RADIUS RECYCLING, INC. This section includes a discussion of our operations for the three and six months endedFebruary 28, 2021 andFebruary 29, 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 our Annual Report on Form 10-K for the year endedAugust 31, 2020 , and the Unaudited Condensed Consolidated Financial Statements and the related Notes thereto included in Part I, Item 1 of this report. General Founded in 1906,Schnitzer Steel Industries, Inc. ("SSI"), anOregon corporation, is one ofNorth America's largest recyclers of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products. As a vertically integrated organization, we offer a range of products and services to meet global demand through our network that includes 50 retail self-service auto parts stores, 44 metals recycling facilities and a steel mini-mill inOregon . Prior to the first quarter of fiscal 2021, our internal organizational and reporting structure included two operating and reportable segments: the Auto andMetals Recycling ("AMR") business and the Cascade Steel and Scrap ("CSS") business. In the first quarter of fiscal 2021, in accordance with our plan announced inApril 2020 , we completed the transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model, supporting a single segment. We consolidated our operations, sales, services and other functional capabilities at an enterprise level reflecting enhanced focus by management on optimizing our vertically integrated value chain. We began reporting on this new single-segment structure in the first quarter of fiscal 2021 as reflected in our Quarterly Report on Form 10-Q for the quarterly period endedNovember 30, 2020 . We sell ferrous and nonferrous recycled scrap metal in both foreign and domestic markets. We also sell a range of finished steel long products produced at our steel mini-mill. We acquire, process and recycle auto bodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap through our recycling facilities. Our retail self-service auto parts stores located acrossthe United States 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 where 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 and sorting, resulting in scrap metal pieces of a size, density and metal content required by customers to meet their production needs. The manufacturing process includes physical separation of ferrous and nonferrous materials through automated and manual processes into various sub-classifications, each of which has a value and metal content used by our customers for their end products. We use a variety of shredding and separation systems to efficiently process and sort recycled scrap metal. Our steel mini-mill produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar and other specialty products using ferrous recycled scrap metal primarily sourced internally from our recycling and joint venture operations and other raw materials. Our deep water 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 deep water port facilities (inKapolei, Hawaii andSalinas ,Puerto Rico ) allow us to efficiently meet the global demand for recycled ferrous metal by enabling us to ship bulk cargoes to steel manufacturers located 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. 23
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SCHNITZER STEEL INDUSTRIES, INC.
Our results of operations depend in large part on the demand and prices for
recycled metal in foreign and domestic markets and on the supply of raw
materials, including end-of-life vehicles, available to be processed at our
facilities. We respond to changes in selling prices for processed metal by
seeking to adjust purchase prices for unprocessed scrap metal in order to manage
the impact on our operating results. We believe we generally benefit from
sustained periods of stable or rising recycled scrap metal selling prices, which
allow us to better maintain or increase both operating results and unprocessed
scrap metal flow into our facilities. When recycled scrap metal selling prices
decline, either sharply or for a sustained period, our operating margins
typically compress. Our results of operations also depend on the demand and
prices for our finished steel products, 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 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.
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 theWorld Health Organization characterized as a pandemic inMarch 2020 , has resulted in governments around the world implementing measures with various levels of stringency to help control the spread of the virus. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. We are a company operating in a critical infrastructure industry, as defined by theU.S. Department of Homeland Security . Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Ensuring the health and welfare of our employees, and all who visit our sites, is our top priority, and we are following allU.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 the first half of our fiscal 2021, resulting in increased demand for our products, which led to our earnings for the second quarter and first six months of our fiscal 2021 exceeding the results for the pre-pandemic comparable prior periods. 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.
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, restructuring charges and other exit-related activities, charges for legacy environmental matters (net of recoveries), business development costs, asset impairment charges (net of recoveries) 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 comparableU.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. 24
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SCHNITZER STEEL INDUSTRIES, INC.
Financial Highlights of Results of Operations for the Second Quarter of Fiscal
2021
• Diluted earnings per share from continuing operations attributable to SSI
shareholders in the second quarter of fiscal 2021 was $1.54 , compared to
$0.14 in the prior year quarter.
