This section includes a discussion of our operations for the three and six months ended February 28, 2022 and 2021. 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 ended August 31, 2021, 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. is one of North America's largest recyclers of ferrous and nonferrous metal, including end-of-life vehicles, and a manufacturer of finished steel products. As a vertically integrated organization, we offer a range of products and services to meet global demand through our network that includes 50 retail self-service auto parts stores, 52 metals recycling facilities, and an electric arc furnace ("EAF") steel mill.
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 across the United States ("U.S.") and Western 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 the U.S. (in Everett, Massachusetts; Providence, Rhode Island; Oakland, California; Tacoma, Washington; and Portland, Oregon) and access to public deepwater port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) allow us to meet the global demand for recycled ferrous metal by enabling us to ship bulk cargoes to steel manufacturers located in Europe, Africa, the Middle East, Asia, North America, Central America, and South America. Our exports of nonferrous recycled metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers, wire and cable producers, wholesalers, and other recycled metal processors globally. We also transport both ferrous and nonferrous metals by truck, rail, and barge in order to transfer scrap metal between our facilities for further processing, to load shipments at our export facilities, and to meet regional domestic demand. Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. Our results of operations also depend substantially on our operating leverage from processing and selling higher volumes of recycled metal as well as our ability to efficiently extract ferrous and nonferrous metals from the shredding process. We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating results. We believe we generally benefit from sustained periods of stable or rising recycled metal selling prices, which allow us to better maintain or increase both operating results and unprocessed scrap metal flow into our facilities. When recycled metal selling prices decline, either sharply or for a sustained period, our operating margins typically compress. With respect to finished steel products produced at our steel mill, our results of operations are impacted by demand and prices for these products, which are sold to customers located primarily in the Western U.S. and Western Canada. 24
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.
We continue to monitor the impact of COVID-19 on all aspects of our business. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we have continued to operate across our footprint throughout the COVID-19 pandemic. Ensuring the health and safety of our employees, and all who visit our sites, is our top priority, and we are following all U.S. Centers for Disease Control and Prevention and state and local health department guidelines. 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 during fiscal 2021, resulting in increased demand for our products. Beginning in our second quarter of fiscal 2021 and continuing through the second quarter of fiscal 2022, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on individual, business, and government activities. The existence of new or enduring variant strains of COVID-19 may lead to a rise in infections, which could cause delays in the easing of restrictions previously in place and the implementation of new restrictions and mandates, and there are ongoing global impacts resulting directly or indirectly from the pandemic including labor shortages, logistical challenges such as increased port congestion, and increases in costs for certain goods and services, which have negatively impacted our sales volumes and operating results to varying degrees. 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.
On May 22, 2021, we experienced a fire at our steel mill in McMinnville, Oregon. Direct physical loss or damage to property from the incident was limited to the mill's melt shop, with no bodily injuries and no physical loss or damage to other buildings or equipment. As a result of the fire, the rolling mill production ceased in early June 2021. In August 2021, the 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 initial 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 the Company's 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 of August 31, 2021, prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets included an initial $10 million insurance receivable recognized in the fourth quarter of fiscal 2021, primarily offsetting applicable losses including capital purchases of $10 million that we had incurred as of August 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 recorded in the first quarter and $12 million recorded in the second quarter, within cost of goods sold in the Unaudited Condensed Consolidated Statements of Income , 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 of $5 million reported within other accrued liabilities in the Unaudited Condensed Consolidated Balance Sheets as of February 28, 2022. 25
On December 8, 2021, we experienced a fire at our metals recycling facility in Everett, 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. On January 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. We have insurance that we believe is fully applicable to the losses and have filed initial insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property damage 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 the second quarter of fiscal 2022, we recognized an initial $10 million insurance receivable and related insurance recovery gain, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets and within cost of goods sold in the Unaudited Condensed Consolidated Statements of Income, respectively, reflecting recovery of applicable losses including impairment charges of $6 million related to the carrying value of plant and equipment assets damaged by the fire and initial capital purchases and other costs totaling $4 million that we had incurred as of February 28, 2022.
