SCHNITZER STEEL INDUSTRIES, INC. - Quarter Report: 2023 May (Form 10-Q)

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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended May 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from __________ to __________

Commission File Number 000-22496

SCHNITZER STEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



Oregon		93-0341923
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

299 SW Clay Street, Suite 350, Portland, Oregon		97201
(Address of principal executive offices)		(Zip Code)

(503) 224-9900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $1.00 par value	SCHN	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐


Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had 27,311,089 shares of Class A common stock, par value of $1.00 per share, and 200,000 shares of Class B common stock, par value of $1.00 per share, outstanding as of June 23, 2023.

SCHNITZER STEEL INDUSTRIES, INC.

FORM 10-Q

TABLE OF CONTENTS


	PAGE
FORWARD-LOOKING STATEMENTS	3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)	4

Unaudited Condensed Consolidated Balance Sheets as of May 31, 2023 and August 31, 2022	4

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended May 31, 2023 and 2022	5

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended May 31, 2023 and 2022	6

Unaudited Condensed Consolidated Statements of Equity for the Three and Nine Months Ended May 31, 2023 and 2022	7

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 2023 and 2022	9

Notes to the Unaudited Condensed Consolidated Financial Statements	11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3. Quantitative and Qualitative Disclosures about Market Risk	39

Item 4. Controls and Procedures	40

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	41

Item 1A. Risk Factors	41

Item 5. Other Information	41

Item 6. Exhibits	42

SIGNATURES	43

Table of Contents

FORWARD-LOOKING STATEMENTS

Statements and information included in this Quarterly Report on Form 10-Q by Schnitzer Steel Industries, Inc. that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Except as noted herein or as the context may otherwise require, all references to “we,” “our,” “us,” “the Company,” and “SSI” refer to Schnitzer Steel Industries, Inc. and its consolidated subsidiaries.

Forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding future events or our expectations, intentions, beliefs, and strategies regarding the future, which may include statements regarding the impact of equipment upgrades, equipment failures, and facility damage on production, including timing of repairs and resumption of operations; the realization of insurance recoveries; the Company’s outlook, growth initiatives, or expected results or objectives, including pricing, margins, sales volumes, and profitability; completion of acquisitions and integration of acquired businesses; the impacts of supply chain disruptions, inflation, and rising interest rates; liquidity positions; our ability to generate cash from continuing operations; trends, cyclicality, and changes in the markets we sell into; strategic direction or goals; targets; changes to manufacturing and production processes; the realization of deferred tax assets; planned capital expenditures; the cost of and the status of any agreements or actions related to our compliance with environmental and other laws; expected tax rates, deductions, and credits; the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; the impact of pandemics, epidemics, or other public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic; the impact of labor shortages or increased labor costs; obligations under our retirement plans; benefits, savings, or additional costs from business realignment, cost containment, and productivity improvement programs; the potential impact of adopting new accounting pronouncements; and the adequacy of accruals.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “outlook,” “target,” “aim,” “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “will,” “should,” “could,” “opinions,” “forecasts,” “projects,” “plans,” “future,” “forward,” “potential,” “probable,” and similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.

We may make other forward-looking statements from time to time, including in reports filed with the Securities and Exchange Commission, press releases, presentations, and on public conference calls. All forward-looking statements we make are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements, except as may be required by law. Our business is subject to the effects of changes in domestic and global economic conditions and a number of other risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in “Item 1A. Risk Factors” of Part I of our most recent Annual Report on Form 10-K. Examples of these risks include: potential environmental cleanup costs related to the Portland Harbor Superfund site or other locations; the impact of equipment upgrades, equipment failures, and facility damage on production; failure to realize or delays in realizing expected benefits from capital projects, including investments in processing and manufacturing technology improvements; the cyclicality and impact of general economic conditions; the impact of inflation, rising interest rates, and foreign currency fluctuations; changing conditions in global markets including the impact of sanctions and tariffs, quotas, and other trade actions and import restrictions; increases in the relative value of the U.S. dollar; economic and geopolitical instability including as a result of military conflict; volatile supply and demand conditions affecting prices and volumes in the markets for raw materials and other inputs we purchase; significant decreases in recycled metal prices; imbalances in supply and demand conditions in the global steel industry; difficulties associated with acquisitions and integration of acquired businesses; supply chain disruptions; reliance on third-party shipping companies, including with respect to freight rates and the availability of transportation; the impact of goodwill impairment charges; the impact of long-lived asset and equity investment impairment charges; the impact of pandemics, epidemics, or other public health emergencies, such as the COVID-19 pandemic; inability to achieve or sustain the benefits from productivity, cost savings, and restructuring initiatives; inability to renew facility leases; customer fulfillment of their contractual obligations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under the agreement governing our bank credit facilities; the impact of consolidation in the steel industry; product liability claims; the impact of legal proceedings and legal compliance; the adverse impact of climate change; the impact of not realizing deferred tax assets; the impact of tax increases and changes in tax rules; the impact of one or more cybersecurity incidents; translation risks associated with fluctuation in foreign exchange rates; inability to obtain or renew business licenses and permits; environmental compliance costs and potential environmental liabilities; increased environmental regulations and enforcement; compliance with climate change and greenhouse gas emission laws and regulations; the impact of labor shortages or increased labor costs; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)


