Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

 

For the Quarterly Period Ended November 30, 20192020

or

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

 

For the Transition Period from                to                

Commission File Number 000-22496

 

SCHNITZER STEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

Oregon

 

93-0341923

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

299 SW Clay Street, Suite 350, Portland, Oregon

 

97201

(Address of principal executive offices)

 

(Zip Code)

(503) 224-9900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Class A Common Stock, $1.00 par value

 

SCHN

 

NASDAQ Global Select Market

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

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

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

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

The registrant had 26,943,06627,253,708 shares of Class A common stock, par value of $1.00 per share, and 200,000 shares of Class B common stock, par value of $1.00 per share, outstanding as of January 6, 20204, 2021.

 

 

 

 


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

PAGE

FORWARD LOOKINGFORWARD-LOOKING STATEMENTS

3

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

4

 

 

Unaudited Condensed Consolidated Balance Sheets as of November 30, 20192020 and August 31, 20192020

4

 

 

Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended November 30, 20192020 and 20182019

5

 

 

Unaudited Condensed Consolidated Statements of ComprehensiveIncome (Loss) Income for the Three Months Ended November 30, 20192020 and 20182019

6

 

 

Unaudited Condensed Consolidated Statements of Equity for the Three Months Ended November 30, 20192020 and 20182019

7

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended November 30, 20192020 and 20182019

8

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

10

 

 

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

2521

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

3831

 

 

Item 4. Controls and Procedures

3932

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

4033

 

 

Item 1A. Risk Factors

4033

 

 

Item 5. Other Information

4033

 

 

Item 6. Exhibits

4134

 

 

SIGNATURES

4235

 

 

 

 


Table of Contents

 

 

FORWARD-LOOKING STATEMENTS

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

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

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

We may make other forward-looking statements from time to time, including in reports filed with the Securities and Exchange Commission, press releases, presentations and on public conference calls. All forward-looking statements we make are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements, except as may be required by law. Our business is subject to the effects of changes in domestic and global economic conditions and a number of other risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in “Item 1A. Risk Factors” of Part I of our most recent Annual Report on Form 10-K, as supplemented by our subsequently filed Quarterly Reports on Form 10-Q. Examples of these risks include: the impact of pandemics, epidemics or other public health emergencies, such as the COVID-19 pandemic; potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the cyclicality and impact of general economic conditions; changing conditions in global markets including the impact of sanctions and tariffs, quotas and other trade actions and import restrictions; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials and other inputs we purchase; significant decreases in scrap metal prices; imbalances in supply and demand conditions in the global steel industry; the impact of goodwill impairment charges; the impact of long-lived asset and equity investment impairment charges; failure to realize or delays in realizing expected benefits from investments in processing and manufacturing technology improvements; inability to achieve or sustain the benefits from productivity, cost savings and restructuring initiatives; inability to realize or delays in realizing expected benefits from investments in technology; inability to renew facility leases; difficulties associated with acquisitions and integration of acquired businesses; 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; reliance on third party shipping companies, including with respect to 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 property tax increases or property tax rate changes; the impact of one or more cybersecurity incidents; environmental compliance costs and potential environmental liabilities; inability to obtain or renew business licenses and permits; compliance with climate change and greenhouse gas emission laws and regulations; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.

 

 

3


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

 

November 30, 2019

 

 

August 31, 2019

 

 

November 30, 2020

 

 

August 31, 2020

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,624

 

 

$

12,377

 

 

$

7,258

 

 

$

17,887

 

Accounts receivable, net of allowance for doubtful accounts of $1,601

and $1,569

 

 

115,012

 

 

 

145,617

 

Accounts receivable, net of allowance for credit losses of $1,602

and $1,593

 

 

166,215

 

 

 

139,147

 

Inventories

 

 

177,934

 

 

 

187,320

 

 

 

185,347

 

 

 

157,269

 

Refundable income taxes

 

 

5,777

 

 

 

5,867

 

 

 

13,398

 

 

 

18,253

 

Prepaid expenses and other current assets

 

 

31,533

 

 

 

115,107

 

 

 

28,812

 

 

 

30,075

 

Total current assets

 

 

339,880

 

 

 

466,288

 

 

 

401,030

 

 

 

362,631

 

Property, plant and equipment, net of accumulated depreciation of $776,514 and $766,033

 

 

456,714

 

 

 

456,400

 

Property, plant and equipment, net of accumulated depreciation of $823,092 and $811,623

 

 

495,376

 

 

 

487,004

 

Operating lease right-of-use assets

 

 

124,458

 

 

 

 

 

 

140,320

 

 

 

140,584

 

Investments in joint ventures

 

 

10,434

 

 

 

10,276

 

 

 

10,930

 

 

 

10,057

 

Goodwill

 

 

169,292

 

 

 

169,237

 

 

 

169,686

 

 

 

169,627

 

Intangibles, net of accumulated amortization of $2,995 and $3,116

 

 

3,811

 

 

 

4,482

 

Intangibles, net of accumulated amortization of $3,392 and $3,528

 

 

4,434

 

 

 

4,585

 

Deferred income taxes

 

 

28,297

 

 

 

28,850

 

 

 

26,083

 

 

 

27,152

 

Other assets

 

 

25,706

 

 

 

25,213

 

 

 

29,674

 

 

 

28,287

 

Total assets

 

$

1,158,592

 

 

$

1,160,746

 

 

$

1,277,533

 

 

$

1,229,927

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

1,431

 

 

$

1,321

 

 

$

2,171

 

 

$

2,184

 

Accounts payable

 

 

72,172

 

 

 

110,297

 

 

 

116,507

 

 

 

106,676

 

Accrued payroll and related liabilities

 

 

16,392

 

 

 

27,547

 

 

 

24,871

 

 

 

41,436

 

Environmental liabilities

 

 

5,576

 

 

 

6,030

 

 

 

7,620

 

 

 

6,302

 

Operating lease liabilities

 

 

18,824

 

 

 

 

 

 

19,901

 

 

 

19,760

 

Other accrued liabilities

 

 

43,036

 

 

 

123,035

 

 

 

42,350

 

 

 

47,306

 

Total current liabilities

 

 

157,431

 

 

 

268,230

 

 

 

213,420

 

 

 

223,664

 

Deferred income taxes

 

 

22,232

 

 

 

25,466

 

 

 

41,840

 

 

 

38,292

 

Long-term debt, net of current maturities

 

 

126,875

 

 

 

103,775

 

 

 

141,172

 

 

 

102,235

 

Environmental liabilities, net of current portion

 

 

45,778

 

 

 

45,769

 

 

 

47,105

 

 

 

47,162

 

Operating lease liabilities, net of current maturities

 

 

107,801

 

 

 

 

 

 

124,225

 

 

 

125,001

 

Other long-term liabilities

 

 

13,439

 

 

 

16,210

 

 

 

21,223

 

 

 

13,137

 

Total liabilities

 

 

473,556

 

 

 

459,450

 

 

 

588,985

 

 

 

549,491

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock – 20,000 shares $1.00 par value authorized, NaN issued

 

 

 

 

 

 

 

 

0

 

 

 

0

 

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

26,943 and 26,464 shares issued and outstanding

 

 

26,943

 

 

 

26,464

 

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

27,254 and 26,899 shares issued and outstanding

 

 

27,254

 

 

 

26,899

 

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

200 and 200 shares issued and outstanding

 

 

200

 

 

 

200

 

 

 

200

 

 

 

200

 

Additional paid-in capital

 

 

29,528

 

 

 

33,700

 

 

 

35,310

 

 

 

36,616

 

Retained earnings

 

 

662,707

 

 

 

675,363

 

 

 

658,710

 

 

 

649,863

 

Accumulated other comprehensive loss

 

 

(38,525

)

 

 

(38,763

)

 

 

(36,892

)

 

 

(36,871

)

Total SSI shareholders’ equity

 

 

680,853

 

 

 

696,964

 

 

 

684,582

 

 

 

676,707

 

Noncontrolling interests

 

 

4,183

 

 

 

4,332

 

 

 

3,966

 

 

 

3,729

 

Total equity

 

 

685,036

 

 

 

701,296

 

 

 

688,548

 

 

 

680,436

 

Total liabilities and equity

 

$

1,158,592

 

 

$

1,160,746

 

 

$

1,277,533

 

 

$

1,229,927

 

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

 

 

4


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

 

 

Three Months Ended November 30,

 

 

 

2019

 

 

2018

 

Revenues

 

$

405,584

 

 

$

564,020

 

Operating expense:

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

364,760

 

 

 

490,132

 

Selling, general and administrative

 

 

46,774

 

 

 

51,419

 

(Income) from joint ventures

 

 

(199

)

 

 

(485

)

Asset impairment charges

 

 

1,692

 

 

 

63

 

Restructuring charges and other exit-related activities

 

 

467

 

 

 

202

 

Operating (loss) income

 

 

(7,910

)

 

 

22,689

 

Interest expense

 

 

(1,423

)

 

 

(1,906

)

Other income, net

 

 

206

 

 

 

23

 

(Loss) income from continuing operations before income taxes

 

 

(9,127

)

 

 

20,806

 

Income tax benefit (expense)

 

 

2,534

 

 

 

(4,116

)

(Loss) income from continuing operations

 

 

(6,593

)

 

 

16,690

 

Income (loss) from discontinued operations, net of tax

 

 

28

 

 

 

(72

)

Net (loss) income

 

 

(6,565

)

 

 

16,618

 

Net income attributable to noncontrolling interests

 

 

(430

)

 

 

(430

)

Net (loss) income attributable to SSI shareholders

 

$

(6,995

)

 

$

16,188

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share attributable to SSI shareholders:

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

(Loss) income per share from continuing operations

 

$

(0.26

)

 

$

0.59

 

Income (loss) per share from discontinued operations

 

 

 

 

 

 

Net (loss) income per share(1)

 

$

(0.25

)

 

$

0.59

 

Diluted:

 

 

 

 

 

 

 

 

(Loss) income per share from continuing operations

 

$

(0.26

)

 

$

0.57

 

Income (loss) per share from discontinued operations

 

 

 

 

 

 

Net (loss) income per share(1)

 

$

(0.25

)

 

$

0.57

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

Basic

 

 

27,515

 

 

 

27,505

 

Diluted

 

 

27,515

 

 

 

28,364

 

 

 

Three Months Ended November 30,

 

 

 

2020

 

 

2019

 

Revenues

 

$

492,107

 

 

$

405,584

 

Operating expense:

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

420,094

 

 

 

364,760

 

Selling, general and administrative

 

 

49,906

 

 

 

46,774

 

(Income) from joint ventures

 

 

(727

)

 

 

(199

)

Asset impairment charges

 

 

 

 

 

1,692

 

Restructuring charges and other exit-related activities

 

 

64

 

 

 

467

 

Operating income (loss)

 

 

22,770

 

 

 

(7,910

)

Interest expense

 

 

(1,780

)

 

 

(1,423

)

Other (loss) income, net

 

 

(165

)

 

 

206

 

Income (loss) from continuing operations before income taxes

 

 

20,825

 

 

 

(9,127

)

Income tax (expense) benefit

 

 

(5,719

)

 

 

2,534

 

Income (loss) from continuing operations

 

 

15,106

 

 

 

(6,593

)

(Loss) income from discontinued operations, net of tax

 

 

(42

)

 

 

28

 

Net income (loss)

 

 

15,064

 

 

 

(6,565

)

Net income attributable to noncontrolling interests

 

 

(960

)

 

 

(430

)

Net income (loss) attributable to SSI shareholders

 

$

14,104

 

 

$

(6,995

)

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to SSI shareholders:

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

Income (loss) per share from continuing operations

 

$

0.51

 

 

$

(0.26

)

Net income (loss) per share

 

$

0.51

 

 

$

(0.25

)

Diluted:

 

 

 

 

 

 

 

 

Income (loss) per share from continuing operations

 

$

0.50

 

 

$

(0.26

)

Net income (loss) per share

 

$

0.50

 

 

$

(0.25

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

Basic

 

 

27,807

 

 

 

27,515

 

Diluted

 

 

28,485

 

 

 

27,515

 

 

(1)

May not foot due to rounding.

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

5


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

 

Three Months Ended November 30,

 

 

Three Months Ended November 30,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Net (loss) income

 

$

(6,565

)

 

$

16,618

 

Net income (loss)

 

$

15,064

 

 

$

(6,565

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

211

 

 

 

(1,364

)

 

 

239

 

 

 

211

 

Pension obligations, net

 

 

27

 

 

 

202

 

 

 

(260

)

 

 

27

 

Total other comprehensive income (loss), net of tax

 

 

238

 

 

 

(1,162

)

Comprehensive (loss) income

 

 

(6,327

)

 

 

15,456

 

Total other comprehensive (loss) income, net of tax

 

 

(21

)

 

 

238

 

Comprehensive income (loss)

 

 

15,043

 

 

 

(6,327

)

Less comprehensive income attributable to noncontrolling interests

 

 

(430

)

 

 

(430

)

 

 

(960

)

 

 

(430

)

Comprehensive (loss) income attributable to SSI shareholders

 

$

(6,757

)

 

$

15,026

 

Comprehensive income (loss) attributable to SSI shareholders

 

$

14,083

 

 

$

(6,757

)

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

 

6


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total SSI

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 2018

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Comprehensive

Loss

 

 

Shareholders'

Equity

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

Balance as of September 1, 2018

 

 

26,502

 

 

$

26,502

 

 

 

200

 

 

$

200

 

 

$

36,929

 

 

$

639,684

 

 

$

(37,237

)

 

$

666,078

 

 

$

4,032

 

 

$

670,110

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,188

 

 

 

 

 

 

16,188

 

 

 

430

 

 

 

16,618

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,162

)

 

 

(1,162

)

 

 

 

 

 

(1,162

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(393

)

 

 

(393

)

Share repurchases

 

 

(150

)

 

 

(150

)

 

 

 

 

 

 

 

 

(3,945

)

 

 

 

 

 

 

 

 

(4,095

)

 

 

 

 

 

(4,095

)

Restricted stock withheld for taxes

 

 

(276

)

 

 

(276

)

 

 

 

 

 

 

 

 

(7,046

)

 

 

 

 

 

 

 

 

(7,322

)

 

 

 

 

 

(7,322

)

Issuance of restricted stock

 

 

750

 

 

 

750

 

 

 

 

 

 

 

 

 

(750

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,404

 

 

 

 

 

 

 

 

 

7,404

 

 

 

 

 

 

7,404

 

Dividends ($0.1875 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,177

)

 

 

 

 

 

(5,177

)

 

 

 

 

 

(5,177

)

Balance as of November 30, 2018

 

 

26,826

 

 

$

26,826

 

 

 

200

 

 

$

200

 

 

$

32,592

 

 

$

650,695

 

 

$

(38,399

)

 

$

671,914

 

 

$

4,069

 

 

$

675,983

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total SSI

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 2019

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Comprehensive

Loss

 

 

Shareholders'

Equity

 

 

Noncontrolling

Interests

 

 

Total

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

accounting guidance for leases, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,995

)

 

 

 

 

 

(6,995

)

 

 

430

 

 

 

(6,565

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

238

 

 

 

238

 

 

 

 

 

 

238

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(579

)

 

 

(579

)

Restricted stock withheld for taxes

 

 

(274

)

 

 

(274

)

 

 

 

 

 

 

 

 

(5,571

)

 

 

 

 

 

 

 

 

(5,845

)

 

 

 

 

 

(5,845

)

Issuance of restricted stock

 

 

753

 

 

 

753

 

 

 

 

 

 

 

 

 

(753

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,152

 

 

 

 

 

 

 

 

 

2,152

 

 

 

 

 

 

2,152

 

Dividends ($0.1875 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,198

)

 

 

 

 

 

(5,198

)

 

 

 

 

 

(5,198

)

Balance as of November 30, 2019

 

 

26,943

 

 

$

26,943

 

 

 

200

 

 

$

200

 

 

$

29,528

 

 

$

662,707

 

 

$

(38,525

)

 

$

680,853

 

 

$

4,183

 

