WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended Fiscal Year Ended August 31, 2017
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition periodTransition Period from
Commission File Number 0-22496
SCHNITZER STEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon | 93-0341923 | |||
(State or other jurisdiction of | (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: (503) 224-9900
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 | ||
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes
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“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer☒ | Accelerated filer☐ | Non-accelerated filer |
Smaller reporting company☐ | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of the registrant’s outstanding common stock held by non-affiliates on February 28, 20172022 was $623,145,280.
The registrant had 26,862,56926,747,474 shares of Class A common stock, par value of $1.00 per share, and 200,000 shares of Class B common stock, par value of $1.00 per share, outstanding as of October 20, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the January 20182023 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
FORM 10-K
TABLE OF CONTENTS
PAGE | ||||
1 | ||||
Item 1 | 2 | |||
Item 1A | 15 | |||
Item 1B | 29 | |||
Item | 30 | |||
Item 3 | 31 | |||
Item 4 | 33 | |||
Item 5 | 34 | |||
Item 6 | 35 | |||
Item 7 | 36 | |||
Item 7A | 54 | |||
Item 8 | 55 | |||
Item 9 | 100 | |||
Item 9A | 100 | |||
Item 9B | 100 | |||
Item 9C | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 100 | ||
Item 10 | 101 | |||
Item 11 | 101 | |||
Item 12 | 101 | |||
Item 13 | 101 | |||
Item 14 | 101 | |||
Item 15 | 102 | |||
Item 16 | 105 | |||
106 |
Statements and information included in this Annual Report on Form 10-K by Schnitzer Steel Industries, Inc. (the “Company”) 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 the CompanySchnitzer Steel Industries, Inc. and its consolidated subsidiaries.
Forward-looking statements in this Annual Report on Form 10-K include statements regarding future events or our expectations, intentions, beliefs, and strategies regarding the future, which may include statements regarding trends, cyclicalitythe impact of equipment upgrades, equipment failures, and changes infacility damage on production, including timing of repairs and resumption of operations; the markets we sell into;realization of insurance recoveries; the Company'simpact of pandemics, epidemics, or other public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic; the Company’s outlook, growth initiatives, or expected results or objectives, including pricing, margins, sales volumes, and profitability; completion of acquisitions and integration of acquired businesses; the impacts of supply chain disruptions, inflation, and rising interest rates; liquidity positions; our ability to generate cash from continuing operations; trends, cyclicality, and changes in the markets we sell into; strategic direction or goals; targets; changes to manufacturing and production processes; the realization of deferred tax assets; planned capital expenditures; the cost of and the status of any agreements or actions related to our compliance with environmental and other laws; expected tax rates, deductions, and credits; the realization of deferred tax assets; planned capital expenditures; liquidity positions; ability to generate cash from continuing operations; the potential impact of adopting new accounting pronouncements;sanctions and tariffs, quotas, and other trade actions and import restrictions; the impact of labor shortages or increased labor costs; obligations under our retirement plans; benefits, savings, or additional costs from business realignment, cost containment, and productivity improvement programs; the potential impact of adopting new accounting pronouncements; and the adequacy of accruals.
Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “outlook,” “target,” “aim,” “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “will,” “should,” “could,” “opinions,” “forecasts,” “projects,” “plans,” “future,” “forward,” “potential,” “probable,” and similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.
We may make other forward-looking statements from time to time, including in reports filed with the Securities and Exchange Commission, press releases, presentations and on public conference calls. All forward-looking statements we make are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements, except as may be required by law. Our business is subject to the effects of changes in domestic and global economic conditions and a number of other risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in "Item“Item 1A. Risk Factors"Factors” of Part I of this Form 10-K. Examples of these risks include: potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the impact of equipment upgrades, equipment failures, and facility damage on production; failure to realize or delays in realizing expected benefits from capital projects, including investments in processing and manufacturing technology improvements; the cyclicality and impact of general economic conditions; the impact of inflation, rising interest rates, and foreign currency fluctuations; changing conditions in global markets including the impact of sanctions and tariffs, quotas and other trade actions and import restrictions; increases in the relative value of the U.S. dollar; economic and geopolitical instability in international markets;including as a result of military conflict; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials and other inputs we purchase; significant decreases in recycled metal prices; imbalances in supply and demand conditions in the global steel industry; difficulties associated with acquisitions and integration of acquired businesses; supply chain disruptions; reliance on third-party shipping companies, including with respect to freight rates and the availability of transportation; the impact of goodwill impairment charges; the impact of long-lived asset and cost and equity method investment impairment charges; the impact of pandemics, epidemics, or other public health emergencies, such as the COVID-19 pandemic; inability to achieve or sustain the benefits from productivity, cost savings and restructuring initiatives; difficulties associated with acquisitions and integration of acquired businesses;inability to renew facility leases; customer fulfillment of their contractual obligations; increases in the relative value of the U.S. dollar; the impact of foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under the agreement governing our bank credit agreement;facilities; the impact of consolidation in the steel industry; inability to realize expected benefits from investments in technology; freight rates and the availability of transportation; the impact of equipment upgrades, equipment failures and facility damage on production; 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;translation risks associated with fluctuation in foreign exchange rates; inability to obtain or renew business licenses and permits or renew facility leases;permits; environmental compliance costs and potential environmental liabilities; increased environmental regulations and enforcement; compliance with climate change and greenhouse gas emission laws and regulations; the impact of labor shortages or increased labor costs; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.
1
/Schnitzer Steel Industries, Inc. Form 10-KITEM 1. BUSINESS
General
Founded in 1906, Schnitzer Steel Industries, Inc. ("SSI"), an Oregon corporation, is one of North America’s largest recyclers of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products. As a vertically integrated organization, we offer a range of products and services to meet global demand through our network that includes 51 retail self-service auto parts stores, 54 metals recycling facilities, and an electric arc furnace (“EAF”) steel mill. Our internal organizational and reporting structure includes a single operating and reportable segment.
Worldwide demand for recycled scrapferrous and nonferrous metal is driven primarily by production levels for finished steel production levels. Steeland for products using nonferrous metal. Recycled ferrous metal is the primary feedstock for steel mill production using electric arc furnace (“EAF”)EAF technology relies on recycled scrap metal as its primary feedstock, and one of the raw materials utilized for steel manufacturing using blast furnace technology also uses recycled scrap metal for a portion of its raw materials.technology. Steel mills around the world, including those in the North American domestic market in which our own steel mill operates, are the primary end markets for our recycled scrap metal.ferrous metal products. Specialty steelmakers, foundries, refineries, smelters, wholesalers, and other recycled metal processors globally are the primary end markets for our recycled nonferrous metal products. Our steel mill in Oregon produces finished steel products using internally sourced recycled scrapferrous metal as the primary raw material and sells to industrial customers located primarily in North America.
We believe long-term demand for recycled metals will continue to be driven by factors including global economic growth and an increased focus on environmental policies promoting natural resource conservation, lower greenhouse gas emissions, and lower energy usage. We believe the fourth quartersignificant environmental benefits and production efficiencies associated with steelmaking that maximizes the use of fiscal 2017, our internal organizationalrecycled metal as a raw material, compared to iron ore mined from natural resources, will positively contribute to worldwide long-term demand for recycled ferrous metal. Further, we believe decarbonization efforts by companies, industries, and reporting structure supported two operatinggovernments around the world, including investments in low carbon technologies that are more metal intensive and reportable segments:minimize carbon dioxide emissions from the Autouse of fossil fuels, among other factors, support global long-term demand for recycled nonferrous metal such as aluminum and Metalscopper.
Business Acquisitions
Columbus Recycling ("AMR") business
On October 1, 2021, we used cash on hand and the Steel Manufacturing Business ("SMB"). In the fourth quarter of fiscal 2017, in accordance with our plan announced in June 2017, we modified our internal organizational and reporting structureborrowings under existing credit facilities to combine our steel manufacturing operations, which had been reported as our SMB segment, with our Oregonacquire 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 acquired Columbus Recycling operations which had been reported within our AMR segment, forming a new division named Cascade Steelpurchase and Scrap ("CSS"). The Oregon metalsprocess scrap metal from industrial manufacturers, local recycling operations include our collection, shredding,companies, and export facilities in Portland, Oregon,individuals, and also include four metals recycling feeder yard operations located in Oregon and Southern Washington and one joint venture ownership interest. The Oregon metals recycling operations source substantially all ofsell the scrap raw material needs of our steel manufacturing operations. This change in organizational structure is intendedrecycled products to enhance our flexibility, generate internal synergies, and enable us to more effectively adjust to market changes across our recyclingregional foundries and steel manufacturing operations. We began reporting on this new segment structure in the fourth quarter of fiscal 2017 as reflected in this Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform to the current period presentation for all activities of the reorganized segments. Recasting this historical information did not have an impact on the consolidated financial performance of SSI for any of the periods presented.
Auto Parts Stores | Metals Recycling Facilities(1) | Total Recycling Facilities | Large-Scale Shredders(2) | Deep Water Ports | Steel Facilities(3) | Segment | ||||||||
Northwest WA, OR, MT | 7 | 3 | 10 | 1 | 1 | — | AMR | |||||||
— | 5 | 5 | 1 | 1 | 1 | CSS | ||||||||
Southwest and Hawaii CA, NV, UT, HI | 22 | 7 | 29 | 2 | 2 | — | AMR | |||||||
— | — | — | — | — | 1 | CSS | ||||||||
Midwest and South IL, IN, OH, MO, KS, TX, AR | 15 | — | 15 | — | — | — | AMR | |||||||
Northeast MA, ME, NH, RI | 2 | 9 | 11 | 1 | 2 | — | AMR | |||||||
Southeast and Puerto Rico GA, AL, TN, FL, VA, PR | 3 | 16 | 19 | 1 | 1 | — | AMR | |||||||
Western Canada BC, AB | 4 | 4 | 8 | — | — | — | AMR | |||||||
Total | 53 | 44 | 97 | 6 | 7 | 2 |
Encore Recycling
On April 29, 2022, we used cash on hand and borrowings under existing credit facilities to acquire two recycling facilities in the greater Atlanta, Georgia metropolitan area, including a discussionmetal shredding operation and recycled auto-parts center, from the previous owners of Encore Recycling. The acquired Encore Recycling operations purchase and process scrap metal and end-of life vehicles from industrial manufacturers, local recycling companies, and individuals, and sell the recycled products to regional foundries and steel mills. Combined with our existing regional metals recycling facilities and recycled auto-parts centers, the acquired operations offer additional recycling products, services, and logistics solutions to customers and suppliers across portions of the primary activitiesSoutheast. The cash purchase price was approximately $55 million, subject to adjustment for acquired net working capital relative to an agreed-upon benchmark, as well as other adjustments. Total purchase consideration measured as of each reportable segment, total assets by reportable segment, operating results from continuing operations, revenues from external customersthe end of fiscal 2022 was approximately $63 million, which included an additional $8 million paid at closing for estimated net working capital in excess of the benchmark, which was still subject to adjustment as of the end of fiscal 2022. See Note 7 - Business Acquisitions in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
2 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
Revenue-Generating Activities
We acquire, process, and concentration of sales to foreign countries.
We operate seven deepwater port locations, fivesix of which are equipped with large-scale shredders. AMR'sOur largest port facilities in Everett, Massachusetts; Portland, Oregon; Oakland, California; and Tacoma, Washington each operate a mega-shredder with 7,000 to 9,000 horsepower. Our port facilities in Salinas, Puerto Rico, and Kapolei, Hawaii each operate a shreddershredders with 1,500 to 6,000 horsepower.and 4,000 horsepower, respectively. Our port facility in Providence, Rhode Island does not operate a shredder.shredder, but exports recycled ferrous metal acquired in the regional market. In addition, we operate a 2,500-horsepower shredder at our non-port facility in Lithonia, Georgia, which we acquired as part of the purchase of the Encore Recycling business in April 2022. Our shredders are designed to provide a denser product and, in conjunction with advanced separation equipment, a more refined form of recycled ferrous scrap metal which iscan be used efficiently by steel mills in the production of new steel. The shredding process reduces autobodiesauto bodies and other scrap metal into fist-size pieces of shredded recycled scrap metal. The shredded material is then carried by conveyor under magnetized drums that attract the ferrous scrap metal and separate it from the mixed nonferrous scrap metal and other residue, found in the shredded material, resulting in a consistent and high-quality shredded ferrous product. The mixed nonferrous scrap metal and residue then pass through a series of additional mechanical sorting systems designed to recover and separate the nonferrous metal from the residue. The remaining mixed nonferrous metal is then further sorted by product and size grade before being sold. AMR investssold as joint products, which include mainly zorba (primarily aluminum), zurik (primarily stainless steel), and shredded insulated wire (primarily copper and aluminum). We sell further separated products with higher metal content such as twitch (light gauge recycled aluminum) and shredded copper and brass. We also purchase nonferrous metal directly from industrial vendors and other suppliers and aggregate and prepare this metal for shipment to customers by ship, rail, or truck.
We invest in nonferrous metal extraction and separation technologies in order to maximizeoptimize the recoverability of valuable nonferrous metal. AMR also purchasesmetal and to meet the metal purity requirements of customers. We have a major strategic initiative currently underway and partially completed to replace, upgrade, and add to our existing nonferrous metal directly from industrial vendorsrecovery technologies that is expected to increase metal recovery yields, provide for additional product optionality, create higher quality furnace-ready products, and other suppliersreduce the metallic portion of shredder residue disposed in landfills. The construction, commissioning, and prepares this metal for shipmentramp up of these new technologies began substantially in fiscal 2021 and are anticipated to customersbe completed by ship, rail or truck.
In addition to the sale of recycled ferrous and nonferrous scrap metal. Ferrous recycled scrap metal is a key feedstock used in the production of finished steel and is largely categorized into heavy melting steel (“HMS”), plate and structural (“bonus”) and shredded scrap (“shred”), although there are various grades of each category depending on metal content and the size and consistency of individual pieces. These attributes affect the product’s relative value. Our nonferrous products include aluminum, copper, stainless steel, nickel, brass, titanium, lead, high temperature alloys and joint products such as zorba (primarily mixed aluminum nonferrous material) and zurik (predominantly stainless steel).
2017 | % of Revenue | 2016 | % of Revenue | 2015 | % of Revenue | |||||||||||||||
North America(1) | $ | 571,620 | 42 | % | $ | 429,997 | 41 | % | $ | 612,275 | 41 | % | ||||||||
Asia | 593,332 | 44 | % | 433,415 | 41 | % | 586,519 | 40 | % | |||||||||||
Europe(2) | 167,576 | 12 | % | 174,038 | 17 | % | 233,970 | 16 | % | |||||||||||
Africa | 11,932 | 1 | % | — | — | % | 61,568 | 4 | % | |||||||||||
South America | 19,158 | 1 | % | 23,142 | 2 | % | 18,983 | 1 | % | |||||||||||
Intercompany sales to CSS | (15,647 | ) | (1 | )% | (12,081 | ) | (1 | )% | (33,029 | ) | (2 | )% | ||||||||
Total (net of intercompany) | $ | 1,347,971 | $ | 1,048,511 | $ | 1,480,286 |
Ferrous Recycled Metal | 2017 | 2016 | 2015 | |||||||||||||||||
Revenues(1) | Volume(2) | Revenues(1) | Volume(2) | Revenues(1) | Volume(2) | |||||||||||||||
Foreign | $ | 608,339 | 2,197 | $ | 452,242 | 2,040 | $ | 653,440 | 2,183 | |||||||||||
Domestic | 234,883 | 948 | 173,275 | 859 | 280,617 | 1,003 | ||||||||||||||
Total | $ | 843,222 | 3,145 | $ | 625,517 | 2,899 | $ | 934,057 | 3,186 |
Nonferrous Recycled Metal | 2017 | 2016 | 2015 | |||||||||||||||||
Revenues(1) | Volume(2) | Revenues(1) | Volume(2) | Revenues(1) | Volume(2) | |||||||||||||||
Foreign | $ | 216,362 | 319,629 | $ | 186,989 | 290,430 | $ | 260,209 | 326,059 | |||||||||||
Domestic | 178,615 | 221,162 | 143,362 | 183,307 | 189,606 | 213,791 | ||||||||||||||
Total | $ | 394,977 | 540,791 | $ | 330,351 | 473,737 | $ | 449,815 | 539,850 |
Our steel production and increased supply flows of scrap metal,
Products and Services
Recycled ferrous metal is a key feedstock used in 1998 and has since been renewed through February 1, 2018. The permit renewal process occurs every five yearsthe production of finished steel and is underwaylargely categorized into heavy melting steel (“HMS”), plate and structural (“bonus”), and shredded scrap (“shred”), although there are various grades of each category depending on metal content and the size and consistency of individual pieces. These attributes affect the product’s relative value.
Our nonferrous products include mixed metal joint products recovered from the shredding process, as well as aluminum, copper, stainless steel, nickel, brass, titanium, lead, and high temperature alloys. We also sell catalytic converters to specialty processors that extract the nonferrous precious metals including platinum, palladium, and rhodium.
3 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
We provide recycling and related services involving scrap metal and other recyclable materials to a range of customers, including large retailers, industrial manufacturers, original equipment manufacturers, and owners of end-of-life railcars. These services include primarily scrap brokerage, certified destruction, automotive parts recycling, railcar dismantling, and reverse logistics.
Each retail self-service auto parts store offers an extensive selection of vehicles (including domestic and foreign cars, vans, and light trucks) from which customers can remove and purchase parts. We employ proprietary information technology systems to centrally manage and operate the geographically diverse network of auto parts stores, and we regularly rotate the inventory to provide customers with greater access to parts. Our used auto parts inventory is also searchable on our Pick-n-Pull public website. We enter into limited duration contracts with public entities and other third parties for the next renewal period.
Our steel mill produces semi-finished goods (billets) and finished goods, consisting of rebar, coiled rebar, wire rod, merchant bar, and other specialty products.products, using recycled ferrous metal sourced internally from our recycling and joint venture operations and other raw materials. Semi-finished goods are predominantly used for CSS’sthe manufacturing of finished products, but also have been produced for sale to other steel mills.products. Rebar is produced in either straight length steel bars or coils and used to increase the strength of poured concrete. Coiled rebar is preferred by some manufacturers because it reduces the waste generated by cutting individual lengths to meet customer specifications and, therefore, improves yield. Wire rod is steel rod, delivered in coiled form, used by manufacturers to produce a variety of products such as chain link fencing, nails, wire, stucco netting, and pre-stressed concrete strand. Merchant bar consists of rounds and square steel bars used by manufacturers to produce a wide variety of products, including bolts, threaded bars, and dowel bars. CSSOur steel mill is also certified to producean approved supplier of high-quality rebar to support nuclear power plant construction and has a license to produce certain patented high-strength specialty steels.
Active Facilities
Tabular presentation of our active facilities by geographic region is as follows:
|
| Auto Parts |
| Metals Recycling |
| Total Recycling |
| Large-Scale |
| Deepwater |
| Steel |
Northwest |
| 7 |
| 8 |
| 15 |
| 2 |
| 2 |
| 1 |
Southwest and Hawaii |
| 22 |
| 7 |
| 29 |
| 2 |
| 2 |
| 1 |
Midwest and South |
| 13 |
| — |
| 13 |
| — |
| — |
| — |
Northeast |
| 2 |
| 9 |
| 11 |
| 1 |
| 2 |
| — |
Southeast and Puerto Rico |
| 3 |
| 26 |
| 29 |
| 2 |
| 1 |
| — |
Western Canada |
| 4 |
| 4 |
| 8 |
| — |
| — |
| — |
Total |
| 51 |
| 54 |
| 105 |
| 7 |
| 7 |
| 2 |
Pricing
Domestic and foreign prices for recycled ferrous and nonferrous metal are generally based on prevailing market rates, which differ by region, and are subject to market cycles that are influenced by worldwide demand from steel and other metal producers, the availability of materials that can be processed into saleable recycled metal, and regulatory policies, among other factors. Sanctions, trade actions, and licensing and inspection requirements can also impact pricing for the affected products. Recycled ferrous and nonferrous metal sales contracts generally provide for shipment within 30 to 60 days after the price is agreed to which, in most cases, includes freight.
4 /Schnitzer Steel Industries, Inc. Form 10-K 2017
SCHNITZER STEEL INDUSTRIES, INC. |
We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating income. The spread between selling prices for processed metal and the cost of Contents SCHNITZER STEEL INDUSTRIES, INC.
The table below sets forth,sales prices for auto parts from salvaged vehicles are deeply discounted from prevailing national new and refurbished sales prices offered at full-service auto dismantlers, retail auto parts stores, and car dealerships. Our stores provide a list price, available at each location and online. Prices for auto bodies sold to third parties and for major component parts, such as engines, transmissions, and alternators sold to wholesalers, are based on prevailing recycled metal market rates which differ by region and are subject to market cycles. Prices for catalytic converters sold to third-party processors are based on prevailing market rates for the extracted precious metals including platinum, palladium, and rhodium. By consolidating shipments of auto bodies and component parts, we are able to optimize prices by focusing on larger wholesale customers that pay a revenuepremium for volume and volume basis,consistency of shipments.
Our finished steel product prices differ by product size and grade. Selling prices are influenced by the salesprice of raw materials, including the cost of recycled ferrous metal and required consumables including graphite electrodes and alloys, as well as regional demand in the West Coast and Western Canadian markets. Selling prices for our finished steel products duringmay also be affected by the last three fiscal years ended August 31:
2017 | 2016 | 2015 | ||||||||||||||||||
Revenues(1) | Volume(2) | Revenues(1) | Volume(2) | Revenues(1) | Volume(2) | |||||||||||||||
Finished steel products | $ | 280,206 | 495,516 | $ | 269,355 | 488,212 | $ | 363,795 | 539,984 |
Customers and Markets Approximately 95% of our consolidated revenues are derived from sales of |
Recycled Ferrous Metal
The table below sets forth, on a revenue and volume basis, the amount of recycled ferrous metal sold to foreign and domestic customers, during the last three fiscal years ended August 31:
|
| For the Year Ended August 31, |
|
| % Increase (Decrease) |
| ||||||||||||||
($ in thousands) |
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2022 vs. 2021 |
|
| 2021 vs. 2020 |
| |||||
Ferrous revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Domestic |
| $ | 438,026 |
|
| $ | 289,742 |
|
| $ | 167,060 |
|
|
| 51 | % |
|
| 73 | % |
Foreign |
|
| 1,476,229 |
|
|
| 1,268,149 |
|
|
| 695,430 |
|
|
| 16 | % |
|
| 82 | % |
Total ferrous revenues |
| $ | 1,914,255 |
|
| $ | 1,557,891 |
|
| $ | 862,490 |
|
|
| 23 | % |
|
| 81 | % |
Ferrous volumes (LT, in thousands)(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Domestic(2) |
|
| 1,806 |
|
|
| 1,500 |
|
|
| 1,429 |
|
|
| 20 | % |
|
| 5 | % |
Foreign |
|
| 2,810 |
|
|
| 2,908 |
|
|
| 2,525 |
|
|
| (3 | )% |
|
| 15 | % |
Total ferrous volumes (LT, in thousands)(3) |
|
| 4,616 |
|
|
| 4,408 |
|
|
| 3,954 |
|
|
| 5 | % |
|
| 11 | % |
LT = Long Ton, which is equivalent to 2,240 pounds.
We export recycled ferrous metal primarily to countries in Asia, the Mediterranean region, and North, Central, and South America. Ferrous exports made up 61%, CSS66%, and 64% of our total ferrous volumes in fiscal 2022, 2021, and 2020, respectively. In fiscal 2022, the three countries from which we derived our largest ferrous export revenues from external customers were Bangladesh, Turkey, and Vietnam, which collectively accounted for 71% of our total ferrous export revenues. In fiscal 2021 and 2020, the three countries from which we derived our largest ferrous export revenues from external customers accounted for 63% and 69%, respectively, of our total ferrous export revenues. We generally attribute revenues from external customers to individual countries based on the country in which the customer is located. Our three largest external recycled ferrous metal customers accounted for 22% of total ferrous revenues in fiscal 2022, compared to 25% and 32% in fiscal 2021 and 2020, respectively.
5 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
Recycled Nonferrous Metal
The table below sets forth, on a revenue and volume basis, the amount of recycled nonferrous metal sold itsto foreign and domestic customers during the last three fiscal years ended August 31:
|
| For the Year Ended August 31, |
|
| % Increase (Decrease) |
| ||||||||||||||
($ in thousands) |
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2022 vs. 2021 |
|
| 2021 vs. 2020 |
| |||||
Nonferrous revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Domestic |
| $ | 480,919 |
|
| $ | 367,744 |
|
| $ | 195,880 |
|
|
| 31 | % |
|
| 88 | % |
Foreign |
|
| 411,525 |
|
|
| 317,118 |
|
|
| 194,418 |
|
|
| 30 | % |
|
| 63 | % |
Total nonferrous revenues |
| $ | 892,444 |
|
| $ | 684,862 |
|
| $ | 390,298 |
|
|
| 30 | % |
|
| 75 | % |
Nonferrous volumes (pounds, in thousands)(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Domestic |
|
| 298,279 |
|
|
| 219,126 |
|
|
| 194,554 |
|
|
| 36 | % |
|
| 13 | % |
Foreign |
|
| 389,140 |
|
|
| 374,252 |
|
|
| 356,012 |
|
|
| 4 | % |
|
| 5 | % |
Total nonferrous volumes (pounds, in thousands)(2) |
|
| 687,419 |
|
|
| 593,378 |
|
|
| 550,566 |
|
|
| 16 | % |
|
| 8 | % |
Nonferrous exports made up 57%, 63%, and 65% of our total nonferrous sales volumes in fiscal 2022, 2021, and 2020, respectively. The substantial majority of our nonferrous joint products recovered from the shredding process are sold to the export market currently and made up 45%, 44%, and 47% of our total nonferrous sales volumes in fiscal 2022, 2021, and 2020, respectively. In fiscal 2022, the three countries from which we derived our largest nonferrous export revenues from external customers were India, Malaysia, and South Korea, which collectively accounted for 68% of our total nonferrous export revenues.In fiscal 2021 and 2020, the three countries from which we derived our largest nonferrous export revenues from external customers accounted for 69% and 58%, respectively, of our total nonferrous export revenues.
Finished Steel Products
The table below sets forth, on a revenue and volume basis, the amount of finished steel products sold during the last three fiscal years ended August 31:
|
| For the Year Ended August 31, |
|
| % Increase (Decrease) |
| ||||||||||||||
($ in thousands) |
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2022 vs. 2021 |
|
| 2021 vs. 2020 |
| |||||
Steel revenues(1) |
| $ | 531,731 |
|
| $ | 379,203 |
|
| $ | 336,980 |
|
|
| 40 | % |
|
| 13 | % |
Finished steel sales volumes (ST, in thousands) |
|
| 465 |
|
|
| 488 |
|
|
| 505 |
|
|
| (5 | )% |
|
| (3 | )% |
ST = Short Ton, which is equivalent to 2,000 pounds.
We sell finished steel products to customers located primarily in the Western U.S.United States and Western Canada. Customers in California accounted for 53%55%, 48%52%, and 46%55% of CSS'sour steel revenues in fiscal 2017, 20162022, 2021, and 2015,2020, respectively. CSS’s ten largest steel customers accounted for 51%, 45% and 42% of its steel revenues during fiscal 2017, 2016 and 2015, respectively. No CSS steel customer accounted for 10% or more of consolidated revenues in fiscal 2017, 2016 and 2015.
Distribution
We deliver recycled ferrous and nonferrous recycled metal to foreign customers by ship and to domestic customers by barge, rail, and road transportation networks. Cost efficiencies are achieved by operating deepwater terminal facilities in Everett, Massachusetts; Portland, Oregon; Oakland, California; Tacoma, Washington; and Providence, Rhode Island, all of which are owned, except for the Providence, Rhode Island facility which is operated under a long-term lease. We also have access to deepwater terminal facilities at Kapolei, Hawaii and Salinas, Puerto Rico through public docks. The use of deepwater terminals enables us to load ferrous material in large vessels capable of holding up to 50,000 tons for trans-oceanic shipments. We believe the use of our owned and leased terminal facilities is advantageous because it allows us to more effectively manage loading costs and minimize the berthing delays often experienced by users of unaffiliated terminals. From time to time, we may enter into contracts of affreightment, which guarantee the availability of ocean-going vessels, in order to manage the risks associated with ship availability and freight costs.
Our nonferrous products are shipped in 20- to 30-ton capacity containers from ports and rail ramps located in close proximity to our recycling facilities. Containerized shipments are exported by marine vessels to customers globally, and domestic shipments are typically shipped to customers by rail or by truck.
6 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
We sell used auto parts from our self-service retail stores. Both before and after retail customers have removed desired parts from acquired salvaged vehicles, we extract and consolidate certain valuable ferrous and nonferrous components from auto bodies for shipment by truck primarily to steel mills, foundrieswholesale customers. We also remove and smelters in Asia.
We sell finished steel products directly from its mini-millour steel mill in McMinnville, Oregon and its ownedour distribution center in City of Industry, California (Los Angeles area). Finished steel products are shipped from the mini-millmill to the distribution center primarily by rail. The distribution center facilitates sales by maintaining an inventory of products close to major customers for just-in-time delivery. CSS communicatesWe communicate regularly with major customers to determine their anticipated needs and plans itsplan our rolling mill production schedule accordingly. Finished steel shipments to customers are made by common carrier, primarily truck or rail.
Sources of Unprocessed Metal
The most common forms of purchased unprocessed metal are obsolete machinery and equipment, such as automobiles, railroad cars, railroad tracks, home appliances and other consumer goods, scrap metal from manufacturing operations and retailers, and demolition metal from buildings and other infrastructure. Unprocessed metal is acquired from a diverse base of suppliers who unload at our facilities, from drop boxes at suppliers’ industrial sites, and through negotiated purchases from other large suppliers, including railroads, manufacturers, automobile salvage facilities, metal dealers, various government entities, and individuals. We typically seek to exportlocate our retail auto parts stores in major population centers with convenient road access. Our auto parts store network spans 16 states in the U.S. and two provinces in Western Canada, with a majority of the stores concentrated in regions where our large-scale shredders are located. Through our network of auto parts stores, we seek to obtain salvaged vehicles from five primary sources: private parties, tow companies, charities, auto auctions, and municipal and other contracts. We have a program to purchase vehicles from private parties called “Cash for Junk Cars” which is advertised in local markets. Private parties either call a toll-free number and receive a quote for their vehicle or obtain an instant online quote. The private party can either deliver the vehicle to one of our retail locations or arrange for the vehicle to be picked up. We also employ car buyers who travel to vendors and bid on vehicles. Further, we enter into limited duration contracts with public entities and other third parties for vehicle dismantling and asset recovery services, which provide a source of low-cost salvage vehicles. The expiration of such contracts may lead us to seek alternative sources of vehicles, potentially at a higher cost. We also source scrap metal and other recyclable materials through our recycling services from a range of customers by bulk ship using its deep water terminal facilityincluding large retailers, industrial manufacturers, original equipment manufacturers, and railcar owners.
The majority of our metal collection and processing facilities receive unprocessed metal via major railroad routes, waterways, or highways. Metals recycling facilities situated near industrial manufacturing and major transportation routes have the competitive advantage of reduced freight costs because of the significant cost of freight relative to the cost of metal. The locations of our West Coast facilities provide access to sources of unprocessed metal in Portland, Oregon,the Northern California region, northward to Western Canada and Alaska, and to the East, including Idaho, Montana, Utah, Colorado, and Nevada. The locations of our East Coast facilities provide access to sources of unprocessed metal in New York, Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, Eastern Canada, and, from time to time, the Midwest. The locations of our facilities in Hawaii and Puerto Rico provide access to sources of unprocessed metal in the respective local markets. In the Southeastern U.S., approximately half of our ferrous and nonferrous recycledunprocessed metal volume is purchased from industrial companies, including auto manufacturers, with the remaining volume being purchased from smaller dealers and individuals. These industrial companies provide us with metals that are by-products of their manufacturing processes.
The supply of scrap metal from these various sources can fluctuate with the level of economic activity in the U.S. and can be sensitive to export customersvariability in containersrecycled metal prices, particularly in the short term, as well as in costs such as labor and fuel incurred by ship.
We believe CSS operates the only mini-milloperate an EAF steel mill in the Western U.S. that obtainssources substantially all its scraprecycled metal requirements from an integrated metals recycler. CSS's metals recycling and joint venture operations. These operations provide itsour steel mill with a mix of recycled metal grades, which allowsallow the mill to achieve optimum efficiency in its melting operations.
7 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
Energy Supply
We require electricity to run itsour steel manufacturing operations, primarily its EAF. CSS purchasesWe purchase electricity under a long-term contract with McMinnville Water & Light (“MW&L”), which in turn relies on the Bonneville Power Administration (“BPA”).Administration. We entered into our current contract with MW&L in October 2011 that will expireexpires in September 2028.
Competition
We compete in the U.S. and in Western Canada for the purchase of scrap metal with large, well-financed recyclers of scrap metal, steel manufacturing operations generally shipmills that own metal recycling facilities, and with smaller metals facilities and dealers. Our auto stores compete for the purchase of end-of-life vehicles with other auto dismantlers, used car dealers, auto auctions, and metals recyclers. In general, the competitive factors impacting the purchase of scrap metal and end-of-life vehicles are the price offered by the purchaser, the proximity of the purchaser to the source of scrap metal and end-of-life vehicles, and the purchaser’s ability to efficiently collect the scrap metal and end-of-life vehicles from certain suppliers’ locations. We also compete with brokers that buy scrap or recycled metal on behalf of domestic and foreign steel mills.
Demand for our products within days afteris cyclical in nature and sensitive to general economic conditions, structural and cyclical changes in markets, and other factors. We compete globally for the receiptsale of a purchase order. As of September 30, 2017 and 2016, CSS had a backlog ofprocessed recycled metal to finished steel ordersand other metal product producers. The predominant competitive factors that impact recycled metal sales are price (including duties and shipping cost), reliability of $19 millionservice, product quality, the relative value of the U.S. dollar, and $5 million, respectively.
We also compete for the sale of used auto parts to retail customers with other self-service and full-service auto dismantlers. The auto parts industry is characterized by diverse and fragmented competition and comprises a large number of aftermarket and used auto parts suppliers of all sizes, ranging from large, multinational corporations which serve both original equipment manufacturers and the aftermarket on a worldwide basis to small, local entities which have more limited supply. The main competitive factors impacting the retail sale of auto parts are price, availability and visibility of product, quality, and convenience of the retail stores to customers.
Our ability to process substantial volumes of recycled metal products, our use of advanced processing and separation equipment, the number and geographic dispersion of our locations, our access to a variety of different modes of transportation, and the operating synergies of our integrated platform provide our business with the ability to compete successfully in varying market conditions.
Our primary domestic competitors of CSS for the sale of finished steel products include Nucor Corporation’s manufacturing facilities in Arizona, Utah, and Washington; Gerdau Long Steel North America’s facility in California;Washington, and Commercial Metals Company’s manufacturing facility in Arizona. In addition to domestic competition, CSS competeswe compete with foreign steel producers, principally located in Asia, Canada, Mexico, and Central and South America, primarily in shorter length rebar and certain wire rod grades. In recent years, a trend of increasing volumes of imported steel products has occurred in CSS's primary domestic markets, driven by global overcapacity in steel-making production and by the relative strength of the U.S. dollar which increases the competitiveness of imports. The principal competitive factors in CSS’sthe steel market currently are price, quality, service, product availability, and the relative value of the U.S. dollar.
8 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
For more than a decade, CSS'sour steel manufacturing operations,operation, as part of a U.S. industry coalition, has petitioned the U.S. Government under our international trade laws for relief in the form of antidumping and countervailing duties against wire rod and rebar products from a number of foreign countries. Many of those cases have beenwere successful, and as of the start of fiscal 2017,resulting antidumping and countervailing duty orders wereled to a decrease in finished steel imports into our domestic markets from the peak reached in fiscal 2016. Those antidumping and countervailing duty orders remained in effect related to imports of rebar from Belarus, China, Indonesia, Latvia, Mexico, Moldova, Poland and Ukraine; a countervailing duty order was in effect related to imports of rebar from Turkey; antidumping duty orders were in effect related to imports of wire rod from Brazil, China, Indonesia, Mexico, Moldova and Trinidad and Tobago; and a countervailing duty order was in effect related to imports of wire rod from Brazil. During 2017, following a petition by the U.S. domestic industry and successful resolution, new antidumping duty orders were imposed against rebar from Japan, Taiwan and Turkey.
There are also a number of antidumping and countervailing duty orders in effect in Canada covering rebar from China, Korea and Turkey, these orders are expectedmany countries that we expect will continue to generally lead to a reduction in the volume of imports into Canada from these countries.
The long-term effectiveness of existing antidumping and countervailing duty orders related to imports of wire rod and rebar products is largely uncertain and is impacted by the level and pricing of imports and the U.S. Government's ability to efficiently identify and respond to violationsGovernment’s assessment of U.S. international trade laws affecting CSS's steel manufacturing operations.
In March 2018, the United States imposed tariffs in the amount of 25 percent and 10 percent on imports of certain steel and aluminum products, respectively. The imposition of the tariffs was the conclusion of an investigation started in April 2017 the U.S. Department of Commerce self-initiated a national security investigation under Section 232(B)232 of the Trade Expansion Act of 1962. The purpose of this law is to provide1962 that allows for an exemption from normal international trade rules if imports of a product or products, are harming national security. Currently, imports from certain countries are exempt from these duties pursuant to various agreements, including quotas. The SecretaryDepartment of Commerce also implemented an exclusion process whereby U.S. entities can request that certain products be excluded from the Section 232 tariffs. We review any exclusion requests relevant to our product line to determine whether an objection might be appropriate. To date, the Biden Administration has 270 days (or until January 2018)allowed most Section 232 duties and procedures to presentremain in place.
Coronavirus Disease 2019 (“COVID-19”)
We continue to monitor the impact of COVID-19 on all aspects of our business. We are a company operating in a critical infrastructure industry, as defined by the U.S. PresidentDepartment of Homeland Security. Consistent with a reportfederal guidelines and recommendations. If remedieswith state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our fiscal 2020 results, global economic conditions improved beginning in fiscal 2021 and continued to improve through most of fiscal 2022, resulting in increased demand for our products. However, there are imposed on steel imports (suchongoing global impacts resulting directly or indirectly from the pandemic including labor shortages, logistical challenges such as additional tariffs, quotas or a combinationincreased port congestion, and increases in costs for certain goods and services, which have negatively impacted our sales volumes, operating costs, and financial results to varying degrees. The ongoing effects of the two), thisCOVID-19 pandemic could result in a decrease in imports and higher prices for those imports which are sold into the U.S.
