RADIUS RECYCLING, INC. This section includes a discussion of our operations for the three and six months endedFebruary 28, 2023 and 2022. 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 our Annual Report on Form 10-K for the year endedAugust 31, 2022 , and the Unaudited Condensed Consolidated Financial Statements and the related Notes thereto included in Part I, Item 1 of this report. General
Founded in 1906,
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. We acquire, process, and recycle end-of-life (salvaged) vehicles, rail cars, home appliances, industrial machinery, manufacturing scrap, and construction and demolition scrap through our facilities. Our retail self-service auto parts stores located acrossthe United States ("U.S.") andWestern Canada , which operate under the commercial brand-name Pick-n-Pull, procure the significant majority of our salvaged vehicles and sell serviceable used auto parts from these vehicles. Upon acquiring a salvaged vehicle, we remove catalytic converters, aluminum wheels, and batteries for separate processing and sale prior to placing the vehicle in our retail lot. After retail customers have removed desired parts from a vehicle, we may remove remaining major component parts containing ferrous and nonferrous metals, which are primarily sold to wholesalers. The remaining auto bodies are crushed and shipped to our metals recycling facilities to be shredded or sold to third parties when geographically more economical. At our metals recycling facilities, we process mixed and large pieces of scrap metal into smaller pieces by crushing, torching, shearing, shredding, separating, and sorting, resulting in recycled ferrous, nonferrous, and mixed metal pieces of a size, density, and metal content required by customers to meet their production needs. Each of our shredding, nonferrous processing, and separation systems is designed to optimize the recovery of valuable recycled metal. We also purchase nonferrous metal directly from industrial vendors and other suppliers and aggregate and prepare this metal for shipment to customers by ship, rail, or truck. In addition to the sale of recycled metal processed at our facilities, we also provide a variety of recycling and related services including brokering the sale of ferrous and nonferrous scrap metal generated by industrial entities and demolition projects to customers in the domestic market, among other services. Our steel mill produces semi-finished goods (billets) and finished goods, consisting of rebar, coiled rebar, wire rod, merchant bar, and other specialty products, using recycled ferrous metal sourced internally from our recycling and joint venture operations and other raw materials. We operate seven deepwater port locations, six of which are equipped with large-scale shredders. Our deepwater port facilities on both the East and West Coasts of theU.S. (inEverett, Massachusetts ;Providence, Rhode Island ;Oakland, California ;Tacoma, Washington ; andPortland, Oregon ) and access to public deepwater port facilities (inKapolei, Hawaii andSalinas ,Puerto Rico ) allow us to ship bulk cargoes of processed recycled ferrous metal to steel manufacturers located inEurope ,Africa , theMiddle East ,Asia ,North America ,Central America , andSouth America . Our exports of nonferrous recycled metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers, wire and cable producers, wholesalers, and other recycled metal processors globally. We also transport both ferrous and nonferrous metals by truck, rail, and barge in order to transfer scrap metal between our facilities for further processing, to load shipments at our export facilities, and to meet regional domestic demand. 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 theWestern U.S. andWestern Canada . 25
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SCHNITZER STEEL INDUSTRIES, INC. 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, varying demand for used auto parts from our self-service retail stores, the efficiency of our supply chain, and variations in production and other operating costs. 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, product quality, 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.
Steel
OnMay 22, 2021 , we experienced a fire at our steel mill inMcMinnville, 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 earlyJune 2021 . InAugust 2021 , our steel mill began ramping up operations following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. We experienced the loss of business income during the shutdown of the steel mill and the subsequent ramp-up phase which was substantially completed during the second quarter of fiscal 2022. We have insurance that we believe is fully applicable to the losses and have filed insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property that experienced physical loss or damage and business income losses resulting from the matter. The property damage deductible under the policies insuring our assets in this matter is$1 million , while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. As ofAugust 31, 2021 , prepaid expenses and other current assets included an initial$10 million insurance receivable recognized in fiscal 2021, primarily offsetting applicable losses including capital purchases of$10 million that we had incurred as ofAugust 31, 2021 . In the first half of fiscal 2022, we increased the amount of this insurance receivable to$25 million and recognized a related$15 million insurance recovery gain,$3 million and$12 million of which was recognized in the first and second quarters of fiscal 2022, respectively, within cost of goods sold and included within the Unaudited Condensed Consolidated Statements of Operations, reflecting recovery of applicable losses incurred as a result of the fire to date. In addition, during the first half of fiscal 2022, we received advance payments from insurers totaling approximately$30 million towards our claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the$25 million insurance receivable to zero with the remaining amount of advance payments reported within other accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets. The amount of advance payments reported within other accrued liabilities was$4 million as ofFebruary 28, 2023 and$5 million as ofAugust 31, 2022 . InMarch 2023 , during the third quarter of fiscal 2023, we received additional advance payments from insurers of approximately$13 million towards our claims, increasing the total of such advance payments from insurers to approximately$43 million , and not reflecting any final or full settlement of claims with the insurers. These amounts do not reflect potential additional recoveries of business income losses resulting from this matter that may be recognized in the future when settlements of the business interruption claims are resolved. 26
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SCHNITZER STEEL INDUSTRIES, INC.