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 before results from discontinued operations, interest expense, income taxes, depreciation and amortization, business development costs not related to ongoing operations including pre-acquisition expenses, charges for legacy environmental matters (net of recoveries), restructuring charges and other exit-related activities, 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. 26
Table of Contents SCHNITZER STEEL INDUSTRIES, INC.
Financial Highlights of Results of Operations for the Second Quarter of Fiscal 2022
• Diluted earnings per share from continuing operations attributable to SSI
shareholders in the second quarter of fiscal 2022 was $1.27, compared to $1.54 per share in the prior year quarter.
• Adjusted diluted earnings per share from continuing operations attributable
to SSI shareholders in the second quarter of fiscal 2022 was $1.38, compared
to $1.51 per share in the prior year quarter.
• Net income in the second quarter of fiscal 2022 was $38 million, compared to
$46 million in the prior year quarter.
• Adjusted EBITDA in the second quarter of fiscal 2022 was $75 million,
compared to $71 million in the prior year quarter.
Market demand for recycled metals was strong in the second quarter of fiscal 2022, leading to significantly higher average net selling prices and increased sales volumes for our ferrous and nonferrous products compared to the prior year quarter. In the second quarter of fiscal 2022, the average net selling prices for our ferrous and nonferrous products increased by 15% and 33%, respectively, and sales volumes for these products increased by 10% and 8%, respectively, compared to the prior year quarter. The increased sales volumes in part reflected additional volumes arising from the Columbus Recycling business acquired on October 1, 2021. Market demand for our finished steel products also improved in the second quarter of fiscal 2022, which contributed to finished steel average selling prices increasing by 51% compared to the prior year quarter. Finished steel sales volumes were 22% lower in the second quarter of fiscal 2022 compared to the prior year quarter in part due to the impact of supply chain disruptions on current volumes, including delays to construction projects related to a concrete industry strike in the Pacific Northwest. Our results for the second quarter of fiscal 2022 reflected benefits from the higher price environment for most of our products and increased ferrous and nonferrous sales volumes driven by strong demand compared to the prior year quarter, as well as recognition of insurance recoveries. Our results in the second quarter of fiscal 2022 also reflected the impact of compressed metal spreads on contracted ferrous sales for February shipments due to a surge in market prices in the second half of the quarter, a less favorable impact from average inventory accounting compared to the prior year quarter, and the effects of supply chain disruptions, lower year-over-year platinum group metals (PGM) prices, inflationary pressure on operating costs, and the adverse impact of the Everett shredder downtime. Selling, general, and administrative expense in the second quarter of fiscal 2022 increased by 13% compared to the prior year quarter primarily due to higher legacy environmental charges, employee salary and wage expenses, and outside and professional services expenses, including from higher costs resulting from our acquisition and other growth-related activities, increased competition for employees in a tight labor market, and the impacts of inflation. These higher expenses in the second quarter of fiscal 2022 were partially offset by lower accruals in connection with our annual incentive compensation plans compared to the prior year quarter.
The following items further highlight selected liquidity and capital structure metrics:
• For the first six months of fiscal 2022, net cash provided by operating
activities was $13 million, compared to net cash used in operating activities of $3 million in the prior year comparable period.
• Debt was $262 million as of February 28, 2022, compared to $75 million as of
August 31, 2021, which increase was primarily due to increased borrowings
from our credit facilities to fund the acquisition of the assets of the Columbus Recycling business and higher net working capital needs.
