ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section includes a discussion of our operations for the fiscal years ended August 31, 2021 and 2020. The following discussion and analysis provide information which management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included in Part II, Item 8 of this report.
For discussion of our results of operations for fiscal year 2019 including comparison to fiscal 2020, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended August 31, 2020.
Business
Founded in 1906, Schnitzer Steel Industries, Inc. is one of North America’s largest recyclers of ferrous and nonferrous metal, including end-of-life vehicles, and a manufacturer of finished steel products. As a vertically integrated organization, we offer a range of products and services to meet global demand through our network that includes 50 retail self-service auto parts stores, 52 metals recycling facilities, and an electric arc furnace (“EAF”) steel mill.
Prior to the first quarter of fiscal 2021, our internal organizational and reporting structure included two operating and reportable segments: the Auto and Metals Recycling (“AMR”) business and the Cascade Steel and Scrap (“CSS”) business. In the first quarter of fiscal 2021, in accordance with our plan announced in April 2020, we completed the transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model (“One Schnitzer”), supporting a single segment. We consolidated our operations, sales, services, and other functional capabilities at an enterprise level reflecting enhanced focus by management on optimizing our vertically integrated value chain. This change in structure has resulted in a more agile organization and solidified achievement of recent productivity improvements and cost efficiency initiatives. We began reporting on this new single-segment structure in the first quarter of fiscal 2021.
We sell recycled ferrous and nonferrous metal in both foreign and domestic markets. We also sell a range of finished steel long products produced at our steel mill. Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. Our results of operations also depend substantially on our operating leverage from processing and selling higher volumes of recycled metal as well as our ability to efficiently extract ferrous and nonferrous metals from the shredding process. We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating results. We believe we generally benefit from sustained periods of stable or rising recycled metal selling prices, which allow us to better maintain or increase both operating results and unprocessed scrap metal flow into our facilities. When recycled metal selling prices decline, either sharply or for a sustained period, our operating margins typically compress. With respect to finished steel products produced at our steel mill, our results of operations are impacted by demand and prices for these products, which are sold to customers located primarily in the Western U.S. and Western Canada.
Our quarterly operating results fluctuate based on a variety of factors including, but not limited to, changes in market conditions for recycled ferrous and nonferrous metal and finished steel products, the supply of scrap metal in our domestic markets, and varying demand for used auto parts from our self-service retail stores. Certain of these factors are influenced, to a degree, by the impact of seasonal changes including severe weather conditions, which can impact the timing of shipments and inhibit construction activity utilizing our products, scrap metal collection and production levels at our facilities, and retail admissions and parts sales at our auto parts stores. Further, sanctions, trade actions, and licensing and inspection requirements can impact the level of profitability on sales of our products and, in certain cases, impede or restrict our ability to sell to certain export markets or require us to direct our sales to alternative market destinations, which can cause our quarterly operating results to fluctuate.
34 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Strategic Priorities
As we continue to closely monitor economic conditions, we remain focused on the following core strategies and plans to meet our business goals and objectives:
|
•
|
Long-term expansion of ferrous and nonferrous scrap metal supply and processing, sales volumes, and operating margins;
|
|
•
|
Technology investments and process improvements to increase the separation and recovery of metal materials from our shredding process and to expand product optionality;
|
|
•
|
Development of new products and expansion of recycling services and capabilities to reach a broader market, enhance customer value, and increase operating margins;
|
|
•
|
Increase market share through initiatives to maximize volumes and through selective partnerships, alliances, and acquisitions;
|
|
•
|
Productivity and continuous improvement initiatives to ensure the safety of our employees, increase operating efficiency and effectiveness, advance sustainable business practices, improve natural resource stewardship, and reduce operating expense;
|
|
•
|
Use of our seven deepwater ports and ground-based logistics network to directly access customers domestically and internationally to meet demand for our products wherever it is greatest; and
|
|
•
|
Further optimization of our integrated recycling and steel manufacturing operating platforms to maximize opportunities for synergies, cost efficiencies, and volumes.
|
Key economic factors and trends affecting the industries in which we operate
We sell recycled metals to the global steel industry for the production of finished steel. Our financial results largely depend on supply of raw materials in the U.S. and Western Canada and demand for recycled metal in foreign and domestic markets and for finished steel products in the Western U.S. and Western Canada. Demand for most of our products is cyclical in nature and sensitive to changes in general economic conditions. The timing and magnitude of the economic cycles in the industries in which our products are used, including global steel manufacturing and nonresidential and infrastructure construction in the U.S., are difficult to predict. Global economic conditions, including impacts of the COVID-19 pandemic discussed below in this section, structural and cyclical changes in supply and demand conditions, the strength of the U.S. dollar, the availability and price of raw material alternatives, and trade actions such as tariffs affect market prices for and sales volumes of recycled ferrous and nonferrous metal in global markets and steel products in the Western U.S. and Western Canada and can have a significant impact on the results of operations for our reportable segments.
In fiscal 2021, market conditions for recycled metals improved globally, with selling prices for many recycled metal commodities reaching multi-year highs during the fiscal year. Selling prices for our ferrous and nonferrous products increased significantly compared to the prior fiscal year which was negatively impacted by the effects of the COVID-19 pandemic. In fiscal 2021, the average net selling prices for our ferrous and nonferrous products increased by 61% and 60%, respectively, compared to the prior fiscal year. The deterioration in global economic conditions that occurred in fiscal 2020 in large part due to the impacts of the COVID-19 pandemic reflected among other things the curtailment of many commercial and government-sponsored activities using steel and other metal materials, causing metal commodity prices to decrease sharply and widespread destocking of inventories. As global economies revived and commercial and investment activities resumed, including throughout fiscal 2021, demand for recycled metals and finished steel increased substantially, which contributed to periods of sharp increases in market selling prices for these products. Increased focus on decarbonization strategies by governments and businesses around the world, including investments in infrastructure and technologies that minimize carbon dioxide emissions from the use of fossil fuels, among other factors, also contributed to strong demand for most of our products in fiscal 2021 and support global long-term demand for recycled ferrous and nonferrous metal. In fiscal 2021, we observed a trend of increased use of recycled metals to manufacture new products, including greater use of EAF technology for steel production which uses recycled metal as a primary raw material. Average selling prices for our finished steel products, which are produced in our steel mill using EAF technology, increased by 17% compared to the prior fiscal year.
35 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Coronavirus Disease 2019 (“COVID-19”)
We continue to monitor the impact of COVID-19 on all aspects of our business. The COVID-19 outbreak, which the World Health Organization characterized as a pandemic in March 2020, has resulted in governments around the world implementing measures with various levels of stringency to help control the spread of the virus as well as vaccination programs to build levels of immunity among the population. In addition, governments and central banks globally have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Ensuring the health and safety of our employees, and all who visit our sites, is our top priority, and we are following all U.S. Centers for Disease Control and Prevention and state and local health department guidelines. Further, we implemented infection control measures at all our sites and put in place travel and in-person meeting restrictions and other physical distancing measures. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our third quarter fiscal 2020 results, global economic conditions improved during fiscal 2021, resulting in increased demand for our products, which led to our earnings for our fiscal 2021 substantially exceeding the results for our fiscal 2020. Beginning in our second quarter of fiscal 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on individual, business, and government activities. The easing of restrictions and the existence of variant strains of COVID-19 may lead to a rise in infections, which could result in the reinstatement of some of the restrictions previously in place and the implementation of new restrictions and mandates, and there are ongoing global impacts resulting directly or indirectly from the pandemic including labor shortages, logistical challenges such as increased port congestion, and increases in costs for certain goods and services. While the ongoing effects of the COVID-19 pandemic could negatively impact our results of operations, cash flows, and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time.
Steel Mill Fire
On May 22, 2021, we experienced a fire at our steel mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. The rolling mill production ceased in early June 2021. In August 2021, our steel mill began ramping up production ahead of the original schedule following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. This production ramp-up was initiated with a full workforce and included acceptance of orders for our complete range of finished steel products based on the rolling schedule. Impacts are expected to continue during the ramp-up phase and may continue thereafter. We have insurance that we believe is fully applicable to the losses and have filed initial insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property damage and business income losses resulting from the matter. The property damage deductible under the policies insuring the Company’s assets is $1 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. In the fourth quarter of fiscal 2021, we recognized an initial $10 million insurance receivable and related insurance recovery gain, reported within prepaid expenses and other current assets on the Consolidated Balance Sheets and within cost of goods sold on the Consolidated Statements of Operations, respectively, partially offsetting the detrimental effects of the incident primarily to our fourth quarter operating results. We incurred approximately $10 million in capital purchases in the fourth quarter to replace and repair property and equipment that had been lost or damaged by the fire. During the first quarter of fiscal 2022 through the date of this report, we received advance payments from insurance carriers totaling approximately $30 million towards our claims, and not reflecting any final or full settlement of claims with the carriers. The insurance claims resolution process may extend significantly beyond completion of repair and replacement of the physical plant property that experienced physical loss or damage at the melt shop and the restart of production activities.
Use of Non-GAAP Financial Measures
In this management’s discussion and analysis, we use supplemental measures of our performance, liquidity, and capital structure which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We believe that providing these non-GAAP financial measures adds a meaningful presentation of our operating and financial performance, liquidity, and capital structure. For example, following the modification of our internal organizational and reporting structure completed in the first quarter of fiscal 2021, we use adjusted EBITDA as one of the measures to compare and evaluate financial performance. Adjusted EBITDA is the sum of our net income before results from discontinued operations, interest expense, income taxes, depreciation and amortization, charges for legacy environmental matters (net of recoveries), business development costs not related to ongoing operations including pre-acquisition expenses, restructuring charges and other exit-related activities, charges related to non-ordinary course legal settlements, asset impairment charges, net and other items which are not related to underlying business operational performance. See the reconciliations of supplemental financial measures, including adjusted EBITDA, in Non-GAAP Financial Measures at the end of this Item 7.
36 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Our non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable U.S. GAAP measures. Although we find these non-GAAP financial measures useful in evaluating the performance of our business, our reliance on these measures is limited because they often materially differ from our consolidated financial statements presented in accordance with GAAP. Therefore, we typically use these adjusted amounts in conjunction with our GAAP results to address these limitations. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Financial Highlights of Results of Operations for Fiscal 2021
|
•
|
Diluted earnings per share from continuing operations attributable to SSI shareholders in fiscal 2021 was $5.66, compared to a loss per share of $(0.15) in the prior fiscal year.
|
|
•
|
Adjusted diluted earnings per share from continuing operations attributable to SSI shareholders in fiscal 2021 was $6.13, compared to $0.43 in the prior fiscal year.
|
|
•
|
Net income in fiscal 2021 was $170 million, compared to a loss of $2 million in the prior fiscal year.
|
|
•
|
Adjusted EBITDA in fiscal 2021 was $289 million, compared to $85 million in the prior fiscal year.
|
Market conditions for recycled metals improved in fiscal 2021, with selling prices for many recycled metal commodities reaching multi-year highs during the year. Average net selling prices for our ferrous and nonferrous products increased significantly compared to the prior fiscal year which was negatively impacted by the economic effects of the COVID-19 pandemic. In fiscal 2021, the average net selling prices for our ferrous and nonferrous products increased by 61% and 60%, respectively, and sales volumes for these products increased by 11% and 8%, respectively, compared to the prior fiscal year. Market conditions for our finished steel products also improved in fiscal 2021, which contributed to finished steel average selling prices increasing by 17% compared to the prior fiscal year, the benefits of which were partially offset by the impact of lower finished steel sales volumes due to a business interruption at our steel mill caused by a fire in May 2021. Our results in fiscal 2021 reflected substantial benefits from the higher price environment for most of our products including a significant expansion in our ferrous metal spreads, increased ferrous and nonferrous sales volumes supported by strong demand and improved supply flows, greater contributions from sales of nonferrous products, and a favorable impact from average inventory accounting, compared to the prior fiscal year.
The following items further highlight selected liquidity and capital structure metrics:
|
•
|
Net cash provided by operating activities of $190 million in fiscal 2021, compared to $125 million in the prior fiscal year.
|
|
•
|
Debt was $75 million as of August 31, 2021, compared to $104 million as of August 31, 2020.
|
|
•
|
Debt, net of cash, was $47 million as of August 31, 2021, compared to $87 million as of August 31, 2020.
|
See the reconciliations of adjusted diluted earnings (loss) per share from continuing operations attributable to SSI shareholders, adjusted EBITDA, and debt, net of cash in Non-GAAP Financial Measures at the end of this Item 7.
37 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Results of Operations
Selected Financial Measures and Operating Statistics
|
|
For the Year Ended August 31,
|
|
|
% Increase (Decrease)
|
|
($ in thousands, except for prices and per share amounts)
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
2021 vs. 2020
|
|
|
2020 vs. 2019
|
|
Ferrous revenues
|
|
$
|
1,557,891
|
|
|
$
|
862,490
|
|
|
$
|
1,164,719
|
|
|
|
81
|
%
|
|
|
(26
|
)%
|
Nonferrous revenues
|
|
|
684,862
|
|
|
|
390,298
|
|
|
|
468,023
|
|
|
|
75
|
%
|
|
|
(17
|
)%
|
Steel revenues(1)
|
|
|
379,203
|
|
|
|
336,980
|
|
|
|
367,956
|
|
|
|
13
|
%
|
|
|
(8
|
)%
|
Retail and other revenues
|
|
|
136,595
|
|
|
|
122,575
|
|
|
|
132,083
|
|
|
|
11
|
%
|
|
|
(7
|
)%
|
Total revenues
|
|
|
2,758,551
|
|
|
|
1,712,343
|
|
|
|
2,132,781
|
|
|
|
61
|
%
|
|
|
(20
|
)%
|
Cost of goods sold
|
|
|
2,305,357
|
|
|
|
1,503,725
|
|
|
|
1,858,535
|
|
|
|
53
|
%
|
|
|
(19
|
)%
|
Gross margin (total revenues less cost of goods sold)
|
|
$
|
453,194
|
|
|
$
|
208,618
|
|
|
$
|
274,246
|
|
|
|
117
|
%
|
|
|
(24
|
)%
|
Gross margin (%)
|
|
|
16.4
|
%
|
|
|
12.2
|
%
|
|
|
12.9
|
%
|
|
|
35
|
%
|
|
|
(5
|
)%
|
Selling, general and administrative expense
|
|
$
|
242,463
|
|
|
$
|
187,876
|
|
|
$
|
191,405
|
|
|
|
29
|
%
|
|
|
(2
|
)%
|
Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
$
|
5.66
|
|
|
$
|
(0.15
|
)
|
|
$
|
2.01
|
|
|
NM
|
|
|
NM
|
|
Adjusted(2)
|
|
$
|
6.13
|
|
|
$
|
0.43
|
|
|
$
|
2.16
|
|
|
|
1,317
|
%
|
|
|
(80
|
)%
|
Net income (loss)
|
|
$
|
169,975
|
|
|
$
|
(2,200
|
)
|
|
$
|
58,322
|
|
|
NM
|
|
|
NM
|
|
Adjusted EBITDA(2)
|
|
$
|
289,209
|
|
|
$
|
85,414
|
|
|
$
|
143,019
|
|
|
|
239
|
%
|
|
|
(40
|
)%
|
Recycled ferrous metal average sales prices ($/LT)(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
364
|
|
|
$
|
220
|
|
|
$
|
274
|
|
|
|
65
|
%
|
|
|
(20
|
)%
|
Foreign
|
|
$
|
385
|
|
|
$
|
241
|
|
|
$
|
296
|
|
|
|
60
|
%
|
|
|
(19
|
)%
|
Average
|
|
$
|
381
|
|
|
$
|
237
|
|
|
$
|
290
|
|
|
|
61
|
%
|
|
|
(18
|
)%
|
Ferrous volumes (LT, in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic(4)
|
|
|
1,500
|
|
|
|
1,429
|
|
|
|
1,699
|
|
|
|
5
|
%
|
|
|
(16
|
)%
|
Foreign
|
|
|
2,908
|
|
|
|
2,525
|
|
|
|
2,621
|
|
|
|
15
|
%
|
|
|
(4
|
)%
|
Total ferrous volumes (LT, in thousands)(4)(5)
|
|
|
4,408
|
|
|
|
3,954
|
|
|
|
4,319
|
|
|
|
11
|
%
|
|
|
(8
|
)%
|
Recycled nonferrous metal average sales price ($/pound)(3)(6)
|
|
$
|
0.88
|
|
|
$
|
0.55
|
|
|
$
|
0.59
|
|
|
|
60
|
%
|
|
|
(7
|
)%
|
Nonferrous volumes (pounds, in thousands)(4)(6)
|
|
|
593,378
|
|
|
|
550,566
|
|
|
|
667,334
|
|
|
|
8
|
%
|
|
|
(17
|
)%
|
Finished steel average sales price ($/ST)(3)
|
|
$
|
737
|
|
|
$
|
630
|
|
|
$
|
713
|
|
|
|
17
|
%
|
|
|
(12
|
)%
|
Finished steel sales volumes (ST, in thousands)
|
|
|
488
|
|
|
|
505
|
|
|
|
478
|
|
|
|
(3
|
)%
|
|
|
6
|
%
|
Cars purchased (in thousands)(7)
|
|
|
338
|
|
|
|
316
|
|
|
|
386
|
|
|
|
7
|
%
|
|
|
(18
|
)%
|
Number of auto parts stores at period end
|
|
|
50
|
|
|
|
50
|
|
|
|
51
|
|
|
|
—
|
%
|
|
|
(2
|
)%
|
Rolling mill utilization(8)
|
|
|
78
|
%
|
|
|
86
|
%
|
|
|
88
|
%
|
|
|
(9
|
)%
|
|
|
(2
|
)%
|
NM = Not Meaningful
LT = Long Ton, which is equivalent to 2,240 pounds. ST = Short Ton, which is equivalent to 2,000 pounds.
(1)
|
Steel revenues include predominantly sales of finished steel products, in addition to sales of semi-finished goods (billets) and steel manufacturing scrap.
|
(2)
|
See the reconciliations of Non-GAAP Financial Measures at the end of this Item 7.
|
(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)
|
May not foot due to rounding.
|
(6)
|
Average sales price and volume information excludes platinum group metals (“PGMs”) in catalytic converters.
|
(7)
|
Cars purchased by auto parts stores only.
|
(8)
|
Rolling mill utilization is based on effective annual production capacity under current conditions of 580 thousand tons of finished steel products.
|
38 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Revenues
Revenues in fiscal 2021 increased by 61% compared to the prior fiscal year primarily due to significantly higher average net selling prices and increased sales volumes for our ferrous and nonferrous products in both export and domestic markets. The increase was driven by stronger market conditions for recycled metals globally, with selling prices for many recycled metal commodities reaching multi-year highs during fiscal 2021. The average net selling price for our ferrous products increased by 61%, and the average net selling price for our nonferrous products increased by 60%, compared to the prior fiscal year. Ferrous sales volumes increased by 11% and nonferrous sales volumes increased by 8%, compared to the prior fiscal year. Market conditions for our finished steel products also improved in fiscal 2021, which contributed to higher finished steel average selling prices, reflecting robust demand in West Coast construction markets. The impact of higher average selling prices for our finished steel products on steel revenues in fiscal 2021 reduced the impact on our financial performance of lower sales volumes and rolling mill utilization compared to the prior fiscal year, which were primarily due to the May 2021 fire and related production interruption at our steel mill.