Everett Facility Shredder Fire
OnDecember 8, 2021 , we experienced a fire at our metals recycling facility inEverett, Massachusetts . Direct physical loss or damage to property from the incident was limited to the facility's shredder building and equipment, with no bodily injuries and no physical loss or damage to property reported at other buildings or equipment. As a result of the fire, shredding operations ceased, while all non-shredding operations at the facility continued, including torching, shearing, separating, and sorting purchased non-shreddable recycled ferrous metals. OnJanuary 28, 2022 , shredding operations at the facility began ramping up following the replacement and repairs to shredder equipment that had been damaged. Completion of the remainder of repair and replacement of property that experienced physical loss or damage, primarily buildings and improvements, will occur over a longer period and impacts on business income may continue. For example, shredding operations temporarily ceased at the facility onJune 18, 2022 and, following discussions with theMassachusetts Department of Environmental Protection and theMassachusetts Attorney General's office, we installed a temporary emission capture system and controls that allowed for us to resume shredding operations onNovember 11, 2022 and continue shredding operations while the repair and replacement of the shredder enclosure building is completed. Non-shredding operations at the facility continued during this period. We have insurance that we believe is fully applicable to the losses, including but not limited to the costs of installing the temporary capture and controls system and any associated loss of business income, and have filed insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property damage or loss and business income losses resulting from the matter. The property damage deductible under the policies insuring our assets in this matter is$0.5 million , while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. The insurance claims resolution process may extend significantly beyond completion of repair and replacement of the physical plant property that experienced physical loss or damage and the restart of production activities. In fiscal 2022, after the fire, we recognized an aggregate$17 million insurance receivable and related insurance recovery gain,$10 million of which was recorded in the second quarter of fiscal 2022, reported within prepaid expenses and other current assets and within cost of goods sold, respectively, reflecting recovery of applicable losses including impairment charges of$7 million related to the carrying value of plant and equipment assets damaged by the fire and initial capital purchases and other costs totaling$10 million that we had incurred as ofAugust 31, 2022 . Also during fiscal 2022, we received advance payments from insurers totaling approximately$7 million towards our claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the insurance receivable to$10 million as ofFebruary 28, 2023 and August, 31 2022. These amounts do not reflect potential additional recoveries of costs for the repair and replacement of property that experienced physical loss or damage or of business income losses resulting from this matter that may be recognized in the future when settlements of the claims are resolved. 27
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SCHNITZER STEEL INDUSTRIES, INC.
Coronavirus Disease 2019 ("COVID-19")
We continue to monitor the impact of COVID-19 on all aspects of our business. Following the onset of COVID-19 and its negative effects on our business, most prominently reflected in our fiscal 2020 results, global economic conditions improved beginning in fiscal 2021 and continued to improve through most of fiscal 2022. However, there are ongoing global impacts resulting directly or indirectly from the pandemic including labor shortages, logistical challenges, and increases in costs for certain goods and services including due to the impact of inflation, which have negatively impacted our sales volumes, operating costs, and financial results to varying degrees. The ongoing effects of the COVID-19 pandemic could negatively impact our results of operations, cash flows, and financial position in the future.
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, we use adjusted EBITDA as one of the measures to compare and
evaluate financial performance. Adjusted EBITDA is the sum of our net income
(loss) before results from discontinued operations, interest expense, income
taxes, depreciation and amortization, restructuring charges and other
exit-related activities, business development costs not related to ongoing
operations including pre-acquisition expenses, charges for legacy environmental
matters (net of recoveries), asset impairment charges, 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 2.