Regulatory Matters
Impact of Legislation and Regulation
Compliance with environmental laws and regulations is a significant factor in our operations. Our businesses are subject to extensive and rapidly evolving local, state, and federal environmental protection, health, safety, and transportation laws and regulations relating to, among others:
9 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
Environmental legislation and regulations have changed rapidly in recent years, and it is likely that we will be subject to Federal, state, and local regulators have increased their focus on metals recycling and auto dismantling facilities that has or could lead to new or expanding regulatory requirements. For example, the California Department of Toxic Substances Control (“DTSC”) has increased its enforcement actions and sought to impose additional permitting and regulatory requirements on the metals recycling industry in the state that has resulted in and could in the future increase operating and compliance costs and require additional capital expenditures. In addition, in July 2021, the EPA issued an enforcement alert reflecting a national enforcement initiative in conjunction with state regulators focused on Clean Air Act compliance at metal recycling facilities that operate auto and scrap metal shredders. While we believe we are an industry leader in air emission controls and have been working with state and local regulators on compliance and permitting matters, we have in the past and may in the future be subject to enforcement actions or litigation by regulators or private parties that could result in additional penalties, compliance requirements, or capital investments. See “Legal Proceedings” in Part I, Item 3 of this report. The Biden Administration and state and local regulators are also emphasizing efforts to strengthen environmental compliance and enforcement, including with respect to clean-up actions under superfund and hazardous waste laws, in overburdened communities that may be disproportionately impacted by adverse health and environmental effects. On September 10, 2021, U.S. EPA Region 9 and the California Environmental Protection Agency announced a joint effort to expand environmental enforcement in overburdened California communities. These initiatives could result in increased enforcement, compliance, and clean-up costs, including increased capital expenditures, at our facilities located at or near such communities. Although our objective is to maintain compliance with applicable environmental laws and regulations, we have, in the past, See further discussion We incurred capital expenditures related to environmental projects 10 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Indirect Consequences of Recent or Future Legislation and Regulation Recent or future legislation or increased regulation regarding climate change and GHG emissions, including Oregon's new Climate Protection Program regulations adopted in December 2021, could impose significant costs on our business and our customers and suppliers, including increased energy, capital equipment, emissions controls, environmental monitoring and reporting, and other costs in order to comply with laws and regulations concerning and limitations imposed on climate change and GHG emissions. The potential costs of allowances, taxes, fees, offsets, or credits that may be part of “cap and trade” programs or similar future legislative or regulatory measures are still GHG legislation and regulation Because the use of recycled iron and steel instead of iron ore to make new steel results in savings in the consumption of energy, virgin materials, and water and reduces mining wastes and other harmful environmental impacts, we believe our recycled metal products and recycling services position us to be more competitive in the future for business from companies wishing to reduce their carbon footprint and impact on the environment. In addition, the EAF at our Physical Impacts of Climate Change on Our Costs and Operations There has been public discussion that climate change may be associated with higher temperatures, lower snowpack, drier forests, rising sea levels as well as extreme weather events and conditions such as more intense hurricanes, thunderstorms, tornadoes, wildfires, and snow or ice storms. For instance, although the impact on our operations was not significant, certain of our facilities in Puerto Rico have experienced damage due to hurricanes, including as a result of Hurricane Fiona in September 2022, and certain of our facilities in California, Oregon, and Washington were briefly closed in September 2020 due to poor air quality as a result of wildfires. Extreme weather conditions may increase our costs or cause damage to our facilities, and any damage resulting from extreme weather may not be fully insured. As many of our recycling facilities are located near 11 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Human Capital Resources Employees We hire employees from across the United States, Puerto Rico, and Canada and have employees residing in all states, territories, and provinces in which we operate. We aim to offer a competitive compensation package and suite of benefits that align our employees with the interests of our strategic long-term growth and our customers, communities, and shareholders. As of Engagement We believe employee engagement contributes significantly to our operational performance, achievement of our strategic goals, and the growth and development of our employees. Our leaders sponsor and, in many cases, lead employee engagement initiatives focusing on diversity, equity, inclusion, volunteering, community involvement, and job satisfaction. For example, our numerous Employee Resource Groups aim to broaden awareness of the diverse characteristics of our workforce and others, and we often survey our employees to gain feedback about our culture, employee experience, and leadership behaviors. In July 2022, for the second consecutive year, we were recognized as a certified Great Place to Work®. Achieving this prominent designation followed an all-employee Trust Index Survey process which had requested the views and beliefs of our employees. Health & Safety Safety is one of our core values. Our approach to safety is proactive and focuses on active leadership, risk and hazard identification, training, frequent checks of high-risk processes, and other monitoring activities. Creating a positive health and safety culture takes time and visible leadership that demonstrate care and concern for the health and safety of our employees. We regularly track and evaluate numerous leading indicators, which are proactive, preventive, and predictive measures that provide information about the effective performance of our health and safety systems and processes, and which allow us to take preventive action to address failures or hazards before they turn into an incident. Leading indicators that we use in connection with our health and safety programs include among others employee training and attendance, workplace inspections, corrective action closure rates, hazard response time analysis, and frequency and quality of layered safety observations conducted at all levels of the organization. We also track health and safety performance using industry-standard metrics including but not limited to the following: We work continuously to improve all aspects of our health and safety performance. Our safety strategy emphasizes prevention of serious injuries and fatalities, works toward achievement of zero injuries, and empowers employees to cultivate personal safety leadership. With zero injuries as our ultimate aspiration, we are working toward a near-term goal of a 1.00 TCIR by the end of fiscal 2025 (one recordable injury per 200,000 working hours). We recorded the lowest TCIR in our history in fiscal 2021, which rate increased slightly in fiscal 2022 but continues to reflect a significantly improved safety performance compared to years prior to fiscal 2021. We attribute our performance to the work we have done over the past several years to engage leaders and front-line employees in proactively preventing workplace injuries and illnesses through training, education, and monitoring programs, in identifying and addressing the root causes of health and safety incidents, and in optimizing overall health and safety performance. 12 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Our TCIR, DART Rate, and LTIR for the fiscal years ended August 31, 2019, 2020, 2021, and 2022 are as follows: COVID-19 cases for which contact tracing could not identify a source of exposure outside of work are included in OSHA reporting in accordance with OSHA reporting requirements using a designated special code for the nature of the illness. These cases are excluded from the TCIRand LTIR metrics shown above. The safety metrics shown above also exclude information for the Columbus Recycling and Encore Recycling businesses that were acquired in fiscal 2022. COVID-19 We implemented and managed a wide range of controls and other protective measures at our sites to detect and prevent the transmission of COVID-19. A key control established as part of our COVID-19 response is monitoring employee health. We utilize an independent 24-hour telemedicine service that allows any employee who exhibits COVID-like symptoms, who has been exposed to a confirmed COVID-19 case, or who tests positive for COVID-19, to be connected with a licensed medical professional who will perform an assessment, offer direction for quarantining as appropriate and access to testing facilities, and establish a connection to healthcare providers. We provide six hours of paid time for our employees to receive the vaccination and booster. In addition, we cover time away for any complications arising from being vaccinated or the booster. Throughout the COVID-19 health crisis, we compensated employees who tested positive at their regular rate of pay while also retaining health and welfare benefits during their recovery, and until returning to their work schedule. At our facilities, we instituted a range of safety practices and COVID-19 prevention controls, such as temperature screening, symptom checks, wearing face coverings when required, hygiene and sanitation procedures, social and physical distancing, installing touchless equipment, and other physical contact reduction processes. We have also supported work-from-home when feasible. To monitor the effectiveness of these controls, our Health and Safety team created a protocol for auditing facilities on their performance against our COVID-19 controls. The results of these audits are reported to senior leadership and used to make any necessary performance improvements. Regular and transparent employee communication also has been critical to our response, including weekly messages of support to help keep safe behaviors top of mind. Ethics Our employees, both union and non-union, participate in annual training on our Company’s Core Values of Safety, Sustainability, and Integrity, which includes instruction on our Code of Conduct and ethical behavior. The training includes important topics such as reporting misconduct, prohibition against retaliation, diversity, equity, and inclusion, and the Company's sustainability program. We also provide training to employees regarding unconscious bias. We empower employees to raise issues and concerns regarding compliance with our Code of Conduct, Company policies, and the law by offering multiple reporting channels, including a third-party, confidential, multi-lingual misconduct reporting system where employees may choose to remain anonymous. We investigate all reports received through actionable channels. In addition to our Code of Conduct and related training, we have a comprehensive Anticorruption Program, inclusive of an overarching Anticorruption Policy available to all employees that details prohibitions against bribery, money laundering, and engaging with terrorists or other sanctioned entities, as well as internal controls. The broader program includes third-party vetting and monitoring, contract provisions, and employee engagement and training. For the eighth consecutive year, we were named one of the 2022 World’s Most Ethical Companies by the Ethisphere Institute. This award is given to companies that foster a culture of ethics and transparency at every level of the company by demonstrating leadership across five key categories: ethics and compliance programs; environmental and societal impacts; culture of ethics; governance; and leadership and reputation. Through the annual process of applying for this award and analyzing our scores across all categories, we gain significant insight into current best practices and can plan and implement improvements to our Company-wide communications, training programs, and other initiatives. 13 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Executive Officers of the Company The executive officers of the Company are elected each year at the organizational meeting of the Board of Directors, which follows the annual meeting of the shareholders, and at other Board of Directors meetings, as appropriate. At October 24, 2022, the executive officers of the Company were as follows: Name Age Office Tamara L. Lundgren 65 Chairman, President and Chief Executive Officer(1) Richard D. Peach 59 Executive Vice President and Chief Strategy Officer(2) Stefano R. Gaggini 51 Senior Vice President and Chief Financial Officer(3) Michael R. Henderson 63 Senior Vice President and President, Operations(4) Steven G. Heiskell 53 Senior Vice President and President, Recycling Products & Services(5) James Matthew Vaughn 50 Senior Vice President, General Counsel and Corporate Secretary(6) Erich D. Wilson 54 Senior Vice President, Chief Human Resources Officer and Chief of Corporate Operations(7) Mark Schuessler 43 Vice President and Chief Accounting Officer(8) 14 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Available Information Our We may use our website as a channel The content of our ITEM 1A. RISK FACTORS Described below are risks, which are categorized as “Risk Factors Relating to Our Business,” “Risk Factors Relating to the Regulatory Risk Factors Relating to Our Business Potential costs related to the environmental cleanup of Portland Harbor may be material to our financial position and liquidity In December 2000, we were notified by the 15 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. The Oregon Department of Environmental Quality is separately providing oversight of our investigations and source control activities at various sites adjacent to Portland Harbor that are focused on controlling any current “uplands” releases of contaminants into the Willamette River. We have accrued liabilities for source control and related work at two sites, reflecting estimated costs of primarily investigation and design, which costs have not been material in the aggregate to date. No liabilities have been established in connection with investigations for any other sites because the extent of contamination, required source control work, and our responsibility for the contamination and source control work, in each case if any, have not yet been determined. In addition, pursuant to our insurance policies, we are being reimbursed for the costs we incur for required source control evaluation and remediation work. Significant cash outflows in the future related to Equipment upgrades, equipment failures, and facility damage may lead to production curtailments or shutdowns Our business operations and recycling and manufacturing processes depend on critical pieces of equipment, including information technology equipment, shredders, nonferrous sorting technology, furnaces, and a rolling mill, which may be out of service occasionally for scheduled upgrades or maintenance or as a result of unanticipated failures or events. Our facilities are subject to equipment failures and the risk of catastrophic loss due to unanticipated events such as mechanical failures, fires, earthquakes, accidents, or violent weather conditions. For instance, although the impact on our operations was not significant, certain of our facilities in Puerto Rico have experienced damage due to hurricanes, including as a result of Hurricane Fiona in September 2022, and certain facilities in California, Oregon, and Washington were briefly closed in September 2020 due to poor air quality as a result of wildfires. Additionally, we experienced a fire at our Cascade Steel Rolling Mills in McMinnville, Oregon in May 2021 as well as at our metals recycling facility in Everett, Massachusetts in December 2021. Direct physical loss or damage to property from these incidents was limited to the mill’s melt shop in the case of the steel mill and to the shredder building and equipment in the case of the Everett recycling facility, with no bodily injuries and no physical loss or damage to other buildings or equipment. With respect to the Everett facility shredder fire, on January 28, 2022, shredding operations at the facility began ramping up following the replacement and repairs to shredder equipment that had been damaged. Completion of the remainder of repair and replacement of property that experienced physical loss or damage, primarily buildings and improvements, will occur over a longer period and impacts on business income may continue. For example, as of June 18, 2022, shredder operations temporarily ceased at the facility pending completion of discussions with the Massachusetts Department of Environmental Protection and the Massachusetts Attorney General's office regarding installation and operation of temporary emission capture and controls that would allow operation of the shredder prior to completion of the repair and replacement of the shredder enclosure building. Non-shredding operations at the facility continue. While we carry insurance that we anticipate will cover repair and replacement of property that experienced physical loss or damage and business income losses resulting from these fires, as discussed in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, our insurance coverage is subject to deductibles, and various conditions, exclusions, and limits. Moreover, our insurance coverage may be unavailable or insufficient to protect us against losses in the case of future events. In addition, insurance may not continue to be available in the future on acceptable terms or at acceptable costs. Interruptions in our processing and production capabilities and shutdowns resulting from unanticipated events also could disrupt customer and supplier relationships and could have a material adverse effect on our financial condition, results of operations, and cash flows. 16 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Failure to realize or delays in realizing expected benefits from capital projects, including investments in processing and manufacturing technology improvements, may impact our financial condition, operating results, and cash flows We may engage in capital projects based on the forecasted project economics, political and regulatory environments, and the expected return on the capital to be employed in the project. Large-scale projects may take many years to complete, during which time the political and regulatory environment or other market conditions may change from our forecast. For example, we make significant investments in processing and manufacturing technology improvements aimed at increasing the efficiency and capabilities of our businesses and to maximize our economies of scale. Completion of and realization of the benefits from such improvements may be subject to many factors including, but not limited to, permitting, construction, equipment delivery, commissioning and ramp up, environmental compliance, and technology performance risks, some of which are outside our control and could result in further delays in such projects or require us to incur additional costs. The COVID-19 pandemic and the ongoing global impacts resulting directly or indirectly from the pandemic, including supply chain disruptions, have contributed to some delays in construction activities and equipment deliveries related to our capital projects, and to the time required to obtain permits from government agencies, resulting in the deferral of certain capital expenditures and in the timing of realization of the anticipated benefits of the technology improvements. Given the continually evolving nature of the COVID-19 pandemic, its ongoing global impacts, and other factors impacting the timing of project completion, the extent to which forecasted capital expenditures could be deferred is uncertain. We have also experienced increased commissioning and ramp-up times on some projects. Failure to realize or delays in realizing the anticipated benefits and to generate adequate returns on such capital projects may have a material adverse effect on our financial condition, results of operations, and cash flows. We operate in industries that are cyclical and sensitive to general economic conditions, which could have a material adverse effect on our operating results, financial condition, and cash flows Demand for most of our products is cyclical in nature and sensitive to general economic conditions. The timing and magnitude of the cycles in the industries in which our products are used, including global steel manufacturing and 17 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Changing conditions in We generate a substantial portion of our revenues from sales to customers located outside the U.S., including countries in Asia, the Mediterranean region, and North, Central, and South America. In each of the last three years, exports comprised approximately 61 to 66 percent of our ferrous sales volumes and 57 to 65 percent of our nonferrous sales volumes. Our ability to sell our products profitably, or at all, For example, in fiscal 2017, regulators in China began implementing the National Sword initiative involving inspections of Chinese industrial enterprises, including recyclers, in order to identify rules violations with respect to discharge of pollutants or illegally transferred scrap imports. In March 2018, the U.S. imposed a 25 percent tariff on certain imported steel products and a 10 percent tariff on certain imported aluminum products under Section 232 of the Trade Expansion Act of 1962. Currently, imports from certain countries are exempt from these duties pursuant to various agreements, including quotas. These tariffs, along with other U.S. trade actions, have triggered retaliatory actions by certain affected countries, and other foreign governments may impose trade measures on other U.S. goods in the future. For example, China has imposed a series of retaliatory tariffs on certain U.S. products, including a 25 percent tariff on all grades of U.S. scrap and an additional 25 percent tariff on U.S. aluminum scrap. These tariffs and other trade actions could result in a decrease in international steel demand and negatively impact demand for our products, which would adversely impact our business. Given the uncertainty regarding the scope and duration of these trade actions by the U.S. or other countries, the impact of the trade actions on our operations or results remains uncertain, but this impact could be material. 18 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Increases in the value of the U.S. dollar relative to other currencies may reduce the demand for our products A significant portion of our recycled metal revenues is generated from sales to foreign customers, which are denominated in U.S. dollars. In our fiscal 2022, the U.S. dollar strengthened relative to other world currencies. A strengthening U.S. dollar makes our products more expensive for non-U.S. customers, which may negatively impact our export sales. A strengthening U.S. dollar also makes imported metal products less expensive, which may result in an increase in imports of steel products into the U.S. As a result, our finished steel products, which are made in the U.S., may become more expensive for our U.S. customers relative to imported steel products thereby reducing demand for our products. Economic and geopolitical instability including as a result of military conflict could have a material adverse effect on our operating results, financial condition, and cash flows In late February 2022, Russian military forces launched significant military action against Ukraine, which has continued through the date of this report. We do not have operations in Russia or Ukraine. Nevertheless, the outbreak of war between Russia and Ukraine and the resulting sanctions by U.S. and European governments, together with any additional future sanctions by them, could have a larger impact that expands into other geographies where we do business, including our supply chain, business partners, and customers in those markets, which could result in lost sales, supply shortages, commodity price fluctuations, increased manufacturing costs, transportation logistics challenges, customer credit and liquidity issues, and lost efficiencies. The acceleration of a global energy crisis including as a result of restrictions on Russia's energy exports could similarly impact the geographies where we do business. In addition, the U.S. has commenced certain trade actions as a result of the Russia-Ukraine conflict, which are expected to result in retaliatory measures or actions, including tariffs, by Russia. While significant uncertainty exists with respect to this matter, the Russia-Ukraine conflict and its broader impacts, including any increased trade barriers or restrictions on global trade imposed by the U.S. or further retaliatory trade measures taken by Russia or other countries in response, could have a material adverse effect on our operating results, financial condition, and cash flows. Changes in the availability or price of inputs such as raw materials and end-of-life vehicles could reduce our sales Our businesses require certain materials that are sourced from third-party suppliers. Although the synergies from our integrated operations allow us to be our own source for some raw materials, particularly with respect to 19 / SCHNITZER STEEL INDUSTRIES, INC. Significant decreases in The timing and magnitude of the cycles in the industries in which we operate are difficult to predict and are influenced by different economic conditions in the domestic market, where we typically acquire our raw materials, and foreign markets, where we typically sell the majority of our products. Purchase prices for scrap metal including end-of-life vehicles and selling prices for recycled Imbalances in supply and demand conditions in the global steel industry may reduce demand for our products Economic expansions and contractions in global economies can result in supply and demand imbalances in the global steel industry that can significantly affect the price of commodities used and sold by our business, as well as the price of and demand for finished steel products. In a number of foreign countries, such as China, steel producers are generally government-owned and may therefore make production decisions based on political or other factors that do not reflect free market conditions. In 20 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences We have made and may continue to make acquisitions of or expand into complementary businesses to enable us to expand our customer and supplier base and grow our revenues. Execution of any past or potential future acquisition or expansion involves several risks, including: If we do not successfully execute on acquisitions or expansions and the acquired or expanded businesses do not perform as projected, our financial condition and results of operations could be materially adversely affected. Supply chain disruptions affecting our customers, end users of our recycled products, or our suppliers could adversely impact the demand for our products or the availability of inputs, increase our costs, or otherwise adversely impact our business Supply chain disruptions, including those resulting from the COVID-19 pandemic, and related labor shortages and logistics constraints have and could continue to impact our customers, end users of our recycled products, and our suppliers and adversely impact our business. Direct and indirect impacts on our business of such supply chain disruptions could include reduction in the demand for and price of certain of our products, slowdown in flows of scrap metal from certain supply channels, and reduced availability or increases in costs of other inputs, consumables, supplies, and capital equipment. Disruptions within our logistics or supply chain network could adversely affect our ability to produce or deliver our products in a timely manner, which could impair our ability to meet customer demand for products and result in reduced volumes and sales, increased supply chain costs, or damage to our reputation. Such disruptions in the future may result from a number of factors beyond our control. Supply chain disruptions due to any of those factors could negatively impact our financial performance or financial condition. Reliance on third-party shipping companies may restrict our ability to ship our products We significantly rely on third parties to handle and transport raw materials to our production facilities and products to customers. Despite our practice of utilizing a diversified group of suppliers of transportation, factors beyond our control, including changes in fuel prices, political events, governmental regulation of transportation, changes in market rates, carrier availability, carrier bankruptcy, labor shortages, shipping industry consolidation, and disruptions in transportation routes and infrastructure, may adversely impact our ability to ship our products and our operating margins. These impacts could include delays or other disruptions in shipments in transit, including as a result of congested seaports and travel routes, or third-party shipping companies increasing their charges for transportation services or otherwise reducing or eliminating the availability of their containers, vehicles, rail cars, barges, or ships. For example, during fiscal 2022 and 2021, worldwide demand for logistical services increased sharply, which led to a global shortage of available shipping containers, congested seaports, and higher freight rates, impacting the timing of certain shipments and resulting in reductions in sales volumes of certain products. The delays in container shipping for U.S. exports have been exacerbated by the backlog of containerized imports at U.S. seaports. While we aim to pass on the majority of shipping and related charges to our customers, there can be no assurance that we will be able to do so into the future. As a result, we may not be able to transport our products in a timely and cost-effective manner, which could have a material adverse effect on our financial condition and results of operations and may harm our reputation. 21 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Goodwill impairment charges may adversely affect our operating results Goodwill represents the excess purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. Impairment of long-lived assets and Our long-lived asset groups are subject to an impairment assessment when certain triggering events or circumstances indicate that their carrying value may be impaired. If the carrying value exceeds our estimate of future undiscounted cash flows of the operations related to the asset group, an impairment is recorded for the difference between the carrying amount and the fair value of the asset group. The results of these tests for potential impairment may be adversely affected by unfavorable market conditions, our financial performance trends, or an increase in interest rates, among other factors. If, as a result of the impairment test, we determine that the fair value of any of our long-lived asset groups is less than its carrying amount, we may incur an impairment charge that could have a material adverse effect on our financial condition and results of operations. We recorded impairment charges of $6 million on long-lived tangible and The coronavirus disease 2019 (COVID-19) pandemic has had, and may continue to have, an adverse effect on our business, results of operations, financial condition, and cash flows. Future epidemics or other public health emergencies could have similar effects. Our operations expose us to risks associated with pandemics, epidemics, or other public health emergencies, such as the COVID-19 outbreak which the World Health Organization characterized as a pandemic in March 2020. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. The onset of COVID-19 negatively affected our business, which is most prominently reflected in our fiscal 2020 results. Beginning in our fiscal 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on individual, business, and government activities. However, the existence of new or enduring variant strains of COVID-19 may cause delays in the easing of restrictions previously in place and the implementation of new restrictions and mandates, which could be applied differently across jurisdictions, and there are ongoing global impacts resulting directly or indirectly from the pandemic including labor shortages, logistical challenges and supply chain disruptions such as increased port congestion, and increases in costs for certain goods and services. These ongoing global impacts have negatively affected our sales volumes, operating costs, and financial results to varying degrees and could continue to negatively affect our results of operations, cash flows, and financial position in the future. 22 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Inability to achieve or sustain the benefits from productivity, cost savings, and restructuring initiatives may adversely impact our operating results During the past several years, we implemented a number of productivity improvement, cost savings, and restructuring initiatives designed to reduce operating expenses and improve profitability and to achieve further integration and synergistic cost efficiencies in our operating platform. These initiatives included idling underutilized assets and closing facilities to more closely align our business to market conditions, implementing productivity initiatives to increase production efficiency and material recovery, and We may We lease a significant portion of Changing economic conditions may result in customers not fulfilling their contractual obligations We enter into export ferrous sales contracts preceded by negotiations that include fixing price, quantity, shipping terms, and other contractual terms. Upon finalization of these terms and satisfactory completion of other contractual contingencies, the customer typically opens a letter of credit to satisfy its payment obligation under the contract prior to our shipment of the cargo. Potential limitations on our ability to access capital resources may restrict our ability to operate Our operations are capital intensive. Our business also requires substantial expenditures for routine maintenance. While we expect that our cash requirements, including the funding of capital expenditures, debt service, dividends, share repurchases, and investments, will be financed by internally generated funds or from borrowings under our secured committed bank credit facilities, there can be no assurance that this will be the case. Additional acquisitions could require financing from external sources. Although we believe we have adequate access to contractually committed borrowings, we could be adversely affected if we are not able to meet the conditions required to incur such borrowing or if our banks ceased lending or were unable to honor their contractual 23 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. The agreement governing our bank credit Our secured bank credit facilities contain certain restrictions on our business which limit (subject to certain exceptions) our ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of our business, engage in transactions with affiliates and enter into restrictive agreements, including agreements that restrict the ability of our subsidiaries to make distributions. These restrictions may affect our ability to operate our business or execute our strategy and may limit our ability to take advantage of potential business opportunities as they arise. Our bank credit agreement also requires that we maintain certain financial and other covenants, including a consolidated fixed charge coverage ratio Consolidation in the steel industry may reduce demand for our products There has been Product liability claims may adversely impact our operating results We could inadvertently acquire radioactive scrap metal that could potentially be included in recycled mixed We are subject to legal proceedings and legal compliance risks that may adversely impact our financial condition, results of operations, and liquidity We spend substantial resources ensuring that we comply with domestic and foreign laws and regulations, contractual obligations and other legal standards. Notwithstanding this, we are subject to a variety of legal proceedings and compliance risks in respect of various matters, including regulatory, safety, environmental, employment, transportation, intellectual property, contractual, import/export, international trade, and governmental matters that arise in the course of our business and in our industry. For example, legal proceedings can include those arising from accidents involving Company-owned vehicles, including Company tractor trailers. In some instances, such accidents and the related litigation involve accidents that have resulted in Climate change may adversely impact our facilities and our ongoing operations The potential physical impacts of climate change on our operations are highly uncertain and depend upon the unique geographic and environmental factors present, for example rising sea levels at our 24 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. We may not realize our deferred tax assets in the future The assessment of recoverability of our deferred tax assets is based on an evaluation of existing positive and negative evidence as to whether it is Tax increases and changes in tax rules may adversely affect our financial results As a company conducting business on a global basis with physical operations throughout North America, we are exposed, both directly and indirectly, to the effects of changes in U.S., state, local, and foreign tax rules. Taxes for financial reporting purposes and cash tax liabilities in the future may be adversely affected by changes in such tax rules. The Biden administration has announced in 2021 and 2022, and in certain cases has enacted, a number of tax proposals to fund new government investments in infrastructure, healthcare, and education, among other things. Certain of these proposals involve an increase in the domestic corporate tax rate, which if implemented could have a material impact on our future results of operations and cash flows. On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law, with tax provisions primarily focused on implementing a 15% minimum tax on global adjusted financial statement income and a 1% excise tax on share repurchases. The IRA also creates a number of potentially beneficial tax credits to incentivize investments in certain technologies and industries which may be applicable to our business. Certain provisions of the IRA will become effective beginning in fiscal 2023. While we do not believe the IRA will have a direct negative impact on our business, the effects of the measures are unknown at this time. One or more cybersecurity incidents may adversely impact our financial condition, results of operations, and reputation Our operations involve the use of multiple systems, some of which are outsourced to certain third-party service and hosting providers, that process, store, and transmit sensitive information about our customers, suppliers, employees, financial position, operating results, and strategies. We face global cybersecurity risks and threats on a continual and ongoing basis, which include, but are not limited to, attempts to access systems and information, computer viruses, or denial-of-service attacks. These risks and threats range from uncoordinated individual attempts to sophisticated and targeted measures. Increased numbers of employees working remotely increases our exposure to cyber-threats. While we are not aware of any material cyber-attacks or breaches of our systems to date, such attempts occur regularly and, thus, we have and continue to implement measures to safeguard our systems and information and mitigate potential risks, including employee training around phishing, malware, and other cyber risks, but there is no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches that manipulate or improperly use our systems, compromise sensitive information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events, including breaches of our security measures or those of our third-party service providers, could negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business due to disruption of operations and/or reputational damage, potential liability and increased remediation and protection costs, any of which could have a material adverse effect on our financial condition and results of operations. We are exposed to translation risks associated with fluctuations in foreign currency exchange rates Our operations in Canada expose us to translation risks associated with fluctuations in foreign currency exchange rates as compared to the U.S. dollar, our reporting currency. As a result, we are subject to foreign currency exchange risks due to exchange rate movements in connection with the translation of the operating costs and the assets and liabilities of our foreign operations into our functional currency for inclusion in our Consolidated Financial Statements. 25 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Risk Factors Relating to the Regulatory Environment Governmental agencies may refuse to grant or renew our licenses and permits, thus restricting our ability to operate We conduct certain aspects of our operations subject to licenses, permits, and approvals from state and local governments. Governmental agencies often resist the establishment of certain types of facilities in their communities, including metal recycling and auto parts facilities. Increased permitting requirements could require substantial additional capital expenditures, impose financial assurance obligations, subject us to increased compliance and penalty risks, severely limit operational flexibility, and increase operating costs, or adversely impact our ability to acquire or sell materials. Increased focus on strengthening environmental compliance and enforcement in overburdened communities that may be disproportionately impacted by adverse health and environmental effects may impact our ability to obtain or renew licenses and permits for facilities in or near such communities. In addition, changes in zoning and increased residential and mixed-use development near our facilities are reducing the buffer zones and creating land use conflicts with heavy industrial uses such as ours. This could result in increased complaints, increased inspections and enforcement including fines and penalties, operating restrictions, the need for additional capital expenditures, and increased opposition to maintaining or renewing required approvals, licenses, and permits. In addition, waste products from our operations are subject to classification and regulations that, among other things, determine how such materials may be handled, stored, transported, and disposed. Failure to obtain or maintain regulatory permits, approvals, or exemptions for such waste could materially increase our costs or limit our operations. For example, in fiscal 2022, as a result of court orders and regulatory changes, we were required at times to transport shredder waste from our Oakland facility out of state for disposal at increased costs. See “Legal Proceedings” in Part I, Item 3. As an additional example, our Bay Area Air Quality Management District (“BAAQMD”) permit to operate currently limits the number of ships that may call at our Oakland, California facility to 26 ships per year. In July 2018, we applied for a modification of such permit to increase the number of annual ship calls to 32 per year. BAAQMD has not acted on our permit modification request but, in the interim, had routinely issued annual Compliance and Settlement Agreements (“CSA”) to permit 32 ship calls in each year. In October 2022, however, BAAQMD declined to renew the CSA for 2022, following which we applied for a short-term variance to authorize the 32 ship calls. Failure to obtain this variance could have a material adverse effect on our financial condition and results of operations through the end of calendar 2022 due to the reduced marine shipments, and lost profits related thereto, during the remainder of such period. Furthermore, from time to time, both the U.S. and foreign governments impose regulations and restrictions on trade in the markets in which we operate. In some countries, governments require us to apply for certificates or registration before allowing shipment of recycled metal to customers in those countries. There can be no assurance that future approvals, licenses, and permits will be granted or that we will be able to maintain and renew the approvals, licenses, and permits we currently hold. Failure to obtain these approvals could cause us to limit or discontinue operations in these locations or prevent us from developing or acquiring new facilities, which could have a material adverse effect on our financial condition and results of operations. Environmental compliance costs and potential environmental liabilities may have a material adverse effect on our financial condition and results of operations Compliance with environmental laws and regulations is a significant factor in our business. We are subject to local, state, and federal environmental laws and regulations in the U.S. and other countries relating to, among other matters: 26 /Schnitzer Steel Industries, Inc. Form 10-K SCHNITZER STEEL INDUSTRIES, INC. We are also required to obtain environmental permits from governmental authorities for certain operations. Violation of or failure to obtain permits or comply with these laws or regulations could result in our business being fined or otherwise sanctioned by regulators or becoming subject to litigation by private parties. In recent years, capital expenditures for environmental projects have increased and have represented a significant share of our annual capital expenditures. Future environmental compliance costs, including capital expenditures for environmental projects, may increase because of new laws and regulations, changing regulatory interpretations and stricter enforcement of current laws and regulations by regulatory authorities, expanding emissions, groundwater, storm water and other testing requirements, and new information on emission or contaminant levels including with respect to emerging contaminants such as per- and polyfluoroalkyl substances ("PFAS"), uncertainty regarding adequate pollution control levels, the future costs of pollution control technology, and issues related to We have seen an increased focus by federal, state, and In addition, previous operations by us, predecessor entities, or others at facilities that we currently or formerly owned, operated, or otherwise used may have caused contamination from hazardous substances. As a result, we are exposed to possible claims, including government fines and penalties, costs for investigation and clean-up activities, claims for natural resources damages, and claims by third parties for personal injury and property damage, under environmental laws and regulations, especially for the remediation of waterways and soil or groundwater contamination. These laws can impose liability for the cleanup of hazardous substances even if the owner or operator was neither aware of nor responsible for the release of the hazardous substances. We have, in the past, The Biden Administration and 27 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Compliance with existing and Recent and future legislation or increased regulation regarding climate change and GHG emissions could impose significant costs on our business and our customers and suppliers, including increased energy, capital equipment, emissions controls, environmental monitoring and reporting, and other costs in order to comply with laws and regulations concerning and limitations imposed on climate change and GHG emissions. The potential costs of allowances, taxes, fees, offsets, or credits or additional emission reduction measures that may be part of “cap and trade” programs or Risk Factors Relating to Our Employees Labor shortages or increased labor costs may adversely affect our operating results, financial condition, and cash flows Our employees contribute to developing and meeting our business goals and objectives, and labor is a significant component of operating our business. The impact of labor shortages or increased labor costs because of increased competition for employees, unemployment levels and benefits, higher employee turnover rates, increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), may increase our costs or impede our ability to operate our facilities and could have a material adverse effect on our results of operations, financial condition, and cash flows. As a result of the tight labor markets we experienced during fiscal 2022 and 2021, we have received fewer job applicants in certain local markets, which hindered our ability to reach full staffing levels at some of our facilities. Recruiting and retaining employees in sufficient numbers to optimally staff our facilities may result in increases in our labor costs. Labor shortages and increased labor costs may continue to be realized as a direct or indirect result of the COVID-19 pandemic, including related response measures implemented by governments, or due to other factors, which may adversely affect our operating results, financial condition, and cash flows. Reliance on employees subject to collective bargaining may restrict our ability to operate Approximately 21% of our full-time employees are represented by unions under collective bargaining agreements, including substantially all of the manufacturing employees at our 28 / SCHNITZER STEEL INDUSTRIES, INC. The underfunded status of our multiemployer pension plans may cause us to increase our contributions to the plans As discussed in In 2004, the Internal Revenue Service (“IRS”) approved a seven-year extension of the period over which the WISPP may amortize unfunded liabilities, conditioned upon maintenance of certain minimum funding levels. In 2014, the WISPP obtained relief from the specified funding requirements from the IRS, which requires that the WISPP meet a minimum funded percentage on each valuation date and achieve a funded percentage of 100% as of October 1, 2029. Based on the most recent actuarial valuation for the WISPP, ITEM 1B. UNRESOLVED STAFF COMMENTS None. 29 / SCHNITZER STEEL INDUSTRIES, INC. ITEM 2. PROPERTIES Our facilities and administrative offices by division, type Number of Facilities Type Location Owned(1) Leased Administrative Offices California — 2 New Jersey — 1 Oregon — 1 Rhode Island — 1 Auto Parts Stores Alberta, Canada — 3 Arkansas — 1 British Columbia, Canada — 1 California(2) 3 16 Florida — 1 Georgia 1 — Illinois — 1 Indiana 1 — Kansas — 1 Missouri 1 3 Nevada — 2 Ohio — 1 Oregon — 2 Rhode Island 2 — Texas — 4 Utah — 1 Virginia — 1 Washington 1 4 Metals Recycling Alabama 3 — British Columbia, Canada — 4 California 4 [A] [B] — Georgia 10 [B] — Hawaii 1 [A] [B] 1 Kentucky 3 1 Maine 2 — Massachusetts 2 [A] [B] 1 Mississippi 3 — Montana 1 — Nevada — 1 New Hampshire 2 — Oregon 4 [A] [B] — Puerto Rico 1 [A] [B] 3 Rhode Island 1 1 [A] Tennessee 1 1 Washington 3 [A] [B] — Steel Mill Oregon 1 — Steel Distribution California 1 — Total Operating Facilities and Administrative Offices 52 60 Non-Operating(3) 7 7 59 67 [A] Operation includes a deepwater port. Puerto Rico and Hawaii operations access deepwater ports through public docks. [B] Includes large-scale shredding operations. 30 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. We consider all operating properties, both owned and leased, to be well-maintained, in good operating condition, and suitable and adequate to carry on our business. ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in various litigation matters that arise in the ordinary course of business involving normal and routine claims, including environmental compliance matters. Such proceedings include, but are not limited to, proceedings relating to our status as a potentially responsible party with respect to the Portland Harbor Superfund Site and proceedings relating to other legacy environmental In fiscal 2013, the Commonwealth of Massachusetts advised us of alleged violations of environmental requirements, including but not limited to those related to air emissions and hazardous waste management, at our operations in the Commonwealth. We actively engaged in discussions with the Commonwealth's representatives, which resulted in a settlement agreement to resolve the alleged violations. A consent judgment was jointly filed with and entered by the Superior Court for the County of Suffolk, Commonwealth of Massachusetts on September 24, 2015. The settlement involved a On February 23, 2021, the California State Department of Toxic Substance Control (“DTSC”) issued a corrective action enforcement order with respect to our metal recycling facility in Oakland, California that would require us to submit a current conditions report, to undertake a facilities investigation, risk assessment, and corrective measures study, and to implement corrective measures selected by the DTSC based on those assessments and studies. We dispute DTSC’s alleged jurisdictional basis for the order, as well as the scope of work required by the order, which we believe is unwarranted and duplicative of ongoing assessments being conducted under the oversight of another state agency. We have filed a notice of defense that by law stays the effectiveness of the order and are challenging the order through the DTSC administrative process. In addition, the DTSC issued a similar corrective action enforcement order on March 18, 2021 with respect to our metal recycling facility in Fresno, California based on inspections conducted by the DTSC in 2013. That 2013 inspection resulted in the issuance of a Summary of Violations in 2015 setting forth a number of alleged violations relating to hazardous waste management requirements. While we dispute the alleged violations, we engaged in settlement discussions that had resulted in a tentative agreement in April 2018 to settle the matter for $490 thousand, of which $368 thousand was to be paid as a civil penalty and $122 thousand was to be paid as reimbursement for agency investigation and enforcement costs. However, the parties were not able to reach agreement on the injunctive terms of the settlement agreement, and the California Office of the Attorney General In January 2018, the 31 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. In January 2020, the USEPA issued a Notice of Violation (“NOV”) based on its evaluation of data requested during a June 2019 inspection at our facility in Oakland, California alleging the same violation of a Bay Area Air Quality Management District (“BAAQMD”) air emissions rule that was the subject of a Compliance and Settlement Agreement (“CSA”) with BAAQMD that was executed as of September 22, 2020 and also alleging violations of Title V Major Source permitting requirements. The CSA required the installation of new emission controls for volatile organic compounds (“VOCs”), the payment of a civil penalty and excess emissions fees totaling $400 thousand, and the provision of certain VOC offsets. The Company maintains that the timely filing of a Title V Major Source permit application constitutes compliance with Title V Major Source rules and that USEPA’s Title V non-compliance allegations are erroneous. The Company has conveyed that position to USEPA and has provided USEPA with documentation requested by USEPA confirming our position. To date, USEPA has taken no further action relating to the On September 3, 2021, the Oregon Department of Environmental Quality (“ODEQ”) issued a Pre-Enforcement Notice (“PEN”) alleging that the Company’s metal shredder facility in Portland, Oregon is in violation of Title V of the federal Clean Air Act (“CAA”) and On August 5, 2020, The Athletics Investment Group LLC (“A’s”) filed an action in the California Superior Court for the County of Alameda against the DTSC as Respondent and the Company as Real Party in Interest, seeking rescission of the “f letter” pursuant to which DTSC classified treated shredder waste from the Company’s metal shredding facility in Oakland, California as a “nonhazardous waste” which among other things permits its use as alternative daily cover at municipal landfills. Pursuant to determinations under section 66260.200(f) of the state hazardous waste regulations issued in 1988 and 1989 (the “f letters”), the DTSC determined that treated shredder waste from the Company’s facility does not pose a significant hazard to human health, safety, or the environment. The Superior Court on April 16, 2021 issued an order and writ of mandate commanding the DTSC within 30 days to rescind the Company’s “f letters” concluding that, under a law enacted by the legislature in 2014, the DTSC had a mandatory duty to rescind the “f letters.” The Superior Court reached this decision despite a determination by DTSC in 2018 pursuant to the 2014 statute reconfirming that treated shredder residue does not need to be managed as a hazardous waste in order to protect human health, safety, or the environment. Following the lifting of an initial stay of that order, DTSC rescinded the Company’s “f letters” on November 29, 2021. As a result of the April 16, 2021 Superior Court order and subsequent orders by the same Superior Court, the Company has at times been required to transport its shredder waste out of state for disposal at increased costs. The Company filed notices of appeal of the Superior Court's orders, and on September 30, 2022 the California State Court of Appeals, First Appellate District, Division Three reversed the April 16, 2021 Superior Court order, holding that the statute does not impose a mandatory duty on DTSC to rescind the Company’s “f letters” and that DTSC could continue to regulate metal shredder waste through statutorily compliant “f letters” since DTSC’s analysis confirmed this waste need not be classified as hazardous to protect human health and the environment. DTSC subsequently agreed to an alternative treatment standard for the shredder waste under existing regulations permitting the Company to cease transporting its shredder waste out of state. 32 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. On December 10, 2021, an emergency regulation (“CTMSR Regulation”) that allows metal shredding facilities to transport and dispose of treated shredder residue as non-hazardous waste under a conditional exclusion became effective, and the Company shipped treated shredder residue for use as alternative daily cover at municipal landfills in California from late December 2021 to September 7, 2022 when the emergency regulation expired. Following an inspection by the DTSC of the Company’s Oakland metal shredding facility on May 16 and 17, 2022, the Company in its compilation and review of records requested by the DTSC during that inspection discovered and promptly self-disclosed to the DTSC that it is unable to confirm that it was in compliance with certain aspects of the CTMSR Regulation for certain periods since the adoption of the emergency regulation. The Company reported the corrective actions it has taken and the numerous detailed procedures that are On May 6, 2022, the A’s filed an action On March 30, 2022 and on September 8, 2022, the Company received letters from the COAG alleging violations of the Stipulation for Entry of Final Judgment and Order on Consent (“Consent Order”) issued by the Superior Court of the State of California, County of Alameda in February 2021 that was entered into ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 33 / ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our Class A common stock is listed on We declared our 114th consecutive quarterly dividend in the fourth quarter of fiscal 2022. The payment of future dividends is subject to approval by our Board of Directors and continued compliance with the terms of our credit agreement. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this report for further discussion of our credit agreement. Issuer Purchases of Equity Securities Pursuant to a share repurchase program as amended in 2001, 2006, and The share repurchase program does not require us to acquire any specific number of shares, and we may suspend, extend, or terminate the program at any time without prior notice, and the program may be executed through open-market purchases, privately negotiated transactions, or utilizing Rule 10b5-1 programs. The table below presents a summary of Period Total Number of Average Price Paid Total Number of Maximum Number June 1 – June 30, 2022 — $ — — 3,262,206 July 1 – July 31, 2022 499,919 $ 32.78 499,919 2,762,287 August 1 – August 31, 2022 — $ — — 2,762,287 Total fourth quarter 2022 499,919 499,919 34 / The following graph and related information Year Ended August 31, 2017 2018 2019 2020 2021 2022 Schnitzer Steel Industries(1) $ 100 $ 100 $ 87 $ 81 $ 198 $ 141 S&P 500 Steel $ 100 $ 113 $ 89 $ 82 $ 213 $ 241 S&P 600 Metals & Mining $ 100 $ 104 $ 68 $ 67 $ 121 $ 119 ITEM 6. [RESERVED] 35 / SCHNITZER STEEL INDUSTRIES, INC. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section includes a discussion of our operations for the For discussion of our results of operations for fiscal year 2020 including comparison to fiscal 2021, refer to Part II, Item Business Founded in 1906, Schnitzer Steel Industries, Inc. is one of North America’s largest recyclers of ferrous and nonferrous We sell recycled ferrous and Our quarterly operating results fluctuate based on a variety of factors including, but not limited to, changes in market conditions for recycled ferrous and nonferrous 36 / As we continue to closely monitor economic conditions, we remain focused on the following core strategies and plans to meet our business goals and objectives: Key economic factors and trends affecting the industries in which we operate We sell recycled metals to the global steel industry for the production of finished steel. Our financial results largely depend on supply of raw materials in the U.S. and Western Canada and demand for recycled metal in foreign and domestic markets and for finished steel products in the Western U.S. and Western Canada. Demand for most of our products is cyclical in nature and sensitive to changes in general economic conditions. The timing and magnitude of the economic cycles in the industries in which our products are used, including global steel manufacturing and nonresidential and infrastructure construction in the U.S., are difficult to predict. Global economic conditions, including impacts of geopolitical instability and the COVID-19 pandemic, structural and cyclical changes in supply and demand conditions, inflation, rising interest rates and the strength of the U.S. dollar, During the first For our full 2022 fiscal year, the average net selling prices for our ferrous and nonferrous products increased by 19% and 23%, respectively, compared to the prior year. In fiscal 2021, these average net selling prices increased by 61% and 60%, respectively, compared to fiscal 2020. For fiscal 2022, ferrous sales volumes increased by 5% and nonferrous sales volumes increased by 16%, compared to the prior year. In fiscal 2021, sales volumes for these products increased by 11% and 8%, respectively, compared to fiscal 2020. Our ferrous and nonferrous sales volumes in fiscal 2022 included additional volumes arising from the Columbus Recycling business acquired on October 1, 2021, and the Encore Recycling business acquired on April 29, 2022. The deterioration in global economic conditions 37 / SCHNITZER STEEL INDUSTRIES, INC. Steel Mill Fire On May 22, 2021, we experienced a fire at our steel mill in Everett Facility Shredder Fire On December 8, 2021, we experienced a fire at our metals recycling facility in 38 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Coronavirus Disease 2019 (“COVID-19”) We continue to monitor the impact of COVID-19 on all aspects of our business. We are a Use of Non-GAAP Financial Measures In this management’s discussion and analysis, we use supplemental measures of our performance, liquidity, and capital structure which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We believe that providing these non-GAAP financial measures adds a meaningful presentation of our operating and financial performance, liquidity, and capital structure. We use adjusted EBITDA as one of the measures to compare and evaluate financial performance. Adjusted EBITDA is the sum of our net income before results from discontinued operations, interest expense, income taxes, depreciation and amortization, charges for legacy environmental matters (net of Our non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable U.S. GAAP measures. Although we find these non-GAAP financial measures useful in evaluating the performance of our business, our reliance on these measures is limited because they often materially differ from our consolidated financial statements presented in accordance with GAAP. Therefore, we typically use these adjusted amounts in conjunction with our GAAP results to address these limitations. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. 