• Debt, net of cash, was $244 million as of February 28, 2022, compared to $47
• Repurchase of 200,000 shares of Class A common stock totaling $8 million in
the first six months of fiscal 2022, compared to none in the prior year comparable period. See the reconciliations of adjusted diluted earnings per share from continuing operations attributable to SSI shareholders, adjusted EBITDA, and debt, net of cash in Non-GAAP Financial Measures at the end of this Item 2. 27
Table of Contents SCHNITZER STEEL INDUSTRIES, INC. Results of Operations
Selected Financial Measures and Operating Statistics
Three Months Ended February 28, Six Months Ended February 28, ($ in thousands, except for prices and per share amounts) 2022 2021 % 2022 2021 % Ferrous revenues $ 438,314 $ 322,679 36 % $ 904,170 $ 574,885 57 % Nonferrous revenues 196,142 147,322 33 % 390,571 267,031 46 % Steel revenues(1) 116,196 99,191 17 % 219,434 187,605 17 % Retail and other revenues 32,546 30,919 5 % 67,141 62,697 7 % Total revenues 783,198 600,111 31 % 1,581,316 1,092,218 45 % Cost of goods sold 670,539 487,025 38 % 1,353,783 907,119 49 % Gross margin (total revenues less cost of goods sold) $ 112,659 $ 113,086 (- )% $ 227,533 $ 185,099 23 % Gross margin (%) 14.4 % 18.8 % (23 )% 14.4 % 16.9 % (15 )% Selling, general and administrative expense $ 61,081 $ 54,142 13 % $ 116,348 $ 104,048 12 % Diluted earnings per share from continuing operations attributable to SSI shareholders: Reported $ 1.27 $ 1.54 (18 )% $ 2.81 $ 2.05 37 % Adjusted(2) $ 1.38 $ 1.51 (9 )% $ 2.96 $ 2.09 42 % Net income $ 38,165 $ 45,679 (16 )% $ 85,441 $ 60,743 41 % Adjusted EBITDA(2) $ 75,259 $ 71,411 5 % $ 153,345 $ 111,666 37 % Average ferrous recycled metal sales prices ($/LT)(3): Domestic $ 418 $ 349 20 % $ 424 $ 297 43 % Foreign $ 455 $ 399 14 % $ 452 $ 334 35 % Average $ 445 $ 387 15 % $ 446 $ 326 37 % Ferrous volumes (LT, in thousands): Domestic(4) 408 391 4 % 839 779 8 % Foreign 663 586 13 % 1,381 1,251 10 % Total ferrous volumes (LT, in thousands)(4)(8) 1,071 977 10 % 2,219 2,030 9 % Average nonferrous sales price ($/pound)(3)(5) $ 1.10 $ 0.83 33 % $ 1.08 $ 0.74 46 % Nonferrous volumes (pounds, in thousands)(4)(5) 147,145 135,899 8 % 300,373 274,135 10 % Finished steel average sales price ($/ST)(3) $ 1,045 $ 690 51 % $ 1,013 $ 656 54 % Finished steel sales volumes (ST, in thousands) 106 136 (22 )% 205 270 (24 )% Cars purchased (in thousands)(6) 73 80 (9 )% 153 158 (3 )% Number of auto parts stores at period end 50 50 (- )% 50 50 (- )% Rolling mill utilization(7) 86 % 88 % (2 )% 82 % 93 % (12 )% NM = Not Meaningful LT = Long Ton, which is equivalent to 2,240 pounds. ST = Short Ton, which is equivalent to 2,000 pounds. (1) Steel revenues include predominantly sales of finished steel products, in
addition to sales of semi-finished goods (billets) and steel manufacturing
(2) See the reconciliations of Non-GAAP Financial Measures at the end of this
(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
(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.