• Adjusted diluted earnings per share from continuing operations attributable
to SSI shareholders in the second quarter of fiscal 2021 was
to
• Net income in the second quarter of fiscal 2021 was
• Adjusted EBITDA in the second quarter of fiscal 2021 was
compared to
Market conditions for recycled metals improved in the second quarter of fiscal 2021, including sharply rising selling prices that reached multi-year highs for certain recycled metal commodities. Average net selling prices for our ferrous and nonferrous products increased significantly compared to the prior year quarter. In the second quarter of fiscal 2021, the average net selling prices for our ferrous and nonferrous products increased by 52% and 51%, respectively, compared to the prior year period. Market conditions for our finished steel products also improved in the second quarter of fiscal 2021, which contributed to higher finished steel average selling prices and sales volumes compared to the prior year period. Our results in the second quarter of fiscal 2021 reflected substantial benefits from the higher price environment for most of our products including a significant expansion in our ferrous metal spreads and a favorable impact from average inventory accounting, as well as increased nonferrous and finished steel sales volumes, compared to the prior year period. We also benefited in the quarter from commercial initiatives and productivity improvements that were supported by the implementation of our One Schnitzer functionally-based organization model completed in the first quarter of fiscal 2021.
The following items further highlight selected liquidity and capital structure metrics:
• For the first six months of fiscal 2021, net cash used in operating
activities was $3 million , compared to net cash provided by operating
activities of $17 million in the prior year comparable period.
• Debt was
of
• Debt, net of cash, was
million as of
See the reconciliations of adjusted diluted earnings per share from continuing
operations attributable to SSI shareholders, adjusted EBITDA, and debt, net of
cash in Non-GAAP Financial Measures at the end of this Item 2.
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SCHNITZER STEEL INDUSTRIES, INC.
Results of Operations
Three Months Ended Six Months Ended
($ in thousands, except
for prices February 28, February 29, Change February 28, February 29, Change
and per share amounts) 2021 2020 % 2021 2020 %
Ferrous revenues $ 322,679 $ 232,066 39 % $ 574,885 $ 431,964 33 %
Nonferrous revenues 147,322 94,522 56 % 267,031 192,363 39 %
Steel revenues(1) 99,191 85,539 16 % 187,605 162,864 15 %
Retail and other revenues 30,919 27,355 13 % 62,697 57,875 8 %
Total revenues 600,111 439,482 37 % 1,092,218 845,066 29 %
Cost of goods sold 487,025 380,520 28 % 907,119 745,280 22 %
Gross margin (total
revenues less cost of
goods sold) $ 113,086 $ 58,962 92 % $ 185,099 $ 99,786 85 %
Gross margin (%) 18.8 % 13.4 % 40 % 16.9 % 11.8 % 44 %
Selling, general and
administrative expense $ 54,142 $ 46,426 17 % $ 104,048 $ 93,200 12 %
Diluted earnings (loss)
per share from continuing
operations attributable
to SSI shareholders:
Reported $ 1.54 $ 0.14 1,000 % $ 2.05 $ (0.11 ) NM
Adjusted(2) $ 1.51 $ 0.31 387 % $ 2.09 $ 0.14 1,393 %
Net income (loss) $ 45,679 $ 4,504 914 % $ 60,743 $ (2,061 ) NM
Adjusted EBITDA(2) $ 71,411 $ 28,265 153 % $ 111,666 $ 38,100 193 %
Average ferrous recycled
metal sales prices
($/LT)(3):
Domestic $ 349 $ 244 43 % $ 297 $ 222 34 %
Foreign $ 399 $ 258 55 % $ 334 $ 243 37 %
Average $ 387 $ 255 52 % $ 326 $ 235 39 %
Ferrous volumes (LT, in
thousands):
Domestic(4) 391 379 3 % 779 743 5 %
Foreign 586 609 (4 )% 1,251 1,221 2 %
Total ferrous volumes
(LT, in thousands)(4) 977 988 (1 )% 2,030 1,964 3 %
Average nonferrous sales
price ($/pound)(3)(5) $ 0.83 $ 0.55 51 % $ 0.74 $ 0.55 35 %
Nonferrous volumes
(pounds, in
thousands)(4)(5) 135,899 124,342 9 % 274,135 268,518 2 %
Finished steel average
sales price ($/ST)(3) $ 690 $ 627 10 % $ 656 $ 635 3 %
Finished steel sales
volumes (ST, in
thousands) 136 129 6 % 270 242 11 %
Cars purchased (in
thousands)(6) 80 85 (6 )% 158 168 (6 )%
Number of auto parts
stores at period end 50 51 (2 )% 50 51 (2 )%
Rolling mill
utilization(7) 88 % 72 % 22 % 93 % 79 % 18 %
NM = Not Meaningful
LT = Long Ton, which is equivalent to 2,240 pounds. ST =
(1) Steel revenues include primarily sales of finished steel products,
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 platinum group metals
("PGMs") in catalytic converters.