	May 31, 2023			August 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	4,511		$	43,803
Accounts receivable, net of allowance for credit losses of $1,513 and $1,566		297,444			237,654
Inventories		298,979			315,189
Refundable income taxes		2,298			1,696
Prepaid expenses and other current assets		56,143			73,044
Total current assets		659,375			671,386
Property, plant and equipment, net of accumulated depreciation of $894,216 and $855,032		697,396			664,120
Operating lease right-of-use assets		118,399			122,413
Investments in joint ventures		10,120			12,841
Goodwill		268,595			255,198
Intangibles, net of accumulated amortization of $10,927 and $7,256		34,055			26,155
Deferred income taxes		22,695			24,598
Other assets		55,793			49,886
Total assets	$	1,866,428		$	1,826,597
Liabilities and Equity
Current liabilities:
Short-term borrowings	$	6,724		$	6,041
Accounts payable		209,795			217,689
Accrued payroll and related liabilities		29,018			59,702
Environmental liabilities		11,521			13,031
Operating lease liabilities		20,357			21,660
Accrued income taxes		1,074			3,856
Other accrued liabilities		63,667			59,594
Total current liabilities		342,156			381,573
Deferred income taxes		61,761			63,328
Long-term debt, net of current maturities		344,084			242,521
Environmental liabilities, net of current portion		54,340			55,469
Operating lease liabilities, net of current maturities		98,175			101,651
Other long-term liabilities		26,320			23,581
Total liabilities		926,836			868,123
Commitments and contingencies (Note 5)
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:
Preferred stock – 20,000 shares $1.00 par value authorized, none issued		—			—
Class A common stock – 75,000 shares $1.00 par value authorized, 27,311 and 26,747 shares issued and outstanding		27,311			26,747
Class B common stock – 25,000 shares $1.00 par value authorized, 200 and 200 shares issued and outstanding		200			200
Additional paid-in capital		23,287			22,975
Retained earnings		925,399			941,146
Accumulated other comprehensive loss		(40,185	)		(37,089	)
Total SSI shareholders’ equity		936,012			953,979
Noncontrolling interests		3,580			4,495
Total equity		939,592			958,474
Total liabilities and equity	$	1,866,428		$	1,826,597

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statement are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)


	Three Months Ended May 31,						Nine Months Ended May 31,
	2023			2022			2023			2022
Revenues	$	809,610		$	1,010,087		$	2,164,293		$	2,591,403
Operating expense:
Cost of goods sold		713,685			834,375			1,946,633			2,188,158
Selling, general and administrative		68,527			77,672			196,712			194,020
(Income) from joint ventures		(285	)		(762	)		(1,386	)		(1,589	)
Asset impairment charges		—			932			—			932
Restructuring charges and other exit-related activities		169			26			2,589			52
Operating income		27,514			97,844			19,745			209,830
Interest expense		(5,146	)		(2,223	)		(13,378	)		(5,496	)
Other loss, net		(1,306	)		(34	)		(5,289	)		(136	)
Income from continuing operations before income taxes		21,062			95,587			1,078			204,198
Income tax expense		(7,221	)		(20,037	)		(676	)		(43,207	)
Income from continuing operations		13,841			75,550			402			160,991
Loss from discontinued operations, net of tax		(233	)		(46	)		(78	)		(46	)
Net income		13,608			75,504			324			160,945
Net income attributable to noncontrolling interests		(148	)		(870	)		(299	)		(2,497	)
Net income attributable to SSI shareholders	$	13,460		$	74,634		$	25		$	158,448

Net income per share attributable to SSI shareholders:
Basic:
Income per share from continuing operations	$	0.49		$	2.65		$	—		$	5.63
Net income per share	$	0.48		$	2.65		$	—		$	5.63
Diluted:
Income per share from continuing operations	$	0.48		$	2.52		$	—		$	5.33
Net income per share	$	0.47		$	2.52		$	—		$	5.33
Weighted average number of common shares:
Basic		28,114			28,143			27,980			28,161
Diluted		28,659			29,625			28,646			29,741

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

(Currency - U.S. Dollar)


	Three Months Ended May 31,						Nine Months Ended May 31,
	2023			2022			2023			2022
Net income	$	13,608		$	75,504		$	324		$	160,945
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		362			153			(3,245	)		(240	)
Pension obligations, net		58			40			149			549
Total other comprehensive income (loss), net of tax		420			193			(3,096	)		309
Comprehensive income (loss)		14,028			75,697			(2,772	)		161,254
Less comprehensive income attributable to noncontrolling interests		(148	)		(870	)		(299	)		(2,497	)
Comprehensive income (loss) attributable to SSI shareholders	$	13,880		$	74,827		$	(3,071	)	$	158,757

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)


	Common Stock																Accumulated
	Class A						Class B				Additional						Other			Total SSI
Three Months Ended May 31, 2022	Shares			Amount			Shares		Amount		Paid-in Capital			Retained Earnings			Comprehensive Loss			Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance as of March 1, 2022		27,433		$	27,433			200	$	200	$	40,821		$	866,776		$	(34,438	)	$	900,792		$	3,857		$	904,649
Net income		—			—			—		—		—			74,634			—			74,634			870			75,504
Other comprehensive income, net of tax		—			—			—		—		—			—			193			193			—			193
Distributions to noncontrolling interests		—			—			—		—		—			—			—			—			(545	)		(545	)
Share repurchases		(244	)		(244	)		—		—		(9,749	)		—			—			(9,993	)		—			(9,993	)
Issuance of restricted stock		89			89			—		—		(89	)		—			—			—			—			—
Restricted stock withheld for taxes		(31	)		(31	)		—		—		(1,395	)		—			—			(1,426	)		—			(1,426	)
Share-based compensation cost		—			—			—		—		4,838			—			—			4,838			—			4,838
Dividends ($0.1875 per common share)		—			—			—		—		—			(5,350	)		—			(5,350	)		—			(5,350	)
Balance as of May 31, 2022		27,247		$	27,247			200	$	200	$	34,426		$	936,060		$	(34,245	)	$	963,688		$	4,182		$	967,870


	Common Stock																Accumulated
	Class A						Class B				Additional						Other			Total SSI
Three Months Ended May 31, 2023	Shares			Amount			Shares		Amount		Paid-in Capital			Retained Earnings			Comprehensive Loss			Shareholders' Equity			Noncontrolling Interests			Total Equity
Balance as of March 1, 2023		27,255		$	27,255			200	$	200	$	20,831		$	917,266		$	(40,605	)	$	924,947		$	3,491		$	928,438
Net income		—			—			—		—		—			13,460			—			13,460			148			13,608
Other comprehensive income, net of tax		—			—			—		—		—			—			420			420			—			420
Distributions to noncontrolling interests		—			—			—		—		—			—			—			—			(59	)		(59	)
Issuance of restricted stock		84			84			—		—		(84	)		—			—			—			—			—
Restricted stock withheld for taxes		(28	)		(28	)		—		—		(774	)		—			—			(802	)		—			(802	)
Share-based compensation cost		—			—			—		—		3,314			—			—			3,314			—			3,314
Dividends ($0.1875 per common share)		—			—			—		—		—			(5,327	)		—			(5,327	)		—			(5,327	)
Balance as of May 31, 2023		27,311		$	27,311			200	$	200	$	23,287		$	925,399		$	(40,185	)	$	936,012		$	3,580		$	939,592