 

$

685,036

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total SSI

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 2019

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Comprehensive

Loss

 

 

Shareholders'

Equity

 

 

Noncontrolling

Interests

 

 

Total

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

accounting guidance for leases, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,995

)

 

 

 

 

 

(6,995

)

 

 

430

 

 

 

(6,565

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

238

 

 

 

238

 

 

 

 

 

 

238

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(579

)

 

 

(579

)

Restricted stock withheld for taxes

 

 

(274

)

 

 

(274

)

 

 

 

 

 

 

 

 

(5,571

)

 

 

 

 

 

 

 

 

(5,845

)

 

 

 

 

 

(5,845

)

Issuance of restricted stock

 

 

753

 

 

 

753

 

 

 

 

 

 

 

 

 

(753

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,152

 

 

 

 

 

 

 

 

 

2,152

 

 

 

 

 

 

2,152

 

Dividends ($0.1875 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,198

)

 

 

 

 

 

(5,198

)

 

 

 

 

 

(5,198

)

Balance as of November 30, 2019

 

 

26,943

 

 

$

26,943

 

 

 

200

 

 

$

200

 

 

$

29,528

 

 

$

662,707

 

 

$

(38,525

)

 

$

680,853

 

 

$

4,183

 

 

$

685,036

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total SSI

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 2020

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Comprehensive

Loss

 

 

Shareholders'

Equity

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

Balance as of September 1, 2020

 

 

26,899

 

 

$

26,899

 

 

 

200

 

 

$

200

 

 

$

36,616

 

 

$

649,863

 

 

$

(36,871

)

 

$

676,707

 

 

$

3,729

 

 

$

680,436

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,104

 

 

 

 

 

 

14,104

 

 

 

960

 

 

 

15,064

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21

)

 

 

(21

)

 

 

 

 

 

(21

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(723

)

 

 

(723

)

Restricted stock withheld for taxes

 

 

(188

)

 

 

(188

)

 

 

 

 

 

 

 

 

(3,782

)

 

 

 

 

 

 

 

 

(3,970

)

 

 

 

 

 

(3,970

)

Issuance of restricted stock

 

 

543

 

 

 

543

 

 

 

 

 

 

 

 

 

(543

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,019

 

 

 

 

 

 

 

 

 

3,019

 

 

 

 

 

 

3,019

 

Dividends ($0.1875 per common share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,257

)

 

 

 

 

 

(5,257

)

 

 

 

 

 

(5,257

)

Balance as of November 30, 2020

 

 

27,254

 

 

$

27,254

 

 

 

200

 

 

$

200

 

 

$

35,310

 

 

$

658,710

 

 

$

(36,892

)

 

$

684,582

 

 

$

3,966

 

 

$

688,548

 

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

 

7


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

 

Three Months Ended November 30,

 

 

Three Months Ended November 30,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(6,565

)

 

$

16,618

 

Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

15,064

 

 

$

(6,565

)

Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Asset impairment charges

 

 

1,692

 

 

 

63

 

 

 

 

 

 

1,692

 

Exit-related asset impairments

 

 

117

 

 

 

23

 

 

 

 

 

 

117

 

Depreciation and amortization

 

 

14,087

 

 

 

13,297

 

 

 

14,826

 

 

 

14,087

 

Deferred income taxes

 

 

(2,456

)

 

 

(697

)

 

 

4,770

 

 

 

(2,456

)

Undistributed equity in earnings of joint ventures

 

 

(199

)

 

 

(485

)

 

 

(727

)

 

 

(199

)

Share-based compensation expense

 

 

2,152

 

 

 

7,404

 

 

 

2,984

 

 

 

2,152

 

(Gain) loss on the disposal of assets, net

 

 

(386

)

 

 

255

 

Unrealized foreign exchange gain, net

 

 

(16

)

 

 

 

Bad debt expense (recoveries), net

 

 

32

 

 

 

(1

)

Gain on the disposal of assets, net

 

 

(61

)

 

 

(386

)

Unrealized foreign exchange loss (gain), net

 

 

82

 

 

 

(16

)

Credit loss, net

 

 

33

 

 

 

32

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

28,202

 

 

 

(28,046

)

 

 

(29,116

)

 

 

28,202

 

Inventories

 

 

11,870

 

 

 

9,626

 

 

 

(25,928

)

 

 

11,870

 

Income taxes

 

 

(227

)

 

 

4,722

 

 

 

5,324

 

 

 

(227

)

Prepaid expenses and other current assets

 

 

(356

)

 

 

(732

)

 

 

738

 

 

 

(356

)

Other long-term assets

 

 

(57

)

 

 

456

 

 

 

(737

)

 

 

(57

)

Operating lease assets and liabilities

 

 

105

 

 

 

 

 

 

(375

)

 

 

105

 

Accounts payable

 

 

(28,953

)

 

 

(6,881

)

 

 

19,015

 

 

 

(28,953

)

Accrued payroll and related liabilities

 

 

(11,159

)

 

 

(27,046

)

 

 

(12,529

)

 

 

(11,159

)

Other accrued liabilities

 

 

3,771

 

 

 

(224

)

 

 

(5,204

)

 

 

3,771

 

Environmental liabilities

 

 

(553

)

 

 

(168

)

 

 

1,252

 

 

 

(553

)

Other long-term liabilities

 

 

32

 

 

 

43

 

 

 

3,158

 

 

 

32

 

Distributed equity in earnings of joint ventures

 

 

 

 

 

167

 

Net cash provided by (used in) operating activities

 

 

11,133

 

 

 

(11,606

)

Net cash (used in) provided by operating activities

 

 

(7,431

)

 

 

11,133

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(23,973

)

 

 

(27,209

)

 

 

(31,827

)

 

 

(23,973

)

Joint venture receipts, net

 

 

 

 

 

641

 

Proceeds from sale of assets

 

 

2

 

 

 

1,279

 

 

 

80

 

 

 

2

 

Net cash used in investing activities

 

 

(23,971

)

 

 

(25,289

)

 

 

(31,747

)

 

 

(23,971

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings from long-term debt

 

 

114,339

 

 

 

158,859

 

 

 

92,714

 

 

 

114,339

 

Repayment of long-term debt

 

 

(92,190

)

 

 

(97,699

)

 

 

(53,781

)

 

 

(92,190

)

Payment of debt issuance costs

 

 

 

 

 

(95

)

Repurchase of Class A common stock

 

 

 

 

 

(4,095

)

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

 

 

(5,845

)

 

 

(7,322

)

 

 

(3,970

)

 

 

(5,845

)

Distributions to noncontrolling interests

 

 

(579

)

 

 

(393

)

 

 

(723

)

 

 

(579

)

Dividends paid

 

 

(5,653

)

 

 

(5,554

)

 

 

(5,680

)

 

 

(5,653

)

Net cash provided by financing activities

 

 

10,072

 

 

 

43,701

 

 

 

28,560

 

 

 

10,072

 

Effect of exchange rate changes on cash

 

 

13

 

 

 

(313

)

 

 

(11

)

 

 

13

 

Net (decrease) increase in cash and cash equivalents

 

 

(2,753

)

 

 

6,493

 

Net decrease in cash and cash equivalents

 

 

(10,629

)

 

 

(2,753

)

Cash and cash equivalents as of beginning of period

 

 

12,377

 

 

 

4,723

 

 

 

17,887

 

 

 

12,377

 

Cash and cash equivalents as of end of period

 

$

9,624

 

 

$

11,216

 

 

$

7,258

 

 

$

9,624

 

 

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

8


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Currency - U.S. Dollar)

 

 

Three Months Ended November 30,

 

 

Three Months Ended November 30,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid (refunded) during the period for:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

885

 

 

$

1,441

 

 

$

1,364

 

 

$

885

 

Income taxes paid (refunded), net

 

$

104

 

 

$

(8

)

Income taxes (refunded) paid, net

 

$

(4,389

)

 

$

104

 

Schedule of noncash investing and financing transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in current liabilities

 

$

8,106

 

 

$

7,418

 

 

$

11,412

 

 

$

8,106

 

 

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

 

 

9


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements of Schnitzer Steel Industries, Inc. and its majority-owned and wholly-owned subsidiaries (the “Company”) have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for Form 10-Q, including Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all normal, recurring adjustments considered necessary for a fair statement have been included. Management suggests that these Unaudited Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019.2020. The results for the three months ended November 30, 20192020 and 20182019 are not necessarily indicative of the results of operations for the entire fiscal year.

SegmentsSegment Reporting

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

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

Prior to the first quarter of fiscal 2021, the Company’s internal organizational and reporting structure includesincluded 2 operating and reportable segments: the Auto and Metals Recycling (“AMR”) business and the Cascade Steel and Scrap (“CSS”) business. In the first quarter of fiscal 2021, in accordance with its plan announced in April 2020, the Company completed its transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model. The Company consolidated its operations, sales, services and other functional capabilities at an enterprise level reflecting enhanced focus by management on optimizing the Company’s vertically integrated value chain. This change resulted in a realignment of how the Chief Executive Officer, who is considered the Company’s chief operating decision-maker, reviews performance and makes decisions on resource allocation, supporting a single segment. The Company began reporting on this new single-segment structure in the first quarter of fiscal 2021 as reflected in this Quarterly Report on Form 10-Q.

Accounting ChangesChange

As of the beginning of the first quarter of fiscal 2020, the Company adopted an accounting standards update initially issued in February 2016, 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 update supersedes the previous lease accounting standard. The Company 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 retained earnings as of September 1, 2019. Such cumulative-effect adjustment for the Company was not material. Adoption usingless than $1 million, which is presented separately in the modified retrospective transition method did not have an impact on any prior period earningsUnaudited Condensed Consolidated Statement of the Company, and no comparative prior periods were adjustedEquity for the new guidance. The Company elected a package of practical expedients permitted under the transition guidance within the new lease accounting standard, which among other things, permit carrying forward the historical lease classification. The Company also elected the practical expedient exempting short-term leases from balance sheet recognition, whereby payments for such leases are recognized in the income statement on a straight-line basis over the lease term. In addition, the Company elected the practical expedient to not separate lease and non-lease components, which the Company elected to apply to all classes of underlying assets. Adoption of the new standard resulted in recognition of $126 million and $128 million of operating three months ended November 30, 2019.lease right-of-use assets and liabilities, respectively, as of September 1, 2019, which are presented as separate line items on the balance sheet. Operating lease right-of-use assets are considered long-lived assets subject to existing long-lived asset impairment guidance. Adoption also resulted in the reclassification of the Company’s capital lease assets and obligations as finance lease right-of-use assets and liabilities as of September 1, 2019, with such reclassification having no impact on the carrying amounts or financial statement line items within which the leases are reported. See Note 3 - Leases for the 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 $14of $27 million and $27$20 million as of November 30, 20192020 and August 31, 2019,2020, respectively.

10


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. Domestic ferrousFerrous and nonferrous metal sales nonferrous metal salesto domestic customers and finished steel sales are generally made on open account, and the majoritya portion of these sales are covered by credit insurance.

10


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company evaluates the collectibilitycollectability 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 awareManagement evaluates 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.trends 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.

Also included in accounts receivable are short-term advances to scrap metal suppliers used as a mechanism to acquire unprocessed scrap metal. The advances are generally repaid with scrap metal, as opposed to cash. Repayments of advances with scrap metal are treated as noncash operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows and totaled $2 million for each of and $4 million for the three months ended November 30, 20192020 and 2018, respectively.2019.

Prepaid Expenses

The Company’s prepaid expenses, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets, totaled $22 million and $23 million as of November 30, 20192020 and August 31, 2019,2020, respectively, and consisted primarily of deposits on capital projects, prepaid services, prepaid property taxesinsurance and prepaid insurance.property taxes.

Other Assets

The Company’s other assets, exclusive of prepaid expenses and assets relating to certain retirement plans, consist primarily of receivables from insurers, spare parts, an equity investment, receivables from insurers, capitalized implementation costs for cloud computing arrangements, debt issuance costs, and notes and other contractual receivables. Other assets are reported within either prepaid expenses and other current assets or other assets in the Unaudited Condensed Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle of one year from the reporting date. Receivables from insurers totaled $7 million and $89 million as of November 30, 2019 and August 31, 2019, respectively, with the decrease in the first quarter of fiscal 2020 resulting primarily from full payment by the Company’s insurers of settlements for lawsuits arising from a 2016 motor vehicle collision. See “Contingencies – Other” in Note 5 – Commitments and Contingencies for further discussion of this matter.

The Company invested $6 million in the equity of a privately-held waste and recycling entity in fiscal 2017. The equity investment does not have a readily determinable fair value and, therefore, is carried at cost and adjusted for impairments and observable price changes. The investment is presented as part of the AMR reportable segment and reported within other assets in the Unaudited Condensed Consolidated Balance Sheets. The carrying value of the investment was $6 million as of November 30, 20192020 and August 31, 2019.2020. The Company has not recorded any impairments or upward or downward adjustments to the carrying value of the investment since acquisition.

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. The segment realignment completed in the first quarter of fiscal 2021 described above in this Note under “Segment Reporting” did not significantly impact the composition of the Company’s asset groups.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, and notes and other contractual receivables. The majority of cash and cash equivalents is maintained with major financial institutions. Balances with these and certain other institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250,000$250 thousand as of November 30, 2019.2020. 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 $46 million and $49 million of open letters of credit as of November 30, 2019 and August 31, 2019, respectively.

Note 2 - Inventories

Inventories consisted of the following (in thousands):

 

 

November 30, 2019

 

 

August 31, 2019

 

Processed and unprocessed scrap metal

 

$

70,070

 

 

$

81,313

 

Semi-finished goods

 

 

9,770

 

 

 

8,712

 

Finished goods

 

 

55,386

 

 

 

53,796

 

Supplies

 

 

42,708

 

 

 

43,499

 

Inventories

 

$

177,934

 

 

$

187,320

 

11


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3 - LeasesRecent Accounting Pronouncements

The Company enters into leases to obtain access to real property, machinery and equipment assets. Mostdoes not expect that its adoption in the future of the Company’s lease obligations relate to real property leases for AMR 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. Theany recently issued 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,pronouncements will 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 recognizedmaterial impact on the balance sheet.its 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. The Company used the incremental borrowing rate to recognize all operating lease right-of-use assets and liabilities as of the new lease accounting standard application date. 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.Note 2 - Inventories

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, or with respect to the Company’s transition to the new lease accounting standard the index or rate at the application date. 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.

The Company’s operating leases for real property underlying its auto parts stores, metals recycling facilities, and administrative offices generally have non-cancellable lease terms of 5 to 10 years and the significant majority, but not all, 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.

For the three months ended November 30, 2019, the Company’s total lease cost was $7 million, consisting primarily of operating lease expense of $6 million and short-term lease expense of $1 million. The other components of the Company’s total lease cost for the period, 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 the three months ended November 30, 2019 is presented within cost of goods sold in the Unaudited Condensed Consolidated Statements of Operations.

12


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Finance lease-related assets and liabilitiesInventories consisted of the following (in thousands):

 

 

Balance Sheet Classification

 

November 30, 2019

 

Assets:

 

 

 

 

 

 

Finance lease right-of-use assets(1)

 

Property, plant and equipment, net

 

$

7,132

 

Liabilities:

 

 

 

 

 

 

Finance lease liabilities - current

 

Short-term borrowings

 

$

1,357

 

Finance lease liabilities - non-current

 

Long-term debt, net of current maturities

 

 

7,159

 

Total finance lease liabilities

 

 

 

$

8,516

 

(1)

Presented net of accumulated amortization of less than $1 million as of November 30, 2019.