(6) Cars purchased by auto parts stores only.
(7) Rolling mill utilization is based on effective annual production capacity
under current conditions of 580 thousand tons of finished steel products.
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SCHNITZER STEEL INDUSTRIES, INC.
Revenues
Revenues in the second quarter and first six months of fiscal 2021 increased by
37% and 29%, respectively, compared to the same periods in the prior year
primarily due to significantly higher average net selling prices for our ferrous
and nonferrous products in both export and domestic markets. These increases
were driven by stronger market conditions for recycled metals globally,
including periods of sharply rising selling prices that reached multi-year highs
for certain recycled metal commodities during the second quarter of fiscal 2021.
In the second quarter and first six months of fiscal 2021, the average net
selling price for our ferrous products increased by 52% and 39%, respectively,
and the average net selling price for our nonferrous products increased by 51%
and 35%, respectively, compared to the prior year periods. Nonferrous sales
volumes for the second quarter and first six months of fiscal 2021 increased by
9% and 2%, respectively, compared to the prior year periods reflecting stronger
demand partially offset by the effects of a shortage of available shipping
containers that impacted the timing of shipments. Ferrous sales volumes in the
second quarter of fiscal 2021 declined marginally compared to the prior year
quarter primarily due to weather-related delays that impacted the timing of
shipments. Market conditions for our finished steel products also improved in
the second quarter and first six months of fiscal 2021, which contributed to
higher finished steel average selling prices and sales volumes compared to the
prior year periods, and reflected steady demand in West Coast construction
markets and higher rolling mill utilization.
Operating Performance
Net income in the second quarter and first six months of fiscal 2021 was$46 million and$61 million , respectively, compared to net income of$5 million and net loss of$2 million , respectively, in the prior year periods. Adjusted EBITDA in the second quarter and first six months of fiscal 2021 was$71 million and$112 million , respectively, compared to$28 million and$38 million , respectively, in the prior year periods. The improvement in our results for the second quarter and first six months of fiscal 2021 reflected substantial benefits from the higher price environment for most of our products including a significant expansion in our ferrous metal spreads and a favorable impact from average inventory accounting, as well as increased nonferrous and finished steel sales volumes, compared to the prior year periods. Ferrous metal spreads in the second quarter and first six months of fiscal 2021 increased by approximately 45% and 25%, respectively, and average net selling prices for our nonferrous joint products that are recovered from the shredding process, comprising primarily zorba, increased by approximately 60% and 45%, respectively, compared to the prior year periods. Our results in the second quarter and first six months of fiscal 2021 also reflected increased contributions from sales of higher priced PGM products compared to the prior year periods and achievement of the full run rate of benefits from productivity initiatives implemented throughout fiscal 2020. In comparison, the lower price environment in the first half of fiscal 2020, which included a sharp decline in commodity prices during most of the first quarter of fiscal 2020 before recovering moderately in the second quarter, adversely impacted ferrous metal margins, the supply of scrap metal including end-of-life vehicles, processed volumes and overall operating results. Selling, general and administrative expense in the second quarter and first six months of fiscal 2021 increased by 17% and 12%, respectively, compared to the prior year periods primarily due to higher incentive compensation accruals aligned with improved business performance. See the reconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the end of this Item 2. 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 run rate of benefits in the second quarter and first half of fiscal 2021. We achieved approximately$4 million and$6 million in realized benefits in the second quarter and first six months of fiscal 2020, respectively. In the first quarter of fiscal 2021, in accordance with our plan announced inApril 2020 , we completed the transition to a new internal organizational and reporting structure reflecting a functionally-based, integrated model. This change in structure has resulted in a more agile organization and solidified achievement of recent productivity improvements and cost reduction initiatives.
