the other legacy environmental loss contingencies, which are discussed separately above, management currently believes that adequate provision has been made for the potential impact of these issues and that the ultimate outcomes will not have a material adverse effect on the Company’s consolidated financial statements as a whole. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material in any given period, but there can be no assurance that such amounts paid will not be material in the future.
Contingencies - Other
Schnitzer Southeast, LLC (a wholly-owned subsidiary of the Company, “SSE”), an SSE employee, the Company and one of the Company’s insurance carriers had been named as defendants in five separate wrongful death lawsuits filed in the State of Georgia arising from an accident in 2016 in Alabama involving a tractor trailer driven by the SSE employee and owned by SSE. In the first quarter of fiscal 2019, the Company settled
two
of the
five
lawsuits for a total of
$20 million
, which amount has been paid and was substantially covered by insurance. In addition to amounts accrued for the
two
lawsuits settled and paid in the first quarter of
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SCHNITZER STEEL INDUSTRIES, INC.
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|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
fiscal 2019, the Company accrued
$10 million
reflecting its estimate of the probable loss related to the
three
unresolved lawsuits and recorded a
$10 million
insurance receivable in fiscal 2018, resulting in no net impact to the Company’s consolidated results of operations. It is reasonably possible that the Company may recognize additional losses in connection with these unresolved lawsuits at the time such additional losses are probable and can be reasonably estimated. Such additional losses may be material to the Company’s consolidated financial statements. To the extent that circumstances change and the Company determines that an additional loss is reasonably possible, can be reasonably estimated, and is material, the Company would then disclose an estimate of the additional possible loss or range of loss. The Company believes that such additional losses, if incurred, would be substantially covered by existing insurance coverage.
The Company is a party to various legal proceedings arising in the normal course of business. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. The Company does not anticipate that the resolution of legal proceedings arising in the normal course of business, after taking into consideration expected insurance recoveries, will have a material adverse effect on its results of operations, financial condition, or cash flows.
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|
SCHNITZER STEEL INDUSTRIES, INC.
|
|
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
Note 6
- Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss, net of tax, comprise the following (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Three Months Ended February 28, 2019
|
|
Three Months Ended February 28, 2018
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension Obligations, Net
|
|
Total
|
|
Foreign Currency Translation Adjustments
|
|
Pension Obligations, Net
|
|
Total
|
|
Balances - December 1
(Beginning of period)
|
$
|
(35,493
|
)
|
|
$
|
(2,906
|
)
|
|
$
|
(38,399
|
)
|
|
$
|
(33,537
|
)
|
|
$
|
(3,383
|
)
|
|
$
|
(36,920
|
)
|
|
Other comprehensive income before reclassifications
|
632
|
|
|
—
|
|
|
632
|
|
|
117
|
|
|
—
|
|
|
117
|
|
|
Income tax (expense) benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive income before reclassifications, net of tax
|
632
|
|
|
—
|
|
|
632
|
|
|
117
|
|
|
—
|
|
|
117
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
52
|
|
|
52
|
|
|
—
|
|
|
77
|
|
|
77
|
|
|
Income tax benefit
|
—
|
|
|
(12
|
)
|
|
(12
|
)
|
|
—
|
|
|
(303
|
)
|
|
(303
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss, net of tax
|
—
|
|
|
40
|
|
|
40
|
|
|
—
|
|
|
(226
|
)
|
|
(226
|
)
|
|
Net periodic other comprehensive income (loss)
|
632
|
|
|
40
|
|
|
672
|
|
|
117
|
|
|
(226
|
)
|
|
(109
|
)
|
|
Balances - February 28
(End of period)
|
$
|
(34,861
|
)
|
|
$
|
(2,866
|
)
|
|
$
|
(37,727
|
)
|
|
$
|
(33,420
|
)
|
|
$
|
(3,609
|
)
|
|
$
|
(37,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended February 28, 2019
|
|
Six Months Ended February 28, 2018
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension Obligations, Net
|
|
Total
|
|
Foreign Currency Translation Adjustments
|
|
Pension Obligations, Net
|
|
Total
|
|