Our non-GAAP financial measures should be considered in addition to, but not as
a substitute for, the most directly comparable 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.
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SCHNITZER STEEL INDUSTRIES, INC.
Financial Highlights of Results of Operations for the Second Quarter of Fiscal 2023
•
Diluted earnings per share from continuing operations attributable to SSI
shareholders in the second quarter of fiscal 2023 was
•
Adjusted diluted earnings per share from continuing operations attributable to SSI shareholders in the second quarter of fiscal 2023 was$0.14 , compared to adjusted diluted earnings per share of$1.38 in the prior year quarter.
•
Net income in the second quarter of fiscal 2023 was
•
Adjusted EBITDA in the second quarter of fiscal 2023 was
Market conditions for recycled metals were weaker in the second quarter of fiscal 2023 compared to the prior year quarter, leading to lower average net selling prices for our ferrous and nonferrous products and a compression in metal spreads. The average net selling prices for our ferrous and nonferrous products decreased by 18% and 10%, respectively, compared to the second quarter of fiscal 2022. Ferrous and nonferrous sales volumes increased by 18% and 12%, respectively, compared to the prior year quarter, reflecting additional volumes arising from our two business acquisitions completed in April andNovember 2022 , a drawdown of ferrous inventories due to the delay of several bulk shipments at the end of the first quarter of fiscal 2023, and the adverse impact of the initialEverett shredder downtime on sales volumes in the prior year quarter. Market conditions for our finished steel products were softer in the second quarter of fiscal 2023, leading to finished steel average selling prices decreasing 10% compared to the prior year quarter. Our results in the second quarter of fiscal 2023 also reflected tighter supply flows and reduced processed volumes in the lower price environment, lower year-over-year platinum group metals (PGM) prices, and the impact of inflation, partially offset by a more favorable impact from average inventory accounting compared to the prior year quarter. We achieved a benefit of approximately$23 million from productivity and cost reduction initiatives in the second quarter of fiscal 2023, including from measures announced inOctober 2022 andJanuary 2023 and implemented during the first half of fiscal 2023, which helped to partially offset the effects of higher operating costs including from inflationary pressure. Selling, general, and administrative ("SG&A") expense in the second quarter of fiscal 2023 increased by 5% compared to the prior year quarter reflecting higher salaries and wages, outside services, and insurance expenses, in part from higher costs resulting from our acquisitions and other growth-related initiatives, and the impact of inflation, partially offset by benefits from productivity and cost reduction initiatives and lower share-based compensation expense and legacy environmental charges.
The following items further highlight selected liquidity and capital structure metrics:
•
For the first six months of fiscal 2023, net cash provided by operating
activities was
•
Debt was$310 million as ofFebruary 28, 2023 , compared to$249 million as ofAugust 31, 2022 , as a result of increased borrowings from our credit facilities primarily to fund capital expenditures and the acquisition of the ScrapSource business.
•
Debt, net of cash, was
See the reconciliations of adjusted diluted earnings per share from continuing
operations attributable to SSI shareholders, adjusted EBITDA, and debt, net of
cash in Non-GAAP Financial Measures at the end of this Item 2.
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SCHNITZER STEEL INDUSTRIES, INC.