The weighted average remaining lease terms and weighted average discount rates for the Company’s leases as of November 30, 2019 were as follows:

 

 

November 30, 2019

 

 

 

Weighted Average

Remaining Lease

Term (Years)

 

 

Weighted Average

Discount Rate

 

Operating leases

 

 

9.7

 

 

 

3.41

%

Finance leases

 

 

6.6

 

 

 

8.83

%

Maturities of lease liabilities by fiscal year as of November 30, 2019 were as follows (in thousands):

Year Ending August 31,

 

Finance Leases

 

 

Operating Leases

 

2020 (for the remainder of fiscal 2020)

 

$

1,487

 

 

$

17,372

 

2021

 

 

1,855

 

 

 

20,226

 

2022

 

 

1,818

 

 

 

19,646

 

2023

 

 

1,681

 

 

 

19,084

 

2024

 

 

1,409

 

 

 

14,928

 

Thereafter

 

 

2,445

 

 

 

60,615

 

Total lease payments

 

$

10,695

 

 

$

151,871

 

Less amounts representing interest

 

 

(2,179

)

 

 

(25,246

)

Total lease liabilities

 

$

8,516

 

 

$

126,625

 

Less current maturities

 

 

(1,357

)

 

 

(18,824

)

Lease liabilities, net of current maturities

 

$

7,159

 

 

$

107,801

 

Supplemental cash flow information and non-cash activity related to leases are as follows (in thousands):

 

 

Three Months

Ended

November 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash flows for operating leases

 

$

5,648

 

Operating cash flows for finance leases

 

$

176

 

Financing cash flows for finance leases

 

$

329

 

Lease liabilities arising from obtaining right-of-use assets:

 

 

 

 

Operating leases

 

$

3,458

 

Finance leases

 

$

1,078

 

13


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As a result of adopting the new lease accounting guidance on September 1, 2019 using the modified retrospective transition method, the Company is required to present future minimum lease commitments for capital leases and operating leases that were previously disclosed in the Company’s 2019 Annual Report on Form 10-K and accounted for under previous lease guidance.

Principal payments on capital lease obligations during the next five fiscal years and thereafter as of August 31, 2019 are as follows (in thousands):

Year Ending August 31,

 

Capital Lease

Obligations

 

2020

 

$

1,917

 

2021

 

 

1,799

 

2022

 

 

1,751

 

2023

 

 

1,622

 

2024

 

 

1,346

 

Thereafter

 

 

1,694

 

Total

 

 

10,129

 

Amounts representing interest

 

 

(2,355

)

Total less interest

 

$

7,774

 

The table below sets forth the Company’s future minimum obligations under non-cancelable operating leases as of August 31, 2019 (in thousands):

Year Ending August 31,

 

Operating

Leases

 

2020

 

$

21,286

 

2021

 

 

15,301

 

2022

 

 

12,488

 

2023

 

 

10,419

 

2024

 

 

5,035

 

Thereafter

 

 

16,095

 

Total

 

$

80,624

 

 

 

November 30, 2020

 

 

August 31, 2020

 

Processed and unprocessed scrap metal

 

$

84,527

 

 

$

63,058

 

Semi-finished goods

 

 

7,627

 

 

 

6,909

 

Finished goods

 

 

49,567

 

 

 

44,476

 

Supplies

 

 

43,626

 

 

 

42,826

 

Inventories

 

$

185,347

 

 

$

157,269

 

 

Note 43 - Goodwill

The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. There were no triggering eventsImpairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is required to be identified duringas a reporting unit if the first three months of fiscal 2020 requiring an interim goodwill impairment test. component is a business for which discrete financial information is available and segment management regularly reviews its operating results.

As of November 30, 2019 and August 31, 2019, all but $1 million2020, the balance of the Company’s goodwill was $170 million, and all but $1 million of such balance was carried by a single reporting unit within AMR.the AMR operating segment that existed at the time. The Company had last performed the quantitative impairment test of goodwill carried by this reporting unit in the fourth quarter of fiscal 2020 using a measurement date of July 1, 2020. The estimated fair value of the reporting unit exceeded its carrying amount by approximately 29% as of July 1, 2020. In the first quarter of fiscal 2021, the Company completed its transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model, resulting in a single operating segment, replacing the AMR and CSS operating segments. The change in structure led to the identification of components within the single operating segment based on disaggregation of financial information regularly reviewed by segment management. In accordance with the accounting guidance, the Company then reassigned the Company's goodwill to the reporting units affected based on the relative fair values of the elements transferred and the elements remaining within the original reporting units as of the date of the reassessment, September 1, 2020. The Company measured the relative fair values of such elements under the market approach based on earnings multiple data. Beginning on the date of reassessment of September 1, 2020, the Company's goodwill is carried by 3 reporting units comprising 2 separate regional groups of metals recycling operations and the Company’s retail auto parts stores.

In connection with the segment realignment and redefinition of the Company's reporting units effective as of September 1, 2020, management evaluated if it was more likely than not that the fair value of any of the either legacy or new reporting units with allocated goodwill was below its carrying value as of September 1, 2020, which would indicate a triggering event requiring a goodwill impairment test. Based on management's assessment as of September 1, 2020, it was not more likely than not that the fair value of each reporting unit with allocated goodwill was below its carrying value. The Company did not record a goodwill impairment charge in any of the periods presented.

The gross change in the carrying amount of goodwill for the three months ended November 30, 20192020 was as follows (in thousands):

 

 

Goodwill

 

August 31, 2019

 

$

169,237

 

Foreign currency translation adjustment

 

 

55

 

November 30, 2019

 

$

169,292

 

 

 

Goodwill

 

August 31, 2020

 

$

169,627

 

Foreign currency translation adjustment

 

 

59

 

November 30, 2020

 

$

169,686

 

Accumulated goodwill impairment charges were $471 million as of November 30, 20192020 and August 31, 2019.2020.

1412


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 54 - Commitments and Contingencies

Contingencies - Environmental

The Company evaluates the adequacy of its environmental liabilities on a quarterly basis. Adjustments to the liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or expenditures are made for which liabilities were established.

Changes in the Company’s environmental liabilities for the three months ended November 30, 20192020 were as follows (in thousands):

 

Balance as of September 1, 2019

 

 

Liabilities

Established

(Released), Net

 

 

Payments and

Other

 

 

Balance as of

November 30, 2019

 

 

Short-Term

 

 

Long-Term

 

Balance as of September 1, 2020

Balance as of September 1, 2020

 

 

Liabilities

Established

(Released), Net

 

 

Payments and

Other

 

 

Balance as of

November 30, 2020

 

 

Short-Term

 

 

Long-Term

 

$

51,799

 

 

$

1,475

 

 

$

(1,920

)

 

$

51,354

 

 

$

5,576

 

 

$

45,778

 

53,464

 

 

$

2,347

 

 

$

(1,086

)

 

$

54,725

 

 

$

7,620

 

 

$

47,105

 

Recycling Operations

As of November 30, 20192020 and August 31, 2019,2020, the Company’s recycling operationsCompany had environmental liabilities of $5155 million and $52$53 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 and certain liabilities discussed under Other Legacy Environmental Loss Contingencies immediately below, such liabilities were not individually material at any site.

Portland Harbor

In December 2000, the Company was notified by the United States Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it is one of the potentially responsible parties (“PRPs”) that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”). The precise nature and extent of cleanup of any specific areas within the Site, the parties to be involved, the timing of any specific remedial action and the allocation of the costs for any cleanup among responsible parties have not yet been determined. The process of site investigation, remedy selection, identification of additional PRPs and allocation of costs has been underway for a number of years, but significant uncertainties remain. It is unclear to what extent the Company will be liable for environmental costs or natural resource damage claims or third party contribution or damage claims with respect to the Site.

While the Company participated in certain preliminary Site study efforts, it was not party to the consent order entered into by the EPA with certain other PRPs, referred to as the “Lower Willamette Group” (“LWG”), for a remedial investigation/feasibility study (“RI/FS”). During fiscal 2007, the Company and certain other parties agreed to an interim settlement with the LWG under which the Company made a cash contribution to the LWG RI/FS. The LWG has indicated that it had incurred over $155 million in investigation-related costs over an approximately 18 year period working on the RI/FS. Following submittal of draft RI and FS documents which the EPA largely rejected, the EPA took over the RI/FS process.

The Company has joined with approximately 100 other PRPs, including the LWG members, in a voluntary process to establish an allocation of costs at the Site, including the costs incurred by the LWG in the RI/FS process. The LWG members have also commenced federal court litigation, which has been stayed, seeking to bring additional parties into the allocation process.

In January 2008, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. Following meetings among the Trustee Council and the PRPs, funding and participation agreements were negotiated under which the participating PRPs, including the Company, agreed to fund the first phase of the three-phase natural resource damage assessment. Phase 1, which included the development of the Natural Resource Damage Assessment Plan (“AP”) and implementation of several early studies, was substantially completed in 2010. In December 2017, the Company joined with other participating PRPs in agreeing to fund Phase 2 of the natural resource damage assessment, which includes the implementation of the AP to develop information sufficient to facilitate early settlements between the Trustee Council and Phase 2 participants and the identification of restoration projects to be funded by the settlements. In late May 2018, the Trustee Council published notice of its intent to proceed with Phase 3, which will involve the full implementation of the AP and the final injury and damage determination. The Company is proceeding with the process established by the Trustee Council regarding early settlements under Phase 2. It is uncertain whether the Company will enter into an early settlement for natural resource damages or what costs it may incur in any such early settlement.

1513


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED 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 the Site and recovery of assessment costs related to natural resources damages from releases at and from the Site to the Multnomah Channel and the Lower Columbia River. The parties have filed various motions to dismiss or stay this suit, and in August 2019, the court issued an order denying the motions to dismiss and staying the action. A number of parties have filed to appeal the court’s denial of the motions to dismiss, which filing the Company joined in part. The Company intends to defend against the claims in this suit and does not have sufficient information to determine the likelihood of a loss in this matter or to estimate the amount of damages being sought or the amount of such damages that could be allocated to the Company.

Estimates of the cost of remedial action for the cleanup of the in-river portion of the Site have varied widely in various drafts of the FS and in the EPA’s final FS issued in June 2016 ranging from approximately $170 million to over $2.5 billion (net present value), depending on the remedial alternative and a number of other factors. In comments submitted to the EPA, the Company and certain other stakeholders identified a number of serious concerns regarding the EPA’s risk and remedial alternatives assessments, cost estimates, scheduling assumptions and conclusions regarding the feasibility and effectiveness of remediation technologies.

In January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for the Site. The selected remedy is a modified version of one of the alternative remedies evaluated in the EPA’s FS that was expanded to include additional work at a greater cost. The EPA has estimated the total cost of the selected remedy at $1.7 billion with a net present value cost of $1.05 billion (at a 7% discount rate) and an estimated construction period of 13 years following completion of the remedial designs. In the ROD, the EPA stated that the cost estimate is an order-of-magnitude engineering estimate that is expected to be within +50% to -30% of the actual project cost and that changes in the cost elements are likely to occur as a result of new information and data collected during the engineering design. The Company has identified a number of concerns regarding the remedy described in the ROD, which is based on data that is more than a decade old, and the EPA’s estimates for the costs and time required to implement the selected remedy. Because of ongoing questions regarding cost effectiveness, technical feasibility, and the use of stale data, it is uncertain whether the ROD will be implemented as issued. In addition, the ROD did not determine or allocate the responsibility for remediation costs among the PRPs.

In the ROD, the EPA acknowledged that much of the data used in preparing the ROD was more than a decade old and would need to be updated with a new round of “baseline” sampling to be conducted prior to the remedial design phase. Accordingly, the ROD provided for additional pre-remedial design investigative work and baseline sampling to be conducted in order to provide a baseline of current conditions and delineate particular remedial actions for specific areas within the Site. This additional sampling was required 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 beare collected, identified and incorporated into technical drawings and specifications developed for the subsequent remedial action. Moreover, the ROD provided only Site-wide cost estimates and did not provide sufficient detail to estimate costs for specific sediment management areas within the Site. Following issuance of the ROD, EPA proposed that the PRPs, or a subgroup of PRPs, perform the additional investigative work identified in the ROD under a new consent order.

In December 2017, the Company and 3 other PRPs entered into a new Administrative Settlement Agreement and Order on Consent with EPA to perform such pre-remedial design investigation and baseline sampling over a two yeartwo-year period. The Company estimated that its share of the costs of performing such work would be approximately $2 million, which it recorded to environmental liabilities and selling, general and administrative expense in the consolidated financial statementsaccrued in fiscal 2018. The Company believes that suchSuch costs will bewere fully covered by existing insurance coverage and, thus, the Company also recorded an insurance receivable for $2 million in fiscal 2018, resulting in no net impact to the Company’s consolidated results of operations. The Company’s loss contingencies as of November 30, 2019 and August 31, 2019 included $1 million for its estimated share of the costs of the investigation, including pre-remedial design investigative activities.

The pre-remedial design investigation and baseline sampling work has been completed, and the report evaluating the data was submitted to EPA on June 17, 2019. The evaluation report concludes that Site conditions have improved substantially since the data forming the basis of the ROD was collected over a decade ago. The analysis contained in the report has significant implications for remedial design and remedial action at the Site. EPA has reviewed the report, finding with a few limited corrections that the data is of suitable quality and generally acceptable and stating that such data will be used, in addition to existing and forthcoming design-level data, to inform implementation of the ROD. However, EPA did not agree that the data or the analysis supportwarrants a change to the conclusions presented in the report.remedy at this time and reaffirmed its commitment to proceed with remedial design. The Company and other PRPs disagree with EPA’s position on use of the more recent data and are reviewing EPA’s commentswill continue to pursue limited, but critical, changes to the selected remedy for the Site during the remedial design phase.

EPA encouraged PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design covering the entire Site and proposed dividing the Company’s options.Site into 8 to 10 subareas for remedial design. Certain PRPs have since

1614


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

EPA has stated that it wants PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design covering the entire Site and has proposed dividing the Site into 8 to 10 subareas for remedial design. Certain PRPs have since executed consent agreements for remedial design work incovering a few portionslittle more than half of the remedial action areas at the Site. Because of EPA’s refusal to date to modify the remedy to reflect the most current data on Site conditions and because of concerns with the terms of the consent agreement, the Company elected not to enter into a consent agreement for remedial design with respect to any of the subareas at the Site. On March 26, 2020, EPA recently indicatedissued a unilateral administrative order (UAO) to the Company and MMGL, LLC (“MMGL”), an unaffiliated company, for the remedial design work in the portion of one of the EPA identified subareas within the Site designated as the River Mile 3.5 East Project Area. Following a conference with the Company to discuss the UAO and written comments submitted by the Company, EPA made limited modifications to the UAO and issued an amendment to the UAO on April 27, 2020 with an effective date of May 4, 2020. As required by the UAO, the Company notified EPA of its intent to comply with the UAO on the effective date 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, EPA’s expected schedule for completion of the remedial design work is four years. EPA has 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 the Site as between the respondents or with respect to any third party. The Company estimated that its share of the costs of performing such work under the UAO would be approximately $3 million, which it recorded to environmental liabilities and selling, general and administrative expense in the consolidated financial statements in the third quarter of fiscal 2020. The Company has insurance policies that it believes will provide reimbursement for costs it incurs for remedial design, but not issue Special Notice Letters for full remedial design/remedial action work at this time, but stated that,any penalties. The Company also expects to pursue in early 2020, it plans to complete pending negotiations withthe future allocation or contribution from other PRPs for additionala portion of such remedial design consent agreementscosts.

The Company’s environmental liabilities as of November 30, 2020 and will utilize its enforcement tools, which include issuance of orders,August 31, 2020 included $6 million and $4 million, respectively, relating to advance progress on remedial design. However, the Company does not currently expect EPA to take immediate enforcement actions pending ongoing discussions with EPA on the results of the pre-remedial design investigation work. The Company has engaged in good-faith negotiations with EPA with respect to potentially performing remedial design; but it is unclear whether the Company will reach agreement with EPA, and the timing for completion of remedial design is uncertain but could take three to four years.Portland Harbor.

Except for certain early action projects in which the Company is not involved, remediation activities are not expected to commence for a number of years. Moreover, remediation activities at the Site are expected to be sequenced, and the order and timing of such sequencing has not been determined. In addition, as discussed above, responsibility for implementing and funding the remedy will be determined in a separate allocation process, which is on-going. The Company would expectexpects the next major stage of the allocation process to proceed in parallel with the remedial design process.