39 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Financial Highlights of Results of Operations for Fiscal 2022 Market demand for our recycled metal products was strong during the first eight months of fiscal 2022, with selling prices reaching multi-year highs in early spring, before declining sharply for most products in the remainder of the fiscal year due to lower demand. For our full 2022 fiscal year, the average net selling prices for our ferrous and nonferrous products increased by 19% and 23%, respectively, and sales volumes for these products increased by 5% and 16%, respectively, compared to the prior fiscal year. Our ferrous and nonferrous sales volumes included additional volumes arising from the Columbus Recycling business acquired on October 1, 2021, and the Encore Recycling business acquired on April 29, 2022. Market demand for our finished steel products improved in fiscal 2022, which contributed to finished steel average selling prices increasing by 46% compared to the prior fiscal year. Finished steel volumes were 5% lower in fiscal 2022 compared to the prior fiscal year in part due to the impact of supply chain disruptions on volumes including logistical restraints and delays to construction projects related to a four-month concrete industry strike in the Pacific Northwest that ended in April 2022. Our results in fiscal The following items further highlight selected liquidity and capital structure metrics: See the 40 / Selected Financial Measures and Operating Statistics For the Year Ended August 31, % Increase (Decrease) ($ in thousands, except for prices and per share amounts) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Ferrous revenues $ 1,914,255 $ 1,557,891 $ 862,490 23 % 81 % Nonferrous revenues 892,444 684,862 390,298 30 % 75 % Steel revenues(1) 531,731 379,203 336,980 40 % 13 % Retail and other revenues 147,385 136,595 122,575 8 % 11 % Total revenues 3,485,815 2,758,551 1,712,343 26 % 61 % Cost of goods sold 2,997,745 2,305,357 1,503,725 30 % 53 % Gross margin (total revenues less cost of goods sold) $ 488,070 $ 453,194 $ 208,618 8 % 117 % Gross margin (%) 14.0 % 16.4 % 12.2 % (15 )% 35 % Selling, general and administrative expense $ 263,257 $ 242,463 $ 187,876 9 % 29 % Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders: Reported $ 5.72 $ 5.66 $ (0.15 ) 1 % NM Adjusted(2) $ 6.07 $ 6.13 $ 0.43 (1 )% 1,317 % Net income (loss) $ 171,996 $ 169,975 $ (2,200 ) 1 % NM Adjusted EBITDA(2) $ 312,715 $ 289,209 $ 85,414 8 % 239 % Recycled ferrous metal average sales prices ($/LT)(3): Domestic $ 438 $ 364 $ 220 20 % 65 % Foreign $ 457 $ 385 $ 241 19 % 60 % Average $ 452 $ 381 $ 237 19 % 61 % Ferrous volumes (LT, in thousands): Domestic(4) 1,806 1,500 1,429 20 % 5 % Foreign 2,810 2,908 2,525 (3 )% 15 % Total ferrous volumes (LT, in thousands)(4)(5) 4,616 4,408 3,954 5 % 11 % Recycled nonferrous metal average sales price ($/pound)(3)(6) $ 1.08 $ 0.88 $ 0.55 23 % 60 % Nonferrous volumes (pounds, in thousands)(4)(6) 687,419 593,378 550,566 16 % 8 % Finished steel average sales price ($/ST)(3) $ 1,075 $ 737 $ 630 46 % 17 % Finished steel sales volumes (ST, in thousands) 465 488 505 (5 )% (3 )% Cars purchased (in thousands)(7) 312 338 316 (8 )% 7 % Number of auto parts stores at period end 51 50 50 2 % — % Rolling mill utilization(8) 88 % 78 % 86 % 13 % (9 )% NM = Not Meaningful LT = Long Ton, which is equivalent to 2,240 41 / Schnitzer Steel Industries, Inc. Form 10-K 2022 SCHNITZER STEEL INDUSTRIES, INC. Revenues Market demand for our recycled metal products was strong during the first eight months of fiscal 2022, with selling prices reaching multi-year highs in early spring, before declining sharply for most products in the remainder of the fiscal year due to lower demand. Revenues for our full 2022 fiscal year increased by 26% compared to the prior fiscal year primarily due to significantly higher average net selling prices for our ferrous, nonferrous, and finished steel products driven by strong market demand during most of the fiscal year. The average net selling prices for our ferrous and nonferrous products increased by 19% and 23%, respectively, compared to the prior fiscal year. Ferrous and nonferrous sales volumes increased by 5% and 16%,respectively, compared to the prior fiscal year. Our ferrous and nonferrous sales volumes in fiscal Operating Performance Net income in fiscal 2022 was $172 million, compared to $170 million in the prior fiscal year. In fiscal Selling, general, and Income Year Ended August 31, 2022 2021 2020 Income (loss) from continuing operations before income taxes $ 216,676 $ 207,989 $ (1,939 ) Income tax expense $ (44,597 ) $ (37,935 ) $ (166 ) Effective tax rate 20.6 % 18.2 % (8.6 )% 42 /even more stringent environmental standards in the future.Concern over climate change, including the impact of global warming, has led to significant U.S. and international regulatory and legislative initiatives to limit greenhouse gas (“GHG”) emissions. In 2007, the U.S. Supreme Court ruled that the EPA was authorized to regulate carbon dioxide under the U.S. Clean Air Act. As a consequence, the EPA initiated a series of regulatory efforts aimed at addressing greenhouse gases as pollutants, including finding that GHG emissions endanger public health, implementing mandatory GHG emission reporting requirements, setting carbon emission standards for light-duty vehicles and taking other steps to address GHG emissions. Legislation has also been proposed in the U.S. Congress on multiple occasions to address GHGgreenhouse gas (“GHG”) emissions and global climate change. In August 2022, President Biden signed the Inflation Reduction Act (“IRA”), a bill that, among other things, creates financial incentives intended to combat climate change, including by directly or indirectly discouraging use of oil and natural gas in favor of alternative sources of energy, among other measures. We cannot predict with any certainty at this time how the climate-related measures in the IRA may affect our operations. A number of states, including states in which we have operations and facilities, have considered, are considering, or have already enacted legislation or executive action to develop information or address climate change and GHG emissions, including state-level “cap and trade” programs, and some form of federal climate change legislation or additional federal regulation is possible. In addition,programs. Currently, we are required to annually report GHG emissions from our steel mill to the State of Oregon Department of Environmental Quality (“ODEQ”) and the EPA. A numberEPA, and our operations in Oregon are subject to or may be impacted by ODEQ regulations, standards, and programs aimed at limiting GHG emissions and toxic air emissions in the state including from large stationary sources such as our steel mill. The implementation of other states,such regulations, standards, and programs and any associated costs, including states in whichany operating or capital expenditures, are uncertain, but may be material to our results of operations, cash flows, and financial position. In addition, we have operations and facilities, have considered, are considering or have already enacted legislationcontinue to develop information or addressincur material capital expenditures to enclose and install additional emission controls for our shredders to meet air emission standards. See "Compliance with existing and future climate change, greenhouse gas, and GHG emissions, as well.been found to be not in compliance with certain environmental laws and regulations and have incurred liabilities, expenditures, fines, and penalties associated with such violations.violations of certain of these laws and regulations. In December 2000, for example, we were notified by the EPA that we are one of the potentially responsible parties that owns or operates, or formerly owned or operated, sites which are part of or adjacent to the Portland Harbor Superfund site (see(“Portland Harbor”). Further, we have been notified that we are or may be a potentially responsible party at sites other than Portland Harbor currently or formerly owned or operated by us or at other sites where we may have responsibility for such costs due to past disposal or other activities. Storm water regulation and compliance is also the subject of regulatory oversight and has resulted and is expected in the future to result in increased operating costs and capital expenditures.in Risk Factorsof Portland Harbor and other environmental-related matters in Part I, Item 1A1A. Risk Factors and 9 –10 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report). In fiscal 2017,report.were $17of $35 million, $21 million, and $10 million in fiscal 2022, 2021, and 2020, respectively, and we expect to spend upin the range of $40 million to $20$50 million on capital expenditures related to environmental projects in fiscal 2018.Futureuncertain.uncertain, and the future of these programs or measures is unknown. Any adopted future climate change and GHG laws or regulations could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to or complying with such limitations.requirements. Furthermore, even without such laws or regulations, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the metals recycling and steel manufacturing industries could harm our reputation and reduce customer demand for our products.is alsoare expected to have an effect on the future price of transportation fuels, natural gas used in the manufacturing process including at our steel mill, and electricity, especially whenelectricity generated using carbon-based fuels. Since the electricity supply for CSSour steel mill includes a significant element of hydro-generated production CSS’swhich is not subject to GHG legislation and regulation, its energy costs are less likely to be impacted than those of competitors using electricity generated by carbon-based fuels. In addition, demand for scraprecycled metal may increase as a result offrom mills with blast furnaces seekingas they seek to maximize the scraprecycled metal component of raw material infeed, as melting scrap metal involveswhich requires less energy than is required for melting iron ore.12 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.SinceEAFsteel mill generates significantly less GHG emissions than traditional blast furnaces.deep waterdeepwater ports, significantly rising sea levels may disrupt our ability to receive scrap metal, process the scrap metal through our mega-shreddersshredders, and ship productproducts to our customers. Periods of extended adverse weather conditions may inhibit the supply ofconstruction activity utilizing our products, scrap metal inflows to AMR and CSS. In addition, sustained periods of increased temperature levels in the summer in areas where our recycling facilities, retail auto parts operations are located could result in less customer traffic, thus resulting in reduced admissions and parts sales.September 30, 2017,August 31, 2022, we had 3,1833,471 full-time employees, consisting745 of 2,464 employees at AMR, 546 employees at CSS and 173 corporate administrative and shared services employees. Of these employees, 665whom were covered by collective bargaining agreements. Of our full-time employees as of August 31, 2022, approximately 95% resided in the United States.Rolling Mills contract withand Scrap business from June 2017 until March 2020. Mr. Henderson was appointed Senior Vice President and President, Operations in March 2020.United SteelworkersAuto and Metals Recycling business from April 2015 until March 2020. Mr. Heiskell was appointed Senior Vice President and President, Recycling Products & Services in March 2020.America, which covers 2892014 through August of these employees,2022.renewedappointed Senior Vice President, Chief Human Resources Officer and ratifiedChief of Corporate Operations in March 2020.20162021 until August 2022. Mr. Schuessler was appointed Vice President and will expire on March 31, 2019. We believe that in general our labor relations are good.Chief Accounting Officer effective September 1, 2022.internetInternet website address is The content of our website is not incorporated by reference into this Annual Report on Form 10-K. We make available on our website, free of charge, under the caption “Investors – SEC Filings” our annual reportsreport on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after electronically filing with or furnishing such materials to the Securities and Exchange Commission (“SEC”) pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934.of distribution offor distributing material Company information. Financial and other material information regarding our Company is routinely posted on and accessible athttp://www.schnitzersteel.com/investors.aspx. In addition, youYou may automaticallyregister your e-mail under the caption “Investors – E-mail Alerts” to receive e-mail alerts and other information aboutnotifications of new company information.Companywebsite is not incorporated by visiting the “E-mail Alerts” section at http://www.schnitzersteel.com/investors.aspx and registering your email address.Environment”Environment,” and “Risk Factors Relating to Our Employees,” that could have a material adverse effect on our results of operations, financial condition, and cash flows or could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report. See “Forward-Looking Statements” that precedes Part I of this report. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may in the future have a material adverse effect on our results of operations, financial condition, and cash flows.EPAUnited States Environmental Protection Agency (“EPA”) under CERCLAthe Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) that we are one of the potentially responsible parties (“PRPs”) that owns or operates or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”). The precise nature and extent of any cleanup of the Site, the parties to be involved, the timing of any specific remedial action and the allocation of the costs for any cleanup among responsible parties have not yet been determined. The process of site investigation, remedy selection, identification of additional PRPs and allocation of costs has been underway for a number of years, but significant uncertainties remain. It is unclear to what extent we will be liable for environmental costs or natural resource damage claims or third party contribution or damage claims with respect to the Site.While we participated in certain preliminary Site study efforts, we were 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, we and certain other parties agreed to an interim settlement with the LWG under which we 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 ten 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.13 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.We have 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 Natural Resource Damages Trustee Council (“Trustees”) for Portland Harbor invited us and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. Following meetings among the Trustees and the PRPs, a funding and participation agreement was negotiated under which the participating PRPs agreed to fund the first phase of the natural resource damage assessment. We joined in that Phase I agreement and paid a portion of those costs. We did not participate in funding the second phase of the natural resource damage assessment.A former Trustee, the Confederated Tribes and Bands of the Yakama Nation, which withdrew from the council in 2009, filed a suit on January 30, 2017 against approximately 30 parties, including us, seeking reimbursement of certain past and future response costs in connection with remedial action at the Site and recovery of assessment costs related to natural resources damages from releases at and from the Site to the Multnomah Channel and the Lower Columbia River. We intend to defend against such claims and do not have sufficient information to determine the likelihood of a loss in this matter or to estimate the amount of damages being sought or the amount of such damages that could be allocated to us.Estimates of the cost of remedial action for the cleanup of the in-river portion of the Site in various drafts of the FS and in the EPA’s final FS issued in June 2016 have varied widely, from approximately $170 million to over $2.5 billion (net present value), depending on the remedy alternative and a number of other factors. In addition, we and certain other stakeholders have identified a number of serious concerns regarding the EPA's risk and remedial alternatives assessments and the EPA's cost estimates, scheduling assumptions and conclusions regarding the feasibility, effectiveness and assignment of remediation technologies, including that the EPA’s FS was based on data that are more than a decade old and may not accurately represent site or background conditions.the Site. The selected remedy is a modified version of one of the alternative remedies in the EPA’s FS that expands the scope of the cleanup and has an estimated cost which is significantly more than the Proposed Plan identified by the EPA in the final FS.Portland Harbor. The EPA has estimated the total cost of the selected remedy at $1.7 billion with a net present value cost of $1.05 billion (at a 7% discount rate) and an estimated construction period of 13 years following completion of the remedial designs. In the ROD, the EPA stated that the cost estimate is an order-of-magnitude engineering estimate that is expected to be within +50% to -30% of the actual project cost and that changes in the cost elements are likely to occur as a result of new information and data collected during the engineering design. We have identified a number of concerns regarding the EPA's estimatedThe ROD provided only site-wide cost estimates and time requireddid not provide sufficient detail to estimate costs for the selected remedy. Because of questions regarding cost-effectiveness and other concerns, such as technical feasibility, use of stale data and the need for new baseline data, it is uncertain whether the ROD will be implemented as issued.specific sediment management areas within Portland Harbor. In addition, the ROD doesdid not determine or allocate the responsibility for remediation costs.Incosts among the ROD, the EPA acknowledged that the assumptions used to estimate costsPRPs. Except for the selected remedy were developed based on the existing data and will be finalized during the remedial design, after design level data to refine the baseline conditionscertain early action projects in which we are obtained. Moreover, the ROD provides only Site-wide cost estimates and does not provide sufficient detail or ranges of certainty and finality to estimate costs for specific sediment management areas. Accordingly, the EPA has indicated and we anticipate that additional pre-remedial design investigative work, such as new baseline sampling and monitoring, will be conducted in order to provide a re-baseline and delineate particular remedial actions for specific areas within the Site. This re-baselining will need 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. The EPA is seeking a new coalition of PRPs to perform the re-baselining and remedial design activities. We are considering whether to become a party to a new Administrative Order on Consent to perform such pre-remedial design investigativeinvolved, remediation activities if an acceptable consent order can be finalized. We do not believe that our share of the costs of performing such work would be material, and we believe that such costs would be allocable and that they would be reimbursable under the insurance policies discussed below.Remediation activitiesat Portland Harbor are not expected to commence for a number of yearsyears. Moreover, those activities are expected to be sequenced, and responsibility for implementingthe order and funding the remedy will be determinedtiming of such sequencing has not been determined. We have joined with approximately 100 other PRPs in a separate allocation process. Whilevoluntary process to establish an allocation process is currently underway as discussed above,of costs at Portland Harbor. We expect the EPA's ROD has raised questions and uncertainty as to when and how that allocation process will proceed. We would not expectnext major stage of the allocation process to proceed until after additional pre-remedialin parallel with the remedial design dataprocess. In addition to the remedial action process overseen by the EPA, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) is collected.specific remediation actions that will be required,allocation among the amountPRPs of natural resource damages or how the costs of the investigations and any remedy and natural resource damages will be allocated among the PRPs,or remedial action costs, we believe it is not possible to reasonably estimate the amount or range of costs which we are likely to or which it is reasonably possible that we will incur in connection with the Site,Portland Harbor, although such costs could be material to our financial position, results of14 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.currently being developedevaluated 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,Portland Harbor, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs. We have insurance policies that we believe will provide reimbursement for costs we incur for defense, remediationremedial design, remedial action, and mitigation for or settlement of natural resource damages claims in connection with Portland Harbor. Most of these policies jointly insure us and MMGL, LLC (“MMGL”), an unaffiliated company, as the Site, although there is no assurance that thosesuccessor to a former subsidiary. We and MMGL have negotiated the settlement with certain insurers of claims against us related to Portland Harbor, continue to seek settlements with other insurers, and formed a Qualified Settlement Fund (“QSF”) which became operative in fiscal 2020 to hold such settlement amounts until funds are needed to pay or reimburse costs incurred by us and MMGL in connection with Portland Harbor. These insurance policies willand the funds in the QSF may not cover all of the costs which we may incur.the SitePortland Harbor could reduce the amount of our borrowing capacity that could otherwise be used for investment in capital expenditures, acquisitions, dividends, and share repurchases and acquisitions.repurchases. Any material liabilities or cash expenditures, net of recoveries, incurred in the future related to the SitePortland Harbor could result in our failure to maintain compliance with certain covenants in our debt agreements. See “Contingencies – Environmental” in Note 9 –10 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.residentialnonresidential and infrastructure construction in the U.S., are difficult to predict. The cyclical nature of our operations tends to reflect and be amplified by changes in economic conditions, both domestically and internationally, the effects of inflation, changes in interest rates, and foreign currency exchange fluctuations. TheIncreasing interest rates, both domestically and internationally, could lead to slowdowns in global investment and production, resulting in reduced generation of scrap and decreased demand for our products. For example, export net selling prices for recycled ferrous metal decreased by approximately $230 per ton, or approximately 40%, between May and June 2022, reflecting weaker demand primarily from slower global growth, including due to the impact of recent political events, such asChina COVID-19 lockdowns, inflationary pressure including high energy prices, the United Kingdom referendumstrength of the U.S. Dollar, and steel inventory destocking. Similarly, market demand for most recycled nonferrous metals softened beginning in May 2022 resulting in selling prices declining sharply for a period followed by a partial recovery near the end of fiscal 2022. In addition, in fiscal 2022, increasing inflation impacted our operating costs, including, but not limited to, exit the European Union declared in June 2016, on global economic conditions is currently uncertain.employee compensation costs and certain costs of production. Economic downturns or a prolonged period of slow growth in the U.S. and foreign markets or any of the industries in which we operate could have a material adverse effect on our results of operations, financial condition, and cash flows.Instabilityinternationalglobal markets including the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions may adversely affect our business,operating results, financial positioncondition, and results of operationstointo international markets is subject to a number of risks including adverse impacts of political, economic, military, terrorist, or major pandemic events; local labor and social issues; legal and regulatory requirements or limitations imposed by foreign governments including quotas, tariffs, or other protectionist trade barriers, sanctions, adverse tax law changes, nationalization, currency restrictions, or import restrictions for certain types of products we export; and disruptions or delays in shipments caused by customs compliance or other actions of government agencies.The scope ofRestrictions resulting from the National Sword initiative which could include import bansa ban on certain imported recycled products, is still being developed. Basedlower contamination limits for permitted recycled materials, and more comprehensive pre- and post-shipment inspection requirements. Disruptions in pre-inspection certifications and stringent inspection procedures at certain Chinese destination ports have limited access to these destinations and resulted in the renegotiation or cancellation of certain nonferrous customer contracts in connection with the redirection of such shipments to alternate destinations. Commencing July 1, 2019, China imposed further restrictions in the form of import license requirements and quotas on certain scrap products, including certain nonferrous products we sell. Chinese import licenses and quotas are issued to Chinese scrap consumers on a quarterly basis for the most current information available, weimportation of scrap products. Since the implementation of this program, the size of import quotas has been steadily reduced on a quarter-over-quarter basis. We have continued to sell our recycled metal products into China; however, additional or modified license requirements and quotas, as well as additional product quality requirements, may be issued in the future. We believe that athe potential impact on our recycling operations of the Chinese regulatory actions described above could include requirements that would necessitate additional processing and packaging of certain nonferrous recycled scrapnonferrous metal products, priorincreased inspection and certification activities with respect to exportexports to China, or a change in the use of our sales channels in the event of delays in the issuance of licenses, restrictive quotas, or an outright ban on certain or all of our recycled metals products by China. If necessary to address additionalAs regulatory developments progress, we may assess the potential forneed to make further investments in nonferrous processing equipment beyond existing planned investments where economically justified.The occurrence of such eventsjustified, incur additional costs in order to comply with new inspection requirements, or seek alternative markets for the impacted products, which may result in lower sales prices or higher costs and conditions may adversely affectimpact our business financial position andor results of operations.scraprecycled metal for our steel manufacturing operations, we rely on other suppliers for most of our raw material and other input needs, including inputs to steel production such as graphite electrodes, alloys, and other required consumables. Industry supply conditions generally involve risks, including the possibility of shortages of raw materials, increases in raw material and other input costs, and reduced control over delivery schedules. We procure our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metal to us. In periods of declining or lower scraprecycled metal prices such as the declining price environment we experienced in fiscal 2015 and the first half of fiscal 2016, suppliers may elect to hold scrap metal to wait for higher prices or intentionally slow their metal collection activities, tightening supply. If a substantial number of suppliers cease selling scrap metal to us, we will be unable to recycle metal at desired levels, and our results of operations and financial condition could be materially adversely affected. For instance, in the third quarter of fiscal 2020, a lower price environment for recycled metals in combination with economic and other restrictions on suppliers relating to COVID-19 severely constricted the supply of scrap metal including end-of-life vehicles, which resulted in significantly reduced processed volumes. A slowdown of industrial production in the U.S. may also reduce the supply of industrial grades of metal to the metals recycling industry, resulting in less recyclable metal available to process and market. Increased competition for domestic scrap metal, including as a result of overcapacity or consolidation in the scrapmetal recycling industry in the U.S. and Canada, may also reduce the supply of scrap metal available to us. Failure to obtain a steady supply of scraprecyclable material could both adversely impact our ability to meet sales commitments and reduce our operating margins. Failure to obtain an adequate supply of end-of-life vehicles, including due to increasing trends over time in the proportion of electric vehicles sold to total vehicles sold, the pace of and the auto recycling industry response to which are uncertain, could adversely impact our ability to attract customers and charge admission fees and reduce parts sales at our auto parts sales.stores. Failure to obtain raw materials and other inputs to steel production, such as alloys, graphite electrodes, alloys, and other required consumables, could adversely impact our ability to make steel to the specifications of our customers.152017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.scraprecycled metal prices may adversely impact our operating resultsscrap metal are subject to market forces beyond our control. For instance, in fiscal 2015 and the first half of fiscal 2016, scrap metal prices experienced a significant downward trend caused primarily by the weak macroeconomic conditions and global steel-making overcapacity, which was further exacerbated by the impact of lower iron ore prices, a raw material used in steel-making in blast furnaces which compete with EAF steel-making production that uses ferrous scrap as its primary feedstock. While we attempt to respond to changing recycled scrap metal selling prices through adjustments to our metal purchase prices, our ability to do so is limited by competitive and other market factors. As a result, we may not be able to reduce our metal purchase prices to fully offset a sharp reduction in recycled scrap metal sales prices, which may adversely impact our operating income and cash flows. In fiscal 2015 and the first half of fiscal 2016, lower demand for recycled scrap metal relative to demand and competition for supply of unprocessed scrap metal in the domestic market compressed operating margins due to selling prices decreasing at a faster rate than purchase prices for unprocessed scrap metal. In addition, a rapid decrease in selling prices may compress our operating margins due to the impact of average inventory cost accounting, which causes cost of goods sold recognized in the Consolidated Statements of Operations to decrease at a slower rate than metal purchase prices. For instance, in fiscal 2020, weaker market conditions for recycled metals, including as a result of the sharp decline in global economic conditions during the third quarter of fiscal 2020 in large part due to the impacts of the COVID-19 pandemic, and structural changes to the market for certain recycled nonferrous products primarily from Chinese import restrictions and tariffs, resulted in periods of sharply declining commodity prices and lower average net selling prices.recent years,the past, overcapacity and excess steel production in these foreign countries resulted in the export of aggressively priced semi-finished and finished steel products. This led to disruptions in steel-making operations within other countries, negatively impacting demand for our recycled scrap metal products used by EAF mills globally as their primary feedstock. Further, the import of foreign steel products into the U.S. at similarly aggressive prices have in the past adversely impacted finished steel sales prices and sales volumes at CSS.volumes. Existing or new trade laws and regulations may cause or be inadequate to prevent disadvantageous trade practices, which could have a material adverse effect on our financial condition and results of operations. Although trade regulations restrict or impose duties on the importation of certain products, if foreign steel production significantly exceeds consumption in those countries, global demand for our recycled scrap metal products could decline and imports of steel products into the U.S. could increase, resulting in lower volumes and selling prices for our recycled metal products and finished steel products.We have a substantial amountAs of August 31, 2022, we had $255 million of goodwill on our balance sheet, all of which was carried by a single reporting unit within AMR as of August 31, 2017.sheet. We test the goodwill balancebalances allocated to our reporting units for impairment on an annual basis and when events occur or circumstances change that indicate that the fair value of theone or more of our reporting unitunits with allocated goodwill may be below its carrying amount. When testing goodwill for impairment, we may be required to measure the fair value of the reporting unitunits in order to determine the amount of impairment, if any. Fair value determinations require considerable judgment and are sensitive to inherent uncertainties and changes in estimates and assumptions regarding revenue growth rates, operating margins, capital expenditures, working capital requirements, discount rates, tax rates, terminal growth rates, discount rates, benefits associated with a taxable transaction, and synergistic benefits available to market participants. DeclinesA lack of recovery or further deterioration in market conditions, a trend of weaker than anticipated financial performance for one of our single reporting unitunits with allocated goodwill, a decline in our share price for a sustained period of time, or an increase in the market-based weighted average cost of capital, among other factors, are indicators that the carrying value of our goodwill may not be recoverable. We may be required to record a goodwill impairment charge that, if incurred, could have a material adverse effect on our financial condition and results of operations. For example,See Note 8 - Goodwill and Other Intangible Assets, net in the second quarterNotes to the Consolidated Financial Statements in Part II, Item 8 of fiscal 2015, management identified a triggering event requiring an interim impairment test of goodwill, which resulted in impairment of a reporting unit's goodwill totaling $141 million, and in the second quarter of fiscal 2016, management identified a triggering event requiring an interim impairment test of goodwill, which resulted in impairment of a different reporting unit's goodwill totaling $9 million. Both of these impairment charges are reported within the results of AMR in this report.16 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.cost and equity method investments may adversely affect our operating resultsintangiblelease right-of-use assets associated with certain regional metals recycling operations and used auto parts store locationsstores in the amount of $8 million and $44 million during fiscal 2016 and 2015, respectively.2020. With respect to our investments in unconsolidated entities accounted for under the cost and equity methods,method, a loss in value of an investment thatis recognized when the decline is other than a temporary decline is recognized. Oncetemporary. With respect to our two equity investments that do not have readily determinable fair values, totaling $11 million as of August 31, 2022, we determine that an other-than-temporary impairment exists, we may incurwould recognize an impairment charge if our qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying value. Impairment of our equity investments could have a material adverse effect on our results of operations. We recorded impairment charges of $1 million and $2 million during fiscal 2017 and 2016, respectively, related to investments in joint ventures accounted for under the equity method. See Note 2 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further detail on long-lived asset and joint venture investment impairment charges.We have undertakenfurther reducing our annualcertain operating expenses through headcount reductions, reducing organizational layers, consolidating shared service functions, savings from procurement activities, streamlining of administrative and supporting services functions, and other non-headcount measures. For example, in fiscal 2020, we implemented productivity initiatives targeted to achieve $20 million in realized benefits in fiscal 2020 by reducing our annual operating expenses, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses, and other non-headcount measures. We may undertake similar or additional productivity initiatives in the future in the normal course or in response to market conditions. Our ability to achieve or sustain the anticipated cost reductions and other benefits from these initiatives within the expected time frame is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive, and other uncertainties, some of which are beyond our control. We incurred restructuring charges and other exit-related activities in fiscal 2017, 2016 and 2015 as a result of these initiatives.initiatives and may incur such charges in the future. Failure to achieve or sustain the expected cost reductions and other benefits related to these productivity improvements, cost savings, and restructuring initiatives could have a material adverse effect on our results of operations and cash flows.Acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequencesmake acquisitionsbe unable to renew facility leases, thus restricting our ability to operatecomplementary businessesour facilities, including the substantial majority of our auto parts facilities. The cost to enable usrenew such leases may increase significantly, and we may not be able to enhancerenew such leases on commercially reasonable terms or at all. Failure to renew these leases or find suitable alternative locations for our customer base and growfacilities may impact our revenues. Execution of any past or potential future acquisition involvesability to continue operations within certain geographic areas, which could have a number of risks, including:Difficulty integrating the acquired businesses’ personnel and operations;Potential loss of key employees or customers of the acquired business;Difficulties in realizing anticipated cost savings, efficiencies and synergies;Unexpected costs;Inaccurate assessment of or undisclosed liabilities;Inability to maintain uniform standards, controls and procedures; andDifficulty in managing growth.If we do not successfully executematerial adverse effect on acquisitions and the acquired businesses do not perform as projected, our financial condition, and results of operations, could be materially adversely affected.Although not considered normal course of business, inIn times of changing economic conditions, including during periods of sharply falling scraprecycled metal prices, such as those experienced in fiscal 2015 and the first half of fiscal 2016, there is an increased risk that customers may not be willing or able to fulfill their contractual obligations or open letters of credit. For example, in fiscal 2015, the resale or modification of the terms, each at significantly lower prices, of certain previously contracted bulk shipments had a $7 million negative impact on our operating results. As of August 31, 20172022 and 2016, 33%2021, 24% and 34%30%, respectively, of our trade accounts receivable balance were covered by letters of credit.17 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table In addition, in higher or rising commodity price environments and during periods of Contents SCHNITZER STEEL INDUSTRIES, INC.Increases in the valuechallenging global macroeconomic and steel industry conditions, we have experienced proportionately lower credit insurance coverage of the U.S. dollar relative to other currencies may reduce the demand for our productsA significant portion of our recycled scrap metal revenues is generated from sales to foreign customers, which are denominated in U.S. dollars, including customers located in Asia, Africa and Europe. A strengthening U.S. dollar, as experienced during fiscal 2015 and fiscal 2016, makes our products more expensive for non-U.S. customers,applicable customer credit limits, which may negatively impact export sales. A strengthening U.S. dollar also makes imported metal products less expensive, which may result in an increase in imports of steel products into the U.S. As a result, our finished steel products, which are made in the U.S., may become more expensive for our U.S. customers relativeexposure to imported steel products thereby reducing demand for our products.We are exposed to translation and transaction risks associated with fluctuations in foreign currency exchange rates Hedging instruments may not be effective in mitigating such risks and may expose us to losses or limit our potential gainsOur operations in Canada expose us to translation and transaction risks associated with fluctuations in foreign currency exchange rates as compared to the U.S. dollar, our reporting currency. As a result, we are subject to foreign currency exchange risks due to exchange rate movements in connection with the translation of the operating costs and the assets and liabilities of our foreign operations into our functional currency for inclusion in our Consolidated Financial Statements.We are also exposed to foreign currency exchange transactioncustomer credit risk. As part of our risk management program, we may use financial instruments, including foreign currency exchange forward contracts. While intended to reduce the effects of fluctuations in foreign currency exchange rates, these instruments may not be effective in reducing all risks related to such fluctuations and may limit our potential gains or expose us to losses. Although we do not enter into these instruments for trading purposes or speculation, and our management believes all such instruments are entered into as hedges of underlying physical transactions, these instruments are dependent on timely performance by our counterparties. Should our counterparties to such instruments or the sponsors of the exchanges through which these transactions are offered fail to honor their obligations due to financial distress or otherwise, we would be exposed to potential losses or the inability to recover anticipated gains from the transactions covered by these instruments.commitments or ceased lending.commitments. Failure to access our credit facilities could restrict our ability to fund operations, make capital expenditures, or execute acquisitions.facilityfacilities imposes certain restrictions on our business and contains financial covenantsa consolidated leverage ratio, and a consolidated asset coverageleverage ratio. Our ability to comply with these covenants may also be affected by events beyond our control, including prevailing economic, financial, and industry conditions. Our failure to comply with any of these restrictions or financial covenants could result in an event of default under the bank credit agreement and permit our lenders to cease lending to us and declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. This could require us to refinance our bank facilities, which we may not be able to do at terms acceptable to us, or at all. a significant amount of consolidation in the steel industry in recent years that has included steel mills acquiring steel fabricators to ensure demand for their products. If any of our steel mill'smill’s significant remaining customers were to be acquired by competing steel mills, this could reduce the demand for our products and force us to lower our prices, reducing our revenues, or to reduce production, which could increase our unit costs and have a material adverse effect on our financial condition and results of operations.18 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.Failure to realize expected benefits from investments in processing and manufacturing technology may impact our operating results and cash flowsWe make significant investments in processing and manufacturing technology improvements aimed at increasing the efficiency and capabilities of our businesses and to maximize our economies of scale. Failure to realize the anticipated benefits and generate adequate returns on such capital improvement projects may have a material adverse effect on our results of operations and cash flows.Reliance on third party shipping companies may restrict our ability to ship our productsWe generally rely on third parties to handle and transport raw materials to our production facilities and products to customers. Despite our practice of utilizing a diversified group of suppliers of transportation, factors beyond our control, including changes in fuel prices, political events, governmental regulation of transportation, changes in market rates, carrier availability, carrier bankruptcy, shipping industry consolidation and disruptions in transportation infrastructure, may adversely impact our ability to ship our products. These impacts could include delays or other disruptions in shipments in transit or third party shipping companies increasing their charges for transportation services or otherwise reducing or eliminating the availability of their vehicles or ships. As a result, we may not be able to transport our products in a timely and cost-effective manner, which could have a material adverse effect on our financial condition and results of operations and may harm our reputation.Equipment upgrades, equipment failures and facility damage may lead to production curtailments or shutdownsOur recycling and manufacturing processes depend on critical pieces of equipment, including shredders, nonferrous sorting technology, furnaces and a rolling mill, which may be out of service occasionally for scheduled upgrades or maintenance or as a result of unanticipated failures. Our facilities are subject to equipment failures and the risk of catastrophic loss due to unanticipated events such as fires, earthquakes, accidents or violent weather conditions. For instance, our metals recycling operations in Puerto Rico were briefly interrupted in September 2017 as a result of Hurricane Maria, although the damages to and losses incurred by the operations were not material. We have insurance to cover certain of the risks associated with equipment damage and resulting business interruption, but there are certain events that would not be covered by insurance and there can be no assurance that insurance will continue to be available on acceptable terms. Interruptions in our processing and production capabilities and shutdowns resulting from unanticipated events could have a material adverse effect on our financial condition, results of operations and cash flows. scrap metal shipped to consumers worldwide. Although we have invested in radiation detection equipment in the majority of our locations, including the facilities from which we ship directly to customers, failure to detect radioactive scrap metal remains a possibility. Even though we maintain insurance to address the risk of this failure in detection, there can be no assurance that the insurance coverage would be adequate or will continue to be available on acceptable terms. In addition, if we fail to meet contractual requirements for a product, we may be subject to product warranty costs and claims. These costs and claims could both have a material adverse effect on our financial condition and results of operations and harm our reputation.third partythird-party fatalities. A negativeAn outcome in an unusual or significant legal proceeding or compliance investigation in excess of insurance recoveries could adversely affect our financial condition and results of operations. For information regarding our current significant legal proceedings and contingencies, see “Legal Proceedings” in Part I, Item 3 and “Contingencies – Other” in Note 10 - Commitments and Contingencies in Part II, Item 8 of this report.19 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.deep waterdeepwater port facilities, changing storm patterns and intensities, and changing temperature levels. As many of our recycling facilities are located near deep waterdeepwater ports, rising sea levels may disrupt our ability to receive scrap metal, process the scrap metal through our mega-shreddersshredders, and ship products to our customers. PeriodsExtreme weather events and conditions, such as wildfires, hurricanes, thunderstorms, tornadoes, and snow or ice storms, may increase our costs or cause damage to our facilities, and any damage resulting from extreme weather may not be fully insured. Increased frequency and duration of extended adverse weather events and conditions may also inhibit the supply ofconstruction activity utilizing our products, scrap metal inflows to our recycling facilities, which could have an adverse effect on our sales or cause us to fail to meet our sales commitments. In addition, sustained periods of increased temperature levels in the summer in areas where our auto store operations are located could result in reduced customer traffic, thus resulting in lowerand retail admissions and parts sales.more likely than notmore-likely-than-not that they will be realized. If negative evidence outweighs positive evidence, a valuation allowance is required. Impairment of deferred tax assets may result from significant negative industry or economic trends, a decrease in earnings performance and projections of future taxable income, adverse changes in laws or regulations, and a variety of other factors. Impairment of deferred tax assets could have a material adverse impact on our results of operations and financial condition and could result in not realizing the deferred tax assets. In recent years,the past, we have recorded significant valuation allowances against our deferred tax assets, and our low annual effective tax rates in the fiscal years presented in this report are primarily the result of our full valuation allowance position.assets. Deferred tax assets generated in future periods may require further valuation allowances if it is not more likely than notmore-likely-than-not that the deferred tax assets will be realized.In many cases, suchSuch changes may put us at a competitive disadvantage compared to some of our major competitors, to the extent we are unable to pass the tax costs through to our customers.We face global cybersecurity risks and threats on a continual and ongoing basis. These risks and threats range from inadvertent release of sensitive information to sophisticated and targeted measures directed at us. treatment;discharge;Global climate change;Discharge,• andsafety.safety; and
•202017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.global climate change.Our operations use, handlegenerate hazardous substances. local regulators on metals recycling and auto dismantling facilities and new or expanding regulatory requirements. For example, the California Department of Toxic Substances Control (“DTSC”) has increased its enforcement actions and sought to impose additional permitting and regulatory requirements on the metals recycling industry in the state that has resulted in and could in the future increase operating and compliance costs and require additional capital expenditures. In addition, in July 2021, the EPA issued an enforcement alert reflecting a national enforcement initiative in conjunction with state regulators focused on Clean Air Act compliance at metal recycling facilities that operate auto and scrap metal shredders. While we believe we are an industry leader in air emission controls and have been working with state and local regulators on compliance and permitting matters, we have in the past and may in the future be subject to enforcement actions or litigation by regulators or private parties that could result in additional penalties, compliance requirements, or capital investments. See “Legal Proceedings” in Part I, Item 3 of this report.been found not to be in compliance with certain of these laws and regulations, and have incurred liabilities, expenditures, fines and penalties associated with such violations.violations of certain of these laws and regulations. In addition,December 2000, we were notified by the EPA that we are one of the potentially responsible parties that owns or operates, or formerly owned or operated, sites which are part of or adjacent to Portland Harbor. Further, we have been notified that we are or may be a potentially responsible party for actual or possible investigation and cleanup costs from historical contamination at sites other than Portland Harbor currently or formerly owned or operated by us or at other sites where we may have responsibility for such costs due to past disposal or other activities. Environmental compliance costs and potential environmental liabilities could have a material adverse effect on our financial condition, results of operations, and cash flows. See also the risk factor “Potential costs related to the environmental cleanup of Portland Harbor may be material to our financial position and liquidity” in this Item 1A.Governmental agencies may refuse1A and “Contingencies – Environmental” in Note 10 - Commitments and Contingencies in the Notes to grant or renew our licensesthe Consolidated Financial Statements in Part II, Item 8 of this report. permits, and we may be unable to renew facility leases, thus restricting our ability to operateWe conduct certain of our operations subject to licenses, permits and approvals from state and local governments. Governmental agencies often resistregulators are also emphasizing efforts to strengthen environmental compliance and enforcement, including with respect to clean-up actions under superfund and hazardous waste laws, in overburdened communities that may be disproportionately impacted by adverse health and environmental effects. On September 10, 2021, U.S. EPA Region 9 and the establishment of certain types of facilitiesCalifornia Environmental Protection Agency announced a joint effort to expand environmental enforcement in their communities,overburdened California communities. These initiatives could result in increased enforcement, compliance, and clean-up costs, including auto parts facilities. In addition, from time to time, both the U.S. and foreign governments impose regulations and restrictions on trade in the markets in which we operate. In some countries, governments can require us to apply for certificates or registration before allowing shipment of recycled metal to customers in those countries. There can be no assurance that future approvals, licenses and permits will be granted or that we will be able to maintain and renew the approvals, licenses and permits we currently hold. Failure to obtain these approvals could cause us to limit or discontinue operations in these locations or prevent us from developing or acquiring new facilities, which could have a material adverse effect on our financial condition and results of operations.We lease a significant portion ofincreased capital expenditures, at our facilities including the substantial majority of our auto parts facilities. Failure to renew these leases may impact our ability to continue operations within certain geographic areas, which could have a material adverse effect on our financial condition, results of operations and cash flows.newfuture climate change, greenhouse gas, and other air emission laws and regulations may adversely impact our operating resultsFuturesimilar futureother legislative or regulatory measuresrequirements are still uncertain and the future of these programs or measures is unknown. AnyFor example, in March 2020, the Governor of Oregon issued an executive order directing state agencies to take certain actions to reduce and regulate GHG emissions. Pursuant to this executive order, ODEQ adopted a new Climate Protection Program to limit GHG emissions in the state including from large stationary sources such as our steel mill. Pursuant to these regulations, the mill’s GHG process emissions will be subject to a best available emission reduction technology analysis and standard and its natural gas GHG combustion emissions will be subject to the cap and annual reductions applied to its natural gas supplier. The implementation of such regulations, standards, and programs and any associated costs, including any operating or capital expenditures, are uncertain, but may be material to our results of operations, cash flows, and financial position. The potential increased costs to us of natural gas supplies are also uncertain. In addition, the ODEQ Cleaner Air Oregon (“CAO”) program regulates toxic air emissions from manufacturing and commercial facilities located in Oregon. The ODEQ has published a prioritization list of the facilities within the state subject to the CAO program based on emissions inventories that facilities submitted to the ODEQ. The prioritization list established four tiers of risk groups. Our steel mill has been assigned to the first-tier risk group and entered the CAO program in 2020. To comply with the existing CAO program rules, and as they may be revised in the future, we must undertake an emissions inventory and a public health risk assessment. We may be required to incur additional operating or capital expenditures to mitigate any significant identified emissions risks, and such expenditures may be material. In addition, we have and continue to incur material capital expenditures to enclose and install additional emission controls for our shredders to meet air emission standards. Recent and future climate change and GHG laws or regulations could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to such limitations.requirements. Until the timing, scope, and extent of any future laws or regulations becomes known, we cannot predict the effect on our financial condition, operating performance, or ability to compete. Furthermore, even without such laws or regulations, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the metals recycling and steel manufacturing industries could harm our reputation and reduce customer demand for our products. See “Business - Environmental Matters” in Part I, Item 1 of this report for further detail. CSS steel manufacturing facility. As these agreements expire, we may not be able to negotiate extensions or replacements of such agreements on acceptable terms. Any failure to reach an agreement with one or more of our unions may result in strikes, lockouts, or other labor actions, including work slowdowns or stoppages, which could have a material adverse effect on our results of operations.212017Table of Contents SCHNITZER STEEL INDUSTRIES, INC. – - Employee Benefits in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report, we contribute to the Steelworkers Western Independent Shops Pension Plan (“WISPP”), a multiemployer plan benefiting union employees of CSS.our steel mill. Because we have no current intention of withdrawing from the WISPP, we have not recognized a withdrawal liability in our consolidated financial statements. However, if such a liability were triggered, it could have a material adverse effect on our results of operations, financial position, liquidity, and cash flows. Our contributions to the WISPP could also increase as a result of a diminished contribution base due to the insolvency or withdrawal of other employers who currently contribute to it, the inability or failure of withdrawing employers to pay their withdrawal liabilities, or other funding deficiencies, as we would need to fund the retirement obligations of these employers.as of October 1, 2016, the funded percentage (based on the ratio of the market value of assets to the accumulated benefits liability (present value of accrued benefits) using the valuation method prescribed by the IRS) was 76.4%, which satisfiesIRS satisfied the minimum funded percentage requirements of the IRS.222017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.including their total acreage,and location were as follows as of August 31, 2017:(2)Division Acreage Leased Owned Total Corporate offices – Domestic 1 — — — Auto and Metals Recycling: Administrative offices 3 — — — Collection and processing 31 47 445 492 Collection 4 5 14 19 Auto parts stores 49 583 166 749 17 47 160 207 Collection and processing 3 28 4 32 Collection 1 6 — 6 Auto parts stores 4 50 — 50 7 24 — 24 Cascade Scrap and Steel: Domestic: Steel mill and administrative offices 2 — 85 85 Collection and processing 3 — 98 98 Collection 2 — 8 8 2 — 50 50 Total company: Domestic 114 682 1,026 1,708 15 108 4 112 129 790 1,030 1,820 _____________________________(3)(1)We jointly own 36 acres in California at three of our sites and 19 acres in Indiana at one of our sites with minority interest partners.(2)All foreign facilities are located in Canada.(3)For long-lived assets by geography, see Note 18 – Segment Information in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.(4)Non-operating sites are comprised of owned and leased real properties, some of which are sublet to external parties.issues, and proceedings arising from accidents involving Company-owned vehicles, including Company tractor trailers.issues. For additional information regarding such matters, see Note 9 –10 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report. Except as described in such Note, we currently believe that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations, cash flows or business.23 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.$450,000$450 thousand cash payment, an additional $450,000$450 thousand in suspended payments to be waived upon completion of a shredder emission control system and certain other specified milestones, and $350,000$350 thousand in supplemental environmental projects that we have completed.The Alameda County District Attorney In fiscal 2021, the upgraded shredder emission control system became fully operational to design criteria, and the adjusted milestones for waiver of the suspended penalties were met.the latter(“COAG”), on behalf of certain state agencies, are jointly investigating alleged violations of environmental requirements, including but not limited to those related to hazardous waste management and water quality, at one of our operationsDTSC, filed suit in the California. We are currently engaged in extensive discussions with the governmental representatives concerning the nature, extent and schedule for implementationSuperior Court of various facility upgrades and remedial activities that have been completed or that are underway and are included in our capital expenditure budget and that we believewill resolve the underlying environmental concerns identified by the agencies. We have also continued to dispute certain of the allegations that have been raised and maintain that the operational practices giving rise to those allegations were in compliance with applicable laws. To date, no complaint has been filed by the District Attorney or the State of California, although we anticipate thatCounty of Fresno on June 25, 2020 against Schnitzer Fresno, Inc., a wholly-owned subsidiary, which operates the settlement of this matter will ultimately involvefacility, seeking a permanent injunction and civil penalties. In early 2022, the simultaneous filing of a complaint and a stipulation (settlement) that involves a commitmentparties agreed to complete agreed-upon actions, payment of a civil penalty, and reimbursementformal mediation of the agencies’dispute, which efforts remain underway. We have also filed a notice of defense to the corrective action enforcement costs. Completion of a Supplemental Environmental Project may offset some portionorder matter that by law stays the effectiveness of the penalty. The government has not yet presented a penalty demand or disclosed itsorder. If settlement efforts are unsuccessful, we also intend to challenge the order through the DTSC administrative process, both as to DTSC’s alleged jurisdictional basis for the March 2021 corrective action enforcement costs, but based on similar enforcement proceedingsorder, as well as the scope of work required by that have recently been concluded in the State of California and the government’s positive response to the facility improvements that have been completed or are underway,order. In either event, we do not believe that the potential penalty or enforcement costs associated with resolution of this enforcement proceedingthe Fresno matters will be material to our financial position, results of operations, cash flows, or liquidity.The California Office ofAttorney General has alsoCompany received a formal enforcement referral relating to another facility that we operate in California. This matter grew outfinding of an agency inspection of the facility and subsequent issuance of a Summary of Violations setting forth a number of alleged violations relating to hazardous waste management requirements. We were notified by the agency that our response to the Summary of Violations was not accepted and that the matter had been referred to the Attorney General. We are currently engaged in settlement discussions to resolve this matter. Based on the nature of the specific allegations and the fact that the activities in question were conducted several years ago and are not ongoing, as well as the settlement discussions to date and resolution of a similar enforcement proceeding that has recently been concluded in California, we do not believe the resolution of this threatened enforcement proceeding will be material to our financial position, results of operations, cash flows or liquidity.In addition, we were informed in late July 2017 that the New Hampshire Office of the Attorney General is contemplating bringing a civil action in connection with a legacy environmental issue at a closed facility in New Hampshire owned and previously operated by New England Metal Recycling LLC (NEMR), an indirectly wholly-owned subsidiary. This matter had been formally referred to the New Hampshire Office of Attorney General and relates to subsurface automotive shredder residue (ASR) located at the site that we discovered and self-reported in response to findings from a routine inspection of the site by the New Hampshire Department of Environmental Services (NHDES) in May 2015. It appears that this subsurface ASR dates back to 2006 or before and may have resultedviolation letter from the failureUnited States Environmental Protection Agency (“USEPA”) with respect to complete a corrective action plan in 2006, although a former NEMR employee reported at the time that the work had been completed. In April 2017, NEMR received a letter of deficiency allegingalleged violations of environmental requirements stemming from refrigerant recovery management program inspections at 12 of our facilities in the New England and Pacific Northwest regions in July 2017 and November 2017. Except with respect to a minor and now corrected non-compliance matter at one facility, we believe that we have fully complied with the relevant regulations. Nevertheless, in December 2017 and prior to receipt of the USEPA letter, we implemented improvements to our refrigerant recovery management program to further strengthen that program, including improvements to address concerns raised by USEPA during the inspections. We conferred with USEPA and the United States Department of Justice (“USDOJ”) regarding the alleged violations and reached agreement to settle this matter. On April 21, 2022, the USDOJ on behalf of the USEPA filed a Complaint and lodged a Consent Decree reflecting the terms of the agreed settlement with the United States District Court for the District of Massachusetts, which Consent Decree was entered as a final judgment by the Court on June 23, 2022. Pursuant to the Consent Decree, the Company agreed to settle the matter without admitting any liability with respect to the allegations in the Complaint for a civil penalty of $1.55 million, implementation of an approved enhanced refrigerant recovery management program, and execution of a R-12 refrigerant destruction mitigation project. The Company has implemented the USEPA approved enhanced refrigerant recovery management program at its metals recycling facilities and paid the civil penalty on July 18, 2022.characterizationNOV. In addition, the Company has completed installation of new VOC emissions controls that have achieved compliance with the BAAQMD emissions rule. Accordingly, the Company does not believe that federal enforcement of the BAAQMD rule or Title V permitting requirements is warranted.disposalstating that ODEQ had referred the matter to USEPA for review and possible formal enforcement. On April 25, 2022, the Company received an Information Request from USEPA, Region 10 under Section 114 of hazardous wastethe CAA with respect to both the Portland shredder facility and the Tacoma metal shredder facility owned and operated by a subsidiary of the Company. The Company has responded to the Information Request. In our response, we identified why Title V does not apply to the Portland and Tacoma facilities, explained that we had submitted an application to ODEQ in December 2018 for an Air Contaminant Discharge Permit for the Portland facility with plant site emission limits that would limit emissions to less than Title V thresholds, noted that the Tacoma facility operates pursuant to an Order of Approval issued by the Puget Sound Clean Air Agency, described that we were proactively enclosing the shredders and installing particulate and volatile organic compound controls at both facilities, and included information on the permit applications that had been submitted in connection with the subsurface ASR. Weenclosure and emission control projects. The Company does not believe that any enforcement action is warranted in this matter.continuingnow in place to workprevent recurrence. The Company is confident that any failure to comply with the NHDESCTMSR Regulation did not pose a risk to preparehuman health or the environment. On August 31, 2022, the DTSC issued an Inspection Report detailing alleged violations including allegations that the Company treated and implementstored metal shredder residue without a remedialpermit or other grant of authorization in violation of the California Hazardous Waste Control Law (“HWCL”). The Company had previously discussed with DTSC the various forms of authorization that would satisfy the CTMSR Regulation and had promptly obtained a Permit by Rule under the HCWL which it understood to be a satisfactory option. In a September 14, 2022 letter, the Company responded in detail to the alleged violations setting forth the corrective actions it has taken including having obtained interim status authorization for the treatment and storage of metal shredder residue under the permitting provisions of the HCWL with a full reservation of rights.planin the Superior Court of the State of California, County of Alameda against the BAAQMD as Respondent and have accruedthe Company as Real Party in Interest (the “BAAQMD Case”) alleging that the BAAQMD has failed to properly regulate the Company’s Oakland shredder facility under the federal and California Clean Air Acts and seeking an order requiring the BAAQMD to revoke the Company’s Permit to Operate for our expected costthe Oakland facility. On June 3, 2022, the BAAQMD removed this action to the United States District Court, Northern District of such work. We expectCalifornia where the A’s had previously filed an action against the Company on July 7, 2021 raising substantially similar issues under the federal Clean Air Act’s citizen suit provision alleging violations by the Oakland facility of the federal Clean Air Act and permit conditions and seeking declaratory and injunctive relief, which action is currently in discovery with a trial, if any, currently scheduled for October 2023. The BAAQMD Case was remanded back to enterAlameda Superior Court on October 7, 2022, and no schedule has yet been established for that case. settlement negotiations with the Alameda County District Attorney General’s Office priorand COAG to filingsettle certain alleged violations of any petitionenvironmental requirements at our Oakland metals recycling facility. The letters demanded that the Company take additional measures to address the off-site release and deposition of light fibrous material (“LFM”). The Company does not believe that it is in the event they proceed with an enforcement case. Based on the natureviolation of the specific allegationsConsent Order and has detailed the factadditional control measures that the activitiesCompany has implemented and continues to implement to reduce the potential for releases of LFM from its Oakland facility. The Company is in question were conducted over ten years ago, as well as our self-reporting ofcontinuing discussions with the COAG, the Alameda County District Attorney’s office, and DTSC regarding this matter and cooperation to date in pro-actively pursuing a remediation action plan, we dodoes not believe the resolution of this threatenedthat enforcement proceeding will be material to our financial position, results of operations, cash flows or liquidity.EXECUTIVE OFFICERS OF THE REGISTRANTInformation about our executive officers is incorporated by reference from Part III, Item 10 of this annual report.242017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.the NASDAQ Global SelectThe Nasdaq Stock Market LLC (“NASDAQ”) under the symbol SCHN. There were 192 149holders of record of Class A common stock on October 20, 2017.2022. Our Class A common stock has been trading since November 16, 1993. The following table sets forth the high and low trading stock prices reported on NASDAQ and the dividends paid per share for the periods indicated. Fiscal 2017 High Price Low Price Dividends Per Share First Quarter $ 30.33 $ 17.30 $ 0.1875 Second Quarter $ 30.60 $ 22.55 $ 0.1875 Third Quarter $ 25.00 $ 17.50 $ 0.1875 Fourth Quarter $ 27.70 $ 18.65 $ 0.1875 Fiscal 2016 High Price Low Price Dividends Per Share First Quarter $ 17.81 $ 12.64 $ 0.1875 Second Quarter $ 16.93 $ 11.70 $ 0.1875 Third Quarter $ 21.57 $ 14.49 $ 0.1875 Fourth Quarter $ 20.65 $ 14.83 $ 0.1875 Our Class B common stock is not publicly traded. There was one holder of record of Class B common stock on October 20, 2017.2006, we were2008, our Board of Directors had previously authorized tothe repurchase of up to 6nine million shares of our Class A common stock when management deems such repurchases to be appropriate. In November 2008,On June 27, 2022, our Board of Directors approvedauthorized a new share repurchase program of up to an increase in the shares authorized for repurchase by 3 million, to 9 million. As of the beginning of fiscal 2015, we had repurchased approximately 6.9additional three million shares of our Class A common stock. We may repurchase our common stock underfor a variety of reasons, such as to optimize our capital structure and to offset dilution related to share-based compensation arrangements. We consider several factors in determining whether to make share repurchases including, among other factors, our cash needs, the program.availability of funding, our future business plans, and the market price of our stock. We repurchased approximately 68944 thousand shares for a total of $1$34 million and 203in open-market transactions in fiscal 2022. We did not repurchase our common stock in fiscal 2021. We repurchased approximately 53 thousand shares for a total of $3$0.9 million in open-market transactions in fiscal 2015 and 2016, respectively. We did not repurchase any shares in fiscal 2017.2020. As of August 31, 2017,2022, there were approximately 1.82.8 million shares available for repurchase under the program. We evaluate long- and short-range forecasts as well as anticipated sources and usescash before determiningour share repurchases during the course of action that would best enhance shareholder value.Securities Authorized for Issuance under Equity Compensation PlansSee Note 14 - Share-Based Compensation in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for information regarding securities authorized for issuance under share-based compensation plans.25quarter ended August 31, 2022:
Shares Purchased
per Share
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
of Shares that may
yet be Purchased
Under the Plans