Operating Performance
Net income in fiscal 2021 was $170 million, compared to net loss of $2 million in the prior fiscal year. Adjusted EBITDA in fiscal 2021 was $289 million, compared to $85 million in the prior fiscal year. The improvement in our results for fiscal 2021 reflected substantial benefits from the higher price environment for most of our products, including a significant expansion in our ferrous metal spreads, increased ferrous and nonferrous sales volumes supported by strong demand and improved supply flows, greater contributions from sales of nonferrous products, and a favorable impact from average inventory accounting, compared to the prior fiscal year. Ferrous metal spreads in fiscal 2021 increased by approximately 44% and average net selling prices for our nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, increased by approximately 58% compared to the prior fiscal year. Our results in fiscal 2021 also reflected substantially increased contributions from sales of higher priced PGM products compared to the prior fiscal year and achievement of the full run rate of benefits from productivity initiatives implemented throughout fiscal 2020. In the fourth quarter of fiscal 2021, we recognized initial insurance recoveries of $10 million related to the May 2021 fire at our steel mill, partially offsetting the detrimental effects of the incident primarily to our fourth quarter operating results. In comparison, our results in fiscal 2020 reflected periods of sharply declining commodity prices and constrained supply of scrap metal, especially during the third quarter of fiscal 2020 due in large part to the effects of the COVID-19 pandemic, which had a significant negative impact on operating margins and overall operating results for fiscal 2020. Selling, general, and administrative expense in fiscal 2021 increased by 29% compared to the prior fiscal year primarily due to an increase in employee-related expenses as a result of higher incentive compensation accruals driven by improved business performance, increased charges related to legacy environmental matters, and increased legal and professional services costs. See the reconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the end of this Item 7.
In fiscal 2020, we implemented productivity initiatives aimed at reducing our annual operating expenses, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses, and other non-headcount measures. We targeted $20 million in annual benefits from these initiatives, and we achieved the full quarterly run rate of benefits in the third quarter of fiscal 2020. We achieved approximately $19 million and $18 million in realized benefits in fiscal 2021 and 2020, respectively. Additionally, in April 2020, we announced our intention to modify our internal organizational and reporting structure to the One Schnitzer functionally-based, integrated model, which we completed in the first quarter of fiscal 2021. This change in structure has resulted in a more agile organization and solidified achievement of recent productivity improvements and cost efficiency initiatives. During fiscal 2020, we incurred severance costs of $2 million, exit-related costs associated with a lease contract termination of $1 million, and professional services costs related to these initiatives of $6 million.
Income Taxes
|
|
Year Ended August 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
207,989
|
|
|
$
|
(1,939
|
)
|
|
$
|
76,240
|
|
Income tax expense
|
|
$
|
(37,935
|
)
|
|
$
|
(166
|
)
|
|
$
|
(17,670
|
)
|
Effective tax rate
|
|
|
18.2
|
%
|
|
|
(8.6
|
)%
|
|
|
23.2
|
%
|
39 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Our effective tax rate from continuing operations for fiscal 2021 was an expense on pre-tax income of 18.2%, compared to an expense on pre-tax loss of 8.6% for fiscal 2020. Our effective tax rate from continuing operations for fiscal 2021 was lower than the U.S. federal statutory rate of 21% primarily due to the benefit from the foreign derived intangible income deduction in fiscal 2021 and the impacts of research and development credits, release of the valuation allowance against Puerto Rico deferred tax assets, and other discrete items. Our effective tax rate from continuing operations for fiscal 2020 was lower than the U.S. federal statutory rate of 21%, and reflective of income tax expense on a pre-tax loss from continuing operations, primarily due to the partially offsetting impacts of individually immaterial permanent differences from non-deductible expenses and research and development credits, the effects of unrecognized tax benefits, and the aggregate impact of state taxes.
We assess the realizability of our deferred tax assets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies, and forecasts of taxable income. We consider all negative and positive evidence, including the weight of the evidence, to determine if valuation allowances against deferred tax assets are required. We continue to maintain valuation allowances against certain deferred tax assets related to certain jurisdictions as a result of negative objective evidence, including the effects of historical losses in these tax jurisdictions, outweighing positive objective and subjective evidence, indicating that it is more-likely-than-not that the associated tax benefit will not be realized. Realization of the deferred tax assets is dependent upon generating sufficient taxable income in the associated tax jurisdictions in future years to benefit from the reversal of net deductible temporary differences and from the utilization of net operating losses. We will continue to regularly assess the realizability of deferred tax assets. Changes in historical earnings performance and future earnings projections, among other factors, may cause us to adjust our valuation allowance on deferred tax assets, which would impact our results of operations in the period we determine that these factors have changed.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted into law. The CARES Act contains several income tax provisions, as well as other measures, aimed at assisting businesses impacted by the economic effects of the COVID-19 pandemic. Among other provisions, the CARES Act removes certain limitations on utilization of net operating losses (“NOLs”) and allows for carrybacks of certain past and future NOLs. We applied the NOL carryback provisions of the CARES Act to our NOL for fiscal 2020, which resulted in the reclassification of a $11 million NOL deferred income tax asset to refundable income taxes and recognition of a $1 million income tax benefit in the third quarter of fiscal 2020. We do not anticipate the other income tax provisions of the CARES Act to have a material impact on our financial statements.
See Note 14 - Income Taxes in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion.
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 $28 million and $18 million as of each August 31, 2021 and 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 August 31, 2021, debt was $75 million, compared to $104 million as of August 31, 2020, and debt, net of cash, was $47 million as of August 31, 2021 compared to $87 million as of August 31, 2020 (see the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 7).
Operating Activities
Net cash provided by operating activities in fiscal 2021 was $190 million, compared to $125 million in fiscal 2020.
Sources of cash other than from earnings in fiscal 2021 included a $65 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of payments, a $28 million increase in accrued payroll and related liabilities primarily due to increased incentive compensation liabilities, and a $23 million increase in income tax accruals. Uses of cash in fiscal 2021 included a $89 million increase in inventories due to higher raw material purchase prices, higher volumes on hand, and the timing of purchases and sales, and a $84 million increase in accounts receivable primarily due to increases in selling prices and higher sales volumes for recycled metals, as well as the timing of sales and collections.
40 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Sources of cash in fiscal 2020 included a $39 million decrease in inventories due to lower raw material purchase prices and the timing of purchases and sales and a $13 million increase in accrued payroll and related liabilities due to increased incentive compensation liabilities and deferred payroll taxes as permitted under the CARES Act. Uses of cash in fiscal 2020 included an $8 million decrease in accounts payable primarily due to lower raw material purchase prices and the timing of payments.
Investing Activities
Net cash used in investing activities in fiscal 2021 was $118 million, compared to $79 million in fiscal 2020.
Cash used in investing activities in fiscal 2021 included capital expenditures of $119 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, as well as $8 million related to the repair and replacement of damaged steel mill equipment, compared to $82 million in the prior year.
Financing Activities
Net cash used in financing activities for fiscal 2021 was $63 million, compared to $41 million in fiscal 2020.
Cash flows from financing activities in fiscal 2021 included $31 million in net repayments of debt, compared to $8 million in the prior fiscal year (refer to Non-GAAP Financial Measures at the end of this Item 7). Uses of cash in both of fiscal 2021 and 2020 also included $21 million for the payment of dividends.
Additionally, during the third quarter of fiscal 2020, we borrowed an incremental $250 million under our credit facilities in order to increase our cash position and preserve financial flexibility in light of the COVID-19 outbreak. We repaid the $250 million of additional borrowings in the fourth quarter of fiscal 2020.
Debt
Following is a summary of our outstanding balances and availability on credit facilities and long-term debt, exclusive of finance lease obligations (in thousands):
|
|
Outstanding as of
August 31, 2021
|
|
|
Remaining
Availability
|
|
Bank secured revolving credit facilities(1)
|
|
$
|
60,000
|
|
|
$
|
643,872
|
|
Other debt obligations
|
|
$
|
8,362
|
|
|
N/A
|
|
(1)
|
Remaining availability is net of $8 million of outstanding stand-by letters of credit as of August 31, 2021.
|
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. The $700 million credit facility includes a $50 million sublimit for letters of credit, a $25 million sublimit for swingline loans and a $50 million sublimit for multicurrency borrowings. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the London Interbank Offered Rate (“LIBOR”) (or the Canadian equivalent for C$ loans), plus a spread of between 1.25% and 3.50%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA (as defined by the credit agreement), or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50% or (c) the daily rate equal to one-month LIBOR plus 1.75%, in each case, plus a spread of between 0.00% and 2.50% based on a pricing grid tied to our consolidated funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.20% and 0.50% based on a pricing grid tied to our ratio of consolidated funded debt to EBITDA.
We had borrowings outstanding under our credit facilities of $60 million and $90 million as of August 31, 2021 and 2020, respectively. The weighted average interest rate on amounts outstanding under our credit facilities was 1.75% and 4.59% as of August 31, 2021 and 2020, respectively.
41 / Schnitzer Steel Industries, Inc. Form 10-K 2021
We use the credit facilities to fund working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. Our 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. As of August 31, 2021, the financial covenants under the credit agreement included (a) a consolidated fixed charge coverage ratio, defined as the four-quarter rolling sum of consolidated EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges, and (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness.
As of August 31, 2021, we were in compliance with the financial covenants under our credit agreement. The consolidated fixed charge coverage ratio was required to be no less than 1.50 to 1.00 and was 7.20 to 1.00 as of August 31, 2021. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.09 to 1.00 as of August 31, 2021.
Our obligations under our 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, we may not be able to do so in the event market conditions, COVID-19, or other negative factors have a significant adverse impact on our results of operations and financial 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. We cannot assure that any such alternative funds, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
Other debt obligations, which totaled $8 million and $7 million as of August 31, 2021 and 2020, respectively, 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.
Capital Expenditures
Capital expenditures totaled $119 million for fiscal 2021, compared to $82 million for fiscal 2020. Capital expenditures in fiscal 2021 included approximately $51 million for investments in growth, including new nonferrous processing technologies, support for volume initiatives, and other growth projects, using cash generated from operations and available credit facilities. We currently plan to invest in the range of $130 million to $160 million in capital expenditures in fiscal 2022, including for investments in growth, including new nonferrous processing technologies and to support volume initiatives as well as post-acquisition and other growth projects, using cash generated from operations and available credit facilities. The COVID-19 pandemic has contributed to some delays in construction activities and equipment deliveries related to our capital projects, and to the time required to obtain permits from government agencies, resulting in the deferral of certain capital expenditures. Given the continually evolving nature of the COVID-19 pandemic and other factors impacting the timing of project completion, the extent to which forecasted capital expenditures could be deferred is uncertain.
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 approximately $21 million in capital expenditures for environmental projects in fiscal 2021, and we currently plan to invest in the range of $30 million to $40 million for such projects in fiscal 2022. These projects include investments in equipment to ensure ongoing compliance with air quality and other environmental regulations and storm water systems.
42 / Schnitzer Steel Industries, Inc. Form 10-K 2021
We have been identified by the United States Environmental Protection Agency (“EPA”) as one of the potentially responsible parties that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”). See Note 9 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 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, remediation, 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 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
On June 30, 2021, our Board of Directors declared a dividend for the fourth quarter of fiscal 2021 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. Dividends of $0.75 per common share, totaling $21 million, were declared and paid during fiscal 2021.
On July 31, 2020, our Board of Directors declared a dividend for the fourth quarter of fiscal 2020 of $0.1875 per common share, which equated to an annual cash dividend of $0.75 per common share. Dividends of $0.75 per common share, totaling $21 million, were declared and paid during fiscal 2020.
Share Repurchase Program
Pursuant to our share repurchase program as amended in 2001, 2006, and 2008, we were authorized to repurchase up to nine million shares of our Class A common stock. As of August 31, 2021, we had authorization to repurchase up to a remaining 706 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. We did not repurchase any shares of our common stock during fiscal 2021.
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.
On October 1, 2021, during the first quarter of our fiscal 2022, we closed a transaction under a definitive agreement with Columbus Recycling entered on August 12, 2021, to acquire eight metals recycling facilities. The cash purchase price was approximately $107 million, subject to adjustment for acquired net working capital relative to an agreed-upon benchmark, as well as other adjustments. We funded the business acquisition using cash on hand and borrowings under our existing credit facilities. See “Acquisition of Columbus Recycling” in Note 18 – Subsequent Events in Part II, Item 8 of this report for further detail.
43 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Contractual Obligations
We have certain contractual obligations to make future payments. The following table summarizes future obligations related to debt and leases as of August 31, 2021 (in thousands):
|
|
Payment Due by Period
|
|
|
|
|
2022
|
|
|
|
2023
|
|
|
|
2024
|
|
|
|
2025
|
|
|
|
2026
|
|
|
Thereafter
|
|
|
Totals
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facilities(1)
|
|
$
|
—
|
|
|
$
|
60,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
60,000
|
|
Interest payments on credit facilities(2)
|
|
$
|
1,050
|
|
|
$
|
1,030
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,080
|
|
Other debt, including interest(3)
|
|
$
|
2,468
|
|
|
$
|
2,618
|
|
|
$
|
1,875
|
|
|
$
|
1,875
|
|
|
$
|
225
|
|
|
$
|
74
|
|
|
$
|
9,135
|
|
Finance leases, including interest
|
|
$
|
1,865
|
|
|
$
|
1,792
|
|
|
$
|
1,498
|
|
|
$
|
714
|
|
|
$
|
595
|
|
|
$
|
1,286
|
|
|
$
|
7,750
|
|
Operating leases(4)
|
|
$
|
25,519
|
|
|
$
|
24,021
|
|
|
$
|
20,000
|
|
|
$
|
14,703
|
|
|
$
|
11,351
|
|
|
$
|
64,784
|
|
|
$
|
160,378
|
|
(1)
|
Credit facilities include the principal amount of borrowings outstanding under bank secured revolving credit facilities, which mature in August 2023.
|
(2)
|
Interest payments on credit facilities are based on interest rates in effect as of August 31, 2021. As contractual interest rates and the amount of debt outstanding is variable in certain cases, actual cash payments may differ from the estimates provided.
|
(3)
|
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.
|
(4)
|
Operating lease payments reflect those embedded in the measurement of our operating lease liabilities and, thus, include future lease payments for the remaining non-cancellable period of the lease together with periods covered by renewal (or termination) options which we are reasonably certain to exercise (or not to exercise). These operating lease payments do not include certain tax, insurance, and maintenance costs, which are also required contractual obligations under our operating leases but are generally not fixed and can fluctuate from year to year. Also, we have excluded future minimum lease payments for leases that have been executed but have not commenced as of August 31, 2021.
|
In addition to future obligations related to debt and leases presented in the table above, we have certain material cash requirements, including but not limited to commitments for capital expenditures. See “Capital Expenditures” within “Liquidity and Capital Resources” above in this Item 7 for discussion of our planned investment in capital expenditures in fiscal 2022, a portion of which represents contractual commitments that existed as of the end of our fiscal 2021. We also had open purchase orders as of August 31, 2021 for purchases of primarily fuels and lubricants, machinery and equipment components and parts, and consumables used in our operations of approximately $60 million, nearly all of which require payment of cash in our fiscal 2022.
See Note 12 – Employee Benefits in Part II, Item 8 of this report for disclosure related to qualified and nonqualified retirement plans, which include a defined benefit pension plan, a supplemental executive retirement benefit plan, multiemployer pension plans, defined contribution plans, and a deferred compensation plan.
We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. At August 31, 2021, we had $8 million outstanding under these arrangements.
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make certain judgments, estimates, and assumptions regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. An accounting estimate is deemed to be critical if it is made based on assumptions and judgments about matters that are inherently uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact our consolidated financial statements. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
Our critical accounting estimates include those related to inventories, long-lived assets, goodwill, environmental costs, and income taxes.
44 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Inventories
Our inventories consist of processed and unprocessed scrap metal (ferrous, nonferrous, and mixed nonferrous recovered joint products arising from the manufacturing process), semi-finished steel products (billets), finished steel products (primarily rebar, wire rod, and merchant bar), used and salvaged vehicles, and supplies. Inventories are stated at the lower of cost and net realizable value. We consider estimated future selling prices when determining the estimated net realizable value of our inventory. As we generally sell our recycled ferrous metal under contracts that provide for shipment within 30 to 60 days after the price is agreed, we utilize the selling prices under committed contracts and sales orders for determining the estimated net realizable value of quantities on hand that will be shipped under these contracts and sales orders.
The accounting process we use to record ferrous scrap metal quantities relies on significant estimates. With respect to estimating the quantities of unprocessed ferrous scrap metal inventory that are moved into production, we rely on weighed quantities of the processed ferrous material, adjusted for estimated metal recoveries and yields that are based on historical trends and other judgments by management. Actual recoveries and yields can vary depending on product quality, moisture content, and the source of the unprocessed metal. The Company’s estimates are intended to reasonably reflect the quantities of unprocessed ferrous scrap metal that are used in the production of processed ferrous metal. To assist in validating the reasonableness of these estimates, we periodically review shrink factors and perform monthly physical inventories. Due to the inherent nature of our scrap metal inventories, including variations in product density, holding period, and production processes utilized to manufacture the products, physical inventories will not necessarily detect all variances for scrap metal inventory such that estimates of quantities are required. To mitigate this risk, we further adjust our ferrous physical inventories when the volume of a commodity is low and a physical inventory count is deemed to more accurately estimate the remaining volume.
Long-Lived Assets
We test long-lived tangible and intangible assets for impairment at the asset group level, which is determined based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. We test our asset groups for impairment when certain triggering events or changes in circumstances indicate that the carrying value of the asset group may be impaired. If the carrying value of the asset group is not recoverable because it exceeds the estimate of future undiscounted cash flows from the use and eventual disposition of the asset group, an impairment loss is recognized by the amount the carrying value exceeds its fair value, if any. The impairment loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value. Fair value is determined using one or more of the income, market, or cost approaches, depending on the nature of the asset group. Determination of fair value is considered a critical accounting estimate. In fiscal 2021, we did not identify any triggering events or changes in circumstances indicating that the carrying value of a material asset group may be impaired.
Goodwill
We evaluate goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. Impairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”).
When testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more-likely-than-not, we are then required to perform the quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. When performing the quantitative impairment test, we apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
45 / Schnitzer Steel Industries, Inc. Form 10-K 2021
We estimate the fair value of a reporting unit using an income approach based on the present value of expected future cash flows utilizing a market-based weighted average cost of capital (“WACC”) determined separately for the reporting unit. To estimate the present value of the cash flows that extend beyond the final year in the discounted cash flow analysis, we employ a terminal value technique, whereby we use estimated operating cash flows minus capital expenditures, adjust for changes in working capital requirements in the final year of the analysis, and then discount these estimated cash flows by the WACC to establish the terminal value.
The determination of fair value using the income approach requires judgment and involves the use of estimates and assumptions about expected future cash flows derived from internal forecasts and the impact of market conditions on those assumptions. Assumptions primarily include revenue growth rates driven by future ferrous and nonferrous commodity price and sales volume expectations, gross margins, selling, general and administrative expense relative to total revenues, capital expenditures, working capital requirements, discount rate (WACC), tax rate, terminal growth rate, benefits associated with a taxable transaction, and synergistic benefits available to market participants.
We also use a market approach based on earnings multiple data and our Company’s market capitalization to corroborate our reporting units’ valuations. We reconcile the Company’s market capitalization to the aggregated estimated fair value of all reporting units, including consideration of a control premium representing the estimated amount a market participant would pay to obtain a controlling interest in the Company.
As a result of the inherent uncertainty associated with forming the estimates described above, actual results could differ from those estimates. Future events and changing market conditions may impact our assumptions as to future revenue and operating margin growth, WACC and other factors that may result in changes in our estimates of the reporting units’ fair value. Although we believe the assumptions used in testing our reporting units’ goodwill for impairment are reasonable, a lack of recovery or further deterioration in market conditions from current levels, a trend of weaker than anticipated financial performance for the reporting unit with allocated goodwill, a decline in our share price from current levels for a sustained period of time, or an increase in the WACC, among other factors, could significantly impact our impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.
In the fourth quarter of fiscal 2021, we performed the annual goodwill impairment test as of July 1, 2021. As of the testing date, the balance of our goodwill was $171 million, and all but $1 million of such balance was carried by two reporting units. We elected to first assess qualitative factors to determine whether the existence of events or circumstances led to a determination that it is more-likely-than-not that the estimated fair value of each reporting unit carrying goodwill is less than its carrying amount. As a result of the qualitative assessment, we concluded that it is not more-likely-than-not that the fair value of each reporting unit carrying goodwill is less than its carrying value as of the testing date, and, therefore, no further impairment testing was required.