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, in thousands, except per share amounts)

(Currency - U.S. Dollar)


	Common Stock																Accumulated
	Class A						Class B				Additional						Other			Total SSI
Nine Months Ended May 31, 2022	Shares			Amount			Shares		Amount		Paid-in Capital			Retained Earnings			Comprehensive Loss			Shareholders' Equity			Noncontrolling Interests			Total Equity
Balance as of September 1, 2021		27,332		$	27,332			200	$	200	$	49,074		$	793,712		$	(34,554	)	$	835,764		$	4,015		$	839,779
Net income		—			—			—		—		—			158,448			—			158,448			2,497			160,945
Other comprehensive income, net of tax		—			—			—		—		—			—			309			309			—			309
Distributions to noncontrolling interests		—			—			—		—		—			—			—			—			(2,330	)		(2,330	)
Share repurchases		(444	)		(444	)		—		—		(17,414	)		—			—			(17,858	)		—			(17,858	)
Issuance of restricted stock		568			568			—		—		(568	)		—			—			—			—			—
Restricted stock withheld for taxes		(209	)		(209	)		—		—		(10,794	)		—			—			(11,003	)		—			(11,003	)
Share-based compensation cost		—			—			—		—		14,128			—			—			14,128			—			14,128
Dividends ($0.5625 per common share)		—			—			—		—		—			(16,100	)		—			(16,100	)		—			(16,100	)
Balance as of May 31, 2022		27,247		$	27,247		200		$	200	$	34,426		$	936,060		$	(34,245	)	$	963,688		$	4,182		$	967,870


	Common Stock																Accumulated
	Class A						Class B				Additional						Other			Total SSI
Nine Months Ended May 31, 2023	Shares			Amount			Shares		Amount		Paid-in Capital			Retained Earnings			Comprehensive Loss			Shareholders' Equity			Noncontrolling Interests			Total Equity
Balance as of September 1, 2022		26,747		$	26,747			200	$	200	$	22,975		$	941,146		$	(37,089	)	$	953,979		$	4,495		$	958,474
Net income		—			—			—		—		—			25			—			25			299			324
Other comprehensive loss, net of tax		—			—			—		—		—			—			(3,096	)		(3,096	)		—			(3,096	)
Distributions to noncontrolling interests		—			—			—		—		—			—			—			—			(1,214	)		(1,214	)
Issuance of restricted stock		846			846			—		—		(846	)		—			—			—			—			—
Restricted stock withheld for taxes		(282	)		(282	)		—		—		(7,329	)		—			—			(7,611	)		—			(7,611	)
Share-based compensation cost		—			—			—		—		8,487			—			—			8,487			—			8,487
Dividends ($0.5625 per common share)		—			—			—		—		—			(15,772	)		—			(15,772	)		—			(15,772	)
Balance as of May 31, 2023		27,311		$	27,311			200	$	200	$	23,287		$	925,399		$	(40,185	)	$	936,012		$	3,580		$	939,592

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Currency - U.S. Dollar)


	Nine Months Ended May 31,
	2023			2022
Cash flows from operating activities:
Net income	$	324		$	160,945
Adjustments to reconcile net income to cash provided by operating activities:
Asset impairment charges		5,455			932
Exit-related asset impairments		254			—
Depreciation and amortization		66,390			54,566
Inventory write-downs		575			3,199
Deferred income taxes		(933	)		23,851
Undistributed equity in earnings of joint ventures		(1,386	)		(1,589	)
Share-based compensation expense		8,438			14,046
Loss on disposal of assets, net		10			1,192
Unrealized foreign exchange loss, net		126			193
Credit loss, net		195			17
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(71,016	)		(43,340	)
Inventories		23,215			(164,196	)
Income taxes		(2,992	)		8,843
Prepaid expenses and other current assets		(12,476	)		(14,771	)
Other long-term assets		(3,868	)		(1,068	)
Operating lease assets and liabilities		(276	)		(2,049	)
Accounts payable		10,259			44,874
Accrued payroll and related liabilities		(30,451	)		(16,890	)
Other accrued liabilities		10,381			1,747
Environmental liabilities		(2,542	)		(14,744	)
Other long-term liabilities		2,850			650
Distributed equity in earnings of joint ventures		2,000			1,600
Net cash provided by operating activities		4,532			58,008
Cash flows from investing activities:
Capital expenditures		(101,270	)		(97,972	)
Acquisitions, net of acquired cash		(26,902	)		(177,070	)
Proceeds from insurance and sale of assets		10,775			18,244
Purchase of equity investment		—			(5,000	)
Deposit on land option		—			(80	)
Net cash used in investing activities		(117,397	)		(261,878	)
Cash flows from financing activities:
Borrowings from long-term debt		501,761			895,175
Repayment of long-term debt		(403,129	)		(655,440	)
Payment of debt issuance costs		(156	)		—
Repurchase of Class A common stock		—			(17,858	)
Taxes paid related to net share settlement of share-based payment awards		(7,611	)		(11,003	)
Distributions to noncontrolling interests		(1,214	)		(2,330	)
Dividends paid		(16,023	)		(16,172	)
Net cash provided by financing activities		73,628			192,372
Effect of exchange rate changes on cash		(55	)		(195	)
Net decrease in cash and cash equivalents		(39,292	)		(11,693	)
Cash and cash equivalents as of beginning of period		43,803			27,818
Cash and cash equivalents as of end of period	$	4,511		$	16,125

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Currency - U.S. Dollar)


	Nine Months Ended May 31,
	2023		2022
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest	$	11,763	$	3,249
Income taxes, net	$	4,565	$	10,502
Schedule of noncash investing and financing transactions:
Purchases of property, plant and equipment included in liabilities	$	12,605	$	19,868

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements of Schnitzer Steel Industries, Inc. and its majority-owned and wholly-owned subsidiaries (the “Company”) have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for Form 10-Q, including Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all normal, recurring adjustments considered necessary for a fair statement have been included. Management suggests that these Unaudited Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2022. The results for the three and nine months ended May 31, 2023 and 2022 are not necessarily indicative of the results of operations for the entire fiscal year.