or Programs2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.comparescompare cumulative total shareholder return on our Class A common stock for the five-year period from September 1, 20122017 through August 31, 2017,2022, with the cumulative total return for the same period of (i) the S&P 500 Steel Index and (ii) the S&P Steel Index and (iii) the NASDAQ Composite600 Metals & Mining Index. These comparisons assume an investment of $100 at the commencement of the five-year period and that all dividends are reinvested. The stock performance outlined in the performance graph below is not necessarily indicative of our future performance, and we do not endorse any predictions as to future stock performance. Year Ended August 31, 2012 2013 2014 2015 2016 2017 $ 100 $ 94 $ 106 $ 69 $ 78 $ 116 NASDAQ 100 119 153 162 179 223 S&P 500 100 119 149 149 168 195 S&P Steel Index 100 99 125 97 108 123 _____________________________(1)Because we operate in two distinct but related businesses, we have no direct market peer issuers.262017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.ITEM 6. SELECTED FINANCIAL DATAThe following table sets forth selected consolidated financial data for each of the five years in the period ended August 31, 2017. The selected consolidated financial data presented below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Part II, Item 7 of this Annual Report on Form 10-K and the consolidated financial statements and the accompanying notes set forth in Part II, Item 8 of this Annual Report on Form 10-K. Year Ended August 31, 2017 2016 2015 2014 2013 STATEMENT OF OPERATIONS DATA: (in thousands, except per share and dividend data) Revenues $ 1,687,591 $ 1,352,543 $ 1,915,399 $ 2,534,926 $ 2,616,792 $ 56,013 $ (7,842 ) $ (195,529 ) $ 24,364 $ (323,178 ) Income (loss) from continuing operations $ 47,368 $ (16,240 ) $ (187,849 ) $ 12,400 $ (275,781 ) $ (390 ) $ (1,348 ) $ (7,227 ) $ (2,809 ) $ (4,242 ) Net income (loss) attributable to SSI $ 44,511 $ (19,409 ) $ (197,009 ) $ 5,924 $ (281,442 ) Income (loss) per share from continuing operations attributable to SSI (diluted) $ 1.60 $ (0.66 ) $ (7.03 ) $ 0.32 $ (10.40 ) Net income (loss) per share attributable to SSI (diluted) $ 1.58 $ (0.71 ) $ (7.29 ) $ 0.22 $ (10.56 ) Dividends declared per common share $ 0.750 $ 0.750 $ 0.750 $ 0.750 $ 0.750 OTHER DATA: 3,145 2,899 3,186 3,591 3,666 AMR recycled nonferrous metal (pounds) 540,791 473,737 539,850 563,530 528,846 CSS finished steel products (tons) 496 488 540 533 488 AMR recycled ferrous metal (per ton) $ 242 $ 193 $ 264 $ 347 $ 351 AMR recycled nonferrous metal (per pound) $ 0.63 $ 0.60 $ 0.74 $ 0.82 $ 0.89 CSS finished steel products (per ton) $ 534 $ 522 $ 639 $ 677 $ 680 August 31, 2017 2016 2015 2014 2013 BALANCE SHEET DATA (in thousands): Total assets $ 933,755 $ 891,429 $ 962,299 $ 1,355,210 $ 1,405,512 Long-term debt, net of current maturities $ 144,403 $ 184,144 $ 227,572 $ 318,842 $ 372,663 _____________________________(1)Operating income in fiscal 2017 includes other asset impairment charges (recoveries), net, of $(1) million and a net gain from restructuring charges and other exit-related activities of less than $1 million. Operating loss in fiscal 2016 includes a goodwill impairment charge of $9 million, other asset impairment charges of $21 million, and restructuring charges and other exit-related activities of $7 million. Operating loss in fiscal 2015 includes a goodwill impairment charge of $141 million, other asset impairment charges of $45 million, and restructuring charges and other exit-related activities of $13 million. Operating income in fiscal 2014 includes other asset impairment charges of $1 million and restructuring charges and other exit-related activities of $7 million. Operating loss in fiscal 2013 includes a goodwill impairment charge of $321 million, other asset impairment charges of $13 million and restructuring charges and other exit-related activities of $8 million.(2)In fiscal 2015, the Company ceased operations at seven auto parts stores, six of which qualified for discontinued operations reporting and whose results have been removed from other data for all periods presented, as applicable. In fiscal 2014, the Company also released an environmental liability of $1 million associated with operations disposed in fiscal 2010. See Note 8 - Discontinued Operations in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion.(3)Tons for recycled ferrous metal are long tons (2,240 pounds) and for finished steel products are short tons (2,000 pounds).(4)The Company sold to external customers or delivered to its steel mill an aggregate of 3,628 thousand, 3,289 thousand, 3,708 thousand, 4,309 thousand, and 4,506 thousand tons of ferrous recycled scrap metal in fiscal 2017, 2016, 2015, 2014 and 2013, respectively. Company-wide ferrous volumes include total ferrous sales volumes for AMR, ferrous tons sold externally by CSS, and ferrous tons delivered by CSS's metals recycling operations to its steel mill, net of inter-segment eliminations.(5)In accordance with generally accepted accounting principles, the Company reports revenues that include amounts billed for freight to customers; however, average net selling prices are shown net of amounts billed for freight.27 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.three fiscal years ended 2017, 2016,2022 and 2015.2021. The following discussion and analysis providesprovide information which management believes is relevant to an assessment and understanding of our financial condition and results of operations and financial condition.operations. The discussion should be read in conjunction with the Consolidated Financial Statements and the related notesNotes thereto included in Part II, Item 8 of this report and the Selected Financial Data contained inreport.67. Management's Discussion and Analysis of this report.We arescrap metal, including end-of-life vehicles, and a manufacturer of finished steel products.Prior As a vertically integrated organization, we offer a range of products and services to the fourth quarter of fiscal 2017,meet global demand through our network that includes 51 retail self-service auto parts stores, 54 metals recycling facilities, and an electric arc furnace (“EAF”) steel mill. Our internal organizational and reporting structure supported twoincludes a single operating and reportable segments: the Autosegment.Metals Recycling ("AMR") businessnonferrous metal in both foreign and the Steel Manufacturing Business ("SMB"). In the fourth quarterdomestic markets. We also sell a range of fiscal 2017, in accordance with our plan announced in June 2017, we modified our internal organizational and reporting structure to combinefinished steel long products produced at our steel manufacturing operations, which had been reported as our SMB segment, with our Oregon metals recycling operations, which had been reported within our AMR segment, forming a new division named Cascade Steel and Scrap ("CSS"). The Oregon metals recycling operations include our shredding and export facilities in Portland, Oregon, and also include four metals recycling feeder yard operations located in Oregon and Southern Washington and one metals recycling joint venture ownership interest. The Oregon metals recycling operations source substantially all of the scrap raw material needs of our steel manufacturing operations. This change in organizational structure is intended to enhance our flexibility, generate internal synergies, and enable us to more effectively adjust to market changes across our recycling and steel manufacturing operations. We began reporting on this new segment structure in the fourth quarter of fiscal 2017 as reflected in this Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform to the current period presentation for all activities of the reorganized segments. Recasting this historical information did not have an impact on the consolidated financial performance of SSI for any of the periods presented.We use operating income to measure our segment performance. Restructuring charges and other exit-related activities are not allocated to segment operating income because we do not include this information in our measurement of the segments’ performance. Expense related to shared services that support operational activities and transactions is allocated from Corporate to the segments. Unallocated Corporate expense consists primarily of expense for management and certain administrative services that benefit both segments. 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. See Note 18 – Segment Information in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for a discussion of the primary activities of each reportable segment, total assets by reportable segment, operating results from continuing operations, revenues from external customers and concentration of sales to foreign countries.income.results. We believe we generally benefit from sustained periods of stable or rising recycled scrap metal selling prices, which allow us to better maintain or increase both operating incomeresults and unprocessed scrap metal flow into our facilities. When recycled scrap metal selling prices decline, either sharply or for a sustained period, our operating margins typically compress.Our deep water port facilities on both the East and West Coasts of the United States (in Everett, Massachusetts; Providence, Rhode Island; Oakland, California; Tacoma, Washington; and Portland, Oregon) and access With respect to public deep water port facilities (in Kapolei, Hawaii; and Salinas, Puerto Rico) allow us to efficiently meet the global demand for recycled ferrous metal by shipping bulk cargoes tofinished steel manufacturers located in Europe, Africa, the Middle East, Asia, and North, Central and South America. Our exports of nonferrous recycled metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers and wire and cable producers globally. We also transport both ferrous and nonferrous metals by truck, rail and barge in order to transfer scrap metal between our facilities for further processing, to load shipmentsproducts produced at our export facilitiessteel mill, our results of operations are impacted by demand and prices for these products, which are sold to meet regional domestic demand. recycled metal and finished steel products, the supply of scrap metal in our domestic markets, and varying demand for used auto parts from our self-service retail stores. TheseCertain of these factors are influenced, to a degree, by the impact of seasonal changes including severe weather conditions, which can impact the timing of shipments and inhibit construction activity utilizing our products, scrap metal collection and production levels at our facilities, and retail admissions and parts sales at our auto parts stores.28 Further, sanctions, trade actions, and licensing and inspection requirements can impact the level of profitability on sales of our products and, in certain cases, impede or restrict our ability to sell to certain export markets or require us to direct our sales to alternative market destinations, which can cause our quarterly operating results to fluctuate.2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.deep waterdeepwater ports and ground-based logistics network to directly access customers domestically and internationally to meet demand for our products wherever it is greatest; andplatformplatforms to maximize opportunities for synergies, cost efficiencies, and volumes;volumes.Continuous improvement initiatives to increase production efficiency, enhance effectiveness in our commercial activities and reduce operating expense;Technology and process improvement investments to increase the separation and recovery of recycled materials from our shredding process and to generate more value-added products; andIncrease market share through initiatives to maximize volumes and through selective partnerships, alliances and acquisitions.Our auto parts stores are key suppliers to our metal recycling facilities, and we look to enhance the geographic proximity of operations among those facilities. We have a recycling presence in the Northwestern U.S., in Northern California and in the Northeastern U.S., near our export facilities in Tacoma, Washington, Portland, Oregon, Oakland, California and Everett, Massachusetts, which enhances our access to regional supplies of scrap metal and end-of-life vehicles.In fiscal 2015, we initiated and implemented restructuring initiatives consisting of idling underutilized metals recycling assets, including a shredder in Johnston, Rhode Island and another shredder in Surrey, British Columbia, and closing seven auto parts stores at AMR to more closely align our business to market conditions. Additional cost savings and productivity improvement initiatives, including adjustments to our operating capacity through additional facility closures, were identified and initiated in fiscal 2016. Facility closures in fiscal 2016 included a small shredding facility in Concord, New Hampshire. Six of the auto parts stores closed in fiscal 2015 qualified for discontinued operations reporting beginning in fiscal 2015. See Note 8 - Discontinued Operations and Note 10 - Restructuring Charges and Other Exit-Related Activities in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report. and the availability and price of raw material alternatives, and trade actions such as tariffs affect market prices for and sales volumes of recycled ferrous and nonferrous metal in global markets and steel products in the Western U.S. and Western Canada and can have a significant impact on the results of operations for our reportable segments.Commencing in fiscal 2012 and spanning throughoperations.halfeight months of fiscal 2016, our markets were adversely impacted2022 through April, market demand for recycled ferrous metals was strong, with selling prices reaching multi-year highs in early spring before declining rapidly and steeply in May through June of 2022. Export net selling prices for recycled ferrous metal decreased by a slowdownapproximately $230 per ton, or approximately 40%, between May and June 2022, reflecting weaker demand primarily from slower global growth, including due to the impact of economic activity globally. The macroeconomic uncertainty, combined with global steel-making overproduction and a strengtheningChina COVID-19 lockdowns, inflationary pressure including high energy prices, the strength of the U.S. dollar had resultedDollar, and steel inventory destocking. Similarly, market demand for most recycled nonferrous metals was also strong during the first eight months of fiscal 2022 before softening, resulting in deteriorating marketselling prices declining sharply for a period followed by a partial recovery near the end of fiscal 2022.forthat occurred in fiscal 2020 in large part due to the impacts of the COVID-19 pandemic reflected among other things the curtailment of many commercial and government-sponsored activities using steel and other metal materials, causing metal commodity prices to decrease sharply and widespread destocking of inventories. As global steel manufacturerseconomies revived and volatile pricing swings. The weak price environmentcommercial and investment activities resumed, including throughout fiscal 2021, continuing into fiscal 2022, demand for recycled metals in fiscal 2015 and the first half of fiscal 2016 was exacerbated by a decline in iron ore prices, a raw material used in steel-making blast furnaces which compete with EAF mills that use ferrous scrap metal as their primary feedstock. Low-priced steel billets which use iron ore as their primary raw material, and which are direct substitutes for ferrous scrap metal in the manufacture of finished steel increased substantially, which contributed to periods of sharp increases in market selling prices for these products during those periods. Further, increased focus on decarbonization strategies by governments and businesses around the world, including investments in infrastructure and technologies that minimize carbon dioxide emissions from the use of fossil fuels, among other factors, also contributed to lower scrap metalstrong demand and pricesfor most of our products during these years. The low economic growth in the U.S.periods and the lower scrap metal price environment contributed to constrained scrap flows in the domestic supply marketssupport global long-term demand for recycled ferrous and nonferrous metal. Average selling prices for our finished steel products, which led to significantly lower marginsare produced in our AMR business duringsteel mill using EAF technology, increased by 46% compared to the prior fiscal 2015 and the first half of fiscal 2016 beforeyear, reflecting robust market demand for these products including record-high selling prices and margins recoveredthat peaked during the second half of fiscal 2016. In fiscal 2017, the combination of improved U.S. and global economic growth and lower Chinese steel exports driven by higher domestic demand and reductions in less efficient steel-making capacity contributed to improved demand and prices for ferrous recycled scrap metal, positively impacting our operating results.292022.2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.Our operating resultsfiscal 2017 benefitedMcMinnville, Oregon. Direct physical loss or damage to property from improved market conditions, increased sales diversification, improved supply volumes, expanded nonferrous metal recovery, and additional benefits from our multi-year cost reduction and productivity improvement measures comparedthe incident was limited to the prior two years.mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. The higher price environmentrolling mill production ceased in early June 2021. In August 2021, our steel mill began ramping up operations following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. We experienced the loss of business income during the shutdown of the steel mill and the subsequent ramp-up phase which was substantially completed during the second quarter of fiscal 2022. We have insurance that we believe is fully applicable to the losses and have filed initial insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for scrap metalthe property that experienced physical loss or damage and business income losses resulting from the matter. The property damage deductible under the policies insuring our assets in this matter is $1 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. As of August 31, 2021, prepaid expenses and other current assets on the Consolidated Balance Sheets included an initial $10 million insurance receivable recognized in the fourth quarter of fiscal 2021, primarily offsetting applicable losses including capital purchases of $10 million that we had incurred as of August 31, 2021. In fiscal 2022, we increased the amount of this insurance receivable to $25 million and recognized a related $15 million insurance recovery gain within cost of goods sold on the Consolidated Statements of Operations, reflecting recovery of applicable losses incurred as a result of the fire to date. In addition, during fiscal 2017 together2022, we received advance payments from insurers totaling approximately $30 million towards our claims, and not reflecting any final or full settlement of claims with benefitsthe insurers, which amount reduced the $25 million insurance receivable to zero with the remaining amount of advance payments of $5 million reported within other accrued liabilities on the Consolidated Balance Sheets as of August 31, 2022. These amounts do not reflect potential additional recoveries of business income losses resulting from commercial initiatives to improve supply channels and an improved trend in U.S. economic conditions led to an increasethis matter that may be recognized in the supplyfuture when settlements of scrap metalthe business interruption claims are resolved.our domestic market, including end-of-life vehicles, resulting in higher processed volumes comparedEverett, Massachusetts. Direct physical loss or damage to fiscal 2016. The higher price environment also positively impactedproperty from the spread between direct purchase costs and selling prices of ferrous recycled metal comparedincident was limited to the facility’s shredder building and equipment, with no bodily injuries and no physical loss or damage to property reported at other buildings or equipment. As a result of the fire, shredding operations ceased, while all non-shredding operations at the facility continued, including torching, shearing, separating, and sorting purchased non-shreddable recycled ferrous metals. On January 28, 2022, shredding operations at the facility began ramping up following the replacement and repairs to shredder equipment that had been damaged. Completion of the remainder of repair and replacement of property that experienced physical loss or damage, primarily buildings and improvements, will occur over a longer period and impacts on business income may continue. For example, as of June 18, 2022, shredder operations temporarily ceased at the facility pending completion of discussions with the Massachusetts Department of Environmental Protection and the Massachusetts Attorney General's office regarding installation and operation of temporary emission capture and controls that would allow operation of the shredder prior year.Executive Overviewto completion of Financial Resultsgenerated consolidated revenueshave insurance that we believe is fully applicable to the losses, including but not limited to the costs of $1.7 billion in fiscal 2017, an increaseinstalling the temporary capture and controls system and any associated loss of 25%business income, and have filed initial insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property damage or loss and business income losses resulting from the $1.4 billionmatter. The property damage deductible under the policies insuring our assets in this matter is $0.5 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. The insurance claims resolution process may extend significantly beyond completion of consolidated revenues generated inrepair and replacement of the physical plant property that experienced physical loss or damage and the restart of production activities. In fiscal 2016, primarily due to improved market conditions for recycled metals2022, we recognized an aggregate $17 million insurance receivable and related insurance recovery gain, reported within prepaid expenses and other current assets in the domesticConsolidated Balance Sheets and export markets resulting in higher average net selling prices and increased sales volumes compared to the prior year, including benefits from increased sales diversification.Consolidated operating income was $56 million in fiscal 2017, compared to consolidated operating losswithin cost of $8 million in fiscal 2016. Adjusted consolidated operating income in fiscal 2017 was $54 million, compared to $28 milliongoods sold in the prior year. Adjusted results in fiscal 2017 exclude net recoveries on previously impaired assetsConsolidated Statement of $1Income, respectively, reflecting recovery of applicable losses including impairment charges of $7 million a net gain from restructuring and exit-related activities of less than $1 million, and recoveries related to the resalecarrying value of plant and equipment assets lost in or modificationdamaged by the fire and initial capital purchases, non-capitalizable repair and replacement costs, and other applicable losses totaling $10 million that we had incurred as of previously contracted shipmentsAugust 31, 2022. Also during fiscal 2022, we received advance payments from insurers totaling approximately $7 million towards our claims, and not reflecting any final or full settlement of $1 million. Adjusted resultsclaims with the insurers, which amount reduced the insurance receivable to $10 million as of August 31, 2022. These amounts do not reflect potential additional recoveries of costs for the repair and replacement of property that experienced physical loss or damage or of business income losses resulting from this matter that may be recognized in fiscal 2016 excludethe future when settlements of the claims are resolved.goodwill impairment chargecompany operating in a critical infrastructure industry, as defined by the U.S. Department of $9 million, other asset impairmentHomeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our fiscal 2020 results, global economic conditions improved beginning in fiscal 2021 and continued to improve through most of fiscal 2022. However, there are ongoing global impacts resulting directly or indirectly from the pandemic including labor shortages, logistical challenges such as increased port congestion, and increases in costs for certain goods and services, which have negatively impacted our sales volumes, operating costs, and financial results to varying degrees. The ongoing effects of the COVID-19 pandemic could negatively impact our results of operations, cash flows, and financial position in the future.$21 million,recoveries), business development costs not related to ongoing operations including pre-acquisition expenses, restructuring charges and other exit-related activities, of $7 million, and recoveriescharges related to the resale or modification of previously contracted shipments of $1 million.non-ordinary course legal settlements, asset impairment charges, and other items which are not related to underlying business operational performance. See the reconciliationreconciliations of supplemental financial measures, including adjusted consolidated operating income (loss)EBITDA, in Non-GAAP Financial Measures at the end of this Item 7.Operating•2017 benefited from better market conditions, increased sales diversification, improved supply volumes, expanded nonferrous metal recovery, and additional2022 reflected benefits from cost savings and productivity improvement initiatives compared to fiscal 2016. Thethe higher price environment for scrapmost of our products including a significant expansion in our ferrous metal in fiscal 2017 together with benefits from commercial initiatives to improve supply channels and an improved trend in U.S. economic conditions also led to an increase in the supply of scrap metal, including end-of-life vehicles, resulting in higher processedfinished steel spreads and increased ferrous and nonferrous sales volumes and improved operating results, primarily at AMR, compared to the prior fiscal year. The stronger price environment also positively impacted the spread between direct purchase costs and selling prices of ferrous recycled metal at AMR, with the metal spread for fiscal 2017 expanding by approximately 10% compared to the prior year. OperatingOur results in fiscal 2016 were adversely impacted by a lower price environment which included sharp declines in commodity selling prices during the first half of fiscal 2016 resulting in2022 also reflected an unfavorable impact from average inventory accounting due to the sharp decline in selling prices for recycled metals during the year. This comparessecond half of the fiscal year compared to a favorable impact from average inventory accounting in fiscal 2017 which, relative to performance benefits from other drivers, was not a major contributor to the improvement in operating results year over year. CSS's operating results improved, with operating income of just over $5 million for fiscal 2017, compared to just under $5 million for the prior year. CSS's operating results included a net recovery on previously impaired assets of $1 million in fiscal 2017, comparedyear, disruptions due to asset impairments of $4 million in fiscal 2016. The benefitsan extended shredding operation outage at our Everett facility to CSS from higher finished steel selling prices and sales volumes in fiscal 2017 were more than offsetreplace equipment damaged by continued pressure from low-priced imports and the adverseDecember 2021 fire, the impact of the downtime and costs associated with major equipment upgrades at ourramp-up of steel mill operations that began in August 2021 and which was substantially completed during the firstsecond quarter, the effects of fiscal 2017.Operating results in fiscal 2016 were also adversely impacted by a non-cash goodwill impairment chargeongoing supply chain disruptions, lower year-over-year platinum group metals (“PGM”) prices, and the impact of $9 million in a reporting unit within AMR and non-cash other asset impairment charges of $21 million primarily at AMR. See Results of Operations, Asset Impairment Charges (Recoveries), net in this Item 7 for further details on asset impairment charges.Consolidated selling, general and administrative ("SG&A") expense in fiscal 2017 increased by $23 million, or 15%, compared to the prior year primarily due to higher employee-related expenses, including an increase in incentive compensation accruals resultinginflation. Contributions from improved financial performance, other expenses related to higher volumes, and increased environmental liabilities. This increase was partially offset by incremental benefits from cost savings and productivity improvement measures. SG&A expense in fiscal 2016 included a $6 million benefit from an insurance reimbursement.In recent years, we implemented a number of cost reduction and productivity improvement measures to more closely align our business to market conditions. The combined benefit of the measures initiated since the beginning of fiscal 2015 represents a targeted annual improvement to operating performance of approximately $95 million. In fiscal 2017, we achieved the full $95 million in combined benefits related to these measures, compared to $78 million and $28 million of benefits in fiscal 2016 and 2015, respectively. In total, we have achieved approximately $160 million in combined annual benefits to operating performance since announcing the initial phase of these cost savingsacquisitions and productivity initiatives athelped to partially offset the endeffects of fiscal 2012. Charges incurred in connection with the foregoing initiatives are discussed in Results of Operations, Restructuring Charges and Other Exit-Related Activities in this Item 7.30 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.Net income from continuing operations attributable to SSI in fiscal 2017 was $45 million, or $1.60 per diluted share, compared to net loss from continuing operations attributable to SSI of $18 million, or $(0.66) per diluted share, in the prior year. Adjusted net income from continuing operations attributable to SSI in fiscal 2017 was $43 million, or $1.53 per diluted share, compared to $19 million, or $0.69 per diluted share, in the prior year. See the reconciliation of adjusted net income (loss) from continuing operations attributable to SSI in Non-GAAP Financial Measures at the end of this Item 7.$100$238 million in fiscal 2017,2022, compared to $99$190 million in the prior year;fiscal year.of $145was $249 million as of August 31, 2017,2022, compared to $193 million as of the prior year-end; andDebt, net of cash, of $138$75 million as of August 31, 2017, compared to $1662021.prior year-end (see the reconciliationreconciliations of adjusted diluted earnings (loss) per share from continuing operations attributable to SSI shareholders, adjusted EBITDA, and debt, net of cash in Non-GAAP Financial Measures at the end of this Item 7).317.2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC. For the Year Ended August 31, % Increase / (Decrease) ($ in thousands) 2017 2016 2015 2017 vs 2016 2016 vs 2015 Revenues: Auto and Metals Recycling $ 1,363,618 $ 1,060,592 $ 1,513,315 29 % (30 )% Cascade Steel and Scrap 339,620 304,032 435,113 12 % (30 )% (15,647 ) (12,081 ) (33,029 ) 30 % (63 )% Total revenues 1,687,591 1,352,543 1,915,399 25 % (29 )% Cost of goods sold: Auto and Metals Recycling 1,158,154 905,863 1,372,456 28 % (34 )% Cascade Steel and Scrap 322,013 283,006 402,374 14 % (30 )% (15,659 ) (12,881 ) (32,152 ) 22 % (60 )% Total cost of goods sold 1,464,508 1,175,988 1,742,678 25 % (33 )% Selling, general and administrative expense: Auto and Metals Recycling 116,461 106,691 122,279 9 % (13 )% Cascade Steel and Scrap 14,321 12,571 12,998 14 % (3 )% 40,788 29,646 35,315 38 % (16 )% Total selling, general and administrative expense 171,570 148,908 170,592 15 % (13 )% (Income) from joint ventures: Auto and Metals Recycling (2,218 ) (386 ) (696 ) 475 % (45 )% Cascade Steel and Scrap (1,456 ) (433 ) (794 ) 236 % (45 )% Total (income) from joint ventures (3,674 ) (819 ) (1,490 ) 349 % (45 )% Goodwill impairment charges: Auto and Metals Recycling — 8,845 141,021 NM (94 )% Other asset impairment charges (recoveries), net: Auto and Metals Recycling (184 ) 16,411 44,374 NM (63 )% Cascade Steel and Scrap (533 ) 4,192 — NM NM Corporate — 79 745 NM (89 )% Total other asset impairment charges (recoveries), net (717 ) 20,682 45,119 NM (54 )% Operating income (loss): Auto and Metals Recycling 91,405 23,168 (166,119 ) 295 % (114 )% Cascade Steel and Scrap 5,275 4,696 20,535 12 % (77 )% Segment operating income (loss) 96,680 27,864 (145,584 ) 247 % (119 )% 109 (6,781 ) (13,008 ) NM (48 )% (40,788 ) (29,725 ) (36,060 ) 37 % (18 )% 12 800 (877 ) (99 )% NM Total operating income (loss) $ 56,013 $ (7,842 ) $ (195,529 ) NM (96 )% _____________________________ (1)AMR sells a small portion of its recycled ferrous metal to CSS at prices that approximate local market rates. These intercompany revenues and cost of goods sold are eliminated in consolidation.(2)Corporate expense consists primarily of unallocated expenses for management and certain administrative services that benefit both reportable segments.(3)Restructuring charges consist of expense for severance, contract termination and other restructuring costs that management does not include in its measurement of the performance of the reportable segments. Other exit-related activities consist of asset impairments and accelerated depreciation, net of gains on exit-related disposals, related to site closures.(4)Intercompany profits are not recognized until the finished products are sold to third parties; therefore, intercompany profit is eliminated while the products remain in inventory.32 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.We operate our business across two reportable segments: AMR and CSS. Additional financial information relating to these reportable segments is contained in Note 18 - Segment Information in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.Auto and Metals Recycling For the Year Ended August 31, % Increase / (Decrease) ($ in thousands, except for prices) 2017 2016 2015 2017 vs 2016 2016 vs 2015 Ferrous revenues $ 843,222 $ 625,517 $ 934,057 35 % (33 )% Nonferrous revenues 394,977 330,351 449,815 20 % (27 )% Retail and other revenues 125,419 104,724 129,443 20 % (19 )% Total segment revenues 1,363,618 1,060,592 1,513,315 29 % (30 )% Cost of goods sold 1,158,154 905,863 1,372,456 28 % (34 )% Selling, general and administrative expense 116,461 106,691 122,279 9 % (13 )% (Income) from joint ventures (2,218 ) (386 ) (696 ) 475 % (45 )% Goodwill impairment charges — 8,845 141,021 NM (94 )% Other asset impairment charges (recoveries), net (184 ) 16,411 44,374 NM (63 )% Segment operating income (loss) $ 91,405 $ 23,168 $ (166,119 ) 295 % NM Domestic $ 236 $ 188 $ 261 26 % (28 )% Foreign $ 244 $ 196 $ 265 24 % (26 )% Average $ 242 $ 193 $ 264 25 % (27 )% Ferrous sales volume (LT, in thousands): Domestic 948 859 1,003 10 % (14 )% Foreign 2,197 2,040 2,183 8 % (7 )% Total ferrous sales volume (LT, in thousands) 3,145 2,899 3,186 9 % (9 )% $ 0.63 $ 0.60 $ 0.74 5 % (19 )% 540,791 473,737 539,850 14 % (12 )% 411 319 337 29 % (5 )% Number of auto parts stores at period end 53 52 55 2 % (5 )% Outbound freight included in cost of goods sold $ 97,400 $ 77,477 $ 110,789 26 % (30 )% _____________________________poundsNMpounds. ST = Not meaningful(1)Price information is shown after netting the cost of freight incurred to deliver the product to the customer.(2)Average sales price and volume information excludes platinum group metals ("PGMs") in catalytic converters.
Short Ton, which is equivalent to 2,000 pounds.(3)Cars purchased by auto parts stores only.Fiscal 2017 compared with fiscal 2016AMR Segment RevenuesRevenuesSteel revenues include predominantly sales of finished steel products, in fiscal 2017 increased by 29% comparedaddition to fiscal 2016 primarily due to improved market conditions for recycled metals in the domesticsales of semi-finished goods (billets) and export markets resulting in higher average net selling prices and increased sales volumes compared to the prior year, including benefits from increased sales diversification. Average net selling prices for shipments of ferrous scrap metal in fiscal 2017 increased by 25% compared to the prior year. Ferrous sales volumes in fiscal 2017 also increased by 9% compared to the prior year due to higher export and domestic shipments in fiscal 2017. Additionally, nonferrous sales volumes in fiscal 2017 were higher by 14% compared to the prior year, and nonferrous average net selling prices were higher by 5%.33 / Schnitzer Steel Industries, Inc. Form 10-K 2017Table of Contents SCHNITZER STEEL INDUSTRIES, INC.
steel manufacturing scrap.AMR Segment Operating IncomeOperating income for fiscal 2017 was $91 million, compared to $23 million in fiscal 2016. Adjusted operating income in fiscal 2017 was $90 million, compared to $48 million in the prior year. See the reconciliationreconciliations of AMR adjusted operating income (loss) in Non-GAAP Financial Measures at the end of this Item 7.Operating results(3)2017 benefited2022 included additional volumes arising from better market conditions, increased sales diversification, improved supply volumes, expanded nonferrous metal recovery,the Columbus Recycling business acquired on October 1, 2021, and additional benefits from cost savings and productivity improvement initiativesthe Encore Recycling business acquired on April 29, 2022. Finished steel average selling prices were 46% higher in fiscal 2022 compared to the prior fiscal 2016.year, reflecting robust market demand for these products. The impact of the higher price environment for scrap metalaverage selling prices on steel revenues in fiscal 2017 together with benefits from commercial initiatives to improve supply channels and an improved trend in U.S. economic conditions also led to an increase in the supply of scrap metal, including end-of-life vehicles, resulting in higher processed2022 was partially offset by lower sales volumes compared to the prior fiscal year in part due to the impact of supply chain disruptions on volumes including logistical restraints and delays to construction projects related to a four-month concrete industry strike in the Pacific Northwest that ended in April 2022.The strongerAdjusted EBITDA in fiscal 2022 was $313 million, compared to $289 million in the prior fiscal year. Our results for fiscal 2022 reflected benefits from the higher price environment also positively impactedfor the spread between direct purchase costsmajority of the fiscal year for most of our products and selling prices ofincreased ferrous recycled metal at AMR, with the metal spread for fiscal 2017 expanding by approximately 10%and nonferrous sales volumes compared to the prior fiscal year supported by stronger demand. Ferrous metal spreads in fiscal 2022 increased by approximately 14%, and average net selling prices for our nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, increased by approximately 22% compared to the prior fiscal year, driven by significantly higher selling prices for a majority of the fiscal year. OperatingThe expansion in ferrous metal spreads compared to the prior fiscal year in part reflected higher spreads on ferrous sales contracted prior to the decline in market selling prices that occurred during the second half of fiscal 2022. Finished steel spreads also expanded significantly in fiscal 2022 compared to the prior fiscal year. Our results in fiscal 2016 were adversely impacted by a lower price environment which included sharp declines in commodity selling prices during the first half of fiscal 2016 resulting in2022 also reflected an unfavorable impact from average inventory accounting due to the sharp decline in selling prices for recycled metals during the year. This comparessecond half of the fiscal year compared to a favorable impact in the prior fiscal year, disruptions due to extended shredding operation outages at our Everett facility to replace equipment damaged by the December 2021 fire, the effects of ongoing supply chain disruptions, lower year-over-year PGM prices, and the impact of inflation. Contributions from average inventory accountingrecent acquisitions and productivity initiatives helped to partially offset the effects of inflationary pressure on operating costs. See the reconciliation of adjusted EBITDA in the Non-GAAP Financial Measures at the end of this Item 7.2017 which, relative to performance benefits from2022, we recognized insurance recoveries of $15 million in connection with the May 2021 fire at our steel mill in McMinnville, Oregon, reflecting recovery of applicable costs incurred by the mill operations following the incident. In fiscal 2022, we also recognized insurance recoveries of $17 million in connection with the December 2021 fire at our Everett shredder facility, reflecting recovery of applicable losses including asset impairment charges, initial capital purchases, non-capitalizable repair and replacement costs, and other drivers, wasapplicable losses that we had incurred as of August 31, 2022. These amounts do not a major contributorreflect potential additional recoveries of business income losses due to the improvementinterruptions that may be recognized in AMR's operating results year over year.In the second quarterfuture when settlements of fiscal 2016, we identified a triggering event requiring an interim impairment test of goodwill allocated to our reporting units. The impairment test resulted in a non-cash goodwill impairment charge of $9 million at a reporting unit within AMR. We also recorded non-cash impairment chargesthe business interruption claims are resolved.accelerated depreciation on certain long-lived and other assets at AMR of $16 million primarily related to certain regional metals recycling operations and used auto parts store locations and certain previously-idled recycling equipment assets. See Results of Operations, Asset Impairment Charges (Recoveries), net in this Item 7 for further details on asset impairment charges.AMR SG&Aadministrative expense in fiscal 20172022 increased by $10 million, or 9%, compared to the prior year primarily due to higher employee-related expenses, including an increasefrom increased competition for employees in incentive compensation accrualsa tight labor market, and increased outside and professional services, insurance, and travel expenses, partially from higher costs resulting from improved financial performance,our acquisitions and other expenses related to higher volumes, and increased environmental liabilities. This increase wasgrowth-related initiatives, as well as the impact of inflation, partially offset by incremental benefits from cost savingsproductivity initiatives. Accruals in connection with our annual incentive compensation plans and productivity improvement measurescharges related to reduce direct costs of production and SG&A expense. AMR operating resultslegacy environmental matters were lower in fiscal 2017 were positively impacted by $11 million of incremental benefits from these measures.AMR's results of operations do not include operating results from discontinued operations. See Note 8 – Discontinued Operations in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.Fiscal 2016 compared with fiscal 2015AMR Segment RevenuesThe 33% decrease in ferrous revenues and 27% decrease in nonferrous revenues in fiscal 2016 were primarily due to significantly lower average net selling prices for ferrous and nonferrous scrap metal, as well as reduced sales volumes2022 compared to the prior year. After experiencing sharp declines in the first half of fiscal 2016, net selling prices for shipments of ferrous scrap metal increased significantly during the third quarter of fiscal 2016, primarily due to improved demand, before decreasing in the fourth quarter and returning to the levels seen at the beginning of the fiscal year. Overall demand for recycled metals in our end-markets was weaker than in the prior year primarily due to continued low global economic growth, the relative strength of the U.S. dollar and the impact of lower iron ore prices during most of the fiscal year. This resulted in significantly lower average net selling prices for ferrous and nonferrous scrap metal and reduced sales volumes in fiscal 2016 compared to the prior year.AMR Segment Operating (Loss)Operating income for fiscal 2016 was $23 million , compared to operating loss of $166 million in the prior year. Adjusted operating income in fiscal 2016 was $48 million, which excludes a goodwill impairment charge of $9 million, other asset impairment charges of $16 million and benefits from contract settlements of $1 million. Adjusted operating income in fiscal 2015 was $26 million, which excludes a goodwill impairment charge of $141 million, other asset impairment charges of $44 million and the impact of reselling or modifying the terms of certain previously contracted bulk ferrous shipments of $7 million. See the reconciliation of AMR adjusted operating income (loss) in Non-GAAP Financial Measures at the end of this Item 7.Operating results during fiscal 2016 and 2015 were adversely impacted by the lower price environment which included sharp declines in commodity selling prices during the first half of each year and asset impairment charges recorded in each year. Operating results in the second half of fiscal 2016 benefited from an increase in ferrous average net selling prices after experiencing sharp declines during the first half of the fiscal year which resulted in the adverse impact from average inventory accounting in fiscal 2016 being significantly less than the adverse impact in fiscal 2015. Operating results in fiscal 2016 also benefited from cost savings and productivity improvement measures initiated in fiscal 2015, and further expanded in fiscal 2016, to reduce direct costs of production and SG&A expense. Excluding the adverse impact of asset impairment charges, these benefits contributed to higher34Taxes2017
For the Year Ended August 31, | ||||||||||||||||||
% Increase / (Decrease) | ||||||||||||||||||
($ in thousands, except for price) | 2017 | 2016 | 2015 | 2017 vs 2016 | 2016 vs 2015 | |||||||||||||
Steel revenues(1) | $ | 280,767 | $ | 269,905 | $ | 375,037 | 4 | % | (28 | )% | ||||||||
Recycling revenues(2) | 58,853 | 34,127 | 60,076 | 72 | % | (43 | )% | |||||||||||
Total segment revenues | 339,620 | 304,032 | 435,113 | 12 | % | (30 | )% | |||||||||||
Cost of goods sold | 322,013 | 283,006 | 402,374 | 14 | % | (30 | )% | |||||||||||
Selling, general and administrative expense | 14,321 | 12,571 | 12,998 | 14 | % | (3 | )% | |||||||||||
(Income) from joint ventures | (1,456 | ) | (433 | ) | (794 | ) | 236 | % | (45 | )% | ||||||||
Other asset impairment charges (recoveries), net | (533 | ) | 4,192 | — | NM | NM | ||||||||||||
Segment operating income | $ | 5,275 | $ | 4,696 | $ | 20,535 | 12 | % | (77 | )% | ||||||||
Finished steel average sales price ($/ST)(3) | $ | 534 | $ | 522 | $ | 639 | 2 | % | (18 | )% | ||||||||
Finished steel products sold (ST, in thousands) | 496 | 488 | 540 | 2 | % | (10 | )% | |||||||||||
Rolling mill utilization(4) | 83 | % | 63 | % | 73 | % | 32 | % | (14 | )% |
SCHNITZER STEEL INDUSTRIES, INC. |
Year Ended August 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Reported within other asset impairment charges (recoveries), net: | |||||||||||
Auto and Metals Recycling | |||||||||||
Long-lived assets | $ | — | $ | 7,336 | $ | 41,676 | |||||
Accelerated depreciation | — | 6,208 | — | ||||||||
Investments in joint ventures | 860 | — | — | ||||||||
Assets held for sale | (1,044 | ) | 1,659 | 2,558 | |||||||
Other assets | — | 1,208 | 140 | ||||||||
Total Auto and Metals Recycling | (184 | ) | 16,411 | 44,374 | |||||||
Cascade Steel and Scrap | |||||||||||
Accelerated depreciation | 401 | — | — | ||||||||
Investments in joint ventures | (934 | ) | 1,968 | — | |||||||
Supplies inventory | — | 2,224 | — | ||||||||
Total Cascade Steel and Scrap | (533 | ) | 4,192 | — | |||||||
Corporate - Other assets | — | 79 | 745 | ||||||||
(717 | ) | 20,682 | 45,119 | ||||||||
Reported within restructuring charges and other exit-related activities: | |||||||||||
Long-lived assets | — | 468 | — | ||||||||
Accelerated depreciation | 96 | 630 | 3,836 | ||||||||
Supplies inventory | — | 1,047 | — | ||||||||
Other assets | 62 | 35 | — | ||||||||
Exit-related gains | (565 | ) | (1,337 | ) | — | ||||||
(407 | ) | 843 | 3,836 | ||||||||
Reported within discontinued operations: | |||||||||||
Long-lived assets | — | 673 | 2,666 | ||||||||
Accelerated depreciation | — | 274 | — | ||||||||
— | 947 | 2,666 | |||||||||
Total | $ | (1,124 | ) | $ | 22,472 | $ | 51,621 |
2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||
All Other Plans | Q2’15 Plan | Total Charges | All Other Plans | Q2’15 Plan | Total Charges | All Other Plans | Q2’15 Plan | Total Charges | |||||||||||||||||||||||||||
Restructuring charges: | |||||||||||||||||||||||||||||||||||
Severance costs | $ | — | $ | (24 | ) | $ | (24 | ) | $ | — | $ | 4,915 | $ | 4,915 | $ | 391 | $ | 5,330 | $ | 5,721 | |||||||||||||||
Contract termination costs | 255 | 139 | 394 | 311 | 796 | 1,107 | 377 | 1,245 | 1,622 | ||||||||||||||||||||||||||
Other restructuring costs | — | — | — | — | — | — | 1,223 | 2,048 | 3,271 | ||||||||||||||||||||||||||
Total restructuring charges | 255 | 115 | 370 | 311 | 5,711 | 6,022 | 1,991 | 8,623 | 10,614 | ||||||||||||||||||||||||||
Other exit-related activities: | |||||||||||||||||||||||||||||||||||
Asset impairments and accelerated depreciation | — | 158 | 158 | — | 3,127 | 3,127 | — | 6,502 | 6,502 | ||||||||||||||||||||||||||
Gains on exit-related disposals | — | (565 | ) | (565 | ) | — | (1,337 | ) | (1,337 | ) | — | — | — | ||||||||||||||||||||||
Total other exit-related activities | — | (407 | ) | (407 | ) | — | 1,790 | 1,790 | — | 6,502 | 6,502 | ||||||||||||||||||||||||
Total restructuring charges and exit-related activities | $ | 255 | $ | (292 | ) | $ | (37 | ) | $ | 311 | $ | 7,501 | $ | 7,812 | $ | 1,991 | $ | 15,125 | $ | 17,116 | |||||||||||||||
Restructuring charges and other exit-related activities included in continuing operations | $ | (109 | ) | $ | 6,781 | $ | 13,008 | ||||||||||||||||||||||||||||
Restructuring charges and other exit-related activities included in discontinued operations | $ | 72 | $ | 1,031 | $ | 4,108 |
Year Ended August 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Income (loss) from continuing operations before income taxes | $ | 48,690 | $ | (15,505 | ) | $ | (200,464 | ) | |||
Income tax (expense) benefit | $ | (1,322 | ) | $ | (735 | ) | $ | 12,615 | |||
Effective tax rate | 2.7 | % | (4.7 | )% | 6.3 | % |
Our effective tax rate from continuing operations infor fiscal 20172022 was an expense on pre-tax income of 2.7%20.6%, whichcompared to 18.2% for fiscal 2021. Our effective tax rate from continuing operations for fiscal 2022 approximated the U.S. federal statutory rate of 21%, reflecting primarily discrete tax benefits resulting from vesting of share-based awards during the fiscal year and other discrete items, as well as the benefit from the foreign derived intangible income ("FDII") deduction in fiscal 2022 and research and development credits, offset by the aggregate impact of state taxes and permanent differences from non-deductible expenses. Our effective tax rate from continuing operations for fiscal 2021 was lower than the U.S. federal statutory rate of 35%21% primarily due to our fullthe benefit from the FDII deduction in fiscal 2021 and the impacts of research and development credits, release of the valuation allowance positions and federal income tax refund claims, partially offset by increases inagainst Puerto Rico deferred tax liabilities from indefinite-lived assets, in all jurisdictions. The valuation allowances onand other discrete items.
We assess the realizability of our 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. We consider all negative and positive evidence, including the weight of the evidence, to determine if valuation allowances against deferred tax assets are therequired. We continue to maintain valuation allowances against certain deferred tax assets related to certain jurisdictions as a result of negative objective evidence, including the effects of historical losses in ourthese tax jurisdictions, outweighing positive objective and subjective evidence, indicating that it is more likely than notmore-likely-than-not that the associated tax benefit will not be realized.
Inflation Reduction Act
On August 16, 2022, the Inflation Reduction Act of 2022 ("IRA") was signed into law, with tax provisions primarily focused on implementing a 15% Corporate Alternative Minimum Tax ("CAMT") and a 1% excise tax on corporate share repurchases. As of August 31, 2022, we did not meet the threshold to release a portion of our valuation allowance within the next twelve months may result in a reductionbe subject to the valuation allowance, which couldCAMT. We may be material
Year Ended August 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Revenues | $ | — | $ | — | $ | 8,263 | |||||
Loss from discontinued operations before income taxes | $ | (390 | ) | $ | (1,348 | ) | $ | (7,227 | ) | ||
Income tax benefit | — | — | — | ||||||||
Loss from discontinued operations, net of tax | $ | (390 | ) | $ | (1,348 | ) | $ | (7,227 | ) |
Liquidity and Capital Resources
We rely on cash provided by operating activities as a primary source of liquidity, supplemented by current cash on hand and borrowings under our existing credit facilities.
Sources and Uses of Cash
We had cash balances of $7$44 million and $27$28 million as of each August 31, 20172022 and 2016,2021, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of August 31, 2017,2022, debt was $145$249 million, compared to $193$75 million as of August 31, 2016,2021, and debt, net of cash, was $138 million, compared to $166$205 million as of August 31, 2016 (refer2022, compared to $47 million as of August 31, 2021, which increases were primarily due to increased borrowings from our credit facilities to fund the acquisitions of the assets of the Columbus Recycling business on October 1, 2021, and the Encore Recycling business on April 29, 2022, and higher net working capital needs. See the reconciliation of debt, net of cash, in Non-GAAP Financial Measures below). Debt, netat the end of cash, decreased by $28 million primarily as a result of the positive cash flows generated by operating activities.
Operating Activities
Net cash provided by operating activities in fiscal 20172022 was $100$238 million, compared to $99$190 million in fiscal 2016 and $145 million2021.
Sources of cash other than from earnings in fiscal 2015.
43 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
Sources of cash other than from earnings in fiscal 2021 included a $65 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of payments, and a $12$28 million increase in accrued payroll and related liabilities primarily due to increases inincreased incentive compensation accruals resulting from improved financial performance.liabilities, and a $23 million increase in income tax accruals. Uses of cash in fiscal 20172021 included a $22$89 million increase in inventoryinventories due to higher raw material purchase prices, higher volumes on hand, and the impact of timing of purchases and sales, and a $36$84 million increase in accounts receivable primarily due to increases in recycled metal selling prices and higher sales volumes andfor recycled metals, as well as the timing of sales and collections.
Investing Activities
Net cash used in investing activities in fiscal 20172022 was $45$316 million, compared to $30$118 million in fiscal 2016 and $28 million in fiscal 2015.
Cash used in investing activities in fiscal 2017, 20162022 included $117 million paid to acquire the Columbus Recycling business on October 1, 2021, which amount included $10 million paid primarily for net working capital in excess of an agreed-upon benchmark. Cash used in investing activities also included $63 million paid to acquire the Encore Recycling business on April 29, 2022, which amount included $8 million paid at closing for estimated net working capital in excess of an agreed-upon benchmark. We funded these acquisitions using cash on hand and 2015borrowings under our existing credit facilities. See Note 7 - Business Acquisitions in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further detail.
Cash used in investing activities in fiscal 2022 also included $45 million, $35 million and $32 million, respectively, in capital expenditures of $150 million to upgrade our equipment and infrastructure and for additional investments in advanced metals recovery technology and environmental and safety-related assets. For allassets, compared to $119 million in the prior year. Cash flows from investing activities in fiscal years presented,2022 included proceeds of $17 million representing the significant majorityportion of advance payments from insurers deemed a recovery of capital expenditures were associated with projects at AMR.
Financing Activities
Net cash provided by financing activities for fiscal 2022 was $95 million, compared to net cash used in financing activities for fiscal 2017 was $75 million, compared with $65of $63 million in fiscal 2016 and $119 million in fiscal 2015.
Cash used inflows from financing activities in fiscal 2017, 20162022 included $166 million in net borrowings of debt, compared to $31 million in net repayments of debt in the prior fiscal year (refer to Non-GAAP Financial Measures at the end of this Item 7). Uses of cash in fiscal 2022 and 20152021 included $20$11 million and $6 million, respectively, for cash dividendspayment of employee tax withholdings resulting from vesting of share-based awards and $21 million in each fiscal year and $48for the payment of dividends. Uses of cash in fiscal 2022 also included $34 million $36 million and $91 million, respectively, in net repayments of debt. Refer to Non-GAAP Financial Measures below.
Debt
Following is a summary of our outstanding balances and availability on credit facilities and long-term debt, exclusive of capitalfinance lease obligations (in thousands):
|
| Outstanding as of |
|
| Remaining |
| ||
Bank secured revolving credit facilities(1) |
| $ | 230,000 |
|
| $ | 573,267 |
|
Other debt obligations |
| $ | 12,668 |
|
| N/A |
|
Outstanding as of 8/31/2017 | Remaining Availability | |||||||
Bank secured revolving credit facilities(1) | $ | 140,000 | $ | 197,040 | ||||
Other debt obligations | $ | 706 | N/A |
On August 22, 2022, the Company and certain of $335 millionour subsidiaries entered into the Third Amendment to the Third Amended and C$15 million, mature in April 2021 pursuant to a credit agreement withRestated Credit Agreement (the "Amended Credit Agreement"), by and among Schnitzer Steel Industries, Inc., as the U.S. borrower, Schnitzer Steel Canada Ltd., as the Canadian borrower, Bank of America, N.A., as administrative agent, and other lenders party thereto. thereto, which amended and restated our previously existing credit agreement (the "Prior Credit Agreement"). The Amended Credit Agreement provides for $800 million and C$15 million in senior secured revolving credit facilities maturing in August 2027. The $800 million credit facility includes a $50 million sublimit for letters of credit, a $25 million sublimit for swingline loans, and a $50 million sublimit for multicurrency borrowings. The Prior Credit Agreement provided for $700 million and C$15 million in senior secured credit facilities maturing in August 2023. We incurred $2 million in debt issuance costs in connection with the Amended Credit Agreement, which are amortized to interest expense over the five-year term of the arrangement.
44 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
Interest rates on outstanding indebtedness under the agreementAmended Credit Agreement are based, at our option, on either the London InterbankSecured Overnight Financing Rate (“SOFR”) (or the Canadian Dollar Offered Rate, ("LIBOR")"CDOR" for C$ loans), or the Canadian equivalent, plus a spread of between 1.75%1.25% and 2.75%2.00%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated net funded debt to EBITDA (as defined by the Company’s leverage ratio,Amended Credit Agreement), or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50%, or (c) the daily rate equal to one-month LIBORTerm SOFR plus 1.75%1.00%, in each case, plus a spread of between zero0.25% and 1.00% based on a pricing grid tied to the Company's leverageour consolidated net funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.20%0.175% and 0.40%0.30% based on a pricing grid tied to our leverage ratio.
Under the Amended Credit Agreement, we may establish one or more key performance indicators (“KPIs”) to measure our performance with respect to certain of our environmental, social and governance targets. Subject to the terms and conditions of the Amended Credit Agreement, we may propose to amend the Amended Credit Agreement to modify (i) the pricing spread and (ii) the commitment fee rate. Such modifications would be tied to our performance against the KPIs and would allow for (i) the pricing spread to be increased or decreased by no more than (a) 0.025% per KPI and (b) 0.05% for all KPIs, and (ii) the commitment fee rate to be increased or decreased by no more than 0.005% for all KPIs. Such adjustments would be determined on an annual basis and would not be cumulative.
We had borrowings outstanding under theour credit facilities of $140$230 million and $180$60 million as of August 31, 20172022 and 2016,2021, respectively. The weighted average interest rate on amounts outstanding under this facilityour credit facilities was 3.48%3.65% and 3.01%1.75% as of August 31, 20172022 and 2016,2021, respectively.
We use the credit facilities to fund working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. TheOur credit agreement contains various representations and warranties, events of default, and financial and other customary covenants which limit (subject to certain exceptions) our ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of our business, engage in transactions with affiliates, and enter into restrictive agreements, including agreements that restrict the ability of our subsidiaries to make distributions. TheAs of August 31, 2022, the financial covenants under the credit agreement includeincluded (a) a consolidated fixed charge coverage ratio, defined as the four-quarter rolling sum of consolidated adjusted EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges;charges, and (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness; and (c) a consolidated asset coverage ratio, defined as the consolidated asset value of eligible assets divided by the consolidated funded indebtedness.
As of August 31, 2017,2022, we were in compliance with the financial covenants under theour credit agreement. The consolidated fixed charge coverage ratio was required to be no less than 1.50 to 1.00 and was 3.167.04 to 1.00 as of August 31, 2017.2022. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.220.21 to 1.00 as of August 31, 2017. The asset coverage ratio was required to be no less than 1.00 to 1.00 and was 1.80 to 1.00 as of August 31, 2017.
Our obligations under theour credit agreement are guaranteed by substantially all of our subsidiaries. The credit facilities and the related guarantees are secured by senior first priority liens on certain of our and our subsidiaries’ assets, including equipment, inventory, and accounts receivable.
While we currently expect to remain in compliance with the financial covenants under the credit agreement, there can be no assurances that we willmay not be able to do so in the event market conditions, COVID-19, or other negative factors which adverselyhave a significant adverse impact on our results of operations and financial position lead to a trend of consolidated net losses.position. If we do not maintain compliance with our financial covenants and are unable to obtain an amendment or waiver from our lenders, a breach of a financial covenant would constitute an event of default and allow the lenders to exercise remedies under the agreements, the most severe of which is the termination of the credit facility under our committed bank credit agreement and acceleration of the amounts owed under the agreement. In such case, we would be required to evaluate available alternatives and take appropriate steps to obtain alternative funds. There can be no assurancesWe cannot assure that any such alternative funds, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
Other debt obligations, which totaled $13 million and $8 million of tax-exempt economic development revenue bonds outstanding with the State of Oregon and scheduled to mature in January 2021. In August 2016, we exercised our option to redeem the bonds prior to maturity. We repaid the bonds in full in September 2016. The obligation is reported as a current liability within short-term borrowings as of August 31, 2016 on2022 and 2021, respectively, primarily relate to equipment purchases, the Consolidated Balance Sheet, andcontract consideration for which includes an obligation to make future monthly payments to the $8 million repayment is reportedvendor in the form of licensing fees. For accounting purposes, such obligations are treated as a cash outflow frompartial financing activitiesof the purchase price by the equipment vendor. Monthly payments commence when the equipment is placed in service and achieves specified minimum operating metrics, with payments continuing for the year ended August 31, 2017 on the Consolidated Statementa period of Cash Flows.
45 /
Schnitzer Steel Industries, Inc. Form 10-KCapital expenditures totaled $45 million, $35 million and $32$150 million for fiscal 2017, 2016 and 2015, respectively.2022, compared to $119 million for fiscal 2021. Capital expenditures in each of these years were primarily to upgrade our equipment and infrastructure andincluded approximately $51 million for additional investments in environmentalgrowth in both fiscal 2022 and safety-related projects.2021. We currently plan to invest in the range of $55$120 million to $70$140 million in capital expenditures in fiscal 2018, an increase from the2023. These capital expenditures madeinclude investments in fiscal 2017 and 2016 primarily due to increased equipment replacement and upgrades, further investment ingrowth, including new nonferrous processing technologies, and to support volume initiatives as well as post-acquisition and other growth projects, and investments to upgrade our equipment and infrastructure and for environmental projectsand safety-related assets, using cash generated from operations and available credit facilities.
Environmental Compliance
Building on our commitment to recycling and operating our business in an environmentally responsible manner, we continue to invest in facilities that improve our environmental presence in the communities in which we operate. As part of our capital expenditures discussed in the prior paragraph, we invested $17 million, $14 million and $10 million for environmental projects in fiscal 2017, 2016 and 2015, respectively. We plan to invest up to $20approximately $35 million in capital expenditures for environmental projects in fiscal
We have been identified by the United States Environmental Protection Agency (“EPA”)EPA as one of the potentially responsible parties that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (“the Site”).Harbor. See
Dividends
On June 29, 2022, our Board of Directors declared a dividend for the fourth quarter of fiscal 2022 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. Dividends of $0.75 per common share, totaling $21 million, were declared and paid during fiscal 2022, and $21 million in dividends were also declared and paid during fiscal 2021.
Share Repurchase Program
For information regarding the authorization of a new share repurchase program we have existing authorization to repurchase up to approximately 1.8 million sharesby our Board of our Class A common stock when we deem suchDirectors on June 27, 2022, and share repurchases to be appropriate. We evaluate long-during fiscal 2022 and short-range forecasts as well as anticipated sourcesfiscal 2020, see “Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and usesIssuer Purchases of cash before determining the courseEquity Securities" above in Part II of action in our share repurchase program. As of the beginning of fiscal 2015, we had repurchased approximately 6.9 million shares of our Class A common stock under the program. We repurchased approximately 68 thousand shares for a total of $1 million and 203 thousand shares for a total of $3 million in open-market transactions in fiscal 2015 and 2016, respectively.this report, incorporated by reference herein. We did not repurchase any shares inof our common stock during fiscal 2017.
Assessment of Liquidity and Capital Resources
Historically, our available cash resources, internally generated funds, credit facilities, and equity offerings have financed our acquisitions, capital expenditures, working capital, and other financing needs.
We generally believe our current cash resources, internally generated funds, existing credit facilities, and access to the capital markets will provide adequate short-term and long-term liquidity needs for working capital, capital expenditures, dividends, share repurchases, dividends,investments and acquisitions, joint ventures, debt service requirements, environmental obligations, investments and acquisitions.other contingencies. However, in the event of a sustained market deterioration, we may need additional liquidity which would require us to evaluate available alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurances that any such supplemental funding, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
46 /
Schnitzer Steel Industries, Inc. Form 10-KWe have certain contractual obligations to make future payments. The following table summarizes these future obligations related to debt and leases as of August 31, 20172022 (in thousands):
|
| Payment Due by Period |
| |||||||||||||||||||||||||
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| 2027 |
|
| Thereafter |
|
| Totals |
| |||||||
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Credit facilities(1) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 230,000 |
|
| $ | — |
|
| $ | 230,000 |
|
Interest payments on credit facilities(2) |
| $ | 8,395 |
|
| $ | 8,395 |
|
| $ | 8,395 |
|
| $ | 8,395 |
|
| $ | 8,188 |
|
| $ | — |
|
| $ | 41,768 |
|
Other debt, including interest(3) |
| $ | 4,306 |
|
| $ | 2,425 |
|
| $ | 2,466 |
|
| $ | 2,735 |
|
| $ | 736 |
|
| $ | — |
|
| $ | 12,668 |
|
Finance leases, including interest |
| $ | 1,991 |
|
| $ | 1,715 |
|
| $ | 920 |
|
| $ | 700 |
|
| $ | 615 |
|
| $ | 735 |
|
| $ | 6,676 |
|
Operating leases(4) |
| $ | 25,012 |
|
| $ | 20,810 |
|
| $ | 15,913 |
|
| $ | 12,754 |
|
| $ | 11,307 |
|
| $ | 59,999 |
|
| $ | 145,795 |
|
Payment Due by Period | |||||||||||||||||||||||||||
2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | |||||||||||||||||||||
Contractual Obligations | |||||||||||||||||||||||||||
Long-term debt(1) | $ | 41 | $ | 153 | $ | 92 | $ | 140,050 | $ | 53 | $ | 317 | $ | 140,706 | |||||||||||||
Interest payments on long-term debt(2) | 4,904 | 4,914 | 4,900 | 3,135 | 26 | 61 | 17,940 | ||||||||||||||||||||
Capital leases, including interest | 1,169 | 1,043 | 1,022 | 885 | 753 | 1,824 | 6,696 | ||||||||||||||||||||
Operating leases | 19,572 | 16,824 | 13,333 | 7,894 | 5,317 | 22,410 | 85,350 | ||||||||||||||||||||
Purchase obligations(3) | 73,230 | 15,143 | 14,985 | 3,591 | 2,067 | 5,600 | 114,616 | ||||||||||||||||||||
Other(4) | 217 | 314 | 311 | 308 | 305 | 3,325 | 4,780 | ||||||||||||||||||||
Total | $ | 99,133 | $ | 38,391 | $ | 34,643 | $ | 155,863 | $ | 8,521 | $ | 33,537 | $ | 370,088 |
In addition to future obligations related to debt and leases presented in the table above, we have certain material cash requirements, including but not limited to commitments for capital expenditures. See “Capital Expenditures” within “Liquidity and Capital Resources” above in this Item 7 for discussion of our planned investment in capital expenditures in fiscal 2023, a portion of which represents contractual commitments that existed as of the end of our fiscal 2022. We also had open purchase orders as of August 31, 2022 for purchases of primarily fuels and lubricants, machinery and equipment components and parts, and consumables used in our operations of approximately $80 million, nearly all of which require payment of cash in our fiscal 2023.