Environmental Costs
We operate in industries that inherently possess environmental risks. To manage these risks, we employ both our own environmental staff and outside consultants. Environmental management and finance personnel meet regularly to discuss environmental risks. We estimate future costs for known environmental remediation requirements and accrue for them on an undiscounted basis when it is probable that we have incurred a liability and the related costs can be reasonably estimated but the timing of incurring the estimated costs is unknown. The regulatory and government management of these projects is complex, which is one of the primary factors that make it difficult to assess the cost of potential and future remediation. When only a wide range of estimated amounts can be reasonably established and no other amount within the range is better than any other, the low end of the range is recorded in the financial statements. If further developments or resolution of an environmental matter result in facts and circumstances that are significantly different than the assumptions used to develop these liabilities, the accrual for environmental remediation could be materially understated or overstated. Adjustments to these liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or when expenditures for which accruals are established are made. The factors we consider in the recognition and measurement of environmental liabilities include:
|
•
|
Current regulations, both at the time the liability is established and during the course of the investigation or remediation process, which specify standards for acceptable remediation;
|
|
•
|
Information about the site which becomes available as the site is studied and remediated;
|
|
•
|
The professional judgment of senior level internal staff and outside consultants, who take into account similar, recent instances of environmental remediation issues, and studies of our sites, among other considerations;
|
|
•
|
Available technologies that can be used for remediation; and
|
|
•
|
The number and financial condition of other potentially responsible parties and the extent of their responsibility for the costs of study and remediation.
|
46 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Our accrued environmental liabilities as of August 31, 2021 included $6 million related to the Portland Harbor Superfund site. Because the final remedial actions have not yet been designed and there has not been a determination of the amount of natural resource damages or of the allocation among the potentially responsible parties of costs of the investigations, remedial action costs, or natural resource damages, we believe it is not possible to reasonably estimate the amount or range of costs which we are likely or which it is reasonably possible that we may incur in connection with the Site, although such costs could be material to our financial position, results of operations, cash flows and liquidity. Therefore, no additional amounts have been accrued. Further, we have been notified that we are or may be a potentially responsible party at sites other than Portland Harbor which are currently or formerly owned or operated by us or at other sites where we may have responsibility for such costs due to past disposal or other activities. See “Contingencies – Environmental” in Note 9 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Income Taxes
Valuation Allowances
We assess the realizability of our deferred tax assets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies, and forecasts of taxable income. We consider all negative and positive evidence, including the weight of the evidence, to determine if valuation allowances against deferred tax assets are required. Due to the significant judgment involved, realizability of our deferred tax assets is considered a critical accounting estimate. We continue to maintain valuation allowances against certain state and Canadian deferred tax assets.
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 measure of our leverage, as cash and cash equivalents can be used, among other things, to repay indebtedness.
The following is a reconciliation of debt, net of cash (in thousands):
|
|
August 31, 2021
|
|
|
August 31, 2020
|
|
|
August 31, 2019
|
|
Short-term borrowings
|
|
$
|
3,654
|
|
|
$
|
2,184
|
|
|
$
|
1,321
|
|
Long-term debt, net of current maturities
|
|
|
71,299
|
|
|
|
102,235
|
|
|
|
103,775
|
|
Total debt
|
|
|
74,953
|
|
|
|
104,419
|
|
|
|
105,096
|
|
Less cash and cash equivalents
|
|
|
27,818
|
|
|
|
17,887
|
|
|
|
12,377
|
|
Total debt, net of cash
|
|
$
|
47,135
|
|
|
$
|
86,532
|
|
|
$
|
92,719
|
|
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 our borrowings (repayments) for the period because we believe it is useful for investors as a meaningful presentation of the change in debt.
The following is a reconciliation of net borrowings (repayments) of debt (in thousands):
|
|
Fiscal 2021
|
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
Borrowings from long-term debt
|
|
$
|
546,706
|
|
|
$
|
690,162
|
|
|
$
|
431,048
|
|
Repayments of long-term debt
|
|
|
(578,030
|
)
|
|
|
(698,492
|
)
|
|
|
(435,353
|
)
|
Net borrowings (repayments) of debt
|
|
$
|
(31,324
|
)
|
|
$
|
(8,330
|
)
|
|
$
|
(4,305
|
)
|
47 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Adjusted EBITDA, adjusted selling, general, and administrative expense, adjusted income from continuing operations attributable to SSI shareholders, and adjusted diluted earnings per share from continuing operations attributable to SSI shareholders
Management believes that providing these non-GAAP financial measures adds a meaningful presentation of our results from business operations excluding adjustments for legacy environmental matters (net of recoveries), business development costs not related to ongoing operations including pre-acquisition expenses, restructuring charges and other exit-related activities, charges related to non-ordinary course legal settlements, asset impairment charges (net of recoveries), and the income tax 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.
Following are reconciliations of net income (loss) to adjusted EBITDA, and adjusted selling, general, and administrative expense (in thousands):
|
|
Year Ended August 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Reconciliation of adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
169,975
|
|
|
$
|
(2,200
|
)
|
|
$
|
58,322
|
|
Loss from discontinued operations, net of tax
|
|
|
79
|
|
|
|
95
|
|
|
|
248
|
|
Interest expense
|
|
|
5,285
|
|
|
|
8,669
|
|
|
|
8,266
|
|
Income tax expense
|
|
|
37,935
|
|
|
|
166
|
|
|
|
17,670
|
|
Depreciation and amortization
|
|
|
58,599
|
|
|
|
58,173
|
|
|
|
53,336
|
|
Charges for legacy environmental matters, net(1)
|
|
|
13,773
|
|
|
|
4,097
|
|
|
|
2,419
|
|
Business development costs
|
|
|
2,155
|
|
|
|
1,619
|
|
|
|
—
|
|
Restructuring charges and other exit-related activities
|
|
|
1,008
|
|
|
|
8,993
|
|
|
|
365
|
|
Charges related to legal settlements(2)
|
|
|
400
|
|
|
|
73
|
|
|
|
2,330
|
|
Asset impairment charges, net
|
|
|
—
|
|
|
|
5,729
|
|
|
|
63
|
|
Adjusted EBITDA
|
|
$
|
289,209
|
|
|
$
|
85,414
|
|
|
$
|
143,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
242,463
|
|
|
$
|
187,876
|
|
|
$
|
191,405
|
|
Charges for legacy environmental matters, net(1)
|
|
|
(13,773
|
)
|
|
|
(4,097
|
)
|
|
|
(2,419
|
)
|
Business development costs
|
|
|
(2,155
|
)
|
|
|
(1,619
|
)
|
|
|
—
|
|
Charges related to legal settlements(2)
|
|
|
—
|
|
|
|
(73
|
)
|
|
|
(2,330
|
)
|
Adjusted
|
|
$
|
226,535
|
|
|
$
|
182,087
|
|
|
$
|
186,656
|
|
(1)
|
Legal and environmental charges, net of recoveries, for legacy environmental matters including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 9 - Commitments and Contingencies, "Portland Harbor" and "Other Legacy Environmental Loss Contingencies" in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
|
(2)
|
Charges related to legal settlements in fiscal 2021 relate to a claim by a utility provider for past charges, and in fiscal 2020 and fiscal 2019 relate to the settlement of a wage and hour class action lawsuit.
|
48 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Following are reconciliations of adjusted income (loss) from continuing operations attributable to SSI shareholders and adjusted diluted earnings (loss) per share from continuing operations attributable to SSI shareholders (in thousands, except per share data):
|
|
Year Ended August 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Income (loss) from continuing operations attributable to SSI shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
165,191
|
|
|
$
|
(4,050
|
)
|
|
$
|
56,593
|
|
Charges for legacy environmental matters, net(1)
|
|
|
13,773
|
|
|
|
4,097
|
|
|
|
2,419
|
|
Business development costs
|
|
|
2,155
|
|
|
|
1,619
|
|
|
|
—
|
|
Restructuring charges and other exit-related activities
|
|
|
1,008
|
|
|
|
8,993
|
|
|
|
365
|
|
Charges related to legal settlements(2)
|
|
|
400
|
|
|
|
73
|
|
|
|
2,330
|
|
Asset impairment charges, net
|
|
|
—
|
|
|
|
5,729
|
|
|
|
63
|
|
Income tax benefit allocated to adjustments(3)
|
|
|
(3,712
|
)
|
|
|
(4,494
|
)
|
|
|
(794
|
)
|
Adjusted
|
|
$
|
178,815
|
|
|
$
|
11,967
|
|
|
$
|
60,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share from continuing operations attributable to SSI shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
5.66
|
|
|
$
|
(0.15
|
)
|
|
$
|
2.01
|
|
Charges for legacy environmental matters, net, per share(1)
|
|
|
0.47
|
|
|
|
0.15
|
|
|
|
0.09
|
|
Business development costs, per share
|
|
|
0.07
|
|
|
|
0.06
|
|
|
|
—
|
|
Restructuring charges and other exit-related activities, per share
|
|
|
0.03
|
|
|
|
0.32
|
|
|
|
0.01
|
|
Charges related to legal settlements, per share(2)
|
|
|
0.01
|
|
|
|
—
|
|
|
|
0.08
|
|
Asset impairment charges, net, per share
|
|
|
—
|
|
|
|
0.21
|
|
|
|
—
|
|
Income tax benefit allocated to adjustments, per share(3)
|
|
|
(0.13
|
)
|
|
|
(0.16
|
)
|
|
|
(0.03
|
)
|
Adjusted(4)
|
|
$
|
6.13
|
|
|
$
|
0.43
|
|
|
$
|
2.16
|
|
(1)
|
Legal and environmental charges, net of recoveries, for legacy environmental matters including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 9 - Commitments and Contingencies, "Portland Harbor" and "Other Legacy Environmental Loss Contingencies" in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
|
(2)
|
Charges related to legal settlements in fiscal 2021 relate to a claim by a utility provider for past charges, and in fiscal 2020 and fiscal 2019 relate to the settlement of a wage and hour class action lawsuit.
|
(3)
|
Income tax allocated to the aggregate adjustments reconciling reported and adjusted income (loss) from continuing operations attributable to SSI shareholders and diluted earnings (loss) per share from continuing operations attributable to SSI shareholders is determined based on a tax provision calculated with and without the adjustments.
|
(4)
|
May not foot due to rounding.
|
49 / Schnitzer Steel Industries, Inc. Form 10-K 2021
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting includes policies and procedures that relate to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of the Company’s consolidated financial statements in accordance with generally accepted accounting principles and that the receipts and expenditures of the Company are being made only in accordance with authorization of the Company’s management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may deteriorate.
Management of the Company assessed the effectiveness of the Company’s internal control over financial reporting using the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its assessment, management determined that the Company’s internal control over financial reporting was effective as of August 31, 2021.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this Annual Report, also audited the effectiveness of the Company’s internal control over financial reporting as of August 31, 2021, as stated in their report included herein.
|
|
|
|
Tamara L. Lundgren
|
|
Richard D. Peach
|
Chairman, President and Chief Executive Officer
|
|
Executive Vice President, Chief Financial Officer and Chief Strategy Officer
|
October 21, 2021
|
|
October 21, 2021
|
51 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Schnitzer Steel Industries, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Schnitzer Steel Industries, Inc. and its subsidiaries (the “Company”) as of August 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income (loss), of equity and of cash flows for each of the three years in the period ended August 31, 2021, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of August 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of September 1, 2019 and the manner in which it accounts for revenue from contracts with customers as of September 1, 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
52 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Volume of Ferrous Metal Inventory
As described in Notes 2 and 4 to the consolidated financial statements, the Company’s processed and unprocessed scrap metal inventory was $165 million as of August 31, 2021, which includes processed and unprocessed ferrous metal inventory, among other types of inventory. The accounting process the Company uses to record ferrous scrap metal quantities relies on significant estimates. With respect to estimating the quantities of unprocessed ferrous scrap metal inventory that are moved into production, management relies on weighed quantities of the processed ferrous material, adjusted for estimated metal recoveries and yields that are based on historical trends and other judgments by management. Actual recoveries and yields can vary depending on product quality, moisture content, and the source of the unprocessed metal. The Company’s estimates are intended to reasonably reflect the quantities of unprocessed ferrous scrap metal that are used in the production of processed ferrous metal. To assist in validating the reasonableness of these estimates, management periodically reviews shrink factors and performs monthly physical inventories. Due to the inherent nature of the Company’s scrap metal inventories, including variations in product density, holding period, and production processes utilized to manufacture the products, physical inventories will not necessarily detect all variances for scrap metal inventory such that estimates of quantities are required. To mitigate this risk, the Company further adjusts its ferrous physical inventories when the volume of a commodity is low and a physical inventory count is deemed to more accurately estimate the remaining volume.
The principal considerations for our determination that performing procedures relating to the volume of ferrous metal inventory is a critical audit matter are (i) the significant judgment by management in the estimation of metal recoveries and yields specific to ferrous metal inventory volumes, and (ii) significant auditor judgment, subjectivity, and effort in performing our audit procedures and in evaluating audit evidence related to the estimates made by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation of metal recoveries and yields specific to ferrous metal inventory volumes. These procedures also included, among others, testing inventory quantities received, assessing the reasonableness of management’s estimated yields by comparing them to actual yields of ultimate inventory recoveries, testing ferrous metal inventory shipments including the volume ultimately recovered, observing management’s physical inventory counts, assessing rollforward activity between the time of the inventory counts and year-end, and considering whether evidence obtained in other areas of the audit is consistent with management’s estimates related to ferrous metal inventory volumes.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
October 21, 2021
We have served as the Company’s auditor since 1976, which includes periods before the Company became subject to SEC reporting requirements.
53 / Schnitzer Steel Industries, Inc. Form 10-K 2021
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Currency – U.S. Dollar)
|
|
August 31,
|
|
|
|
2021
|
|
|
2020
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,818
|
|
|
$
|
17,887
|
|
Accounts receivable, net
|
|
|
214,098
|
|
|
|
139,147
|
|
Inventories
|
|
|
256,427
|
|
|
|
157,269
|
|
Refundable income taxes
|
|
|
837
|
|
|
|
18,253
|
|
Prepaid expenses and other current assets
|
|
|
43,934
|
|
|
|
30,075
|
|
Total current assets
|
|
|
543,114
|
|
|
|
362,631
|
|
Property, plant and equipment, net
|
|
|
562,674
|
|
|
|
487,004
|
|
Operating lease right-of-use assets
|
|
|
131,221
|
|
|
|
140,584
|
|
Investments in joint ventures
|
|
|
12,844
|
|
|
|
10,057
|
|
Goodwill
|
|
|
170,304
|
|
|
|
169,627
|
|
Intangibles, net
|
|
|
3,980
|
|
|
|
4,585
|
|
Deferred income taxes
|
|
|
27,561
|
|
|
|
27,152
|
|
Other assets
|
|
|
42,665
|
|
|
|
28,287
|
|
Total assets
|
|
$
|
1,494,363
|
|
|
$
|
1,229,927
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
3,654
|
|
|
$
|
2,184
|
|
Accounts payable
|
|
|
179,917
|
|
|
|
106,676
|
|
Accrued payroll and related liabilities
|
|
|
69,622
|
|
|
|
41,436
|
|
Environmental liabilities
|
|
|
24,743
|
|
|
|
6,302
|
|
Operating lease liabilities
|
|
|
21,417
|
|
|
|
19,760
|
|
Accrued income taxes
|
|
|
3,521
|
|
|
|
—
|
|
Other accrued liabilities
|
|
|
49,976
|
|
|
|
47,306
|
|
Total current liabilities
|
|
|
352,850
|
|
|
|
223,664
|
|
Deferred income taxes
|
|
|
40,593
|
|
|
|
38,292
|
|
Long-term debt, net of current maturities
|
|
|
71,299
|
|
|
|
102,235
|
|
Environmental liabilities, net of current portion
|
|
|
52,385
|
|
|
|
47,162
|
|
Operating lease liabilities, net of current maturities
|
|
|
113,165
|
|
|
|
125,001
|
|
Other long-term liabilities
|
|
|
24,292
|
|
|
|
13,137
|
|
Total liabilities
|
|
|
654,584
|
|
|
|
549,491
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock – 20,000 shares $1.00 par value authorized, none issued
|
|
|
—
|
|
|
|
—
|
|
Class A common stock – 75,000 shares $1.00 par value authorized,
27,332 and 26,899 shares issued and outstanding
|
|
|
27,332
|
|
|
|
26,899
|
|
Class B common stock – 25,000 shares $1.00 par value authorized,
200 and 200 shares issued and outstanding
|
|
|
200
|
|
|
|
200
|
|
Additional paid-in capital
|
|
|
49,074
|
|
|
|
36,616
|
|
Retained earnings
|
|
|
793,712
|
|
|
|
649,863
|
|
Accumulated other comprehensive loss
|
|
|
(34,554
|
)
|
|
|
(36,871
|
)
|
Total SSI shareholders’ equity
|
|
|
835,764
|
|
|
|
676,707
|
|
Noncontrolling interests
|
|
|
4,015
|
|
|
|
3,729
|
|
Total equity
|
|
|
839,779
|
|
|
|
680,436
|
|
Total liabilities and equity
|
|
$
|
1,494,363
|
|
|
$
|
1,229,927
|
|
See Notes to the Consolidated Financial Statements.
54 / Schnitzer Steel Industries, Inc. Form 10-K 2021
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Currency – U.S. Dollar)
|
|
Year Ended August 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
2,758,551
|
|
|
$
|
1,712,343
|
|
|
$
|
2,132,781
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,305,357
|
|
|
|
1,503,725
|
|
|
|
1,858,535
|
|
Selling, general and administrative
|
|
|
242,463
|
|
|
|
187,876
|
|
|
|
191,405
|
|
(Income) from joint ventures
|
|
|
(4,006
|
)
|
|
|
(834
|
)
|
|
|
(1,452
|
)
|
Asset impairment charges, net
|
|
|
—
|
|
|
|
5,729
|
|
|
|
63
|
|
Restructuring charges and other exit-related activities
|
|
|
1,008
|
|
|
|
8,993
|
|
|
|
365
|
|
Operating income
|
|
|
213,729
|
|
|
|
6,854
|
|
|
|
83,865
|
|
Interest expense
|
|
|
(5,285
|
)
|
|
|
(8,669
|
)
|
|
|
(8,266
|
)
|
Other (expense) income, net
|
|
|
(455
|
)
|
|
|
(124
|
)
|
|
|
641
|
|
Income (loss) from continuing operations before income taxes
|
|
|
207,989
|
|
|
|
(1,939
|
)
|
|
|
76,240
|
|
Income tax expense
|
|
|
(37,935
|
)
|
|
|
(166
|
)
|
|
|
(17,670
|
)
|
Income (loss) from continuing operations
|
|
|
170,054
|
|
|
|
(2,105
|
)
|
|
|
58,570
|
|
Loss from discontinued operations, net of tax
|
|
|
(79
|
)
|
|
|
(95
|
)
|
|
|
(248
|
)
|
Net income (loss)
|
|
|
169,975
|
|
|
|
(2,200
|
)
|
|
|
58,322
|
|
Net income attributable to noncontrolling interests
|
|
|
(4,863
|
)
|
|
|
(1,945
|
)
|
|
|
(1,977
|
)
|
Net income (loss) attributable to SSI shareholders
|
|
$
|
165,112
|
|
|
$
|
(4,145
|
)
|
|
$
|
56,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to SSI shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share from continuing operations
|
|
$
|
5.90
|
|
|
$
|
(0.15
|
)
|
|
$
|
2.06
|
|
Net income (loss) per share
|
|
$
|
5.90
|
|
|
$
|
(0.15
|
)
|
|
$
|
2.05
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share from continuing operations
|
|
$
|
5.66
|
|
|
$
|
(0.15
|
)
|
|
$
|
2.01
|
|
Net income (loss) per share
|
|
$
|
5.66
|
|
|
$
|
(0.15
|
)
|
|
$
|
2.00
|
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,982
|
|
|
|
27,672
|
|
|
|
27,527
|
|
Diluted
|
|
|
29,193
|
|
|
|
27,672
|
|
|
|
28,222
|
|
See Notes to the Consolidated Financial Statements.