Table of Contents SCHNITZER STEEL INDUSTRIES, INC. Revenues Revenues in the second quarter and first six months of fiscal 2022 increased by 31% and 45%, respectively, compared to the same periods in the prior year primarily due to significantly higher average net selling prices and increased sales volumes for our ferrous and nonferrous products driven by strong market demand for recycled metals globally. In the second quarter and first six months of fiscal 2022, the average net selling prices for our ferrous products increased by 15% and 37%, respectively, and the average net selling prices for our nonferrous products increased by 33% and 46%, respectively, compared to the prior year periods. In the second quarter and first six months of fiscal 2022, ferrous sales volumes increased by 10% and 9%, respectively, and nonferrous sales volumes increased by 8% and 10%, respectively, compared to the prior year periods. The expansion in recycled metal sales volumes compared to the prior year periods reflected strong demand for these products globally, the effects of which were partially offset by the impact of logistics constraints including ship and container delays for ferrous and nonferrous sales to customers. The increased ferrous and nonferrous sales volumes in part reflected additional volumes arising from the Columbus Recycling business acquired on October 1, 2021. Finished steel average selling prices were significantly higher in the second quarter and first six months of fiscal 2022 compared to the prior year periods, reflecting robust market demand for these products. The impact of these higher average selling prices on steel revenues in the second quarter and first six months of fiscal 2022 was partially offset by lower sales volumes and rolling mill utilization compared to the prior year periods, which were primarily due to the impact of the ramp-up of steel mill operations that began in August 2021 and which was substantially completed during the second quarter, as well as the impact of supply chain disruptions on current volumes, including delays to construction projects related to a concrete industry strike in the Pacific Northwest experienced in the second quarter of fiscal 2022. The ramp-up of steel mill operations followed completion of repair and replacement of damaged property arising from the May 2021 steel mill fire.
Net income in the second quarter and first six months of fiscal 2022 was $38 million and $85 million, respectively, compared to $46 million and $61 million in the prior year periods. Adjusted EBITDA in the second quarter and first six months of fiscal 2022 was $75 million and $153 million, respectively, compared to $71 million and $112 million, respectively, in the prior year periods. Our results for the second quarter of fiscal 2022 reflected benefits from the higher price environment for most of our products and increased ferrous and nonferrous sales volumes supported by strong demand compared to the prior year quarter, as well as recognition of insurance recoveries. Our results in the second quarter of fiscal 2022 also reflected the impact of compressed metal spreads on contracted ferrous sales for February shipments due to a surge in market prices in the second half of the quarter, a less favorable impact from average inventory accounting compared to the prior year quarter, and the effects of supply chain disruptions, lower year-over-year PGM prices, inflationary pressure on operating costs, and the adverse impact of the Everett shredder downtime. Our results for the first six months of fiscal 2022 benefited from a significant expansion in our ferrous metal spreads primarily during the first quarter of fiscal 2022 and increased finished steel metal margins, greater contributions from sales of nonferrous products, and increased ferrous and nonferrous sales volumes driven by strong demand, compared to the prior year period. In the second quarter and first six months of fiscal 2022, we recognized insurance recoveries of $12 million and $15 million, respectively, in connection with the May 2021 fire at our steel mill in McMinnville, Oregon, reflecting recovery of applicable costs incurred by the mill operations following the incident. In the second quarter of fiscal 2022, we also recognized insurance recoveries of $10 million in connection with the December 2021 fire at our Everett shredder facility, reflecting recovery of applicable losses including asset impairment charges, initial capital purchases, and other costs incurred in the period. These amounts do not reflect potential additional recoveries of business income losses due to the interruptions that may be recognized in the future when settlements of the business interruption claims are resolved. Selling, general, and administrative expense in the second quarter and first six months of fiscal 2022 increased by 13% and 12%, respectively, compared to the prior year periods primarily due to higher legacy environmental charges, employee salary and wage expenses, and outside and professional services expenses, including from higher costs resulting from our acquisition and other growth-related activities, increased competition for employees in a tight labor market, and the impacts of inflation. These higher expenses in the second quarter and first six months of fiscal 2022 were partially offset by lower accruals in connection with our annual incentive compensation plans compared to the prior year periods.
See the reconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the end of this Item 2.
Table of Contents SCHNITZER STEEL INDUSTRIES, INC. Income Tax The effective tax rate from continuing operations for the second quarter and first six months of fiscal 2022 was an expense on pre-tax income of 24.0% and 21.3%, respectively, compared to 20.1% and 22.1%, respectively, for the comparable prior year periods. For the second quarter of fiscal 2022, the effective tax rate from continuing operations was higher than the U.S. federal statutory rate of 21% 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.