Results of Operations
Selected Financial Measures and Operating Statistics
Three Months Ended February 28, Six Months Ended February 28,
($ in thousands, except
for prices and per share
amounts) 2023 2022 % 2023 2022 %
Ferrous revenues $ 434,122 $ 438,314 (1 )% $ 695,851 $ 904,170 (23 )%
Nonferrous revenues 179,655 196,142 (8 )% 357,330 390,571 (9 )%
Steel revenues(1) 107,825 116,196 (7 )% 232,340 219,434 6 %
Retail and other revenues 34,351 32,546 6 % 69,162 67,141 3 %
Total revenues 755,953 783,198 (3 )% 1,354,683 1,581,316 (14 )%
Cost of goods sold 682,937 670,539 2 % 1,232,948 1,353,783 (9 )%
Gross margin (total
revenues less cost of
goods sold) $ 73,016 $ 112,659 (35 )% $ 121,735 $ 227,533 (46 )%
Gross margin (%) 9.7 % 14.4 % (33 )% 9.0 % 14.4 % (38 )%
Selling, general and
administrative expense $ 63,957 $ 61,081 5 % $ 128,185 $ 116,348 10 %
Diluted earnings (loss)
per share from continuing
operations attributable to
SSI shareholders:
Reported $ 0.14 $ 1.27 (89 )% $ (0.49 ) $ 2.81 NM
Adjusted(2) $ 0.14 $ 1.38 (90 )% $ (0.30 ) $ 2.96 NM
Net income (loss) $ 4,272 $ 38,165 (89 )% $ (13,284 ) $ 85,441 NM
Adjusted EBITDA(2) $ 31,850 $ 75,259 (58 )% $ 40,212 $ 153,345 (74 )%
Average ferrous recycled
metal sales prices
($/LT)(3):
Domestic $ 359 $ 418 (14 )% $ 336 $ 424 (21 )%
Foreign $ 368 $ 455 (19 )% $ 364 $ 452 (19 )%
Average $ 367 $ 445 (18 )% $ 357 $ 446 (20 )%
Ferrous volumes (LT, in
thousands):
Domestic(4) 444 408 9 % 876 839 4 %
Foreign 819 663 24 % 1,238 1,381 (10 )%
Total ferrous volumes (LT,
in thousands)(4)(8) 1,263 1,071 18 % 2,114 2,219 (5 )%
Average nonferrous sales
price ($/pound)(3)(5) $ 0.99 $ 1.10 (10 )% $ 0.94 $ 1.08 (13 )%
Nonferrous volumes
(pounds, in
thousands)(4)(5) 164,796 147,145 12 % 327,516 300,373 9 %
Finished steel average
sales price ($/ST)(3) $ 943 $ 1,045 (10 )% $ 980 $ 1,013 (3 )%
Finished steel sales
volumes (ST, in thousands) 109 106 3 % 227 205 11 %
Cars purchased (in
thousands)(6) 72 73 (1 )% 141 153 (8 )%
Number of auto parts
stores at period end 50 50 (- )% 50 50 (- )%
Rolling mill
utilization(7) 75 % 86 % (13 )% 78 % 82 % (5 )%
NM = Not Meaningful
LT = Long Ton, which is equivalent to 2,240 pounds. ST =
(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 2.
(3)
Price information is shown after netting the cost of freight incurred to deliver the product to the customer.
(4)
Ferrous and nonferrous volumes sold externally and delivered to our steel mill for finished steel production.
(5)
Average sales price and volume information excludes PGMs in catalytic converters.
(6)
Cars purchased by auto parts stores only.
(7)
Rolling mill utilization is based on effective annual production capacity under current conditions of 580 thousand tons of finished steel products.
(8)
May not foot due to rounding.
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SCHNITZER STEEL INDUSTRIES, INC.
Revenues
Revenues in the second quarter and first six months of fiscal 2023 decreased by
3% and 14%, respectively, compared to the prior year periods primarily due to
lower average net selling prices for our ferrous and nonferrous products driven
by weaker market conditions for recycled metals globally. In the second quarter
and first six months of fiscal 2023, the average net selling prices for our
ferrous products decreased by 18% and 20%, respectively, and for our nonferrous
products decreased by 10% and 13%, respectively, compared to the prior year
periods. Ferrous sales volumes in the second quarter and first six months of
fiscal 2023 increased by 18% and decreased by 5%, respectively, and nonferrous
sales volumes increased by 12% and 9%, respectively, compared to the prior year
periods. Our ferrous and nonferrous sales volumes in the second quarter and
first six months of fiscal 2023 in part reflected additional volumes arising
from the Columbus Recycling business acquired on October 1, 2021 , the Encore
Recycling business acquired on April 29, 2022 , and the ScrapSource business
acquired on November 18, 2022 , as well as the adverse impact on sales volumes in
the prior year periods of the initial Everett shredder downtime. Our ferrous
sales volumes in the first six months of fiscal 2023 were adversely impacted by
disruptions related to an extended shredder outage at the Everett facility and a
regulatory issue limiting operations at our shredder facility in California ,
both of which were resolved by mid-November 2022 , as well as tight supply flows
in the lower price environment. Market conditions for our finished steel
products were softer in the second quarter and first six months of fiscal 2023,
leading to finished steel average selling prices decreasing 10% and 3%,
respectively, compared to the prior year periods. Finished steel sales volumes
increased 11% in the first six months of fiscal 2023, compared to the prior year
period, primarily reflecting the impact on the prior period volumes of the ramp
up of steel mill operations that began in August 2021 and which was
substantially completed during the second quarter of fiscal 2022. The ramp-up of
steel mill operations during the first half of fiscal 2022 followed completion
of repair and replacement of damaged property arising from the May 2021 steel
mill fire.