Balances - September 1
(Beginning of period)
|
$
|
(34,129
|
)
|
|
$
|
(3,108
|
)
|
|
$
|
(37,237
|
)
|
|
$
|
(31,828
|
)
|
|
$
|
(3,465
|
)
|
|
$
|
(35,293
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(732
|
)
|
|
208
|
|
|
(524
|
)
|
|
(1,592
|
)
|
|
(185
|
)
|
|
(1,777
|
)
|
|
Income tax (expense) benefit
|
—
|
|
|
(46
|
)
|
|
(46
|
)
|
|
—
|
|
|
227
|
|
|
227
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
(732
|
)
|
|
162
|
|
|
(570
|
)
|
|
(1,592
|
)
|
|
42
|
|
|
(1,550
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
104
|
|
|
104
|
|
|
—
|
|
|
140
|
|
|
140
|
|
|
Income tax benefit
|
—
|
|
|
(24
|
)
|
|
(24
|
)
|
|
—
|
|
|
(326
|
)
|
|
(326
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss, net of tax
|
—
|
|
|
80
|
|
|
80
|
|
|
—
|
|
|
(186
|
)
|
|
(186
|
)
|
|
Net periodic other comprehensive income (loss)
|
(732
|
)
|
|
242
|
|
|
(490
|
)
|
|
(1,592
|
)
|
|
(144
|
)
|
|
(1,736
|
)
|
|
Balances - February 28
(End of period)
|
$
|
(34,861
|
)
|
|
$
|
(2,866
|
)
|
|
$
|
(37,727
|
)
|
|
$
|
(33,420
|
)
|
|
$
|
(3,609
|
)
|
|
$
|
(37,029
|
)
|
In the second quarter of fiscal 2018, the Company adopted an accounting standard update that allows for a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“Tax Act”) enacted on December 22, 2017. Reclassifications from AOCI to retained earnings for stranded tax effects in the second quarter of fiscal 2018, both individually and in the aggregate, were not material. Reclassifications from AOCI to earnings,
|
|
|
|
|
|
|
|
SCHNITZER STEEL INDUSTRIES, INC.
|
|
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
both individually and in the aggregate, were not material to the impacted captions in the Unaudited Condensed Consolidated Statements of Income for all periods presented.
Note 7
- Revenue
The Company recognizes revenue upon satisfying its promises to transfer goods or services to customers under the terms of its contracts. Nearly all of these promises, referred to as performance obligations, consist of the transfer of physical goods, including ferrous and nonferrous recycled scrap metal, autobodies, auto parts, and finished steel products, to customers. These performance obligations are satisfied at the point in time the Company transfers control of the goods to the customer, which in nearly all cases is when title to and risk of loss of the goods transfer to the customer. The timing of transfer of title and risk of loss is dictated by customary or explicitly stated contract terms. For example, the Company recognizes revenue on partially loaded bulk shipments of ferrous recycled scrap metal when contractual terms support revenue recognition based on transfer of title and risk of loss. The significant majority of the Company’s sales involve transfer of control to the customer, and thus revenue recognition, before delivery to the customer’s destination; for example, upon release of the goods to the shipper. Shipping and handling activities that occur after a customer has obtained control of a good are accounted for as fulfillment costs rather than an additional promise in a contract. As such, shipping and handling consideration (freight revenue) is recognized when control of the goods transfers to the customer, and freight expense is accrued when the related revenue is recognized.
In certain regional markets, the Company enters into contracts whereby it arranges for, or brokers, the transfer of scrap material between scrap suppliers and end customers. For transactions in which the Company obtains substantive control of the scrap material before the goods are transferred to the end customer, for example by arranging for the processing or warehousing of the material, the Company recognizes revenue equal to the gross amount of the consideration it expects to receive from the customer (as principal). Alternatively, for transactions in which the Company does not obtain substantive control of the scrap material before the product is transferred to the end customer, the Company recognizes revenue equal to the net amount of the consideration it expects to retain after paying the supplier for the purchase of the scrap metal (as agent). The Company is the agent in the transaction for the substantial majority of brokerage arrangements.
Nearly all of the Company’s sales contracts reflect market pricing at the time the contract is executed, are one year or less, and generally provide for shipment within 30 to 60 days after the price has been agreed upon with the customer. The Company’s retail auto parts sales are at listed prices and are recognized at the point of sale.