55 / Schnitzer Steel Industries, Inc. Form 10-K 2021
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Currency – U.S. Dollar)
|
|
Year Ended August 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
|
$
|
169,975
|
|
|
$
|
(2,200
|
)
|
|
$
|
58,322
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
2,575
|
|
|
|
1,505
|
|
|
|
(1,560
|
)
|
Pension obligations, net
|
|
|
(258
|
)
|
|
|
387
|
|
|
|
34
|
|
Total other comprehensive income (loss), net of tax
|
|
|
2,317
|
|
|
|
1,892
|
|
|
|
(1,526
|
)
|
Comprehensive income (loss)
|
|
|
172,292
|
|
|
|
(308
|
)
|
|
|
56,796
|
|
Less comprehensive income attributable to noncontrolling interests
|
|
|
(4,863
|
)
|
|
|
(1,945
|
)
|
|
|
(1,977
|
)
|
Comprehensive income (loss) attributable to SSI shareholders
|
|
$
|
167,429
|
|
|
$
|
(2,253
|
)
|
|
$
|
54,819
|
|
See Notes to the Consolidated Financial Statements.
56 / Schnitzer Steel Industries, Inc. Form 10-K 2021
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share amounts)
(Currency – U.S. Dollar)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
Total SSI
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
Interests
|
|
|
Equity
|
|
Balance as of September 1, 2018
|
|
|
26,502
|
|
|
$
|
26,502
|
|
|
|
200
|
|
|
$
|
200
|
|
|
$
|
36,929
|
|
|
$
|
639,684
|
|
|
$
|
(37,237
|
)
|
|
$
|
666,078
|
|
|
$
|
4,032
|
|
|
$
|
670,110
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,345
|
|
|
|
—
|
|
|
|
56,345
|
|
|
|
1,977
|
|
|
|
58,322
|
|
Other comprehensive loss, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,526
|
)
|
|
|
(1,526
|
)
|
|
|
—
|
|
|
|
(1,526
|
)
|
Distributions to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,677
|
)
|
|
|
(1,677
|
)
|
Share repurchases
|
|
|
(527
|
)
|
|
|
(527
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,556
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,083
|
)
|
|
|
—
|
|
|
|
(13,083
|
)
|
Restricted stock withheld for taxes
|
|
|
(278
|
)
|
|
|
(278
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,206
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,484
|
)
|
|
|
—
|
|
|
|
(7,484
|
)
|
Issuance of restricted stock
|
|
|
767
|
|
|
|
767
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(767
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Share-based compensation cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,300
|
|
|
|
—
|
|
|
|
17,300
|
|
Dividends ($0.75 per common share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,666
|
)
|
|
|
—
|
|
|
|
(20,666
|
)
|
|
|
—
|
|
|
|
(20,666
|
)
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,145
|
)
|
|
|
—
|
|
|
|
(4,145
|
)
|
|
|
1,945
|
|
|
|
(2,200
|
)
|
Other comprehensive income, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,892
|
|
|
|
1,892
|
|
|
|
—
|
|
|
|
1,892
|
|
Distributions to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,548
|
)
|
|
|
(2,548
|
)
|
Share repurchases
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(861
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(914
|
)
|
|
|
—
|
|
|
|
(914
|
)
|
Issuance of restricted stock
|
|
|
762
|
|
|
|
762
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(762
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restricted stock withheld for taxes
|
|
|
(274
|
)
|
|
|
(274
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,571
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,845
|
)
|
|
|
—
|
|
|
|
(5,845
|
)
|
Share-based compensation cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,110
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,110
|
|
|
|
—
|
|
|
|
10,110
|
|
Dividends ($0.75 per common share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,892
|
)
|
|
|
—
|
|
|
|
(20,892
|
)
|
|
|
—
|
|
|
|
(20,892
|
)
|
Balance as of August 31, 2020
|
|
|
26,899
|
|
|
|
26,899
|
|
|
|
200
|
|
|
|
200
|
|
|
|
36,616
|
|
|
|
649,863
|
|
|
|
(36,871
|
)
|
|
|
676,707
|
|
|
|
3,729
|
|
|
|
680,436
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
165,112
|
|
|
|
—
|
|
|
|
165,112
|
|
|
|
4,863
|
|
|
|
169,975
|
|
Other comprehensive income, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,317
|
|
|
|
2,317
|
|
|
|
—
|
|
|
|
2,317
|
|
Distributions to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,577
|
)
|
|
|
(4,577
|
)
|
Issuance of restricted stock
|
|
|
657
|
|
|
|
657
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(657
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restricted stock withheld for taxes
|
|
|
(224
|
)
|
|
|
(224
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,414
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,638
|
)
|
|
|
—
|
|
|
|
(5,638
|
)
|
Share-based compensation cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,529
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,529
|
|
|
|
—
|
|
|
|
18,529
|
|
Dividends ($0.75 per common share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,263
|
)
|
|
|
—
|
|
|
|
(21,263
|
)
|
|
|
—
|
|
|
|
(21,263
|
)
|
Balance as of August 31, 2021
|
|
|
27,332
|
|
|
$
|
27,332
|
|
|
|
200
|
|
|
$
|
200
|
|
|
$
|
49,074
|
|
|
$
|
793,712
|
|
|
$
|
(34,554
|
)
|
|
$
|
835,764
|
|
|
$
|
4,015
|
|
|
$
|
839,779
|
|
See Notes to the Consolidated Financial Statements.
57 / Schnitzer Steel Industries, Inc. Form 10-K 2021
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Currency – U.S. Dollar)
|
|
Year Ended August 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
169,975
|
|
|
$
|
(2,200
|
)
|
|
$
|
58,322
|
|
Adjustments to reconcile net income (loss) to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment charges, net of recoveries
|
|
|
—
|
|
|
|
5,729
|
|
|
|
63
|
|
Exit-related asset impairments
|
|
|
—
|
|
|
|
971
|
|
|
|
23
|
|
Depreciation and amortization
|
|
|
58,599
|
|
|
|
58,173
|
|
|
|
53,336
|
|
Inventory write-downs
|
|
|
—
|
|
|
|
—
|
|
|
|
775
|
|
Deferred income taxes
|
|
|
6,884
|
|
|
|
15,096
|
|
|
|
14,613
|
|
Undistributed equity in earnings of joint ventures
|
|
|
(4,006
|
)
|
|
|
(834
|
)
|
|
|
(1,452
|
)
|
Share-based compensation expense
|
|
|
18,213
|
|
|
|
10,033
|
|
|
|
17,300
|
|
Loss (gain) on the disposal of assets, net
|
|
|
717
|
|
|
|
530
|
|
|
|
(1,545
|
)
|
Unrealized foreign exchange loss (gain), net
|
|
|
127
|
|
|
|
(67
|
)
|
|
|
148
|
|
Credit loss, net
|
|
|
—
|
|
|
|
66
|
|
|
|
74
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(84,086
|
)
|
|
|
(2,252
|
)
|
|
|
9,478
|
|
Inventories
|
|
|
(88,622
|
)
|
|
|
39,226
|
|
|
|
33,466
|
|
Income taxes
|
|
|
22,789
|
|
|
|
(15,433
|
)
|
|
|
(1,158
|
)
|
Prepaid expenses and other current assets
|
|
|
(15,674
|
)
|
|
|
63
|
|
|
|
(859
|
)
|
Other long-term assets
|
|
|
(5,402
|
)
|
|
|
(216
|
)
|
|
|
1,167
|
|
Operating lease assets and liabilities
|
|
|
(813
|
)
|
|
|
334
|
|
|
|
—
|
|
Accounts payable
|
|
|
64,956
|
|
|
|
(7,971
|
)
|
|
|
(17,068
|
)
|
Accrued payroll and related liabilities
|
|
|
27,824
|
|
|
|
13,465
|
|
|
|
(19,117
|
)
|
Other accrued liabilities
|
|
|
613
|
|
|
|
7,148
|
|
|
|
(3,560
|
)
|
Environmental liabilities
|
|
|
12,895
|
|
|
|
1,602
|
|
|
|
(2,476
|
)
|
Other long-term liabilities
|
|
|
3,825
|
|
|
|
134
|
|
|
|
518
|
|
Distributed equity in earnings of joint ventures
|
|
|
1,250
|
|
|
|
1,000
|
|
|
|
2,692
|
|
Net cash provided by operating activities
|
|
|
190,064
|
|
|
|
124,597
|
|
|
|
144,740
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(118,866
|
)
|
|
|
(82,005
|
)
|
|
|
(94,613
|
)
|
Acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,553
|
)
|
Joint venture receipts, net
|
|
|
—
|
|
|
|
—
|
|
|
|
641
|
|
Proceeds from sale of assets
|
|
|
587
|
|
|
|
1,290
|
|
|
|
4,070
|
|
Deposit on land option
|
|
|
630
|
|
|
|
1,860
|
|
|
|
1,890
|
|
Net cash used in investing activities
|
|
|
(117,649
|
)
|
|
|
(78,855
|
)
|
|
|
(89,565
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from long-term debt
|
|
|
546,706
|
|
|
|
690,162
|
|
|
|
431,048
|
|
Repayments of long-term debt
|
|
|
(578,030
|
)
|
|
|
(698,492
|
)
|
|
|
(435,353
|
)
|
Payment of debt issuance costs
|
|
|
(23
|
)
|
|
|
(1,983
|
)
|
|
|
(102
|
)
|
Repurchase of Class A common stock
|
|
|
—
|
|
|
|
(914
|
)
|
|
|
(13,083
|
)
|
Taxes paid related to net share settlement of share-based payment awards
|
|
|
(5,638
|
)
|
|
|
(5,845
|
)
|
|
|
(7,484
|
)
|
Distributions to noncontrolling interests
|
|
|
(4,577
|
)
|
|
|
(2,548
|
)
|
|
|
(1,677
|
)
|
Dividends paid
|
|
|
(21,259
|
)
|
|
|
(20,884
|
)
|
|
|
(20,615
|
)
|
Net cash used in financing activities
|
|
|
(62,821
|
)
|
|
|
(40,504
|
)
|
|
|
(47,266
|
)
|
Effect of exchange rate changes on cash
|
|
|
337
|
|
|
|
272
|
|
|
|
(255
|
)
|
Net increase in cash and cash equivalents
|
|
|
9,931
|
|
|
|
5,510
|
|
|
|
7,654
|
|
Cash and cash equivalents as of beginning of year
|
|
|
17,887
|
|
|
|
12,377
|
|
|
|
4,723
|
|
Cash and cash equivalents as of end of year
|
|
$
|
27,818
|
|
|
$
|
17,887
|
|
|
$
|
12,377
|
|
See Notes to the Consolidated Financial Statements.
58 / Schnitzer Steel Industries, Inc. Form 10-K 2021
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
(Currency – U.S. Dollar)
|
|
Year Ended August 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,669
|
|
|
$
|
5,503
|
|
|
$
|
6,191
|
|
Income taxes, net
|
|
$
|
8,244
|
|
|
$
|
478
|
|
|
$
|
3,527
|
|
Schedule of noncash investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment included in liabilities
|
|
$
|
29,337
|
|
|
$
|
27,319
|
|
|
$
|
17,191
|
|
See Notes to the Consolidated Financial Statements.
59 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1 - Nature of Operations
Founded in 1906, Schnitzer Steel Industries, Inc., an Oregon corporation, is one of North America’s largest recyclers of ferrous and nonferrous metal, including end-of-life vehicles, and a manufacturer of finished steel products. Schnitzer Steel Industries, Inc. and its consolidated subsidiaries, together, are referred to as the Company.
The Company acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors, and brokers, and it procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores. Most of these auto parts stores supply the Company’s shredding facilities with auto bodies that are processed into saleable recycled metal products. In addition to the sale of recycled metal products processed at its facilities, the Company provides a variety of recycling and related services. The Company also produces a range of finished steel long products at its electric arc furnace (“EAF”) steel mill using recycled ferrous metal sourced internally from its recycling and joint venture operations and other raw materials.
As of August 31, 2021, all of the Company’s facilities were located in the United States (“U.S.”) and its territories and Canada.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include the accounts of Schnitzer Steel Industries, Inc. and its majority-owned and wholly-owned subsidiaries. The equity method of accounting is used for investments in joint ventures over which the Company has significant influence but does not have effective control. All significant intercompany account balances, transactions, profits, and losses have been eliminated. All transactions and relationships with variable interest entities are evaluated to determine whether the Company is the primary beneficiary of the entities, therefore requiring consolidation. The Company does not have any variable interest entities requiring consolidation.
Segment Reporting
The accounting standards for reporting information about operating segments define an operating segment as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses for which discrete financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.
Prior to the first quarter of fiscal 2021, the Company’s internal organizational and reporting structure included two operating and reportable segments: the Auto and Metals Recycling (“AMR”) business and the Cascade Steel and Scrap (“CSS”) business. In the first quarter of fiscal 2021, in accordance with 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.
Accounting Changes
As of the beginning of the first quarter of fiscal 2020, the Company adopted an accounting standards update that requires a lessee to recognize a lease liability and a lease right-of-use asset on its balance sheet for all leases greater than 12 months, including those classified as operating leases. The 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 less than $1 million, which is presented separately in the Consolidated Statements of Equity. Adoption using the modified retrospective transition method did not have an impact on any prior period earnings of the Company, and no comparative prior periods were adjusted for the new guidance. See Note 5 - Leases for the disclosures required under the new standard.
As of the beginning of the first quarter of fiscal 2019, the Company adopted an accounting standards update that clarifies the principles for recognizing revenue from contracts with customers. The Company adopted the accounting standard using the modified retrospective approach and recorded no cumulative-effect adjustment to the opening balance of retained earnings as of September 1, 2018. See Note 11 - Revenue for the disclosures required under the new standard.
60 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
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 $47 million and $20 million as of August 31, 2021 and 2020, respectively.
Accounts Receivable, net
Accounts receivable represent amounts primarily due from customers on product and other sales. These accounts receivable, which are reduced by an allowance for credit losses, are recorded at the invoiced amount and do not bear interest. The Company extends credit to customers under contracts containing customary and explicit payment terms, and payment is generally required within 30 to 60 days of shipment. Nonferrous export sales typically require a deposit prior to shipment. Historically, almost all of the Company’s ferrous export sales have been made with letters of credit. Ferrous and nonferrous metal sales to domestic customers and finished steel sales are generally made on open account, and a portion of these sales are covered by credit insurance.
The Company evaluates the collectibility of its accounts receivable based on a combination of factors, including whether sales were made pursuant to letters of credit. Management evaluates the aging of customer receivable balances, the financial condition of the Company’s customers, historical collection rates, and economic 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. The allowance for credit losses was $2 million as of both of August 31, 2021 and 2020.
Also included in accounts receivable are short-term advances to scrap metal suppliers used as a mechanism to acquire unprocessed scrap metal. The advances are generally repaid with scrap metal, as opposed to cash. Repayments of advances with scrap metal are treated as noncash operating activities in the Consolidated Statements of Cash Flows and totaled $10 million, $9 million, and $15 million for the fiscal years ended August 31, 2021, 2020, and 2019, respectively.
Inventories
The Company’s inventories consist of processed and unprocessed scrap metal (ferrous, nonferrous, and mixed nonferrous recovered joint products arising from the manufacturing process), semi-finished steel products (billets), finished steel products (primarily rebar, wire rod, and merchant bar), used and salvaged vehicles, and supplies. Inventories are stated at the lower of cost and net realizable value. The Company determines the cost of ferrous and nonferrous scrap metal inventories using the average cost method and capitalizes substantially all direct processing costs and facility costs into inventory. The Company allocates material and production costs to joint products using the gross margin method. The Company determines the cost of used and salvaged vehicle inventory at its auto parts stores, which is reported within finished goods, based on the average price the Company pays for a vehicle and capitalizes the vehicle cost and substantially all production costs into inventory. The Company determines the cost of its semi-finished and finished steel product inventories based on average costs and capitalizes all direct and indirect costs of manufacturing into inventory. Indirect costs of manufacturing include general plant costs, maintenance, and facility costs. The Company determines the cost of the substantial majority of its supplies inventory using the average cost method and reduces the carrying value for losses due to obsolescence. Fixed manufacturing costs incurred in periods of abnormally low production are expensed. The Company considers estimated future selling prices when determining the estimated net realizable value of its inventory. As the Company generally sells its recycled ferrous metal under contracts that provide for shipment within 30 to 60 days after the price is agreed, it utilizes the selling prices under committed contracts and sales orders for determining the estimated net realizable value of quantities on hand that will be shipped under these contracts and sales orders.
The accounting process the Company uses to record ferrous scrap metal quantities relies on significant estimates. With respect to estimating the quantities of unprocessed ferrous scrap metal inventory that are moved into production, management relies on weighed quantities of the processed ferrous material, adjusted for estimated metal recoveries and yields that are based on historical trends and other judgments by management. Actual recoveries and yields can vary depending on product quality, moisture content, and the source of the unprocessed metal. The Company’s estimates are intended to reasonably reflect the quantities of unprocessed ferrous scrap metal that are used in the production of processed ferrous metal. To assist in validating the reasonableness of these estimates, management periodically reviews shrink factors and performs monthly physical inventories. Due to the inherent nature of the Company’s scrap metal inventories, including variations in product density, holding period, and production processes utilized to manufacture the products, physical inventories will not necessarily detect all variances for scrap metal inventory such that estimates of quantities are required. To mitigate this risk, the Company further adjusts its ferrous physical inventories when the volume of a commodity is low and a physical inventory count is deemed to more accurately estimate the remaining volume.
61 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Leases
The Company enters into leases to obtain access to real property, machinery, and equipment assets. Most of the Company’s lease obligations relate to real property leases for the Company’s operating sites, including the substantial majority of its auto parts stores, and for the Company’s administrative offices. The Company determines whether an arrangement contains a lease at inception by assessing whether it receives the right to direct the use of and obtain substantially all of the economic benefit from use of the underlying asset. Lease classification, measurement, and recognition are determined at lease commencement, which is the date the underlying asset is available for use by the Company. The accounting classification of a lease is based on whether the arrangement is effectively a financed purchase of the underlying asset (finance lease) or not (operating lease). Leases that, at lease commencement, have a non-cancellable lease term of 12 months or less and do not include an option to either purchase the underlying asset or renew the lease beyond 12 months that the Company is reasonably certain to exercise are classified as short-term leases and are not recognized on the balance sheet.
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 of September 1, 2019. Right-of-use assets and lease liabilities are subject to remeasurement after lease commencement when certain events or changes in circumstances arise, such as a change in the lease term due to reassessment of whether the Company is reasonably certain to exercise a renewal or termination option.
For operating leases, lease expense is recognized on a straight-line basis over the lease term. For finance leases, the lease right-of-use asset is amortized on a straight-line basis and interest expense is recognized on the lease liability using the effective interest rate method. Many of the Company’s real property leases contain variable lease payments that depend on an index or a rate, which are included in the measurement of the right-of-use asset and lease liability using the index or rate at lease commencement, 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. See Note 5 - Leases for further detail.
The Company leases machinery assets to customers primarily to facilitate the provision of recycling services. For the periods presented, such lessor arrangements were classified as operating leases, whereby the Company keeps the asset underlying the lease on its balance sheet and depreciates the asset based on its estimated useful life. The Company recognizes lease income for these operating leases on a straight-line basis within revenues in the Consolidated Statements of Operations. As of August 31, 2021 and 2020, property, plant and equipment, net, as reported in the Consolidated Balance Sheets, included machinery assets underlying these operating leases with a carrying value of $11 million and $3 million, respectively. Lease income derived from these operating leases was not material to any of the periods presented.
Property, Plant and Equipment, net
Property, plant and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, while routine repair and maintenance costs are expensed as incurred. Interest cost related to the construction of qualifying assets is capitalized as part of the construction costs and was not material to any of the periods presented. When assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and resulting gains or losses are generally included in operating expense. Gains and losses from sales of assets related to an exit activity are reported within restructuring charges and other exit-related activities in the Consolidated Statements of Operations. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets. Upon idling an asset, depreciation continues to be recorded. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease term.
62 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
As of August 31, 2021, the useful lives used for depreciation and amortization were as follows:
|
|
Useful Life
(in years)
|
Machinery and equipment
|
|
3 to 40
|
Land improvements
|
|
3 to 35
|
Buildings and leasehold improvements
|
|
5 to 40
|
Enterprise Resource Planning (“ERP”) systems
|
|
6 to 17
|
Office equipment and other software licenses
|
|
3 to 10
|
Prepaid Expenses
The Company’s prepaid expenses, reported within prepaid expenses and other current assets in the Consolidated Balance Sheets, totaled $22 million and $23 million as of August 31, 2021 and 2020, respectively, and consisted primarily of prepaid insurance, deposits on capital projects, prepaid services, and prepaid property taxes.