Income Tax
The effective tax rate from continuing operations for the second quarter and first six months of fiscal 2021 was an expense on pre-tax income of 20.1% and 22.1%, respectively, compared to an expense on pre-tax income of 28.2% and a benefit on pre-tax loss of 26.8%, respectively, for the comparable prior year periods. The effective tax rate from continuing operations for the second quarter and first six months of fiscal 2021 was lower than that for the comparable prior year periods primarily due to the benefit from the foreign derived intangible income deduction in fiscal 2021 and the effects of higher pre-tax income compared to the prior year periods. The effective tax rate from continuing operations for the second quarter and first six months of fiscal 2020 was higher than theU.S. federal statutory rate of 21% primarily due to the impact of non-deductible officers' compensation and other expenses, as well as the aggregate impact of state taxes, on the projected annual effective tax rate applied to the quarterly results. 27
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SCHNITZER STEEL INDUSTRIES, INC. 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$18 million as ofFebruary 28, 2021 andAugust 31, 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 ofFebruary 28, 2021 , debt was$171 million compared to$104 million as ofAugust 31, 2020 , and debt, net of cash, was$159 million as ofFebruary 28, 2021 compared to$87 million as ofAugust 31, 2020 (refer to Non-GAAP Financial Measures at the end of this Item 2). Operating Activities Net cash used in operating activities in the first six months of fiscal 2021 was$3 million , compared to net cash provided by operating activities of$17 million in the first six months of fiscal 2020. Sources of cash other than from earnings in the first six months of fiscal 2021 included a$45 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of payments, and a$16 million increase in income tax accruals. Uses of cash in the first six months of fiscal 2021 included a$90 million increase in inventories due to higher raw material purchase prices, higher volumes on hand and the timing of purchases and sales, and a$76 million increase in accounts receivable primarily due to increases in selling prices for recycled metals and finished steel as well as the timing of sales and collections. Sources of cash in the first six months of fiscal 2020 included a$9 million decrease in inventories due to lower raw material purchase prices and the timing of purchases and sales. Uses of cash in the first six months of fiscal 2020 included a$18 million increase in accounts receivable primarily due to the timing of sales and collections, a$8 million decrease in accounts payable primarily due to lower raw material purchase prices and the timing of payments, and a$7 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation previously accrued for under our fiscal 2019 plans. Investing Activities
Net cash used in investing activities was
Cash used in investing activities in the first six months of fiscal 2021 included capital expenditures of$55 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, compared to$37 million in the prior year period. Financing Activities
Net cash provided by financing activities in the first six months of fiscal 2021
was
Cash flows from financing activities in the first six months of fiscal 2021 included$66 million in net borrowings of debt, compared to$36 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 2021 and 2020 included$11 million for the payment of dividends. Cash used in financing activities in the first six months of fiscal 2020 included$1 million for share repurchases. 28
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SCHNITZER STEEL INDUSTRIES, INC.
Debt
Our senior secured revolving credit facilities, which provide for revolving
loans of $700 million and C$15 million , mature in August 2023 pursuant to a
credit agreement with Bank of America, N.A ., as administrative agent, and other
lenders party thereto. Interest rates on outstanding indebtedness under the
credit agreement are based, at our option, on either the London Interbank
Offered Rate ("LIBOR") (or the Canadian equivalent for C$ 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
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, (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness, and (c) a consolidated asset coverage ratio, defined as consolidated asset values divided by consolidated funded indebtedness. As ofFebruary 28, 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 1.10 to 1.00 and was 4.47 to 1.00 as ofFebruary 28, 2021 . The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.20 to 1.00 as ofFebruary 28, 2021 . The consolidated asset coverage ratio was required to be no less than 1.00 to 1.00 and was 2.39 to 1.00 as ofFebruary 28, 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$7 million as of each ofFebruary 28, 2021 andAugust 31, 2020 , 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. 29
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SCHNITZER STEEL INDUSTRIES, INC.
Capital Expenditures
Capital expenditures totaled $55 million for the first six months of fiscal
2021, compared to $37 million for the prior year period. We currently plan to
invest up to $120 million in capital expenditures in fiscal 2021, including
approximately $55 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.
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$7 million in capital expenditures for environmental projects in the first six months of fiscal 2021, and we currently plan to invest up to$25 million for such projects in fiscal 2021. These projects include investments in storm water systems and equipment to ensure ongoing compliance with air quality and other environmental regulations. 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 (the "Site"). See Note 4 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of this matter, as well as other legacy environmental loss contingencies. We believe it is not possible to reasonably estimate the amount or range of costs which we are likely to or which it is reasonably possible that we will incur in connection with the Site, although such costs could be material to our financial position, results of operations, cash flows and liquidity. We have insurance policies that we believe will provide reimbursement for costs we incur for defense, 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 and other environmental matters could reduce the amounts available for borrowing that could otherwise be used for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions and could result in our failure to maintain compliance with certain covenants in our debt agreements, and could adversely impact our liquidity.
Dividends
OnJanuary 7, 2021 , our Board of Directors declared a dividend for the second quarter of fiscal 2021 of$0.1875 per common share, which equates to an annual cash dividend of$0.75 per common share. The dividend totaling$5 million was paid onFebruary 1, 2021 . 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 ofFebruary 28, 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 our common stock during the first half of 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.