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, the amount of natural resource damages or of the allocation among the PRPs of costs of the investigations, and any remedy andremedial action costs or natural resource damages, among the PRPs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it is likely to or which it is reasonably possible that it will incur in connection with the Site, although such costs could be material to the Company’s financial position, results of operations, cash flows and liquidity. Among the facts currently being developed are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on each property within the Site, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs.

The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense, (including the pre-remedial design investigative activities), remedial design, remedial action and mitigation for or settlement of natural resource damages claims in connection with the Site. Most of these policies jointly insure the Company 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 the Site, although there is no assurance that thosecontinue to seek settlements with other insurers and formed a Qualified Settlement Fund (“QSF”) which became operative in the fourth quarter of 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 the Site. 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 and one appointed by MMGL, share equally the power to direct the activities of the VIE that most significantly impact its economic performance. The Company’s appointee to co-manage the VIE is an executive officer of the Company. Neither MMGL nor its appointee to co-manage the VIE is a related party of the Company for the purpose of the primary beneficiary assessment or otherwise.

The Oregon Department of Environmental Quality is separately providing oversight of voluntary investigations and source control activities by the Company involving the Company’s sites adjacent to the Portland Harbor which are focused on controlling any current “uplands” releases of contaminants into the Willamette River. No liabilities have been established in connection with these investigations because the extent of contamination (if any) and the Company’s responsibility for the contamination (if any) have not yet been determined.

15


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other Legacy Environmental Loss Contingencies

The Company’s environmental loss contingencies as of November 30, 20192020 and August 31, 2019,2020, other than Portland Harbor, include actual or possible investigation and cleanup 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”). 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 cleanup activities are ongoing or may be required in the future. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. When investigation and cleanup activities are ongoing or where the Company has not yet been identified as having responsibility or the contamination has not yet been identified, it is reasonably possible that the Company may need to recognize additional liabilities in connection with such sites but the Company cannot currently reasonably estimate the possible loss or range of loss absent additional information or developments. Such additional liabilities, individually or in the aggregate, may have a material adverse effect on the Company’s results of operations, financial condition or cash flows.

During fiscal 2018, the Company accrued $4 million in expense at its Corporate division for the estimated costs related to remediation of shredder residue disposed of in or around the 1970s at third-party sites located near each other. Investigation activities have been conducted under oversight of the applicable state regulatory agency. As of November 30, 20192020 and August 31, 2019,2020, the Company had $4 million accrued for this matter. It is reasonably possible that the Company may recognize additional liabilities in connection with this matter at the time such losses are probable and can be reasonably estimated. The Company currently estimatespreviously estimated a range of reasonably possible losses related to this matter in excess of current accruals at between 0 and $28 million based on a range of remedial alternatives and subject to development and approval by regulators of a specific remedy implementation plan. However, subsequent to the development of those remedial alternatives, the Company performed additional investigative activities under new state requirements that have the potential to impact the required remedial actions and associated cost estimates pending further analysis and discussion by the Company and regulators.The Company is

17


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 November 30, 20192020 and August 31, 2019 incl2020 included $5ude $7 million and $8 million, respectively, for the estimated costs related to remediation of soil and groundwater conditions, including penalties, environmental matters in connection with a closed facility owned and previously operated by an indirect, wholly-owned subsidiary.subsidiary, including monitoring and remediation of soil and groundwater conditions. Investigation activities have been conducted under the oversight of the applicable state regulatory agency, and the Company has also been working with local officials with respect to the protection of public water supplies. The decrease in the loss contingency accrual in the first quarter of fiscal 2021 primarily reflects payment during the quarter of penalties in the amount of $2.7 million pursuant to the previously agreed settlement. It is reasonably possible that the Company may recognize additional liabilities including penalties, in connection with this matter at the time such additional losses are probable and can be reasonably estimated. However, the Company cannot reasonably estimate at this time the possible additional loss or range of possible additional losses associated with this matter pending completion of on-going studies and determination of remediation plans and pending further negotiations to settle the related enforcement matter.plans. As part of its activities relating to the protection of public water supplies, the Company has agreed to reimburse the municipality for certain studies and plans, and it is reasonably possible that it may incur additional liabilities and costs in the future, including for wellhead treatment, which mayin the case of costs for installation of wellhead treatment, if incurred, could be material.

Steel Manufacturing Operations

The Company’s steel manufacturing operations had 0 known environmental liabilities asin the range of November 30, 2019 and August 31, 2019.

The steel mill’s electric arc furnace generates dust (“EAF dust”) that is classified as hazardous waste by the EPA because of its zinc and lead content. As a result, the Company captures the EAF dust and ships it in specialized rail cars$10 million to firms that apply treatments that allow for the ultimate disposal of the EAF dust.

The Company’s steel mill has an operating permit issued under Title V of the Clean Air Act Amendments of 1990, which governs certain air quality standards. The permit is based on an annual production capacity of approximately 950 thousand tons. The Company’s permit was first issued in 1998 and has since been renewed through February 1, 2018. The permit renewal process occurs every five years, and the renewal process is underway; however, the existing permit is extended by administrative rule until the current renewal process is finalized.$13 million.

Summary - Environmental Contingencies

With respect to environmental contingencies other than the Portland Harbor Superfund site and the other legacy environmental loss contingencies,Other Legacy Environmental Loss Contingencies, which are discussed separately above, management currently believes that adequate provision has been made for the potential impact of its environmental loss contingencies. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material in any given period, but there can be no assurance that such amounts paid will not be material in the future.

16


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contingencies - Other

Schnitzer Southeast, LLC (a wholly-owned subsidiary of the Company, “SSE”), an SSE employee, the Company and one of the Company’s insurance carriers had been named as defendants in 5 separate wrongful death lawsuits filed in the State of Georgia arising from an accident in 2016 in Alabama involving a tractor trailer driven by the SSE employee and owned by SSE. In fiscalFebruary 2019, the Company settled 3received a letter sent on behalf of the five lawsuitsDistrict Attorneys for a total of $35 million. In the first quarter of fiscal 2020,six counties in California notifying the Company settledof a joint investigation into the 2 remaining lawsuits for a totalalleged mishandling of $68 million. The aggregate settlement amount of $103 million was substantially covered by insurance, resulting in no net impact tohazardous materials and hazardous waste and into the Company’s consolidated results of operations. As of August 31, 2019,disposal practices, as well as alleged water pollution violations, at various retail auto parts stores within California and requesting a meeting to discuss the alleged violations. The Company has implemented additional compliance measures, and based on these additional actions and the initial discussions with the District Attorneys’ offices, the Company had accrued loss contingencies and offsetting insurance receivables relatedexpects to the lawsuits totaling $83 million. The full amount accrued asnegotiate a settlement of August 31, 2019 was paid by the Company’s insurers in the first quarter of fiscal 2020. There are 0 further contingencies in relation to this matter asthat will address the concerns raised in this joint investigation. There has been no discussion to date of November 30, 2019.potential monetary sanctions. The Company may recognize a liability in connection with this matter at the time a loss is probable and can be reasonably estimated. However, the Company cannot reasonably estimate at this time the probable or possible loss or range of probable or possible loss associated with this matter pending further discussions with the District Attorneys’ offices.

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. The Company does not anticipate that the resolution of 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.

18


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 65 - Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss, net of tax, comprise the following (in thousands):

 

 

Three Months Ended November 30, 2019

 

 

Three Months Ended November 30, 2018

 

 

Three Months Ended November 30, 2020

 

 

Three Months Ended November 30, 2019

 

 

Foreign Currency

Translation

Adjustments

 

 

Pension Obligations,

Net

 

 

Total

 

 

Foreign Currency

Translation

Adjustments

 

 

Pension Obligations,

Net

 

 

Total

 

 

Foreign Currency

Translation

Adjustments

 

 

Pension Obligations,

Net

 

 

Total

 

 

Foreign Currency

Translation

Adjustments

 

 

Pension Obligations,

Net

 

 

Total

 

Balances - September 1

(Beginning of period)

 

$

(35,689

)

 

$

(3,074

)

 

$

(38,763

)

 

$

(34,129

)

 

$

(3,108

)

 

$

(37,237

)

 

$

(34,184

)

 

$

(2,687

)

 

$

(36,871

)

 

$

(35,689

)

 

$

(3,074

)

 

$

(38,763

)

Other comprehensive income (loss)

before reclassifications

 

 

211

 

 

 

(17

)

 

 

194

 

 

 

(1,364

)

 

 

208

 

 

 

(1,156

)

 

 

239

 

 

 

(385

)

 

 

(146

)

 

 

211

 

 

 

(17

)

 

 

194

 

Income tax benefit (expense)

 

 

 

 

 

4

 

 

 

4

 

 

 

 

 

 

(46

)

 

 

(46

)

 

 

0

 

 

 

87

 

 

 

87

 

 

 

0

 

 

 

4

 

 

 

4

 

Other comprehensive income (loss)

before reclassifications,

net of tax

 

 

211

 

 

 

(13

)

 

 

198

 

 

 

(1,364

)

 

 

162

 

 

 

(1,202

)

 

 

239

 

 

 

(298

)

 

 

(59

)

 

 

211

 

 

 

(13

)

 

 

198

 

Amounts reclassified from

accumulated other

comprehensive loss

 

 

 

 

 

52

 

 

 

52

 

 

 

 

 

 

52

 

 

 

52

 

 

 

0

 

 

 

49

 

 

 

49

 

 

 

0

 

 

 

52

 

 

 

52

 

Income tax benefit

 

 

 

 

 

(12

)

 

 

(12

)

 

 

 

 

 

(12

)

 

 

(12

)

 

 

0

 

 

 

(11

)

 

 

(11

)

 

 

0

 

 

 

(12

)

 

 

(12

)

Amounts reclassified from

accumulated other

comprehensive loss,

net of tax

 

 

 

 

 

40

 

 

 

40

 

 

 

 

 

 

40

 

 

 

40

 

 

 

0

 

 

 

38

 

 

 

38

 

 

 

0

 

 

 

40

 

 

 

40

 

Net periodic other

comprehensive income (loss)

 

 

211

 

 

 

27

 

 

 

238

 

 

 

(1,364

)

 

 

202

 

 

 

(1,162

)

 

 

239

 

 

 

(260

)

 

 

(21

)

 

 

211

 

 

 

27

 

 

 

238

 

Balances - November 30

(End of period)

 

$

(35,478

)

 

$

(3,047

)

 

$

(38,525

)

 

$

(35,493

)

 

$

(2,906

)

 

$

(38,399

)

 

$

(33,945

)

 

$

(2,947

)

 

$

(36,892

)

 

$

(35,478

)

 

$

(3,047

)

 

$

(38,525

)

 

Reclassifications from accumulated other comprehensive loss to earnings, both individually and in the aggregate, were not material to the impacted captions in the Unaudited Condensed Consolidated Statements of Operations forin all periods presented.presented.

Note 7 - Revenue

Disaggregation of Revenues

The table below illustrates the Company’s revenues disaggregated by major product and sales destination for each reportable segment (in thousands):

 

 

Three Months Ended November 30, 2019

 

 

 

AMR

 

 

CSS

 

 

Intercompany

Revenue Eliminations

 

 

Total

 

Major product information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ferrous revenues

 

$

192,472

 

 

$

8,650

 

 

$

(1,224

)

 

$

199,898

 

Nonferrous revenues

 

 

89,812

 

 

 

8,244

 

 

 

(215

)

 

 

97,841

 

Steel revenues(1)

 

 

 

 

 

77,325

 

 

 

 

 

 

77,325

 

Retail and other revenues

 

 

30,473

 

 

 

47

 

 

 

 

 

 

30,520

 

Total revenues

 

$

312,757

 

 

$

94,266

 

 

$

(1,439

)

 

$

405,584

 

Revenues based on sales destination:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

$

198,577

 

 

$

19,905

 

 

$

 

 

$

218,482

 

Domestic

 

 

114,180

 

 

 

74,361

 

 

 

(1,439

)

 

 

187,102

 

Total revenues

 

$

312,757

 

 

$

94,266

 

 

$

(1,439

)

 

$

405,584

 

1917


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Revenue

Disaggregation of Revenues

The table below illustrates the Company’s revenues disaggregated by major product and sales destination (in thousands):

 

 

Three Months Ended November 30, 2018

 

 

Three Months Ended November 30,

 

 

AMR

 

 

CSS

 

 

Intercompany

Revenue Eliminations

 

 

Total

 

 

2020

 

 

2019

 

Major product information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ferrous revenues

 

$

298,812

 

 

$

19,743

 

 

$

(2,508

)

 

$

316,047

 

 

$

252,206

 

 

$

199,898

 

Nonferrous revenues

 

 

104,181

 

 

 

9,031

 

 

 

(270

)

 

 

112,942

 

 

 

119,709

 

 

 

97,841

 

Steel revenues(1)

 

 

 

 

 

101,337

 

 

 

 

 

 

101,337

 

Steel revenues(1)

 

 

88,414

 

 

 

77,325

 

Retail and other revenues

 

 

33,419

 

 

 

275

 

 

 

 

 

 

33,694

 

 

 

31,778

 

 

 

30,520

 

Total revenues

 

$

436,412

 

 

$

130,386

 

 

$

(2,778

)

 

$

564,020

 

 

$

492,107

 

 

$

405,584

 

Revenues based on sales destination:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

$

263,511

 

 

$

28,131

 

 

$

 

 

$

291,642

 

 

$

268,399

 

 

$

218,482

 

Domestic

 

 

172,901

 

 

 

102,255

 

 

 

(2,778

)

 

 

272,378

 

 

 

223,708

 

 

 

187,102

 

Total revenues

 

$

436,412

 

 

$

130,386

 

 

$

(2,778

)

 

$

564,020

 

 

$

492,107

 

 

$

405,584

 

 

(1)

Steel revenues include primarily sales of finished steel products, semi-finished goods (billets) and manufacturing scrap.

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 November 30, 20192020 and August 31, 2019, 2020, receivables from contracts with customers, net of an allowance for doubtful accounts,credit losses, totaled $112$161 million and $142$135 million representing 97%97% of the respective total accounts receivable reported on the Unaudited Condensed Consolidated Balance Sheets.

Contract Liabilities

Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company’s contract liabilities consist almost entirely of customer deposits for recycled scrap metal sales contracts, which are reported within accounts payable on the Unaudited Condensed Consolidated Balance Sheets and totaled $3$7 million and $8 million as of November 30, 20192020 and August 31, 2019.2020, respectively. 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 three months ended November 30, 2020, the Company reclassified $5 million in customer deposits as of August 31, 2020 to revenues as a result of satisfying performance obligations during the period. During the three months ended November 30, 2019, the Company reclassified $2$2 million in customer deposits as of August 31, 2019 to revenues as a result of satisfying performance obligations during the period. During the three months ended November 30, 2018, the Company reclassified $7 million in customer deposits as of August 31, 2018 to revenues as a result of satisfying performance obligations during the period.

20


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 87 - Share-Based Compensation

In the first quarter of fiscal 2020,2021, as part of the annual awards under the Company’s Long-Term Incentive Plan, the Compensation Committee of the Company’s Board of Directors granted 337,700317,760 restricted stock units (“RSUs”) and 316,649 performance share awards to the Company’s key employees and officers under the Company’s 1993 Amended and Restated Stock Incentive Plan. The RSUs have a five-year term and vest 20% per year commencing October 31, 2021. The aggregate fair value of all of the RSUs granted was based on the market closing price of the underlying Class A common stock on the grant date and totaled $7 million. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures, 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 awards is the longer of two years or the period ending on the date retirement eligibility is achieved.

18


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The performance share awards comprise 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 the first quarter of fiscal 2020,2021, the performance metrics were the Company’s total shareholder return (“TSR”) relative to a designated peer group of 15 companiesand the Company’s return on capital employed (“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 number of performance shares granted multiplied by a payout factor, which ranges from a threshold of 50% to a maximum of 200%. The TSR award stipulates certain limitations to the payout in the event the value of the payout reaches a defined ceiling level or the Company’s TSR is negative.