The Company recognizes revenue based on contractually stated selling prices and quantities shipped, adjusted for estimated claims and discounts. Claims are customary in the recycled scrap metal industry and arise from variances in the quantity or quality of delivered products. Revenue adjustments may be required if the settlement of claims exceeds original estimates. Discounts offered to certain finished steel customers qualify as variable consideration as the discounts are contingent upon future events. Variable consideration arising from discounts is recognized upon the transfer of finished steel products to customers based upon either the expected value or the most likely amount and was not material for the
three and six
months ended
February 28, 2019
. The Company experiences very few sales returns and, therefore, no material provisions for returns have been made when sales are recognized. During the
three and six
months ended
February 28, 2019
, revenue adjustments related to performance obligations that were satisfied in previous periods were not material.
|
|
|
|
|
|
|
|
SCHNITZER STEEL INDUSTRIES, INC.
|
|
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
Disaggregation of Revenues
The table below illustrates the Company’s revenues disaggregated by major product and sales destination for each reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, 2019
|
|
|
AMR
|
|
CSS
|
|
Intersegment Revenues
|
|
Total
|
|
Revenues by major product:
|
|
|
|
|
|
|
|
|
Ferrous
|
$
|
257,488
|
|
|
$
|
7,120
|
|
|
$
|
(2,641
|
)
|
|
$
|
261,967
|
|
|
Nonferrous
|
99,484
|
|
|
9,115
|
|
|
(257
|
)
|
|
108,342
|
|
|
Steel
|
—
|
|
|
74,025
|
|
|
—
|
|
|
74,025
|
|
|
Retail and other
|
29,093
|
|
|
138
|
|
|
—
|
|
|
29,231
|
|
|
Total revenues
|
$
|
386,065
|
|
|
$
|
90,398
|
|
|
$
|
(2,898
|
)
|
|
$
|
473,565
|
|
|
Revenues based on sales destination:
|
|
|
|
|
|
|
|
|
Foreign
|
$
|
217,057
|
|
|
$
|
16,023
|
|
|
$
|
—
|
|
|
$
|
233,080
|
|
|
Domestic
|
169,008
|
|
|
74,375
|
|
|
(2,898
|
)
|
|
240,485
|
|
|
Total revenues
|
$
|
386,065
|
|
|
$
|
90,398
|
|
|
$
|
(2,898
|
)
|
|
$
|
473,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended February 28, 2019
|
|
|
AMR
|
|
CSS
|
|
Intersegment Revenues
|
|
Total
|
|
Revenues by major product:
|
|
|
|
|
|
|
|
|
Ferrous
|
$
|
556,300
|
|
|
$
|
26,863
|
|
|
$
|
(5,149
|
)
|
|
$
|
578,014
|
|
|
Nonferrous
|
203,665
|
|
|
18,146
|
|
|
(527
|
)
|
|
221,284
|
|
|
Steel
|
—
|
|
|
175,362
|
|
|
—
|
|
|
175,362
|
|
|
Retail and other
|
62,512
|
|
|
413
|
|
|
—
|
|
|
62,925
|
|
|
Total revenues
|
$
|
822,477
|
|
|
$
|
220,784
|
|
|
$
|
(5,676
|
)
|
|
$
|
1,037,585
|
|
|
Revenues based on sales destination:
|
|
|
|
|
|
|
|
|
Foreign
|
$
|
480,568
|
|
|
$
|
44,154
|
|
|
$
|
—
|
|
|
$
|
524,722
|
|
|
Domestic
|
341,909
|
|
|
176,630
|
|
|
(5,676
|
)
|
|
512,863
|
|
|
Total revenues
|
$
|
822,477
|
|
|
$
|
220,784
|
|
|
$
|
(5,676
|
)
|
|
$
|
1,037,585
|
|
Receivables from Contracts with Customers
The revenue accounting standard defines a receivable as an entity’s right to consideration that is unconditional, meaning that only the passage of time is required before payment is due. As of
February 28, 2019
and
August 31, 2018
, receivables from contracts with customers, net of an allowance for doubtful accounts, totaled
$161 million
and
$164 million
, respectively, representing
98%
and
97%
, respectively, of total accounts receivable reported on the Unaudited Condensed Consolidated Balance Sheets.
Contract Liabilities
Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company’s contract liabilities consist almost entirely of customer deposits for recycled scrap metal sales contracts, which are reported within accounts payable on the Unaudited Condensed Consolidated Balance Sheets and totaled
$4 million
and
$9 million
as of
February 28, 2019
and
August 31, 2018
, respectively. Unsatisfied performance obligations reflected in these contract liabilities relate to contracts with original expected durations of one year or less. During the
three and six
months ended
February 28, 2019
, the Company reclassified
$1 million
and
$8 million
, respectively, in customer deposits as of
August 31, 2018
to revenues as a result of satisfying performance obligations during the respective periods.
|
|
|
|
|
|
|
|
SCHNITZER STEEL INDUSTRIES, INC.
|
|
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
Note 8
- Share-Based Compensation
In the first quarter of fiscal 2019, as part of the annual awards under the Company’s Long-Term Incentive Plan, the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”) granted
261,642
restricted stock units (“RSUs”) and
254,620
performance share awards to the Company’s key employees and officers under the Company’s 1993 Amended and Restated Stock Incentive Plan (“SIP”).