Operating Performance
Net income (loss) in the second quarter and first six months of fiscal 2023 was
$4 million and $(13) million , respectively, compared to net income of $38
million and $85 million , respectively, in the prior year periods. Adjusted
EBITDA in the second quarter and first six months of fiscal 2023 was $32 million
and $40 million , respectively, compared to $75 million and $153 million ,
respectively, in the prior year periods. The lower price environment for
recycled metals, as well as the impact of tight supply flows, reduced processed
volumes, and the extended operational disruptions in the first quarter of fiscal
2023 had a significant adverse impact on our operating margins and overall
operating results in the second quarter and first six months of fiscal 2023.
Ferrous metal spreads in the second quarter and first six months of fiscal 2023
decreased by approximately 19% and 20%, respectively, and average net selling
prices for our nonferrous joint products that are recovered from the shredding
process, comprising primarily zorba, decreased by approximately 3% and 5%,
respectively, compared to the prior year periods. Finished steel metal spreads
were lower in the second quarter of fiscal 2023, compared to the prior year
quarter. Our results in the second quarter and first six months of fiscal 2023
also reflected lower year-over-year PGM prices, an impairment charge related to
an equity investment recorded in the first quarter of fiscal 2023, and the
impact of inflation on operating costs, partially offset by a more favorable
impact from average inventory accounting compared to the prior year periods.
SG&A expense in the second quarter and first six months of fiscal 2023 increased
by 5% and 10%, respectively, compared to the prior year periods primarily due to
higher salaries and wages, outside and professional services, insurance, and
travel expenses, partially resulting from our acquisitions and other
growth-related initiatives, and the impact of inflation, partially offset by
lower share-based compensation expense and legacy environmental charges. The
higher expenses in the second quarter and first six months of fiscal 2023 were
partially offset by benefits from productivity and cost reduction initiatives
when compared to the prior year periods.
In October 2022 , we announced and began implementing productivity and cost
reduction initiatives with a targeted annual benefit of approximately $40
million , the vast majority of which is expected to be achieved in fiscal 2023.
In addition, in January 2023 , we announced incremental initiatives aiming to
reduce SG&A costs by approximately $20 million annually, of which approximately
two-thirds is expected to be achieved in fiscal 2023. These initiatives aim to
improve profitability through a combination of increased yields, efficiencies in
processing, procurement, and pricing, and reduced costs including from headcount
reductions, decreased lease costs, professional and outside services, and
implementation of operational efficiencies. In the second quarter and first six
months of fiscal 2023, we achieved a benefit from these initiatives, and others
implemented during fiscal 2022, of approximately $23 million and $37 million ,
respectively, which helped to partially offset the effects of inflationary
pressure on operating costs.
See the reconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the end of this Item 2.
Interest Expense Interest expense was$5 million and$8 million , respectively, for the second quarter and first six months of fiscal 2023, compared to$2 million and$3 million for the same periods in the prior year. The increase in interest expense was primarily due to higher interest rates on amounts outstanding under our bank credit facilities, as well as increased average borrowings, compared to the prior year periods. 31
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SCHNITZER STEEL INDUSTRIES, INC.
Income Tax
The effective tax rate from continuing operations for the second quarter and
first six months of fiscal 2023 was a benefit on pre-tax income of 14.5% and a
benefit on pre-tax loss of 32.8%, respectively, compared to an expense on
pre-tax income of 24.0% and 21.3%, respectively, for the comparable prior year
periods. Our effective tax rate from continuing operations for the second
quarter of fiscal 2023 was significantly different than the U.S. federal
statutory rate of 21% primarily due to our financial performance and the effect
of discrete items on intra-period allocation. For the second quarter of fiscal
2022, the effective tax rate from continuing operations was higher than the U.S.
federal statutory rate primarily due to the aggregate impact of state taxes and
permanent differences from non-deductible expenses on the projected annual
effective tax rate applied to the quarterly results.
Liquidity and Capital Resources
We rely on cash provided by operating activities as a primary source of liquidity, supplemented by current cash on hand and borrowings under our existing credit facilities.
