SCHNITZER STEEL(SCHN) - 2024 Q3 - Quarterly Report

Forward-Looking Statements This section introduces the report's forward-looking statements, highlighting their inherent uncertainties and the potential for actual results to differ materially Forward-Looking Statements This section clarifies the report's forward-looking statements, noting their inherent uncertainties and the company's non-obligation to update them, with actual results potentially differing due to various risks - Forward-looking statements are identified by words like "outlook," "expects," "plans," and similar expressions, and are subject to risks and uncertainties[11] - Key risks include, but are not limited to: potential environmental cleanup costs (e.g., Portland Harbor), equipment failures, economic cyclicality, inflation, rising interest rates, supply chain disruptions, and geopolitical instability[12] PART I. FINANCIAL INFORMATION This part presents the company's unaudited financial statements and management's discussion and analysis of its financial performance Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the three and nine months ended May 31, 2024, including a significant goodwill impairment charge Unaudited Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of May 31, 2024, and August 31, 2023 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | May 31, 2024 | August 31, 2023 | | :--- | :--- | :--- | | Total current assets | $616,643 | $550,340 | | Goodwill | $13,105 | $229,419 | | Total assets | $1,552,904 | $1,715,949 | | Total current liabilities | $311,418 | $323,930 | | Long-term debt, net | $405,514 | $243,579 | | Total liabilities | $906,879 | $804,290 | | Total equity | $646,025 | $911,659 | - Goodwill decreased significantly from $229.4 million to $13.1 million due to an impairment charge[15] - Long-term debt increased from $243.6 million to $405.5 million[15] Unaudited Condensed Consolidated Statements of Operations This section details the company's financial performance, highlighting revenues, expenses, and net loss for the three and nine months ended May 31, 2024 Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $673,920 | $809,610 | $1,967,876 | $2,164,293 | | Goodwill impairment charges | $215,941 | $0 | $215,941 | $0 | | Operating (loss) income | ($235,486) | $27,514 | ($285,191) | $19,745 | | Net (loss) income | ($198,511) | $13,608 | ($250,320) | $324 | | Diluted (loss) income per share | ($6.97) | $0.47 | ($8.82) | $0.00 | - The company reported a net loss of $198.5 million for Q3 2024, a stark contrast to the $13.6 million net income in Q3 2023, primarily driven by a $216 million goodwill impairment charge[17] Unaudited Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended May 31, 2024 Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended May 31, 2024 | Nine Months Ended May 31, 2023 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($57,218) | $4,532 | | Net cash used in investing activities | ($59,429) | ($117,397) | | Net cash provided by financing activities | $135,760 | $73,628 | | Net increase (decrease) in cash | $19,157 | ($39,292) | | Cash and cash equivalents at end of period | $25,189 | $4,511 | - Operating activities used $57.2 million in cash for the first nine months of fiscal 2024, compared to providing $4.5 million in the prior year period[28] - Financing activities provided $135.8 million, largely from increased debt borrowings[28] Notes to the Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements, including significant accounting policies and contingent liabilities - Goodwill Impairment: A triggering event in Q3 2024, related to financial performance and a sustained decrease in market capitalization, led to a quantitative test, resulting in a non-cash goodwill impairment charge of $216 million, as the carrying amount of three reporting units exceeded their estimated fair value[64][66][67] - Debt: As of May 31, 2024, total debt was $411 million, up from $249 million at August 31, 2023, with a credit agreement amendment on June 17, 2024, temporarily replacing certain financial covenants[127][128] - Revenue Disaggregation: For the nine months ended May 31, 2024, revenues were primarily from Ferrous metals ($999.4 million), Nonferrous metals ($517.9 million), and Steel products ($322.5 million), with foreign sales constituting $1.02 billion of the $1.97 billion total revenue[101] - Environmental Contingencies: The company has accrued $65 million for environmental liabilities as of May 31, 2024, including matters related to the Portland Harbor Superfund site, where ultimate costs are not yet reasonably estimable and could be material[72][87] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Q3 fiscal 2024 results, noting divergent market conditions with strong nonferrous demand but weaker ferrous and finished steel markets, leading to a significant net loss primarily due to a goodwill impairment charge Results of Operations This section analyzes the company's operational performance for Q3 2024, detailing revenue trends, gross margin, net loss, and the impact of market conditions and impairment charges Q3 2024 vs Q3 2023 Performance | Metric | Q3 2024 | Q3 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $673.9M | $809.6M | (17)% | | Gross Margin | $45.5M | $95.9M | (53)% | | Net (Loss) Income | ($198.5M) | $13.6M | NM | | Adjusted EBITDA | $8.6M | $55.6M | (85)% | | Ferrous Volumes (k LT) | 1,112 | 1,157 | (4)% | | Nonferrous Volumes (k lbs) | 183,230 | 207,714 | (12)% | - Q3 2024 performance was negatively impacted by a 15% decrease in average ferrous selling prices and a 12% decrease in finished steel selling prices compared to the prior year, leading to compressed metal spreads[153][163] - A non-cash goodwill impairment charge of $216 million was the primary driver of the $199 million net loss in Q3 2024[154][165] - The company is implementing productivity and cost reduction initiatives