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SCHNITZER STEEL INDUSTRIES, INC. 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 endedAugust 31, 2020 .
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, 2021 August 31, 2020
Short-term borrowings $ 2,372 $ 2,184
Long-term debt, net of current maturities 168,441 102,235
Total debt 170,813
104,419
Less cash and cash equivalents 11,326 17,887 Total debt, net of cash $ 159,487 $ 86,532
Net borrowings (repayments) of debt
Net borrowings (repayments) of debt is the sum of borrowings from long-term debt
and repayments of long-term debt. We present this amount as the net change in
borrowings (repayments) for the period because we believe it is useful to
investors as a meaningful presentation of the change in debt.
The following is a reconciliation of net borrowings (repayments) of debt (in
thousands):
Six Months Ended
February 28 , February 29,
2021 2020
Borrowings from long-term debt
(199,229 ) (208,614 )
Net borrowings (repayments) of debt
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SCHNITZER STEEL INDUSTRIES, INC.
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, legacy
environmental matters (net of recoveries), business development costs not
related to ongoing operations, asset impairment charges, and the income tax
expense (benefit) allocated to these adjustments, items which are not related to
underlying business operational performance, and improves the period-to-period
comparability of our results from business operations.
Following are reconciliations of net income (loss) to adjusted EBITDA, and adjusted selling, general and administrative expense (in thousands):
Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2021 2020 2021 2020
Reconciliation of adjusted EBITDA:
Net income (loss) $ 45,679 $ 4,504 $ 60,743 $ (2,061 )
(Income) loss from discontinued
operations, net of tax (30 ) (1 ) 12 (29 )
Interest expense 1,224 1,320 3,004 2,743
Income tax expense (benefit) 11,469 1,770 17,188 (764 )
Depreciation and amortization 14,469 14,385 29,295 28,472
Restructuring charges and other
exit-related activities 814 4,633 878 5,100
(Recoveries) charges for legacy
environmental matters, net(1) (2,214 ) 451 546 1,744
Business development costs - 801 - 801
Asset impairment charges - 402 - 2,094
Adjusted EBITDA $ 71,411 $ 28,265 $ 111,666 $ 38,100
Selling, general and administrative
expense:
As reported $ 54,142 $ 46,426 $ 104,048 $ 93,200
Recoveries (charges) for legacy
environmental matters, net(1) 2,214 (451 ) (546 ) (1,744 )
Business development costs - (801 ) - (801 )
Adjusted $ 56,356 $ 45,174 $ 103,502 $ 90,655 (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 4 - Commitments and
Contingencies, "
Contingencies" in the Notes to the Unaudited Condensed Consolidated Financial
Statements in Part I, Item 1 of this report.
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SCHNITZER STEEL INDUSTRIES, INC. 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):
Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2021 2020 2021 2020
Income (loss) from continuing
operations attributable to SSI
shareholders:
As reported $ 44,558 $ 3,882 $ 58,704 $ (3,141 )
Restructuring charges and other
exit-related activities 814 4,633 878 5,100
(Recoveries) charges for legacy
environmental matters, net(1) (2,214 ) 451 546 1,744
Business development costs - 801 - 801
Asset impairment charges - 402 - 2,094
Income tax expense (benefit) allocated
to adjustments(2) 334 (1,464 ) (315 ) (2,615 )
Adjusted $ 43,492 $ 8,705 $ 59,813 $ 3,983
Diluted earnings (loss) per share from
continuing operations attributable to
SSI shareholders:
As reported $ 1.54 $ 0.14 $ 2.05 $ (0.11 )
Restructuring charges and other
exit-related activities, per share 0.03 0.16 0.03 0.18
(Recoveries) charges for legacy
environmental matters, net, per
share(1) (0.08 ) 0.02 0.02 0.06
Business development costs, per share - 0.03 - 0.03
Asset impairment charges, per share - 0.01 - 0.08
Income tax expense (benefit) allocated
to adjustments, per share(2) 0.01 (0.05 ) (0.01 ) (0.09 )
Adjusted(3) $ 1.51 $ 0.31 $ 2.09 $ 0.14
(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 4 - Commitments and
Contingencies, "
Contingencies" in the Notes to the Unaudited Condensed Consolidated Financial
Statements in Part I, Item 1 of this report.
(2) Income tax allocated to the aggregate adjustments reconciling reported and
adjusted 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.
(3) May not foot due to rounding.
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