Sources and Uses of Cash
We had cash balances of$11 million and$44 million as ofFebruary 28, 2023 andAugust 31, 2022 , 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 ofFebruary 28, 2023 , debt was$310 million compared to$249 million as ofAugust 31, 2022 , and debt, net of cash, was$299 million as ofFebruary 28, 2023 , compared to$205 million as ofAugust 31, 2022 , which increases were primarily due to increased borrowings from our credit facilities to fund higher net working capital needs, capital expenditures, and the acquisition of the ScrapSource business onNovember 18, 2022 . See the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2.
Operating Activities
Net cash provided by operating activities in the first six months of fiscal 2023
was
Sources of cash in the first six months of fiscal 2023 included a$34 million decrease in inventory primarily due to lower raw material purchase costs and the timing of purchases and sales and a$12 million increase in accounts payable primarily due to the timing of purchases and payments. Uses of cash in the first six months of fiscal 2023 included a$33 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation in the first quarter of fiscal 2023 previously accrued under our fiscal 2022 plans and a$14 million increase in accounts receivable primarily due to the timing of sales and collections. Sources of cash other than from earnings in the first six months of fiscal 2022 included a$12 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of purchases and payments and an$8 million increase in other accrued liabilities primarily reflecting the portion of advance payments from insurance carriers received in the period towards our claims arising from theMay 2021 steel mill fire deemed attributable to operating activities. Uses of cash in the first six months of fiscal 2022 included a$53 million increase in inventories due to higher raw material purchase costs and the timing of purchases and sales, a$48 million increase in accounts receivable primarily due to higher selling prices and higher sales volumes for recycled metals, as well as the timing of sales and collections, a$40 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation in the first quarter of fiscal 2022 previously accrued under our fiscal 2021 plans, and a$12 million decrease in environmental liabilities primarily due to payments in connection with legacy environmental matters. The sources and uses of cash related to operating activities described above also reflect higher net working capital needs during the ramp-up of steel mill operations that began inAugust 2021 following completion of repair and replacement of damaged property arising from theMay 2021 steel mill fire. Investing Activities
Net cash used in investing activities was
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SCHNITZER STEEL INDUSTRIES, INC. Cash used in investing activities in the first six months of fiscal 2023 included$25 million paid to acquire the assets of the ScrapSource business onNovember 18, 2022 . We funded the acquisition using cash on hand and borrowings under our existing credit facilities. See Note 3 - Business Acquisitions in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further detail. Cash used in investing activities also included capital expenditures of$75 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, compared to$69 million in the prior year period. Cash used in investing activities in the first six months of fiscal 2022 included$114 million paid to acquire the assets of theColumbus Recycling business onOctober 1, 2021 . We funded the acquisition using cash on hand and borrowings under our existing credit facilities. See Note 3 - Business Acquisitions in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further detail. Cash flows from investing activities in the first six months of fiscal 2022 also included proceeds of$10 million representing the portion of advance payments from insurance carriers deemed a recovery of capital purchases incurred for repair and replacement of damaged property arising from theMay 2021 steel mill fire.