The RSUs have a five-year term and vest
20%
per year commencing on October 31, 2019. The aggregate fair value of all of the RSUs granted was based on the market closing price of the underlying Class A common stock on the grant date and totaled
$7 million
. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures, or to the date retirement eligibility is achieved (if before the end of the service period).
The performance share awards comprise two separate and distinct awards with different vesting conditions.
The Compensation Committee granted
123,812
performance share awards based on a relative Total Shareholder Return (“TSR”) metric over a performance period spanning November 15, 2018 to August 31, 2021. Award share payouts range from a threshold of
50%
to a maximum of
200%
based on the relative ranking of the Company’s TSR among a designated peer group of
16
companies. The TSR award stipulates certain limitations to the payout in the event the payout reaches a defined ceiling level or the Company’s TSR is negative. The TSR awards contain a market condition and, therefore, once the award recipients complete the requisite service period, the related compensation expense based on the grant-date fair value is not changed, regardless of whether the market condition has been satisfied. The estimated fair value of the TSR awards at the date of grant was
$4 million
. The Company estimated the fair value of the TSR awards using a Monte-Carlo simulation model utilizing several key assumptions including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features.
The remaining
130,808
performance share awards have a three-year performance period consisting of the Company’s 2019, 2020 and 2021 fiscal years. The performance targets are based on the Company’s return on capital employed over the three-year performance period, with award payouts ranging from a threshold of
50%
to a maximum of
200%
. The fair value of the awards granted was based on the market closing price of the underlying Class A common stock on the grant date and totaled
$4 million
.
The compensation expense associated with performance share awards is recognized over the requisite service period, net of forfeitures. Performance share awards will be paid in Class A common stock as soon as practicable after the end of the requisite service period and vesting date of October 31, 2021.
In the second quarter of fiscal 2019, the Company granted deferred stock units (“DSUs”) to each of its non-employee directors under the Company’s SIP. Each DSU gives the director the right to receive one share of Class A common stock at a future date. The grant included an aggregate of
31,218
shares that will vest in full on the day before the Company’s 2020 annual meeting of shareholders, subject to continued Board service. The total value of these awards at the grant date was
$1 million
.
Note 9
- Income Taxes
On December 22, 2017, the President of the United States signed and enacted into law comprehensive tax legislation commonly referred to as the Tax Act, which, except for certain provisions, is effective for tax years beginning on or after January 1, 2018. The Tax Act’s primary change is a reduction in the federal statutory corporate tax rate from
35%
to
21%
, resulting in a pro rata reduction for the Company from
35%
to
25.7%
for fiscal 2018 and a full reduction to
21%
for fiscal 2019. As a change in tax law is accounted for in the period of enactment, the Company recognized a discrete benefit of
$7 million
in the second quarter of fiscal 2018 due to the revaluation of U.S. net deferred tax liabilities to reflect the lower statutory rate. The Company’s effective tax rate in the second quarter and first six months of fiscal 2018 also reflected application of the Tax Act’s lower federal statutory corporate tax rate to fiscal 2018 projected taxable income at the time. The Company’s accounting for the impacts of the Tax Act was complete as of November 30, 2018.
Effective Tax Rate
The Company’s effective tax rate from continuing operations for the
second
quarter and first
six
months of fiscal
2019
was an expense of
22.3%
and
20.9%
, respectively, compared to a benefit of
33.9%
and
8.2%
, respectively, for the comparable prior year periods. The Company reported a tax benefit on pre-tax income for the
second
quarter and first
six
months of fiscal
2018
primarily due to the discrete benefits recorded in the second quarter of fiscal 2018 comprising
$7 million
resulting from enactment of the Tax Act and
$7 million
from the release of valuation allowances against certain deferred tax assets.
|
|
|
|
|
|
|
|
SCHNITZER STEEL INDUSTRIES, INC.
|
|
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
Valuation Allowances
The Company assesses the realizability of its deferred tax assets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies, and forecasts of taxable income. The Company considers all negative and positive evidence, including the weight of the evidence, to determine if valuation allowances against deferred tax assets are required. As discussed above in this section, in the second quarter of fiscal 2018, the Company released valuation allowances against certain U.S. federal and state deferred tax assets resulting in a discrete tax benefit of
$7 million
. The release of these valuation allowances was the result of sufficient positive evidence at the time, including cumulative income in recent years and projections of future taxable income based primarily on the Company’s improved financial performance, that it is more-likely-than-not that the deferred tax assets will be realized. The Company continues to maintain valuation allowances against certain U.S. federal, state, Canadian and all Puerto Rican deferred tax assets.