Other Assets
The Company’s other assets, exclusive of prepaid expenses and assets relating to certain employee benefit plans, consisted primarily of receivables from insurers, capitalized implementation costs for cloud computing arrangements, major spare parts and equipment, cash held in a client trust account relating to a legal settlement, an equity investment, debt issuance costs, and notes and other contractual receivables. Other assets are reported within either prepaid expenses and other current assets or other assets in the Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle of one year from the reporting date. See Note 12 – Employee Benefits for further detail on the Company’s assets relating to employee benefit plans.
Receivables from insurers represent the portion of insured losses expected to be recovered from the Company’s insurance carriers. The receivable is recorded at an amount not to exceed the recorded loss and only if the terms of legally enforceable insurance contracts support that the insurance recovery will not be disputed and is deemed collectible. Receivables from insurers totaled $21 million and $5 million as of August 31, 2021 and 2020, respectively. As of August 31, 2021, receivables from insurers comprised primarily $10 million relating to property damage and other claims in connection with the May 2021 fire at the Company’s melt shop operations, $6 million relating to environmental claims, and $4 million relating to workers’ compensation claims. As of August 31, 2020, receivables from insurers comprised primarily $4 million relating to workers’ compensation claims. See “Accounting for Impacts of Steel Mill Fire” below in this Note for further discussion of receivables from insurers relating to property damage and business interruption claims.
Other assets as of August 31, 2021 also included approximately $7.6 million in cash deposited into a client trust account in the second quarter of fiscal 2021 to fund the remediation of a site a portion of which was previously leased to and operated by an indirect, wholly-owned subsidiary. The cash was deposited into the client trust account by other potentially liable parties in connection with settlement of a lawsuit relating to allocation of the remediation costs, including agreement by the Company’s subsidiary to perform certain remedial actions. See “Other Legacy Environmental Loss Contingencies” within “Contingencies – Environmental” in Note 9 - Commitments and Contingencies for further discussion of this matter.
The Company invested $6 million in the equity of a privately-held waste and recycling entity in fiscal 2017. The equity investment does not have a readily determinable fair value and, therefore, is carried at cost and adjusted for impairments and observable price changes. The investment is reported within other assets in the Consolidated Balance Sheets. The carrying value of the investment was $6 million as of August 31, 2021 and 2020. The Company has not recorded any impairments or upward or downward adjustments to the carrying value of the investment since acquisition.
The Company’s cloud computing arrangements primarily comprise hosting arrangements which are service contracts, whereby the Company gains remote access to use enterprise software hosted by the vendor or another third party on an as-needed basis for a period of time in exchange for a subscription fee. Subscription fees are usually prepaid and recorded in operating expense over the period that the Company has access to use the software. Implementation costs for cloud computing arrangements are capitalized if certain criteria are met and consist of internal and external costs directly attributable to developing and configuring cloud computing software for its intended use. Amortization of capitalized implementation costs is recorded on a straight-line basis over the term of the cloud computing arrangement, which is the non-cancellable period of the agreement, together with periods covered by renewal options which the Company is reasonably certain to exercise.
63 / Schnitzer Steel Industries, Inc. Form 10-K 2021
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Debt issuance costs consist primarily of costs incurred by the Company to enter or modify its credit facilities. The Company reports deferred debt issuance costs within other assets in the Consolidated Balance Sheets and amortizes them to interest expense on a straight-line basis over the contractual term of the arrangement.
Notes and other contractual receivables consist primarily of advances to entities in the business of extracting scrap metal through demolition and other activities. Repayment of these advances to suppliers is in either cash or scrap metal. The Company performs periodic reviews of its notes and other contractual receivables to identify credit risks and to assess the overall collectibility of the receivables, which typically involves consideration of the value of collateral which in the case of advances to suppliers is generally in the form of scrap metal extracted from demolition and construction projects. A note or other contractual receivable is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the agreement. If the carrying value of the receivable exceeds its recoverable amount, an impairment is recorded for the difference.
Accounting for Impacts of Steel Mill Fire
Assets destroyed or damaged as a result of involuntary events are written off or reduced in carrying value to their salvage value. When recovery of all or a portion of the amount of property damage loss or other covered expenses through insurance proceeds is demonstrated to be probable, a receivable is recorded and offsets the loss or expense up to the amount of the total loss or expense. No gain is recorded until all contingencies related to the insurance claim have been resolved.
On May 22, 2021, the Company experienced a fire at its steel mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill’s melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. The rolling mill production ceased in early June 2021. In August 2021, the steel mill began ramping up production following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. Impacts on business income are expected to continue during the ramp-up phase and may continue thereafter. The Company filed initial insurance claims for the property that experienced physical loss or damage and business income losses resulting from the matter. In the fourth quarter of fiscal 2021, the Company recognized an initial $10 million insurance receivable and related insurance recovery gain, reported within prepaid expenses and other current assets in the Consolidated Balance Sheets and within cost of goods sold in the Consolidated Statements of Operations, respectively, primarily offsetting applicable losses including capital purchases of $10 million that had been incurred by the Company as of August 31, 2021. See “Steel Mill Fire” in Note 18 – Subsequent Events for disclosure of a subsequent event related to this matter.
Long-Lived Assets
The Company tests long-lived tangible and intangible assets for impairment at the asset group level, which is determined based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Operating lease right-of-use assets are considered long-lived assets subject to this impairment testing. 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. For the Company’s metals recycling operations, an asset group generally consists of the regional shredding and export operation along with surrounding feeder operations, except that the combined Oregon metals recycling and steel manufacturing operations is a single asset group. For regions with no shredding and export operations, each metals recycling facility is an asset group. For the Company’s auto parts operations, generally each auto parts store is an asset group. The Company tests its asset groups for impairment when certain triggering events or changes in circumstances indicate that the carrying value of the asset group may be impaired. If the carrying value of the asset group is not recoverable because it exceeds the Company’s estimate of future undiscounted cash flows from the use and eventual disposition of the asset group, an impairment loss is recognized by the amount the carrying value exceeds its fair value, if any. The impairment loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value. Fair value is determined using one or more of the income, market, or cost approaches, depending on the nature of the asset group.
With respect to individual long-lived assets, changes in circumstances may merit a change in the estimated useful lives or salvage values of the assets, which are accounted for prospectively in the period of change. For such assets, the useful life is shortened based on the Company’s plans to dispose of or abandon the asset before the end of its original useful life and depreciation is accelerated beginning when that determination is made.
64 / Schnitzer Steel Industries, Inc. Form 10-K 2021
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Long-lived asset impairment charges (recoveries) and accelerated depreciation are reported in the Consolidated Statements of Operations within (1) asset impairment charges, net and (2) restructuring charges and other exit-related activities if related to a site closure. During fiscal 2020, the Company reported $6 million of such items within asset impairment charges, net, comprising primarily $2 million related to abandonment of obsolete machinery and equipment assets, $2 million related to impairment of two auto parts stores, and $2 million related to accelerated depreciation due to the shortening of the useful lives of certain metals recovery assets.
Investments in Joint Ventures
As of August 31, 2021, the Company had two 50%-owned joint venture interests which were accounted for under the equity method of accounting. One of the joint ventures sells recycled metal to the Company’s operations at prices that approximate local market rates, which produces intercompany profit. This intercompany profit is eliminated while the products remain in inventory and is not recognized until the finished products are sold to third parties. As of August 31, 2021, the Company’s investments in equity method joint ventures have generated $11 million in cumulative undistributed earnings.
A loss in value of an investment in a joint venture is recognized when the decline is other than temporary. Management considers all available evidence to evaluate the realizable value of its investments including the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the joint venture business, and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. Once management determines that an other-than-temporary impairment exists, the investment is written down to its fair value, which establishes a new cost basis. The Company determines fair value using Level 3 inputs under the fair value hierarchy using an income approach based on a discounted cash flow analysis. See Note 17 - Related Party Transactions for further detail on transactions with joint ventures.
Goodwill and Other Intangible Assets, net
Goodwill represents the excess of the purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. Impairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is required to be identified as a reporting unit if the component is a business for which discrete financial information is available and segment management regularly reviews its operating results.
When testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more-likely-than-not, the Company is then required to perform the quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. When performing the quantitative impairment test, the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
When the Company performs a quantitative goodwill impairment test, it estimates the fair value of the reporting unit using an income approach based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital (“WACC”) determined separately for the reporting unit. The determination of fair value involves the use of estimates and assumptions, including revenue growth rates driven by future ferrous and nonferrous commodity price and sales volume expectations, gross margins, selling, general, and administrative expense relative to total revenues, capital expenditures, working capital requirements, discount rate (WACC), tax rate, terminal growth rate, benefits associated with a taxable transaction, and synergistic benefits available to market participants. In addition, to corroborate the reporting units’ valuation, the Company uses a market approach based on earnings multiple data and a reconciliation of the Company’s estimate of the aggregate fair value of all reporting units to the Company’s market capitalization, including consideration of a control premium. The Company did not record goodwill impairment charges in any of the periods presented.
The Company tests indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If the Company believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The Company did not record impairment charges on indefinite-lived intangible assets in any of the periods presented. See Note 7 - Goodwill and Other Intangible Assets, net for further detail.
65 / Schnitzer Steel Industries, Inc. Form 10-K 2021
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Business Acquisitions
The Company recognizes the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. Within one year from the date of acquisition, the Company may update the value allocated to the assets acquired and liabilities assumed and the resulting goodwill balance as a result of information received regarding the valuation of such assets and liabilities that was not available at the time of purchase. Measuring assets and liabilities at fair value requires the Company to determine the price that would be paid by a third-party market participant based on the highest and best use of the assets or interests acquired. Acquisition costs are expensed as incurred.
The Company acquired certain assets of an auto recycling business in northern California in fiscal 2019. The acquisition was not material to the Company’s financial position or results of operations. Pro forma operating results for the acquisition are not presented because the aggregate results would not be significantly different than reported results. There were no business acquisitions completed in fiscal 2021 or 2020. See “Acquisition of Columbus Recycling” in Note 18 – Subsequent Events for disclosure of a subsequent event related to business acquisitions.
Restructuring Charges and Other Exit-Related Activities
Restructuring charges consist of severance, contract termination, and other restructuring-related costs. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. A liability for contract termination or other restructuring-related costs is measured at its fair value in the period in which the liability is incurred. Exit-related activities consist primarily of asset impairments in connection with closure of certain operations and sites, net of gains on exit-related disposals.
Accrued Workers’ Compensation Costs
The Company is self-insured for the significant majority of workers’ compensation claims with exposure limited by various stop-loss insurance policies. The Company estimates the costs of workers’ compensation claims based on the nature of the injury incurred and on guidelines established by the applicable state. An accrual is recorded based upon the amount of unpaid claims as of the balance sheet date. Accrued amounts recorded for individual claims are reviewed periodically as treatment progresses and adjusted to reflect additional information that becomes available. The estimated cost of claims incurred but not reported is included in the accrual. The Company accrued $7 million and $8 million for the estimated cost of unpaid workers’ compensation claims as of August 31, 2021 and 2020, respectively, which are included in other accrued liabilities in the Consolidated Balance Sheets, with corresponding workers’ compensation insurance receivables of $4 million as of each of August 31, 2021 and 2020 included in other current assets.
Environmental Liabilities
The Company estimates future costs for known environmental remediation requirements and accrues for them on an undiscounted basis when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated but the timing of incurring the estimated costs is unknown. The Company considers various factors when estimating its environmental liabilities, and it evaluates the adequacy of these liabilities on a quarterly basis. Adjustments to the liabilities are recorded to selling, general, and administrative expense in the Consolidated Statements of Operations 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. Legal investigation and defense costs incurred in connection with environmental contingencies are expensed as incurred.
When only a wide range of estimated amounts can be reasonably established and no other amount within the range is a better estimate than another, the low end of the range is recorded in the financial statements. In a number of cases, it is possible that the Company may receive reimbursement through insurance or from other third parties for a site or matter. In these situations, recoveries of environmental remediation costs from other parties are recognized when realization of the claim for recovery is deemed probable. The amounts recorded for environmental liabilities are reviewed periodically as assessment and remediation progresses at individual sites or for particular matters and adjusted to reflect additional information that becomes available. Due to evolving remediation technology, changing regulations, possible third-party contributions, the subjective nature of the assumptions used, and other factors, amounts accrued could vary significantly from amounts paid. See “Contingencies – Environmental” in Note 9 - Commitments and Contingencies for further detail.
66 / Schnitzer Steel Industries, Inc. Form 10-K 2021
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Loss Contingencies
The Company is subject to certain legal proceedings and contingencies in addition to those related to environmental liabilities discussed above in this Note, the outcomes of which are subject to significant uncertainty. The Company accrues for estimated losses if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company uses judgment and evaluates whether a loss contingency arising from litigation or an unasserted claim should be disclosed or recorded. The outcome of legal proceedings and other contingencies is inherently uncertain and often difficult to estimate. Accrued legal contingencies are reported within other accrued liabilities in the Consolidated Balance Sheets. See “Contingencies – Other” in Note 9 - Commitments and Contingencies for further detail.
Financial Instruments
The Company’s financial instruments include primarily cash and cash equivalents, accounts receivable, accounts payable, and debt. The Company uses the market approach to value its financial assets and liabilities, determined using available market information. The net carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments. For long-term debt, which is primarily at variable interest rates, fair value is estimated using observable inputs (Level 2) and approximates the carrying value.
Fair Value Measurements
Fair value is measured using inputs from the three levels of the fair value hierarchy. Classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are described as follows:
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•
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Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities.
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•
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Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the determination of the fair value of the asset or liability, either directly or indirectly.
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•
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Level 3 – Unobservable inputs that are significant to the determination of the fair value of the asset or liability.
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When developing fair value measurements, the Company uses quoted market prices whenever available or seeks to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available.
Derivatives
Derivative contracts for commodities used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases and normal sales. Contracts that qualify as normal purchases or normal sales are not marked-to-market. The Company does not use derivative instruments for trading or speculative purposes.
Foreign Currency Translation and Transactions
Assets and liabilities of the Company’s operations in Canada are translated into U.S. dollars at the period-end exchange rate, revenues and expenses of these operations are translated into U.S. dollars at the average exchange rate for the period, and cash flows of these operations are translated into U.S. dollars using the exchange rates in effect at the time of the cash flows. Translation adjustments are not included in determining net income for the period, but are recorded in accumulated other comprehensive income, a separate component of shareholders’ equity. Foreign currency transaction gains and losses are generated from the effects of exchange rate changes on transactions denominated in a currency other than the functional currency. Gains and losses on foreign currency transactions are generally included in determining net income for the period. The Company reports these gains and losses within other income (expense), net in the Consolidated Statements of Operations. Net realized and unrealized foreign currency transaction gains and losses were not material for fiscal 2021, 2020, or 2019.
Common Stock
Each share of Class A and Class B common stock is entitled to one vote. Additionally, each share of Class B common stock may be converted to one share of Class A common stock. As such, the Company reserves one share of Class A common stock for each share of Class B common stock outstanding. There are currently no meaningful distinctions between the rights of holders of Class A shares and Class B shares.
67 / Schnitzer Steel Industries, Inc. Form 10-K 2021
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Share Repurchases
The Company accounts for the repurchase of stock at par value. All shares repurchased are deemed retired. Upon retirement of the shares, the Company records the difference between the weighted average cost of such shares and the par value of the stock as an adjustment to additional paid-in capital, with the excess recorded to retained earnings when additional paid-in capital is not sufficient.
Revenue Recognition
The Company recognizes revenue upon satisfying its promises to transfer goods or services to customers under the terms of its contracts. Nearly all of these promises, referred to as performance obligations, consist of the transfer of physical goods, including recycled ferrous and nonferrous metal, auto bodies, auto parts, and finished steel products, to customers. These performance obligations are satisfied at the point in time the Company transfers control of the goods to the customer, which in nearly all cases is when title to and risk of loss of the goods transfer to the customer. The timing of transfer of title and risk of loss is dictated by customary or explicitly stated contract terms. For example, the Company recognizes revenue on partially loaded bulk shipments of recycled ferrous metal when contractual terms support revenue recognition based on transfer of title and risk of loss. The significant majority of the Company’s sales involve transfer of control to the customer, and thus revenue recognition, before delivery to the customer’s destination; for example, upon release of the goods to the shipper. The Company’s bill-and-hold arrangements involve transfer of control to the customer when the goods have been segregated from other inventory at the Company’s facility and are ready for physical transfer to the customer. Shipping and handling activities that occur after a customer has obtained control of a good are accounted for as fulfillment costs rather than an additional promise in a contract. As such, shipping and handling consideration (freight revenue) is recognized when control of the goods transfers to the customer, and freight expense is accrued to cost of goods sold when the related revenue is recognized.
In certain regional markets, the Company enters into contracts whereby it arranges for, or brokers, the transfer of recyclable material between suppliers and end customers. For transactions in which the Company obtains substantive control of the material before the goods are transferred to the end customer, for example by arranging for the processing or warehousing of the material, the Company recognizes revenue equal to the gross amount of the consideration it expects to receive from the customer (as principal). Alternatively, for transactions in which the Company does not obtain substantive control of the material before the product is transferred to the end customer, the Company recognizes revenue equal to the net amount of the consideration it expects to retain after paying the supplier for the purchase of the material (as agent). The Company is the agent in the transaction for the substantial majority of brokerage arrangements.
Nearly all of the Company’s sales contracts reflect market pricing at the time the contract is executed, are one year or less, and generally provide for shipment within 30 to 60 days after the price has been agreed upon with the customer. The Company’s retail auto parts sales are at listed prices and are recognized at the point of sale.
The Company recognizes revenue based on contractually stated selling prices and quantities shipped, net of sales tax, and adjusted for estimated claims and discounts. Claims are customary in the recycled metal industry and arise from variances in the quantity or quality of delivered products. Revenue adjustments may be required if the settlement of claims exceeds original estimates. Discounts offered to certain finished steel customers qualify as variable consideration as the discounts are contingent upon future events. Variable consideration arising from discounts is recognized upon the transfer of finished steel products to customers based upon either the expected value or the most likely amount and was not material for each of the years ended August 31, 2021, 2020, and 2019. The Company experiences very few sales returns and, therefore, no material provisions for returns have been made when sales are recognized. For each of the years ended August 31, 2021, 2020, and 2019, revenue adjustments related to performance obligations that were satisfied in previous periods were not material.
Advertising Costs
The Company expenses advertising costs when incurred. Advertising expense for the years ended August 31, 2021, 2020, and 2019 was $6 million, $5 million, and $6 million, respectively.
68 / Schnitzer Steel Industries, Inc. Form 10-K 2021
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Share-Based Compensation
The Company estimates the grant-date fair value of stock-based compensation awards based on the market closing price of the underlying Class A common stock on the date of grant, except for performance share awards with a total shareholder return (“TSR”) market performance metric for which the Company estimates the grant-date fair value using a Monte-Carlo simulation model. The Company recognizes compensation cost for all awards, net of estimated forfeitures, over the requisite service period. Share-based compensation cost is based on the grant-date fair value as described above, except for performance share awards with a non-market return on capital employed (“ROCE") performance metric. For these awards, compensation cost is based on the probable outcome of achieving the specified performance conditions. The Company reassesses whether achievement of the ROCE performance metric is probable at each reporting date and, if probable, the level of achievement. See Note 13 - Share-Based Compensation for further detail.
Income Taxes
Income taxes are accounted for using the asset and liability method. This requires the recognition of taxes currently payable or refundable and the recognition of deferred tax assets and liabilities for the future tax consequences of events that are recognized in one reporting period in the Consolidated Financial Statements but in a different reporting period on the tax returns. Tax credits are recognized as a reduction of income tax expense in the year the credit arises. Valuation allowances are recorded to reduce deferred tax assets when it is more-likely-than-not that a tax benefit will not be realized. The Company assesses the realizability of its deferred tax assets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies, and forecasts of taxable income. The Company considers all negative and positive evidence, including the weight of the evidence, to determine if valuation allowances against deferred tax assets are required. Tax benefits arising from uncertain tax positions are recognized when it is more-likely-than-not that the position will be sustained upon examination by the relevant tax authorities. The amount recognized in the financial statements is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. See Note 14 - Income Taxes for further detail.