 

The Company granted 165,834157,791 performance share awards based on its relative TSR metric over a performance period spanning November 14, 20199, 2020 to August 31, 2022.2023. The Company estimates the fair value of TSR awards using a Monte-Carlo simulation model utilizing several key assumptions, including the following for TSR awards granted on November 14, 2019:9, 2020:

 

 

 

Percentage

 

Expected share price volatility (SSI)

 

 

38.948.5

%

Expected share price volatility (Peer group)

 

 

44.554.9

%

Expected correlation to peer group companies

 

 

34.344.5

%

Risk-free rate of return

 

 

1.580.23

%

The estimated fair value of the TSR awards at the date of grant was $4 million. The TSR award stipulates certain limitations to the payout in the event the payout reaches a defined ceiling level or the Company’s TSR is negative. The compensation expense for the TSR awards 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.

The Company granted 171,936158,858 performance share awards based on its ROCE for the three-year performance period consisting of the Company’s 2020, 2021, 2022 and 20222023 fiscal years. The fair value of the awards granted was based on the market closing price of the underlying Class A common stock on the grant date and totaled $4 million.

The Company accrues compensation cost for ROCE awards based on the probable outcome of achieving 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 service period, all related compensation cost previously recognized is reversed.

Performance share awards will be paid in Class A common stock as soon as practicable after the end of the requisite service period and vesting date of October 31, 2022.2023.

Note 98 - Income Taxes

Effective Tax Rate

The Company’s effective tax rate from continuing operations for the first quarter of fiscal 20202021 was a benefitan expense on pre-tax income of 27.8%27.5%, compared to an expensea benefit on a pre-tax loss of 19.8%27.8% for the prior year period. TheFor each quarterly period, the Company’s effective tax rate from continuing operations for the first quarter of fiscal 2020 was higher than the U.S. federal statutory rate of 21% primarily due to the impact of non-deductible officers’ compensation and other expenses, as well as the aggregate impact of state taxes and the impact of permanent differences from non-deductible expenses on the projected annual effective tax rate applied to the quarterly results.

2119


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Valuation Allowances

The Company assesses the realizability of its deferred tax assets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies, and forecasts of taxable income. The Company considers all negative and positive evidence, including the weight of the evidence, to determine if valuation allowances against deferred tax assets are required. The Company maintains valuation allowances against certain U.S. federal, state, Canadian and all Puerto Rican deferred tax assets.

The Company files federal and state income tax returns in the U.S. and foreign tax returns in Puerto Rico and Canada. For U.S. federal income tax returns, fiscal years 2013 to 20192020 remain subject to examination under the statute of limitations.

Note 10 - Restructuring Charges and Other Exit-Related Activities

On January 8, 2020, subsequent to the end of the first quarter of fiscal 2020, the Company committed to certain restructuring initiatives aimed at further reducing its annual operating expenses, primarily SG&A, at Corporate, AMR and CSS, primarily through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses and other non-headcount measures. The Company expects to incur aggregate estimated restructuring charges, as defined in ASC 420, Exit or Disposal Cost Obligations, and other exit-related costs of approximately $4 million in connection with these initiatives. The Company expects the substantial majority of the restructuring charges to be recognized by the end of fiscal 2020 and to require the Company to make cash payments.

Note 119 - Net Income (Loss) Income Per Share

The following table sets forth the information used to compute basic and diluted net income (loss) income per share attributable to SSI shareholders (in thousands):

 

 

Three Months Ended November 30,

 

 

Three Months Ended November 30,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

(Loss) income from continuing operations

 

$

(6,593

)

 

$

16,690

 

Income (loss) from continuing operations

 

$

15,106

 

 

$

(6,593

)

Net income attributable to noncontrolling interests

 

 

(430

)

 

 

(430

)

 

 

(960

)

 

 

(430

)

(Loss) income from continuing operations attributable to SSI shareholders

 

 

(7,023

)

 

 

16,260

 

Income (loss) from discontinued operations, net of tax

 

 

28

 

 

 

(72

)

Net (loss) income attributable to SSI shareholders

 

$

(6,995

)

 

$

16,188

 

Income (loss) from continuing operations attributable to SSI shareholders

 

 

14,146

 

 

 

(7,023

)

(Loss) income from discontinued operations, net of tax

 

 

(42

)

 

 

28

 

Net income (loss) attributable to SSI shareholders

 

$

14,104

 

 

$

(6,995

)

Computation of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

27,515

 

 

 

27,505

 

 

 

27,807

 

 

 

27,515

 

Incremental common shares attributable to dilutive performance

share awards, restricted stock units and deferred stock units

 

 

 

 

 

859

 

 

 

678

 

 

 

 

Weighted average common shares outstanding, diluted

 

 

27,515

 

 

 

28,364

 

 

 

28,485

 

 

 

27,515

 

Common stock equivalent shares of 153,374 and 865,354 and 102,755 were considered antidilutive and were excluded from the calculation of diluted net income (loss) income per share for the three months ended November 30, 2020 and 2019, and 2018, respectively.

Note 1210 - Related Party Transactions

The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $3 million and $4$3 million for each of the three months ended November 30, 20192020 and 2018, respectively.2019.

22

20


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 13 - Segment Information

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

The Company’s internal organizational and reporting structure includes 2 operating and reportable segments: the Auto and Metals Recycling (“AMR”) business and the Cascade Steel and Scrap (“CSS”) business.

AMR acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors and brokers, and procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores. These auto parts stores also supply the Company’s shredding facilities with auto bodies that are processed into saleable recycled scrap metal.

CSS operates a steel mini-mill that produces a range of finished steel long products using recycled scrap metal and other raw materials. CSS’s steel mill obtains substantially all of its recycled scrap metal raw material requirements from its integrated metals recycling and joint venture operations. CSS’s metals recycling operations also sell recycled metal to external customers primarily in export markets.

The Company holds noncontrolling ownership interests in joint ventures, which are either in the metals recycling business or are suppliers of unprocessed metal. The Company’s allocable portion of the results of these joint ventures is reported within the segment results. As of November 30, 2019 and August 31, 2019, the Company had 2 50%-owned joint venture interests, 1 presented as part of AMR operations, and 1 presented as part of CSS operations. The joint venture within CSS sells recycled scrap metal to other operations within CSS at prices that approximate local market rates, which produces intercompany profit. This intercompany profit is eliminated while the products remain in inventories and is not recognized until the finished products are sold to third parties.

Intersegment sales from AMR to CSS are made at prices that approximate local market rates. These intercompany sales tend to produce intercompany profit which is not recognized until the finished products are ultimately sold to third parties.

The information provided below is obtained from internal information that is provided to the Company’s chief operating decision maker for the purpose of corporate management. The Company uses segment operating income to measure segment performance. The Company does not allocate corporate interest income and expense, income taxes and other income and expense to its reportable segments. Certain expenses related to shared services that support operational activities and transactions are allocated from Corporate to the segments. Unallocated Corporate expense consists primarily of expense for management and certain administrative services that benefit both reportable segments. In addition, the Company does not allocate certain items to segment operating income because management does not include the information in its measurement of the performance of the operating segments. Such unallocated items include restructuring charges and other exit-related activities, charges (net of recoveries) related to legacy environmental matters, and provisions for certain legal matters. Because of the unallocated income and expense, the operating income of each reportable segment does not reflect the operating income the reportable segment would report as a stand-alone business. The results of discontinued operations are excluded from segment operating income and are presented separately, net of tax, from the results of ongoing operations for all periods presented.

See Note 7 - Revenue in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for presentation of the Company’s revenues by reportable segment.

23


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The table below illustrates the reconciliation of the Company’s segment operating (loss) income to (loss) income from continuing operations before income taxes (in thousands):

 

 

Three Months Ended November 30,

 

 

 

2019

 

 

2018

 

AMR

 

$

(2,432

)

 

$

23,017

 

CSS

 

 

4,237

 

 

 

11,918

 

Segment operating (loss) income

 

 

1,805

 

 

 

34,935

 

Restructuring charges and other exit-related activities

 

 

(467

)

 

 

(202

)

Corporate and eliminations

 

 

(9,248

)

 

 

(12,044

)

Operating (loss) income

 

 

(7,910

)

 

 

22,689

 

Interest expense

 

 

(1,423

)

 

 

(1,906

)

Other income, net

 

 

206

 

 

 

23

 

(Loss) income from continuing operations before income taxes

 

$

(9,127

)

 

$

20,806

 

The following is a summary of the Company’s total assets by reportable segment (in thousands):

 

 

November 30, 2019

 

 

August 31, 2019

 

AMR(1)

 

$

1,655,799

 

 

$

1,561,267

 

CSS(1)

 

 

768,270

 

 

 

769,930

 

Total segment assets

 

 

2,424,069

 

 

 

2,331,197

 

Corporate and eliminations(2)

 

 

(1,265,477

)

 

 

(1,170,451

)

Total assets

 

$

1,158,592

 

 

$

1,160,746

 

(1)

AMR total assets include $3 million for an investment in a joint venture as of November 30, 2019 and August 31, 2019. CSS total assets include $7 million for an investment in a joint venture as of November 30, 2019 and August 31, 2019.

(2)

The substantial majority of Corporate and eliminations total assets consist of Corporate intercompany payables to the Company’s operating segments and intercompany eliminations.

24


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section includes a discussion of our operations for the three months ended November 30, 20192020 and 2018.2019. 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. The discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, 2019,2020, and the Unaudited Condensed Consolidated Financial Statements and the related Notes thereto included in Part I, Item 1 of this report.

General

Founded in 1906, Schnitzer Steel Industries, Inc. (“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 50 retail self-service auto parts stores, 44 metals recycling facilities and a steel mini-mill in Oregon.

OurPrior to the first quarter of fiscal 2021, our internal organizational and reporting structure includesincluded two operating and reportable segments: the Auto and Metals Recycling (“AMR”) business and the Cascade Steel and Scrap (“CSS”) business. In the first quarter of fiscal 2021, in accordance with our plan announced in April 2020, we completed the transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model, supporting a single segment. We consolidated our operations, sales, services and other functional capabilities at an enterprise level reflecting enhanced focus by management on optimizing our vertically integrated value chain. We began reporting on this new single-segment structure in the first quarter of fiscal 2021 as reflected in this Quarterly Report on Form 10-Q.

AMR sellsWe sell ferrous and nonferrous recycled scrap metal in both foreign and domestic markets. AMR acquires, processesWe also sell a range of finished steel long products produced at our steel mini-mill. We acquire, process and recyclesrecycle auto bodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap through its 90our recycling auto and metals recycling facilities. Our largest source of auto bodies is our own network of retail auto parts stores, which operate under the commercial brand-name Pick-n-Pull. AMR procures salvaged vehicles and sells serviceable used auto parts from these vehicles through its 51 self-service auto parts stores located across the United States and Western Canada.Canada, which operate under the commercial brand-name Pick-n-Pull, procure the significant majority of our salvaged vehicles and sell serviceable used auto parts from these vehicles. Upon acquiring a salvaged vehicle, we remove catalytic converters, aluminum wheels and batteries for separate processing and sale prior to placing the vehicle in our retail lot. After retail customers have removed desired parts from a vehicle, we may remove remaining major component parts containing ferrous and nonferrous metals, which are primarily sold to wholesalers. The remaining auto bodies are crushed and shipped to our metals recycling facilities to be shredded or sold to third parties where geographically more economical. AMR then processesAt our metals recycling facilities, we process mixed and large pieces of scrap metal into smaller pieces by crushing, torching, shearing, shredding and sorting, resulting in scrap metal pieces of a size, density and metal content required by customers to meet their production needs. The manufacturing process includes physical separation of ferrous and nonferrous materials through automated and manual processes into various sub-classifications, each of which has a value and metal content used by our customers for their end products. AMR usesWe use a variety of shredding and separation systems to efficiently process and sort recycled scrap metal.

CSS operates a Our steel mini-mill in McMinnville, Oregon that produces a range of finished steel long products such as reinforcingrebar, wire rod, coiled rebar, merchant bar (rebar) and wire rod. The primary feedstock for the manufacture of itsother specialty products isusing ferrous recycled scrap metal. CSS’s steel mill obtains substantially all of its scrap metal raw material requirementsprimarily sourced internally from its integrated metalsour recycling and joint venture operations. CSS’s metals recycling operations comprise a collection, shredding and export operation in Portland, Oregon, four feeder yard operations located in Oregon and Southern Washington, and one metals recycling joint venture ownership interest. Additionally, CSS purchases small volumes of ferrous scrap metal from AMR and sells ferrous and nonferrous recycled scrap metal primarily into the export market.

We use segment operating income to measure our segment performance. We do not allocate corporate interest income and expense, income taxes and other income and expense to our reportable segments. Certain expenses related to shared services that support operational activities and transactions are allocated from Corporate to the segments. Unallocated Corporate expense consists primarily of expense for management and certain administrative services that benefit both reportable segments. In addition, we do not allocate certain items to segment operating income because management does not include the information in its measurement of the performance of the operating segments. Such unallocated items include restructuring charges and other exit-related activities, charges (net of recoveries) related to legacy environmental matters, and provisions for certain legal matters. Because of the unallocated income and expense, the operating income of each reportable segment does not reflect the operating income the reportable segment would report as a stand-alone business. The results of discontinued operations are excluded from segment operating income and are presented separately, net of tax, from the results of ongoing operations for all periods presented.raw materials.

For further information regarding our reportable segments, see Note 13 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. 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. 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 income 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.

25


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

Our deep water port facilities on both the East and West Coasts of the U.S. (in Everett, Massachusetts; Providence, Rhode Island; Oakland, California; Tacoma, Washington; and Portland, Oregon) and access to public deep water port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) allow us to efficiently meet the global demand for recycled ferrous metal by enabling us to ship bulk cargoes to steel manufacturers located in Europe, Africa, the Middle East, Asia, North America, Central America and South America. Our exports of nonferrous recycled metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers, wire and cable producers, wholesalers, and other recycled metal processors globally. We also transport both ferrous and nonferrous metals by truck, rail and barge in order to transfer scrap metal between our facilities for further processing, to load shipments at our export facilities, and to meet regional domestic demand.

21


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating results. We believe we generally benefit from sustained periods of stable or rising recycled scrap metal selling prices, which allow us to better maintain or increase both operating results 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 results of operations also depend on the demand and prices for our finished steel products, the manufacture of which uses internally sourced ferrous recycled scrap metal as the primary feedstock, as well as other raw materials. Our steel mill in Oregon sellsare sold to industrial customers located primarily in North America.the Western U.S. and Western Canada.

Our quarterly operating results fluctuate based on a variety of factors including, but not limited to, changes in market conditions for ferrous and nonferrous 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. Certain of these factors are influenced, to a degree, by the impact of seasonal changes including severe weather conditions, which can impact the timing of shipments and inhibit construction activity utilizing our products, scrap metal collection at our facilities and production levels in our yards, and retail admissions and parts sales at our auto parts stores. Further, trade actions, including tariffs and any retaliation by affected countries, 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 fluctuatefluctuate.

Coronavirus Disease 2019 (COVID-19)

In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments around the world implementing measures with various levels of stringency to help control the spread of the virus. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Ensuring the health and welfare of our employees, and all who visit our sites, is our top priority, and we are following all U.S. Centers for Disease Control and Prevention and state and local health department guidelines. Further, we implemented infection control measures at all our sites and put in place travel and in-person meeting .restrictions and other physical distancing measures. Notwithstanding our continued operations, COVID-19 has negatively impacted our business and may have further negative impacts on our financial performance, operations, supply chain and flows of raw materials, transportation and logistics networks and customers. Global economic conditions improved during the first quarter of fiscal 2021, resulting in increased demand for our products, which led to our earnings for the first quarter of fiscal 2021 exceeding the results for the pre-pandemic prior year quarter.

 

26Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, continually changing and difficult to predict, the pandemic’s impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategies and initiatives, remains uncertain and difficult to predict. Further, the ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited to: governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic (including restrictions on travel and transport and workforce pressures); the impact of the pandemic and actions taken in response on global and regional economies, travel, and economic activity; the availability of federal, state or local funding programs; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of economic recovery. While the COVID-19 pandemic could continue to negatively impact our results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time.