Financing Activities
Net cash provided by financing activities in the first six months of fiscal 2023
was
Cash flows from financing activities in the first six months of fiscal 2023 included$59 million in net borrowings of debt, compared to$180 million in the prior year period (refer to Non-GAAP Financial Measures at the end of this Item 2). Uses of cash in the first six months of fiscal 2023 and 2022 included$7 million and$10 million , respectively, for payment of employee tax withholdings resulting from vesting of share-based awards and$11 million in each period for the payment of dividends. Debt Our senior secured revolving credit facilities, which provide for revolving loans of$800 million andC$15 million , mature inAugust 2027 pursuant to a credit agreement withBank of America, N.A ., as administrative agent, and other lenders party thereto. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the Secured Overnight Financing Rate ("SOFR") (or the Canadian Dollar Offered Rate, "CDOR" for C$ loans), plus a spread of between 1.25% and 2.00%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated net funded debt to EBITDA (as defined by the 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 Term SOFR plus 1.00%, in each case, plus a spread of between 0.25% and 1.00% based on a pricing grid tied to our consolidated net funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.175% and 0.30% based on a pricing grid tied to our ratio of consolidated net funded debt to EBITDA. Under the credit agreement, we may establish one or more key performance indicators ("KPIs") to measure our performance with respect to certain of our environmental, social and governance targets. Subject to the terms and conditions of the credit agreement, we may propose to amend the credit agreement to modify (i) the pricing spread and (ii) the commitment fee rate. Such modifications would be tied to our performance against the KPIs and would allow for (i) the pricing spread to be increased or decreased by no more than (a) 0.025% per KPI and (b) 0.05% for all KPIs, and (ii) the commitment fee rate to be increased or decreased by no more than 0.005% for all KPIs. Such adjustments would be determined on an annual basis and would not be cumulative. We had borrowings outstanding under our credit facilities of$290 million as ofFebruary 28, 2023 and$230 million as ofAugust 31, 2022 . The weighted average interest rate on amounts outstanding under our credit facilities was 6.20% and 3.65% as ofFebruary 28, 2023 andAugust 31, 2022 , respectively. 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. The financial covenants under the credit agreement include (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. 33
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SCHNITZER STEEL INDUSTRIES, INC. As ofFebruary 28, 2023 , 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 4.36 to 1.00 as ofFebruary 28, 2023 . The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.26 to 1.00 as ofFebruary 28, 2023 . 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$13 million as of each ofFebruary 28, 2023 andAugust 31, 2022 , respectively, primarily relate to equipment purchases, 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 obligations are treated as a partial financing of the purchase price by the equipment vendor. Monthly payments commence when the equipment is placed in service and achieves specified minimum operating metrics, with payments continuing for a period of four years thereafter.
Capital Expenditures
Capital expenditures totaled$75 million for the first six months of fiscal 2023, compared to$69 million for the prior year period. Capital expenditures in the first six months of fiscal 2023 included approximately$18 million for investments in growth. We currently plan to invest in the range of$110 million to$120 million in capital expenditures in fiscal 2023, which range excludes capital expenditures associated with the ongoing repair and replacement of the shredder enclosure building damaged by the fire at ourEverett facility, as these expenditures are expected to be substantially recovered through insurance. These capital expenditures include investments in growth, including new nonferrous processing technologies, and to support volume initiatives as well as post-acquisition and other growth projects, and investments to upgrade our equipment and infrastructure and for environmental and safety-related assets, using cash generated from operations and available credit facilities. Supply chain disruptions have contributed to some delays in construction activities and equipment deliveries related to our capital projects, and to the time required to obtain permits from government agencies, resulting in the deferral of certain capital expenditures. Given the continually evolving nature of such disruptions 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$12 million in capital expenditures for environmental projects in the first six months of fiscal 2023, and we currently plan to invest in the range of$30 million to$40 million for such projects in fiscal 2023. These projects include investments in equipment to ensure ongoing compliance with air quality and other environmental regulations and storm water systems. We have been identified by theUnited States Environmental Protection Agency as one of the potentially responsible parties that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site ("Portland Harbor "). See Note 5 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of this matter, as well as other legacy environmental loss contingencies. We believe it is not possible to reasonably estimate the amount or range of costs which we are likely to or which it is reasonably possible that we will incur in connection withPortland Harbor , although such costs could be material to our financial position, results of operations, cash flows, and liquidity. We have insurance policies and Qualified Settlement Funds ("QSFs") that we believe will provide reimbursement for costs we incur for defense, remediation, and mitigation for natural resource damages claims in connection withPortland Harbor , although there are no assurances that those policies and the QSFs will cover all of the costs which we may incur. Significant cash outflows in the future related toPortland Harbor , as well as related to other legacy environmental loss contingencies, 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. 34
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SCHNITZER STEEL INDUSTRIES, INC.
Dividends
On January 5, 2023 , our Board of Directors declared a dividend for the second
quarter of fiscal 2023 of $0.1875 per common share, which equates to an annual
cash dividend of $0.75 per common share. The dividend was paid on February 14,
2023 .
Share Repurchase Program
As of February 28, 2023 , pursuant to our board-authorized share repurchase
programs, we had remaining authorization to repurchase up to 2.8 million 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 of our common stock during the second quarter of fiscal 2023.
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, investments and acquisitions, joint ventures, debt service requirements, environmental obligations, share repurchases, 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.
Contractual Obligations
There were no material changes related to contractual obligations and
commitments from the information provided in our Annual Report on Form 10-K for
the fiscal year ended
We maintain stand-by letters of credit to provide support for certain
obligations, including workers' compensation and performance bonds. As of
Critical Accounting Estimates
There were no material changes to our critical accounting estimates as described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year endedAugust 31, 2022 .