Segment Reporting

The Company acquires and recycles ferrous and nonferrous scrap metal for sale to foreign and domestic metal producers, processors, and brokers, and it procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores. Most of these auto parts stores supply the Company’s shredding facilities with auto bodies that are processed into saleable recycled metal products. In addition to the sale of recycled metal products processed at its facilities, the Company provides a variety of recycling and related services. The Company also produces a range of finished steel long products at its electric arc furnace (“EAF”) steel mill using recycled ferrous metal sourced internally from its recycling and joint venture operations and other raw materials.

The accounting standards for reporting information about operating segments define an operating segment as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses for which discrete financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s internal organizational and reporting structure reflects a functionally based, integrated model and includes a single operating and reportable segment.

Cash and Cash Equivalents

Cash and cash equivalents include short-term securities that are not restricted by third parties and have an original maturity date of 90 days or less. Included in accounts payable are book overdrafts representing outstanding payments in excess of funds on deposit of $55 million and $56 million as of May 31, 2023 and August 31, 2022, respectively.

Accounts Receivable, net

Accounts receivable represent amounts primarily due from customers on product and other sales. These accounts receivable, which are reduced by an allowance for credit losses, are recorded at the invoiced amount and do not bear interest. The Company extends credit to customers under contracts containing customary and explicit payment terms, and payment is generally required within 30 to 60 days of shipment. Nonferrous export sales typically require a deposit prior to shipment. Historically, almost all of the Company’s ferrous export sales have been made with letters of credit. Ferrous and nonferrous metal sales to domestic customers and finished steel sales are generally made on open account, and a portion of these sales are covered by credit insurance.

The Company evaluates the collectibility of its accounts receivable based on a combination of factors, including whether sales were made pursuant to letters of credit or required deposits prior to shipment, the aging of customer receivable balances, the financial condition of the Company’s customers, historical collection rates, and economic trends. Management uses this evaluation to estimate the amount of customer receivables that may not be collected in the future and records a provision for expected credit losses. Accounts are written off when all efforts to collect have been exhausted.

Also included in accounts receivable are short-term advances to scrap metal suppliers used as a mechanism to acquire unprocessed scrap metal. The advances are generally repaid with scrap metal, as opposed to cash. Repayments of advances with scrap metal are treated as noncash operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows and totaled $8 million and $9 million for the nine months ended May 31, 2023 and 2022, respectively.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Prepaid Expenses

The Company’s prepaid expenses, reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets, totaled $33 million and $43 million as of May 31, 2023 and August 31, 2022, respectively, and consisted primarily of prepaid insurance, deposits on capital projects, prepaid services, and prepaid property taxes.

Other Assets

The Company’s other assets, exclusive of prepaid expenses and assets relating to certain employee benefit plans, consisted primarily of receivables from insurers, cash held in a client trust account relating to a legal settlement, two equity investments, capitalized implementation costs for cloud computing arrangements, major spare parts and equipment, prepaid plant equipment lease costs, debt issuance costs, and notes and other contractual receivables. Other assets are reported within either prepaid expenses and other current assets or other assets in the Unaudited Condensed Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle of one year from the reporting date.

Receivables from insurers represent the portion of insured losses expected to be recovered from the Company’s insurers under various insurance policies or from a Qualified Settlement Fund holding settlement amounts deposited by certain insurers of claims against the Company related to the Portland Harbor Superfund site. The receivables are recorded at an amount not to exceed the recorded loss and only if the terms of legally enforceable insurance contracts support that the insurance recovery will not be disputed and is deemed collectible, or if recovery of the loss by the Company from a Qualified Settlement Fund is probable. Receivables from insurers totaled $19 million and $28 million as of May 31, 2023 and August 31, 2022, respectively. As of May 31, 2023, receivables from insurers comprised primarily $5 million relating to property loss and damage and other claims in connection with the December 2021 fire at the Company’s shredder facility in Everett, Massachusetts, $10 million relating to environmental claims, $2 million relating to workers’ compensation claims, and $1 million relating to third-party claims. As of August 31, 2022, receivables from insurers comprised primarily $10 million relating to property loss and damage and other claims in connection with the December 2021 fire at the Company’s shredder facility in Everett, Massachusetts, $7 million relating to environmental claims, $6 million relating to third-party claims, and $4 million relating to workers’ compensation claims. See “Accounting for Impacts of Involuntary Events” below in this Note for further discussion of receivables and advance payments from insurers relating to property damage and business interruption claims.

Other assets as of both May 31, 2023 and August 31, 2022 also included approximately $7 million in connection with cash deposited into a client trust account in the second quarter of fiscal 2021 to fund the remediation of a site, a portion of which was previously leased to and operated by an indirect, wholly-owned subsidiary. The cash was deposited into the client trust account by other potentially liable parties in connection with settlement of a lawsuit relating to allocation of the remediation costs, including agreement by the Company’s subsidiary to perform certain remedial actions. See “Other Legacy Environmental Loss Contingencies” within “Contingencies – Environmental” in Note 5 - Commitments and Contingencies for further discussion of this matter.

The Company invested $5 million in the equity of a privately-held Canadian recycling technology entity in May 2022. The Company's influence over the operating and financial policies of the entity is not significant, and, thus, the investment is accounted for under the guidance for investments in equity securities. The equity investment does not have a readily determinable fair value and, therefore, is carried at cost and adjusted for impairments and observable price changes. The investment is reported within other assets in the Unaudited Condensed Consolidated Balance Sheets. The carrying value of the investment was $5 million as of both May 31, 2023 and August 31, 2022. The Company has not recorded any impairments or upward or downward adjustments to the carrying value of the investment since acquisition.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company invested $6 million in the equity of a privately-held U.S. waste and recycling entity in fiscal 2017. The investment is accounted for under the guidance for investments in equity securities. In August 2022, the privately-held entity merged with a publicly-traded U.S. entity. As a result of the merger, the Company's investment became held in equity units of a subsidiary of the publicly-traded entity, which equity units are not publicly traded but are exchangeable for shares of the publicly traded entity. The timing and magnitude of exchange is solely at the discretion of the publicly-traded entity. During the first half of fiscal 2023, the equity investment was determined to not have a readily determinable fair value and, therefore, was carried at cost and adjusted for impairments and observable price changes. In the first quarter of fiscal 2023, the Company identified an impairment indicator for its investment and, based on its fair value measurement incorporating observable trading prices of the publicly-traded entity and unobservable inputs, recognized a $4 million impairment in other loss, net on the Unaudited Condensed Consolidated Statement of Operations. During the third quarter of fiscal 2023, the publicly-traded entity allowed for an exchange event, and the Company exchanged its full investment in the subsidiary's equity units for shares of the publicly-traded entity, which have a readily determinable fair value, and which the Company still held as of May 31, 2023. As a result, in the third quarter of fiscal 2023, the Company recorded a $1 million downward adjustment of the equity investment to its fair value of $1 million as of May 31, 2023, which loss is reported within other loss, net on the Unaudited Condensed Consolidated Statement of Operations. The investment is reported within prepaid expenses and other current assets as of May 31, 2023, and within other assets as of August 31, 2022, in the Unaudited Condensed Consolidated Balance Sheets.