The Company files federal and state income tax returns in the U.S. and foreign tax returns in Puerto Rico and Canada. For U.S. federal income tax returns, fiscal years 2014 to 2018 remain subject to examination under the statute of limitations.
Note 10
- Net Income Per Share
The following table sets forth the information used to compute basic and diluted net income per share attributable to SSI (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28,
|
|
Six Months Ended February 28,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Income from continuing operations
|
$
|
13,435
|
|
|
$
|
41,755
|
|
|
$
|
30,125
|
|
|
$
|
61,011
|
|
|
Net income attributable to noncontrolling interests
|
(405
|
)
|
|
(903
|
)
|
|
(835
|
)
|
|
(1,760
|
)
|
|
Income from continuing operations attributable to SSI
|
13,030
|
|
|
40,852
|
|
|
29,290
|
|
|
59,251
|
|
|
Income (loss) from discontinued operations, net of tax
|
(138
|
)
|
|
164
|
|
|
(210
|
)
|
|
129
|
|
|
Net income attributable to SSI
|
$
|
12,892
|
|
|
$
|
41,016
|
|
|
$
|
29,080
|
|
|
$
|
59,380
|
|
|
Computation of shares:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
27,630
|
|
|
27,797
|
|
|
27,568
|
|
|
27,745
|
|
|
Incremental common shares attributable to dilutive performance share, RSU and DSU awards
|
484
|
|
|
1,008
|
|
|
671
|
|
|
992
|
|
|
Weighted average common shares outstanding, diluted
|
28,114
|
|
|
28,805
|
|
|
28,239
|
|
|
28,737
|
|
Common stock equivalent shares of
313,956
and
159,417
were considered antidilutive and were excluded from the calculation of diluted net income per share for the
three and six
months ended
February 28, 2019
, respectively. An insignificant number of common stock equivalent shares were considered antidilutive for the
three and six
months ended
February 28, 2018
.
Note 11
- Related Party Transactions
The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled
$3 million
and
$4 million
for the
three
months ended
February 28, 2019
and
2018
, respectively, and
$7 million
for the
six
months ended
February 28, 2019
and
2018
.
Note 12
- Segment Information
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
two
operating and reportable segments: the Auto and Metals Recycling (“AMR”) business and the Cascade Steel and Scrap (“CSS”) business.
AMR acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors and brokers, and procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service
|
|
|
|
|
|
|
|
SCHNITZER STEEL INDUSTRIES, INC.
|
|
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
auto parts stores. These auto parts stores also supply the Company’s shredding facilities with autobodies that are processed into saleable recycled scrap metal.
CSS operates a steel mini-mill that produces a range of finished steel long products using recycled scrap metal and other raw materials. CSS’s steel mill obtains substantially all of its recycled scrap metal raw material requirements from its integrated metals recycling and joint venture operations. CSS’s metals recycling operations also sell recycled metal to external customers primarily in export markets.
The Company holds noncontrolling ownership interests in joint ventures, which are either in the metals recycling business or are suppliers of unprocessed metal. The joint ventures sell recycled scrap metal to AMR and to CSS at prices that approximate local market rates, which produces intercompany profit. This intercompany profit is eliminated while the products remain in inventory and is not recognized until the finished products are sold to third parties. The Company’s allocable portion of the results of these joint ventures is reported within the segment results. As of
February 28, 2019
and
August 31, 2018
, the Company had
two
50%
-owned joint venture interests,
one
presented as part of AMR operations, and
one
presented as part of CSS operations. Income from joint ventures for the
three and six
months ended
February 28, 2018
includes the results of
two
additional
50%
joint venture interests presented as part of AMR operations which dissolved in the fourth quarter of fiscal 2018.
Intersegment sales from AMR to CSS are made at prices that approximate local market rates. These intercompany sales tend to produce intercompany profit which is not recognized until the finished products are ultimately sold to third parties.