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):
February 28, 2023 August 31, 2022
Short-term borrowings $ 6,527 $ 6,041
Long-term debt, net of current maturities 303,552
242,521
Total debt 310,079
248,562
Less cash and cash equivalents 11,459 43,803
Total debt, net of cash $ 298,620 $ 204,759
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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):
Six Months Ended February 28,
2023 2022
Borrowings from long-term debt
(274,036 ) (225,395 )
Net borrowings (repayments) of debt
Adjusted EBITDA, adjusted selling, general, and administrative expense, adjusted income (loss) from continuing operations attributable to SSI shareholders, and adjusted diluted earnings (loss) 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 restructuring charges and other exit-related activities, business development costs not related to ongoing operations including pre-acquisition expenses, charges for legacy environmental matters (net of recoveries), asset impairment charges, 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):
Three Months Ended
February 28, Six Months Ended February 28,
2023 2022 2023 2022
Reconciliation of adjusted EBITDA:
Net income (loss) $ 4,272 $ 38,165 $ (13,284 ) $ 85,441
(Income) from discontinued operations, net
of tax (224 ) (29 ) (155 ) -
Interest expense 4,908 1,901 8,232 3,273
Income tax (benefit) expense (513 ) 12,073 (6,545 ) 23,170
Depreciation and amortization 22,399 18,596 43,850 35,816
Restructuring charges and other
exit-related activities 828 4 2,420 26
Business development costs 103 545 338 1,159
Charges for legacy environmental matters,
net(1) 77 4,004 1,356 4,460
Asset impairment charges(2) - - 4,000 -
Adjusted EBITDA $ 31,850 $ 75,259 $ 40,212 $ 153,345
Selling, general and administrative
expense:
As reported $ 63,957 $ 61,081 $ 128,185 $ 116,348
Business development costs (103 ) (545 ) (338 ) (1,159 )
Charges for legacy environmental matters,
net(1) (77 ) (4,004 ) (1,356 ) (4,460 )
Adjusted $ 63,777 $ 56,532 $ 126,491 $ 110,729
(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 5 - Commitments and
Contingencies, "Portland Harbor " and "Other Legacy Environmental Loss
Contingencies" in the Notes to the Unaudited Condensed Consolidated Financial
Statements in Part I, Item 1 of this report.
(2)
For the six months ended
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Following are reconciliations of adjusted net 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):
Three Months Ended
February 28, Six Months Ended February 28,
2023 2022 2023 2022
Income (loss) from continuing operations
attributable to SSI shareholders:
As reported $ 4,129 $ 37,586 $ (13,590 ) $ 83,814
Restructuring charges and other
exit-related activities 828 4 2,420 26
Business development costs 103 545 338 1,159
Charges for legacy environmental matters,
net(1) 77 4,004 1,356 4,460
Asset impairment charges(2) - - 4,000 -
Income tax benefit allocated to
adjustments(3) (1,151 ) (1,073 ) (2,865 ) (1,322 )
Adjusted $ 3,986 $ 41,066 $ (8,341 ) $ 88,137
Diluted earnings (loss) per share from
continuing operations attributable to SSI
shareholders:
As reported $ 0.14 $ 1.27 $ (0.49 ) $ 2.81
Restructuring charges and other
exit-related activities, per share 0.03 - 0.09 -
Business development costs, per share - 0.02 0.01 0.04
Charges for legacy environmental matters,
net, per share(1) - 0.13 0.05 0.15
Asset impairment charges, per share(2) - - 0.14 -
Income tax benefit allocated to
adjustments, per share(3) (0.04 ) (0.04 ) (0.10 ) (0.04 )
Adjusted(4) $ 0.14 $ 1.38 $ (0.30 ) $ 2.96
(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 5 - Commitments and
Contingencies, "Portland Harbor " and "Other Legacy Environmental Loss
Contingencies" in the Notes to the Unaudited Condensed Consolidated Financial
Statements in Part I, Item 1 of this report.
(2)
For the six months endedFebruary 28, 2023 , asset impairment charges included$4 million ($0.14 per share before income tax) reported within "Other loss, net" on the Unaudited Condensed Consolidated Statement of Operations.
(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.
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