Net Income (Loss) Per Share
Basic net income (loss) per share attributable to SSI shareholders is computed by dividing net income (loss) attributable to SSI shareholders by the weighted average number of outstanding common shares during the period presented including vested deferred stock units (“DSUs”) and restricted stock units (“RSUs”) meeting certain criteria. Diluted net income (loss) per share attributable to SSI shareholders is computed by dividing net income (loss) attributable to SSI shareholders by the weighted average number of common shares outstanding, assuming dilution. Potentially dilutive common shares include the assumed vesting of performance share, RSU, and DSU awards using the treasury stock method. Net income attributable to noncontrolling interests is deducted from income (loss) from continuing operations to arrive at income (loss) from continuing operations attributable to SSI shareholders for the purpose of calculating income (loss) per share from continuing operations attributable to SSI shareholders. See Note 16 - Net Income (Loss) Per Share for further detail.
Use of Estimates
The preparation of the Company’s Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of revenue and expenses during the reporting period. Examples include revenue recognition; the allowance for credit losses; estimates of contingencies, including environmental liabilities and other legal liabilities; goodwill, long-lived asset and indefinite-lived intangible asset valuation; valuation of equity investments; valuation of certain share-based awards; other asset valuation; inventory measurement and valuation; pension plan assumptions; and the assessment of the valuation of deferred income taxes and income tax contingencies. Actual results may differ from estimated amounts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The majority of cash and cash equivalents is maintained with major financial institutions. Balances with these and certain other institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250 thousand as of August 31, 2021. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up the Company’s customer base. The Company controls credit risk through credit approvals, credit limits, credit insurance, letters of credit or other collateral, cash deposits, and monitoring procedures.
69 / Schnitzer Steel Industries, Inc. Form 10-K 2021
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Note 3 - Recent Accounting Pronouncements
The Company does not expect that its adoption in the future of any recently issued accounting pronouncements will have a material impact on its consolidated financial statements.
Note 4 - Inventories
Inventories consisted of the following as of August 31 (in thousands):
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|
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2021
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|
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2020
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Processed and unprocessed scrap metal
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$
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164,960
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|
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$
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63,058
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Semi-finished goods
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|
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7,671
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|
|
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6,909
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Finished goods
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|
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39,368
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|
|
|
44,476
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|
Supplies
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|
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44,428
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|
|
|
42,826
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Inventories
|
|
$
|
256,427
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|
|
$
|
157,269
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|
Note 5 - Leases
The Company’s operating leases for real property underlying certain auto parts stores, metals recycling facilities, and administrative offices generally have non-cancellable lease terms of 5 to 10 years, and the significant majority contain multiple renewal options for a further 5 to 20 years. Renewal options which the Company is reasonably certain to exercise are included in the measurement of lease term. The Company’s finance leases and other operating leases involve primarily transportation equipment assets, have non-cancellable lease terms of less than 10 years and usually do not include renewal options.
The Company’s fiscal 2021 total lease cost was $30 million, consisting primarily of operating lease expense of $24 million and short-term lease expense of $5 million. The Company’s fiscal 2020 total lease cost was $28 million, consisting primarily of operating lease expense of $23 million and short-term lease expense of $4 million. The other components of the Company’s total lease cost for each of fiscal 2021 and 2020, including finance lease amortization and interest expense, variable lease expense, and sublease income, were not material both individually and in aggregate. The substantial majority of the Company’s total lease cost for each of fiscal 2021 and 2020 is presented within cost of goods sold in the Consolidated Statements of Operations. Rent expense was $27 million for fiscal 2019.
Finance lease assets and liabilities consisted of the following as of August 31 (in thousands):
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Balance Sheet Classification
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2021
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2020
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Assets:
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|
|
|
|
|
|
|
|
|
|
Finance lease right-of-use assets(1)
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|
Property, plant and equipment, net
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|
$
|
5,422
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|
|
$
|
6,274
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|
Liabilities:
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|
|
|
|
|
|
|
|
|
|
Finance lease liabilities - current
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|
Short-term borrowings
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|
$
|
1,464
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|
|
$
|
1,341
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|
Finance lease liabilities - noncurrent
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|
Long-term debt, net of current maturities
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|
|
5,127
|
|
|
|
6,167
|
|
Total finance lease liabilities
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|
|
|
$
|
6,591
|
|
|
$
|
7,508
|
|
(1)
|
Presented net of accumulated amortization of $2 million and $1 million as of August 31, 2021 and 2020, respectively.
|
The weighted average remaining lease terms and weighted average discount rates for the Company’s leases as of August 31:
|
|
2021
|
|
|
2020
|
|
|
|
|
Weighted Average
Remaining Lease
Term (Years)
|
|
|
Weighted Average
Discount Rate
|
|
|
Weighted Average
Remaining Lease
Term (Years)
|
|
|
Weighted Average
Discount Rate
|
|
|
Operating leases
|
|
|
9.7
|
|
|
|
3.37
|
%
|
|
|
10.2
|
|
|
|
3.37
|
%
|
|
Finance leases
|
|
|
5.2
|
|
|
|
7.78
|
%
|
|
|
6.0
|
|
|
|
8.22
|
%
|
|
70 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Maturities of lease liabilities by fiscal year as of August 31, 2021 were as follows (in thousands):
Year Ending August 31,
|
|
Finance Leases
|
|
|
Operating Leases
|
|
2022
|
|
$
|
1,865
|
|
|
$
|
25,519
|
|
2023
|
|
|
1,792
|
|
|
|
24,021
|
|
2024
|
|
|
1,498
|
|
|
|
20,000
|
|
2025
|
|
|
714
|
|
|
|
14,703
|
|
2026
|
|
|
595
|
|
|
|
11,351
|
|
Thereafter
|
|
|
1,286
|
|
|
|
64,784
|
|
Total lease payments
|
|
|
7,750
|
|
|
|
160,378
|
|
Less amounts representing interest
|
|
|
(1,159
|
)
|
|
|
(25,796
|
)
|
Total lease liabilities
|
|
|
6,591
|
|
|
|
134,582
|
|
Less current maturities
|
|
|
(1,464
|
)
|
|
|
(21,417
|
)
|
Lease liabilities, net of current maturities
|
|
$
|
5,127
|
|
|
$
|
113,165
|
|
Supplemental cash flow information and non-cash activity related to leases are as follows (in thousands):
|
|
Year Ended August 31,
|
|
|
|
2021
|
|
|
2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
24,154
|
|
|
$
|
22,225
|
|
Operating cash flows for finance leases
|
|
$
|
498
|
|
|
$
|
628
|
|
Financing cash flows for finance leases
|
|
$
|
1,332
|
|
|
$
|
1,336
|
|
Lease liabilities arising from obtaining right-of-use assets(1):
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
8,325
|
|
|
$
|
34,586
|
|
Finance leases
|
|
$
|
445
|
|
|
$
|
1,230
|
|
(1)
|
Amounts include new leases and adjustments to lease balances as a result of remeasurement.
|
Note 6 - Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following as of August 31 (in thousands):
|
|
|
2021
|
|
|
|
2020
|
|
Machinery and equipment
|
|
$
|
791,043
|
|
|
$
|
746,845
|
|
Land and improvements
|
|
|
304,188
|
|
|
|
295,575
|
|
Buildings and leasehold improvements
|
|
|
147,106
|
|
|
|
138,380
|
|
ERP systems
|
|
|
17,760
|
|
|
|
17,760
|
|
Office equipment and other software licenses
|
|
|
37,326
|
|
|
|
44,103
|
|
Construction in progress
|
|
|
102,544
|
|
|
|
55,964
|
|
Property, plant and equipment, gross
|
|
|
1,399,967
|
|
|
|
1,298,627
|
|
Less accumulated depreciation
|
|
|
(837,293
|
)
|
|
|
(811,623
|
)
|
Property, plant and equipment, net(1)
|
|
$
|
562,674
|
|
|
$
|
487,004
|
|
(1)
|
Property, plant and equipment, net included $18 million and $16 million as of August 31, 2021 and 2020, respectively, related to the Company’s Canadian operations.
|
Depreciation expense for property, plant and equipment, which includes amortization expense for finance lease right-of-use assets, was $58 million, $57 million, and $53 million for the years ended August 31, 2021, 2020, and 2019, respectively. See Note 5 - Leases for additional disclosure on finance leases.
71 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 7 - Goodwill and Other Intangible Assets, net
Goodwill
The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired.
As of August 31, 2020, 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 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 three reporting units comprising two 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.
In the fourth quarter of fiscal 2021, the Company performed the annual goodwill impairment test as of July 1, 2021. As of the testing date, the balance of the Company’s goodwill was $171 million, and all but $1 million of such balance was carried by two reporting units comprising a regional group of metals recycling operations and the Company’s retail auto parts stores. The Company elected to first assess qualitative factors to determine whether the existence of events or circumstances led to a determination that it is more-likely-than-not that the estimated fair value of each reporting unit carrying goodwill is less than its carrying amount. As a result of the qualitative assessment, the Company concluded that it was not more-likely-than-not that the fair value of each reporting unit carrying goodwill was less than its carrying value as of the testing date, and, therefore, no further impairment testing was required.
The gross change in the carrying amount of goodwill for the years ended August 31, 2021 and 2020 was as follows (in thousands):
|
|
Goodwill
|
|
Balance as of September 1, 2019
|
|
$
|
169,237
|
|
Foreign currency translation adjustment
|
|
|
390
|
|
Balance as of August 31, 2020
|
|
|
169,627
|
|
Foreign currency translation adjustment
|
|
|
677
|
|
Balance as of August 31, 2021
|
|
$
|
170,304
|
|
Accumulated goodwill impairment charges were $471 million as of each of August 31, 2021 and 2020.
72 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Other Intangible Assets, net
The following table presents the Company’s other intangible assets as of August 31 (in thousands):
|
|
2021
|
|
|
2020
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Covenants not to compete
|
|
$
|
6,745
|
|
|
$
|
(3,846
|
)
|
|
$
|
2,899
|
|
|
$
|
7,032
|
|
|
$
|
(3,528
|
)
|
|
$
|
3,504
|
|
Indefinite-lived intangibles(1)
|
|
|
1,081
|
|
|
|
—
|
|
|
|
1,081
|
|
|
|
1,081
|
|
|
|
—
|
|
|
|
1,081
|
|
Total
|
|
$
|
7,826
|
|
|
$
|
(3,846
|
)
|
|
$
|
3,980
|
|
|
$
|
8,113
|
|
|
$
|
(3,528
|
)
|
|
$
|
4,585
|
|
(1)
|
Indefinite-lived intangibles include previously acquired trade names and certain permits and licenses.
|
Total intangible asset amortization expense was $1 million in each of the years ended August 31, 2021, 2020, and 2019. There were no impairments of intangible assets recognized for the periods presented.
The estimated amortization expense, based on current intangible asset balances, during the next five fiscal years and thereafter is as follows (in thousands):
Years Ending August 31,
|
|
Estimated
Amortization
Expense
|
|
2022
|
|
$
|
723
|
|
2023
|
|
|
458
|
|
2024
|
|
|
411
|
|
2025
|
|
|
407
|
|
2026
|
|
|
287
|
|
Thereafter
|
|
|
613
|
|
Total
|
|
$
|
2,899
|
|
Note 8 - Debt
Debt consisted of the following as of August 31 (in thousands):
|
|
|
2021
|
|
|
|
2020
|
|
Bank revolving credit facilities, interest primarily at LIBOR plus a spread
|
|
$
|
60,000
|
|
|
$
|
90,000
|
|
Finance lease liabilities
|
|
|
6,591
|
|
|
|
7,508
|
|
Other debt obligations
|
|
|
8,362
|
|
|
|
6,911
|
|
Total debt
|
|
|
74,953
|
|
|
|
104,419
|
|
Less current maturities
|
|
|
(3,654
|
)
|
|
|
(2,184
|
)
|
Debt, net of current maturities
|
|
$
|
71,299
|
|
|
$
|
102,235
|
|
73 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
The Company’s 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. The $700 million credit facility includes a $50 million sublimit for letters of credit, a $25 million sublimit for swingline loans, and a $50 million sublimit for multicurrency borrowings. Interest rates on outstanding indebtedness under the credit agreement are based, at the Company’s option, on either the London Interbank Offered Rate (“LIBOR”) (or the Canadian equivalent for C$ loans), plus a spread of between 1.25% and 3.50%, with the amount of the spread based on a pricing grid tied to the Company’s ratio of consolidated funded debt to EBITDA (as defined by the credit agreement), or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50%, or (c) the daily rate equal to one-month LIBOR plus 1.75%, in each case, plus a spread of between 0.00% and 2.50% based on a pricing grid tied to the Company’s consolidated funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.20% and 0.50% based on a pricing grid tied to the Company’s ratio of consolidated funded debt to EBITDA.
As of August 31, 2021 and 2020, borrowings outstanding under the credit facilities were $60 million and $90 million, respectively. The weighted average interest rate on amounts outstanding under the credit facilities was 1.75% and 4.59% as of August 31, 2021 and 2020, respectively.
The credit agreement contains various representations and warranties, events of default, and financial and other customary covenants which limit (subject to certain exceptions) the Company’s ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of the business, engage in transactions with affiliates, and enter into restrictive agreements, including agreements that restrict the ability of the subsidiaries to make distributions. As of August 31, 2021, the financial covenants under the credit agreement included (a) a consolidated fixed charge coverage ratio, defined as the four-quarter rolling sum of consolidated EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges and (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness. The Company’s obligations under the credit agreement are guaranteed by substantially all of its subsidiaries. The credit facilities and the related guarantees are secured by senior first priority liens on certain of the Company’s and its subsidiaries’ assets, including equipment, inventory, and accounts receivable.
Other debt obligations, which totaled $8 million and $7 million as of August 31, 2021 and 2020, respectively, 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.
Principal payments on the Company’s bank revolving credit facilities and other debt obligations during the next five fiscal years and thereafter are as follows (in thousands):
Year Ending August 31,
|
|
Credit Facilities
|
|
|
Other Debt Obligations
|
|
2022
|
|
$
|
—
|
|
|
$
|
2,158
|
|
2023
|
|
|
60,000
|
|
|
|
2,385
|
|
2024
|
|
|
—
|
|
|
|
1,724
|
|
2025
|
|
|
—
|
|
|
|
1,809
|
|
2026
|
|
|
—
|
|
|
|
216
|
|
Thereafter
|
|
|
—
|
|
|
|
70
|
|
Total
|
|
$
|
60,000
|
|
|
$
|
8,362
|
|
See Note 5 - Leases for additional disclosure on finance lease obligations, including payments during the next five fiscal years and thereafter. The Company maintains stand-by letters of credit to provide for certain obligations including workers’ compensation and performance bonds. The Company had $8 million and $10 million outstanding under these arrangements as of August 31, 2021 and 2020, respectively.
74 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 9 - Commitments and Contingencies
Contingencies - Environmental
Changes in the Company’s environmental liabilities for the years ended August 31, 2021 and 2020 were as follows (in thousands):
Balance as of
September 1, 2019
|
|
|
Liabilities
Established
(Released), Net
|
|
|
Payments and
Other
|
|
|
Ending Balance
August 31, 2020
|
|
|
Liabilities
Established
(Released), Net
|
|
|
Payments and
Other
|
|
|
Ending Balance
August 31, 2021
|
|
|
Current
Liability
|
|
|
Noncurrent Liability
|
|
$
|
51,799
|
|
|
$
|
5,713
|
|
|
$
|
(4,048
|
)
|
|
$
|
53,464
|
|
|
$
|
28,761
|
|
|
$
|
(5,097
|
)
|
|
$
|
77,128
|
|
|
$
|
24,743
|
|
|
$
|
52,385
|
|
As of August 31, 2021 and 2020, the Company had environmental liabilities of $77 million and $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” 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 third-party contribution or damage claims with respect to the Site.
From 2000 to 2017, the EPA oversaw a remedial investigation/feasibility study (“RI/FS”) at the Site. The Company was not among the parties that performed the RI/FS, but it contributed to the costs through an interim settlement with the performing parties. The performing parties have indicated that they incurred more than $155 million in that effort.
In January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for the Site. The EPA has estimated the total cost of the selected remedy at $1.7 billion with a net present value cost of $1.05 billion (at a 7% discount rate) and an estimated construction period of 13 years following completion of the remedial designs. In the ROD, the EPA stated that the cost estimate is an order-of-magnitude engineering estimate that is expected to be within +50% to -30% of the actual project cost and that changes in the cost elements are likely to occur as a result of new information and data collected during the engineering design. The Company has identified a number of concerns regarding the remedy described in the ROD, which is based on data that is more than 15 years old, and the EPA’s estimates for the costs and time required to implement the selected remedy. Moreover, the ROD provided only Site-wide cost estimates and did not provide sufficient detail to estimate costs for specific sediment management areas within the Site. In addition, the ROD did not determine or allocate the responsibility for remediation costs among the PRPs.
In the ROD, the EPA acknowledged that much of the data was more than a decade old at that time and would need to be updated with a new round of “baseline” sampling to be conducted prior to the remedial design phase. The remedial design phase is an engineering phase during which additional technical information and data are collected, identified, and incorporated into technical drawings and specifications developed for the subsequent remedial action. Following issuance of the ROD, the EPA proposed that the PRPs, or a subgroup of PRPs, perform the additional investigative work in advance of remedial design.
In December 2017, the Company and three other PRPs entered into an Administrative Settlement Agreement and Order on Consent with the EPA to perform such pre-remedial design investigation and baseline sampling over a two-year period. The report analyzing the results concluded that Site conditions have improved substantially since the data forming the basis of the ROD was collected. The EPA found with a few limited corrections that the data is of suitable quality and stated that such data will be used, in addition to existing and forthcoming design-level data, to inform implementation of the ROD. However, the EPA did not agree that the data or the analysis warranted a change to the remedy at this time and reaffirmed its commitment to proceed with remedial design. The Company and other PRPs disagree with the EPA’s position on use of the more recent data and will continue to pursue limited, but critical, changes to the selected remedy for the Site during the remedial design phase.
75 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
The EPA encouraged PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design in various project areas covering the entire Site. While certain PRPs executed consent agreements for remedial design work, because of the EPA’s refusal to date to modify the remedy to reflect the most current data on Site conditions and because of concerns with the terms of the consent agreement, the Company elected not to enter into a consent agreement. In April 2020, the EPA issued a unilateral administrative order (“UAO”) to the Company and MMGL, LLC (“MMGL”), an unaffiliated company, for the remedial design work in a portion of the Site designated as the River Mile 3.5 East Project Area. As required by the UAO, the Company notified the EPA of its intent to comply while reserving all of its sufficient cause defenses. Failure to comply with a UAO, without sufficient cause, could subject the Company to significant penalties or treble damages. Pursuant to the optimized remedial design timeline set forth in the UAO, the EPA’s expected schedule for completion of the remedial design work is four years. The 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 pursuant to which the Company is being reimbursed for the costs it has incurred for remedial design. In the second quarter of fiscal 2021, the Company recorded an insurance receivable and a related insurance recovery to selling, general, and administrative expense for approximately $3 million. See “Other Assets” in Note 2 – Summary of Significant Accounting Policies for further discussion of receivables from insurers. The Company also expects to pursue in the future allocation or contribution from other PRPs for a portion of such remedial design costs. In February 2021, the EPA announced that 100 percent of the Site’s areas requiring active cleanup are in the remedial design phase of the process.
Except for certain early action projects in which the Company is not involved, remediation activities at the Site are not expected to commence for a number of years. Moreover, those activities are expected to be sequenced, and the order and timing of such sequencing has not been determined. In addition, as noted above, the ROD does not determine the allocation of costs among PRPs.
The Company has joined with approximately 100 other PRPs, including the RI/FS performing parties, in a voluntary process to establish an allocation of costs at the Site, including the costs incurred in the RI/FS, ongoing remedial design costs, and future remedial action costs. The Company expects the next major stage of the allocation process to proceed in parallel with the remedial design process.