See Note 13 - Employee Benefits in Part II, Item 8 of this report for disclosure related to qualified and nonqualified retirement plans, which include a defined benefit pension plan, a supplemental executive retirement benefit plan, multiemployer pension plans, defined contribution plans, and a deferred compensation plan.
We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. At August 31, 2017,2022, we had $10$8 million outstanding under these arrangements.
47 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make certain judgments, estimates, and assumptions regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. An accounting policyestimate is deemed to be critical if it requires an accounting estimate to beis made based on assumptions and judgments about matters that are inherently uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact our consolidated financial statements. We deem critical accounting policies to be those that are most important to the portrayal of our financial condition and results of operations. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies.use. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
Our critical accounting estimates include those related to goodwill,inventories, business acquisitions, long-lived assets, goodwill, environmental costs, and income taxes.
Inventories
Our inventories consist of processed and unprocessed scrap metal (ferrous, nonferrous, and mixed nonferrous recovered joint products arising from the manufacturing process), semi-finished steel products (billets), finished steel products (primarily rebar, wire rod, and merchant bar), used and salvaged vehicles, and supplies. Inventories are stated at the lower of cost and net realizable value. We consider estimated future selling prices when determining the estimated net realizable value of our inventory. As we generally sell our recycled ferrous metal under contracts that provide for shipment within 30 to 60 days after the price is agreed, we utilize the selling prices under committed contracts and sales orders for determining the estimated net realizable value of quantities on hand that will be shipped under these contracts and sales orders.
The accounting process we use to record ferrous scrap metal quantities relies on significant estimates. With respect to estimating the quantities of unprocessed ferrous scrap metal inventory that are moved into production, we rely on weighed quantities of the processed ferrous material, adjusted for business combinationsestimated metal recoveries and revenue recognition.
Business Acquisitions
We evaluate goodwill for impairment annuallyrecognize the assets acquired, the liabilities assumed, and uponany noncontrolling interest in the occurrenceacquiree at the acquisition date, measured at their fair values as of certain triggering events or substantive changes in circumstances that indicate thatdate. Contingent purchase consideration is recorded at fair value at the date of acquisition. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. Within one year from the date of acquisition, we may update the value allocated to the assets acquired and liabilities assumed, and the resulting goodwill may be impaired. Impairmentbalance, based on information received regarding the valuation of goodwill is testedsuch assets and liabilities that was not available at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a ‘component’).
48 /
Schnitzer Steel Industries, Inc. Form 10-KWe test long-lived tangible and intangible assets for impairment at the asset group level, which is determined based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. For our metals recycling operations reported within AMR, an asset group is generally comprised of the regional shredding and export operation along with surrounding feeder yards. For regions with no shredding and export operations, each metals recycling yard is an asset group. For our auto parts operations, generally each auto parts store is an asset group. The combined steel manufacturing and metals recycling operations within CSS are a single asset group. Prior to their combination into CSS in the fourth quarter of fiscal 2017, our steel manufacturing operations and Oregon metals recycling operations were distinct asset groups. We test our asset groups for impairment when certain triggering events or changes in circumstances indicate that the carrying value of the asset group may be impaired. If the carrying value of the asset group is not recoverable because it exceeds the estimate of future undiscounted cash flows from the use and eventual disposition of the asset group, an impairment loss is recognized by the amount the carrying value exceeds its fair value, if any. The impairment loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value. Fair value is determined primarily using one or more of the income, market, or cost and market approaches.
Goodwill
We evaluate 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 change“component”).
When testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more-likely-than-not, we are then required to perform the quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. When performing the quantitative impairment test, we apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
We estimate the fair value of a reporting unit using an income approach based on the present value of expected future cash flows utilizing a market-based weighted average cost of capital (“WACC”) determined separately for the reporting unit. To estimate the present value of the cash flows that extend beyond the final year in the discounted cash flow analysis, we employ a terminal value technique, whereby we use estimated useful lives or salvage valuesoperating cash flows minus capital expenditures, adjust for changes in working capital requirements in the final year of the assets, which are accounted for prospectivelyanalysis, and then discount these estimated cash flows by the WACC to establish the terminal value.
The determination of fair value using the income approach requires judgment and involves the use of estimates and assumptions about expected future cash flows derived from internal forecasts and the impact of market conditions on those assumptions. Assumptions primarily include revenue growth rates driven by future ferrous and nonferrous commodity price and sales volume expectations, automobile scrap and core price and sales volume expectations, gross margins, selling, general and administrative expense relative to total revenues, capital expenditures, working capital requirements, discount rate (WACC), tax rate, terminal growth rate, benefits associated with a taxable transaction, and synergistic benefits available to market participants.
We also use a market approach based on earnings multiple data and our Company’s market capitalization to corroborate our reporting units’ valuations. We reconcile the Company’s market capitalization to the aggregated estimated fair value of all reporting units, including consideration of a control premium representing the estimated amount a market participant would pay to obtain a controlling interest in the periodCompany.
In the fourth quarter of change. For such assets,fiscal 2022, we performed the useful life is shortened basedannual goodwill impairment test as of July 1, 2022. As of the testing date, the balance of our goodwill was $254 million, which was carried by three reporting units. Although we performed the annual goodwill impairment test for fiscal 2021 as of July 1, 2021, we had last performed the quantitative impairment test of goodwill in the fourth quarter of fiscal 2020 using a measurement date of July 1, 2020. Based on our current plansthe changes in market conditions related to disposethe general economy and the metals recycling industry, the extent of or abandontime that had passed since the asset beforelast quantitative goodwill impairment test as of July 1, 2020, and the endrealignment of its original useful lifereporting units as of September 1, 2020, we elected to not perform the qualitative assessment and depreciation is accelerated beginning when that determination is made.
49 /
Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. |
The two reporting units for which we performed the quantitative assessment consist of Contents SCHNITZER STEEL INDUSTRIES, INC.
As a result of the inherent uncertainty associated with forming the estimates described above, actual results could differ from those estimates. Future events and changing market conditions may impact our assumptions as to future revenue and operating margin growth, WACC, and other factors that may result in changes in our estimates of the reporting units’ fair value. Although we believe the assumptions used in testing our reporting units’ goodwill for impairment are reasonable, a lack of recovery or further deterioration in market conditions from current levels, a trend of weaker than anticipated financial performance for the reporting units with allocated goodwill,a decline in our share price from current levels for a sustained period of time, or an increase in the WACC, among other factors, could significantly impact our impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.
Environmental Costs
We operate in industries that inherently possess environmental risks. To manage these risks, we employ both our own environmental staff and outside consultants. Environmental staffmanagement and finance personnel meet regularly to discuss environmental risks. We estimate future costs for known environmental remediation requirements and accrue for them on an undiscounted basis when it is probable that we have incurred a liability and the related costs can be reasonably estimated but the timing of incurring the estimated costs is unknown. The regulatory and government management of these projects is complex, which is one of the primary factors that make it difficult to assess the cost of potential and future remediation. When only a wide range of estimated amounts can be reasonably established and no other amount within the range is better than any other, the low end of the range is recorded in the financial statements. If further developments or resolution of an environmental matter result in facts and circumstances that are significantly different than the assumptions used to develop these liabilities, the accrual for environmental remediation could be materially understated or overstated. Adjustments to these liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or when expenditures for which accruals are established are made. The factors we consider in the recognition and measurement of environmental liabilities include:
50 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
Our accrued environmental liabilities as of August 31, 20172022 included $1$6 million related to third party investigation costs for the Portland Harbor Superfund site. Because the final remedial actions have not yet been designed and there has not been a determination of the total cost of the investigations, the remediation that will be required, the amount of natural resource damages or howof the allocation among the potentially responsible parties of costs of the ongoing investigations, and any remedy andremedial action costs, or natural resource damages, will be allocated among the PRPs, we believe it is not possible to reasonably estimate the amount or range of costs which we are likely or which it is reasonably possible that we may incur in connection with the Site,Portland Harbor, although such costs could be material to our financial position, results of operations, cash flows, and liquidity. Therefore, no additional amounts have been accrued. Further, we have been notified that we are or may be a potentially responsible party at sites other than Portland Harbor which are currently or formerly owned or operated by us or at other sites where we may have responsibility for such costs due to past disposal or other activities. See Contingencies“Contingencies – EnvironmentalEnvironmental” in Note 9 –10 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Income Taxes
Valuation Allowances
We assess the realizability of processedour 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 unprocessed scrap metal (ferrous, nonferrous, and nonferrous recovered joint product arising from the manufacturing process), semi-finished steel products (billets), finished steel products (primarily rebar, merchant bar and wire rod), used and salvaged vehicles, and supplies. Inventories are stated at the lowerforecasts of cost or market.taxable income. We consider estimated future selling prices when determiningall negative and positive evidence, including the estimated net realizable value for our inventory. As we generally sell our recycled ferrous metal under contracts that provide for shipment within 30 to 60 days after the price is agreed, we utilize the selling prices under committed contracts and sales orders for determining the estimated market price of quantities on hand.
Recently Issued Accounting Standards
For a description of recent accounting pronouncements that may have an impact on our financial condition, results of operations, or cash flows, see
Note 3Non-GAAP Financial Measures
Debt, net of cash
Debt, net of cash is the difference between (i) the sum of long-term debt and short-term borrowings (i.e., total debt) and (ii) cash and cash equivalents. We believe that presenting debt, net of cash is useful to investors as a useful measure for investors because,of our leverage, as cash and cash equivalents can be used, among other things, to repay indebtedness, netting this against total debt is a useful measure of our leverage.
The following is a reconciliation of debt, net of cash (in thousands):
August 31, 2017 | August 31, 2016 | August 31, 2015 | |||||||||
Short-term borrowings | $ | 721 | $ | 8,374 | $ | 584 | |||||
Long-term debt, net of current maturities | 144,403 | 184,144 | 227,572 | ||||||||
Total debt | 145,124 | 192,518 | 228,156 | ||||||||
Less: cash and cash equivalents | 7,287 | 26,819 | 22,755 | ||||||||
Total debt, net of cash | $ | 137,837 | $ | 165,699 | $ | 205,401 |
|
| August 31, 2022 |
|
| August 31, 2021 |
| ||
Short-term borrowings |
| $ | 6,041 |
|
| $ | 3,654 |
|
Long-term debt, net of current maturities |
|
| 242,521 |
|
|
| 71,299 |
|
Total debt |
|
| 248,562 |
|
|
| 74,953 |
|
Less cash and cash equivalents |
|
| 43,803 |
|
|
| 27,818 |
|
Total debt, net of cash |
| $ | 204,759 |
|
| $ | 47,135 |
|
Net borrowings (repayment)(repayments) of debt
Net borrowings (repayment)(repayments) of debt is the sum of borrowings from long-term debt and repayments of long-term debt, proceeds from line of credit, and repayment of line of credit.debt. We present this amount as the net change in our borrowings (repayments) for the period because we believe it is useful for investors as a meaningful presentation of the change in debt.
The following is a reconciliation of net borrowings (repayments) of debt (in thousands):
Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | |||||||||
Borrowings from long-term debt | $ | 433,336 | $ | 152,311 | $ | 140,536 | |||||
Proceeds from line of credit | — | 135,500 | 266,500 | ||||||||
Repayment of long-term debt | (481,757 | ) | (187,951 | ) | (231,103 | ) | |||||
Repayment of line of credit | — | (135,500 | ) | (266,500 | ) | ||||||
Net repayments of debt | $ | (48,421 | ) | $ | (35,640 | ) | $ | (90,567 | ) |
|
| Fiscal 2022 |
|
| Fiscal 2021 |
|
| Fiscal 2020 |
| |||
Borrowings from long-term debt |
| $ | 1,055,106 |
|
| $ | 546,706 |
|
| $ | 690,162 |
|
Repayments of long-term debt |
|
| (889,127 | ) |
|
| (578,030 | ) |
|
| (698,492 | ) |
Net borrowings (repayments) of debt |
| $ | 165,979 |
|
| $ | (31,324 | ) |
| $ | (8,330 | ) |
51 /
Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. |
Adjusted consolidated operatingEBITDA, adjusted selling, general, and administrative expense, adjusted income (loss), adjusted AMR operating income (loss), adjusted CSS operating income, adjusted net income (loss) from continuing operations attributable to SSI shareholders, and adjusted diluted earnings (loss) per share from continuing operations attributable to SSI
Management believes that providing these non-GAAP financial measures adds a meaningful presentation of our results from business operations excluding adjustments for goodwill impairment charges, otherlegacy environmental matters (net of recoveries), business development costs not related to ongoing operations including pre-acquisition expenses, asset impairment charges net(net of recoveries,recoveries), charges related to non-ordinary course legal settlements, restructuring charges and other exit-related activities, recoveries related toand the resale or modification of previously contracted shipments, the non-cash write-off of debt issuance costs, and income tax expense (benefit) associated withbenefit allocated to these adjustments, items which are not related to underlying business operational performance, and improves the period-to-period comparability of our results from business operations. Adjusted operating results
Following are reconciliations of net income (loss) to adjusted EBITDA, and adjusted selling, general, and administrative expense (in thousands):
|
| Year Ended August 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Reconciliation of adjusted EBITDA: |
|
|
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 171,996 |
|
| $ | 169,975 |
|
| $ | (2,200 | ) |
Loss from discontinued operations, net of tax |
|
| 83 |
|
|
| 79 |
|
|
| 95 |
|
Interest expense |
|
| 8,538 |
|
|
| 5,285 |
|
|
| 8,669 |
|
Income tax expense |
|
| 44,597 |
|
|
| 37,935 |
|
|
| 166 |
|
Depreciation and amortization |
|
| 75,053 |
|
|
| 58,599 |
|
|
| 58,173 |
|
Charges for legacy environmental matters, net(1) |
|
| 7,518 |
|
|
| 13,773 |
|
|
| 4,097 |
|
Business development costs |
|
| 2,693 |
|
|
| 2,155 |
|
|
| 1,619 |
|
Asset impairment charges, net |
|
| 1,570 |
|
|
| — |
|
|
| 5,729 |
|
Charges related to legal settlements(2) |
|
| 590 |
|
|
| 400 |
|
|
| 73 |
|
Restructuring charges and other exit-related activities |
|
| 77 |
|
|
| 1,008 |
|
|
| 8,993 |
|
Adjusted EBITDA |
| $ | 312,715 |
|
| $ | 289,209 |
|
| $ | 85,414 |
|
|
|
|
|
|
|
|
|
|
| |||
Selling, general and administrative expense: |
|
|
|
|
|
|
|
|
| |||
As reported |
| $ | 263,257 |
|
| $ | 242,463 |
|
| $ | 187,876 |
|
Charges for legacy environmental matters, net(1) |
|
| (7,518 | ) |
|
| (13,773 | ) |
|
| (4,097 | ) |
Business development costs |
|
| (2,693 | ) |
|
| (2,155 | ) |
|
| (1,619 | ) |
Charges related to legal settlements(2) |
|
| — |
|
|
| — |
|
|
| (73 | ) |
Adjusted |
| $ | 253,046 |
|
| $ | 226,535 |
|
| $ | 182,087 |
|
Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | |||||||||
Consolidated operating income (loss): | |||||||||||
As reported | $ | 56,013 | $ | (7,842 | ) | $ | (195,529 | ) | |||
Goodwill impairment charges | — | 8,845 | 141,021 | ||||||||
Other asset impairment charges (recoveries), net | (717 | ) | 20,682 | 45,119 | |||||||
Restructuring charges and other exit-related activities | (109 | ) | 6,781 | 13,008 | |||||||
Resale or modification of previously contracted shipments, net of recoveries | (1,144 | ) | (694 | ) | 6,928 | ||||||
Adjusted | $ | 54,043 | $ | 27,772 | $ | 10,547 | |||||
AMR operating income (loss): | |||||||||||
As reported | $ | 91,405 | $ | 23,168 | $ | (166,119 | ) | ||||
Goodwill impairment charges | — | 8,845 | 141,021 | ||||||||
Other asset impairment charges (recoveries), net | (184 | ) | 16,411 | 44,374 | |||||||
Resale or modification of previously contracted shipments, net of recoveries | (1,144 | ) | (694 | ) | 6,928 | ||||||
Adjusted | $ | 90,077 | $ | 47,730 | $ | 26,204 | |||||
CSS operating income (loss): | |||||||||||
As reported | $ | 5,275 | $ | 4,696 | $ | 20,535 | |||||
Other asset impairment charges (recoveries), net | (533 | ) | 4,192 | — | |||||||
Adjusted | $ | 4,742 | $ | 8,888 | $ | 20,535 |
52 /
Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. |
Following are reconciliations of Contents SCHNITZER STEEL INDUSTRIES, INC.
|
| Year Ended August 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Income (loss) from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
| |||
As reported |
| $ | 168,883 |
|
| $ | 165,191 |
|
| $ | (4,050 | ) |
Charges for legacy environmental matters, net(1) |
|
| 7,518 |
|
|
| 13,773 |
|
|
| 4,097 |
|
Business development costs |
|
| 2,693 |
|
|
| 2,155 |
|
|
| 1,619 |
|
Asset impairment charges, net |
|
| 1,570 |
|
|
| — |
|
|
| 5,729 |
|
Charges related to legal settlements(2) |
|
| 590 |
|
|
| 400 |
|
|
| 73 |
|
Restructuring charges and other exit-related activities |
|
| 77 |
|
|
| 1,008 |
|
|
| 8,993 |
|
Income tax benefit allocated to adjustments(3) |
|
| (1,992 | ) |
|
| (3,712 | ) |
|
| (4,494 | ) |
Adjusted |
| $ | 179,339 |
|
| $ | 178,815 |
|
| $ | 11,967 |
|
|
|
|
|
|
|
|
|
|
| |||
Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
| |||
As reported |
| $ | 5.72 |
|
| $ | 5.66 |
|
| $ | (0.15 | ) |
Charges for legacy environmental matters, net, per share(1) |
|
| 0.25 |
|
|
| 0.47 |
|
|
| 0.15 |
|
Business development costs, per share |
|
| 0.09 |
|
|
| 0.07 |
|
|
| 0.06 |
|
Asset impairment charges, net, per share |
|
| 0.05 |
|
|
| — |
|
|
| 0.21 |
|
Charges related to legal settlements, per share(2) |
|
| 0.02 |
|
|
| 0.01 |
|
|
| — |
|
Restructuring charges and other exit-related activities, per share |
|
| — |
|
|
| 0.03 |
|
|
| 0.32 |
|
Income tax benefit allocated to adjustments, per share(3) |
|
| (0.07 | ) |
|
| (0.13 | ) |
|
| (0.16 | ) |
Adjusted(4) |
| $ | 6.07 |
|
| $ | 6.13 |
|
| $ | 0.43 |
|
Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | |||||||||
Net income (loss) from continuing operations attributable to SSI: | |||||||||||
As reported | $ | 44,901 | $ | (18,061 | ) | $ | (189,782 | ) | |||
Goodwill impairment charges | — | 8,845 | 141,021 | ||||||||
Other asset impairment charges (recoveries), net | (717 | ) | 20,682 | 45,119 | |||||||
Restructuring charges and other exit-related activities | (109 | ) | 6,781 | 13,008 | |||||||
Resale or modification of previously contracted shipments, net of recoveries | (1,144 | ) | (694 | ) | 6,928 | ||||||
Non-cash write-off of debt issuance costs | — | 768 | — | ||||||||
Income tax expense (benefit) allocated to adjustments(1) | — | 529 | (12,703 | ) | |||||||
Adjusted | $ | 42,931 | $ | 18,850 | $ | 3,591 | |||||
Diluted earnings (loss) per share from continuing operations attributable to SSI: | |||||||||||
As reported | $ | 1.60 | $ | (0.66 | ) | $ | (7.03 | ) | |||
Goodwill impairment charges, per share | — | 0.32 | 5.22 | ||||||||
Other asset impairment charges (recoveries), net, per share | (0.03 | ) | 0.76 | 1.67 | |||||||
Restructuring charges and other exit-related activities, per share | — | 0.25 | 0.48 | ||||||||
Resale or modification of certain previously contracted shipments, net of recoveries, per share | (0.04 | ) | (0.03 | ) | 0.26 | ||||||
Non-cash write-off of debt issuance costs, per share | — | 0.03 | — | ||||||||
Income tax expense (benefit) allocated to adjustments, per share(1) | — | 0.02 | (0.47 | ) | |||||||
Adjusted | $ | 1.53 | $ | 0.69 | $ | 0.13 |
53 /
Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We are exposed to commodity price risk, mainly associated with variations in the market price for ferrous and nonferrous metals, including scraprecycled metal, finished steel products, autobodiesauto bodies, and other commodities. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions. We respond to increases and decreases in forward selling prices by adjusting purchase prices. We actively manage our exposure to commodity price risk and monitor the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. Sales contracts are based on prices negotiated with our customers, and generally orders are placed 30 to 60 days ahead of the shipment date. However, financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter based upon contracted sales orders and estimated future selling prices. Based on contracted sales and estimates of future selling prices,prices. For our uncommitted inventories, a 10% decrease in the selling price of inventory would not have had a material NRV impact on any of our reportable segments as of August 31, 20172022 and 2016.
Interest Rate Risk
We are exposed to market risk associated with changes in interest rates related to our debt obligations. Our revolving credit facility is subject to variable interest rates and therefore have exposure to changes in interest rates. If market interest rates had changed 10% from actual interest rate levels in fiscal 20172022 or 2016,2021, the effect on our interest expense and net income would not have been material.
Credit Risk
Credit risk relates to the risk of loss that might occur as a result of non-performance by counterparties of their contractual obligations to take delivery of scraprecycled metal and finished steel products and to make financial settlements of these obligations, or to provide sufficient quantities of scraprecycled metal or payment to settle advances, loans and other contractual receivables in connection with demolition and scrap extraction projects. We manage our exposure to credit risk through a variety of methods, including shipping recycled ferrous scrap metal exports under letters of credit, collection of deposits prior to shipment for certain nonferrous export customers, establishment of credit limits for certain sales on open terms, credit insurance and designation of collateral and financial guarantees securing advances, loans, and other contractual receivables.
Historically, we have shipped almost all of our large shipments of recycled ferrous bulk salesmetal to foreign customers under contracts supported by letters of credit issued or confirmed by banks it deemsdeemed creditworthy. The letters of credit ensure payment by the customer. As we generally sell export recycled ferrous metal under contracts or orders that generally provide for shipment within 30 to 60 days after the price is agreed, our customers typically do not have difficulty obtaining letters of credit from their banks in periods of rising ferrous prices, as the value of the letters of credit are collateralized by the value of the inventory on the ship. However, in periods of significantly declining prices, our customers may not be able to obtain letters of credit for the full sales value of the inventory to be shipped.
As of August 31,
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate risk, mainly associated with sales transactions and related accounts receivable denominated in the U.S. Dollar by our Canadian subsidiary with a functional currency of the Canadian Dollar. In certain instances, we may use derivatives to manage some portion of this risk. As of August 31, 2017,2022 and 2021, we did not have any derivative contracts.
54 /
Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting includes policies and procedures that relate to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of the Company’s consolidated financial statements in accordance with generally accepted accounting principles and that the receipts and expenditures of the Company are being made only in accordance with authorization of the Company’s management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may deteriorate.
Management of the Company assessed the effectiveness of the Company’s internal control over financial reporting using the criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway CommissionPricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this Annual Report, also audited the effectiveness of the Company’s internal control over financial reporting as of
August 31,Tamara L. Lundgren | Stefano R. Gaggini | |
Chairman, President and Chief Executive Officer | Senior Vice President and Chief Financial Officer | |
October 24, | October 24, |
55 /
Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Schnitzer Steel Industries, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets and the related consolidated
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2022 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of Sponsoring Organizations of the Treadway Commission (COSO). September 1, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, management has excluded the Columbus Recycling business and Encore Recycling business from its assessment of internal control over financial reporting as of August 31, 2022 because they were acquired by the Company in purchase business combinations during fiscal 2022. We have also excluded the Columbus Recycling business and Encore Recycling business from our audit of internal control over financial reporting. The Columbus Recycling business and Encore Recycling business are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 11% and 5%, respectively, of the related consolidated financial statement amounts as of and for the year ended August 31, 2022.
56 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. |
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Volume of Ferrous Metal Inventory
As described in Notes 2 and 4 to the consolidated financial statements, the Company’s processed and unprocessed scrap metal inventory was $166 million as of August 31, 2022, which includes processed and unprocessed ferrous metal inventory, among other types of inventory. The accounting process the Company uses to record ferrous scrap metal quantities relies on significant estimates. With respect to estimating the quantities of unprocessed ferrous scrap metal inventory that are moved into production, management relies on weighed quantities of the processed ferrous material, adjusted for estimated metal recoveries and yields that are based on historical trends and other judgments by management. Actual recoveries and yields can vary depending on product quality, moisture content, and the source of the unprocessed metal. The Company’s estimates are intended to reasonably reflect the quantities of unprocessed ferrous scrap metal that are used in the production of processed ferrous metal. To assist in validating the reasonableness of these estimates, management periodically reviews shrink factors and performs monthly physical inventories. Due to the inherent nature of the Company’s scrap metal inventories, including variations in product density, holding period, and production processes utilized to manufacture the products, physical inventories will not necessarily detect all variances for scrap metal inventory such that estimates of quantities are required. To mitigate this risk, the Company further adjusts its ferrous physical inventories when the volume of a commodity is low and a physical inventory count is deemed to more accurately estimate the remaining volume.
The principal considerations for our determination that performing procedures relating to the volume of ferrous metal inventory is a critical audit matter are (i) the significant judgment by management in the estimation of metal recoveries and yields specific to ferrous metal inventory volumes, and (ii) significant auditor judgment, subjectivity, and effort in performing our audit procedures and in evaluating audit evidence related to the estimates made by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation of metal recoveries and yields specific to ferrous metal inventory volumes. These procedures also included, among others, testing inventory quantities received, assessing the reasonableness of management’s estimated yields by comparing them to actual yields of ultimate inventory recoveries, testing ferrous metal inventory shipments including the volume ultimately recovered, observing management’s physical inventory counts, assessing rollforward activity between the time of the inventory counts and year-end, and considering whether evidence obtained in other areas of the audit is consistent with management’s estimates related to ferrous metal inventory volumes.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
October 24, 2017
57 /
Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. |
We have served as the Company’s auditor since 1976, which includes periods before the Company became subject to SEC reporting requirements.
58 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
August 31, | |||||||
2017 | 2016 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 7,287 | $ | 26,819 | |||
Accounts receivable, net | 138,998 | 113,952 | |||||
Inventories | 166,942 | 132,972 | |||||
Refundable income taxes | 2,366 | 1,254 | |||||
Prepaid expenses and other current assets | 22,357 | 24,809 | |||||
Total current assets | 337,950 | 299,806 | |||||
Property, plant and equipment, net | 390,629 | 392,820 | |||||
Investments in joint ventures | 11,204 | 13,616 | |||||
Goodwill | 167,835 | 166,847 | |||||
Intangibles, net | 4,424 | 4,931 | |||||
Other assets | 21,713 | 13,409 | |||||
Total assets | $ | 933,755 | $ | 891,429 | |||
Liabilities and Equity | |||||||
Current liabilities: | |||||||
Short-term borrowings | $ | 721 | $ | 8,374 | |||
Accounts payable | 94,674 | 58,439 | |||||
Accrued payroll and related liabilities | 41,593 | 29,116 | |||||
Environmental liabilities | 2,007 | 1,967 | |||||
Accrued income taxes | 9 | — | |||||
Other accrued liabilities | 37,256 | 35,758 | |||||
Total current liabilities | 176,260 | 133,654 | |||||
Deferred income taxes | 19,147 | 16,682 | |||||
Long-term debt, net of current maturities | 144,403 | 184,144 | |||||
Environmental liabilities, net of current portion | 46,391 | 44,383 | |||||
Other long-term liabilities | 10,061 | 11,134 | |||||
Total liabilities | 396,262 | 389,997 | |||||
Commitments and contingencies (Note 9) | |||||||
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, | |||||||
26,859 and 26,482 shares issued and outstanding | 26,859 | 26,482 | |||||
Class B common stock – 25,000 shares $1.00 par value authorized, | |||||||
200 and 306 shares issued and outstanding | 200 | 306 | |||||
Additional paid-in capital | 38,050 | 30,948 | |||||
Retained earnings | 503,770 | 480,100 | |||||
Accumulated other comprehensive loss | (35,293 | ) | (40,115 | ) | |||
Total SSI shareholders’ equity | 533,586 | 497,721 | |||||
Noncontrolling interests | 3,907 | 3,711 | |||||
Total equity | 537,493 | 501,432 | |||||
Total liabilities and equity | $ | 933,755 | $ | 891,429 |
(Currency – U.S. Dollar)
|
| August 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Assets |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 43,803 |
|
| $ | 27,818 |
|
Accounts receivable, net |
|
| 237,654 |
|
|
| 214,098 |
|
Inventories |
|
| 315,189 |
|
|
| 256,427 |
|
Refundable income taxes |
|
| 1,696 |
|
|
| 837 |
|
Prepaid expenses and other current assets |
|
| 73,044 |
|
|
| 43,934 |
|
Total current assets |
|
| 671,386 |
|
|
| 543,114 |
|
Property, plant and equipment, net |
|
| 664,120 |
|
|
| 562,674 |
|
Operating lease right-of-use assets |
|
| 122,413 |
|
|
| 131,221 |
|
Investments in joint ventures |
|
| 12,841 |
|
|
| 12,844 |
|
Goodwill |
|
| 255,198 |
|
|
| 170,304 |
|
Intangibles, net |
|
| 26,155 |
|
|
| 3,980 |
|
Deferred income taxes |
|
| 24,598 |
|
|
| 27,561 |
|
Other assets |
|
| 49,886 |
|
|
| 42,665 |
|
Total assets |
| $ | 1,826,597 |
|
| $ | 1,494,363 |
|
Liabilities and Equity |
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Short-term borrowings |
| $ | 6,041 |
|
| $ | 3,654 |
|
Accounts payable |
|
| 217,689 |
|
|
| 179,917 |
|
Accrued payroll and related liabilities |
|
| 59,702 |
|
|
| 69,622 |
|
Environmental liabilities |
|
| 13,031 |
|
|
| 24,743 |
|
Operating lease liabilities |
|
| 21,660 |
|
|
| 21,417 |
|
Accrued income taxes |
|
| 3,856 |
|
|
| 3,521 |
|
Other accrued liabilities |
|
| 59,594 |
|
|
| 49,976 |
|
Total current liabilities |
|
| 381,573 |
|
|
| 352,850 |
|
Deferred income taxes |
|
| 63,328 |
|
|
| 40,593 |
|
Long-term debt, net of current maturities |
|
| 242,521 |
|
|
| 71,299 |
|
Environmental liabilities, net of current portion |
|
| 55,469 |
|
|
| 52,385 |
|
Operating lease liabilities, net of current maturities |
|
| 101,651 |
|
|
| 113,165 |
|
Other long-term liabilities |
|
| 23,581 |
|
|
| 24,292 |
|
Total liabilities |
|
| 868,123 |
|
|
| 654,584 |
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
| ||
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, |
|
| 26,747 |
|
|
| 27,332 |
|
Class B common stock – 25,000 shares $1.00 par value authorized, |
|
| 200 |
|
|
| 200 |
|
Additional paid-in capital |
|
| 22,975 |
|
|
| 49,074 |
|
Retained earnings |
|
| 941,146 |
|
|
| 793,712 |
|
Accumulated other comprehensive loss |
|
| (37,089 | ) |
|
| (34,554 | ) |
Total SSI shareholders’ equity |
|
| 953,979 |
|
|
| 835,764 |
|
Noncontrolling interests |
|
| 4,495 |
|
|
| 4,015 |
|
Total equity |
|
| 958,474 |
|
|
| 839,779 |
|
Total liabilities and equity |
| $ | 1,826,597 |
|
| $ | 1,494,363 |
|
See Notes to the Consolidated Financial Statements.
59 /
Schnitzer Steel Industries, Inc. Form 10-KCONSOLIDATED STATEMENTS OF OPERATIONS
(inIn thousands, except per share amounts)
Year Ended August 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Revenues | $ | 1,687,591 | $ | 1,352,543 | $ | 1,915,399 | |||||
Operating expense: | |||||||||||
Cost of goods sold | 1,464,508 | 1,175,988 | 1,742,678 | ||||||||
Selling, general and administrative | 171,570 | 148,908 | 170,592 | ||||||||
(Income) from joint ventures | (3,674 | ) | (819 | ) | (1,490 | ) | |||||
Goodwill impairment charges | — | 8,845 | 141,021 | ||||||||
Other asset impairment charges (recoveries), net | (717 | ) | 20,682 | 45,119 | |||||||
Restructuring charges and other exit-related activities | (109 | ) | 6,781 | 13,008 | |||||||
Operating income (loss) | 56,013 | (7,842 | ) | (195,529 | ) | ||||||
Interest expense | (8,081 | ) | (8,889 | ) | (9,191 | ) | |||||
Other income, net | 758 | 1,226 | 4,256 | ||||||||
Income (loss) from continuing operations before income taxes | 48,690 | (15,505 | ) | (200,464 | ) | ||||||
Income tax (expense) benefit | (1,322 | ) | (735 | ) | 12,615 | ||||||
Income (loss) from continuing operations | 47,368 | (16,240 | ) | (187,849 | ) | ||||||
Loss from discontinued operations, net of tax | (390 | ) | (1,348 | ) | (7,227 | ) | |||||
Net income (loss) | 46,978 | (17,588 | ) | (195,076 | ) | ||||||
Net income attributable to noncontrolling interests | (2,467 | ) | (1,821 | ) | (1,933 | ) | |||||
Net income (loss) attributable to SSI | $ | 44,511 | $ | (19,409 | ) | $ | (197,009 | ) | |||
Net income (loss) per share attributable to SSI: | |||||||||||
Basic: | |||||||||||
Income (loss) per share from continuing operations attributable to SSI | $ | 1.63 | $ | (0.66 | ) | $ | (7.03 | ) | |||
Loss per share from discontinued operations attributable to SSI | (0.01 | ) | (0.05 | ) | (0.27 | ) | |||||
Net income (loss) per share attributable to SSI(1) | $ | 1.62 | $ | (0.71 | ) | $ | (7.29 | ) | |||
Diluted: | |||||||||||
Income (loss) per share from continuing operations attributable to SSI | $ | 1.60 | $ | (0.66 | ) | $ | (7.03 | ) | |||
Loss per share from discontinued operations attributable to SSI | (0.01 | ) | (0.05 | ) | (0.27 | ) | |||||
Net income (loss) per share attributable to SSI(1) | $ | 1.58 | $ | (0.71 | ) | $ | (7.29 | ) | |||
Weighted average number of common shares: | |||||||||||
Basic | 27,537 | 27,229 | 27,010 | ||||||||
Diluted | 28,141 | 27,229 | 27,010 | ||||||||
Dividends declared per common share | $ | 0.750 | $ | 0.750 | $ | 0.750 |
(Currency – U.S. Dollar)
|
| Year Ended August 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Revenues |
| $ | 3,485,815 |
|
| $ | 2,758,551 |
|
| $ | 1,712,343 |
|
Operating expense: |
|
|
|
|
|
|
|
|
| |||
Cost of goods sold |
|
| 2,997,745 |
|
|
| 2,305,357 |
|
|
| 1,503,725 |
|
Selling, general and administrative |
|
| 263,257 |
|
|
| 242,463 |
|
|
| 187,876 |
|
(Income) from joint ventures |
|
| (2,740 | ) |
|
| (4,006 | ) |
|
| (834 | ) |
Asset impairment charges, net |
|
| 1,570 |
|
|
| — |
|
|
| 5,729 |
|
Restructuring charges and other exit-related activities |
|
| 77 |
|
|
| 1,008 |
|
|
| 8,993 |
|
Operating income |
|
| 225,906 |
|
|
| 213,729 |
|
|
| 6,854 |
|
Interest expense |
|
| (8,538 | ) |
|
| (5,285 | ) |
|
| (8,669 | ) |
Other expense, net |
|
| (692 | ) |
|
| (455 | ) |
|
| (124 | ) |
Income (loss) from continuing operations before income taxes |
|
| 216,676 |
|
|
| 207,989 |
|
|
| (1,939 | ) |
Income tax expense |
|
| (44,597 | ) |
|
| (37,935 | ) |
|
| (166 | ) |
Income (loss) from continuing operations |
|
| 172,079 |
|
| �� | 170,054 |
|
|
| (2,105 | ) |
Loss from discontinued operations, net of tax |
|
| (83 | ) |
|
| (79 | ) |
|
| (95 | ) |
Net income (loss) |
|
| 171,996 |
|
|
| 169,975 |
|
|
| (2,200 | ) |
Net income attributable to noncontrolling interests |
|
| (3,196 | ) |
|
| (4,863 | ) |
|
| (1,945 | ) |
Net income (loss) attributable to SSI shareholders |
| $ | 168,800 |
|
| $ | 165,112 |
|
| $ | (4,145 | ) |
|
|
|
|
|
|
|
|
|
| |||
Net income (loss) per share attributable to SSI shareholders: |
|
|
|
|
|
|
|
|
| |||
Basic: |
|
|
|
|
|
|
|
|
| |||
Income (loss) per share from continuing operations |
| $ | 6.01 |
|
| $ | 5.90 |
|
| $ | (0.15 | ) |
Net income (loss) per share |
| $ | 6.01 |
|
| $ | 5.90 |
|
| $ | (0.15 | ) |
Diluted: |
|
|
|
|
|
|
|
|
| |||
Income (loss) per share from continuing operations |
| $ | 5.72 |
|
| $ | 5.66 |
|
| $ | (0.15 | ) |
Net income (loss) per share |
| $ | 5.72 |
|
| $ | 5.66 |
|
| $ | (0.15 | ) |
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
| |||
Basic |
|
| 28,084 |
|
|
| 27,982 |
|
|
| 27,672 |
|
Diluted |
|
| 29,529 |
|
|
| 29,193 |
|
|
| 27,672 |
|
See Notes to the Consolidated Financial Statements.
60 /
Schnitzer Steel Industries, Inc. Form 10-KCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(inIn thousands)
Year Ended August 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Net income (loss) | $ | 46,978 | $ | (17,588 | ) | $ | (195,076 | ) | ||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Foreign currency translation adjustments | 2,711 | (530 | ) | (23,346 | ) | |||||||
Cash flow hedges, net | — | 240 | (298 | ) | ||||||||
Pension obligations, net | 2,111 | (1,303 | ) | (2,237 | ) | |||||||
Total other comprehensive income (loss), net of tax | 4,822 | (1,593 | ) | (25,881 | ) | |||||||
Comprehensive income (loss) | 51,800 | (19,181 | ) | (220,957 | ) | |||||||
Less comprehensive income attributable to noncontrolling interests | (2,467 | ) | (1,821 | ) | (1,933 | ) | ||||||
Comprehensive income (loss) attributable to SSI | $ | 49,333 | $ | (21,002 | ) | $ | (222,890 | ) |
(Currency – U.S. Dollar)
|
| Year Ended August 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Net income (loss) |
| $ | 171,996 |
|
| $ | 169,975 |
|
| $ | (2,200 | ) |
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
|
| (3,070 | ) |
|
| 2,575 |
|
|
| 1,505 |
|
Pension obligations, net |
|
| 535 |
|
|
| (258 | ) |
|
| 387 |
|
Total other comprehensive (loss) income, net of tax |
|
| (2,535 | ) |
|
| 2,317 |
|
|
| 1,892 |
|
Comprehensive income (loss) |
|
| 169,461 |
|
|
| 172,292 |
|
|
| (308 | ) |
Less comprehensive income attributable to noncontrolling interests |
|
| (3,196 | ) |
|
| (4,863 | ) |
|
| (1,945 | ) |
Comprehensive income (loss) attributable to SSI shareholders |
| $ | 166,265 |
|
| $ | 167,429 |
|
| $ | (2,253 | ) |
See Notes to the Consolidated Financial Statements.
61 /
Schnitzer Steel Industries, Inc. Form 10-KCONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total SSI Shareholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||
Class A | Class B | ||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance as of August 31, 2014 | 26,384 | $ | 26,384 | 306 | $ | 306 | $ | 19,164 | $ | 737,571 | $ | (12,641 | ) | $ | 770,784 | $ | 5,193 | $ | 775,977 | ||||||||||||||||||
Net income (loss) | — | — | — | — | — | (197,009 | ) | — | (197,009 | ) | 1,933 | (195,076 | ) | ||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | (25,881 | ) | (25,881 | ) | — | (25,881 | ) | ||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | (3,110 | ) | (3,110 | ) | |||||||||||||||||||||||||
Share repurchases | (68 | ) | (68 | ) | — | — | (1,279 | ) | — | — | (1,347 | ) | — | (1,347 | ) | ||||||||||||||||||||||
Restricted stock withheld for taxes | (92 | ) | (92 | ) | — | — | (1,905 | ) | — | — | (1,997 | ) | — | (1,997 | ) | ||||||||||||||||||||||
Issuance of restricted stock | 250 | 250 | — | — | (250 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | 10,481 | — | — | 10,481 | — | 10,481 | |||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | (20,496 | ) | — | (20,496 | ) | — | (20,496 | ) | ||||||||||||||||||||||||
Balance as of August 31, 2015 | 26,474 | 26,474 | 306 | 306 | 26,211 | 520,066 | (38,522 | ) | 534,535 | 4,016 | 538,551 | ||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (19,409 | ) | — | (19,409 | ) | 1,821 | (17,588 | ) | ||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | (1,593 | ) | (1,593 | ) | — | (1,593 | ) | ||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | (2,126 | ) | (2,126 | ) | |||||||||||||||||||||||||
Share repurchases | (203 | ) | (203 | ) | — | — | (3,276 | ) | — | — | (3,479 | ) | — | (3,479 | ) | ||||||||||||||||||||||
Restricted stock withheld for taxes | (132 | ) | (132 | ) | — | — | (2,081 | ) | — | — | (2,213 | ) | — | (2,213 | ) | ||||||||||||||||||||||
Issuance of restricted stock | 343 | 343 | — | — | (343 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | 10,437 | — | — | 10,437 | — | 10,437 | |||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | (20,557 | ) | — | (20,557 | ) | — | (20,557 | ) | ||||||||||||||||||||||||
Balance as of August 31, 2016 | 26,482 | 26,482 | 306 | 306 | 30,948 | 480,100 | (40,115 | ) | 497,721 | 3,711 | 501,432 | ||||||||||||||||||||||||||
Net income | — | — | — | — | — | 44,511 | — | 44,511 | 2,467 | 46,978 | |||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | 4,822 | 4,822 | — | 4,822 | |||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | (2,271 | ) | (2,271 | ) | |||||||||||||||||||||||||
Conversion of common stock | 106 | 106 | (106 | ) | (106 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||
Restricted stock withheld for taxes | (148 | ) | (148 | ) | — | — | (3,326 | ) | — | — | (3,474 | ) | — | (3,474 | ) | ||||||||||||||||||||||
Issuance of restricted stock | 419 | 419 | — | — | (419 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | 10,847 | — | — | 10,847 | — | 10,847 | |||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | (20,841 | ) | — | (20,841 | ) | — | (20,841 | ) | ||||||||||||||||||||||||
Balance as of August 31, 2017 | 26,859 | $ | 26,859 | 200 | $ | 200 | $ | 38,050 | $ | 503,770 | $ | (35,293 | ) | $ | 533,586 | $ | 3,907 | $ | 537,493 |
(Currency – U.S. Dollar)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Common Stock |
|
| Additional |
|
|
|
|
| Other |
|
| Total SSI |
|
|
|
|
|
|
| |||||||||||||||||||
|
| Class A |
|
| Class B |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Shareholders’ |
|
| Noncontrolling |
|
| Total |
| ||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Equity |
|
| Interests |
|
| Equity |
| ||||||||||
Balance as of August 31, 2019 |
|
| 26,464 |
|
| $ | 26,464 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 33,700 |
|
| $ | 675,363 |
|
| $ | (38,763 | ) |
| $ | 696,964 |
|
| $ | 4,332 |
|
| $ | 701,296 |
|
Cumulative effect on adoption of new |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (463 | ) |
|
| — |
|
|
| (463 | ) |
|
| — |
|
|
| (463 | ) |
Balance as of September 1, 2019 |
|
| 26,464 |
|
| $ | 26,464 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 33,700 |
|
| $ | 674,900 |
|
| $ | (38,763 | ) |
| $ | 696,501 |
|
| $ | 4,332 |
|
| $ | 700,833 |
|
Net (loss) income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,145 | ) |
|
| — |
|
|
| (4,145 | ) |
|
| 1,945 |
|
|
| (2,200 | ) |
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,892 |
|
|
| 1,892 |
|
|
| — |
|
|
| 1,892 |
|
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,548 | ) |
|
| (2,548 | ) |
Share repurchases |
|
| (53 | ) |
|
| (53 | ) |
|
| — |
|
|
| — |
|
|
| (861 | ) |
|
| — |
|
|
| — |
|
|
| (914 | ) |
|
| — |
|
|
| (914 | ) |
Issuance of restricted stock |
|
| 762 |
|
|
| 762 |
|
|
| — |
|
|
| — |
|
|
| (762 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock withheld for taxes |
|
| (274 | ) |
|
| (274 | ) |
|
| — |
|
|
| — |
|
|
| (5,571 | ) |
|
| — |
|
|
| — |
|
|
| (5,845 | ) |
|
| — |
|
|
| (5,845 | ) |
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,110 |
|
|
| — |
|
|
| — |
|
|
| 10,110 |
|
|
| — |
|
|
| 10,110 |
|
Dividends ($0.75 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,892 | ) |
|
| — |
|
|
| (20,892 | ) |
|
| — |
|
|
| (20,892 | ) |
Balance as of August 31, 2020 |
|
| 26,899 |
|
|
| 26,899 |
|
|
| 200 |
|
|
| 200 |
|
|
| 36,616 |
|
|
| 649,863 |
|
|
| (36,871 | ) |
|
| 676,707 |
|
|
| 3,729 |
|
|
| 680,436 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 165,112 |
|
|
| — |
|
|
| 165,112 |
|
|
| 4,863 |
|
|
| 169,975 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,317 |
|
|
| 2,317 |
|
|
| — |
|
|
| 2,317 |
|
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,577 | ) |
|
| (4,577 | ) |
Issuance of restricted stock |
|
| 657 |
|
|
| 657 |
|
|
| — |
|
|
| — |
|
|
| (657 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock withheld for taxes |
|
| (224 | ) |
|
| (224 | ) |
|
| — |
|
|
| — |
|
|
| (5,414 | ) |
|
| — |
|
|
| — |
|
|
| (5,638 | ) |
|
| — |
|
|
| (5,638 | ) |
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,529 |
|
|
| — |
|
|
| — |
|
|
| 18,529 |
|
|
| — |
|
|
| 18,529 |
|
Dividends ($0.75 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (21,263 | ) |
|
| — |
|
|
| (21,263 | ) |
|
| — |
|
|
| (21,263 | ) |
Balance as of August 31, 2021 |
|
| 27,332 |
|
|
| 27,332 |
|
|
| 200 |
|
|
| 200 |
|
|
| 49,074 |
|
|
| 793,712 |
|
|
| (34,554 | ) |
|
| 835,764 |
|
|
| 4,015 |
|
|
| 839,779 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 168,800 |
|
|
| — |
|
|
| 168,800 |
|
|
| 3,196 |
|
|
| 171,996 |
|
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,535 | ) |
|
| (2,535 | ) |
|
| — |
|
|
| (2,535 | ) |
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,716 | ) |
|
| (2,716 | ) |
Share repurchases |
|
| (944 | ) |
|
| (944 | ) |
|
| — |
|
|
| — |
|
|
| (33,304 | ) |
|
| — |
|
|
| — |
|
|
| (34,248 | ) |
|
| — |
|
|
| (34,248 | ) |
Issuance of restricted stock |
|
| 568 |
|
|
| 568 |
|
|
| — |
|
|
| — |
|
|
| (568 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock withheld for taxes |
|
| (209 | ) |
|
| (209 | ) |
|
| — |
|
|
| — |
|
|
| (10,848 | ) |
|
| — |
|
|
| — |
|
|
| (11,057 | ) |
|
| — |
|
|
| (11,057 | ) |
Share-based compensation cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,621 |
|
|
| — |
|
|
| — |
|
|
| 18,621 |
|
|
| — |
|
|
| 18,621 |
|
Dividends ($0.75 per common share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (21,366 | ) |
|
| — |
|
|
| (21,366 | ) |
|
| — |
|
|
| (21,366 | ) |
Balance as of August 31, 2022 |
|
| 26,747 |
|
| $ | 26,747 |
|
|
| 200 |
|
| $ | 200 |
|
| $ | 22,975 |
|
| $ | 941,146 |
|
| $ | (37,089 | ) |
| $ | 953,979 |
|
| $ | 4,495 |
|
| $ | 958,474 |
|
62 / Schnitzer Steel Industries, Inc. Form 10-K 2022
See Notes to the Consolidated Financial Statements.
