This section includes a discussion of our operations for the three months ended
General
Founded in 1906,
Our internal organizational and reporting structure includes two operating
and reportable segments: the Auto and
AMR sells ferrous and nonferrous recycled scrap metal in both foreign and
domestic markets. AMR acquires, processes and recycles auto bodies, rail cars,
home appliances, industrial machinery, manufacturing scrap and construction and
demolition scrap through its 90 auto and metals recycling facilities. Our
largest source of auto bodies is our own network of retail auto parts stores,
which operate under the commercial brand-name Pick-n-Pull. AMR procures salvaged
vehicles and sells serviceable used auto parts from these vehicles through its
51 self-service auto parts stores located across
CSS operates a steel mini-mill in
We use segment operating income to measure our segment performance. We do not allocate corporate interest income and expense, income taxes and other income and expense to our reportable segments. Certain expenses related to shared services that support operational activities and transactions are allocated from Corporate to the segments. Unallocated Corporate expense consists primarily of expense for management and certain administrative services that benefit both reportable segments. In addition, we do not allocate certain items to segment operating income because management does not include the information in its measurement of the performance of the operating segments. Such unallocated items include restructuring charges and other exit-related activities, charges (net of recoveries) related to legacy environmental matters, and provisions for certain legal matters. Because of the unallocated income and expense, the operating income of each reportable segment does not reflect the operating income the reportable segment would report as a stand-alone business. The results of discontinued operations are excluded from segment operating income and are presented separately, net of tax, from the results of ongoing operations for all periods presented.
For further information regarding our reportable segments, see Note 13 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating income. We believe we generally benefit from sustained periods of stable or rising recycled scrap metal selling prices, which allow us to better maintain or increase both operating income and unprocessed scrap metal flow into our facilities. When recycled scrap metal selling prices decline, either sharply or for a sustained period, our operating margins typically compress.
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Our deep water port facilities on both the East and West Coasts of the
Our results of operations also depend on the demand and prices for our finished
steel products, the manufacture of which uses internally sourced ferrous
recycled scrap metal as the primary feedstock, as well as other raw materials.
Our steel mill in
Our quarterly operating results fluctuate based on a variety of factors including, but not limited to, changes in market conditions for ferrous and nonferrous recycled metal and finished steel products, the supply of scrap metal in our domestic markets, and varying demand for used auto parts from our self-service retail stores. Certain of these factors are influenced, to a degree, by the impact of seasonal changes including severe weather conditions, which can impact the timing of shipments and inhibit construction activity utilizing our products, scrap metal collection at our facilities and production levels in our yards, and retail admissions and parts sales at our auto parts stores. Further, trade actions, including tariffs and any retaliation by affected countries, and licensing and inspection requirements can impact the level of profitability on sales of our products and, in certain cases, impede or restrict our ability to sell to certain export markets or require us to direct our sales to alternative market destinations, which can cause our quarterly operating results to fluctuate.
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Executive Overview of Financial Results for the First Quarter of Fiscal 2020
We generated consolidated revenues of
Consolidated operating loss was
AMR reported an operating loss in the first quarter of fiscal 2020 of
CSS reported operating income of
Consolidated selling, general and administrative ("SG&A") expense in the first
quarter of fiscal 2020 decreased by
In the first quarter of fiscal 2020, we invested
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Net loss from continuing operations attributable to SSI shareholders in the
first quarter of fiscal 2020 was
The following items further highlight selected liquidity and capital structure metrics:
• For the first three months of fiscal 2020, net cash provided by operating activities of$11 million , compared to net cash used in operating activities of$12 million in the prior year comparable period; • Debt of$128 million as ofNovember 30, 2019 , compared to$105 million as ofAugust 31, 2019 ; and • Debt, net of cash, of$119 million as ofNovember 30, 2019 , compared to$93 million as ofAugust 31, 2019 (see the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2). 28