Accounting for Impacts of Involuntary Events

Assets destroyed or damaged as a result of involuntary events are written off or reduced in carrying value to their salvage value. When recovery of all or a portion of the amount of property damage loss or other covered expenses through insurance proceeds is demonstrated to be probable, a receivable is recorded and offsets the loss or expense up to the amount of the total loss or expense. No gain is recorded until all contingencies related to the insurance claim have been resolved.

On May 22, 2021, the Company experienced a fire at its 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. The Company 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. The Company filed insurance claims for the physical loss and damage experienced at the mill’s melt shop and business income losses resulting from the matter. As of August 31, 2021, prepaid expenses and other current assets included an initial $10 million insurance receivable recognized in fiscal 2021, primarily offsetting applicable losses including capital purchases of $10 million that had been incurred by the Company as of August 31, 2021. In the first nine months of fiscal 2022, the Company increased the amount of this insurance receivable to $25 million and recognized a related $15 million insurance recovery gain, $3 million and $12 million of which were recognized in the first and second quarters of fiscal 2022, respectively, within cost of goods sold in the Unaudited Condensed Consolidated Statements of Operations, reflecting recovery of applicable losses incurred as a result of the fire to date. In addition, during the first nine months of fiscal 2022, the Company received advance payments from insurers totaling approximately $30 million towards the Company’s claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the $25 million insurance receivable to zero with the remaining amount of advance payments reported within other accrued liabilities in the Unaudited Condensed Consolidated Balance Sheets. In the third quarter of fiscal 2023, the Company received additional advance payments from insurers of approximately $13 million towards the Company's claims, increasing the total of such advance payments from insurers to approximately $43 million, and not reflecting any final or full settlement of claims with the insurers. The amount of advance payments reported within other accrued liabilities was $18 million as of May 31, 2023 and $5 million as of August 31, 2022.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On December 8, 2021, the Company experienced a fire at its 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. In addition, shredding operations temporarily ceased at the facility on June 18, 2022 and, following discussions with the Massachusetts Department of Environmental Protection and the Massachusetts Attorney General’s office, the Company installed a temporary emission capture system and controls that allowed for the resumption of shredding operations on November 11, 2022 and for continued operation during the repair and replacement of the shredder enclosure building. Non-shredding operations at the facility continued during this period. The Company filed insurance claims for the property that experienced physical loss or damage and anticipated business income losses resulting from the matter. In fiscal 2022, after the fire, the Company recognized an aggregate $17 million insurance receivable and related insurance recovery gain, $10 million and $1 million of which were recorded in the second and third quarters of fiscal 2022, respectively. In each of the third quarter and first nine months of fiscal 2023, the Company recognized an additional $2 million insurance receivable and related insurance recovery gain. As of May 31, 2023, the Company had recognized a total of $20 million in insurance recovery gains, all reported within cost of goods sold, reflecting recovery of applicable losses to date including impairment charges of $7 million related to the carrying value of plant and equipment assets lost in or damaged by the fire and initial capital purchases, non-capitalizable repair and replacement costs, and other applicable losses totaling $13 million. Also, in the third quarters of fiscal 2023 and 2022, the Company received advance payments from insurers totaling approximately $8 million and $7 million, respectively, towards the Company's claims, and not reflecting any final or full settlement of claims with the insurers, which amounts reduced the insurance receivable to $5 million and $10 million as of May 31, 2023 and August 31, 2022, respectively. The insurance receivable is reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets.

Investments in Joint Ventures

As of August 31, 2022, the Company had two 50%-owned joint venture interests which were accounted for under the equity method of accounting. On November 7, 2022, the Company sold its ownership interest in one of the 50%-owned joint ventures for approximately $2 million. No gain or loss was recognized as a result of the sale.

Business Acquisitions

The Company recognizes 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, the Company may update the value allocated to the assets acquired and liabilities assumed and the resulting goodwill balance as a result of 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 the Company 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. Acquisition costs are expensed as incurred. See Note 3 - Business Acquisitions for further detail.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The majority of cash and cash equivalents is maintained with major financial institutions. Balances with these and certain other institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250 thousand as of May 31, 2023. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up the Company’s customer base. The Company controls credit risk through credit approvals, credit limits, credit insurance, letters of credit or other collateral, cash deposits, and monitoring procedures. The Company is exposed to a residual credit risk with respect to open letters of credit by virtue of the possibility of the failure of a bank providing a letter of credit.

Recent Accounting Pronouncements

The Company does not expect that its adoption in the future of any recently issued accounting pronouncements will have a material impact on its consolidated financial statements.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Inventories

Inventories consisted of the following (in thousands):


	May 31, 2023		August 31, 2022
Processed and unprocessed scrap metal	$	153,255	$	166,368
Semi-finished goods		13,232		20,009
Finished goods		69,207		72,625
Supplies		63,285		56,187
Inventories	$	298,979	$	315,189

Note 3 - Business Acquisitions

Fiscal 2023 Business Acquisition

On November 18, 2022, the Company used cash on hand and borrowings under existing credit facilities to acquire the operating assets of ScrapSource, a recycling services company that provides solutions for industrial companies that generate scrap metal from their manufacturing process. The acquired business expands the Company's national recycling services operations, giving rise to expected benefits supporting the amount of acquired goodwill. The transaction qualified as a business combination for accounting purposes, which involves application of the acquisition method described in Accounting Standards Codification Topic 805, Business Combinations, and summarized in “Business Acquisitions” in Note 1 - Summary of Significant Accounting Policies. The total purchase consideration was approximately $25 million. As of the date of this report, measurement of the fair values of certain assets acquired and liabilities assumed is still preliminary and subject to change based on the completion of valuation procedures.