In addition to the remedial action process overseen by the EPA, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) is assessing natural resource damages at the Site. In 2008, the Trustee Council invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. The Company and other participating PRPs ultimately agreed to fund the first two phases of the three-phase assessment, which included the development of the Natural Resource Damage Assessment Plan (“AP”) and implementation of the AP to develop information sufficient to facilitate early settlements between the Trustee Council and Phase 2 participants and the identification of restoration projects to be funded by the settlements. In late May 2018, the Trustee Council published notice of its intent to proceed with Phase 3, which will involve the full implementation of the AP and the final injury and damage determination. The Company is proceeding with the process established by the Trustee Council regarding early settlements under Phase 2. The Company has established an environmental reserve of approximately $2.3 million for this alleged natural resource damages liability as it continues to work with the Trustee Council to finalize an early settlement. The Company has insurance policies that it believes will provide reimbursement for costs related to this matter. As of August 31, 2021, the Company had an insurance receivable in the same amount as the environmental reserve. See “Other Assets” in Note 2 – Summary of Significant Accounting Policies for further discussion of receivables from insurers.
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 filed various motions to dismiss or stay this suit, and in August 2019, the court issued an order denying the motions to dismiss and staying the action. The Company intends to defend against the claims in this suit and does not have sufficient information to determine the likelihood of a loss in this matter or to estimate the amount of damages being sought or the amount of such damages that could be allocated to the Company.
The Company’s environmental liabilities as of August 31, 2021 and 2020 included $6 million and $4 million, respectively, relating to the Portland Harbor matters described above.
76 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Because the final remedial actions have not yet been designed and there has not been a determination of the allocation among the PRPs of costs of the investigations or remedial action costs, 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 being evaluated are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on each property within the Site, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs.
The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense, remedial design, remedial action, and mitigation for or settlement of natural resource damages claims in connection with the Site. Most of these policies jointly insure 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, continue to seek settlements with other insurers, and formed a Qualified Settlement Fund (“QSF”) which became operative in fiscal 2020 to hold such settlement amounts until funds are needed to pay or reimburse costs incurred by the Company and MMGL in connection with the Site. These insurance policies and 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 investigations and source control activities by the Company at various sites adjacent to Portland Harbor that are focused on controlling any current “uplands” releases of contaminants into the Willamette River. No liabilities have been established in connection with these investigations beyond the costs of investigation and design, which costs have not been material to date, because the extent of contamination, required source control work, and the Company’s responsibility for the contamination and source control work, in each case if any, have not yet been determined. In addition, pursuant to its insurance policies, the Company is being reimbursed for the costs it incurs for required source control evaluation and remediation work.
Other Legacy Environmental Loss Contingencies
The Company’s environmental loss contingencies as of August 31, 2021 and 2020, other than Portland Harbor, include actual or possible investigation and remediation 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 remediation 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, allocation, and remediation 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.
In fiscal 2018, the Company accrued $4 million for the estimated costs related to remediation of shredder residue disposed of in or around the 1970s at third-party sites located near each other. Investigation activities have been conducted under oversight of the applicable state regulatory agency. As of August 31, 2021 and 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 previously estimated a range of reasonably possible losses related to this matter in excess of current accruals at between zero and $28 million based on a range of remedial alternatives and subject to development and approval by regulators of 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 investigation, analysis, and discussion by the Company and regulators. The Company is investigating whether a portion or all of the current and future losses related to this matter, if incurred, are covered by existing insurance coverage or may be offset by contributions from other responsible parties.
77 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
In addition, the Company’s loss contingencies as of August 31, 2021 and 2020 included $19 million and $8 million, respectively, for the estimated costs related to environmental matters in connection with a closed facility owned and previously operated by an indirect, wholly-owned subsidiary, including monitoring and remediation of soil and groundwater conditions. Investigation and remediation activities have been conducted under the oversight of the applicable state regulatory agency and are on-going, and the Company has also been working with state and local officials with respect to the protection of public and private water supplies. As part of its activities relating to the protection of public water supplies, the Company has agreed to reimburse the municipality for certain studies and plans and is in discussions with the municipality regarding funding for wellhead treatment. The Company accrued $17 million in fiscal 2021 for incremental estimated remediation costs and for funding for wellhead treatment, which was offset by payments during fiscal 2021 including payment of penalties in the amount of $2.7 million pursuant to a previously agreed settlement. It is reasonably possible that the Company may recognize additional liabilities in connection with this matter at the time such additional losses are probable and can be reasonably estimated. However, the Company cannot reasonably estimate at this time the possible additional loss or range of possible additional losses associated with this matter pending the on-going implementation of the approved remediation plan for soil and groundwater conditions, determination of the costs for wellhead treatment based on receipt and award of contractor bids, and finalization of discussions regarding the Company’s share of funding for such costs.
In addition, the Company’s loss contingencies as of August 31, 2021 and 2020 included $8 million and less than $1 million, respectively, for the estimated costs related to remediation of a site a portion of which was previously leased to and operated by an indirect, wholly-owned subsidiary. In connection with settlement of a lawsuit relating to allocation of the remediation costs, the Company’s subsidiary agreed to perform the remedial action related to metals contamination on the site estimated to cost approximately $7.9 million, and another potentially liable party agreed to perform the remedial action related to creosote contamination at the site. As part of the settlement, other potentially liable parties agreed to make payments totaling approximately $7.6 million to fund the remediation of the metals contamination at the site in exchange for a release and indemnity. This amount was fully funded into a client trust account for the Company’s subsidiary in December 2020. See “Other Assets” in Note 2 - Summary of Significant Accounting Policies for further discussion of this client trust account. It is reasonably possible that the Company may recognize additional liabilities in connection with this matter at the time such additional losses are probable and can be reasonably estimated. However, the Company cannot reasonably estimate at this time the possible additional loss or range of possible additional losses associated with this matter pending completion, approval and implementation of the remediation action plan.
Summary - Environmental Contingencies
With respect to environmental contingencies other than the Portland Harbor Superfund site and the Other Legacy Environmental Loss Contingencies, which are discussed separately above, management currently believes that adequate provision has been made for the potential impact of its environmental 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.
Contingencies - Other
In addition to legal proceedings relating to the contingencies described above, the Company is a party to various legal proceedings arising in the normal course of business. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. The Company does not anticipate that the liabilities arising from such legal proceedings 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.
78 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 10 - Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows as of August 31, 2021, 2020, and 2019 (in thousands):
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Pension Obligations,
net
|
|
|
Total
|
|
Balance as of September 1, 2018
|
|
$
|
(34,129
|
)
|
|
$
|
(3,108
|
)
|
|
$
|
(37,237
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(1,560
|
)
|
|
|
(326
|
)
|
|
|
(1,886
|
)
|
Income tax benefit
|
|
|
—
|
|
|
|
65
|
|
|
|
65
|
|
Other comprehensive loss before reclassifications,
net of tax
|
|
|
(1,560
|
)
|
|
|
(261
|
)
|
|
|
(1,821
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
—
|
|
|
|
369
|
|
|
|
369
|
|
Income tax benefit
|
|
|
—
|
|
|
|
(74
|
)
|
|
|
(74
|
)
|
Amounts reclassified from accumulated other comprehensive loss,
net of tax
|
|
|
—
|
|
|
|
295
|
|
|
|
295
|
|
Net periodic other comprehensive (loss) income
|
|
|
(1,560
|
)
|
|
|
34
|
|
|
|
(1,526
|
)
|
Balance as of August 31, 2019
|
|
|
(35,689
|
)
|
|
|
(3,074
|
)
|
|
|
(38,763
|
)
|
Other comprehensive income before reclassifications
|
|
|
1,505
|
|
|
|
190
|
|
|
|
1,695
|
|
Income tax expense
|
|
|
—
|
|
|
|
(42
|
)
|
|
|
(42
|
)
|
Other comprehensive income before reclassifications, net
of tax
|
|
|
1,505
|
|
|
|
148
|
|
|
|
1,653
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
—
|
|
|
|
309
|
|
|
|
309
|
|
Income tax benefit
|
|
|
—
|
|
|
|
(70
|
)
|
|
|
(70
|
)
|
Amounts reclassified from accumulated other comprehensive loss,
net of tax
|
|
|
—
|
|
|
|
239
|
|
|
|
239
|
|
Net periodic other comprehensive income
|
|
|
1,505
|
|
|
|
387
|
|
|
|
1,892
|
|
Balance as of August 31, 2020
|
|
|
(34,184
|
)
|
|
|
(2,687
|
)
|
|
|
(36,871
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
2,575
|
|
|
|
(530
|
)
|
|
|
2,045
|
|
Income tax benefit
|
|
|
—
|
|
|
|
120
|
|
|
|
120
|
|
Other comprehensive income (loss) before reclassifications, net
of tax
|
|
|
2,575
|
|
|
|
(410
|
)
|
|
|
2,165
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
—
|
|
|
|
196
|
|
|
|
196
|
|
Income tax benefit
|
|
|
—
|
|
|
|
(44
|
)
|
|
|
(44
|
)
|
Amounts reclassified from accumulated other comprehensive loss,
net of tax
|
|
|
—
|
|
|
|
152
|
|
|
|
152
|
|
Net periodic other comprehensive income (loss)
|
|
|
2,575
|
|
|
|
(258
|
)
|
|
|
2,317
|
|
Balance as of August 31, 2021
|
|
$
|
(31,609
|
)
|
|
$
|
(2,945
|
)
|
|
$
|
(34,554
|
)
|
Reclassifications from accumulated other comprehensive loss to earnings, both individually and in the aggregate, were not material to the impacted captions in the Consolidated Statements of Operations in all periods presented.
79 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 11 - Revenue
Disaggregation of Revenues
The table below illustrates the Company’s revenues disaggregated by major product and sales destination (in thousands):
|
|
Year Ended August 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
Major product information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ferrous revenues
|
|
$
|
1,557,891
|
|
|
$
|
862,490
|
|
|
$
|
1,164,719
|
|
|
Nonferrous revenues
|
|
|
684,862
|
|
|
|
390,298
|
|
|
|
468,023
|
|
|
Steel revenues(1)
|
|
|
379,203
|
|
|
|
336,980
|
|
|
|
367,956
|
|
|
Retail and other revenues
|
|
|
136,595
|
|
|
|
122,575
|
|
|
|
132,083
|
|
|
Total revenues
|
|
$
|
2,758,551
|
|
|
$
|
1,712,343
|
|
|
$
|
2,132,781
|
|
|
Revenues based on sales destination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
1,612,744
|
|
|
$
|
910,785
|
|
|
$
|
1,141,077
|
|
|
Domestic
|
|
|
1,145,807
|
|
|
|
801,558
|
|
|
|
991,704
|
|
|
Total revenues
|
|
$
|
2,758,551
|
|
|
$
|
1,712,343
|
|
|
$
|
2,132,781
|
|
|
(1)
|
Steel revenues include predominantly sales of finished steel products, in addition to sales of semi-finished goods (billets) and steel manufacturing scrap.
|
In fiscal 2021, 2020, and 2019, the Company had no external customer that accounted for more than 10% of the Company’s consolidated revenues. Sales to customers located in foreign countries are a significant part of the Company’s business. The schedule below identifies those foreign countries to which the Company’s sales exceeded 10% of consolidated revenues in any of the last three years ended August 31 (in thousands):
|
|
|
2021
|
|
|
% of
Revenue
|
|
|
|
2020
|
|
|
% of
Revenue
|
|
|
|
2019
|
|
|
% of
Revenue
|
Bangladesh
|
|
$
|
375,668
|
|
|
|
14
|
%
|
|
$
|
197,391
|
|
|
|
12
|
%
|
|
N/A
|
|
|
N/A
|
Turkey
|
|
N/A
|
|
|
N/A
|
|
|
$
|
222,141
|
|
|
|
13
|
%
|
|
N/A
|
|
|
N/A
|
N/A = Sales were less than the 10% threshold.
Receivables from Contracts with Customers
The revenue accounting standard defines a receivable as an entity’s right to consideration that is unconditional, meaning that only the passage of time is required before payment is due. As of August 31, 2021 and 2020, receivables from contracts with customers, net of an allowance for credit losses, totaled $210 million and $135 million, respectively, representing 98% and 97%, respectively, of total accounts receivable reported in the Consolidated Balance Sheets as of each reporting date.
Contract Liabilities
Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company’s contract liabilities, which consist almost entirely of customer deposits for recycled metal and finished steel sales contracts reported within accounts payable in the Consolidated Balance Sheets, totaled $8 million as of each of August 31, 2021 and 2020. Unsatisfied performance obligations reflected in these contract liabilities relate to contracts with original expected durations of one year or less and, therefore, are not disclosed. During the year ended August 31, 2021, the Company reclassified $7 million in contract liabilities as of August 31, 2020 to revenues as a result of satisfying performance obligations during the year. During the year ended August 31, 2020, the Company reclassified $3 million in contract liabilities as of August 31, 2019 to revenues as a result of satisfying performance obligations during the year.
80 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 12 - Employee Benefits
The Company and certain of its subsidiaries have or contribute to qualified and nonqualified retirement plans. These plans include a defined benefit pension plan, a supplemental executive retirement benefit plan (“SERBP”), multiemployer pension plans, defined contribution plans, and a deferred compensation plan.
Defined Benefit Pension Plan and Supplemental Executive Retirement Benefit Plan
The Company maintains a qualified defined benefit pension plan for certain nonunion employees. Effective June 30, 2006, the Company froze this plan and ceased accruing further benefits for employee service. The Company reflects the funded status of the defined benefit pension plan as a net asset or liability in its Consolidated Balance Sheets. Changes in its funded status are recognized in comprehensive income. The Company amortizes as a component of net periodic pension benefit cost a portion of the net gain or loss reported within accumulated other comprehensive loss if the beginning-of-year net gain or loss exceeds 5% of the greater of the benefit obligation or the market value of plan assets. Net periodic pension benefit cost was not material for each of the fiscal years presented in this report. The fair value of plan assets was $21 million as of each of August 31, 2021 and 2020, and the projected benefit obligation was $17 million and $18 million as of August 31, 2021 and 2020, respectively. The plan was fully funded with the plan assets exceeding the projected benefit obligation by $4 million as of each of August 31, 2021 and 2020. Under the fair value hierarchy, plan assets comprised Level 1 and Level 2 investments as of August 31, 2021 and 2020. Level 1 investments are valued based on quoted market prices of identical securities in the principal market. Level 2 investments are corporate bonds valued at the yields currently available on comparable securities of issuers with similar credit ratings. No significant contributions are expected to be made to the defined benefit pension plan in the future; however, changes in the discount rate or actual investment returns that are lower than the long-term expected return on plan assets could result in the need for the Company to make additional contributions. The assumed discount rate used to calculate the projected benefit obligation was 2.46% and 2.38% as of August 31, 2021 and 2020, respectively. The Company estimates future annual benefit payments to be between $1 million and $3 million per year.
The Company also has a nonqualified SERBP for certain executives. A restricted trust fund has been established with assets invested in life insurance policies that can be used for plan benefits, although the fund is subject to claims of the Company’s general creditors. The trust fund is included in other assets, the current portion of the pension liability is included in other accrued liabilities, and the noncurrent portion of the pension liability is included in other long-term liabilities in the Company’s Consolidated Balance Sheets. The trust fund was valued at $4 million as of August 31, 2021, and $3 million as of August 31, 2020. The trust fund assets’ gains and losses are included in other income (expense), net in the Company’s Consolidated Statements of Operations. The benefit obligation was $5 million as of each of August 31, 2021 and 2020. Net periodic pension benefit cost under the SERBP was not material for each of the fiscal years presented in this report.
Because the defined benefit pension plan and the SERBP are not material to the Consolidated Financial Statements, other disclosures required by U.S. GAAP have been omitted.
Multiemployer Pension Plans
The Company contributes to 14 multiemployer pension plans in accordance with its collective bargaining agreements. Multiemployer pension plans are defined benefit plans sponsored by multiple employers in accordance with one or more collective bargaining agreements. The plans are jointly managed by trustees that include representatives from both management and labor unions. Contributions to the plans are made based upon a fixed rate per hour worked and are agreed to by contributing employers and the unions in collective bargaining. Benefit levels are set by a joint board of trustees based on the advice of an independent actuary regarding the level of benefits that agreed-upon contributions can be expected to support. To the extent that the pension obligation of other participating employers is unfunded, the Company may be required to make additional contributions in the future to fund these obligations.
81 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
One of the multiemployer plans that the Company contributes to is the Steelworkers Western Independent Shops Pension Plan (“WISPP,” EIN 90-0169564, Plan No. 001) benefiting the union employees of the Company’s steel manufacturing operations, which are covered by a collective bargaining agreement that will expire on March 31, 2022. As of October 1, 2020, the WISPP was certified by the plan’s actuaries as being in the Green Zone, as defined by the Pension Protection Act of 2006. The Company contributed $4 million to the WISPP for the year ended August 31, 2021, and $3 million for each of the years ended August 31, 2020 and 2019. These contributions represented more than 5% of total contributions to the WISPP for each year.
In 2004, the Internal Revenue Service (“IRS”) approved a seven-year extension of the period over which the WISPP may amortize unfunded liabilities, conditioned upon maintenance of certain minimum funding levels. In 2014, the WISPP obtained relief from the specified funding requirements from the IRS, which requires that the WISPP meet a minimum funded percentage on each valuation date and achieve a funded percentage of 100% as of October 1, 2029. Based on the most recent actuarial valuation for the WISPP, the funded percentage using the valuation method prescribed by the IRS satisfied the minimum funded percentage requirement.
Company contributions to all of the multiemployer plans were $6 million for each of the years ended August 31, 2021, 2020, and 2019.
Defined Contribution Plans
The Company has several defined contribution plans covering certain employees. Company contributions to the defined contribution plans totaled $4 million for each of the years ended August 31, 2021, 2020, and 2019.
Deferred Compensation Plan
In fiscal 2021, the Company established a non-qualified deferred compensation plan (the “DCP”) which permits eligible employees to elect to defer receipt of compensation including salary, bonuses, and certain equity awards made under the Company’s long-term incentive plan. The DCP also allows the Company to make discretionary contributions to participant accounts that may be subject to one or more vesting schedules. Participant contributions, excluding equity awards subject to vesting conditions, are fully vested at all times. The deferred compensation liability as of August 31, 2021 was less than $1 million, consisted entirely of deferred salary, and was classified within other long-term liabilities in the Consolidated Balance Sheets. The Company maintains a rabbi trust to fund obligations under the DCP. The carrying value of assets held in the rabbi trust, which comprise company-owned life insurance policies, substantially equaled the deferred compensation liability as of August 31, 2021. The rabbi trust asset is classified within other assets in the Consolidated Balance Sheets.
Note 13 - Share-Based Compensation
The Company’s 1993 Stock Incentive Plan, as amended (the “SIP”), was established to provide for the grant of stock-based compensation awards to its employees, consultants, and directors. The SIP authorizes the grant of restricted shares, restricted stock units, performance-based awards including performance share awards, stock options, and stock appreciation rights, and other stock-based awards. The SIP is administered by the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”). There are 12.2 million shares of Class A common stock reserved for issuance under the SIP, of which 2.2 million were available for future grants as of August 31, 2021. Share-based compensation expense recognized in cost of goods sold or selling, general, and administrative expense, as applicable, was $18 million, $10 million, and $17 million for the years ended August 31, 2021, 2020, and 2019, respectively. The Company capitalized less than $1 million of share-based compensation cost to the cost of qualifying long-lived assets in each of fiscal 2021 and 2020.
Restricted Stock Units (“RSUs”)
During the years ended August 31, 2021, 2020, and 2019, the Compensation Committee granted 317,760, 470,917, and 261,642 RSUs, respectively, to the Company’s key employees under the SIP. RSUs generally vest 20% per year over five years commencing October 31 of the year after grant. Each RSU entitles the recipient to receive one share of Class A common stock upon vesting.