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Table of Contents SCHNITZER STEEL INDUSTRIES, INC. Results of Operations Three Months Ended November 30, ($ in thousands) 2019 2018 % Change Revenues: Auto and Metals Recycling$ 312,757 $ 436,412 (28 )% Cascade Steel and Scrap 94,266 130,386 (28 )% Intercompany revenue eliminations(1) (1,439 ) (2,778 ) (48 )% Total revenues 405,584 564,020 (28 )% Cost of goods sold: Auto and Metals Recycling 280,129 378,736 (26 )% Cascade Steel and Scrap 86,244 114,335 (25 )% Intercompany cost of goods sold eliminations(1) (1,613 ) (2,939 ) (45 )% Total cost of goods sold 364,760 490,132 (26 )% Selling, general and administrative expense: Auto and Metals Recycling 33,519 34,766 (4 )% Cascade Steel and Scrap 3,945 4,448 (11 )% Corporate(2) 9,310 12,205 (24 )% Total selling, general and administrative expense 46,774 51,419 (9 )% Income from joint ventures: Auto and Metals Recycling (39 ) (170 ) (77 )% Cascade Steel and Scrap (160 ) (315 ) (49 )% Total income from joint ventures (199 ) (485 ) (59 )% Asset impairment charges: Auto and Metals Recycling 1,580 63 NM Corporate 112 - NM Total asset impairment charges 1,692 63 NM Operating (loss) income: Auto and Metals Recycling (2,432 ) 23,017 NM Cascade Steel and Scrap 4,237 11,918 (64 )% Segment operating income 1,805 34,935 NM Restructuring charges and other exit-related activities(3) (467 ) (202 ) 131 % Corporate expense(2) (9,422 ) (12,205 ) (23 )% Change in intercompany profit elimination(4) 174 161 8 % Total operating (loss) income$ (7,910 ) $ 22,689 NM NM = Not Meaningful
(1) AMR sells a small portion of its recycled ferrous metal to CSS at prices that
approximate local market rates. These intercompany revenues and cost of goods
sold are eliminated in consolidation.
(2) Corporate expense consists primarily of unallocated expenses for management
and certain administrative services that benefit both reportable segments.
(3) Restructuring charges consist of expense for severance, contract termination
and other restructuring costs that management does not include in its measurement of the performance of the reportable segments. Other exit-related activities consist primarily of asset impairments and accelerated depreciation, net of gains on exit-related disposals, related to site closures.
(4) Intercompany profits are not recognized until the finished products are sold
to third parties; therefore, intercompany profit is eliminated while the
products remain in inventories.
We operate our business across two reportable segments: AMR and CSS. Additional financial information relating to these reportable segments is contained in Note 13 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
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Auto and
Three Months Ended November 30, ($ in thousands, except for prices) 2019 2018 % Change Ferrous revenues$ 192,472 $ 298,812 (36 )% Nonferrous revenues 89,812 104,181 (14 )% Retail and other revenues 30,473 33,419 (9 )% Total segment revenues 312,757 436,412 (28 )% Segment operating (loss) income$ (2,432 ) $ 23,017 NM Average ferrous recycled metal sales prices ($/LT)(1): Domestic $ 195 $ 290 (33 )% Foreign $ 229 $ 314 (27 )% Average $ 221 $ 306 (28 )% Ferrous sales volume (LT, in thousands): Domestic 247 340 (27 )% Foreign 583 579 1 % Total ferrous sales volume (LT, in thousands) 830 919 (10 )% Average nonferrous sales price ($/pound)(1)(2)$ 0.54 $ 0.59 (8 )% Nonferrous sales volume (pounds, in thousands)(2) 131,501 152,869 (14 )% Cars purchased (in thousands)(3) 83 94 (12 )% Number of auto parts stores at period end 51 51 (- )%
LT = Long Ton, which is equivalent to 2,240 pounds
(1) Price information is shown after netting the cost of freight incurred to
deliver the product to the customer.
(2) Average sales price and volume information excludes platinum group metals
("PGMs") in catalytic converters.
(3) Cars purchased by auto parts stores only.
AMR Segment Revenues
Revenues in the first quarter of fiscal 2020 decreased by 28% compared to the
prior year quarter primarily due to significantly lower average net selling
prices for our ferrous and nonferrous products, in both export and domestic
markets, and reduced sales volumes compared to the prior year quarter. These
decreases were driven by weaker market conditions for recycled metals globally
primarily due to softer demand for finished steel and structural changes to the
market for certain recycled nonferrous products. Market selling prices for
ferrous recycled metal declined sharply by approximately
AMR Segment Operating (Loss) Income
Operating (loss) income in the first quarter of fiscal 2020 was
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Table of Contents SCHNITZER STEEL INDUSTRIES, INC. Cascade Steel and Scrap (CSS) Three Months Ended November 30, ($ in thousands, except for price) 2019 2018 % Change Steel revenues(1)$ 77,325 $ 101,337 (24 )% Recycling revenues(2) 16,941 29,049 (42 )% Total segment revenues 94,266 130,386 (28 )% Segment operating income$ 4,237 $ 11,918 (64 )% Finished steel average sales price ($/ST)(3) $ 643 $ 747 (14 )% Finished steel sales volume (ST, in thousands) 114 119 (5 )% Rolling mill utilization(4) 85 % 87 % (2 )%
ST =
(1) Steel revenues include primarily sales of finished steel products,
semi-finished goods (billets) and steel manufacturing scrap.