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 $18 million and $28 million as of February 28, 2022 and August 31, 2021, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of February 28, 2022, debt was $262 million compared to $75 million as of August 31, 2021, and debt, net of cash, was $244 million as of February 28, 2022, compared to $47 million as of August 31, 2021, which increases were primarily due to increased borrowings from our credit facilities to fund the acquisition of the assets of the Columbus Recycling business on October 1, 2021, and higher net working capital needs. 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 2022 was $13 million, compared to net cash used in operating activities of $3 million in the first six months of fiscal 2021. 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 the May 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 in August 2021 following completion of repair and replacement of damaged property arising from the May 2021 steel mill fire. 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 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.
Net cash used in investing activities was $172 million in the first six months of fiscal 2022, compared to $54 million in the first six months of fiscal 2021.
Cash used in investing activities in the first six months of fiscal 2022 included $114 million paid to acquire the assets of the Columbus Recycling business on October 1, 2021, which amount included $7 million paid at closing for estimated net working capital in excess of an agreed-upon benchmark. We funded the acquisition using cash on hand and borrowings under our existing credit facilities. See Note 3 - Business Acquisition in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further detail. 30
SCHNITZER STEEL INDUSTRIES, INC. Cash used in investing activities in the first six months of fiscal 2022 also included capital expenditures of $69 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, compared to $55 million in the prior year period. Cash flows from investing activities in the first six months of fiscal 2022 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 the May 2021 steel mill fire. Financing Activities
Net cash provided by financing activities in the first six months of fiscal 2022 was $150 million, compared to $50 million in the first six months of fiscal 2021.
Cash flows from financing activities in the first six months of fiscal 2022 included $180 million in net borrowings of debt, compared to $66 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 2022 and 2021 included $10 million and $4 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. Cash used in financing activities for the first six months of fiscal 2022 also included $8 million for share repurchases.
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. The credit facility provides that LIBOR or any LIBOR successor rate is subject to a 0.50% floor and contains mechanics by which the parties may replace the benchmark interest rate used in the agreement from LIBOR to one or more rates based on the secured overnight financing rate administered by the Federal Reserve Bank of New York or another alternative benchmark rate. We had borrowings outstanding under our credit facilities of $240 million as of February 28, 2022 and $60 million as of August 31, 2021. The weighted average interest rate on amounts outstanding under our credit facilities was 2.03% and 1.75% as of February 28, 2022 and August 31, 2021, 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. As of February 28, 2022, 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 5.84 to 1.00 as of February 28, 2022. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.23 to 1.00 as of February 28, 2022. 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. 31
SCHNITZER STEEL INDUSTRIES, INC. 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 $15 million and $8 million as of February 28, 2022 and August 31, 2021, 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. In the second quarter of fiscal 2022, we recorded $7 million of additional debt obligations with these terms generally. Capital Expenditures Capital expenditures totaled $69 million for the first six months of fiscal 2022, compared to $55 million for the prior year period. Capital expenditures in the first six months of fiscal 2022 included approximately $21 million for investments in growth. We currently plan to invest in the range of $130 million to $160 million in capital expenditures in fiscal 2022. 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. 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.
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 $10 million in capital expenditures for environmental projects in the first six months of fiscal 2022, and we currently plan to invest in the range of $30 million to $40 million for such projects in fiscal 2022. These projects include investments in equipment to ensure ongoing compliance with air quality and other environmental regulations and storm water systems. We have been identified by the United States Environmental Protection Agency as one of the potentially responsible parties that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the "Site"). See Note 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 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, 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. 32
Table of Contents SCHNITZER STEEL INDUSTRIES, INC. Dividends On January 6, 2022, our Board of Directors declared a dividend for the second quarter of fiscal 2022 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, 2022. Share Repurchase Program Pursuant to our share repurchase program as amended in 2001, 2006 and 2008, we were authorized to repurchase up to nine million shares of our Class A common stock. As of February 28, 2022, we had authorization to repurchase up to a remaining 506 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. In the second quarter of fiscal 2022, we repurchased 200 thousand shares of our Class A common stock in open-market transactions for a total of $8 million.
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.
There were no material changes related to contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021.
We maintain stand-by letters of credit to provide support for certain obligations, including workers' compensation and performance bonds. As of February 28, 2022, we had $8 million outstanding under these arrangements.