The information provided below is obtained from internal information that is provided to the Company’s chief operating decision maker for the purpose of corporate management. The Company uses segment operating income to measure segment performance. The Company does not allocate corporate interest income and expense, income taxes and other income and expense to its reportable segments. Certain expenses related to shared services that support operational activities and transactions are allocated from Corporate to the segments. Unallocated Corporate expense consists primarily of expense for management and certain administrative services that benefit both reportable segments. In addition, the Company does not allocate certain items to segment operating income because management does not include the information in its measurement of the performance of the operating segments. Such unallocated items include restructuring charges and other exit-related activities, activities related to legacy environmental matters, and provisions for certain legal matters. Because of the unallocated income and expense, the operating income of each reportable segment does not reflect the operating income the reportable segment would report as a stand-alone business. The results of discontinued operations are excluded from segment operating income and are presented separately, net of tax, from the results of ongoing operations for all periods presented.
The table below illustrates the Company’s revenues from continuing operations by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28,
|
|
Six Months Ended February 28,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
AMR:
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
386,065
|
|
|
$
|
449,785
|
|
|
$
|
822,477
|
|
|
$
|
847,839
|
|
|
Less intersegment revenues
|
(2,898
|
)
|
|
(7,056
|
)
|
|
(5,676
|
)
|
|
(11,815
|
)
|
|
AMR external customer revenues
|
383,167
|
|
|
442,729
|
|
|
816,801
|
|
|
836,024
|
|
|
CSS:
|
|
|
|
|
|
|
|
|
Revenues
|
90,398
|
|
|
116,714
|
|
|
220,784
|
|
|
206,698
|
|
|
Total revenues
|
$
|
473,565
|
|
|
$
|
559,443
|
|
|
$
|
1,037,585
|
|
|
$
|
1,042,722
|
|
|
|
|
|
|
|
|
|
SCHNITZER STEEL INDUSTRIES, INC.
|
|
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
The table below illustrates the reconciliation of the Company’s segment operating income to income from continuing operations before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28,
|
|
Six Months Ended February 28,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
AMR
|
$
|
21,741
|
|
|
$
|
45,132
|
|
|
$
|
44,758
|
|
|
$
|
80,304
|
|
|
CSS
|
5,768
|
|
|
5,413
|
|
|
17,686
|
|
|
13,889
|
|
|
Segment operating income
|
27,509
|
|
|
50,545
|
|
|
62,444
|
|
|
94,193
|
|
|
Restructuring charges and other exit-related activities
|
(536
|
)
|
|
(91
|
)
|
|
(738
|
)
|
|
(191
|
)
|
|
Corporate and eliminations
|
(7,937
|
)
|
|
(17,096
|
)
|
|
(19,981
|
)
|
|
(34,221
|
)
|
|
Operating income
|
19,036
|
|
|
33,358
|
|
|
41,725
|
|
|
59,781
|
|
|
Interest expense
|
(2,067
|
)
|
|
(2,281
|
)
|
|
(3,973
|
)
|
|
(4,340
|
)
|
|
Other income, net
|
321
|
|
|
101
|
|
|
344
|
|
|
950
|
|
|
Income from continuing operations before income taxes
|
$
|
17,290
|
|
|
$
|
31,178
|
|
|
$
|
38,096
|
|
|
$
|
56,391
|
|
The following is a summary of the Company’s total assets by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2019
|
|
August 31, 2018
|
|
AMR
(1)
|
$
|
1,497,819
|
|
|
$
|
1,485,626
|
|
|
CSS
(1)
|
751,996
|
|
|
740,967
|
|
|
Total segment assets
|
2,249,815
|
|
|
2,226,593
|
|
|
Corporate and eliminations
(2)
|
(1,162,563
|
)
|
|
(1,121,776
|
)
|
|
Total assets
|
$
|
1,087,252
|
|
|
$
|
1,104,817
|
|
_____________________________
|
|
|
|
(1)
|
AMR total assets include
$3 million
and
$4 million
for an investment in a joint venture as of
February 28, 2019
and
August 31, 2018
, respectively. CSS total assets include
$8 million
for an investment in a joint venture as of
February 28, 2019
and
August 31, 2018
.
|
|
|
|
|
(2)
|
The substantial majority of Corporate and eliminations total assets consist of Corporate intercompany payables to the Company’s operating segments and intercompany eliminations.
|
|
|
|
|
|
|
|
|
SCHNITZER STEEL INDUSTRIES, INC.
|
|