The following table summarizes the provisional fair values of assets acquired and liabilities assumed by the Company as of the November 18, 2022 acquisition date (in thousands):


Operating lease right-of-use assets	$	466
Goodwill(1)		13,105
Other intangible assets		11,955
Other assets		9
Total assets acquired		25,535
Operating lease liability		466
Total liabilities assumed		466
Net assets acquired	$	25,069

(1)

All of the provisional amount of acquired goodwill is tax deductible.

The following table summarizes the provisional purchase price allocation to the identifiable intangible assets and their estimated useful lives as of the November 18, 2022 acquisition date (in thousands):

The results of operations for the acquired ScrapSource business beginning as of the November 18, 2022 acquisition date are included in the accompanying financial statements. For each of the three and nine months ended May 31, 2023, the revenues and net income contributed by the acquired ScrapSource business and reported in the Unaudited Condensed Consolidated Statements of Operations were not material to the financial statements taken as a whole.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Fiscal 2022 Business Acquisitions

On October 1, 2021, the Company completed the acquisition of eight metals recycling facilities across Mississippi, Tennessee, and Kentucky from Columbus Recycling, a provider of recycled ferrous and nonferrous metal products and recycling services. The total purchase consideration of $117 million was allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the date of the acquisition. The $65 million excess of the total purchase consideration over the fair value of the identifiable net assets acquired was recorded as goodwill. The results of operations for the acquired Columbus Recycling business beginning as of the October 1, 2021 acquisition date are included in the accompanying financial statements.

On April 29, 2022, the Company completed the acquisition of two recycling facilities in the greater Atlanta, Georgia metropolitan area, including a metal shredding operation and recycled auto-parts center, from the previous owners of Encore Recycling. The total purchase consideration of $64 million was allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the date of the acquisition. The $21 million excess of the total purchase consideration over the fair value of the identifiable net assets acquired was recorded as goodwill. The results of operations for the acquired Encore Recycling business beginning as of the April 29, 2022 acquisition date are included in the accompanying financial statements.

Unaudited Pro Forma Information

The following unaudited pro forma information presents the effect on the consolidated financial results of the Company of the Columbus Recycling and Encore Recycling businesses acquired during fiscal 2022 as though the businesses had been acquired as of the beginning of fiscal 2021 (in thousands):


	Three Months Ended May 31,		Nine Months Ended May 31,
	2022		2022
Revenues	$	1,029,000	$	2,671,500
Net income	$	79,000	$	173,000
Net income attributable to SSI shareholders	$	78,000	$	170,500

There are no individually material, nonrecurring pro forma adjustments directly attributable to the business combinations included in these pro forma revenues and earnings.

For the three months ended May 31, 2022 and for the nine months ended May 31, 2023 and 2022, the unaudited pro forma amounts of revenues and net income of the acquired ScrapSource business were not material to the financial statements taken as a whole and, therefore, are not included in the unaudited pro forma information presented above.

The information included in the unaudited pro forma amounts is derived from historical information obtained from the sellers of the businesses. These unaudited pro forma results are not necessarily indicative of what actual results would have been had these acquisitions occurred as of the beginning of fiscal 2021. In addition, the unaudited pro forma results are not intended to be a projection of future results and do not reflect any synergies that may be achieved from combining operations.

Note 4 - Goodwill

The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. There were no triggering events identified during the first nine months of fiscal 2023 requiring an interim goodwill impairment test, and the Company did not record a goodwill impairment charge in any of the periods presented.

Impairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is required to be identified as a reporting unit if the component is a business for which discrete financial information is available and segment management regularly reviews its operating results. The Company most recently performed the quantitative impairment test for goodwill carried by two of its reporting units, consisting of a regional metals recycling operation and its network of auto parts stores, as of July 1, 2022. For the metals recycling and autos reporting units subject to the quantitative impairment test, the estimated fair value of the reporting unit exceeded its carrying amount by approximately 32% and 44%, respectively, as of July 1, 2022.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The determination of fair value of the reporting units used to perform the impairment test requires judgment and involves significant estimates and assumptions about the expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact management's assumptions used to estimate the reporting units’ fair value. Although the Company believes the assumptions used in testing its reporting units’ goodwill for impairment are reasonable, a lack of recovery or further deterioration in market conditions from current levels, a trend of weaker than anticipated financial performance for the reporting units with allocated goodwill, a decline in the Company's share price from current levels for a sustained period of time, or an increase in the weighted average cost of capital, among other factors, could significantly impact the Company's impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on its financial condition and results of operations.

The gross change in the carrying amount of goodwill for the nine months ended May 31, 2023 was as follows (in thousands):


	Goodwill
August 31, 2022	$	255,198
Additions(1)		14,759
Measurement period adjustments(2)		(725	)
Foreign currency translation adjustment		(637	)
May 31, 2023	$	268,595

(1)

Additions to goodwill relate entirely to the ScrapSource business acquired on November 18, 2022 and are exclusive of measurement period adjustments. See Note 3 - Business Acquisitions.

(2)

Measurement period adjustments relate to the acquired ScrapSource and Encore Recycling businesses.

Note 5 - Commitments and Contingencies

Contingencies - Environmental

The Company evaluates the adequacy of its environmental liabilities on a quarterly basis. Adjustments to the liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or expenditures are made for which liabilities were established.

Changes in the Company’s environmental liabilities for the nine months ended May 31, 2023 were as follows (in thousands):


Balance as of September 1, 2022		Liabilities Established (Released), Net		Payments and Other			Balance as of May 31, 2023		Short-Term		Long-Term
$	68,500	$	7,170	$	(9,809	)	$	65,861	$	11,521	$	54,340

As of May 31, 2023 and August 31, 2022, the Company had environmental liabilities of $66 million and $69 million, respectively, for the potential remediation of locations where it has conducted business or has environmental liabilities from historical or recent activities. These liabilities relate to the investigation and potential remediation of waterways and soil and groundwater contamination and may also involve natural resource damages, governmental fines and penalties, and claims by third parties for personal injury and property damage. Except for Portland Harbor and certain liabilities discussed under “Other Legacy Environmental Loss Contingencies” below, such liabilities were not individually material at any site.

Portland Harbor

In December 2000, the Company was notified by the United States Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it is one of the potentially responsible parties (“PRPs”) that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (“Portland Harbor”).