63 /
Schnitzer Steel Industries, Inc. Form 10-KCONSOLIDATED STATEMENTS OF CASH FLOWS
(inIn thousands)
Year Ended August 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | 46,978 | $ | (17,588 | ) | $ | (195,076 | ) | |||
Adjustments to reconcile net income (loss) to cash provided by operating activities: | |||||||||||
Goodwill impairment charges | — | 8,845 | 141,021 | ||||||||
Other asset impairment charges (recoveries), net | (717 | ) | 20,682 | 45,119 | |||||||
Exit-related (gains), asset impairments and accelerated depreciation, net | (407 | ) | 1,790 | 6,502 | |||||||
Depreciation and amortization | 49,840 | 54,630 | 67,936 | ||||||||
Inventory write-downs | — | 710 | 3,031 | ||||||||
Deferred income taxes | 2,278 | 507 | (1,988 | ) | |||||||
Undistributed equity in earnings of joint ventures | (3,674 | ) | (819 | ) | (1,490 | ) | |||||
Share-based compensation expense | 10,847 | 10,437 | 10,481 | ||||||||
Loss (gain) on the disposal of assets | 448 | (465 | ) | (2,875 | ) | ||||||
Unrealized foreign exchange (gain) loss, net | 361 | (109 | ) | (1,909 | ) | ||||||
Bad debt expense (recoveries), net | 126 | 131 | (264 | ) | |||||||
Write-off of debt issuance costs | — | 768 | — | ||||||||
Excess tax benefit from share-based payment arrangements | — | — | (343 | ) | |||||||
Changes in assets and liabilities, net of acquisitions: | |||||||||||
Accounts receivable | (36,195 | ) | (10,693 | ) | 55,600 | ||||||
Inventories | (22,207 | ) | 27,504 | 69,256 | |||||||
Income taxes | (1,086 | ) | 5,861 | (5,846 | ) | ||||||
Prepaid expenses and other current assets | (1,704 | ) | (1,864 | ) | 2,403 | ||||||
Other long-term assets | 537 | 266 | 1,064 | ||||||||
Accounts payable | 33,062 | (763 | ) | (35,638 | ) | ||||||
Accrued payroll and related liabilities | 12,389 | 3,633 | (6,330 | ) | |||||||
Other accrued liabilities | 5,073 | (4,362 | ) | (2,710 | ) | ||||||
Environmental liabilities | 1,884 | (451 | ) | (702 | ) | ||||||
Other long-term liabilities | (1,101 | ) | 30 | (3,384 | ) | ||||||
Distributed equity in earnings of joint ventures | 3,638 | 560 | 770 | ||||||||
Net cash provided by operating activities | 100,370 | 99,240 | 144,628 | ||||||||
Cash flows from investing activities: | |||||||||||
Capital expenditures | (44,940 | ) | (34,571 | ) | (32,297 | ) | |||||
Purchase of cost method investment | (6,017 | ) | — | — | |||||||
Acquisitions, net of cash acquired | — | — | (150 | ) | |||||||
Joint venture receipts (payments), net | 405 | (11 | ) | (1 | ) | ||||||
Proceeds from sale of assets | 5,158 | 4,106 | 4,270 | ||||||||
Net cash used in investing activities | (45,394 | ) | (30,476 | ) | (28,178 | ) | |||||
Cash flows from financing activities: | |||||||||||
Borrowings from long-term debt | 433,336 | 152,311 | 140,536 | ||||||||
Repayment of long-term debt | (481,757 | ) | (187,951 | ) | (231,103 | ) | |||||
Proceeds from line of credit | — | 135,500 | 266,500 | ||||||||
Repayment of line of credit | — | (135,500 | ) | (266,500 | ) | ||||||
Payment of debt issuance costs | (112 | ) | (1,011 | ) | (978 | ) | |||||
Repurchase of Class A common stock | — | (3,479 | ) | (1,347 | ) | ||||||
Taxes paid related to net share settlement of share-based payment arrangements | (3,474 | ) | (2,213 | ) | (1,997 | ) | |||||
Excess tax benefit from share-based payment arrangements | — | — | 343 | ||||||||
Distributions to noncontrolling interests | (2,271 | ) | (2,126 | ) | (3,110 | ) | |||||
Contingent consideration paid relating to business acquisitions | — | — | (759 | ) | |||||||
Dividends paid | (20,396 | ) | (20,444 | ) | (20,336 | ) | |||||
Net cash used in financing activities | (74,674 | ) | (64,913 | ) | (118,751 | ) | |||||
Effect of exchange rate changes on cash | 166 | 213 | (616 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (19,532 | ) | 4,064 | (2,917 | ) | ||||||
Cash and cash equivalents as of beginning of year | 26,819 | 22,755 | 25,672 | ||||||||
Cash and cash equivalents as of end of year | $ | 7,287 | $ | 26,819 | $ | 22,755 |
Year Ended August 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
SUPPLEMENTAL DISCLOSURES: | |||||||||||
Cash paid (received) during the year for: | |||||||||||
Interest | $ | 7,016 | $ | 6,077 | $ | 7,138 | |||||
Income taxes paid (refunds received), net | $ | 148 | $ | (5,691 | ) | $ | (1,866 | ) | |||
Schedule of noncash investing and financing transactions: | |||||||||||
Purchases of property, plant and equipment included in current liabilities | $ | 11,082 | $ | 8,268 | $ | 6,086 |
(Currency – U.S. Dollar)
|
| Year Ended August 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 171,996 |
|
| $ | 169,975 |
|
| $ | (2,200 | ) |
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
|
|
|
|
|
|
|
|
| |||
Asset impairment charges, net |
|
| 1,570 |
|
|
| — |
|
|
| 5,729 |
|
Exit-related asset impairments |
|
| — |
|
|
| — |
|
|
| 971 |
|
Depreciation and amortization |
|
| 75,053 |
|
|
| 58,599 |
|
|
| 58,173 |
|
Inventory write-downs |
|
| 3,199 |
|
|
| — |
|
|
| — |
|
Deferred income taxes |
|
| 25,052 |
|
|
| 6,884 |
|
|
| 15,096 |
|
Undistributed equity in earnings of joint ventures |
|
| (2,740 | ) |
|
| (4,006 | ) |
|
| (834 | ) |
Share-based compensation expense |
|
| 18,517 |
|
|
| 18,213 |
|
|
| 10,033 |
|
Loss on disposal of assets, net |
|
| 824 |
|
|
| 717 |
|
|
| 530 |
|
Unrealized foreign exchange loss (gain), net |
|
| 78 |
|
|
| 127 |
|
|
| (67 | ) |
Credit loss, net |
|
| 40 |
|
|
| — |
|
|
| 66 |
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
| |||
Accounts receivable |
|
| 633 |
|
|
| (84,086 | ) |
|
| (2,252 | ) |
Inventories |
|
| (37,232 | ) |
|
| (88,622 | ) |
|
| 39,226 |
|
Income taxes |
|
| 2,119 |
|
|
| 22,789 |
|
|
| (15,433 | ) |
Prepaid expenses and other current assets |
|
| (19,117 | ) |
|
| (15,674 | ) |
|
| 63 |
|
Other long-term assets |
|
| (994 | ) |
|
| (5,402 | ) |
|
| (216 | ) |
Operating lease assets and liabilities |
|
| (2,198 | ) |
|
| (813 | ) |
|
| 334 |
|
Accounts payable |
|
| 20,578 |
|
|
| 64,956 |
|
|
| (7,971 | ) |
Accrued payroll and related liabilities |
|
| (13,866 | ) |
|
| 27,824 |
|
|
| 13,465 |
|
Other accrued liabilities |
|
| 4,798 |
|
|
| 613 |
|
|
| 7,148 |
|
Environmental liabilities |
|
| (14,866 | ) |
|
| 12,895 |
|
|
| 1,602 |
|
Other long-term liabilities |
|
| 1,132 |
|
|
| 3,825 |
|
|
| 134 |
|
Distributed equity in earnings of joint ventures |
|
| 3,100 |
|
|
| 1,250 |
|
|
| 1,000 |
|
Net cash provided by operating activities |
|
| 237,676 |
|
|
| 190,064 |
|
|
| 124,597 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| |||
Capital expenditures |
|
| (150,121 | ) |
|
| (118,866 | ) |
|
| (82,005 | ) |
Acquisitions, net of acquired cash |
|
| (179,721 | ) |
|
| — |
|
|
| — |
|
Proceeds from insurance and sale of assets |
|
| 18,776 |
|
|
| 587 |
|
|
| 1,290 |
|
Purchase of equity investment |
|
| (5,000 | ) |
|
| — |
|
|
| — |
|
Deposit on land option |
|
| (80 | ) |
|
| 630 |
|
|
| 1,860 |
|
Net cash used in investing activities |
|
| (316,146 | ) |
|
| (117,649 | ) |
|
| (78,855 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| |||
Borrowings from long-term debt |
|
| 1,055,106 |
|
|
| 546,706 |
|
|
| 690,162 |
|
Repayments of long-term debt |
|
| (889,127 | ) |
|
| (578,030 | ) |
|
| (698,492 | ) |
Payment of debt issuance costs |
|
| (2,093 | ) |
|
| (23 | ) |
|
| (1,983 | ) |
Repurchase of Class A common stock |
|
| (34,248 | ) |
|
| — |
|
|
| (914 | ) |
Taxes paid related to net share settlement of share-based payment awards |
|
| (11,057 | ) |
|
| (5,638 | ) |
|
| (5,845 | ) |
Distributions to noncontrolling interests |
|
| (2,716 | ) |
|
| (4,577 | ) |
|
| (2,548 | ) |
Dividends paid |
|
| (21,291 | ) |
|
| (21,259 | ) |
|
| (20,884 | ) |
Net cash provided by (used in) financing activities |
|
| 94,574 |
|
|
| (62,821 | ) |
|
| (40,504 | ) |
Effect of exchange rate changes on cash |
|
| (119 | ) |
|
| 337 |
|
|
| 272 |
|
Net increase in cash and cash equivalents |
|
| 15,985 |
|
|
| 9,931 |
|
|
| 5,510 |
|
Cash and cash equivalents as of beginning of year |
|
| 27,818 |
|
|
| 17,887 |
|
|
| 12,377 |
|
Cash and cash equivalents as of end of year |
| $ | 43,803 |
|
| $ | 27,818 |
|
| $ | 17,887 |
|
See Notes to the Consolidated Financial Statements.
64 /
Schnitzer Steel Industries, Inc. Form 10-KCONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Currency – U.S. Dollar)
|
| Year Ended August 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
| |||
Cash paid during the year for: |
|
|
|
|
|
|
|
|
| |||
Interest |
| $ | 4,712 |
|
| $ | 2,669 |
|
| $ | 5,503 |
|
Income taxes, net |
| $ | 17,309 |
|
| $ | 8,244 |
|
| $ | 478 |
|
Schedule of noncash investing and financing transactions: |
|
|
|
|
|
|
|
|
| |||
Purchases of property, plant and equipment included in liabilities |
| $ | 38,136 |
|
| $ | 29,337 |
|
| $ | 27,319 |
|
See Notes to the Consolidated Financial Statements.
65 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Note 1
Founded in 1906, Schnitzer Steel Industries, Inc. (the “Company”), an Oregon corporation, is one of North America’s largest recyclers of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products.
The Company began reporting on this new segment structure in the fourth quarter of fiscal 2017 as reflected in this Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform to the current period presentation for all activities of the reorganized segments. Recasting this historical information did not have an impact on the Company's consolidated financial performance for any of the periods presented.
As of August 31, 2017,2022, all of the Company’s facilities were located in the United States ("(“U.S."”) and its territories and Canada.
Note 2 –- Summary of Significant Accounting Policies
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the CompanySchnitzer Steel Industries, Inc. and its majority-owned and wholly-owned subsidiaries. The equity method of accounting is used for investments in joint ventures over which the Company has significant influence but does not have effective control. The cost method of accounting is used for investments in entities over which the Company is not able to exercise significant influence. All significant intercompany account balances, transactions, profits, and losses have been eliminated. All transactions and relationships with potential variable interest entities are evaluated to determine whether the Company is the primary beneficiary of the entities, therefore requiring consolidation. The Company does not have any variable interest entities requiring consolidation.
Segment Reporting
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 reflects a functionally based, integrated model and includes a single operating and reportable segment.
Accounting Changes
As of the beginning of the first quarter of fiscal 2020, the Company adopted an accounting standards update that requires a lessee to recognize a lease liability and a lease right-of-use asset on its balance sheet for all leases greater than 12 months, including those classified as operating leases. The resultsCompany adopted the new lease accounting standard using the modified retrospective transition method, whereby it applied the new requirements by recognizing a cumulative-effect adjustment to the opening balance of discontinued operations areretained earnings as of September 1, 2019. Such cumulative-effect adjustment for the Company was less than $1 million, which is presented separately net of tax, from the results of ongoing operations for all periods presented. The expenses included in the resultsConsolidated Statements of discontinued operations areEquity. Adoption using the direct operating expenses incurred by the disposed components that may be reasonably segregated from the costsmodified retrospective transition method did not have an impact on any prior period earnings of the ongoing operations ofCompany, and no comparative prior periods were adjusted for the Company. Asset impairments related to the disposed components are also included in the results of discontinued operations.new guidance. See Note 85 - Discontinued Operations andLeases for the Asset Impairment Charges (Recoveries), net section of this Note for further detail.disclosures required under the new standard.
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 $21$56 million and $3$47 million as of
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,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 of 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.
66 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
The Company evaluates the collectabilitycollectibility 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 awarerequired deposits prior to shipment, the aging of circumstances that may impair a customer’s ability to meet itscustomer receivable balances, the financial obligations, management records a specific allowance against amounts due and reducescondition of the receivable to the amount the Company believes will be collected. For all otherCompany’s customers, the Company maintains an allowance that considers the total receivables outstanding, 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. The allowance for doubtful accountscredit losses was $2$2 million as of both August 31, 20172022 and 2016.2021.
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 Consolidated Statements of Cash Flows and totaled $11 million, $10 million, and $9 million for the fiscal years ended August 31, 2022, 2021, and 2020, respectively.
Inventories
The Company’s inventories consist of processed and unprocessed scrap metal (ferrous, nonferrous, and mixed nonferrous recovered joint productproducts arising from the manufacturing process), semi-finished steel products (billets), finished steel products (primarily rebar, wire rod, and merchant bar), used and salvaged vehicles, and supplies. Inventories are stated at the lower of cost or market.and net realizable value. The Company determines the cost of ferrous and nonferrous scrap metal inventories using the average cost method and capitalizes substantially all direct processing costs and yardfacility costs into inventory. The Company allocates material and production costs to joint products using the gross margin method. AMRThe Company determines the cost of used and salvaged vehicle inventory at its auto parts stores, which is reported within finished goods, based on the average price the Company pays for a vehicle and capitalizes the vehicle cost and substantially all production costs into inventory. CSSThe Company determines the cost of its semi-finished and finished steel product inventories based on average costs and capitalizes all direct and indirect costs of manufacturing into inventory. Indirect costs of manufacturing include general plant costs, maintenance, and yardfacility costs. The Company determines the cost of the substantial majority of its supplies inventory using the average cost method and reduces the carrying value for losses due to obsolescence. Fixed manufacturing costs incurred in periods of abnormally low production are expensed. The Company considers estimated future selling prices when determining the estimated net realizable value of its inventory. As the Company generally sells its export recycled ferrous metal under contracts that provide for shipment within 30 to 60 days after the price is agreed, it utilizes the selling prices under committed contracts and sales orders for determining the estimated market pricenet realizable value of quantities on hand that will be shipped under these contracts and sales orders.
The accounting process the Company uses to record ferrous scrap metal quantities relies on significant estimates. With respect to estimating the quantities of unprocessed ferrous scrap metal inventory that are moved into production, management relies on weighed quantities of the processed ferrous material, adjusted for estimated metal recoveries and yields that are based on historical trends and other judgments by management. Actual recoveries and yields can vary depending on product quality, moisture content, and the source of the unprocessed metal. The Company’s estimates are intended to reasonably reflect the quantities of unprocessed ferrous scrap metal that are used in the production of processed ferrous metal. To assist in validating the reasonableness of these estimates, management periodically reviews shrink factors and performs periodicmonthly physical inventories to verify the quantity of inventory on hand.inventories. Due to the inherent nature of the Company'sCompany’s scrap metal inventories, including variations in product density, holding period, and production processes utilized to manufacture the products, physical inventories will not necessarily detect all variances for scrap metal inventory such that estimates of quantities are required. To mitigate this risk, the Company further adjusts its ferrous physical inventories when the volume of a commodity is low and a physical inventory count canis deemed to more accurately estimate the remaining volume.
Leases
The Company enters into leases to obtain access to real property, machinery, and equipment assets. Most of the Company’s lease obligations relate to real property leases for the Company’s operating sites, including the substantial majority of its auto parts stores, and for the Company’s administrative offices. The Company determines whether an arrangement contains a lease at inception by assessing whether it receives the right to direct the use of and obtain substantially all of the economic benefit from use of the underlying asset. Lease classification, measurement, and recognition are determined at lease commencement, which is the date the underlying asset is available for use by the Company. The accounting classification of a lease is based on whether the arrangement is effectively a financed purchase of the underlying asset (finance lease) or not (operating lease). Leases that, at lease commencement, have a non-cancellable lease term of 12 months or less and do not include an option to either purchase the underlying asset or renew the lease beyond 12 months that the Company is reasonably certain to exercise are classified as short-term leases and are not recognized on the balance sheet.
67 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
For leases other than short-term leases, the Company recognizes right-of-use assets and lease liabilities based primarily on the present value of future minimum lease payments over the lease term at lease commencement. Right-of-use assets represent the Company’s right to use the underlying asset during the lease term, while lease liabilities represent the Company’s obligation to make future lease payments. The lease term is the non-cancellable period of the lease, together with periods covered by renewal (or termination) options which the Company is reasonably certain to exercise (or not to exercise). Lease payments are discounted to present value using the Company’s incremental borrowing rate unless the discount rate implicit in the lease is readily determinable. The Company’s incremental borrowing rate for each lease is the estimated rate of interest that the Company would have to pay to borrow the aggregate lease payments on a collateralized basis over the lease term. Estimation of the incremental borrowing rate requires judgment by management and reflects an assessment of the Company’s credit standing to derive an implied secured credit rating and corresponding yield curve. Right-of-use assets and lease liabilities are subject to remeasurement after lease commencement when certain events or changes in circumstances arise, such as a change in the lease term due to reassessment of whether the Company is reasonably certain to exercise a renewal or termination option.
For operating leases, lease expense is recognized on a straight-line basis over the lease term. For finance leases, the lease right-of-use asset is amortized on a straight-line basis and interest expense is recognized on the lease liability using the effective interest rate method. Many of the Company’s real property leases contain variable lease payments that depend on an index or a rate, which are included in the measurement of the right-of-use asset and lease liability using the index or rate at lease commencement. Subsequent changes in variable lease payments are recorded as variable lease expenses during the period in which they are incurred. The Company elected a practical expedient to not separate lease and related non-lease components for accounting purposes and, thus, costs related to such non-lease components are disclosed as lease expense. Payments for short-term leases are recognized in the income statement on a straight-line basis over the lease term. See Note 5 - Leases for further detail.
The Company leases machinery assets to customers primarily to facilitate the provision of recycling services. For the periods presented, such lessor arrangements were classified as operating leases, whereby the Company keeps the asset underlying the lease on its balance sheet and depreciates the asset based on its estimated useful life. The Company recognizes lease income for these operating leases on a straight-line basis within revenues in the Consolidated Statements of Operations. As of August 31, 2022 and 2021, property, plant and equipment, net, as reported in the Consolidated Balance Sheets, included machinery assets underlying these operating leases with a carrying value of $13 million and $11 million, respectively. Lease income derived from these operating leases was not material to any of the periods presented.
Property, Plant and Equipment, net
Property, plant and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, while routine repair and maintenance costs are expensed as incurred. Interest cost related to the construction of qualifying assets is capitalized as part of the construction costs and was not material to any of the periods presented. When assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and resulting gains or losses are generally included in operating expense. Gains and losses from sales of assets related to an exit activity are reported within restructuring charges and other exit-related activities in the Consolidated Statements of Operations. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets. Upon idling an asset, depreciation continues to be recorded. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease term.
As of
August 31,Useful Life | ||
Machinery and equipment | 3 to 40 | |
Land improvements | 3 to 35 | |
Buildings and leasehold improvements | 5 to 40 | |
Enterprise Resource Planning (“ERP”) systems | 6 to 17 | |
Office equipment and other software licenses | 3 to 10 |
Prepaid Expenses
The Company’s prepaid expenses, reported within prepaid expenses and other current assets in the Consolidated Balance Sheets, totaled $43 million and $22 million as of August 31, 2022 and 2021, respectively, and consisted primarily of deposits on capital projects, prepaid insurance, prepaid services, and prepaid property taxes.
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Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Other Assets
The Company’s other assets, exclusive of prepaid expenses consistand assets relating to certain employee benefit plans, consisted primarily of receivables from insurers, two equity investments, capitalized implementation costs for cloud computing arrangements, cash held in a cost method investment,client trust account relating to a legal settlement, major spare parts and equipment, debt issuance costs, and notes and other contractual receivables from suppliers, and assets held for sale.receivables. Other assets are reported within either prepaid expenses and other current assets or other assets in the 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.insurers. 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.
Other assets as of August 31, 2022 and 2021 also included approximately $7 million and $8 million, respectively, in connection with 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 10 - Commitments and Contingencies for further discussion of this matter.
The Company invested $6 million in the equity of a privately-held U.S. waste and recycling entity in fiscal 2017, and in May 2022, the Company invested $6$5 million in athe equity of an unrelated privately-held Canadian recycling entity.In August 2022, the privately-held U.S. waste and recycling entity merged with a publicly-traded U.S. entity. As a result of the merger, the Company's investment is held in equity units of a subsidiary of the publicly-traded entity, which equity units are not publicly traded but are exchangeable for shares of the publicly-traded entity. The timing and magnitude of exchange is solely at the discretion of the publicly-traded entity.The Company's influence over the operating and financial policies of theeach entity is not significant, and, thus, the investment isinvestments are accounted for under the cost method. Under the cost method, the investment isguidance for investments in equity securities. The equity investments do not have readily determinable fair values and, therefore, are carried at cost and adjusted only for other-than-temporary impairments certain distributions, and additional investments.observable price changes. The investment is presented as part of AMR andinvestments are reported within other assets in the Consolidated Balance Sheets. The Company does not hold any other cost-method investments. As of August 31, 2017,2022 and 2021, the Company had not identified any events or changes in circumstances that may have a significant adverse effect on the fairaggregate carrying value of the investmentinvestments was $11 million and $6 million, respectively. The Company has not recorded any impairments or indicatorsupward or downward adjustments to the carrying value of other-than-temporary impairment.
The Company’s cloud computing arrangements primarily comprise hosting arrangements which are service contracts, whereby the Company gains remote access to use enterprise software hosted by the vendor or another third party on an as-needed basis for a period of time in exchange for a subscription fee. Subscription fees are usually prepaid and recorded in operating expense over the period that the Company has access to use the software. Implementation costs for cloud computing arrangements are capitalized if certain criteria are met and consist of internal and external costs directly attributable to developing and configuring cloud computing software for its intended use. Amortization of capitalized implementation costs is recorded on a straight-line basis over the term of the cloud computing arrangement, which is the non-cancellable period of the agreement, together with periods covered by renewal options which the Company is reasonably certain to exercise.
Debt issuance costs consist primarily of costs incurred by the Company to enter into or modify its credit facilities. The Company reports deferred debt issuance costs within other assets in the Consolidated Balance Sheets and amortizes them to interest expense on a straight-line basis over the contractual term of the arrangement.
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SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Notes and other contractual receivables from suppliers consist primarily of advances to entities in the business of extracting scrap metal through demolition and other activities. Repayment of these advances to suppliers is in either cash or scrap metal. The Company performs periodic reviews of its notes and other contractual receivables from suppliers to identify credit risks and to assess the overall collectabilitycollectibility of the receivables, which typically involves consideration of the value of collateral which in the case of advances to suppliers is generally in the form of scrap metal extracted from demolition and construction projects. A note or other contractual receivable from a supplier is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the agreement. Once a note or other contractual receivable from a supplier has been identified as impaired, it is measured based on the present value of payments expected to be received, discounted at the receivable’s contractual interest rate, or for arrangements that are solely dependent on collateral for repayment, the estimated fair value of the collateral less estimated costs to sell. If the carrying value of the receivable exceeds its recoverable amount, an impairment is recorded for the difference.
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 classified as held for sale upon meeting criteria specifieddemonstrated 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.
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. As a result of the fire, the rolling mill production ceased in early June 2021. In August 2021, the steel mill began ramping up operations following the substantial completion of replacement and repairs of property and equipment in the accounting standards. An asset classified as heldmelt shop that had been lost or damaged by the fire. The Company experienced the loss of business income during the shutdown of the steel mill and the subsequent ramp-up phase, which was substantially completed during the second quarter of fiscal 2022. The Company filed initial insurance claims for sale is measuredthe physical loss and damage experienced at the lowermill's melt shop and business income losses resulting from the matter. As of its carrying amount or fair value less cost to sell with no further adjustments for depreciation. An impairment loss is recognized for any initial or subsequent write-down of the asset to its fair value less cost to sell. The Company generally determines fair value using Level 3 inputs under the fair value hierarchy consisting of information provided by brokersAugust 31, 2021, prepaid expenses and other external sources along with management’s own assumptions. Seecurrent assets in the Asset Impairment Charges (Recoveries), net sectionConsolidated Balance Sheets included an initial $10 million insurance receivable recognized in the fourth quarter of this Note below for tabular presentationfiscal 2021, primarily offsetting applicable losses including capital purchases of impairment charges recorded$10 million that had been incurred by the Company on assets held for sale during the periods presented.as of August 31, 2021. In fiscal 2017,2022, the Company sold equipment assets that had been classified as held for sale priorincreased the amount of this insurance receivable to being fully impaired in fiscal 2015. The Company recorded$25 million and recognized a related $15 million insurance recovery gain on the salewithin cost of $1 million in fiscal 2017, which is reported within other asset impairment charges (recoveries), netgoods sold in the Consolidated Statements of Operations. TheOperations, reflecting recovery of applicable losses incurred as a result of the fire to date. In addition, during fiscal 2022, the Company didreceived advance payments from insurers totaling approximately $30 million towards the Company’s claims, and not havereflecting any assets held for salefinal or full settlement of claims with the insurers, which amount reduced the $25 million insurance receivable to zero with the remaining amount of advance payments of $5 million reported within other accrued liabilities in the Consolidated Balance Sheets as of August 31, 2017. As of August 31, 2016,2022.
On December 8, 2021, the Company experienced a fire at its metals recycling facility in Everett, Massachusetts. Direct physical loss or damage to property from the incident was limited to the facility’s shredder building and equipment, with no bodily injuries and no physical loss or damage to property reported less than $1at other buildings or equipment. As a result of the fire, shredding operations ceased, while all non-shredding operations at the facility continued, including torching, shearing, separating, and sorting purchased non-shreddable recycled ferrous metals. On January 28, 2022, shredding operations at the facility began ramping up following the replacement and repairs to shredder equipment that had been damaged. Completion of the remainder of repair and replacement of property that experienced physical loss or damage, primarily buildings and improvements, will occur over a longer period and impacts on business income may continue. In addition, as of June 18, 2022, shredder operations temporarily ceased at the facility pending completion of discussions with the Massachusetts Department of Environmental Protection and the Massachusetts Attorney General’s office regarding installation and operation of temporary emission capture and controls that would allow operation of the shredder prior to completion of the repair and replacement of the shredder enclosure building. Non-shredding operations at the facility continue. The Company filed initial insurance claims for the property that experienced physical loss or damage and anticipated business income losses resulting from the matter. In fiscal 2022, the Company recognized an aggregate $17 million of assets held for saleinsurance receivable and related insurance recovery gain, reported within prepaid expenses and other current assets in the Consolidated Balance Sheets.Sheets and within cost of goods sold in the Consolidated Statements of Operations, respectively, reflecting recovery of applicable losses including impairment charges of $7 million related to the carrying value of plant and equipment assets lost in or damaged by the fire and initial capital purchases, non-capitalizable repair and replacement costs, and other applicable losses totaling $10 million that had been incurred by the Company as of August 31, 2022. Also, during fiscal 2022, the Company received advance payments from insurers totaling approximately $7 million towards the Company's claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the insurance receivable to $10 million as of August 31, 2022.
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Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Long-Lived Assets
The Company tests long-lived tangible and intangible assets for impairment at the asset group level, which is determined based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Operating lease right-of-use assets are considered long-lived assets subject to this impairment testing. For the Company'sCompany’s metals recycling operations, reported within AMR, an asset group is generally comprisedconsists of the regional shredding and export operation along with surrounding feeder yards. For regions with no shredding and export operations, eachexcept that the combined Oregon metals recycling yardand steel manufacturing operations is ana single asset group. For the Company'sCompany’s auto parts operations, generally each auto parts store is an asset group. The combined steel manufacturing and metals recycling operations within CSS are a single asset group. Prior to their combination into CSS in the fourth quarter of fiscal 2017, the Company's steel manufacturing operations and Oregon metals recycling operations were distinct asset groups. The Company tests its asset groups for impairment when certain triggering events or changes in circumstances indicate that the carrying value of the asset group may be impaired. If the carrying value of the asset group is not recoverable because it exceeds the Company’s estimate of future undiscounted cash flows from the use and eventual disposition of the asset group, an impairment loss is recognized by the amount the carrying value exceeds its fair value, if any. The impairment loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value. Fair value is determined primarily using one or more of the income, market, or cost and market approaches.
With respect to individual long-lived assets, changes in circumstances may merit a change in the estimated useful lives or salvage values of the assets, which are accounted for prospectively in the period of change. For such assets, the useful life is shortened based on the Company's currentCompany’s plans to dispose of or abandon the asset before the end of its original useful life and depreciation is accelerated beginning when that determination is made. During fiscal 2017, the Company recognized accelerated depreciation primarily due to shortening the useful lives of idled and decommissioned machinery and equipment assets. During fiscal 2016 and 2015, the Company recognized accelerated depreciation due to shortened useful lives in connection with site closures and idled equipment.
Long-lived asset impairment charges and accelerated depreciation. Long-lived asset impairment charges(recoveries) and accelerated depreciation are reported in the Consolidated Statements of Operations within (1) other asset impairment charges, (recoveries), net;net and (2) restructuring charges and other exit-related activities if related to a site closure not qualifying for discontinued operations reporting; or (3) loss from discontinued operations, ifclosure. In fiscal 2022, the Company reported $2 million of such items within asset impairment charges, net, related primarily to abandonment of obsolete machinery and equipment assets. In fiscal 2020, the Company reported $6 million of such items within asset impairment charges, net, comprising primarily $2 million related to a componentabandonment of obsolete machinery and equipment assets, $2 million related to impairment of two auto parts stores, and $2 million related to accelerated depreciation due to the shortening of the Company qualifying for discontinued operations reporting.useful lives of certain metals recovery assets.
Investments in Joint Ventures
As of August 31, 2017,2022, the Company had four 50%two50%-owned joint venture interests which were accounted for under the equity method of accounting. ThreeOne of the joint venture interests are presented as part of AMR operations, and one interest is presented as part of CSS operations. The joint ventures sellsells recycled metal to AMR and to CSSthe Company’s operations 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. As of August 31, 2017,2022, the Company’s investments in equity method joint ventures have generated $9$12 million in cumulative undistributed earnings.
A loss in value of an investment in a joint venture is recognized when the decline is other than temporary. Management considers all available evidence to evaluate the realizable value of its investments including the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the joint venture business, and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. Once management determines that an other-than-temporary impairment exists, the investment is written down to its fair value, which establishes a new cost basis. The Company determines fair value using Level 3 inputs under the fair value hierarchy using an income approach based on a discounted cash flow analysis. During fiscal 2017 and 2016, the Company recorded impairment charges of $1 million and $2 million, respectively, related to its investments in joint ventures, which are reported within other asset impairment charges (recoveries), net in the Consolidated Statements of Operations.
Year Ended August 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Reported within other asset impairment charges (recoveries), net: | |||||||||||
Auto and Metals Recycling | |||||||||||
Long-lived assets | $ | — | $ | 7,336 | $ | 41,676 | |||||
Accelerated depreciation | — | 6,208 | — | ||||||||
Investments in joint ventures | 860 | — | — | ||||||||
Assets held for sale | (1,044 | ) | 1,659 | 2,558 | |||||||
Other assets | — | 1,208 | 140 | ||||||||
Total Auto and Metals Recycling | (184 | ) | 16,411 | 44,374 | |||||||
Cascade Steel and Scrap | |||||||||||
Accelerated depreciation | 401 | — | — | ||||||||
Investments in joint ventures | (934 | ) | 1,968 | — | |||||||
Supplies inventory | — | 2,224 | — | ||||||||
Total Cascade Steel and Scrap | (533 | ) | 4,192 | — | |||||||
Corporate - Other assets | — | 79 | 745 | ||||||||
(717 | ) | 20,682 | 45,119 | ||||||||
Reported within restructuring charges and other exit-related activities: | |||||||||||
Long-lived assets | — | 468 | — | ||||||||
Accelerated depreciation | 96 | 630 | 3,836 | ||||||||
Supplies inventory | — | 1,047 | — | ||||||||
Other assets | 62 | 35 | — | ||||||||
Exit-related gains | (565 | ) | (1,337 | ) | — | ||||||
(407 | ) | 843 | 3,836 | ||||||||
Reported within discontinued operations: | |||||||||||
Long-lived assets | — | 673 | 2,666 | ||||||||
Accelerated depreciation | — | 274 | — | ||||||||
— | 947 | 2,666 | |||||||||
Total | $ | (1,124 | ) | $ | 22,472 | $ | 51,621 |
Goodwill and Other Intangible Assets, net
Goodwill represents the excess of the purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. 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)“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 results.
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Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
When testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than notmore-likely-than-not that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not,more-likely-than-not, the Company is then required to perform the quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
When the Company is required to performperforms a quantitative goodwill impairment test, it estimates the fair value of itsthe reporting unitsunit using an income approach based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital (“WACC”) determined separately for eachthe reporting unit. The determination of fair value involves the use of significant estimates and assumptions, including revenue growth rates driven by future ferrous and nonferrous commodity pricesprice and sales volume expectations, operatingautomobile scrap and core price and sales volume expectations, gross margins, selling, general, and administrative expense relative to total revenues, capital expenditures, working capital requirements, discount rate (WACC), tax rates,rate, terminal growth rates, discount rates,rate, benefits associated with a taxable transaction, and synergistic benefits available to market participants. In addition, to corroborate the reporting units’ valuation, the Company uses a market approach based on earnings multiple data and a reconciliation of the Company’s estimate of the aggregate fair value of theall reporting units to the Company’s market capitalization, including consideration of a control premium. See Note 6 - Goodwill and Other Intangible Assets, net for further detail including the recognition ofThe Company did not record goodwill impairment charges in any of $9 million and $141 million during fiscal 2016 and 2015, respectively.
The Company tests indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If the Company believes, as a result of its qualitative assessment, that it is more likely than notmore-likely-than-not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The Company did not record impairment charges on indefinite-lived intangible assets in any of the periods presented. See Note 8 - Goodwill and Other Intangible Assets, net for further detail.
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 as a result of 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. See Note 7 - Business Acquisitions for further detail.
Restructuring Charges
Restructuring charges consist of severance, contract termination, and other restructuring-related costs. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred under operating leases for their remaining terms without economic benefit to the Company. A liability for contract termination costs is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals. A liability foror other restructuring-related costs is measured at its fair value in the period in which the liability is incurred. See
Accrued Workers’ Compensation Costs
The Company is self-insured for the significant majority of workers’ compensation claims with exposure limited by various stop-loss insurance policies. The Company estimates the costs of workers’ compensation claims based on the nature of the injury incurred and on guidelines established by the applicable state. An accrual is recorded based upon the amount of unpaid claims as of the balance sheet date. Accrued amounts recorded for individual claims are reviewed periodically as treatment progresses and adjusted to reflect additional information that becomes available. The estimated cost of claims incurred but not reported is included in the accrual. The Company accrued $10$6 million and $7 million for the estimated cost of unpaid workers’ compensation claims as of August 31, 20172022 and 2016,2021, respectively, which are included in other accrued liabilities in the Consolidated Balance Sheets.Sheets, with corresponding workers’ compensation insurance receivables of $4 million as of both August 31, 2022 and 2021 included in other current assets.
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Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Environmental Liabilities
The Company estimates future costs for known environmental remediation requirements and accrues for them on an undiscounted basis when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated but the timing of incurring the estimated costs is unknown. The Company considers various factors when estimating its environmental liabilities.liabilities, and it evaluates the adequacy of these liabilities on a quarterly basis. Adjustments to the liabilities are recorded to selling, general, and administrative expense and madein the Consolidated Statements of Operations when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or when expenditures are made for which liabilities were established. Legal investigation and defense costs incurred in connection with environmental contingencies are expensed as incurred.
When only a wide range of estimated amounts can be reasonably established and no other amount within the range is a better estimate than another, the low end of the range is recorded in the financial statements. In a number of cases, it is possible that the Company may receive reimbursement through insurance or from other potentially responsiblethird parties for a site.site or matter. In these situations, recoveries of environmental remediation costs from other parties are recognized when realization of the claim for recovery is either realized or realizable.deemed probable. The amounts recorded for environmental liabilities are reviewed periodically as site assessment and remediation progresses at individual sites or for particular matters and adjusted to reflect additional information that becomes available. Due to evolving remediation technology, changing regulations, possible third partythird-party contributions, the subjective nature of the assumptions used, and other factors, amounts accrued could vary significantly from amounts paid. See “Contingencies – Environmental” in
Loss Contingencies
The Company is subject to certain legal proceedings and contingencies in addition to those related to environmental liabilities discussed above in this Note, the outcomes of which are subject to significant uncertainty. The Company accrues for estimated losses if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company uses judgment and evaluates whether a loss contingency arising from litigation or an unasserted claim should be disclosed or recorded. The outcome of legal proceedings and other contingencies is inherently uncertain and often difficult to estimate. As of August 31, 2017 and 2016, accruals forAccrued legal contingencies net of corresponding receivables from insurers were not material.are reported within other accrued liabilities in the Consolidated Balance Sheets. See “Contingencies – Other” in Note 10 - Commitments and Contingencies for further detail.
Financial Instruments
The Company’s financial instruments include primarily cash and cash equivalents, accounts receivable, accounts payable, and debt. The Company uses the market approach to value its financial assets and liabilities, determined using available market information. The net carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments. For long-term debt, which is primarily at variable interest rates, fair value is estimated using observable inputs (Level 2) and approximates itsthe carrying value.
Fair Value Measurements
Fair value is measured using inputs from the
three levels of the fair value hierarchy. Classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are described as follows:When developing the fair value measurements, the Company uses quoted market prices whenever available or seeks to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available.
Derivatives
Derivative contracts for commodities used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases and normal sales. Contracts that qualify as normal purchases or normal sales are not marked-to-market. The Company does not use derivative instruments for trading or speculative purposes.
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SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Foreign Currency Translation and Transactions
Assets and liabilities of the Company’s operations in Canada are translated into U.S. dollars at the period-end exchange rate, revenues and expenses of these operations are translated into U.S. dollars at the average exchange rate for the period, and cash flows of these operations are translated into U.S. dollars using the exchange rates in effect at the time of the cash flows. Translation adjustments are not included in determining net income (loss) for the period, but are recorded in accumulated other comprehensive loss,income, a separate component of shareholders’ equity. Foreign currency transaction gains and losses are generated from the effects of exchange rate changes on transactions denominated in a currency other than the functional currency. Gains and losses on foreign currency transactions are generally included in determining net income (loss) for the period. The Company reports these gains and losses within other income,expense, net in the Consolidated Statements of Operations. Net realized and unrealized foreign currency transaction gains and losses were not material for fiscal years 2017, 2016 and 2015.2022, 2021, or 2020.
Common Stock
Each share of Class A and Class B common stock is entitled to
one vote. Additionally, each share of Class B common stock may be converted to one share of Class A common stock. As such, the Company reserves one share of Class A common stock for each share of Class B common stock outstanding. There are currently no meaningful distinctions between the rights of holders of Class A shares and Class B shares.Share Repurchases
The Company accounts for the repurchase of stock at par value. All shares repurchased are deemed retired. Upon retirement of the shares, the Company records the difference between the weighted average cost of such shares and the par value of the stock as an adjustment to additional paid-in capital, with the excess recorded to retained earnings when additional paid-in capital is not sufficient.
Revenue Recognition
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 recycled ferrous and nonferrous metal, auto bodies, 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 it has a contract or purchase order from a customer with a fixed or determinable price,title to and risk of loss of the goods transfer to the customer. The timing of transfer of title and risk of loss transfer to the buyer, and collectibility is reasonably assured. Title for both recycled scrap metal and finished steel products transfers based ondictated by customary or explicitly stated contract terms. Nearly all of the Company’s ferrous export sales are made with letters of credit, reducing credit risk. However, ferrous domestic sales, nonferrous sales and sales of finished steel products are generally made on open account. Nonferrous export sales typically require a deposit prior to shipment. All sales made on open account are evaluated for collectability prior to revenue recognition. Additionally,For example, the Company recognizes revenue on partially loaded bulk shipments of ferrous recycled scrapferrous metal when contractual terms support revenue recognition based on transfer of title and risk of loss. The Company reports revenue netsignificant majority of the payments madeCompany’s sales involve transfer of control to the suppliercustomer, and thus revenue recognition, before delivery to the customer’s destination; for example, upon release of scrap metalthe goods to the shipper. The Company’s bill-and-hold arrangements involve transfer of control to the customer when the supplier,goods have been segregated from other inventory at the Company’s facility and not the Company, is responsibleare ready for fulfillment, including the acceptability of the products purchased byphysical transfer to the customer. Retail auto parts revenueShipping 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, paysand freight expense is accrued to cost of goods sold when the related revenue is recognized.
In certain regional markets, the Company enters into contracts whereby it arranges for, or brokers, the transfer of recyclable material between suppliers and end customers. For transactions in which the Company obtains substantive control of the material before the goods are transferred to the end customer, for example by arranging for the part. Historically, there haveprocessing 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 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 material (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.
74 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
The Company recognizes revenue based on contractually stated selling prices and quantities shipped, net of sales tax, and adjusted for estimated claims and discounts. Claims are customary in the recycled 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 each of the years ended August 31, 2022, 2021, and 2020. The Company experiences very few sales returns and, adjustments that impact the ultimate collection of revenues; therefore, no material provisions for returns have been made when sales are recognized. For each of the years ended August 31, 2022, 2021, and 2020, revenue adjustments related to performance obligations that were satisfied in previous periods were not material.
Advertising Costs
The Company expenses advertising costs when incurred. Advertising expense was $6 million in fiscal 2017, and $5 million infor each of fiscal 2016the years ended August 31, 2022 and 2015.2021 was $6 million and was $5 million for the year ended August 31, 2020.
Share-Based Compensation
The Company estimates the grant-date fair value of stock-based compensation awards based on the market closing price of the underlying Class A common stock on the date of grant, except for performance share awards with a total shareholder return (“TSR”) market condition for which the Company estimates the grant-date fair value using a Monte-Carlo simulation model. The Company recognizes compensation cost relating to share-based payment transactions with employees and non-employee directorsfor all awards, net of estimated forfeitures, over the vesting period, with therequisite service period. Share-based compensation cost measuredis based on the grant-date fair value as described above, except for performance share awards with a non-market performance condition. For these awards, compensation cost is based on the probable outcome of achieving the specified performance conditions. The Company reassesses whether achievement of the equity instruments issued, netperformance condition is probable at each reporting date and, if probable, the level of an estimated forfeiture rate.achievement. See
Income Taxes
Income taxes are accounted for using the asset and liability method. This requires the recognition of taxes currently payable or refundable and the recognition of deferred tax assets and liabilities for the future tax consequences of events that are recognized in one reporting period onin the Consolidated Financial Statements but in a different reporting period on the tax returns. Tax credits are recognized as a reduction of income tax expense in the year the credit arises. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than notmore-likely-than-not that a tax benefit will not be realized. 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. Tax benefits arising from uncertain tax positions are recognized when it is more likely than notmore-likely-than-not that the position will be sustained upon examination by the relevant tax authorities. The amount recognized in the financial statements is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. See
Net Income (Loss) Per Share
Basic net income (loss) per share attributable to SSI shareholders is computed by dividing net income (loss) attributable to SSI shareholders by the weighted average number of outstanding common shares during the periodsperiod presented including vested deferred stock units (“DSUs”) and restricted stock units (“RSUs”) meeting certain criteria. Diluted net income (loss) per share attributable to SSI shareholders is computed by dividing net income (loss) attributable to SSI shareholders by the weighted average number of common shares outstanding, assuming dilution. Potentially dilutive common shares include the assumed exercise of stock options and assumed vesting of performance share, DSURSU, and RSUDSU awards using the treasury stock method. Certain of the Company’s stock options and RSU and performance share awards were excluded from the calculation of diluted net income (loss) per share attributable to SSI because they were antidilutive; however, certain of these RSU and performance share awards could be dilutive in the future. Net income attributable to noncontrolling interests is deducted from income (loss) from continuing operations to arrive at income (loss) from continuing operations attributable to SSI shareholders for the purpose of calculating income (loss) per share from continuing operations attributable to SSI. Loss per share from discontinued operations attributable to SSI is presented separately in the Consolidated Statements of Operations.shareholders. See
75 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Use of Estimates
The preparation of the Company’s Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of revenue and expenses during the reporting period. Examples include revenue recognition; the allowance for doubtful accounts;credit losses; estimates of contingencies, including environmental liabilities and other legal liabilities; goodwill, long-lived asset and indefinite-lived intangible asset valuation; valuation of equity method and cost method investments; valuation of certain share-based awards; other asset valuation; inventory measurement and valuation; pension plan assumptions; and the assessment of the valuation of deferred income taxes and income tax contingencies. Actual results may differ from estimated amounts.
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, and notes and other contractual receivables from suppliers.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 $250,000$250 thousand as of August 31, 2017.2022. 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. 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 $48 million and $40 million of open letters of credit as of
Note 3 –- Recent Accounting Pronouncements
In May 2014,June 2022, an accounting standardstandards update was issued that clarifies that a contractual restriction on the principles for recognizing revenue from contracts with customers. The update will supersede the existing standard for recognizing revenue. Additional updates have been issued since May 2014 amending aspectssale of an equity security is not considered part of the initial updateunit of account of the equity security and, providing implementation guidance.therefore, is not considered in measuring fair value. The guidance is applicable to all contracts with customers regardlessamendments also clarify that an entity cannot, as a separate unit of industry-specific or transaction-specific fact patterns.account, recognize and measure a contractual sale restriction. Further, the guidance requires improved disclosures to help users of financial statements better understand the fair value, nature, amount,and timing and uncertainty of revenueequity securities subject to contractual sale restrictions. The guidance is applicable to all equity investments measured at fair value that is recognized.are subject to contractual restrictions. The standard is effective for the Company beginning in fiscal 2019,2025, including interim periods within that fiscal year. Upon becoming effective, an entity may adopt the standard either retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company is in the process of examining its current revenue streams and significant contracts with customers under the requirements of the new standard and, based on the progress of this examination to date, does not believe the standard will have a material impact on its financial position, net income or cash flows. The Company is currently examining certain scrap metal purchase and sale arrangements to determine if it is the principal or the agent in the transaction under the new guidance, the outcome of which could result in a different classification of the cost of scrap metal purchased compared to the Company's treatment under the existing revenue standard. The Company is also analyzing the expanded disclosure requirements under the new standard, the method of adoption, and potential changes to its accounting policies, processes, systems and internal controls that may be required to support the new standard.
Note 4 –- Inventories
Inventories consisted of the following as of August 31 (in thousands):
|
| 2022 |
|
| 2021 |
| ||
Processed and unprocessed scrap metal |
| $ | 166,368 |
|
| $ | 164,960 |
|
Semi-finished goods |
|
| 20,009 |
|
|
| 7,671 |
|
Finished goods |
|
| 72,625 |
|
|
| 39,368 |
|
Supplies |
|
| 56,187 |
|
|
| 44,428 |
|
Inventories |
| $ | 315,189 |
|
| $ | 256,427 |
|
2017 | 2016 | ||||||
Processed and unprocessed scrap metal | $ | 88,441 | $ | 49,061 | |||
Semi-finished goods (billets) | 3,243 | 8,320 | |||||
Finished goods | 40,462 | 40,646 | |||||
Supplies | 34,796 | 34,945 | |||||
Inventories | $ | 166,942 | $ | 132,972 |
76 /
Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Note 5 - Leases
The Company’s operating leases for real property underlying certain auto parts stores, metals recycling facilities, and administrative offices generally have non-cancellable lease terms of 5 to 10 years, and the significant majority contain multiple renewal options for a further 5 to 20 years. Renewal options which the Company is reasonably certain to exercise are included in the measurement of lease term. The Company��s finance leases and other operating leases involve primarily transportation equipment assets, have non-cancellable lease terms of less than 10 years and usually do not include renewal options.
The Company’s fiscal 2022 total lease cost was $36 million, consisting primarily of operating lease expense of $25 million and short-term lease expense of $10 million. The Company’s fiscal 2021 total lease cost was $30 million, consisting primarily of operating lease expense of $24 million and short-term lease expense of $5 million. The Company’s fiscal 2020 total lease cost was $28 million, consisting primarily of operating lease expense of $23 million and short-term lease expense of $4 million. The other components of the Company’s total lease cost for each of fiscal 2022, 2021 and 2020, including finance lease amortization and interest expense, variable lease expense, and sublease income, were not material both individually and in aggregate. The substantial majority of the Company’s total lease cost for each of fiscal 2022, 2021, and 2020 is presented within cost of goods sold in the Consolidated Statements of Operations.