22


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

 

Executive Overview

Use of Non-GAAP Financial ResultsMeasures

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. Our non-GAAP financial measures should be considered in addition to, but not as a substitute for, the First Quartermost directly comparable U.S. GAAP measures. Although we find these non-GAAP financial measures useful in evaluating the performance of Fiscal 2020

We generatedour business, our reliance on these measures is limited because they often materially differ from our consolidated revenuesfinancial 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 $406 millionother 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. For example, following the modification of our internal organizational and reporting structure completed in the first quarter of fiscal 2020, a decrease2021, we use adjusted EBITDA as one of 28%the measures to compare and evaluate financial performance. Adjusted EBITDA is the sum of our net income before results from the $564 million of consolidated revenues in the first quarter of fiscal 2019, primarily due to significantly lower average net selling prices for our ferrousdiscontinued operations, interest expense, income taxes, depreciation and nonferrous products, in both export and domestic markets, and reduced sales volumes compared to the prior year quarter. These decreases were driven by weaker market conditions for recycled metals globally primarily due to softer demand for finished steel and structural changes to the market for certain recycled nonferrous products resulting from Chinese import restrictions and tariffs. Market selling prices for ferrous recycled metal declined sharply by approximately $60 per ton, or approximately 20%, between the beginning of August and October 2019, before partially recovering in November. Compared to the prior year quarter, average net selling prices for our ferrous products at AMR decreased by 28% and ferrous sales volumes at AMR decreased by 10%, reflecting weaker demand globally and reduced supply of raw materials including end-of-life vehicles due to the lower price environment. Nonferrous revenues at AMR in the first quarter of fiscal 2020 decreased by 14% compared to the prior year quarter, as nonferrous average net selling prices and sales volumes at AMR decreased by 8% and 14%, respectively. Steel revenues in the first quarter of fiscal 2020 decreased by 24% compared to the prior year quarter primarily reflecting the impact of significantly lower average net selling prices for our finished steel products and decreased sales volumes.

Consolidated operating loss was $(8) million in the first quarter of fiscal 2020, compared to income of $23 million in the first quarter of fiscal 2019. Adjusted consolidated operating loss was $(4) million in the first quarter of fiscal 2020, compared to income of $23 million in the first quarter of fiscal 2019. Adjusted consolidated operating (loss) income for each period excludes the impact ofamortization, charges for legacy environmental matters net(net of recoveries, asset impairment charges, andrecoveries), restructuring charges and other exit-related activities.activities, asset impairment charges (net of recoveries) and other items which are not related to underlying business operational performance. See the reconciliationreconciliations of supplemental financial measures, including adjusted consolidated operating (loss) incomeEBITDA, in Non-GAAP Financial Measures at the end of this Item 2.

AMR reported an operating

Financial Highlights of Results of Operations for the First Quarter of Fiscal 2021

Diluted earnings per share from continuing operations attributable to SSI shareholders in the first quarter of fiscal 2021 was $0.50, compared to loss per share of $(0.26) in the prior year quarter.

Adjusted diluted earnings per share from continuing operations attributable to SSI shareholders in the first quarter of fiscal 2021 was $0.57, compared to adjusted loss per share of $(0.17) in the prior year quarter.

Net income in the first quarter of fiscal 2021 was $15 million, compared to net loss of $(7) million in the prior year quarter.

Adjusted EBITDA in the first quarter of fiscal 2021 was $40 million, compared to $10 million in the prior year quarter.

Market conditions for recycled metals improved in the first quarter of fiscal 2020 of $(2) million, compared2021, leading to income of $23 million in the prior year period. The sharply declining price environment during most of the first quarter of fiscal 2020 had a significant adverse impact on operating margins and overall operating results at AMR for the period. Ferrous metal spreads at AMR in the first quarter of fiscal 2020 declined by approximately 20% andsignificantly increased average net selling prices for AMR’sour ferrous and nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, decreased by 12%, compared to the prior year quarter. In the sharply declining commodity price environment, average inventory costs did not decrease as quickly as purchase costs for scrap metal, resulting in an adverse effect on cost of goods sold and overall operating results at AMR. In addition, the lower price environment adversely impacted the supply of scrap metal including end-of-life vehicles, which resulted in lower processed volumes compared to the prior year quarter. The adverse effects of the market conditions on AMR’s operatingOur results in the first quarter of fiscal 2020 were partially offset by2021 reflected an expansion in our ferrous metal spreads from the benefits from productivity initiatives implemented subsequent to the prior year quarter.

CSS reported operating income of $4 million in the first quarter of fiscal 2020, compared to $12 million in the prior year quarter, with the decrease primarily reflecting the impact of the declininghigher price environment and increased sales volumes for our ferrous and finished steel during the first quarter of fiscal 2020. Finished steel average net selling prices declined $104 per ton, or 14%, products compared to the prior year quarter, which led to a compression ofdriven by stronger market conditions for recycled metals globally and resilient demand for finished steel margins as decreases in selling prices outpaced the reduction in raw material purchase prices and other input costs. The effects of finished steel margin compression were partially offset by benefits from productivity initiatives. CSS operating resultsWest Coast construction markets. We also benefited in the first quarter of fiscal 2019 reflected higher finished steel margins compared to the current quarter,from commercial initiatives and productivity improvements that were supported by the higher and rising price environment at the time.

Consolidated selling, general and administrative (“SG&A”) expense in the first quarter of fiscal 2020 decreased by $5 million, or 9%, compared to the prior year quarter primarily due to a $6 million decrease in employee-related expenses, including from lower incentive compensation accruals, partially offset by a $1 million charge related to an environmental matter at AMR.

In the first quarter of fiscal 2020, we invested $24 million in capital expenditures, including towards the implementation of advanced metals recovery technology at several of our major export facilities consistent with our strategic plan, which we expect will deliver benefits to our profitability beginning in the second half of fiscal 2020. We currently plan to invest up to $125 million in capital expenditures in fiscal 2020, including $60 million for investments in growth, including advanced metals recovery technology and to support volume initiatives and other growth projects.

27


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

Net loss from continuing operations attributable to SSI shareholders in the first quarter of fiscal 2020 was $(7) million, or $(0.26) per diluted share, compared to net income of $16 million, or $0.57 per diluted share, in the prior year quarter. Adjusted net loss from continuing operations attributable to SSI shareholders in the first quarter of fiscal 2020 was $(5) million, or $(0.17) per diluted share, compared to net income of $17 million, or $0.59 per diluted share, in the prior year quarter. See the reconciliation of adjusted net (loss) income from continuing operations attributable to SSI shareholders and adjusted diluted (loss) earnings per share from continuing operations attributable to SSI shareholders in Non-GAAP Financial Measures at the end of this Item 2.One Schnitzer functionally-based organization model.

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

 

For the first three months of fiscal 2020, net cash provided by operating activities of $11 million, compared to2021, net cash used in operating activities was $7 million, compared to net cash provided by operating activities of $12$11 million in the prior year comparable period;period.

 

Debt of $128was $143 million as of November 30, 2019,2020, compared to $105$104 million as of August 31, 2019; and2020.

 

Debt, net of cash, of $119was $136 million as of November 30, 2019,2020, compared to $93$87 million as of August 31, 2019 (see the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2).2020.

See the reconciliations of adjusted diluted earnings (loss) per share from continuing operations attributable to SSI shareholders, adjusted EBITDA, and debt, net of cash in Non-GAAP Financial Measures at the end of this Item 2.

2823


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

 

Results of Operations

Selected Financial Measures and Operating Statistics

 

 

 

Three Months Ended November 30,

 

($ in thousands)

 

2019

 

 

2018

 

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Auto and Metals Recycling

 

$

312,757

 

 

$

436,412

 

 

 

(28

)%

Cascade Steel and Scrap

 

 

94,266

 

 

 

130,386

 

 

 

(28

)%

Intercompany revenue eliminations(1)

 

 

(1,439

)

 

 

(2,778

)

 

 

(48

)%

Total revenues

 

 

405,584

 

 

 

564,020

 

 

 

(28

)%

Cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

Auto and Metals Recycling

 

 

280,129

 

 

 

378,736

 

 

 

(26

)%

Cascade Steel and Scrap

 

 

86,244

 

 

 

114,335

 

 

 

(25

)%

Intercompany cost of goods sold eliminations(1)

 

 

(1,613

)

 

 

(2,939

)

 

 

(45

)%

Total cost of goods sold

 

 

364,760

 

 

 

490,132

 

 

 

(26

)%

Selling, general and administrative expense:

 

 

 

 

 

 

 

 

 

 

 

 

Auto and Metals Recycling

 

 

33,519

 

 

 

34,766

 

 

 

(4

)%

Cascade Steel and Scrap

 

 

3,945

 

 

 

4,448

 

 

 

(11

)%

Corporate(2)

 

 

9,310

 

 

 

12,205

 

 

 

(24

)%

Total selling, general and administrative expense

 

 

46,774

 

 

 

51,419

 

 

 

(9

)%

Income from joint ventures:

 

 

 

 

 

 

 

 

 

 

 

 

Auto and Metals Recycling

 

 

(39

)

 

 

(170

)

 

 

(77

)%

Cascade Steel and Scrap

 

 

(160

)

 

 

(315

)

 

 

(49

)%

Total income from joint ventures

 

 

(199

)

 

 

(485

)

 

 

(59

)%

Asset impairment charges:

 

 

 

 

 

 

 

 

 

 

 

 

Auto and Metals Recycling

 

 

1,580

 

 

 

63

 

 

NM

 

Corporate

 

 

112

 

 

 

 

 

NM

 

Total asset impairment charges

 

 

1,692

 

 

 

63

 

 

NM

 

Operating (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Auto and Metals Recycling

 

 

(2,432

)

 

 

23,017

 

 

NM

 

Cascade Steel and Scrap

 

 

4,237

 

 

 

11,918

 

 

 

(64

)%

Segment operating income

 

 

1,805

 

 

 

34,935

 

 

NM

 

Restructuring charges and other exit-related activities(3)

 

 

(467

)

 

 

(202

)

 

 

131

%

Corporate expense(2)

 

 

(9,422

)

 

 

(12,205

)

 

 

(23

)%

Change in intercompany profit elimination(4)

 

 

174

 

 

 

161

 

 

 

8

%

Total operating (loss) income

 

$

(7,910

)

 

$

22,689

 

 

NM

 

 

 

Three Months Ended November 30,

 

($ in thousands, except for prices and per share amounts)

 

2020

 

 

2019

 

 

% Change

 

Ferrous revenues

 

$

252,206

 

 

$

199,898

 

 

 

26

%

Nonferrous revenues

 

 

119,709

 

 

 

97,841

 

 

 

22

%

Steel revenues(1)

 

 

88,414

 

 

 

77,325

 

 

 

14

%

Retail and other revenues

 

 

31,778

 

 

 

30,520

 

 

 

4

%

Total revenues

 

 

492,107

 

 

 

405,584

 

 

 

21

%

Cost of goods sold

 

 

420,094

 

 

 

364,760

 

 

 

15

%

Gross margin (total revenues less cost of goods sold)

 

$

72,013

 

 

$

40,824

 

 

 

76

%

Gross margin (%)

 

 

14.6

%

 

 

10.1

%

 

 

45

%

Selling, general and administrative expense

 

$

49,906

 

 

$

46,774

 

 

 

7

%

Diluted earnings (loss) per share from continuing operations

attributable to SSI shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Reported

 

$

0.50

 

 

$

(0.26

)

 

NM

 

Adjusted(2)

 

$

0.57

 

 

$

(0.17

)

 

NM

 

Net income (loss)

 

$

15,064

 

 

$

(6,565

)

 

NM

 

Adjusted EBITDA(2)

 

$

40,255

 

 

$

9,835

 

 

 

309

%

Average ferrous recycled metal sales prices ($/LT)(3):

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

242

 

 

$

196

 

 

 

23

%

Foreign

 

$

276

 

 

$

229

 

 

 

21

%

Average

 

$

269

 

 

$

222

 

 

 

21

%

Ferrous volumes (LT, in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Domestic(4)

 

 

388

 

 

 

363

 

 

 

7

%

Foreign

 

 

665

 

 

 

613

 

 

 

9

%

Total ferrous volumes (LT, in thousands)(4)

 

 

1,053

 

 

 

976

 

 

 

8

%

Average nonferrous sales price ($/pound)(3)(5)

 

$

0.64

 

 

$

0.54

 

 

 

19

%

Nonferrous volumes (pounds, in thousands)(4)(5)

 

 

138,236

 

 

 

144,176

 

 

 

(4

)%

Finished steel average sales price ($/ST)(3)

 

$

621

 

 

$

643

 

 

 

(3

)%

Finished steel sales volumes (ST, in thousands)

 

 

134

 

 

 

114

 

 

 

18

%

Cars purchased (in thousands)(6)

 

 

78

 

 

 

83

 

 

 

(6

)%

Number of auto parts stores at period end

 

 

50

 

 

 

51

 

 

 

(2

)%

Rolling mill utilization(7)

 

 

97

%

 

 

85

%

 

 

14

%

 

NM = Not Meaningful

(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 primarily 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 inventories.

We operate our business across two reportable segments: AMR and CSS. Additional financial information relating to these reportable segments is contained in Note 13 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

29


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

Auto and Metals Recycling (AMR)

 

 

Three Months Ended November 30,

 

($ in thousands, except for prices)

 

2019

 

 

2018

 

 

% Change

 

Ferrous revenues

 

$

192,472

 

 

$

298,812

 

 

 

(36

)%

Nonferrous revenues

 

 

89,812

 

 

 

104,181

 

 

 

(14

)%

Retail and other revenues

 

 

30,473

 

 

 

33,419

 

 

 

(9

)%

Total segment revenues

 

 

312,757

 

 

 

436,412

 

 

 

(28

)%

Segment operating (loss) income

 

$

(2,432

)

 

$

23,017

 

 

NM

 

Average ferrous recycled metal sales prices ($/LT)(1):

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

195

 

 

$

290

 

 

 

(33

)%

Foreign

 

$

229

 

 

$

314

 

 

 

(27

)%

Average

 

$

221

 

 

$

306

 

 

 

(28

)%

Ferrous sales volume (LT, in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

247

 

 

 

340

 

 

 

(27

)%

Foreign

 

 

583

 

 

 

579

 

 

 

1

%

Total ferrous sales volume (LT, in thousands)

 

 

830

 

 

 

919

 

 

 

(10

)%

Average nonferrous sales price ($/pound)(1)(2)

 

$

0.54

 

 

$

0.59

 

 

 

(8

)%

Nonferrous sales volume (pounds, in thousands)(2)

 

 

131,501

 

 

 

152,869

 

 

 

(14

)%

Cars purchased (in thousands)(3)

 

 

83

 

 

 

94

 

 

 

(12

)%

Number of auto parts stores at period end

 

 

51

 

 

 

51

 

 

 

(—

)%

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

(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.

(3)

Cars purchased by auto parts stores only.

AMR Segment Revenues

Revenues in the first quarter of fiscal 2020 decreased by 28% compared to the prior year quarter primarily due to significantly lower average net selling prices for our ferrous and nonferrous products, in both export and domestic markets, and reduced sales volumes compared to the prior year quarter. These decreases were driven by weaker market conditions for recycled metals globally primarily due to softer demand for finished steel and structural changes to the market for certain recycled nonferrous products. Market selling prices for ferrous recycled metal declined sharply by approximately $60 per ton, or approximately 20%, between the beginning of August and early October 2019, before partially recovering in November. Compared to the prior year quarter, average net selling prices for shipments of ferrous products at AMR decreased by 28% and ferrous sales volumes decreased by 10%, reflecting weaker demand globally and reduced supply of raw materials including end-of-life vehicles due to the lower price environment. Nonferrous revenues in the first quarter of fiscal 2020 decreased by 14% compared to the prior year quarter, as nonferrous average net selling prices and sales volumes decreased by 8% and 14%, respectively.