targeting an aggregate annual benefit of approximately $70 million, achieving about three-quarters of the quarterly run rate for these benefits in Q3 2024[167][169] Liquidity and Capital Resources This section analyzes the company's cash flow, debt levels, and capital expenditure plans, highlighting strategies for managing liquidity and funding operations - Net cash used in operating activities was $57 million for the first nine months of fiscal 2024, compared to $5 million provided in the prior year period, mainly due to an increase in inventories[175][176] - Total debt increased to $411 million as of May 31, 2024, from $249 million as of August 31, 2023, primarily to fund working capital and capital expenditures[174] - The company amended its credit agreement on June 17, 2024, modifying financial covenants to provide flexibility, and was in compliance with the new covenants as of May 31, 2024[184][190] - Planned capital expenditures for fiscal 2024 are approximately $75 million to $80 million, down from $101 million spent in the first nine months of fiscal 2023[193] Non-GAAP Financial Measures This section provides reconciliations of non-GAAP financial measures, such as Adjusted EBITDA and Adjusted Diluted EPS, to their most directly comparable GAAP measures Reconciliation of Net (Loss) Income to Adjusted EBITDA (in thousands) | | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Net (loss) income | ($198,511) | $13,608 | | Adjustments | | | | Interest, Taxes, D&A | ($12,777) | $34,907 | | Goodwill impairment charges | $215,941 | $0 | | Other adjustments | $3,948 | $7,095 | | Adjusted EBITDA | $8,618 | $55,610 | Reconciliation of Reported to Adjusted Diluted (Loss) EPS | | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Reported Diluted (Loss) EPS | ($6.97) | $0.48 | | Goodwill impairment | $7.58 | $0.00 | | Other adjustments | $0.12 | $0.24 | | Tax effect of adjustments | ($1.34) | ($0.05) | | Adjusted Diluted (Loss) EPS | ($0.59) | $0.67 | Quantitative and Qualitative Disclosures about Market Risk The company details its exposure to several market risks: commodity price risk for metals, interest rate risk on variable-rate debt, credit risk from customer non-performance, and foreign currency risk, along with mitigation strategies - Commodity Price Risk: The company is exposed to price fluctuations in ferrous and nonferrous metals, managed by adjusting purchase prices in response to selling price changes, with a hypothetical 10% decrease in selling prices not materially impacting inventory net realizable value as of May 31, 2024[225] - Credit Risk: Risk is managed through letters of credit, deposits, and credit insurance, with 50% of accounts receivable covered by letters of credit as of May 31, 2024, an increase from 38% at August 31, 2023[227][229] - Interest Rate Risk: The company has not materially changed its interest rate risk profile since its last annual report[226] Controls and Procedures Management, with the participation of the CEO and CFO, evaluated the company's disclosure controls and procedures, concluding their effectiveness and noting no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of May 31, 2024, the company's disclosure controls and procedures were effective at providing reasonable assurance[232] - No changes occurred during the quarter ended May 31, 2024, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[233] PART II. OTHER INFORMATION This part provides additional information on legal proceedings, risk factors, corporate updates, and exhibits Legal Proceedings The company reports a new legal matter where the Alameda County Criminal Grand Jury returned an indictment against the company and two employees on June 28, 2024, alleging environmental violations and destruction of evidence, which the company disputes - On June 28, 2024, an indictment was returned against the Company and two employees alleging felony and misdemeanor environmental violations[236] - The charges stem from an August 2023 fire at the Oakland, CA facility and the subsequent shredding of burned material, which prosecutors allege constituted destruction of evidence[236] - The Company disputes the allegations, stating regulators were on-site, found no evidence of hazardous waste, and did not object to the processing of the material, and intends to defend itself vigorously[236] Risk Factors This section states that there have been no material changes to the company's risk factors since those disclosed in its Annual Report on Form 10-K for the fiscal year ended August 31, 2023 - There have been no material changes to risk factors since the filing of the Annual Report on Form 10-K for the year ended August 31, 2023[237] Other Information The company announced the retirement of Richard D. Peach, Executive Vice President and Chief Strategy Officer, effective July 2, 2024, with a consulting agreement for transition services - Richard D. Peach, EVP and Chief Strategy Officer, will retire effective July 2, 2024[239] - A consulting agreement was signed to facilitate the transition, under which Mr. Peach will receive continued vesting of his RSUs and a pro-rated FY24 bonus[240] Exhibits This section lists the exhibits filed with the Form 10-Q report, including CEO and CFO certifications and Inline XBRL data files - The filing includes CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[243] - Interactive Data Files (Inline XBRL) are included as exhibits 101 and 104[243] Signatures This section confirms the official signing of the Form 10-Q report by the company's key executives on July 2, 2024 Signatures The Form 10-Q report was duly authorized and signed on July 2, 2024, by Tamara L. Lundgren, Chairman, President and Chief Executive Officer, and Stefano R. Gaggini, Senior Vice President and Chief Financial Officer - The report was signed on July 2, 2024[246] - Signatories are Tamara L. Lundgren (CEO) and Stefano R. Gaggini (CFO)[246]