Finance lease assets and liabilities consisted of the following as of August 31 (in thousands):
|
| Balance Sheet Classification |
| 2022 |
|
| 2021 |
| ||
Assets: |
|
|
|
|
|
|
|
| ||
Finance lease right-of-use assets(1) |
| Property, plant and equipment, net |
| $ | 4,861 |
|
| $ | 5,422 |
|
Liabilities: |
|
|
|
|
|
|
|
| ||
Finance lease liabilities - current |
| Short-term borrowings |
| $ | 1,736 |
|
| $ | 1,464 |
|
Finance lease liabilities - noncurrent |
| Long-term debt, net of current maturities |
|
| 4,158 |
|
|
| 5,127 |
|
Total finance lease liabilities |
|
|
| $ | 5,894 |
|
| $ | 6,591 |
|
The weighted average remaining lease terms and weighted average discount rates for the Company’s leases as of August 31:
|
| 2022 |
|
| 2021 |
| ||||||||||
|
| Weighted Average |
|
| Weighted Average |
|
| Weighted Average |
|
| Weighted Average |
| ||||
Operating leases |
|
| 9.5 |
|
|
| 3.36 | % |
|
| 9.7 |
|
|
| 3.37 | % |
Finance leases |
|
| 4.5 |
|
|
| 7.17 | % |
|
| 5.2 |
|
|
| 7.78 | % |
Maturities of lease liabilities by fiscal year as of August 31, 2022 were as follows (in thousands):
Year Ending August 31, |
| Finance Leases |
|
| Operating Leases |
| ||
2023 |
| $ | 1,991 |
|
| $ | 25,012 |
|
2024 |
|
| 1,715 |
|
|
| 20,810 |
|
2025 |
|
| 920 |
|
|
| 15,913 |
|
2026 |
|
| 700 |
|
|
| 12,754 |
|
2027 |
|
| 615 |
|
|
| 11,307 |
|
Thereafter |
|
| 735 |
|
|
| 59,999 |
|
Total lease payments |
|
| 6,676 |
|
|
| 145,795 |
|
Less amounts representing interest |
|
| (782 | ) |
|
| (22,484 | ) |
Total lease liabilities |
|
| 5,894 |
|
|
| 123,311 |
|
Less current maturities |
|
| (1,736 | ) |
|
| (21,660 | ) |
Lease liabilities, net of current maturities |
| $ | 4,158 |
|
| $ | 101,651 |
|
77 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Supplemental cash flow information and non-cash activity related to leases are as follows (in thousands):
|
| Year Ended August 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
| |||
Operating cash flows for operating leases |
| $ | 25,351 |
|
| $ | 24,154 |
|
| $ | 22,225 |
|
Operating cash flows for finance leases |
| $ | 403 |
|
| $ | 498 |
|
| $ | 628 |
|
Financing cash flows for finance leases |
| $ | 1,483 |
|
| $ | 1,332 |
|
| $ | 1,336 |
|
Lease liabilities arising from obtaining right-of-use assets(1): |
|
|
|
|
|
|
|
|
| |||
Operating leases |
| $ | 12,000 |
|
| $ | 8,325 |
|
| $ | 34,586 |
|
Finance leases |
| $ | 534 |
|
| $ | 445 |
|
| $ | 1,230 |
|
Note 5 –6 - Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following as of August 31 (in thousands):
|
| 2022 |
|
| 2021 |
| ||
Machinery and equipment |
| $ | 875,904 |
|
| $ | 791,043 |
|
Land and improvements |
|
| 324,453 |
|
|
| 304,188 |
|
Buildings and leasehold improvements |
|
| 148,634 |
|
|
| 147,106 |
|
Enterprise resource planning (ERP) systems |
|
| 18,945 |
|
|
| 17,760 |
|
Office equipment and other software licenses |
|
| 30,797 |
|
|
| 37,326 |
|
Construction in progress |
|
| 120,419 |
|
|
| 102,544 |
|
Property, plant and equipment, gross |
|
| 1,519,152 |
|
|
| 1,399,967 |
|
Less accumulated depreciation |
|
| (855,032 | ) |
|
| (837,293 | ) |
Property, plant and equipment, net(1) |
| $ | 664,120 |
|
| $ | 562,674 |
|
2017 | 2016 | ||||||
Machinery and equipment | $ | 683,364 | $ | 659,641 | |||
Land and improvements | 260,854 | 245,266 | |||||
Buildings and leasehold improvements | 111,077 | 104,121 | |||||
Office equipment | 48,517 | 49,924 | |||||
ERP systems | 17,884 | 17,735 | |||||
Construction in progress | 25,427 | 31,098 | |||||
Property, plant and equipment, gross | 1,147,123 | 1,107,785 | |||||
Less: accumulated depreciation | (756,494 | ) | (714,965 | ) | |||
Property, plant and equipment, net | $ | 390,629 | $ | 392,820 |
Depreciation expense for property, plant and equipment, which includes amortization expense for finance lease right-of-use assets, under capital leases, was $49$72 million,
Note 7 - Business Acquisitions
Columbus Recycling
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 $1recycled 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 2 - Summary of Significant Accounting Policies. The cash purchase price was approximately $107 million, was reported within discontinued operationssubject to adjustment for acquired net working capital relative to an agreed-upon benchmark, as well as other adjustments. The Company paid an additional $7 million at closing and an additional $3 million in August 2022, primarily for acquired net working capital in excess of the benchmark, resulting in total purchase consideration measured as of the fiscal year ended August 31, 2015. No depreciation expense was reported within discontinued2022 of approximately $117 million. 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 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.
78 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
The following table summarizes the 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 |
|
| 13,491 |
|
Operating lease right-of-use assets |
|
| 254 |
|
Goodwill(1) |
|
| 65,203 |
|
Other intangible assets |
|
| 19,741 |
|
Total assets acquired |
|
| 132,092 |
|
Current liabilities |
|
| 11,828 |
|
Other liabilities |
|
| 3,350 |
|
Total liabilities assumed |
|
| 15,178 |
|
Net assets acquired |
| $ | 116,914 |
|
The following table summarizes the 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 yearsacquired Columbus Recycling business beginning as of the October 1, 2021 acquisition date are included in the accompanying consolidated financial statements. For the fiscal year ended August 31, 20172022, the revenues of the acquired Columbus Recycling business contributed 4% of the Company’s consolidated revenues reported on the Consolidated Statements of Operations, and 2016.the amount of net income contributed by the acquired Columbus Recycling business was not material to the consolidated financial statements taken as a whole.
Encore Recycling
On April 29, 2022, the Company used cash on hand and borrowings under existing credit facilities to acquire two recycling facilities in the greater Atlanta, Georgia metropolitan area, including a metal shredding operation and recycled auto-parts center from the previous owners of Encore Recycling. The acquired Encore Recycling operations purchase and process scrap metal and end-of life vehicles from industrial manufacturers, local recycling companies, and individuals, and sell the recycled products to regional foundries and steel mills. Combined with the Company’s existing regional metals recycling facilities and recycled auto-parts centers, the acquired operations offer additional recycling products, services, and logistics solutions to customers and suppliers across portions of the Southeast, giving rise to expected benefits supporting the amount of acquired goodwill. The transaction qualified as a business combination for accounting purposes. The cash purchase price was approximately $55 million, subject to adjustment for acquired net working capital relative to an agreed-upon benchmark, as well as other adjustments. The Company paid an additional $8 million at closing for estimated net working capital in excess of the benchmark, which was still subject to adjustment as of the end of fiscal 2022, resulting in total purchase consideration measured as of August 31, 2022 of approximately $63 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.
79 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed by the Company as of the April 29, 2022 acquisition date (in thousands):
Accounts receivable |
| $ | 10,356 |
|
Inventories |
|
| 4,325 |
|
Other current assets |
|
| 15 |
|
Property, plant and equipment |
|
| 25,143 |
|
Operating lease right-of-use assets |
|
| 402 |
|
Goodwill(1) |
|
| 20,494 |
|
Other intangible assets |
|
| 4,809 |
|
Total assets acquired |
|
| 65,544 |
|
Current liabilities |
|
| 1,322 |
|
Other liabilities |
|
| 1,091 |
|
Total liabilities assumed |
|
| 2,413 |
|
Net assets acquired |
| $ | 63,131 |
|
The following table summarizes the provisional purchase price allocation to the identifiable intangible assets and their estimated useful lives as of the April 29, 2022 acquisition date (in thousands):
|
|
|
|
| Useful Life | |
Supplier relationships |
| $ | 3,679 |
|
| 7 |
Customer relationships |
|
| 1,130 |
|
| 7 |
|
| $ | 4,809 |
|
|
|
The results of operations for the acquired Encore Recycling business beginning as of the April 29, 2022 acquisition date are included in the accompanying consolidated financial statements. For the fiscal year ended August 31, 2022, the revenues and net income contributed by the acquired Encore Recycling business and reported in the Consolidated Statements of Operations were not material to the consolidated financial statements taken as a whole.
The following unaudited pro forma information presents the effect on the consolidated financial results of the Company of the Columbus Recycling and Encore Recycling businesses acquired during fiscal 2022 as though the businesses had been acquired as of the beginning of fiscal 2021 (in thousands):
|
| Year Ended August 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Revenues |
| $ | 3,566,000 |
|
| $ | 2,989,000 |
|
Net income |
| $ | 184,500 |
|
| $ | 179,000 |
|
Net income attributable to SSI shareholders |
| $ | 181,000 |
|
| $ | 174,500 |
|
There are no individually material, nonrecurring pro forma adjustments directly attributable to the business combinations included in these pro forma revenues and earnings.
The information included in the pro forma amounts is derived from historical information obtained from the sellers of the businesses. These pro forma results are not necessarily indicative of what actual results would have been had these acquisitions occurred as of the beginning of fiscal 2021. In addition, the pro forma results are not intended to be a projection of future results and do not reflect any synergies that may be achieved from combining operations.
80 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Note 6 –8 - Goodwill and Other Intangible Assets, net
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. In the second quarter of fiscal 2015, management identified the combination of a significant further weakening in market conditions at such time, continued constrained supply of raw materials due to the lower price environment which negatively impacted volumes, the planned idling or closure of certain production facilities and retail stores, the Company’s financial performance and a decline in the Company’s market capitalization during the first half of fiscal 2015 as a triggering event requiring an interim impairment test of goodwill allocated to its reporting units, which resulted in impairment of the remaining carrying amount of a reporting unit's goodwill totaling $141 million. The impairment charge is reported within the results of AMR in this report.
In the fourth quarter of fiscal 2017,2022, the Company performed the annual goodwill impairment test as of July 1, 2017.2022. As of the testing date, the balance of the Company'sCompany’s goodwill of $167was $254 million, which was carried in three reporting units. Substantially all of the $85 million of goodwill carried by one of the reporting units, a single reporting unit within AMR.regional metals recycling operation, related to two business acquisitions that were completed in fiscal 2022. The Company elected to first assess qualitative factors to determine whether the existence of events or circumstances led to a determination that it was more likely than not that the estimated fair value of the reporting unit was less than its carrying amount. As a result ofperform the qualitative assessment the Companyfor this reporting unit and concluded that it was not more likely than not that the fair value of the reporting unit was less than its carrying valuevalue. The remaining $169 million of goodwill was carried by two reporting units, which consist of a regional metals recycling operation and the Company's network of auto parts stores. For this remaining amount of goodwill, the Company had last performed the quantitative impairment test of goodwill in the fourth quarter of fiscal 2020 using a measurement date of July 1, 2020. Based on the changes in market conditions related to the general economy and the metals recycling industry, the extent of time that had passed since the last quantitative goodwill impairment test as of July 1, 2020, and the testingrealignment of reporting units as of September 1, 2020, the Company elected to not perform the qualitative assessment and proceed directly to the quantitative impairment test for goodwill carried by these two reporting units to identify potential impairment and measure an impairment loss, if necessary. The quantitative impairment test entails estimating the fair value of each reporting unit carrying goodwill and comparing it to the reporting unit’s carrying amount. The Company records the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, if any, not to exceed the total amount of goodwill allocated to that reporting unit.
The Company estimated the fair value of the metals recycling and autos reporting units subject to the quantitative impairment test as of July 1, 2022 using an income approach based on the present value of expected future cash flows, including terminal value, utilizing a market-based WACC assessed specifically for each reporting unit. The determination of fair value involves the use of estimates and assumptions, including revenue growth rates driven by future ferrous and nonferrous commodity price and sales volume expectations, automobile scrap and core price and sales volume expectations, gross margins, selling, general and administrative expense relative to total revenues, capital expenditures, working capital requirements, discount rate (WACC), tax rate, terminal growth rate, benefits associated with a taxable transaction, and synergistic benefits available to market participants. In addition, to corroborate the valuation of the reporting units, the Company used a market approach based on earnings multiple data and a reconciliation of the Company’s estimate of the aggregate fair value of all reporting units to the Company’s market capitalization, including consideration of a control premium.
For the metals recycling and autos reporting units subject to the quantitative impairment test, the estimated fair value of the reporting unit exceeded its carrying amount by approximately 32% and 44%, respectively, as of July 1, 2022. The projections used in the income approach for the metals recycling and autos reporting units took into consideration, as applicable, the impact of recent and current market conditions for ferrous and nonferrous recycled metals, the cost of obtaining adequate supply flows of scrap metal including end-of-life vehicles, and recent trends in retail auto parts sales. The projections assumed a limited recovery of operating margins from the levels experienced around the time of the July 1, 2022 measurement date over a multi-year period. The WACC rates used in the income approach valuation for the metals recycling and therefore, no further impairment testingautos reporting units were 13.33% and 12.13%, respectively, and the terminal growth rate used for both reporting units was required.
The Company reconciled its market capitalization to the aggregated estimated fair value of all reporting units, including consideration of a control premium representing the estimated amount a market participant would pay to obtain a controlling interest in the Company. The implied control premium resulting from the difference between (i) the Company's market capitalization (based on the average trading price of the Company's Class A common stock for the two-week period ended July 1, 2022) increased by the estimated fair value of noncontrolling interests and (ii) the higher aggregated estimated fair value of all reporting units was within the historical range of average and mean premiums observed for historical transactions within the steel-making, scrap processing, and metals industries. The Company identified specific reconciling items, including market participant synergies, tax amortization benefits, and benefits from in-process technology investments, which supported the implied control premium as of July 1, 2022.
81 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
The gross changeschange in the carrying amount of goodwill by reportable segment for the years ended August 31, 20172022 and 2016 were2021 was as follows (in thousands):
|
| Goodwill |
| |
Balance as of September 1, 2020 |
| $ | 169,627 |
|
Foreign currency translation adjustment |
|
| 677 |
|
Balance as of August 31, 2021 |
|
| 170,304 |
|
Additions(1) |
|
| 84,040 |
|
Measurement period adjustments |
|
| 1,657 |
|
Foreign currency translation adjustment |
|
| (803 | ) |
Balance as of August 31, 2022 |
| $ | 255,198 |
|
AMR | |||
Balance as of August 31, 2015 | $ | 175,676 | |
Foreign currency translation adjustment | 16 | ||
Goodwill impairment charge | (8,845 | ) | |
Balance as of August 31, 2016 | 166,847 | ||
Foreign currency translation adjustment | 988 | ||
Balance as of August 31, 2017 | $ | 167,835 |
Accumulated goodwill impairment charges were $471$471 million as of each of August 31, 20172022 and 2016.
Other Intangible Assets, net
The following table presents the Company’s other intangible assets as of August 31 (in thousands):
|
| 2022 |
|
| 2021 |
| ||||||||||||||||||
|
| Gross |
|
| Accumulated |
|
| Net |
|
| Gross |
|
| Accumulated |
|
| Net |
| ||||||
Covenants not to compete |
| $ | 7,780 |
|
| $ | (4,442 | ) |
| $ | 3,338 |
|
| $ | 6,745 |
|
| $ | (3,846 | ) |
| $ | 2,899 |
|
Supplier relationships(1) |
|
| 20,924 |
|
|
| (2,433 | ) |
|
| 18,491 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Customer relationships(1) |
|
| 3,626 |
|
|
| (381 | ) |
|
| 3,245 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Indefinite-lived intangibles(2) |
|
| 1,081 |
|
|
| — |
|
|
| 1,081 |
|
|
| 1,081 |
|
|
| — |
|
|
| 1,081 |
|
Total |
| $ | 33,411 |
|
| $ | (7,256 | ) |
| $ | 26,155 |
|
| $ | 7,826 |
|
| $ | (3,846 | ) |
| $ | 3,980 |
|
2017 | 2016 | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||
Covenants not to compete | $ | 6,094 | $ | (3,140 | ) | $ | 2,954 | $ | 6,145 | $ | (2,791 | ) | $ | 3,354 | |||||||||
Other intangible assets subject to amortization(1) | 1,162 | (773 | ) | 389 | 1,162 | (666 | ) | 496 | |||||||||||||||
Indefinite-lived intangibles(2) | 1,081 | — | 1,081 | 1,081 | — | 1,081 | |||||||||||||||||
Total | $ | 8,337 | $ | (3,913 | ) | $ | 4,424 | $ | 8,388 | $ | (3,457 | ) | $ | 4,931 |
Total intangible asset amortization expense was $1 $3million $1 million and $2 million for the years ended August 31, 2017, 2016 and 2015, respectively. Amortization expense of less than $1 million was reported within discontinued operations for the year ended August 31, 2015. No amortization expense was reported within discontinued operations for2022, and $1 million in each of the years ended August 31, 20172021, and 2016. Impairments2020. There were no impairments of intangible assets were immaterialrecognized for allthe periods presented.
The estimated amortization expense, based on current intangible asset balances, during the next five fiscal years and thereafter is as follows (in thousands):
Years Ending August 31, |
| Estimated |
| |
2023 |
| $ | 4,283 |
|
2024 |
|
| 4,232 |
|
2025 |
|
| 4,078 |
|
2026 |
|
| 4,078 |
|
2027 |
|
| 3,834 |
|
Thereafter |
|
| 4,569 |
|
Total |
| $ | 25,074 |
|
82 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Years Ending August 31, | Estimated Amortization Expense | |||
2018 | $ | 456 | ||
2019 | 303 | |||
2020 | 274 | |||
2021 | 274 | |||
2022 | 273 | |||
Thereafter | 1,763 | |||
Total | $ | 3,343 |
Note 7
Debt consisted of the following as of August 31 (in thousands):
|
| 2022 |
|
| 2021 |
| ||
Bank revolving credit facilities, interest primarily at SOFR or LIBOR plus a spread |
| $ | 230,000 |
|
| $ | 60,000 |
|
Finance lease liabilities |
|
| 5,894 |
|
|
| 6,591 |
|
Other debt obligations |
|
| 12,668 |
|
|
| 8,362 |
|
Total debt |
|
| 248,562 |
|
|
| 74,953 |
|
Less current maturities |
|
| (6,041 | ) |
|
| (3,654 | ) |
Debt, net of current maturities |
| $ | 242,521 |
|
| $ | 71,299 |
|
2017 | 2016 | ||||||
Bank revolving credit facilities, interest at LIBOR plus a spread | $ | 140,000 | $ | 180,000 | |||
Tax-exempt economic development revenue bonds due January 2021, redeemed and repaid in full in September 2016 | — | 7,700 | |||||
Capital lease obligations due through February 2028 | 4,418 | 4,053 | |||||
Other debt obligations | 706 | 765 | |||||
Total debt | 145,124 | 192,518 | |||||
Less current maturities | (721 | ) | (8,374 | ) | |||
Debt, net of current maturities | $ | 144,403 | $ | 184,144 |
On August 22, 2022, the Company and certain of $335 millionits subsidiaries entered into the Third Amendment to the Third Amended and C$15 million mature in April 2021 pursuant to a credit agreement withRestated Credit Agreement (the "Amended Credit Agreement"), by and among Schnitzer Steel Industries, Inc., as the U.S. borrower, Schnitzer Steel Canada Ltd., as the Canadian borrower, Bank of America, N.A., as administrative agent, and other lenders party thereto. Subjectthereto, which amended and restated our previously existing credit agreement (the "Prior Credit Agreement"). The Amended Credit Agreement provides for $800 million and C$15 million in senior secured revolving credit facilities maturing in August 2027. The $800 million credit facility includes a $50 million sublimit for letters of credit, a $25 million sublimit for swing line loans, and a $50 million sublimit for multicurrency borrowings. The Prior Credit Agreement provided for $700 million and C$15 million in senior secured credit facilities maturing in August 2023. The Company incurred $2 million in debt issuance costs in connection with the Amended Credit Agreement, which are amortized to interest expense over the terms and conditionsfive-year term of the agreement, the Company may request that the commitments under the U.S. credit facility be increased by an aggregate amount not exceeding $100 million if certain conditions are met including pre-approval by the lenders and achievement of certain pro forma financial results. As of August 31, 2017 and 2016, borrowings outstanding
Interest rates on outstanding indebtedness under the credit agreementAmended Credit Agreement are based, at the Company’sour option, on either the London InterbankSecured Overnight Financing Rate (“SOFR”) (or the Canadian Dollar Offered Rate, ("LIBOR")"CDOR" for C$ loans), or the Canadian equivalent, plus a spread of between 1.75%1.25% and 2.75%2.00%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated net funded debt to EBITDA (as defined by the Company’s leverage ratio but no less than 2.50% for the fiscal quarters ended May 31, 2016, August 31, 2016 and November 30, 2016,Amended Credit Agreement), or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50%0.50% or (c) the daily rate equal to one-month LIBORTerm SOFR plus 1.75%1.00%, in each case, plus a spread of between zero0.25% and 1.00%1.00% based on a pricing grid tied to the Company's leverageour consolidated net funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.20%0.175% and 0.40%0.30% based on a pricing grid tied to our ratio of consolidated net funded debt to EBITDA.
Interest rates on outstanding indebtedness under the Company’s leveragePrior Credit Agreement were based, at our option, on either the London Interbank Offered Rate (“LIBOR”) (or the Canadian equivalent for C$ loans), plus a spread of between 1.25% and 3.50%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA (as defined by the credit agreement), or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50% or (c) the daily rate equal to one-month LIBOR plus 1.75%, in each case, plus a spread of between 0.00% and 2.50% based on a pricing grid tied to our consolidated funded debt to EBITDA ratio.
As of August 31, 2022 and 2021, borrowings outstanding under the credit facilities were $230 million and $60 million, respectively. The weighted average interest rate on amounts outstanding under the credit facilities was 3.65% and 1.75% as of August 31, 2022 and 2021, respectively.
83 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
The credit agreement contains certainvarious representations and warranties, events of default, and financial and other customary covenants which limit (subject to certain exceptions) the Company’s ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of the business, engage in transactions with affiliates, and enter into restrictive agreements, including covenantsagreements that limitrestrict the ability of the Company and its subsidiaries to enter into certain typesmake distributions. As of transactions. FinancialAugust 31, 2022, the financial covenants include covenants requiring maintenance ofunder the credit agreement included (a) a minimumconsolidated fixed charge coverage ratio, defined as the four-quarter rolling sum of consolidated EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges and (b) a maximumconsolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and a minimum asset coverage ratio.consolidated funded indebtedness. The Company’s obligations under the credit agreement are guaranteed by substantially all of its subsidiaries. The credit facilities and the related guarantees are secured by senior first priority liens on certain of the Company'sCompany’s and its subsidiaries’ assets, including equipment, inventory, and accounts receivable.
Other debt obligations, which totaled $13 million of tax-exempt economic development revenue bonds outstanding with the State of Oregon and scheduled to mature in January 2021. In August 2016, the Company exercised its option to redeem the bonds prior to maturity. The Company repaid the bonds in full in September 2016. The obligation is reported as a current liability within short-term borrowings$8 million as of August 31, 2016 on2022 and 2021, respectively, primarily relate to equipment purchases, the Consolidated Balance Sheet, andcontract consideration for which includes an obligation to make future monthly payments to the $8 million repayment is reportedvendor in the form of licensing fees. For accounting purposes, such obligations are treated as a cash outflow frompartial financing activitiesof the purchase price by the equipment vendor. Monthly payments commence when the equipment is placed in service and achieves specified minimum operating metrics, with payments continuing for a period of four years thereafter. In fiscal 2022, the fiscal year ended August 31, 2017 on the Consolidated StatementCompany recorded $7 million of Cash Flows.
Principal payments on long-termthe Company’s bank revolving credit facilities and other debt and capital lease obligations during the next five fiscal years and thereafter are as follows (in thousands):
Year Ending August 31, |
| Credit Facilities |
|
| Other Debt Obligations |
| ||
2023 |
| $ | — |
|
| $ | 4,306 |
|
2024 |
|
| — |
|
|
| 2,425 |
|
2025 |
|
| — |
|
|
| 2,466 |
|
2026 |
|
| — |
|
|
| 2,735 |
|
2027 |
|
| 230,000 |
|
|
| 736 |
|
Thereafter |
|
| — |
|
|
| — |
|
Total |
| $ | 230,000 |
|
| $ | 12,668 |
|
Year Ending August 31, | Long-Term Debt | Capital Lease Obligations | Total | |||||||||
2018 | $ | 41 | $ | 1,169 | $ | 1,210 | ||||||
2019 | 153 | 1,043 | 1,196 | |||||||||
2020 | 92 | 1,022 | 1,114 | |||||||||
2021 | 140,050 | 885 | 140,935 | |||||||||
2022 | 53 | 753 | 806 | |||||||||
Thereafter | 317 | 1,824 | 2,141 | |||||||||
Total | 140,706 | 6,696 | 147,402 | |||||||||
Amounts representing interest and executory costs | — | (2,278 | ) | (2,278 | ) | |||||||
Total less interest | $ | 140,706 | $ | 4,418 | $ | 145,124 |
See Note 5 - Leases for additional disclosure on finance lease obligations, including payments during the next five fiscal years and thereafter. The Company maintains stand-by letters of credit to provide for certain obligations including workers’ compensation and performance bonds. The Company had $10$8 million outstanding under these arrangements as of both August 31, 20172022 and $16 million as of August 31, 2016.2021.
2017 | 2016 | 2015 | |||||||||
Revenues | $ | — | $ | — | $ | 8,263 | |||||
Loss from discontinued operations before income taxes | $ | (390 | ) | $ | (1,348 | ) | $ | (7,227 | ) | ||
Income tax expense | — | — | — | ||||||||
Loss from discontinued operations, net of tax | $ | (390 | ) | $ | (1,348 | ) | $ | (7,227 | ) |
Note 9 –10 - Commitments and Contingencies
Year Ending August 31, | Operating Leases | |||
2018 | $ | 19,572 | ||
2019 | 16,824 | |||
2020 | 13,333 | |||
2021 | 7,894 | |||
2022 | 5,317 | |||
Thereafter | 22,410 | |||
Total | $ | 85,350 |
Contingencies –- Environmental
Changes in the Company’s environmental liabilities for the years ended
August 31,Balance as of |
|
| Liabilities |
|
| Payments and |
|
| Ending Balance |
|
| Liabilities |
|
| Payments and |
|
| Ending Balance |
|
| Current |
|
| Noncurrent Liability |
| |||||||||
$ | 53,464 |
|
| $ | 28,761 |
|
| $ | (5,097 | ) |
| $ | 77,128 |
|
| $ | 12,839 |
|
| $ | (21,467 | ) |
| $ | 68,500 |
|
| $ | 13,031 |
|
| $ | 55,469 |
|
Balance 8/31/2015 | Liabilities Established (Released), Net | Payments and Other | Ending Balance 8/31/2016 | Liabilities Established (Released), Net | Payments and Other | Ending Balance 8/31/2017 | Short-Term | Long-Term | ||||||||||||||||||||||||||
$ | 46,793 | $ | 480 | $ | (923 | ) | $ | 46,350 | $ | 2,560 | $ | (512 | ) | $ | 48,398 | $ | 2,007 | $ | 46,391 |
As of August 31, 2022 and 2021, the Company had environmental liabilities of $69 million and $77 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 contaminated sediments and riverbanks, soil contamination, groundwater contamination, storm water runoff issues, and other natural resource damages. Except for Portland Harbor
84 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
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”(“Portland Harbor”).
The precise nature and extent of any cleanup of the Site,any specific areas within Portland Harbor, 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 partythird-party contribution or damage claims with respect to the Site.
From 2000 to the consent order entered into by2017, the EPA with certain other PRPs, referred to as the “Lower Willamette Group” (“LWG”), foroversaw a remedial investigation/feasibility study (“RI/FS”). During fiscal 2007, at Portland Harbor. The Company was not among the Company and certain other parties agreedthat performed the RI/FS, but it contributed to the costs through an interim settlement with the LWG under which the Company made a cash contribution to the LWG RI/FS.performing parties. The LWG hasperforming parties have indicated that it hadthey incurred over $115more than $155 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.
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 in the EPA’s FS that expands the scope of the cleanup and has an estimated cost which is significantly more than the Proposed Plan identified by the EPA in the final FS.Portland Harbor. The EPA has estimated the total cost of the selected remedy at $1.7$1.7 billion with a net present value cost of $1.05$1.05 billion (at a 7%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%+50% to -30%-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 EPA's estimated costremedy described in the ROD, which is based on data that is more than 15 years old, and the EPA’s estimates for the costs and time required forto implement the selected remedy. Because of questions regarding cost-effectiveness and other concerns, such as technical feasibility, use of stale data and the need for new baseline data, it is uncertain whetherMoreover, the ROD will be implemented as issued.provided only Portland Harbor site-wide cost estimates and did not provide sufficient detail to estimate costs for specific sediment management areas within Portland Harbor. In addition, the ROD doesdid not determine or allocate the responsibility for remediation costs.
In the ROD, the EPA acknowledged that much of the assumptions useddata was more than a decade old at that time and would need to estimate costs for the selected remedy were developed based on the existing data and will be finalized duringupdated with a new round of “baseline” sampling to be conducted prior to the remedial design after design level data to refine the baseline conditions are obtained. Moreover, the ROD provides only Site-wide cost estimates and does not provide sufficient detail or ranges of certainty and finality to estimate costs for specific sediment management areas. Accordingly, the EPA has indicated and the Company anticipates that additional pre-remedial design investigative work, such as new baseline sampling and monitoring, will be conducted in order to provide a re-baseline and delineated particular remedial actions for specific areas within the Site. This re-baselining will need to occur prior to proceeding with the next phase in the process which is the remedial design.phase. The remedial design phase is an engineering phase during which additional technical information and data will beare collected, identified, and incorporated into technical drawings and specifications developed for the subsequent remedial action. TheFollowing issuance of the ROD, the EPA is seekingproposed that the PRPs, or a new coalitionsubgroup of PRPs, to perform the re-baseliningadditional investigative work in advance of remedial design.
In December 2017, the Company and remedial design activities. The Company is considering whether to become a party to a newthree other PRPs entered into an Administrative Settlement Agreement and Order on Consent with the EPA to perform such pre-remedial design investigative activities, if an acceptable consent order caninvestigation and baseline sampling over a two-year period. The report analyzing the results concluded that Portland Harbor conditions have improved substantially since the data forming the basis of the ROD was collected. The EPA found with a few limited corrections that the data is of suitable quality and stated that such data will be finalized.used, in addition to existing and forthcoming design-level data, to inform implementation of the ROD. However, the EPA did not agree that the data or the analysis warranted a change to the remedy at this time and reaffirmed its commitment to proceed with remedial design. The Company doesand other PRPs disagree with the EPA’s position on use of the more recent data and will continue to pursue limited, but critical, changes to the selected remedy for Portland Harbor during the remedial design phase.
85 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
The EPA encouraged PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design in various project areas covering Portland Harbor. While certain PRPs executed consent agreements for remedial design work, because of the EPA’s refusal to date to modify the remedy to reflect the most current data on Portland Harbor conditions and because of concerns with the terms of the consent agreement, the Company elected not believeto enter into a consent agreement. In April 2020, the EPA issued a unilateral administrative order (“UAO”) to the Company and MMGL, LLC (“MMGL”), an unaffiliated company, for the remedial design work in a portion of Portland Harbor designated as the River Mile 3.5 East Project Area. As required by the UAO, the Company notified the EPA of its intent to comply while reserving all of its sufficient cause defenses. Failure to comply with a UAO, without sufficient cause, could subject the Company to significant penalties or treble damages. Pursuant to the optimized remedial design timeline set forth in the UAO, the EPA’s expected schedule for completion of the remedial design work was four years. At the time it issued the UAO in April 2020, the EPA estimated the cost of the work at approximately $4 million. The Company has agreed with the other respondent to the UAO, MMGL, that the Company will lead the performance and be responsible for a portion of the costs of the work for remedial design under the UAO and also entered into an agreement with another PRP pursuant to which such other PRP has agreed to fund a portion of the costs of such work. These agreements are not an allocation of liability or claims associated with Portland Harbor as between the respondents or with respect to any third party. At the time the EPA issued the UAO in April 2020, the Company estimated that its share of the costs of performing such work under the UAO would be material,approximately $3 million, which it recorded to environmental liabilities and selling, general, and administrative (“SG&A”) expense in the consolidated financial statements in the third quarter of fiscal 2020. In the fourth quarter of fiscal 2022, based primarily on our assessment of progress with respect to tasks and milestones specified in the UAO, as well as remaining work and associated costs, the Company believes thatincreased the estimate of its share of the costs of performing such costs would be allocable and that they would be reimbursablework under the UAO by approximately $2 million, which it recorded to environmental liabilities and SG&A expense. The Company has insurance policies discussed below.
Except for certain early action projects in which the Company is not involved, remediation activities at Portland Harbor are not expected to commence for a number of yearsyears. Moreover, those activities are expected to be sequenced, and responsibility for implementingthe order and fundingtiming of such sequencing has not been determined. In addition, as noted above, the remedy will be determinedROD does not determine the allocation of costs among PRPs.
The Company has joined with approximately 100 other PRPs, including the RI/FS performing parties, in a separate allocation process. Whilevoluntary process to establish an allocation process is currently underway as discussed above,of costs at Portland Harbor, including the EPA's ROD has raised questionscosts incurred in the RI/FS, ongoing remedial design costs, and uncertainty as to when and how that allocation process will proceed.future remedial action costs. The Company would not expectexpects the next major stage of the allocation process to proceed until after additional pre-remedialin parallel with the remedial design dataprocess.
In addition to the remedial action process overseen by the EPA, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) is collected.
86 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
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 Portland Harbor and recovery of assessment costs related to natural resources damages from releases at and from Portland Harbor to the Multnomah Channel and the Lower Columbia River. The parties filed various motions to dismiss or stay this suit, and in August 2019, the court issued an order denying the motions to dismiss and staying the action. 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.
The Company’s environmental liabilities as of both August 31, 2022 and 2021 included $6 million relating to the Portland Harbor matters described above.
Because the final remedial actions have not yet been designed and there has not been a determination of the specific remediation actions that will be required,allocation among the amountPRPs of natural resource damages or how the costs of the investigations and any remedy and natural resource damages will be allocated among the PRPs,or remedial action costs, 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
The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense, remediationremedial design, remedial action, and mitigation for or settlement of natural resource damages claims in connection with Portland Harbor. Most of these policies jointly insure the Site, although there is no assurance that thoseCompany and MMGL, as the successor to a former subsidiary of the Company. The Company and MMGL have negotiated the settlement with certain insurers of claims against them related to Portland Harbor, continue to seek settlements with other insurers, and formed a Qualified Settlement Fund (“QSF”) which became operative in fiscal 2020 to hold such settlement amounts until funds are needed to pay or reimburse costs incurred by the Company and MMGL in connection with Portland Harbor. These insurance policies willand the funds in the QSF may not cover all of the costs which the Company may incur. The QSF is an unconsolidated variable interest entity (“VIE”) with no primary beneficiary. Two parties unrelated to each other, one appointed by the Company previously recorded a liability for its estimatedand one appointed by MMGL, share equally the power to direct the activities of the costsVIE that most significantly impact its economic performance. The Company’s appointee to co-manage the VIE is an executive officer of the investigationCompany. Neither MMGL nor its appointee to co-manage the VIE is a related party of $1 million.
The Oregon Department of Environmental Quality is separately providing oversight of voluntary investigations and source control activities by the Company involving the Company’sat various sites adjacent to the Portland Harbor whichthat are focused on controlling any current “uplands” releases of contaminants into the Willamette River. The Company has accrued liabilities for source control and related work at two sites, reflecting estimated costs of primarily investigation and design, which costs have not been material in the aggregate to date. No liabilities have been established in connection with these investigations for any other sites because the extent of contamination, (if any)required source control work, and the Company’s responsibility for the contamination (if any)and source control work, in each case if any, have not yet been determined.
Other Legacy Environmental Loss Contingencies
The Company’s environmental loss contingencies as of August 31, 20172022 and 2016,2021, other than Portland Harbor, include actual or possible investigation and cleanupremediation costs from historical contamination at sites currently or formerly owned or formerly 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"contingencies”). These legacy environmental loss contingencies relate to the potential remediation 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 cleanupremediation 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. WhereWhen investigation, allocation, and cleanupremediation 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'sCompany’s results of operations, financial condition, or cash flows.
87 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
In fiscal 2018, the Company accrued $4 million 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 August 31, 2022 and 2021, 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 previously estimated 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 specific remedy implementation plans. However, subsequent to the development of those remedial alternatives, the Company performed additional investigative activities under new state requirements that are likely to impact the required remedial actions and associated cost estimates, but the scope of such impacts and the amount or the range of the additional associated costs are not reasonably estimable at this time and are subject to further investigation, analysis, and discussion by the Company and regulators. 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 August 31, 2022 and 2021 included $8 million and $19 million, respectively, for the estimated costs related to environmental matters in connection with a closed facility owned and previously operated by an indirect, wholly-owned subsidiary, including monitoring and remediation of soil and groundwater conditions and funding for wellhead treatment facilities. In fiscal 2022, the Company recognized $6 million for certain soil remediation activities based on additional information related to estimated costs to complete. Investigation and remediation activities have been conducted under the oversight of the applicable state regulatory agency and are on-going, and the Company's subsidiary has also been working with state and local officials with respect to the protection of public and private water supplies. As part of its activities relating to the protection of public water supplies, the Company’s subsidiary agreed to reimburse the municipality for certain studies and plans and to provide funding for the construction and operation by the municipality of wellhead treatment facilities, which agreement resulted in payment by the Company to the municipality of $11 million in the second quarter of fiscal 2022. It is reasonably possible that the Company may recognize additional liabilities 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 additional loss or range of possible additional losses associated with this matter pending the on-going implementation of the approved remediation plan for soil and groundwater conditions and completion and operation of the wellhead treatment facilities.
In addition, the Company’s loss contingencies as of August 31, 2022 and 2021 included $7 million and $8 million, respectively, for the estimated costs related to remediation of a site a portion of which was previously leased to and operated by an indirect, wholly-owned subsidiary. In connection with settlement of a lawsuit relating to allocation of the remediation costs, the Company’s subsidiary agreed to perform the remedial action related to metals contamination on the site estimated to cost approximately $7.9 million, and another potentially liable party agreed to perform the remedial action related to creosote contamination at the site. As part of the settlement, other potentially liable parties agreed to make payments totaling approximately $7.6 million to fund the remediation of the metals contamination at the site in exchange for a release and indemnity. This amount was fully funded into a client trust account for the Company’s subsidiary in December 2020. See “Other Assets” in Note 2 - Summary of Significant Accounting Policies for further discussion of this client trust account. It is reasonably possible that the Company may recognize additional liabilities 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 additional loss or range of possible additional losses associated with this matter pending completion, approval and implementation of the remediation action plan.
Summary - Environmental Contingencies
With respect to environmental contingencies other than the Portland Harbor Superfund site and legacy environmental loss contingencies,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 Consolidated Financial Statements of the Company as a whole.its environmental contingencies. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material in any given period.
Contingencies - Other
In addition to legal proceedings relating to the contingencies described above, 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. Legal proceedings include those arising from accidents involving Company-owned vehicles, including Company tractor trailers. In some instances, such accidents and the related litigation involve accidents that have resulted in third party fatalities. It is reasonably possible that the Company may recognize additional losses in connection with such lawsuits at the time such losses are probable and can be reasonably estimated. Such losses may be material to the Company's consolidated financial statements. The Company believes that such losses, if incurred, will be substantially covered by existing insurance coverage. The Company does not anticipate that the resolution ofliabilities arising from such 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.
88 /
Schnitzer Steel Industries, Inc. Form 10-K2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||
All Other Plans | Q2’15 Plan | Total Charges | All Other Plans | Q2’15 Plan | Total Charges | All Other Plans | Q2’15 Plan | Total Charges | |||||||||||||||||||||||||||
Restructuring charges: | |||||||||||||||||||||||||||||||||||
Severance costs | $ | — | $ | (24 | ) | $ | (24 | ) | $ | — | $ | 4,915 | $ | 4,915 | $ | 391 | $ | 5,330 | $ | 5,721 | |||||||||||||||
Contract termination costs | 255 | 139 | 394 | 311 | 796 | 1,107 | 377 | 1,245 | 1,622 | ||||||||||||||||||||||||||
Other restructuring costs | — | — | — | — | — | — | 1,223 | 2,048 | 3,271 | ||||||||||||||||||||||||||
Total restructuring charges | 255 | 115 | 370 | 311 | 5,711 | 6,022 | 1,991 | 8,623 | 10,614 | ||||||||||||||||||||||||||
Other exit-related activities: | |||||||||||||||||||||||||||||||||||
Asset impairments and accelerated depreciation | — | 158 | 158 | — | 3,127 | 3,127 | — | 6,502 | 6,502 | ||||||||||||||||||||||||||
Gains on exit-related disposals | — | (565 | ) | (565 | ) | — | (1,337 | ) | (1,337 | ) | — | — | — | ||||||||||||||||||||||
Total other exit-related activities | — | (407 | ) | (407 | ) | — | 1,790 | 1,790 | — | 6,502 | 6,502 | ||||||||||||||||||||||||
Total restructuring charges and other exit-related activities | $ | 255 | $ | (292 | ) | $ | (37 | ) | $ | 311 | $ | 7,501 | $ | 7,812 | $ | 1,991 | $ | 15,125 | $ | 17,116 | |||||||||||||||
Restructuring charges and other exit-related activities included in continuing operations | $ | (109 | ) | $ | 6,781 | $ | 13,008 | ||||||||||||||||||||||||||||
Restructuring charges and other exit-related activities included in discontinued operations | $ | 72 | $ | 1,031 | $ | 4,108 |
Q2’15 Plan | |||
Total restructuring charges to date | $ | 14,449 | |
Total expected restructuring charges | $ | 14,480 |
Q2’15 Plan | |||||||||||||||||||||||||||
Balance 8/31/2015 | Charges | Payments and Other | Balance 8/31/2016 | Charges | Payments and Other | Balance 8/31/2017 | |||||||||||||||||||||
Severance costs | $ | 1,226 | $ | 4,915 | $ | (5,223 | ) | $ | 918 | $ | (24 | ) | $ | (859 | ) | $ | 35 | ||||||||||
Contract termination costs | 1,320 | 796 | (957 | ) | 1,159 | 139 | (409 | ) | 889 | ||||||||||||||||||
Other restructuring costs | — | — | — | — | — | — | — | ||||||||||||||||||||
Total | $ | 2,546 | $ | 5,711 | $ | (6,180 | ) | $ | 2,077 | $ | 115 | $ | (1,268 | ) | $ | 924 |
Total Charges to Date(1) | Total Expected Charges(1) | ||||||
Severance costs | $ | 10,251 | $ | 10,251 | |||
Contract termination costs | 2,149 | 2,180 | |||||
Other restructuring costs | 2,049 | 2,049 | |||||
Total | $ | 14,449 | $ | 14,480 |
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Note 11 - Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows as of August 31, 2022, 2021, and 2020 (in thousands):
|
| Foreign Currency |
|
| Pension Obligations, |
|
| Total |
| |||
Balance as of September 1, 2019 |
| $ | (35,689 | ) |
| $ | (3,074 | ) |
| $ | (38,763 | ) |
Other comprehensive income before reclassifications |
|
| 1,505 |
|
|
| 190 |
|
|
| 1,695 |
|
Income tax expense |
|
| — |
|
|
| (42 | ) |
|
| (42 | ) |
Other comprehensive income before reclassifications, |
|
| 1,505 |
|
|
| 148 |
|
|
| 1,653 |
|
Amounts reclassified from accumulated other comprehensive loss |
|
| — |
|
|
| 309 |
|
|
| 309 |
|
Income tax benefit |
|
| — |
|
|
| (70 | ) |
|
| (70 | ) |
Amounts reclassified from accumulated other comprehensive loss, |
|
| — |
|
|
| 239 |
|
|
| 239 |
|
Net periodic other comprehensive income |
|
| 1,505 |
|
|
| 387 |
|
|
| 1,892 |
|
Balance as of August 31, 2020 |
|
| (34,184 | ) |
|
| (2,687 | ) |
|
| (36,871 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 2,575 |
|
|
| (530 | ) |
|
| 2,045 |
|
Income tax benefit |
|
| — |
|
|
| 120 |
|
|
| 120 |
|
Other comprehensive income (loss) before reclassifications, net |
|
| 2,575 |
|
|
| (410 | ) |
|
| 2,165 |
|
Amounts reclassified from accumulated other comprehensive loss |
|
| — |
|
|
| 196 |
|
|
| 196 |
|
Income tax benefit |
|
| — |
|
|
| (44 | ) |
|
| (44 | ) |
Amounts reclassified from accumulated other comprehensive loss, |
|
| — |
|
|
| 152 |
|
|
| 152 |
|
Net periodic other comprehensive income (loss) |
|
| 2,575 |
|
|
| (258 | ) |
|
| 2,317 |
|
Balance as of August 31, 2021 |
|
| (31,609 | ) |
|
| (2,945 | ) |
|
| (34,554 | ) |
Other comprehensive (loss) income before reclassifications |
|
| (3,070 | ) |
|
| 355 |
|
|
| (2,715 | ) |
Income tax expense |
|
| — |
|
|
| (80 | ) |
|
| (80 | ) |
Other comprehensive (loss) income before reclassifications, net |
|
| (3,070 | ) |
|
| 275 |
|
|
| (2,795 | ) |
Amounts reclassified from accumulated other comprehensive loss |
|
| — |
|
|
| 336 |
|
|
| 336 |
|
Income tax benefit |
|
| — |
|
|
| (76 | ) |
|
| (76 | ) |
Amounts reclassified from accumulated other comprehensive loss, |
|
| — |
|
|
| 260 |
|
|
| 260 |
|
Net periodic other comprehensive (loss) income |
|
| (3,070 | ) |
|
| 535 |
|
|
| (2,535 | ) |
Balance as of August 31, 2022 |
| $ | (34,679 | ) |
| $ | (2,410 | ) |
| $ | (37,089 | ) |
Reclassifications from accumulated other comprehensive loss to earnings, both individually and in the aggregate, were not material to the impacted captions in the Consolidated Statements of Operations in all periods presented.
89 /Schnitzer Steel Industries, Inc. Form 10-K 2017
Fiscal 2017 Charges | Fiscal 2016 Charges | Fiscal 2015 Charges | Total Charges to Date(2) | Total Expected Charges(2) | |||||||||||||||
Restructuring charges: | |||||||||||||||||||
AMR and CSS(1) | $ | 250 | $ | 4,995 | $ | 6,944 | $ | 9,488 | $ | 9,504 | |||||||||
Unallocated (Corporate) | 48 | 943 | 2,228 | 3,226 | 3,226 | ||||||||||||||
Discontinued operations | 72 | 84 | 1,442 | 1,735 | 1,750 | ||||||||||||||
Total restructuring charges | 370 | 6,022 | 10,614 | 14,449 | $ | 14,480 | |||||||||||||
Other exit-related activities: | |||||||||||||||||||
Asset impairments and accelerated depreciation: | |||||||||||||||||||
AMR | 158 | 2,180 | 3,836 | 4,272 | |||||||||||||||
Discontinued operations | — | 947 | 2,666 | 3,613 | |||||||||||||||
Total asset impairments and accelerated depreciation | 158 | 3,127 | 6,502 | 7,885 | |||||||||||||||
Gains on exit-related disposals: | |||||||||||||||||||
AMR | (565 | ) | (1,337 | ) | — | (1,902 | ) | ||||||||||||
Total gains on exit-related disposals | (565 | ) | (1,337 | ) | — | (1,902 | ) | ||||||||||||
Total exit-related activities | (407 | ) | 1,790 | 6,502 | 5,983 | ||||||||||||||
Total restructuring charges and other exit-related activities | $ | (37 | ) | $ | 7,812 | $ | 17,116 | $ | 20,432 |
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Note 12 - Revenue
Disaggregation of Revenues
The table below illustrates the Company’s revenues disaggregated by major product and sales destination (in thousands):
|
| Year Ended August 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Major product information: |
|
|
|
|
|
|
|
|
| |||
Ferrous revenues |
| $ | 1,914,255 |
|
| $ | 1,557,891 |
|
| $ | 862,490 |
|
Nonferrous revenues |
|
| 892,444 |
|
|
| 684,862 |
|
|
| 390,298 |
|
Steel revenues(1) |
|
| 531,731 |
|
|
| 379,203 |
|
|
| 336,980 |
|
Retail and other revenues |
|
| 147,385 |
|
|
| 136,595 |
|
|
| 122,575 |
|
Total revenues |
| $ | 3,485,815 |
|
| $ | 2,758,551 |
|
| $ | 1,712,343 |
|
Revenues based on sales destination: |
|
|
|
|
|
|
|
|
| |||
Foreign |
| $ | 1,925,235 |
|
| $ | 1,612,744 |
|
| $ | 910,785 |
|
Domestic |
|
| 1,560,580 |
|
|
| 1,145,807 |
|
|
| 801,558 |
|
Total revenues |
| $ | 3,485,815 |
|
| $ | 2,758,551 |
|
| $ | 1,712,343 |
|
In fiscal 2022, 2021, and 2020, the Company does not allocate restructuring charges and other exit-related activities to the segments' operating results because management does not include this information in its measurementhad no external customer that accounted for more than 10% of the performanceCompany’s consolidated revenues. Sales to customers located in foreign countries are a significant part of the operating segments.Company’s business. The schedule below identifies those foreign countries to which the Company’s sales exceeded 10% of consolidated revenues in any of the last three years ended August 31 (in thousands):
|
| 2022 |
|
| % of |
|
| 2021 |
|
| % of |
|
| 2020 |
|
| % of |
| ||||||
Bangladesh |
| $ | 446,385 |
|
|
| 13 | % |
| $ | 375,668 |
|
|
| 14 | % |
| $ | 197,391 |
|
|
| 12 | % |
Turkey |
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
|
| $ | 222,141 |
|
|
| 13 | % |
N/A = Sales were less than the 10% threshold.
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 August 31, 2022 and 2021, receivables from contracts with customers, net of an allowance for credit losses, totaled $230 million and $210 million, respectively, representing 97% and 98%, respectively, of total accounts receivable reported in the Consolidated Balance Sheets as of each reporting date.
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, which consist almost entirely of customer deposits for recycled metal and finished steel sales contracts reported within accounts payable in the Consolidated Balance Sheets, totaled $8 million as of both August 31, 2022 and 2021. Unsatisfied performance obligations reflected in these contract liabilities relate to contracts with original expected durations of one year or less and, therefore, are not disclosed. During the year ended August 31, 2022, the Company reclassified $7 million in contract liabilities as of August 31, 2021 to revenues as a result of satisfying performance obligations during the year. During the year ended August 31, 2021, the Company reclassified $7 million in contract liabilities as of August 31, 2020 to revenues as a result of satisfying performance obligations during the year.