AMR Segment Operating (Loss) Income

Operating (loss) income in the first quarter of fiscal 2020 was $(2) million compared to $23 million in the prior year quarter. The sharply declining price environment during most of the first quarter of fiscal 2020 had a significant adverse impact on operating margins and overall operating results at AMR for the period. Ferrous metal spreads at AMR in the first quarter of fiscal 2020 declined by approximately 20% and average net selling prices for AMR’s nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, decreased by 12%, compared to the prior year quarter. In the sharply declining commodity price environment, average inventory costs did not decrease as quickly as purchase costs for scrap metal, resulting in an adverse effect on cost of goods sold and overall operating results at AMR. In addition, the lower price environment adversely impacted the supply of scrap metal including end-of-life vehicles, which resulted in lower processed volumes compared to the prior year quarter. The adverse effects of the market conditions on AMR’s operating results in the first quarter of fiscal 2020 were partially offset by the benefits from productivity initiatives implemented subsequent to the prior year quarter. Operating results at AMR in the first quarter of fiscal 2019 included $8 million in positive contributions from a limited-duration contract, which was substantially complete at the end of fiscal 2019, and which had provided a high margin source of supply.

30


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

Cascade Steel and Scrap (CSS)

 

 

Three Months Ended November 30,

 

($ in thousands, except for price)

 

2019

 

 

2018

 

 

% Change

 

Steel revenues(1)

 

$

77,325

 

 

$

101,337

 

 

 

(24

)%

Recycling revenues(2)

 

 

16,941

 

 

 

29,049

 

 

 

(42

)%

Total segment revenues

 

 

94,266

 

 

 

130,386

 

 

 

(28

)%

Segment operating income

 

$

4,237

 

 

$

11,918

 

 

 

(64

)%

Finished steel average sales price ($/ST)(3)

 

$

643

 

 

$

747

 

 

 

(14

)%

Finished steel sales volume (ST, in thousands)

 

 

114

 

 

 

119

 

 

 

(5

)%

Rolling mill utilization(4)

 

 

85

%

 

 

87

%

 

 

(2

)%

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

(1)

Steel revenues include primarily sales of finished steel products, semi-finished goods (billets) and steel manufacturing scrap.

(2)

Recycling revenues include primarily salesSee the reconciliations of ferrous and nonferrous recycled scrap metal to export markets.Non-GAAP Financial Measures at the end of this Item 2.

(3)

Price information is shown after netting the cost of freight incurred to deliver the product to the customer.

(4)

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

(5)

Average sales price and volume information excludes platinum group metals (“PGMs”) in catalytic converters.

(6)

Cars purchased by auto parts stores only.

(7)

Rolling mill utilization is based on effective annual production capacity under current conditions of 580 thousand tons of finished steel products.

CSS Segment 24


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

Revenues

RevenuesWe generated revenues of $492 million in the first quarter of fiscal 2020 decreased2021, an increase of 21% from the $406 million of revenues generated in the prior year quarter primarily due to significantly higher average net selling prices for our ferrous and nonferrous products and increased ferrous sales volumes compared to the prior year quarter. These increases were driven by $36 million, or 28%stronger market conditions for recycled metals globally compared to the prior year quarter, which prior year quarter experienced a sharp decline in prices for recycled metals that adversely impacted the supply of raw materials including end-of-life vehicles. Finished steel sales volumes were significantly higher in the first quarter of fiscal 2021 compared to the prior year quarter, reflecting significantlyresilient demand in West Coast construction markets and higher rolling mill utilization, partially offset by marginally lower average net selling prices for our finished steel products, lower finished steel sales volumes and decreased sales of ferrous recycled scrap metal.

CSS Segment Operating Incomeselling prices.

Operating Performance

Net income in the first quarter of fiscal 20202021 was $4$15 million, compared to $12a net loss of $(7) million in the prior year quarter, with the decrease primarily reflecting the impact of the declining price environment for finished steel duringquarter. Adjusted EBITDA in the first quarter of fiscal 2020. Finished steel2021 was $40 million, compared to $10 million in the prior year quarter. The improvement in our results for the first quarter of fiscal 2021 reflected an expansion in our ferrous metal spreads from the higher price environment for recycled metals in the quarter, including for certain recycled nonferrous products. Ferrous metal spreads in the first quarter of fiscal 2021 increased by approximately 5%, and average net selling prices declined $104 per ton, or 14%for our nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, increased by 29%, compared to the prior year quarter, which led to a compression of finished steel margins as decreases in selling prices outpaced the reduction in raw material purchase prices and other input costs. The effects of finished steel margin compression were partially offset by benefits from productivity initiatives. CSS operatingquarter. Our results in the first quarter of fiscal 20192021 also reflected positive contributions from sales of higher finished steel marginspriced PGM products compared to the currentprior year quarter supported byand achievement of the higher and risingfull run rate of benefits from productivity initiatives implemented throughout fiscal 2020. In comparison, the sharply declining price environment at the time.

Corporate Expense

Corporate SG&A expense forduring most of the first quarter of fiscal 2020 decreasedhad a significant negative impact on our ferrous metal spreads as well as on the supply of scrap metal including end-of-life vehicles, which resulted in lower processed volumes and an adverse impact from average inventory accounting. Selling, general and administrative expense in the first quarter of fiscal 2021 increased by $3 million, or 24%7%, compared to the prior year quarter primarily due to decreasedan increase in employee-related expenses, including from lowerhigher incentive compensation accruals. The lower incentive compensation accruals primarily reflectSee the reduced expense attributable to share-based awards grantedreconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the firstend of this Item 2.

Productivity Initiatives

In the second quarter of fiscal 2020, compared to the prior year period.

Productivity Initiatives and Restructuring Charges

In order to mitigate the weaker price environment in the ferrous and nonferrous markets, in fiscal 2019 we implemented productivity initiatives aimed at delivering $35 million in annual benefits primarily through a combination of production cost efficiencies and reductions in SG&A expense. Of the total, approximately 75% of the targeted benefits are in AMR with the remainder split between CSS and Corporate. For fiscal 2019, we achieved approximately $30 million in benefits as a result of these initiatives, with the full amount expected to be achieved in fiscal 2020. Our first quarter fiscal 2020 performance reflects achievement of the full quarterly run rate of these initiatives. In addition, in fiscal 2020 we also initiated and are in the process of implementing additional productivity initiatives aimed at further reducing our annual operating expenses, at Corporate, AMR and CSS, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses and other non-headcount measures. We are targeting $15achieved approximately $18 million in realized benefits in fiscal 2020 from these additional initiatives.

31


Tableinitiatives, and we expect the full run rate of Contents

SCHNITZER STEEL INDUSTRIES, INC.

We expect to incur aggregate estimated restructuring charges and other exit-related costs of approximately $4over $20 million in connection with these initiatives, the substantial majority of which are expected to be recognizedachieved in fiscal 2021.

In the first quarter of fiscal 2021, in accordance with our plan announced in April 2020, we completed the transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model. This change in structure is intended to require the Company to make cash payments. The estimated charges consist primarily of employee termination benefits of $2 million, professional services costs of $1 million,result in a more agile organization and a loss associated with a lease contract termination of $1 million.solidify recent productivity improvement and cost reduction initiatives.

Income Tax

The effective tax rate from continuing operations for the first quarter of fiscal 2020 2021 was an expense on pre-tax income of 27.5% compared to a benefiton a pre-tax loss of 27.8% compared to an expense of 19.8% for the comparable prior year period. For each quarterly period, Thethe effective tax rate from continuing operations for the first quarter of fiscal 2020 was higher than the U.S. federal statutory rate of 21% primarily due to the impact of non-deductible officers’ compensation and other expenses, as well as the aggregate impact of state taxes and the impact of permanent differences from non-deductible expenses on the projected annual effective tax rate applied to the quarterly results.

Liquidity and Capital Resources

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

Sources and Uses of Cash

We had cash balances of $107 million and $12$18 million as of November 30, 20192020 and August 31, 2019,2020, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of November 30, 2019,2020, debt was $128$143 million compared to $105$104 million as of August 31, 2019,2020, and debt, net of cash, was $119$136 million as of November 30, 20192020 compared to $93$87 million as of August 31, 20192020 (refer to Non-GAAP Financial Measures at the end of this Item 2).

25


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

Operating Activities

Net cash provided by used in operating activities in the first three months of fiscal 20202021 was $11$7 million, compared tonet cash used inprovided by operating activities of $12$11 million in the first three months of fiscal 2019.2020.

Uses of cash in the first three months of fiscal 2021 included a $29 million increase in accounts receivable due to higher selling prices for recycled metals and the timing of sales and collections, a $26 million increase in inventories due to higher raw material purchase prices and the timing of purchases and sales, and a $13 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation previously accrued under our fiscal 2020 plans. Sources of cash in the first three months of fiscal 2021, other than from earnings, included a $19 million increase in accounts payable primarily due to higher raw material purchases prices and the timing of purchases and payments.

Sources of cash in the first three months of fiscal 2020 included a $28 million decrease in accounts receivable primarily due to the timing of sales and collections, and a $12 million decrease in inventories due to lower raw material purchase prices and the timing of purchases and sales. Uses of cash in the first three months of fiscal 2020 included a $29 million decrease in accounts payable primarily due to lower raw material purchase prices and the timing of payments, and aan $11 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation previously accrued under our fiscal 2019 plans.

Uses of cash in the first three months of fiscal 2019 included a $28 million increase in accounts receivable primarily due to the timing of sales and collections and a $27 million decrease in accrued payroll and related liabilities due to the payment of incentive compensation previously accrued under our fiscal 20182019 plans. Sources of cash other than from earnings in the first three months of fiscal 2019 included a $10 million decrease in inventories primarily due to lower raw material purchase prices and the impact of timing of purchases and sales.

Investing Activities

Net cash used in investing activities was $32 million in the first three months of fiscal 2021, compared to $24 million in the first three months of fiscal 2020, compared to $25 million in the first three months of fiscal 2019.2020.

Cash used in investing activities in the first three months of fiscal 20202021 included capital expenditures of $2432 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, compared to $27$24 million in the prior year period.

Financing Activities

Net cash provided by financing activities in the first three months of fiscal 20202021 was $10$29 million, compared to $44$10 million in the first three months of fiscal 2019.2020.

Cash flows from financing activities in the first three months of fiscal 20202021 included $22$39 million in net borrowings of debt, compared to $61$22 million in the prior year period (refer to Non-GAAP Financial Measures at the end of this Item 2). Uses of cash in the first three

32


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

months of fiscal 20202021 and 20192020 included $6 million for the payment of dividends. Cash used in financing activities in the first three months of fiscal 2019 also included $4 million for share repurchases.

Debt

Our senior secured revolving credit facilities, which provide for revolving loans of $700 million and C$15 million, mature in August 2023 pursuant to a credit agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the London Interbank Offered Rate (“LIBOR”), or (or the Canadian equivalent for C$ loans,loans), plus a spread of between 1.25% and 2.75%3.50%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA ratio,(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 zero0.00% and 1.50%2.50% based on a pricing grid tied to our consolidated funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.15%0.20% and 0.45%0.50% based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA ratio.EBITDA.

We had borrowings outstanding under our credit facilities of $119129 millionas of November 30, 20192020 and $97$90 million as of August 31, 2019.2020. The weighted average interest rate on amounts outstanding under our credit facilities was 3.25%2.05% and 3.78%4.59% as of November 30, 20192020 and August 31, 2019,2020, respectively.

26


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

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. The financial covenants under the credit agreement include (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, 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 consolidated asset values divided by consolidated funded indebtedness.

As of November 30, 2019,2020, 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 1.501.10 to 1.00 and was 2.742.99 to 1.00 as of November 30, 2019.2020. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.18 to 1.00 as of November 30, 2019.2020. The consolidated asset coverage ratio was required to be no less than 1.00 to 1.00 and was 2.33 to 1.00 as of November 30, 2020.

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 primarily relate to an equipment purchase, the contract consideration for which includes an obligation to make future monthly payments to the vendor in the form of licensing fees. For accounting purposes, such obligation is treated as a partial financing of the purchase price by the equipment vendor. Monthly payments commence when the equipment is placed in service and continue for a period of four years thereafter. We impute interest on this obligation at a rate of 4.25% reflecting the estimated rate that would be recorded in a market transaction with similar terms.

Capital Expenditures

Capital expenditures totaled $24$32 million for the first three months of fiscal 2020,2021, compared to $27$24 million for the prior year period. We currently plan to invest up to $125 million in capital expenditures in fiscal 2020,2021, including approximately $60 million for investments in growth, including advanced metals recovery technology and tonew nonferrous processing technologies, support for volume initiatives and other growth projects, using cash generated from operations and available credit facilities. The COVID-19 pandemic has caused some delays in construction activities and equipment deliveries related to our capital projects, and to the time required to obtain permits from government agencies, resulting in the deferral of certain capital expenditures. Given the continually evolving nature of the COVID-19 pandemic and other factors impacting the timing of project completion, the extent to which forecasted capital expenditures could be deferred is uncertain.

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 $3 million in capital expenditures for environmental projects in the first three months of fiscal 2020,

33


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

and plan to invest up to $15$25 million for such projects in fiscal 2020.2021. These projects include investments in storm water systems and equipment to ensure ongoing compliance with air quality and other environmental regulations.

27


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

We have been identified by the United States Environmental Protection Agency as one of the potentially responsible parties that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”). See Note 54 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of this matter, as well as other legacy environmental loss contingencies. We believe it is not possible to reasonably estimate the amount or range of costs which we are likely to or which it is reasonably possible that we will incur in connection with the Site, although such costs could be material to our financial position, results of operations, cash flows and liquidity. We have insurance policies that we believe will provide reimbursement for costs we incur for defense, (including pre-remedial design investigative activities), remedial design, remedial actionremediation and mitigation for natural resource damages claims in connection with the Site, although there are no assurances that those policies will cover all of the costs which we may incur. Significant cash outflows in the future related to the Site and other environmental matters could reduce the amounts available for borrowing that could otherwise be used for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions and could result in our failure to maintain compliance with certain covenants in our debt agreements, and could adversely impact our liquidity.

Dividends

OnNovember 6, 2019, October 20, 2020, our Board of Directors declared a dividend for the first quarter of fiscal 20202021 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend was paid on November 29, 201916, 2020.

Share Repurchase Program

Pursuant to our amended share repurchase program as of November 30, 2019,amended in 2001, 2006 and 2008, we have existing authorization remaining under the programwere authorized to repurchase up to approximatelynine million shares of our Class A common stock. As of November 30, 2020, we had authorization to repurchase up to a remaining 706 759 thousand shares of our Class A common stock when we deem such repurchases to be appropriate. We may repurchase our common stock for a variety of reasons, such as to optimize our capital structure and to offset dilution related to share-based compensation arrangements. We consider several factors in determining whether to make share repurchases including, among other things, our cash needs, the availability of funding, our future business plans and the market price of our stock.

Assessment of Liquidity and Capital Resources

Historically, our available cash resources, internally generated funds, credit facilities and equity offerings have financed our acquisitions, capital expenditures, working capital and other financing needs.

We generally believe our current cash resources, internally generated funds, existing credit facilities and access to the capital markets will provide adequate short-term and long-term liquidity needs for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions, joint ventures, debt service requirements, environmental obligations and other contingencies. However, in the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurances that any such supplemental funding, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.

Off-Balance Sheet Arrangements

None requiring disclosure pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934.

Contractual Obligations

There were no material changes related to contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019.2020.

We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. As of November 30, 2019,2020, we had $10$9 million outstanding under these arrangements.

Critical Accounting Policies and Estimates

There were no material changes to our critical accounting policies and estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended August 31, 2019, except for changes resulting from adoption of the new lease accounting standard in the first quarter of fiscal 2020. Refer to Note 3

3428


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

 

- Leases in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for the disclosures required under the new lease accounting standard.

Recently Issued Accounting Standards

We have not identified any recent accounting pronouncements that are expected to have a material impact on our financial condition, results of operations or cash flows upon adoption.