The precise nature and extent of cleanup of any specific areas within Portland Harbor, the parties to be involved, the timing of any specific remedial action and the allocation of the costs for any cleanup among responsible parties have not yet been determined. The process of site investigation, remedy selection, identification of additional PRPs, and allocation of costs has been underway for a number of years, but significant uncertainties remain. It is unclear to what extent the Company will be liable for environmental costs or third-party contribution or damage claims with respect to Portland Harbor.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

From 2000 to 2017, the EPA oversaw a remedial investigation/feasibility study (“RI/FS”) at Portland Harbor. The Company was not among the parties that performed the RI/FS, but it contributed to the costs through an interim settlement with the performing parties. The performing parties have indicated that they incurred more than $155 million in that effort.

In January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for Portland Harbor. The EPA has estimated the total cost of the selected remedy at $1.7 billion with a net present value cost of $1.05 billion (at a 7% discount rate) and an estimated construction period of 13 years following completion of the remedial designs. In the ROD, the EPA stated that the cost estimate is an order-of-magnitude engineering estimate that is expected to be within +50% to -30% of the actual project cost and that changes in the cost elements are likely to occur as a result of new information and data collected during the engineering design. The Company has identified a number of concerns regarding the remedy described in the ROD, which is based on data that is more than 15 years old, and the EPA’s estimates for the costs and time required to implement the selected remedy. Moreover, the ROD provided only site-wide cost estimates and did not provide sufficient detail to estimate costs for specific sediment management areas within Portland Harbor. In addition, the ROD did not determine or allocate the responsibility for remediation costs among the PRPs.

In the ROD, the EPA acknowledged that much of the data was more than a decade old at that time and would need to be updated with a new round of “baseline” sampling to be conducted prior to the remedial design phase. The remedial design phase is an engineering phase during which additional technical information and data are collected, identified, and incorporated into technical drawings and specifications developed for the subsequent remedial action. Following issuance of the ROD, the EPA proposed that the PRPs, or a subgroup of PRPs, perform the additional investigative work in advance of remedial design.

In December 2017, the Company and three other PRPs entered into an Administrative Settlement Agreement and Order on Consent with the EPA to perform such pre-remedial design investigation and baseline sampling over a two-year period. The report analyzing the results concluded that Portland Harbor conditions have improved substantially since the data forming the basis of the ROD was collected. The EPA found with a few limited corrections that the new baseline data is of suitable quality and stated that such data will be used, in addition to existing and forthcoming design-level data, to inform implementation of the ROD. However, the EPA did not agree that the data or the analysis warranted a change to the remedy at this time and reaffirmed its commitment to proceed with remedial design. The Company and other PRPs disagree with the EPA’s position on use of the more recent data and will continue to pursue limited, but critical, changes to the selected remedy for Portland Harbor during the remedial design phase.

The EPA encouraged PRPs to step forward (individually or in groups) to enter into consent agreements to perform remedial design in various project areas covering Portland Harbor. While certain PRPs executed consent agreements for remedial design work, because of the EPA’s refusal to date to modify the remedy to reflect the most current data on Portland Harbor conditions and because of concerns with the terms of the consent agreement, the Company elected not to enter into a consent agreement. In April 2020, the EPA issued a unilateral administrative order (“UAO”) to the Company and MMGL, LLC (“MMGL”), an unaffiliated company, for the remedial design work in a portion of Portland Harbor designated as the River Mile 3.5 East Project Area. As required by the UAO, the Company notified the EPA of its intent to comply while reserving all of its sufficient cause defenses. Failure to comply with a UAO, without sufficient cause, could subject the Company to significant penalties or treble damages. Pursuant to the optimized remedial design timeline set forth in the UAO, the EPA’s expected schedule for completion of the remedial design work was four years. At the time it issued the UAO in April 2020, the EPA estimated the cost of the work at approximately $4 million. The Company has agreed with the other respondent to the UAO, MMGL, that the Company will lead the performance and be responsible for a portion of the costs of the work for remedial design under the UAO and also entered into an agreement with another PRP pursuant to which such other PRP has agreed to fund a portion of the costs of such work. These agreements are not an allocation of liability or claims associated with Portland Harbor between the respondents or with respect to any third party. As of May 31, 2023 and August 31, 2022, the Company had $2 million and $3 million, respectively, in environmental reserves related to this matter. The Company has insurance policies and Qualified Settlement Funds (“QSFs”) pursuant to which the Company is being reimbursed for the costs it has incurred for remedial design. See further discussion of the QSFs below in this Note. As of both May 31, 2023 and August 31, 2022, the Company had insurance and other receivables in the same amount as the environmental reserves for such remedial design work under the UAO. See “Other Assets” in Note 1 - Summary of Significant Accounting Policies for further discussion of insurance and other related receivables. The Company also expects to pursue in the future allocation or contribution from other PRPs for a portion of such remedial design costs. In February 2021, the EPA announced that 100 percent of Portland Harbor's areas requiring active cleanup are in the remedial design phase of the process.

Except for certain early action projects in which the Company is not involved, remediation activities at Portland Harbor are not expected to commence for a number of years. Moreover, those activities are expected to be sequenced, and the order and timing of such sequencing has not been determined. In addition, as noted above, the ROD does not determine the allocation of costs among PRPs.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has joined with approximately 100 other PRPs, including the RI/FS performing parties, in a voluntary process to establish an allocation of costs at Portland Harbor, including the costs incurred in the RI/FS, ongoing remedial design costs, and future remedial action costs. The Company expects the next major stage of the allocation process to proceed in parallel with the remedial design process.

In addition to the remedial action process overseen by the EPA, the Portland Harbor Natural Resource Trustee Council (“Trustee Council”) is assessing natural resource damages at Portland Harbor. In 2008, the Trustee Council invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for Portland Harbor. The Company and other participating PRPs ultimately agreed to fund the first two phases of the three-phase assessment, which included the development of the Natural Resource Damage Assessment Plan (“AP”) and implementation of the AP to develop information sufficient to facilitate early settlements between the Trustee Council and Phase 2 participants and the identification of restoration projects to be funded by the settlements. In late May 2018, the Trustee Council published notice of its intent to proceed with Phase 3, which will involve the full implementation of the AP and the final injury and damage determination. The Company is proceeding with the process established by the Trustee Council regarding early settlements under Phase 2. The Company has established an environmental reserve of approximately $2.3 million for this alleged natural resource damages liability as it continues to work with the Trustee Council to finalize an early settlement. As of both May 31, 2023 and August 31, 2022, the Company had a receivable in the same amount as the environmental reserve. See “Other Assets” in Note 1 - Summary of Significant Accounting Policies for further discussion of insurance and other related receivables.