(2) Recycling revenues include primarily sales of ferrous and nonferrous recycled
scrap metal to export markets.
(3) Price information is shown after netting the cost of freight incurred to
deliver the product to the customer.
(4) Rolling mill utilization is based on effective annual production capacity
under current conditions of 580 thousand tons of finished steel products.
CSS Segment Revenues
Revenues in the first quarter of fiscal 2020 decreased by
CSS Segment Operating Income
Operating income in the first quarter of fiscal 2020 was
Corporate Expense
Corporate SG&A expense for the first quarter of fiscal 2020 decreased by
Productivity Initiatives and Restructuring Charges
In order to mitigate the weaker price environment in the ferrous and nonferrous
markets, in fiscal 2019 we implemented productivity initiatives aimed at
delivering
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We expect to incur aggregate estimated restructuring charges and other
exit-related costs of approximately
Income Tax
The effective tax rate from continuing operations for the first quarter of
fiscal 2020 was a benefit of 27.8% compared to an expense of 19.8% for the
comparable prior year period. The effective tax rate from continuing operations
for the first quarter of fiscal 2020 was higher than the
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
Operating Activities
Net cash provided by operating activities in the first three months of fiscal
2020 was
Sources of cash in the first three months of fiscal 2020 included a
Uses of cash in the first three months of fiscal 2019 included a
Investing Activities
Net cash used in investing activities was
Cash used in investing activities in the first three months of fiscal 2020
included capital expenditures of
Financing Activities
Net cash provided by financing activities in the first three months of fiscal
2020 was
Cash flows from financing activities in the first three months of fiscal 2020
included
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months of fiscal 2020 and 2019 included
Debt
Our senior secured revolving credit facilities, which provide for revolving
loans of
We had borrowings outstanding under our credit facilities of
We use the credit facilities to fund working capital, capital expenditures, dividends, share repurchases, investments and acquisitions. The credit agreement contains various representations and warranties, events of default and financial and other customary covenants which limit (subject to certain exceptions) our ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of our business, engage in transactions with affiliates and enter into restrictive agreements, including agreements that restrict the ability of our subsidiaries to make distributions. The financial covenants under the credit agreement include (a) a consolidated fixed charge coverage ratio, defined as the four-quarter rolling sum of consolidated adjusted EBITDA less defined maintenance capital expenditures and certain environmental expenditures divided by consolidated fixed charges and (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness.
As of
Our obligations under the 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 expect to remain in compliance with the financial covenants under the credit agreement, there can be no assurances that we will be able to do so in the event market conditions or other negative factors which adversely impact our results of operations and financial position lead to a trend of consolidated net losses. If we do not maintain compliance with our financial covenants and are unable to obtain an amendment or waiver from our lenders, a breach of a financial covenant would constitute an event of default and allow the lenders to exercise remedies under the agreements, the most severe of which is the termination of the credit facility under our committed bank credit agreement and acceleration of the amounts owed under the agreement. In such case, we would be required to evaluate available alternatives and take appropriate steps to obtain alternative funds. There can be no assurances that any such alternative funds, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
Capital Expenditures
Capital expenditures totaled
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
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and plan to invest up to
We have been identified by the
Dividends
On
Share Repurchase Program
Pursuant to our amended share repurchase program, as of
Assessment of Liquidity and Capital Resources
Historically, our available cash resources, internally generated funds, credit facilities and equity offerings have financed our acquisitions, capital expenditures, working capital and other financing needs.
We generally believe our current cash resources, internally generated funds, existing credit facilities and access to the capital markets will provide adequate short-term and long-term liquidity needs for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions, joint ventures, debt service requirements, environmental obligations and other contingencies. However, in the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurances that any such supplemental funding, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
Off-Balance Sheet Arrangements
None requiring disclosure pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934.
Contractual Obligations
There were no material changes related to contractual obligations and
commitments from the information provided in our Annual Report on Form 10-K for
the fiscal year ended
We maintain stand-by letters of credit to provide support for certain
obligations, including workers' compensation and performance bonds. As of
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies and estimates
as described in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section of our Annual Report on Form 10-K for the
year ended
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- Leases in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for the disclosures required under the new lease accounting standard.
Recently Issued Accounting Standards
We have not identified any recent accounting pronouncements that are expected to have a material impact on our financial condition, results of operations or cash flows upon adoption.