Non-GAAP Financial Measures

Debt, net of cash

Debt, net of cash is the difference between (i) the sum of long-term debt and short-term borrowings (i.e., total debt) and (ii) cash and cash equivalents. We believe that presenting debt, net of cash is useful to investors as a 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.indebtedness.

The following is a reconciliation of debt, net of cash (in thousands):

 

 

November 30, 2019

 

 

August 31, 2019

 

 

November 30, 2020

 

 

August 31, 2020

 

Short-term borrowings

 

$

1,431

 

 

$

1,321

 

 

$

2,171

 

 

$

2,184

 

Long-term debt, net of current maturities

 

 

126,875

 

 

 

103,775

 

 

 

141,172

 

 

 

102,235

 

Total debt

 

 

128,306

 

 

 

105,096

 

 

 

143,343

 

 

 

104,419

 

Less cash and cash equivalents

 

 

9,624

 

 

 

12,377

 

 

 

7,258

 

 

 

17,887

 

Total debt, net of cash

 

$

118,682

 

 

$

92,719

 

 

$

136,085

 

 

$

86,532

 

 

Net borrowings (repayments) of debt

Net borrowings (repayments) of debt is the sum of borrowings from long-term debt and repayments of long-term debt. We present this amount as the net change in borrowings (repayments) for the period because we believe it is useful to investors as a meaningful presentation of the change in debt.

The following is a reconciliation of net borrowings (repayments) of debt (in thousands):

 

 

Three Months Ended November 30,

 

 

Three Months Ended November 30,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Borrowings from long-term debt

 

$

114,339

 

 

$

158,859

 

 

$

92,714

 

 

$

114,339

 

Repayments of long-term debt

 

 

(92,190

)

 

 

(97,699

)

 

 

(53,781

)

 

 

(92,190

)

Net borrowings (repayments) of debt

 

$

22,149

 

 

$

61,160

 

 

$

38,933

 

 

$

22,149

 

 

Adjusted consolidated operating (loss) income,EBITDA, adjusted AMR operating (loss) income, adjusted Corporateselling, general and administrative expense, adjusted netincome (loss) income from continuing operations attributable to SSI shareholders, and adjusted diluted earnings (loss) earnings per share from continuing operations attributable to SSI shareholders.shareholders

Management believes that providing these non-GAAP financial measures adds a meaningful presentation of our results from business operations excluding adjustments for charges for legacy environmental matters, net of recoveries, asset impairment charges, restructuring charges and other exit-related activities, asset impairment charges, and the income tax expense (benefit) allocated to these adjustments, items which are not related to underlying business operational performance, and improves the period-to-period comparability of our results from business operations.

3529


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

 

The following is a reconciliationFollowing are reconciliations of net income (loss) to adjusted consolidated operating (loss) income, adjusted AMR operating (loss) incomeEBITDA, and adjusted Corporateselling, general and administrative expense (in thousands):

 

 

Three Months Ended November 30,

 

 

Three Months Ended November 30,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Consolidated operating (loss) income:

 

 

 

 

 

 

 

 

As reported

 

$

(7,910

)

 

$

22,689

 

Charges for legacy environmental matters, net(1)

 

 

1,293

 

 

 

471

 

Reconciliation of adjusted EBITDA:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

15,064

 

 

$

(6,565

)

Loss (income) from discontinued operations, net of tax

 

 

42

 

 

 

(28

)

Interest expense

 

 

1,780

 

 

 

1,423

 

Income tax expense (benefit)

 

 

5,719

 

 

 

(2,534

)

Depreciation and amortization

 

 

14,826

 

 

 

14,087

 

Charges for legacy environmental matters, net(1)

 

 

2,760

 

 

 

1,293

 

Restructuring charges and other exit-related activities

 

 

467

 

 

 

202

 

 

 

64

 

 

 

467

 

Asset impairment charges

 

 

1,692

 

 

 

63

 

 

 

 

 

 

1,692

 

Adjusted EBITDA

 

$

40,255

 

 

$

9,835

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense:

 

 

 

 

 

 

 

 

As reported

 

$

49,906

 

 

$

46,774

 

Charges for legacy environmental matters, net(1)

 

 

(2,760

)

 

 

(1,293

)

Adjusted

 

$

(4,458

)

 

$

23,425

 

 

$

47,146

 

 

$

45,481

 

 

 

 

 

 

 

 

 

AMR operating (loss) income:

 

 

 

 

 

 

 

 

As reported

 

$

(2,432

)

 

$

23,017

 

Asset impairment charges

 

 

1,580

 

 

 

63

 

Adjusted

 

$

(852

)

 

$

23,080

 

 

 

 

 

 

 

 

 

Corporate expense:

 

 

 

 

 

 

 

 

As reported

 

$

9,422

 

 

$

12,205

 

Charges for legacy environmental matters, net(1)

 

 

(1,293

)

 

 

(471

)

Asset impairment charges

 

 

(112

)

 

 

 

Adjusted

 

$

8,017

 

 

$

11,734

 

 

(1)

Legal and environmental charges, net of recoveries, for legacy environmental matters net of recoveries. The prior year period has been recast for comparability. Legacy environmental matters include charges (net of recoveries)including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 54 - Commitments and Contingencies, ‘Portland Harbor’“Portland Harbor” and ‘Other“Other Legacy Environmental Loss Contingencies’Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

 

36


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

The following is a reconciliationFollowing are reconciliations of adjusted netincome (loss) income from continuing operations attributable to SSI shareholders and adjusted diluted earnings (loss) earnings per share from continuing operations attributable to SSI shareholders (in thousands, except per share data):

 

 

Three Months Ended November 30,

 

 

Three Months Ended November 30,

 

 

 

2019

 

 

 

2018

 

 

2020

 

 

2019

 

Net (loss) income from continuing operations attributable to SSI shareholders:

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributable to SSI shareholders:

 

 

 

 

 

 

 

 

As reported

 

$

(7,023

)

 

$

16,260

 

 

$

14,146

 

 

$

(7,023

)

Charges for legacy environmental matters, net(1)

 

 

1,293

 

 

 

471

 

Charges for legacy environmental matters, net(1)

 

 

2,760

 

 

 

1,293

 

Restructuring charges and other exit-related activities

 

 

467

 

 

 

202

 

 

 

64

 

 

 

467

 

Asset impairment charges

 

 

1,692

 

 

 

63

 

 

 

 

 

 

1,692

 

Income tax benefit allocated to adjustments(2)

 

 

(1,151

)

 

 

(184

)

Income tax benefit allocated to adjustments(2)

 

 

(649

)

 

 

(1,151

)

Adjusted

 

$

(4,722

)

 

$

16,812

 

 

$

16,321

 

 

$

(4,722

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per share from continuing operations attributable to SSI shareholders:

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders:

 

 

 

 

 

 

 

 

As reported

 

$

(0.26

)

 

$

0.57

 

 

$

0.50

 

 

$

(0.26

)

Charges for legacy environmental matters, net, per share(1)

 

 

0.05

 

 

 

0.02

 

Charges for legacy environmental matters, net, per share(1)

 

 

0.10

 

 

 

0.05

 

Restructuring charges and other exit-related activities, per share

 

 

0.02

 

 

 

0.01

 

 

 

 

 

 

0.02

 

Asset impairment charges, per share

 

 

0.06

 

 

 

 

 

 

 

 

 

0.06

 

Income tax benefit allocated to adjustments, per share(2)

 

 

(0.04

)

 

 

(0.01

)

Adjusted

 

$

(0.17

)

 

$

0.59

 

Income tax benefit allocated to adjustments, per share(2)

 

 

(0.02

)

 

 

(0.04

)

Adjusted(3)

 

$

0.57

 

 

$

(0.17

)

 

(1)

Legal and environmental charges, net of recoveries, for legacy environmental matters net of recoveries. The prior year period has been recast for comparability. Legacy environmental matters include charges (net of recoveries)including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 54 - Commitments and Contingencies, ‘Portland Harbor’“Portland Harbor” and ‘Other“Other Legacy Environmental Loss Contingencies’Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

(2)

Income tax allocated to the aggregate adjustments reconciling reported and adjusted netincome (loss) income from continuing operations attributable to SSI shareholders and diluted earnings (loss) earnings per share from continuing operations attributable to SSI shareholders is determined based on a tax provision calculated with and without the adjustments.

(3)

May not foot due to rounding.

We believe that these non-GAAP financial measures allow for a better understanding of our operating and financial performance. These 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 the adjustments often have a material impact on 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.

3730


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

We are exposed to commodity price risk, mainly associated with variations in the market price for ferrous and nonferrous metals, including scrap metal, finished steel products, auto bodies and other commodities. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions. We respond to increases and decreases in forward selling prices by adjusting purchase prices. We actively manage our exposure to commodity price risk and monitor the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. Sales contracts are based on prices negotiated with our customers, and generally orders are placed 30 to 60 days ahead of the shipment date. However, financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter based upon contracted sales orders and estimated future selling prices. Based on contracted sales and estimates of future selling prices, a 10% decrease in the selling price of inventory would not have had a material NRV impact on any of our reportable segments as of November 30, 2019.2020.

Interest Rate Risk

There have been no material changes to our disclosure regarding interest rate risk set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended August 31, 2019.2020.

Credit Risk

Credit risk relates to the risk of loss that might occur as a result of non-performance by counterparties of their contractual obligations to take delivery of scrap metal and finished steel products and to make financial settlements of these obligations, or to provide sufficient quantities of scrap metal or payment to settle advances, loans and other contractual receivables in connection with demolition and scrap extraction projects. We manage our exposure to credit risk through a variety of methods, including shipping ferrous scrap metal exports under letters of credit, collection of deposits prior to shipment for certain nonferrous export customers, establishment of credit limits for certain sales on open terms, credit insurance and designation of collateral and financial guarantees securing advances, loans and other contractual receivables. As a result of COVID-19, we have experienced reductions in the availability of credit insurance that we have historically used to cover a portion of our recycled metal and finished steel sales to domestic customers, which reduced availability may increase our exposure to customer credit risk.

Historically, we have shipped almost all of our large shipments of ferrous scrap metal to foreign customers under contracts supported by letters of credit issued or confirmed by banks deemed creditworthy. The letters of credit ensure payment by the customer. As we generally sell export recycled ferrous metal under contracts or orders that generally provide for shipment within 30 to 60 days after the price is agreed, our customers typically do not have difficulty obtaining letters of credit from their banks in periods of rising ferrous prices, as the value of the letters of credit are collateralized by the value of the inventory on the ship. However, in periods of significantly declining prices, our customers may not be able to obtain letters of credit for the full sales value of the inventory to be shipped.

As of November 30, 20192020 and August 31, 2019,2020, 38%45% and 32%40%, respectively, of our accounts receivable balance was covered by letters of credit. Of the remaining balance, 97% and 96%98% was less than 60 days past due as of November 30, 20192020 and August 31, 2019,2020, respectively.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk, mainly associated with sales transactions and related accounts receivable denominated in the U.S. Dollar by our Canadian subsidiary with a functional currency of the Canadian Dollar. In certain instances, we may use derivatives to manage some portion of this risk. As of November 30, 20192020 and August 31, 2019, 2020, we did not have any derivative contracts.

3831


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of November 30, 2019,2020, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the quarter ended November 30, 2019, we implemented changes to our processes, systems, and internal controls over financial reporting relating to our adoption of and ongoing compliance with the new lease accounting standard, ASC 842, which we adopted as of September 1, 2019. There werewas no other changeschange in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscalthe quarter ended November 30, 2020, that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.

3932


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

 

PART II. OTHER INFORMATION

Information regarding reportable legal proceedings is contained in Part I, “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019,2020, and below in this Part II, “Item 1. Legal Proceedings” of this Quarterly Report on Form 10-Q. Also see Note 54 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item I, incorporated by reference herein.

With respect to theAs previously reported, matter in whichNew England Metal Recycling LLC (NEMR), an indirectly wholly-owned subsidiary of the Company, has been in settlement discussionsentered into a consent decree as of September 17, 2020 with the Alameda County District Attorney and the CaliforniaNew Hampshire Office of the Attorney General (COAG), the latteracting on behalf of certain state agencies, regardingthe New Hampshire Department of Environmental Services, in resolution of an enforcement matter in connection with a legacy environmental issue at a closed facility in New Hampshire owned and previously operated by NEMR. The consent decree, which provided for a civil penalty in the amount of $2.7 million and the schedule for completing the remaining remedial work, was filed with and entered as an order of the Strafford Superior Court, State of New Hampshire on October 1, 2020. The civil penalty under the consent decree was paid in November 2020.

In addition, as previously reported, the Company had reached agreement with the Bay Area Air Quality Management District (BAAQMD) on the terms of a Compliance and Settlement Agreement (CSA) to resolve a July 2019 Notice of Violation with respect to alleged violations of environmental requirementsa BAAQMD air emissions rule at one of our operationsfacilities in California stemming from investigations initiated in 2013 and inspections conducted in 2015,Oakland, California. The CSA covers the Company has completed various facility upgrades that we believe resolve the underlying environmental concerns identified by the agencies and has agreed to settle the matter for $4.556 million, inclusiveperiod pending installation of civil penalties, reimbursement of the agencies’ enforcement costs and Supplemental Environmental Projects (SEPs), which amount includes a credit of $925 thousand for performance of a SEP to install additional emissionemissions controls at the facility. The settlement is subjectfacility and provides for the payment of a civil penalty in the amount of $400,000, a suspended payment in the amount of $100,000 to finalization ofbe forgiven in the stipulation and settlement agreement and final approvalevent the Company completes the compliance work by the agenciesagreed deadline, and the purchase by the Company of certain emission reduction credits. The CSA was executed as of September 22, 2020. The $400,000 civil penalty was paid and the settlement includingemission reduction credits were purchased in the SEP credit.first quarter of fiscal 2021.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors reported or new risk factors identified since the filing of our Annual Report on Form 10-K for the year ended August 31, 20192020.

ITEM 5. OTHER INFORMATION

On January 8, 2020, subsequent to the end of our fiscal 2020 first quarter, we committed to certain restructuring initiatives aimed at further reducing our annual operating expenses, primarily SG&A, at Corporate, AMR and CSS, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses and other non-headcount measures. We expect to incur aggregate estimated restructuring charges, as defined in ASC 420, Exit or Disposal Cost Obligations, and other exit-related costs of approximately $4 million in connection with these initiatives. The estimated charges consist primarily of employee termination benefits of $2 million, professional services costs of $1 million, and a loss associated with a lease contract termination of $1 million. We expect the substantial majority of the restructuring charges to be recognized by the end of fiscal 2020 and to require the Company to make cash payments.None.

 

4033


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

 

ITEM 6.EXHIBITS

 

Exhibit Number

 

Exhibit Description

 

 

 

  10.1*

 

Form of Long-Term Incentive Award Agreement under the 1993 Stock Incentive Plan used for awards granted in fiscal 2020.2021.

 

 

 

  10.2*

 

Form of Restricted Stock Unit Award Agreement under the 1993 Stock Incentive Plan used for awards granted in fiscal 2021.

  10.3*

Fiscal 20202021 Annual Performance Bonus Program for the Chief Executive Officer.

 

 

 

  31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

 

*

*Management contract or compensatory plan or arrangement.

 

4134


Table of Contents

 

SCHNITZER STEEL INDUSTRIES, INC.

 

SIGNATURES

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

 

 

 

 

 

SCHNITZER STEEL INDUSTRIES, INC.

 

 

 

 

(Registrant)

 

 

 

 

 

 

 

Date:

 

January 8, 20207, 2021

 

By:

 

/s/ Tamara L. Lundgren

 

 

 

 

 

 

Tamara L. Lundgren

 

 

 

 

 

 

Chairman, President and Chief Executive Officer

 

 

 

 

 

 

 

Date:

 

January 8, 20207, 2021

 

By:

 

/s/ Richard D. Peach

 

 

 

 

 

 

Richard D. Peach

 

 

 

 

 

 

SeniorExecutive Vice President, Chief Financial Officer and Chief of Corporate OperationsStrategy Officer

 

4235