82 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
The estimated fair value of an RSU is based on the market closing price of the underlying Class A common stock on the date of grant. The weighted average grant date fair value of RSUs granted was $22.26, $14.88, and $27.61 per unit for the years ended August 31, 2021, 2020, and 2019, respectively. The total estimated fair value of RSUs granted during each of the years ended August 31, 2021, 2020, and 2019 was $7 million. For RSUs granted in each of the years ended August 31, 2020 and 2021, the compensation cost associated with these 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 award is the longer of two years or the period ending on the date retirement eligibility is achieved. For the awards granted in the year ended August 31, 2019, RSU compensation cost is recognized over the requisite service period of the award, net of estimated forfeitures, or to the date retirement eligibility is achieved (if before the end of the service period). RSU compensation cost was $7 million, $4 million, and $6 million for the years ended August 31, 2021, 2020, and 2019, respectively.
A summary of the Company’s RSU activity for the year ended August 31, 2021 is as follows:
|
|
Number of
Units
(in thousands)
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Outstanding as of August 31, 2020
|
|
|
986
|
|
|
$
|
20.10
|
|
Granted
|
|
|
318
|
|
|
$
|
22.26
|
|
Vested
|
|
|
(327
|
)
|
|
$
|
20.95
|
|
Forfeited
|
|
|
(21
|
)
|
|
$
|
15.50
|
|
Outstanding as of August 31, 2021
|
|
|
956
|
|
|
$
|
20.62
|
|
The total fair value of RSUs which vested, based on the market closing price of the underlying Class A common stock on the vesting date, was $10 million, $6 million, and $7 million for the years ended August 31, 2021, 2020, and 2019, respectively. As of August 31, 2021, total unrecognized compensation costs related to unvested RSUs amounted to $10 million, which is expected to be recognized over a weighted average period of two years.
Performance Share Awards
The SIP authorizes performance-based awards to certain employees subject to certain conditions and restrictions. Vesting is subject to both the continued employment of the participant with the Company and the achievement of certain performance goals established by the Compensation Committee. A participant generally must be employed by the Company on October 31 following the end of the performance period to receive an award payout. However, adjusted awards will be paid if employment terminates earlier on account of a qualifying employment termination event such as death, disability, retirement, termination without cause after the first year of the performance period, or a sale of the Company.
The Compensation Committee determined that performance share awards granted in fiscal years 2021, 2020, and 2019 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. The award performance metrics were the Company’s total shareholder return (“TSR”) relative to a designated peer group and the Company’s return on capital employed (“ROCE”). Awards share payouts depend on the extent to which the performance goals have been achieved. The number of shares that a participant receives is equal to the award granted multiplied by a payout factor, which ranges from a threshold of 50% to a maximum of 200%. The TSR 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 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 during the years ended August 31:
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Expected share price volatility (SSI)
|
|
|
48.5
|
%
|
|
|
38.9
|
%
|
|
|
42.5
|
%
|
Expected share price volatility (Peer group)
|
|
|
54.9
|
%
|
|
|
44.5
|
%
|
|
|
51.4
|
%
|
Expected correlation to peer group companies
|
|
|
44.5
|
%
|
|
|
34.3
|
%
|
|
|
35.6
|
%
|
Risk-free rate of return
|
|
|
0.23
|
%
|
|
|
1.58
|
%
|
|
|
2.89
|
%
|
83 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
The compensation cost 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. Compensation cost for TSR awards was $3 million, $3 million, and $4 million for the years ended August 31, 2021, 2020, and 2019, respectively.
The fair value of the ROCE awards granted is based on the market closing price of the underlying Class A common stock on the grant date. 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 ROCE performance conditions is probable at each reporting date. If it is probable that the actual performance results will exceed the stated target performance conditions, the Company accrues additional compensation cost for the additional performance shares to be awarded. If, upon reassessment, it is no longer probable that the actual performance results will exceed the stated target performance conditions, or that it is no longer probable that the target performance conditions will be achieved, the Company reverses any recognized compensation cost for shares no longer probable of being issued. If the performance conditions are not achieved at the end of the performance period, all related compensation cost previously recognized is reversed. Compensation cost for ROCE awards and other performance share awards with a non-market performance metric granted prior to fiscal 2018 was $7 million, $2 million, and $6 million for the years ended August 31, 2021, 2020, and 2019, respectively.
During the years ended August 31, 2021, 2020, and 2019, the Compensation Committee granted a total of 316,649 (157,791 TSR and 158,858 ROCE), 337,770 (165,834 TSR and 171,936 ROCE), and 254,620 (123,812 TSR and 130,808 ROCE) performance share awards, respectively. The weighted average grant date fair value per share of performance share awards granted was $22.33, $21.32, and $28.37 for the years ended August 31, 2021, 2020, and 2019, respectively.
A summary of the Company’s performance-based awards activity for the year ended August 31, 2021 is as follows:
|
|
Number of
Awards
(in thousands)
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Outstanding as of August 31, 2020
|
|
|
798
|
|
|
$
|
25.19
|
|
Granted
|
|
|
317
|
|
|
$
|
22.33
|
|
Performance achievement(1)
|
|
|
90
|
|
|
$
|
26.60
|
|
Vested
|
|
|
(320
|
)
|
|
$
|
27.12
|
|
Forfeited
|
|
|
(12
|
)
|
|
$
|
23.11
|
|
Outstanding as of August 31, 2021
|
|
|
873
|
|
|
|
23.62
|
|
(1)
|
Reflects the net number of awards achieved above target levels based on actual performance measured at the end of the performance period.
|
The total fair value of performance share awards which vested, based on the market closing price of the Company’s Class A common stock on the vesting date, was $7 million, $10 million, and $13 million for the years ended August 31, 2021, 2020, and 2019, respectively. As of August 31, 2021, total unrecognized compensation costs related to unvested performance share awards amounted to $11 million, which is expected to be recognized over a weighted average period of two years.
Deferred Stock Units (“DSUs”)
The Deferred Compensation Plan for Non-Employee Directors (“DSU Plan”) provides for the issuance of DSUs to non-employee directors to be granted under the DSU Plan. Each DSU gives the director the right to receive one share of Class A common stock at a future date. Immediately following the annual meeting of shareholders, each non-employee director will receive DSUs which will become fully vested on the day before the next annual meeting, subject to continued service on the Board. The compensation cost associated with the DSUs granted is recognized over the requisite service period of the awards.
The Company will issue Class A common stock to a director pursuant to vested DSUs in a lump sum in January of the first year after the director ceases to be a director of the Company, subject to the right of the director to elect an installment payment program under the DSU Plan.
DSUs granted during the years ended August 31, 2021, 2020, and 2019 totaled 28,042 units, 41,592 units, and 31,218 units, respectively. The compensation cost associated with DSUs and the total value of shares vested during each of the years ended August 31, 2021, 2020, and 2019, as well as the unrecognized compensation cost as of August 31, 2021, were not material.
84 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 14 - Income Taxes
Income (loss) from continuing operations before income taxes was as follows for the years ended August 31 (in thousands):
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
195,037
|
|
|
$
|
(5,649
|
)
|
|
$
|
69,476
|
|
Foreign
|
|
|
12,952
|
|
|
|
3,710
|
|
|
|
6,764
|
|
Total
|
|
$
|
207,989
|
|
|
$
|
(1,939
|
)
|
|
$
|
76,240
|
|
Income tax expense (benefit) from continuing operations consisted of the following for the years ended August 31 (in thousands):
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
27,244
|
|
|
$
|
(15,778
|
)
|
|
$
|
2,690
|
|
State
|
|
|
3,811
|
|
|
|
329
|
|
|
|
315
|
|
Foreign
|
|
|
(4
|
)
|
|
|
519
|
|
|
|
52
|
|
Total current tax expense (benefit)
|
|
|
31,051
|
|
|
|
(14,930
|
)
|
|
|
3,057
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
6,939
|
|
|
|
12,292
|
|
|
|
12,930
|
|
State
|
|
|
(547
|
)
|
|
|
1,338
|
|
|
|
794
|
|
Foreign
|
|
|
492
|
|
|
|
1,466
|
|
|
|
889
|
|
Total deferred tax expense
|
|
|
6,884
|
|
|
|
15,096
|
|
|
|
14,613
|
|
Total income tax expense
|
|
$
|
37,935
|
|
|
$
|
166
|
|
|
$
|
17,670
|
|
A reconciliation of the difference between the federal statutory rate and the Company’s effective tax rate for the years ended August 31 is as follows:
|
|
|
2021
|
|
|
|
2020
|
|
|
2019
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State taxes, net of credits
|
|
|
1.4
|
|
|
|
(57.9
|
)
|
|
|
1.2
|
|
Foreign income taxed at different rates
|
|
|
(0.5
|
)
|
|
|
(11.6
|
)
|
|
|
(0.2
|
)
|
Valuation allowance on deferred tax assets
|
|
|
(1.0
|
)
|
|
|
(24.5
|
)
|
|
|
(0.2
|
)
|
Federal rate change
|
|
|
0.4
|
|
|
|
71.9
|
|
|
|
—
|
|
Non-deductible officers’ compensation
|
|
|
1.2
|
|
|
|
(46.9
|
)
|
|
|
1.8
|
|
Other non-deductible expenses
|
|
|
0.4
|
|
|
|
(66.0
|
)
|
|
|
1.0
|
|
Noncontrolling interests
|
|
|
(0.5
|
)
|
|
|
21.1
|
|
|
|
(0.5
|
)
|
Research and development credits
|
|
|
(1.5
|
)
|
|
|
99.3
|
|
|
|
(0.5
|
)
|
Tax return to provision adjustment
|
|
|
—
|
|
|
|
89.2
|
|
|
|
0.5
|
|
Unrecognized tax benefits
|
|
|
0.9
|
|
|
|
(97.3
|
)
|
|
|
0.7
|
|
Interest income
|
|
|
(0.1
|
)
|
|
|
9.0
|
|
|
|
(0.4
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
(0.2
|
)
|
|
|
3.0
|
|
|
|
(1.2
|
)
|
Foreign derived intangible income
|
|
|
(2.5
|
)
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
(0.8
|
)
|
|
|
(18.9
|
)
|
|
|
—
|
|
Effective tax rate
|
|
|
18.2
|
%
|
|
|
(8.6
|
)%
|
|
|
23.2
|
%
|
85 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Effective Tax Rate
The Company’s effective tax rate from continuing operations for fiscal 2021 was an expense on pre-tax income of 18.2%, compared to an expense on pre-tax loss of 8.6% for fiscal 2020. The Company’s effective tax rate from continuing operations for fiscal 2021 was lower than the U.S. federal statutory rate of 21% primarily due to the benefit from the foreign derived intangible income deduction in fiscal 2021 and the impacts of research and development credits, release of the valuation allowance against Puerto Rico deferred tax assets, and other discrete items. The reconciling differences between the Company’s effective tax rate from continuing operations for fiscal 2020 and the U.S. federal statutory rate of 21% are exaggerated due to the Company’s near-break-even pre-tax loss from continuing operations of $2 million for fiscal 2020, despite none of the reconciling differences being individually material. The Company’s effective tax rate from continuing operations for fiscal 2020 was lower than the U.S. federal statutory rate, and reflective of income tax expense on a pre-tax loss from continuing operations, primarily due to the partially offsetting impacts of individually immaterial permanent differences from non-deductible expenses and research and development credits, the effects of unrecognized tax benefits, and the aggregate impact of state taxes.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted into law. The CARES Act contains several income tax provisions, as well as other measures, aimed at assisting businesses impacted by the economic effects of the COVID-19 pandemic. Among other provisions, the CARES Act removes certain limitations on utilization of net operating losses (“NOLs”) and allows for carrybacks of certain past and future NOLs. The Company applied the NOL carryback provisions of the CARES Act to its NOL for fiscal 2020, which resulted in the reclassification of a $11 million NOL deferred income tax asset to refundable income taxes and recognition of a $1 million income tax benefit in the third quarter of fiscal 2020. The Company does not anticipate the other income tax provisions of the CARES Act to have a material impact on its financial statements.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities comprised the following as of August 31 (in thousands):
|
|
|
2021
|
|
|
|
2020
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
$
|
20,645
|
|
|
$
|
22,676
|
|
Amortizable goodwill and other intangibles
|
|
|
13,490
|
|
|
|
17,455
|
|
Employee benefit accruals
|
|
|
14,007
|
|
|
|
9,246
|
|
Net operating loss carryforwards
|
|
|
7,642
|
|
|
|
8,484
|
|
Environmental liabilities
|
|
|
10,508
|
|
|
|
7,938
|
|
Other contingencies(1)
|
|
|
5,044
|
|
|
|
4,133
|
|
State credit carryforwards
|
|
|
7,216
|
|
|
|
7,933
|
|
Federal credit carryforwards
|
|
—
|
|
|
|
5,116
|
|
Inventory valuation methods
|
|
|
2,129
|
|
|
|
2,865
|
|
Other
|
|
|
2,459
|
|
|
|
2,941
|
|
Valuation allowances
|
|
|
(14,522
|
)
|
|
|
(16,933
|
)
|
Total deferred tax assets
|
|
|
68,618
|
|
|
|
71,854
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accelerated depreciation and other basis differences
|
|
|
43,304
|
|
|
|
39,596
|
|
Operating lease right-of-use assets
|
|
|
19,895
|
|
|
|
21,104
|
|
Investment in operating partnerships
|
|
|
12,410
|
|
|
|
14,703
|
|
Uncertain tax positions
|
|
—
|
|
|
|
4,936
|
|
Prepaid expense acceleration and other
|
|
|
6,041
|
|
|
|
2,655
|
|
Total deferred tax liabilities
|
|
|
81,650
|
|
|
|
82,994
|
|
Net deferred tax liabilities
|
|
$
|
(13,032
|
)
|
|
$
|
(11,140
|
)
|
(1) The deferred tax asset balance as of August 31, 2020 was classified within “Other” in the Annual Report on Form 10-K for fiscal 2020.
As of August 31, 2021, foreign operating loss carryforwards were $10 million, which expire if not used between 2025 and 2041. State credit carryforwards will expire if not used between 2021 and 2035.
86 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE 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. In fiscal 2021, the Company released the valuation allowance against its Puerto Rican deferred tax assets resulting in a discrete tax benefit of $2 million. The release of this valuation allowance was the result of sufficient positive evidence at the time, including cumulative income in the Company’s Puerto Rico tax jurisdiction in recent years and projections of future taxable income based primarily on the Company's improved financial performance, that it is more-likely-than-not that the deferred tax assets will be realized. The Company continues to maintain valuation allowances against certain state and Canadian deferred tax assets. Canadian deferred tax assets against which the Company continues to maintain a valuation allowance relate to indefinite-lived assets.
Accounting for Uncertainty in Income Taxes
The following table summarizes the activity related to the Company’s reserve for unrecognized tax benefits, excluding interest and penalties, for the years ended August 31 (in thousands):
|
|
|
2021
|
|
|
|
2020
|
|
|
2019
|
|
Unrecognized tax benefits, as of the beginning of the year
|
|
$
|
7,456
|
|
|
$
|
5,410
|
|
|
$
|
5,054
|
|
(Reductions) additions for tax positions of prior years
|
|
|
(574
|
)
|
|
|
1,368
|
|
|
|
(151
|
)
|
Additions for tax positions of the current year
|
|
|
1,486
|
|
|
|
852
|
|
|
|
507
|
|
Reductions for lapse of statutes
|
|
|
(48
|
)
|
|
|
(174
|
)
|
|
|
—
|
|
Unrecognized tax benefits, as of the end of the year
|
|
$
|
8,320
|
|
|
$
|
7,456
|
|
|
$
|
5,410
|
|
The Company does not anticipate any material changes to the reserve in the next 12 months. The recognized amount of tax-related penalties and interest was not material for each of the fiscal years presented in this report.
The Company files federal and state income tax returns in the U.S. and foreign tax returns in Puerto Rico and Canada. For U.S. federal income tax returns, fiscal years 2014 to 2021 remain subject to examination under the statute of limitations.
Note 15 - Restructuring Charges and Other Exit-Related Activities
In fiscal 2020, the Company implemented restructuring initiatives aimed at further reducing its annual operating expenses, primarily selling, general, and administrative, mainly through reductions in non-trade procurement spend, including outside and professional services, lower employee-related expenses, and other non-headcount measures. Additionally, in April 2020, the Company announced its intention to modify its internal organizational and reporting structure to the One Schnitzer functionally-based, integrated model, which it completed in the first quarter of fiscal 2021. During fiscal 2020, the Company incurred severance costs of $2 million, exit-related costs associated with a lease contract termination of $1 million, and professional services costs related to these initiatives of $6 million.
87 / Schnitzer Steel Industries, Inc. Form 10-K 2021
Table of Contents
|
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 16 - Net Income (Loss) Per Share
The following table sets forth the information used to compute basic and diluted net income (loss) per share attributable to SSI shareholders for the years ended August 31 (in thousands):
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2019
|
|
Income (loss) from continuing operations
|
|
$
|
170,054
|
|
|
$
|
(2,105
|
)
|
|
$
|
58,570
|
|
Net income attributable to noncontrolling interests
|
|
|
(4,863
|
)
|
|
|
(1,945
|
)
|
|
|
(1,977
|
)
|
Income (loss) from continuing operations attributable to SSI shareholders
|
|
|
165,191
|
|
|
|
(4,050
|
)
|
|
|
56,593
|
|
Loss from discontinued operations, net of tax
|
|
|
(79
|
)
|
|
|
(95
|
)
|
|
|
(248
|
)
|
Net income (loss) attributable to SSI shareholders
|
|
$
|
165,112
|
|
|
$
|
(4,145
|
)
|
|
$
|
56,345
|
|
Computation of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
|
27,982
|
|
|
|
27,672
|
|
|
|
27,527
|
|
Incremental common shares attributable to dilutive performance share, RSU and DSU awards
|
|
|
1,211
|
|
|
|
—
|
|
|
|
695
|
|
Weighted average common shares outstanding, diluted
|
|
|
29,193
|
|
|
|
27,672
|
|
|
|
28,222
|
|
No common stock equivalent shares were considered antidilutive for the year ended August 31, 2021. Common stock equivalent shares of 629,223 and 92,873 were considered antidilutive and were excluded from the calculation of diluted net income (loss) per share attributable to SSI shareholders for the years ended August 31, 2020 and 2019, respectively.
Note 17 - Related Party Transactions
The Company purchases recycled metal from one of its joint venture operations at prices that approximate fair market value. These purchases totaled $20 million, $11 million, and $15 million for the years ended August 31, 2021, 2020, and 2019, respectively.
Note 18 - Subsequent Events
Steel Mill Fire
As disclosed in “Accounting for Impacts of Steel Mill Fire” within Note 2 – Summary of Significant Accounting Policies, on May 22, 2021, the Company experienced a fire at its steel mill in McMinnville, Oregon. The Company filed insurance claims for the property that experienced physical loss or damage and business income losses resulting from the matter. During the first quarter of fiscal 2022 through the date of this report, the Company received advance payments from insurance carriers totaling approximately $30 million towards the Company’s claims, and not reflecting any final or full settlement of claims with the carriers.
Acquisition of Columbus Recycling
On August 12, 2021, the Company entered into a definitive agreement with Columbus Recycling, a leading provider of recycled ferrous and nonferrous metal products and recycling services, to acquire eight metals recycling facilities across several states in the Southeast, including Mississippi, Tennessee, and Kentucky. The transaction closed on October 1, 2021, during the first quarter of the Company’s fiscal 2022. The acquired Columbus Recycling operations purchase and process scrap metal from industrial manufacturers, local recycling companies, and individuals, and sell the recycled products to regional foundries and steel mills. Combined with the Company’s twelve existing metals recycling facilities in Georgia, Alabama, and Tennessee, the acquired operations offer additional recycling products, services, and logistics solutions to customers and suppliers across the Southeast. The cash purchase price was approximately $107 million, subject to adjustment for acquired net working capital relative to an agreed-upon benchmark, as well as other adjustments. The Company funded the business acquisition using cash on hand and borrowings under existing credit facilities. Due to the short period between the closing of the acquisition and the issuance of this report, the Company is unable to provide certain disclosures required by U.S. GAAP concerning the acquisition including, but not limited to, the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed and the amount of goodwill remaining after the allocation of the purchase price.
88 / Schnitzer Steel Industries, Inc. Form 10-K 2021