Non-GAAP Financial Measures Debt, net of cash
Debt, net of cash is the difference between (i) the sum of long-term debt and short-term borrowings (i.e., total debt) and (ii) cash and cash equivalents. We believe that debt, net of cash is a useful measure for investors because, as cash and cash equivalents can be used, among other things, to repay indebtedness, netting this against total debt is a useful measure of our leverage.
The following is a reconciliation of debt, net of cash (in thousands):
November 30, 2019 August 31, 2019 Short-term borrowings $ 1,431 $ 1,321 Long-term debt, net of current maturities 126,875 103,775 Total debt 128,306 105,096 Less cash and cash equivalents 9,624 12,377 Total debt, net of cash $ 118,682 $ 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 borrowings (repayments) for the period because we believe it is useful to investors as a meaningful presentation of the change in debt.
The following is a reconciliation of net borrowings (repayments) of debt (in thousands): Three Months EndedNovember 30, 2019 2018
Borrowings from long-term debt
(92,190 ) (97,699 )
Net borrowings (repayments) of debt $ 22,149 $ 61,160
Adjusted consolidated operating (loss) income, adjusted AMR operating (loss) income, adjusted Corporate expense, adjusted net (loss) income from continuing operations attributable to SSI shareholders, and adjusted diluted (loss) earnings per share from continuing operations attributable to SSI shareholders.
Management believes that providing these non-GAAP financial measures adds a meaningful presentation of our results from business operations excluding adjustments for charges for legacy environmental matters, net of recoveries, asset impairment charges, restructuring charges and other exit-related activities, and the income tax expense (benefit) allocated to these adjustments, items which are not related to underlying business operational performance, and improves the period-to-period comparability of our results from business operations.
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Table of Contents SCHNITZER STEEL INDUSTRIES, INC. The following is a reconciliation of adjusted consolidated operating (loss) income, adjusted AMR operating (loss) income and adjusted Corporate expense (in thousands): Three Months Ended November 30, 2019 2018 Consolidated operating (loss) income: As reported$ (7,910 ) $ 22,689 Charges for legacy environmental matters, net(1) 1,293 471 Restructuring charges and other exit-related activities 467 202 Asset impairment charges 1,692 63 Adjusted$ (4,458 ) $ 23,425 AMR operating (loss) income: As reported$ (2,432 ) $ 23,017 Asset impairment charges 1,580 63 Adjusted $ (852 )$ 23,080 Corporate expense: As reported $ 9,422$ 12,205 Charges for legacy environmental matters, net(1) (1,293 ) (471 ) Asset impairment charges (112 ) - Adjusted $ 8,017$ 11,734
(1) Legal and environmental charges for legacy environmental matters, net of
recoveries. The prior year period has been recast for comparability. Legacy environmental matters include charges (net of recoveries) 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. 36
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The following is a reconciliation of adjusted net (loss) income from continuing operations attributable to SSI shareholders and adjusted diluted (loss) earnings per share from continuing operations attributable to SSI shareholders (in thousands, except per share data):
Three Months Ended November 30, 2019 2018 Net (loss) income from continuing operations attributable to SSI shareholders: As reported$ (7,023 ) $ 16,260 Charges for legacy environmental matters, net(1) 1,293 471 Restructuring charges and other exit-related activities 467 202 Asset impairment charges 1,692 63 Income tax benefit allocated to adjustments(2) (1,151 ) (184 ) Adjusted$ (4,722 ) $ 16,812 Diluted (loss) earnings per share from continuing operations attributable to SSI shareholders: As reported $ (0.26 ) $ 0.57
Charges for legacy environmental matters, net, per share(1)
0.05 0.02 Restructuring charges and other exit-related activities, per share 0.02 0.01 Asset impairment charges, per share 0.06 - Income tax benefit allocated to adjustments, per share(2) (0.04 ) (0.01 ) Adjusted $ (0.17 ) $ 0.59
(1) Legal and environmental charges for legacy environmental matters, net of
recoveries. The prior year period has been recast for comparability. Legacy environmental matters include charges (net of recoveries) 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' Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
(2) Income tax allocated to the aggregate adjustments reconciling reported and
adjusted net (loss) income from continuing operations attributable to SSI shareholders and diluted (loss) earnings per share from continuing operations attributable to SSI shareholders is determined based on a tax provision calculated with and without the adjustments.
We believe that these non-GAAP financial measures allow for a better
understanding of our operating and financial performance. These non-GAAP
financial measures should be considered in addition to, but not as a substitute
for, the most directly comparable
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