90 /
Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Foreign Currency Translation Adjustments | Pension Obligations, net | Net Unrealized Gain (Loss) on Cash Flow Hedges | Total | ||||||||||||
Balance as of August 31, 2014 | $ | (10,663 | ) | $ | (2,036 | ) | $ | 58 | $ | (12,641 | ) | ||||
Other comprehensive loss before reclassifications | (23,346 | ) | (2,874 | ) | (5,310 | ) | (31,530 | ) | |||||||
Income tax benefit | — | 260 | 428 | 688 | |||||||||||
Other comprehensive loss before reclassifications, net of tax | (23,346 | ) | (2,614 | ) | (4,882 | ) | (30,842 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss | — | 575 | 4,923 | 5,498 | |||||||||||
Income tax benefit | — | (198 | ) | (339 | ) | (537 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | — | 377 | 4,584 | 4,961 | |||||||||||
Net periodic other comprehensive loss | (23,346 | ) | (2,237 | ) | (298 | ) | (25,881 | ) | |||||||
Balance as of August 31, 2015 | (34,009 | ) | (4,273 | ) | (240 | ) | (38,522 | ) | |||||||
Other comprehensive loss before reclassifications | (530 | ) | (2,139 | ) | — | (2,669 | ) | ||||||||
Income tax benefit | — | 167 | — | 167 | |||||||||||
Other comprehensive loss before reclassifications, net of tax | (530 | ) | (1,972 | ) | — | (2,502 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive loss | — | 688 | 312 | 1,000 | |||||||||||
Income tax benefit | — | (19 | ) | (72 | ) | (91 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | — | 669 | 240 | 909 | |||||||||||
Net periodic other comprehensive income (loss) | (530 | ) | (1,303 | ) | 240 | (1,593 | ) | ||||||||
Balance as of August 31, 2016 | (34,539 | ) | (5,576 | ) | — | (40,115 | ) | ||||||||
Other comprehensive income before reclassifications | 2,711 | 1,477 | — | 4,188 | |||||||||||
Income tax expense | — | (194 | ) | — | (194 | ) | |||||||||
Other comprehensive income before reclassifications, net of tax | 2,711 | 1,283 | — | 3,994 | |||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | 851 | — | 851 | |||||||||||
Income tax benefit | — | (23 | ) | — | (23 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | — | 828 | — | 828 | |||||||||||
Net periodic other comprehensive income | 2,711 | 2,111 | — | 4,822 | |||||||||||
Balance as of August 31, 2017 | $ | (31,828 | ) | $ | (3,465 | ) | $ | — | $ | (35,293 | ) |
Derivative Gain (Loss) Recognized in | |||||||||||
Fiscal 2015 | |||||||||||
Other Comprehensive Income | Revenues - Effective Portion | Other Income (Expense), net | |||||||||
Foreign currency exchange forward contracts - designated as cash flow hedges | $ | (5,310 | ) | $ | (4,923 | ) | $ | 216 | |||
Foreign currency exchange forward contracts - not designated as cash flow hedges | — | — | (87 | ) |
Note 13
The Company and certain of its subsidiaries have or contribute to qualified and nonqualified retirement plans covering substantially all employees.plans. These plans include a defined benefit pension plan, a supplemental executive retirement benefit plan (“SERBP”), multiemployer pension plans, and defined contribution plans.
Defined Benefit Pension Plan and Supplemental Executive Retirement Benefit Plan
The Company maintains a qualified defined benefit pension plan for certain nonunion employees. Effective June 30, 2006, the Company froze this plan and ceased accruing further benefits for employee service. The Company reflects the funded status of the defined benefit pension plan as a net asset or liability in its Consolidated Balance Sheets. Changes in its funded status are recognized in comprehensive income (loss).income. The Company amortizes as a component of net periodic pension benefit cost a portion of the net gain or loss reported within accumulated other comprehensive loss if the beginning-of-year net gain or loss exceeds 5%5% of the greater of the benefit obligation or the market value of plan assets. Net periodic pension benefit cost was not material for each of the fiscal years ended
The Company also has a nonqualified SERBP for certain executives. A restricted trust fund has been established with assets invested in life insurance policies that can be used for plan benefits, although the fund is subject to claims of the Company’s general creditors. The trust fund is included in other assets, the current portion of the pension liability is included in other accrued liabilities, and the noncurrent portion of the pension liability is included in other long-term liabilities in the Company’s Consolidated Balance Sheets. The trust fund was valued at $3$4 million as of each August 31, 20172022, and 2016.2021. The trust fund assets’ gains and losses are included in other income,expense, net in the Company’s Consolidated Statements of Operations. The benefit obligation and the unfunded amount were $4was $4 million as of August 31, 20172022, and 2016.$5 million as of August 31,2021. Net periodic pension benefit cost under the SERBP was not material for each of the fiscal years ended
Because the defined benefit pension plan and the SERBP are not material to the Consolidated Financial Statements, other disclosures required by U.S. GAAP have been omitted.
Multiemployer Pension Plans
The Company contributes to 14 multiemployer pension plans in accordance with its collective bargaining agreements. Multiemployer pension plans are defined benefit plans sponsored by multiple employers in accordance with one or more collective bargaining agreements. The plans are jointly managed by trustees that include representatives from both management and labor unions. Contributions to the plans are made based upon a fixed rate per hour worked and are agreed to by contributing employers and the unions in collective bargaining. Benefit levels are set by a joint board of trustees based on the advice of an independent actuary regarding the level of benefits that agreed-upon contributions can be expected to support. To the extent that the pension obligation of other participating employers is unfunded, the Company may be required to make additional contributions in the future to fund these obligations.
91 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
One of the multiemployer plans that the Company contributes to is the Steelworkers Western Independent Shops Pension Plan (“WISPP”,WISPP,” EIN 90-0169564, Plan No. 001) benefiting the union employees of the Company'sCompany’s steel manufacturing operations, which are covered by a collective bargaining agreement that will expire on March 31, 2019.2026. As of October 1, 2016,2021, the WISPP was certified by the plan’s actuaries as being in the Green Zone, as defined by the Pension Protection Act of 2006. The Company contributed $3$4 million to the WISPP for each of the years ended August 31, 2017, 20162022 and 2015.2021, and $3 million for the year ended August 31, 2020. These contributions represented more than 5%5% of total contributions to the WISPP for each year.
In 2004, the Internal Revenue Service (“IRS”) approved a seven-year extension of the period over which the WISPP may amortize unfunded liabilities, conditioned upon maintenance of certain minimum funding levels. In 2014, the WISPP obtained relief from the specified funding requirements from the IRS, which requires that the WISPP meet a minimum funded percentage on each valuation date and achieve a funded percentage of 100%100% as of October 1, 2029. Based on the most recent actuarial valuation for the WISPP, as of October 1, 2016, the funded percentage (based on the ratio of the market value of assets to the accumulated benefits liability (present value of accrued benefits) using the valuation method prescribed by the IRS) was 76.4%, which satisfiesIRS satisfied the minimum funded percentage requirements of the IRS.
Company contributions to all of the multiemployer plans were $4$7 million for the year ended August 31, 2022, and $6 million for each of the years ended August 31, 2017, 20162021, and 2015.
Defined Contribution Plans
The Company has several defined contribution plans covering certain employees. Company contributions to the defined contribution plans totaled $3$5 million for the year ended August 31, 2022, and $4 million for each of the years ended August 31, 2017, 20162021, and 2015.2020.
Deferred Compensation Plan
In fiscal 2021, the Company established a non-qualified deferred compensation plan (the “DCP”) which permits eligible employees to elect to defer receipt of compensation including salary, bonuses, and certain equity awards made under the Company’s long-term incentive plan. The DCP also allows the Company to make discretionary contributions to participant accounts that may be subject to one or more vesting schedules. Participant contributions, excluding equity awards subject to vesting conditions, are fully vested at all times. The deferred compensation liability as of August 31, 2022 and 2021 was $1million and less than $1 million, respectively, consisted entirely of deferred salary, and was classified within other long-term liabilities in the Consolidated Balance Sheets. The Company maintains a rabbi trust to fund obligations under the DCP. The carrying value of assets held in the rabbi trust, which comprise company-owned life insurance policies, substantially equaled the deferred compensation liability as of both August 31, 2022 and 2021. The rabbi trust asset is classified within other assets in the Consolidated Balance Sheets.
92 /
Schnitzer Steel Industries, Inc. Form 10-KSCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Note 14 - Share-Based Compensation
The Company’s 1993 Stock Incentive Plan, as amended (the “SIP”), was established to provide for the grant of stock-based compensation awards to its employees, consultants, and directors. The SIP authorizes the grant of restricted shares, restricted stock units, performance-based awards including performance share awards, stock options, and stock appreciation rights, and other stock-based awards. The SIP is administered by the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”). There are 12.2 million shares of Class A common stock reserved for issuance under the SIP, of which 2.2 million were available for future grants as of August 31, 2022. Share-based compensation expense recognized in cost of goods sold or selling, general, and administrative expense, as applicable, was $19 million, $18 million, and $10 million for the years ended August 31, 2022, 2021, and 2020, respectively. The Company capitalized less than $1 million of share-based compensation cost to the cost of qualifying long-lived assets in each of fiscal 2022, 2021, and 2020.
Restricted Stock Units (“RSUs”)
During the years ended August 31, 2022, 2021, and 2020, the Compensation Committee granted 160,312, 317,760, and 470,917 RSUs, respectively, to the Company’s key employees under the SIP. RSUs generally vest 20% per year over five years commencing October 31 of the year after grant. Each RSU entitles the recipient to receive one share of Class A common stock upon vesting.
The estimated fair value of an RSU is based on the market closing price of the underlying Class A common stock on the date of grant. The weighted average grant date fair value of RSUs granted was $52.32, $22.26, and $14.88 per unit for the years ended August 31, 2022, 2021, and 2020, respectively. The total estimated fair value of RSUs granted was $8 million for the year ended August 31, 2022, and $7 million for each of the years ended August 31, 2021 and 2020. For RSUs granted in each of the years ended August 31, 2022, 2021, and 2020, the compensation cost is recognized over the requisite service period of the awards, net of forfeitures, which for participants who were retirement eligible as of the grant date or who will become retirement eligible during the five-year term of the award is the longer of two years or the period ending on the date retirement eligibility is achieved. RSU compensation cost was $8 million, $7 million, and $4 million for the years ended August 31, 2022, 2021, and 2020, respectively.
A summary of the Company’s RSU activity for the year ended August 31, 2022 is as follows:
|
| Number of |
|
| Weighted Average |
| ||
Outstanding as of August 31, 2021 |
|
| 956 |
|
| $ | 20.62 |
|
Granted |
|
| 160 |
|
| $ | 52.32 |
|
Vested |
|
| (296 | ) |
| $ | 21.33 |
|
Forfeited |
|
| (7 | ) |
| $ | 22.38 |
|
Outstanding as of August 31, 2022 |
|
| 813 |
|
| $ | 26.59 |
|
The total fair value of RSUs that vested, based on the market closing price of the underlying Class A common stock on the vesting date, was $15 million, $10 million, and $6 million for the years ended August 31, 2022, 2021, and 2020, respectively. As of August 31, 2022, total unrecognized compensation costs related to unvested RSUs amounted to $10 million, which is expected to be recognized over a weighted average period of two years.
Performance Share Awards
The SIP authorizes performance-based awards to certain employees subject to certain conditions and restrictions. Vesting is subject to both the continued employment of the participant with the Company and the achievement of certain performance goals established by the Compensation Committee. A participant generally must be employed by the Company on October 31 following the end of the performance period to receive an award payout. However, adjusted awards are paid if employment terminates earlier on account of a qualifying employment termination event such as death, disability, retirement, termination without cause after the first year of the performance period, or a sale of the Company.
93 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
In recent years, the performance share awards have comprised two separate and distinct awards with different vesting conditions. Awards vest if the threshold level under the specified metric is met at the end of the approximately three-year performance period. For awards granted in fiscal 2022, the performance metrics are the Company’s recycled metal volume growthand its return on capital employed (“ROCE”). Award share payouts depend on the extent to which the performance goals have been achieved, which performance-based payout factors are adjusted by a total shareholder return (“TSR”) modifier based on the Company’s average TSR percentile rank relative to a designated peer group. The number of shares that a participant receives is equal to the number of performance shares granted multiplied by an initial payout factor based on recycled metal volume growth and ROCE, which ranges from a threshold of 50% to a maximum of 200%. The final payout factor is then determined by applying the TSR modifier to the initial payout factor within a certain range, with a maximum increase or decrease of 20%.
For awards granted in fiscal 2021 and 2020, the performance metrics are the Company’s TSR relative to a designated peer group and the Company’s ROCE. Award share payouts depend on the extent to which the performance goals have been achieved. The number of shares that a participant receives is equal to the award granted multiplied by a payout factor, which ranges from a threshold of 50% to a maximum of 200%. The TSR awards granted in fiscal 2021 and 2020 stipulate certain limitations to the payout in the event the payout reaches a defined ceiling level or the Company’s TSR is negative.
The Company estimates the fair value of performance share awards with a TSR market condition using a Monte-Carlo simulation model utilizing several key assumptions, including the following for such awards granted during the years ended August 31:
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Expected share price volatility (SSI) |
|
| 51.6 | % |
|
| 48.5 | % |
|
| 38.9 | % |
Expected share price volatility (Peer group) |
|
| 58.5 | % |
|
| 54.9 | % |
|
| 44.5 | % |
Expected correlation to peer group companies |
|
| 46.0 | % |
|
| 44.5 | % |
|
| 34.3 | % |
Risk-free rate of return |
|
| 0.61 | % |
|
| 0.23 | % |
|
| 1.58 | % |
The fair value of the ROCE awards granted in fiscal 2021 and 2020, which awards do not have a TSR market condition, is based on the market closing price of the underlying Class A common stock on the grant date.
All the performance share awards granted in fiscal 2022 have a non-market performance condition (either recycled metal volume growth or ROCE) in addition to a market condition (TSR modifier), and the ROCE awards granted in fiscal 2021 and 2020 have only a non-market performance condition. The Company accrues compensation cost for these performance share awards based on the probable outcome of achieving the specified performance conditions, net of estimated forfeitures, over the requisite service period (or to the date a qualifying employment termination event entitles the recipient to a prorated award, if before the end of the service period). The Company reassesses whether achievement of the performance conditions is probable at each reporting date. If it is probable that the actual performance results will exceed the stated target performance conditions, the Company accrues additional compensation cost for the additional performance shares to be awarded. If, upon reassessment, it is no longer probable that the actual performance results will exceed the stated target performance conditions, or that it is no longer probable that the target performance conditions will be achieved, the Company reverses any recognized compensation cost for shares no longer probable of being issued. If the performance conditions are not achieved at the end of the performance period, all related compensation cost previously recognized is reversed.
The compensation cost for the TSR awards granted in fiscal 2021 and 2020 based on the grant-date fair value, net of estimated forfeitures, is recognized over the requisite service period (or to the date a qualifying employment termination event entitles the recipient to a prorated award, if before the end of the service period), regardless of whether the market condition has been or will be satisfied.
During the years ended August 31, 2022, 2021, and 2020, the Compensation Committee granted a total of 153,080 (76,540 recycled metal volume growth with TSR modifier and 76,540 ROCE with TSR modifier), 316,649 (157,791 TSR and 158,858 ROCE), and 337,770 (165,834 TSR and 171,936 ROCE) performance share awards, respectively. The weighted average grant date fair value per share of performance share awards granted was $54.29, $22.33, and $21.32 for the years ended August 31, 2022, 2021, and 2020, respectively.
94 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
A summary of the Company’s performance-based awards activity for the year ended August 31, 2022 is as follows:
|
| Number of |
|
| Weighted Average |
| ||
Outstanding as of August 31, 2021 |
|
| 873 |
|
| $ | 23.62 |
|
Granted |
|
| 153 |
|
| $ | 54.29 |
|
Performance achievement(1) |
|
| 61 |
|
| $ | 29.17 |
|
Vested |
|
| (263 | ) |
| $ | 28.66 |
|
Forfeited |
|
| (42 | ) |
| $ | 27.44 |
|
Outstanding as of August 31, 2022 |
|
| 782 |
|
|
| 28.16 |
|
The total fair value of performance share awards which vested, based on the market closing price of the Company’s Class A common stock on the vesting date, was $14 million, $7 million, and $10 million for the years ended August 31, 2022, 2021, and 2020, respectively. As of August 31, 2022, total unrecognized compensation costs related to unvested performance share awards amounted to $10 million, which is expected to be recognized over a weighted average period of two years.
Deferred Stock Units (“DSUs”)
The Deferred Compensation Plan for Non-Employee Directors (“DSU Plan”) provides for the issuance of DSUs to non-employee directors to be granted under the DSU Plan. Each DSU gives the director the right to receive one share of Class A common stock at a future date. Immediately following the annual meeting of shareholders, each non-employee director receives DSUs which become fully vested on the day before the next annual meeting, subject to continued service on the Board. The compensation cost associated with the DSUs granted is recognized over the requisite service period of the awards.
The Company issues Class A common stock to a director pursuant to vested DSUs in a lump sum in January of the first year after the director ceases to be a director of the Company, subject to the right of the director to elect an installment payment program under the DSU Plan.
DSUs granted during the years ended August 31, 2022, 2021, and 2020 totaled 20,876 units, 28,042 units, and 41,592 units, respectively. The compensation cost associated with DSUs and the total value of shares vested during each of the years ended August 31, 2022, 2021, and 2020, as well as the unrecognized compensation cost as of August 31, 2022, were not material.
Note 15 - Income Taxes
Income (loss) from continuing operations before income taxes was as follows for the years ended August 31 (in thousands):
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
United States |
| $ | 204,150 |
|
| $ | 195,037 |
|
| $ | (5,649 | ) |
Foreign |
|
| 12,526 |
|
|
| 12,952 |
|
|
| 3,710 |
|
Total |
| $ | 216,676 |
|
| $ | 207,989 |
|
| $ | (1,939 | ) |
95 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Income tax expense (benefit) from continuing operations consisted of the following for the years ended August 31 (in thousands):
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Current: |
|
|
|
|
|
|
|
|
| |||
Federal |
| $ | 18,114 |
|
| $ | 27,244 |
|
| $ | (15,778 | ) |
State |
|
| 1,392 |
|
|
| 3,811 |
|
|
| 329 |
|
Foreign |
|
| 39 |
|
|
| (4 | ) |
|
| 519 |
|
Total current tax expense (benefit) |
|
| 19,545 |
|
|
| 31,051 |
|
|
| (14,930 | ) |
Deferred: |
|
|
|
|
|
|
|
|
| |||
Federal |
|
| 21,771 |
|
|
| 6,939 |
|
|
| 12,292 |
|
State |
|
| 780 |
|
|
| (547 | ) |
|
| 1,338 |
|
Foreign |
|
| 2,501 |
|
|
| 492 |
|
|
| 1,466 |
|
Total deferred tax expense |
|
| 25,052 |
|
|
| 6,884 |
|
|
| 15,096 |
|
Total income tax expense |
| $ | 44,597 |
|
| $ | 37,935 |
|
| $ | 166 |
|
A reconciliation of the difference between the federal statutory rate and the Company’s effective tax rate for the years ended August 31 is as follows:
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Federal statutory rate |
|
| 21.0 | % |
|
| 21.0 | % |
|
| 21.0 | % |
State taxes, net of credits |
|
| 1.6 |
|
|
| 1.4 |
|
|
| (57.9 | ) |
Foreign income taxed at different rates |
|
| — |
|
|
| (0.5 | ) |
|
| (11.6 | ) |
Valuation allowance on deferred tax assets |
|
| 0.4 |
|
|
| (1.0 | ) |
|
| (24.5 | ) |
Federal rate change |
|
| — |
|
|
| 0.4 |
|
|
| 71.9 |
|
Non-deductible officers’ compensation |
|
| 2.5 |
|
|
| 1.2 |
|
|
| (46.9 | ) |
Other non-deductible expenses |
|
| 0.3 |
|
|
| 0.4 |
|
|
| (66.0 | ) |
Noncontrolling interests |
|
| (0.3 | ) |
|
| (0.5 | ) |
|
| 21.1 |
|
Research and development credits |
|
| (0.9 | ) |
|
| (1.5 | ) |
|
| 99.3 |
|
Tax return to provision adjustment |
|
| (2.4 | ) |
|
| — |
|
|
| 89.2 |
|
Unrecognized tax benefits |
|
| 1.2 |
|
|
| 0.9 |
|
|
| (97.3 | ) |
Interest income |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
| 9.0 |
|
Excess tax benefit from stock-based compensation |
|
| (1.6 | ) |
|
| (0.2 | ) |
|
| 3.0 |
|
Foreign derived intangible income |
|
| (1.0 | ) |
|
| (2.5 | ) |
|
| — |
|
Other |
|
| (0.1 | ) |
|
| (0.8 | ) |
|
| (18.9 | ) |
Effective tax rate |
|
| 20.6 | % |
|
| 18.2 | % |
|
| (8.6 | )% |
Effective Tax Rate
The Company’s effective tax rate from continuing operations for fiscal 2022 was an expense on pre-tax income of 20.6%, compared to 18.2% for fiscal 2021. The Company's effective tax rate from continuing operations for fiscal 2020 was an expense on pre-tax loss of 8.6%. The Company’s effective tax rate from continuing operations for fiscal 2022 approximated the U.S. federal statutory rate of 21%, reflecting primarily discrete tax benefits resulting from vesting of share-based awards during the fiscal year and other discrete items, as well as the benefit from the foreign derived intangible income ("FDII") deduction in fiscal 2022 and research and development credits, offset by the aggregate impact of state taxes and permanent differences from non-deductible expenses. The Company's effective tax rate from continuing operations for fiscal 2021 was lower than the U.S. federal statutory rate of 21% primarily due to the benefit from the FDII deduction in fiscal 2021 and the impacts of research and development credits, release of the valuation allowance against Puerto Rico deferred tax assets, and other discrete items. The Company's effective tax rate from continuing operations for fiscal 2020 was lower than the U.S. federal statutory rate of 21%, and reflective of income tax expense on a pre-tax loss from continuing operations, primarily due to the partially offsetting impacts of individually immaterial permanent differences from non-deductible expenses and research and development credits, the effects of unrecognized tax benefits, and the aggregate impact of state taxes.
Inflation Reduction Act
On August 16, 2022, the Inflation Reduction Act of 2022 ("IRA") was signed into law, which included the introduction of a new 15% Corporate Alternative Minimum Tax ("CAMT"), as well as a 1% excise tax on corporate share repurchases. The Company does not meet the threshold to be subject to the CAMT, and there were no other impacts of the IRA to the Company in fiscal 2022.
96 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities comprised the following as of August 31 (in thousands):
|
| 2022 |
|
| 2021 |
| ||
Deferred tax assets: |
|
|
|
|
|
| ||
Operating lease liabilities |
| $ | 17,901 |
|
| $ | 20,645 |
|
Amortizable goodwill and other intangibles |
|
| 9,914 |
|
|
| 13,490 |
|
Employee benefit accruals |
|
| 12,241 |
|
|
| 14,007 |
|
Net operating loss carryforwards |
|
| 7,499 |
|
|
| 7,642 |
|
Environmental liabilities |
|
| 9,742 |
|
|
| 10,508 |
|
Other contingencies |
|
| 5,199 |
|
|
| 5,044 |
|
State credit carryforwards |
|
| 7,212 |
|
|
| 7,216 |
|
Inventory valuation methods |
|
| 2,749 |
|
|
| 2,129 |
|
Other |
|
| 3,687 |
|
|
| 2,459 |
|
Valuation allowances |
|
| (15,342 | ) |
|
| (14,522 | ) |
Total deferred tax assets |
|
| 60,802 |
|
|
| 68,618 |
|
Deferred tax liabilities: |
|
|
|
|
|
| ||
Accelerated depreciation and other basis differences |
|
| 60,539 |
|
|
| 43,304 |
|
Operating lease right-of-use assets |
|
| 17,353 |
|
|
| 19,895 |
|
Investment in operating partnerships |
|
| 15,553 |
|
|
| 12,410 |
|
Prepaid expense acceleration and other |
|
| 6,087 |
|
|
| 6,041 |
|
Total deferred tax liabilities |
|
| 99,532 |
|
|
| 81,650 |
|
Net deferred tax liabilities |
| $ | (38,730 | ) |
| $ | (13,032 | ) |
As of August 31, 2022, foreign operating loss carryforwards were $3.1 million, which expire if not used between 2033 and 2042. State credit carryforwards will expire if not used between 2022 and 2036.
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. In fiscal 2021, the Company released the valuation allowance against its Puerto Rican deferred tax assets resulting in a discrete tax benefit of $2 million. The release of this valuation allowance was the result of sufficient positive evidence at the time, including cumulative income in the Company’s Puerto Rico tax jurisdiction 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 state and Canadian deferred tax assets. Canadian deferred tax assets against which the Company continues to maintain a valuation allowance relate to indefinite-lived assets.
Accounting for Uncertainty in Income Taxes
The following table summarizes the activity related to the Company’s reserve for unrecognized tax benefits, excluding interest and penalties, for the years ended August 31 (in thousands):
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Unrecognized tax benefits, as of the beginning of the year |
| $ | 8,320 |
|
| $ | 7,456 |
|
| $ | 5,410 |
|
Additions (reductions) for tax positions of prior years |
|
| 1,055 |
|
|
| (574 | ) |
|
| 1,368 |
|
Additions for tax positions of the current year |
|
| 974 |
|
|
| 1,486 |
|
|
| 852 |
|
Reductions for lapse of statutes |
|
| (23 | ) |
|
| (48 | ) |
|
| (174 | ) |
Unrecognized tax benefits, as of the end of the year |
| $ | 10,326 |
|
| $ | 8,320 |
|
| $ | 7,456 |
|
The Company does not anticipate any material changes to the reserve in the next 12 months. The recognized amount of tax-related penalties and interest was not material for each of the fiscal years presented in this report.
97 / Schnitzer Steel Industries, Inc. Form 10-K 2022
SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
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 2021 remain subject to examination under the statute of limitations.
Note 14
In fiscal 2020, the Plan”) was established forCompany implemented restructuring initiatives aimed at further reducing its employees, consultantsannual operating expenses, primarily selling, general, and directors. There are 12.2 million shares of Class A common stock reserved for issuance underadministrative, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses, and other non-headcount measures. Additionally, in April 2020, the Plan, ofCompany announced its intention to modify its internal organizational and reporting structure to the One Schnitzer functionally-based, integrated model, which 4.3 million are available for future grants as of August 31, 2017. Share-based compensation expense was $11 million, $10 million and $10 million for the years ended August 31, 2017, 2016 and 2015, respectively.
Number of Shares (in thousands) | Weighted Average Grant Date Fair Value | Fair Value(1) | ||||||||
Outstanding as of August 31, 2014 | 389 | $ | 33.97 | |||||||
Granted | 287 | $ | 22.58 | |||||||
Vested | (151 | ) | $ | 35.96 | $ | 20.34 | ||||
Forfeited | (40 | ) | $ | 26.59 | ||||||
Outstanding as of August 31, 2015 | 485 | $ | 27.21 | |||||||
Granted | 409 | $ | 18.28 | |||||||
Vested | (145 | ) | $ | 30.86 | $ | 16.36 | ||||
Forfeited | (14 | ) | $ | 22.61 | ||||||
Outstanding as of August 31, 2016 | 735 | $ | 21.59 | |||||||
Granted | 315 | $ | 20.95 | |||||||
Vested | (218 | ) | $ | 22.94 | $ | 23.50 | ||||
Forfeited | — | $ | 23.55 | |||||||
Outstanding as of August 31, 2017 | 832 | $ | 21.00 |
Note except that the performance period for the TSR awards started on April 27, 2016 and for the CFROI awards on March 1, 2016. The estimated fair value of each of the TSR awards and CFROI awards at the date of grant was $2 million.
Number of Shares (in thousands) | Weighted Average Grant Date Fair Value | Fair Value(1) | ||||||||
Outstanding as of August 31, 2014 | 623 | $ | 27.93 | |||||||
Granted | 269 | $ | 24.02 | |||||||
Vested | (98 | ) | $ | 26.27 | $ | 23.60 | ||||
Forfeited | (159 | ) | $ | 26.36 | ||||||
Outstanding as of August 31, 2015 | 635 | $ | 26.92 | |||||||
Granted | 364 | $ | 19.19 | |||||||
Vested | (194 | ) | $ | 28.82 | $ | 16.86 | ||||
Forfeited | (210 | ) | $ | 28.48 | ||||||
Outstanding as of August 31, 2016 | 595 | $ | 21.02 | |||||||
Granted | 302 | $ | 21.52 | |||||||
Vested | (163 | ) | $ | 24.02 | $ | 24.15 | ||||
Forfeited | (83 | ) | $ | 24.02 | ||||||
Outstanding as of August 31, 2017 | 651 | $ | 20.12 |
Options (in thousands) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands)(1) | |||||||||
Outstanding as of August 31, 2014 | 526 | $ | 32.25 | 2.2 | $ | 335 | ||||||
Granted | — | $ | — | |||||||||
Exercised | — | $ | — | |||||||||
Canceled | (122 | ) | $ | 24.95 | ||||||||
Outstanding as of August 31, 2015 | 404 | $ | 34.46 | 1.3 | $ | — | ||||||
Granted | — | $ | — | |||||||||
Exercised | — | $ | — | |||||||||
Canceled | (182 | ) | $ | 34.11 | ||||||||
Outstanding as of August 31, 2016 | 222 | $ | 34.75 | 1.0 | $ | — | ||||||
Granted | — | $ | — | |||||||||
Exercised | — | $ | — | |||||||||
Canceled | (222 | ) | $ | 34.75 | ||||||||
Outstanding as of August 31, 2017 | — | $ | — | $ | — |
2017 | 2016 | 2015 | |||||||||
United States | $ | 43,871 | $ | (4,303 | ) | $ | (113,084 | ) | |||
Foreign | 4,819 | (11,202 | ) | (87,380 | ) | ||||||
Total | $ | 48,690 | $ | (15,505 | ) | $ | (200,464 | ) |
2017 | 2016 | 2015 | |||||||||
Current: | |||||||||||
Federal | $ | (1,130 | ) | $ | 23 | $ | (11,275 | ) | |||
State | 190 | 180 | (84 | ) | |||||||
Foreign | (16 | ) | 25 | 732 | |||||||
Total current tax expense (benefit) | $ | (956 | ) | $ | 228 | $ | (10,627 | ) | |||
Deferred: | |||||||||||
Federal | $ | 2,046 | $ | 502 | $ | (4,752 | ) | ||||
State | 232 | 54 | 2,805 | ||||||||
Foreign | — | (49 | ) | (41 | ) | ||||||
Total deferred tax expense (benefit) | 2,278 | 507 | (1,988 | ) | |||||||
Total income tax expense (benefit) | $ | 1,322 | $ | 735 | $ | (12,615 | ) |
2017 | 2016 | 2015 | ||||||
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
State taxes, net of credits | 1.8 | 1.3 | 1.1 | |||||
Foreign income taxed at different rates | (1.9 | ) | (12.0 | ) | (7.7 | ) | ||
Non-deductible officers’ compensation | 2.2 | (2.0 | ) | (0.1 | ) | |||
Noncontrolling interests | (1.8 | ) | 4.1 | 0.3 | ||||
Research and development credits | (1.5 | ) | 2.4 | 0.3 | ||||
Valuation allowance on deferred tax assets | (31.2 | ) | (59.0 | ) | (25.2 | ) | ||
Unrecognized tax benefits | 1.3 | (3.6 | ) | (0.6 | ) | |||
Non-deductible goodwill | — | (0.9 | ) | (2.5 | ) | |||
Realized foreign investment basis | (0.9 | ) | 29.4 | 6.3 | ||||
Other | (0.3 | ) | 0.6 | (0.6 | ) | |||
Effective tax rate | 2.7 | % | (4.7 | )% | 6.3 | % |
2017 | 2016 | ||||||
Deferred tax assets: | |||||||
Environmental liabilities | $ | 11,187 | $ | 11,048 | |||
Employee benefit accruals | 13,692 | 12,620 | |||||
State income tax and other | 7,608 | 8,518 | |||||
Net operating loss carryforwards | 9,243 | 19,723 | |||||
State credit carryforwards | 6,678 | 6,352 | |||||
Inventory valuation methods | 690 | — | |||||
Amortizable goodwill and other intangibles | 41,793 | 47,023 | |||||
Valuation allowances | (70,374 | ) | (86,917 | ) | |||
Total deferred tax assets | $ | 20,517 | $ | 18,367 | |||
Deferred tax liabilities: | |||||||
Accelerated depreciation and other basis differences | $ | 37,096 | $ | 32,528 | |||
Prepaid expense acceleration | 2,568 | 2,402 | |||||
Inventory valuation methods | — | 119 | |||||
Total deferred tax liabilities | 39,664 | 35,049 | |||||
Net deferred tax liability | $ | 19,147 | $ | 16,682 |
2017 | 2016 | 2015 | |||||||||
Unrecognized tax benefits, as of the beginning of the year | $ | 4,724 | $ | 3,970 | $ | 2,780 | |||||
Additions for tax positions of prior years | — | — | — | ||||||||
Reductions for tax positions of prior years | (120 | ) | (56 | ) | — | ||||||
Additions for tax positions of the current year | 944 | 810 | 1,571 | ||||||||
Settlements with tax authorities | — | — | (381 | ) | |||||||
Unrecognized tax benefits, as of the end of the year | $ | 5,548 | $ | 4,724 | $ | 3,970 |
The following table sets forth the information used to compute basic and diluted net income (loss) per share attributable to SSI shareholders for the years ended August 31 (in thousands):
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Income (loss) from continuing operations |
| $ | 172,079 |
|
| $ | 170,054 |
|
| $ | (2,105 | ) |
Net income attributable to noncontrolling interests |
|
| (3,196 | ) |
|
| (4,863 | ) |
|
| (1,945 | ) |
Income (loss) from continuing operations attributable to SSI shareholders |
|
| 168,883 |
|
|
| 165,191 |
|
|
| (4,050 | ) |
Loss from discontinued operations, net of tax |
|
| (83 | ) |
|
| (79 | ) |
|
| (95 | ) |
Net income (loss) attributable to SSI shareholders |
| $ | 168,800 |
|
| $ | 165,112 |
|
| $ | (4,145 | ) |
Computation of shares: |
|
|
|
|
|
|
|
|
| |||
Weighted average common shares outstanding, basic |
|
| 28,084 |
|
|
| 27,982 |
|
|
| 27,672 |
|
Incremental common shares attributable to dilutive performance share, RSU and DSU awards |
|
| 1,445 |
|
|
| 1,211 |
|
|
| — |
|
Weighted average common shares outstanding, diluted |
|
| 29,529 |
|
|
| 29,193 |
|
|
| 27,672 |
|
2017 | 2016 | 2015 | |||||||||
Income (loss) from continuing operations | $ | 47,368 | $ | (16,240 | ) | $ | (187,849 | ) | |||
Net income attributable to noncontrolling interests | (2,467 | ) | (1,821 | ) | (1,933 | ) | |||||
Income (loss) from continuing operations attributable to SSI | 44,901 | (18,061 | ) | (189,782 | ) | ||||||
Loss from discontinued operations, net of tax | (390 | ) | (1,348 | ) | (7,227 | ) | |||||
Net income (loss) attributable to SSI | $ | 44,511 | $ | (19,409 | ) | $ | (197,009 | ) | |||
Computation of shares: | |||||||||||
Weighted average common shares outstanding, basic | 27,537 | 27,229 | 27,010 | ||||||||
Incremental common shares attributable to dilutive performance share, RSU and DSU awards | 604 | — | — | ||||||||
Weighted average common shares outstanding, diluted | 28,141 | 27,229 | 27,010 |
Common stock equivalent shares of 251,899, 1,016,745 and 1,018,858113,005 were considered antidilutive and were excluded from the calculation of diluted net income (loss) per share attributable to SSI shareholders for the yearsyear ended August 31, 2017, 20162022. No common stock equivalent shares were considered antidilutive for the year ended August 31, 2021. Common stock equivalent shares of 629,223 were considered antidilutive and 2015, respectively.were excluded from the calculation of diluted net loss per share attributable to SSI shareholders for the year ended August 31, 2020.
Note 17 –18 - Related Party Transactions
The Company purchases recycled metal from one of its joint venture operations at prices that approximate fair market value. These purchases totaled $14$26 million, $12$20 million, and
98 /
Schnitzer Steel Industries, Inc. Form 10-K2017 | 2016 | ||||||
Total assets: | |||||||
Auto and Metals Recycling(1) | $ | 1,298,757 | $ | 1,186,949 | |||
Cascade Steel and Scrap | 696,269 | 696,031 | |||||
Total segment assets | 1,995,026 | 1,882,980 | |||||
Corporate and eliminations(2) | (1,061,271 | ) | (991,551 | ) | |||
Total assets | $ | 933,755 | $ | 891,429 | |||
Property, plant and equipment, net (3) | $ | 390,629 | $ | 392,820 |
2017 | 2016 | 2015 | |||||||||
Auto and Metals Recycling: | |||||||||||
Revenues | $ | 1,363,618 | $ | 1,060,592 | $ | 1,513,315 | |||||
Less: Intersegment revenues | (15,647 | ) | (12,081 | ) | (33,029 | ) | |||||
AMR external customer revenues | 1,347,971 | 1,048,511 | 1,480,286 | ||||||||
Cascade Steel and Scrap: | |||||||||||
Revenues | 339,620 | 304,032 | 435,113 | ||||||||
Total revenues | $ | 1,687,591 | $ | 1,352,543 | $ | 1,915,399 | |||||
Depreciation and amortization: | |||||||||||
Auto and Metals Recycling | $ | 34,853 | $ | 39,033 | $ | 50,126 | |||||
Cascade Steel and Scrap | 12,525 | 13,052 | 14,164 | ||||||||
Segment depreciation and amortization | 47,378 | 52,085 | 64,290 | ||||||||
Corporate | 2,462 | 2,545 | 2,825 | ||||||||
Total depreciation and amortization | $ | 49,840 | $ | 54,630 | $ | 67,115 | |||||
Capital expenditures: | |||||||||||
Auto and Metals Recycling | $ | 34,575 | $ | 26,623 | $ | 21,845 | |||||
Cascade Steel and Scrap | 10,224 | 7,044 | 7,816 | ||||||||
Segment capital expenditures | 44,799 | 33,667 | 29,661 | ||||||||
Corporate | 141 | 904 | 2,636 | ||||||||
Total capital expenditures | $ | 44,940 | $ | 34,571 | $ | 32,297 | |||||
Reconciliation of the Company’s segment operating income (loss) to income (loss) from continuing operations before income taxes: | |||||||||||
Auto and Metals Recycling(1) | $ | 91,405 | $ | 23,168 | $ | (166,119 | ) | ||||
Cascade Steel and Scrap(2) | 5,275 | 4,696 | 20,535 | ||||||||
Segment operating income (loss) | 96,680 | 27,864 | (145,584 | ) | |||||||
Restructuring charges and other exit-related activities | 109 | (6,781 | ) | (13,008 | ) | ||||||
Corporate and eliminations | (40,776 | ) | (28,925 | ) | (36,937 | ) | |||||
Operating income (loss) | 56,013 | (7,842 | ) | (195,529 | ) | ||||||
Interest expense | (8,081 | ) | (8,889 | ) | (9,191 | ) | |||||
Other income, net | 758 | 1,226 | 4,256 | ||||||||
Income (loss) from continuing operations before income taxes | $ | 48,690 | $ | (15,505 | ) | $ | (200,464 | ) |
2017 | 2016 | 2015 | |||||||||
Revenues based on sales destination: | |||||||||||
Foreign | $ | 894,265 | $ | 683,569 | $ | 984,910 | |||||
Domestic | 793,326 | 668,974 | 930,489 | ||||||||
Total revenues from external customers | $ | 1,687,591 | $ | 1,352,543 | $ | 1,915,399 | |||||
Major product information: | |||||||||||
Ferrous scrap metal | $ | 855,161 | $ | 619,060 | $ | 922,291 | |||||
Nonferrous scrap metal | 425,989 | 340,025 | 488,036 | ||||||||
Retail and other | 126,235 | 123,553 | 130,035 | ||||||||
Finished steel products | 280,206 | 269,355 | 363,795 | ||||||||
Semi-finished steel products | — | 550 | 11,242 | ||||||||
Total revenues from external customers | $ | 1,687,591 | $ | 1,352,543 | $ | 1,915,399 |
2017 | % of Revenue | 2016 | % of Revenue | 2015 | % of Revenue | |||||||||||||||
China | $ | 216,231 | 13 | % | $ | 150,570 | 11 | % | $ | 240,279 | 13 | % | ||||||||
Turkey(1) | N/A | N/A | 163,696 | 12 | % | 225,040 | 12 | % |
Fiscal 2017 | |||||||||||||||
First | Second | Third | Fourth | ||||||||||||
Revenues | $ | 334,161 | $ | 382,084 | $ | 477,088 | $ | 494,258 | |||||||
Cost of goods sold | $ | 295,892 | $ | 326,804 | $ | 411,109 | $ | 430,703 | |||||||
Operating income | $ | 587 | $ | 14,171 | $ | 19,147 | $ | 22,108 | |||||||
Loss from discontinued operations, net of tax | $ | (53 | ) | $ | (95 | ) | $ | (127 | ) | $ | (114 | ) | |||
Net income (loss) attributable to SSI | $ | (1,326 | ) | $ | 11,037 | $ | 16,565 | $ | 18,235 | ||||||
Basic net income (loss) per share attributable to SSI | $ | (0.05 | ) | $ | 0.40 | $ | 0.60 | $ | 0.66 | ||||||
Diluted net income (loss) per share attributable to SSI | $ | (0.05 | ) | $ | 0.40 | $ | 0.60 | $ | 0.64 | ||||||
Fiscal 2016 | |||||||||||||||
First | Second | Third | Fourth | ||||||||||||
Revenues | $ | 321,198 | $ | 289,077 | $ | 351,604 | $ | 390,664 | |||||||
Cost of goods sold | $ | 284,854 | $ | 259,670 | $ | 294,738 | $ | 336,726 | |||||||
Operating income (loss) | $ | (4,028 | ) | $ | (37,076 | ) | $ | 14,886 | $ | 18,376 | |||||
Loss from discontinued operations, net of tax | $ | (65 | ) | $ | (1,024 | ) | $ | (116 | ) | $ | (143 | ) | |||
Net income (loss) attributable to SSI | $ | (5,296 | ) | $ | (41,245 | ) | $ | 11,000 | $ | 16,132 | |||||
Basic net income (loss) per share attributable to SSI | $ | (0.20 | ) | $ | (1.52 | ) | $ | 0.40 | $ | 0.59 | |||||
Diluted net income (loss) per share attributable to SSI | $ | (0.20 | ) | $ | (1.52 | ) | $ | 0.40 | $ | 0.58 |
Schedule II – Valuation and Qualifying Accounts
For the Years Ended August 31,
(In thousands)
Column A |
| Column B |
|
| Column C |
|
| Column D |
|
| Column E |
| ||||
Description |
| Balance at |
|
| Charges |
|
| Deductions |
|
| Balance at |
| ||||
Fiscal 2022 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Allowance for credit losses |
| $ | 1,566 |
|
| $ | 40 |
|
| $ | (56 | ) |
| $ | 1,550 |
|
Deferred tax valuation allowance |
| $ | 14,522 |
|
| $ | 2,326 |
|
| $ | (1,506 | ) |
| $ | 15,342 |
|
Fiscal 2021 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Allowance for doubtful accounts |
| $ | 1,593 |
|
| $ | — |
|
| $ | (27 | ) |
| $ | 1,566 |
|
Deferred tax valuation allowance |
| $ | 16,933 |
|
| $ | 482 |
|
| $ | (2,893 | ) |
| $ | 14,522 |
|
Fiscal 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Allowance for doubtful accounts |
| $ | 1,569 |
|
| $ | 66 |
|
| $ | (42 | ) |
| $ | 1,593 |
|
Deferred tax valuation allowance |
| $ | 16,436 |
|
| $ | 1,293 |
|
| $ | (796 | ) |
| $ | 16,933 |
|
Column A | Column B | Column C | Column D | Column E | ||||||||||||
Description | Balance at beginning of period | Charges to cost and expenses | Deductions | Balance at end of period | ||||||||||||
Fiscal 2017 | ||||||||||||||||
Allowance for doubtful accounts | $ | 2,315 | $ | 126 | $ | (161 | ) | $ | 2,280 | |||||||
Deferred tax valuation allowance | $ | 86,917 | $ | 690 | $ | (17,233 | ) | $ | 70,374 | |||||||
Fiscal 2016 | ||||||||||||||||
Allowance for doubtful accounts | $ | 2,496 | $ | 131 | $ | (312 | ) | $ | 2,315 | |||||||
Deferred tax valuation allowance | $ | 78,304 | $ | 8,613 | $ | — | $ | 86,917 | ||||||||
Fiscal 2015 | ||||||||||||||||
Allowance for doubtful accounts | $ | 2,720 | $ | (280 | ) | $ | 56 | $ | 2,496 | |||||||
Allowance for notes and other contractual receivables | $ | 7,602 | $ | — | $ | (7,602 | ) | $ | — | |||||||
Deferred tax valuation allowance | $ | 30,265 | $ | 48,039 | $ | — | $ | 78,304 |
99 /
Schnitzer Steel Industries, Inc. Form 10-KITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of the Company’sCompany's disclosure controls and procedures. Consistent with guidance issued by the Securities and Exchange Commission that an assessment of internal controls over financial reporting of a recently acquired business may be omitted from management's evaluation of disclosure controls and procedures, management is excluding an assessment of the internal controls of the acquired Columbus Recycling business, which the Company acquired on October 1, 2021, and the Encore Recycling business, which the Company acquired on April 29, 2022, from its evaluation of the effectiveness of our disclosure controls and procedures. Together, the Columbus Recycling and Encore Recycling businesses represented approximately 11% of consolidated total assets and 5% of consolidated total revenues as of and for the year ended August 31, 2022. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of
Management’s Annual Report on Internal Control Over Financial Reporting
Management’s Annual Report on Internal Control Over Financial Reporting is presented within Part II, Item 8 of this report and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during its most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
100 /
Schnitzer Steel Industries, Inc. Form 10-KITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by Item 401 of Regulation S-K regarding directors, and information required by Items 405, 407(c)(3), 407(d)(4), and 407(d)(5) of Regulation S-K, will be included under “Election of Directors,”Directors” and “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 20182023 Annual Meeting of Shareholders and is incorporated herein by reference.
Information regarding executive officers is included in Part I, Item 1 “Business – Executive Officers of the Registrant
Code of Ethics
On April 27, 2017,November 5, 2021, the Board of Directors approved a revised Company’s Code of Conduct that is applicable to all of its directors and employees. It includes additional provisions that apply to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions (the “Senior Financial Officers”). This document is posted onunder the Corporate Governance pagecaption “Company – About Schnitzer – Ethics & Code of Conduct” on the Company’s internet website (www.schnitzersteel.com) and is available free of charge by calling the Company or submitting a request to ir@schn.com. The Company intends to satisfy its disclosure obligations with respect to any amendments to or waivers of the Code of Conduct for directors, executive officers or Senior Financial Officers by posting such information on its internet website set forth above rather than by filing a Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K will be included under “Compensation of Executive Officers,” “Compensation Discussion and Analysis”, “Director Compensation”, “Corporate Governance – Assessment of Compensation Risk” and “Compensation Committee Report” in the Company’s Proxy Statementthis Item 11 is incorporated herein by reference to be filedour definitive proxy statement for its 2018our 2023 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners and management, as required by this Item 403 of Regulation S-K, will be included under “Voting Securities and Principal Shareholders” in the Company’s Proxy Statement12 is incorporated herein by reference to our definitive proxy statement for its 2018our 2023 Annual Meeting of Shareholders and is incorporated herein by reference. Information with respect to securities authorized for issuancebe filed pursuant to Regulation 14A under equity compensation plans, as required by Item 201(d) of Regulation S-K, will be included under “Compensation Plan Information” in the Company’s Proxy Statement for its 2018 Annual Meeting of Shareholders and is incorporated herein by reference.
Information required by Items 404 and 407(a) of Regulation S-K will be included under “Certain Transactions” and “Corporate Governance – Director Independence” in the Company’s Proxy Statementthis Item 13 is incorporated herein by reference to our definitive proxy statement for its
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding the Company’s principal accountant fees and services required by this Item 9(e) of Schedule 14A will be included under “Independent Registered Public Accounting Firm” in the Company’s Proxy Statement14 is incorporated herein by reference to our definitive proxy statement for its
101 /
Schnitzer Steel Industries, Inc. Form 10-KITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | The following | |||
FORM 10-K | ||||
PAGE | ||||
1. | Financial Statements: | |||
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | 56 | |||
59 | ||||
60 | ||||
61 | ||||
Consolidated Statements of Equity for each of the three years ended August 31, 2022, 2021 and 2020 | 62 | |||
64 | ||||
66 | ||||
2. | Financial Statement Schedules: | |||
99 | ||||
All other schedules are omitted as the information is either not applicable or is not required. | ||||
3. | Exhibits: | |||
3.1 | ||||
3.2 | ||||
4.1 | ||||
10.1 | Lease Agreement, dated September 1, 1988, between Schnitzer Investment Corp. and the Registrant, as amended, relating to the Portland Metals Recycling operation and which has terminated except for surviving indemnity obligations. Filed as Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 filed on September 24, 1993 (Commission File No. 33-69352), and incorporated herein by | |||
10.2 | ||||
10.3 | ||||
10.4 | ||||
10.5 |
102 / Schnitzer Steel Industries, Inc. Form 10-K 2022
10.6 | |||
10.7 | |||
10.8 | |||
10.9 | |||
*10.10 | |||
*10.11 | |||
*10.12 | |||
*10.13 |
*10.14 | ||
*10.15 | ||
*10.16 | ||
*10.17 | ||
*10.18 | ||
*10.19 | ||
*10.20 | ||
*10.21 | ||
103 / Schnitzer Steel Industries, Inc. Form 10-K 2022
*10.22 | ||
*10.23 | ||
*10.24 | ||
*10.25 | ||
*10.26 | ||
Form of Restricted Stock Unit Award Agreement under the 1993 Stock Incentive Plan used for awards granted after the first half of fiscal | |||
*10.27 | |||
*10.28 | |||
*10.29 | |||
*10.30 | |||
*10.31 | |||
*10.32 | |||
*10.33 | |||
*10.34 | |||
*10.35 | |||
21.1 | |||
23.1 | |||
24.1 | |||
31.1 | |||
31.2 | |||
104 / Schnitzer Steel Industries, Inc. Form 10-K 2022
32.1 | |||
32.2 | |||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in |
*Management contract or compensatory plan or arrangement.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document as of the date they were made and may not describe the actual state of affairs as of the date they were madefor any other purpose or at any other time.
ITEM 16. FORM 10-K SUMMARY
None.
105 /
Schnitzer Steel Industries, Inc. Form 10-KPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SCHNITZER STEEL INDUSTRIES, INC. | |||
Dated: October 24, | By: | /s/ | |
Senior Vice President and Chief Financial Officer | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on
October 24,Signature | Title | |
Principal Executive Officer: | ||
/s/ TAMARA L. LUNDGREN | Chairman, President and Chief Executive Officer | |
Tamara L. Lundgren | ||
Principal Financial Officer: | ||
/s/ | Senior Vice President and Chief Financial Officer | |
Stefano R. Gaggini | ||
Principal Accounting Officer: | ||
/s/ MARK SCHUESSLER | Vice President and Chief | |
Mark Schuessler | ||
Directors: | ||
*WAYLAND R. HICKS | Director | |
Wayland R. Hicks | ||
*RHONDA D. HUNTER | Director | |
Rhonda D. Hunter | ||
*DAVID L. JAHNKE | Director | |
David L. Jahnke |
*JUDITH A. JOHANSEN | Director | |
Judith A. Johansen | ||
* | Director | |
Glenda Minor | ||
*LESLIE L. SHOEMAKER | Director | |
Leslie L. Shoemaker | ||
*MICHAEL SUTHERLIN | Director | |
Michael Sutherlin |
*By: | /s/ STEFANO R. GAGGINI | |||
Attorney-in-fact, Stefano R. Gaggini | ||||
106 /
Schnitzer Steel Industries, Inc. Form 10-K