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 ended August 31, 2021, other than the following.
We recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. Within one year from the date of acquisition, we may update the value allocated to the assets acquired and liabilities assumed, and the resulting goodwill balance, based on information received regarding the valuation of such assets and liabilities that was not available at the time of purchase. Measuring assets and liabilities at fair value requires us to determine the price that would be paid by a third-party market participant based on the highest and best use of the assets or interests acquired. See Note 3 - Business Acquisition in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for disclosure of our acquisition of the assets of the Columbus Recycling business on October 1, 2021. As of the date of this report, measurement of actual acquired net working capital, as well as the fair values of certain other acquired assets and assumed liabilities, is still preliminary and subject to change based on the completion of valuation procedures.
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. 33
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):
Long-term debt, net of current maturities 254,126
Less cash and cash equivalents 17,823 27,818 Total debt, net of cash $ 243,754 $ 47,135
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, 2022 2021
Borrowings from long-term debt $ 405,094 $ 265,645 Repayments of long-term debt
Net borrowings (repayments) of debt $ 179,699 $ 66,416
SCHNITZER STEEL INDUSTRIES, INC. Adjusted EBITDA, adjusted income from continuing operations attributable to SSI shareholders, and adjusted diluted earnings per share from continuing operations attributable to SSI shareholders Management believes that providing these non-GAAP financial measures adds a meaningful presentation of our results from business operations excluding adjustments for business development costs not related to ongoing operations including pre-acquisition expenses, legacy environmental matters (net of recoveries), restructuring charges and other exit-related activities, 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 to adjusted EBITDA (in thousands): Three Months Ended February 28, Six Months Ended February 28, 2022 2021 2022 2021 Reconciliation of adjusted EBITDA: Net income $ 38,165 $ 45,679 $ 85,441 $ 60,743 (Income) loss from discontinued operations, net of tax (29 ) (30 ) - 12 Interest expense 1,901 1,224 3,273 3,004 Income tax expense 12,073 11,469 23,170 17,188 Depreciation and amortization 18,596 14,469 35,816 29,295 Charges (recoveries) for legacy environmental matters, net(1) 4,004 (2,214 ) 4,460 546 Business development costs 545 - 1,159 - Restructuring charges and other exit-related activities 4 814 26 878 Adjusted EBITDA $ 75,259 $ 71,411 $ 153,345 $ 111,666
(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. 35
Table of Contents SCHNITZER STEEL INDUSTRIES, INC. Following are reconciliations of adjusted income from continuing operations attributable to SSI shareholders and adjusted diluted earnings 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, 2022 2021 2022 2021 Income from continuing operations attributable to SSI shareholders: As reported $ 37,586 $ 44,558 $ 83,814 $ 58,704 Charges (recoveries) for legacy environmental matters, net(1) 4,004 (2,214 ) 4,460 546 Business development costs 545 - 1,159 - Restructuring charges and other exit-related activities 4 814 26 878 Income tax (benefit) expense allocated to adjustments(2) (1,073 ) 334 (1,322 ) (315 ) Adjusted $ 41,066 $ 43,492 $ 88,137 $ 59,813 Diluted earnings per share from continuing operations attributable to SSI shareholders: As reported $ 1.27 $ 1.54 $ 2.81 $ 2.05 Charges (recoveries) for legacy environmental matters, net, per share(1) 0.13 (0.08 ) 0.15 0.02 Business development costs, per share 0.02 - 0.04 - Restructuring charges and other exit-related activities, per share - 0.03 - 0.03 Income tax (benefit) expense allocated to adjustments, per share(2) (0.04 ) 0.01 (0.04 ) (0.01 ) Adjusted(3) $ 1.38 $ 1.51 $ 2.96 $ 2.09
(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) Income tax allocated to the aggregate adjustments reconciling reported and
adjusted income from continuing operations attributable to SSI shareholders
and diluted earnings per share from continuing operations attributable to SSI
shareholders is determined based on a tax provision calculated with and
(3) May not foot due to rounding.
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