On January 30, 2017, one of the Trustees, the Confederated Tribes and Bands of the Yakama Nation, which withdrew from the council in 2009, filed a suit against approximately 30 parties, including the Company, seeking reimbursement of certain past and future response costs in connection with remedial action at Portland Harbor and recovery of assessment costs related to natural resources damages from releases at and from Portland Harbor to the Multnomah Channel and the Lower Columbia River. The parties filed various motions to dismiss or stay this suit, and in August 2019, the court issued an order denying the motions to dismiss and staying the action. The Company intends to defend against the claims in this suit and does not have sufficient information to determine the likelihood of a loss in this matter or to estimate the amount of damages being sought or the amount of such damages that could be allocated to the Company.

The Company’s environmental liabilities as of May 31, 2023 and August 31, 2022 included $5 million and $6 million, respectively, relating to the Portland Harbor matters described above.

Because the final remedial actions have not yet been designed and there has not been a determination of the allocation among the PRPs of costs of the investigations or remedial action costs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it is likely to or which it is reasonably possible that it will incur in connection with Portland Harbor, although such costs could be material to the Company’s financial position, results of operations, cash flows, and liquidity. Among the facts being evaluated are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on each property within Portland Harbor, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs.

The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense, remediation, and mitigation for or settlement of natural resource damages claims in connection with Portland Harbor, although there are no assurances that those policies will cover all of the costs which the Company may incur. Most of these policies jointly insure the Company and MMGL, as the successor to a former subsidiary of the Company. The Company and MMGL have negotiated the settlement with certain insurers of claims against them related to Portland Harbor, continue to seek settlements with other insurers, and formed two QSFs which became operative in fiscal 2020 and the second quarter of fiscal 2023, respectively, to hold such settlement amounts until funds are needed to pay or reimburse costs incurred by the Company and MMGL in connection with Portland Harbor. These insurance policies and the funds in the QSFs may not cover all of the costs which the Company may incur. Each QSF is an unconsolidated variable interest entity (“VIE”) with no primary beneficiary. Two managers unrelated to each other, one appointed by the Company and one appointed by MMGL, share equally the power to direct the activities of each VIE that most significantly impact its economic performance. The Company’s appointee to co-manage each VIE is an executive officer of the Company. Neither MMGL nor its appointee to co-manage each VIE is a related party of the Company for the purpose of the primary beneficiary assessment or otherwise.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Oregon Department of Environmental Quality is separately providing oversight of investigations and source control activities by the Company at various sites adjacent to Portland Harbor that are focused on controlling any current “uplands” releases of contaminants into the Willamette River. The Company has accrued liabilities for source control and related work at two sites, reflecting estimated costs of primarily investigation and design, which costs have not been material in the aggregate to date. No liabilities have been established in connection with investigations for any other sites because the extent of contamination, required source control work, and the Company’s responsibility for the contamination and source control work, in each case if any, have not yet been determined. The Company believes that, pursuant to its insurance policies, it will be reimbursed for the costs it incurs for required source control evaluation and remediation work; however, the Company’s insurance policies may not cover all of the costs which the Company incurs. As of both May 31, 2023 and August 31, 2022, the Company had an insurance receivable in the same amount as the environmental reserve for such source control work.

Other Legacy Environmental Loss Contingencies

The Company’s environmental loss contingencies as of May 31, 2023 and August 31, 2022, other than Portland Harbor, include actual or possible investigation and remediation costs from historical contamination at sites currently or formerly owned or formerly operated by the Company or at other sites where the Company may have responsibility for such costs due to past disposal or other activities (“legacy environmental loss contingencies”). These legacy environmental loss contingencies relate to the potential remediation of waterways and soil and groundwater contamination and may also involve natural resource damages, governmental fines and penalties, and claims by third parties for personal injury and property damage. The Company has been notified that it is or may be a potentially responsible party at certain of these sites, and investigation and remediation activities are ongoing or may be required in the future. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. When investigation, allocation, and remediation activities are ongoing or where the Company has not yet been identified as having responsibility or the contamination has not yet been identified, it is reasonably possible that the Company may need to recognize additional liabilities in connection with such sites but the Company cannot currently reasonably estimate the possible loss or range of loss absent additional information or developments. Such additional liabilities, individually or in the aggregate, may have a material adverse effect on the Company’s results of operations, financial condition, or cash flows.

In fiscal 2018, the Company accrued $4 million for the estimated costs related to remediation of shredder residue disposed of in or around the 1970s at third-party sites located near each other. Investigation activities have been conducted under oversight of the applicable state regulatory agency. As of both May 31, 2023 and August 31, 2022, the Company had $4 million accrued for this matter. It is reasonably possible that the Company may recognize additional liabilities in connection with this matter at the time such losses are probable and can be reasonably estimated. The Company previously estimated a range of reasonably possible losses related to this matter in excess of current accruals at between zero and $28 million based on a range of remedial alternatives and subject to development and approval by regulators of specific remedy implementation plans. However, subsequent to the development of those remedial alternatives, the Company performed additional investigative activities under new state requirements that are likely to impact the required remedial actions and associated cost estimates, but the scope of such impacts and the amount or the range of the additional associated costs are not reasonably estimable at this time and are subject to further investigation, analysis, and discussion by the Company and regulators. The Company is investigating whether a portion or all of the current and future losses related to this matter, if incurred, are covered by existing insurance coverage or may be offset by contributions from other responsible parties.

In addition, the Company’s loss contingencies as of May 31, 2023 and August 31, 2022 included $7 million and $8 million, respectively, for the estimated costs related to environmental matters in connection with a closed facility owned and previously operated by an indirect, wholly-owned subsidiary, including monitoring and remediation of soil and groundwater conditions and funding for wellhead treatment facilities. In the third quarter and first nine months of fiscal 2023, the Company accrued an incremental $6 million and $7 million, respectively, for certain soil remediation activities based on additional information related to estimated costs to complete. Investigation and remediation activities have been conducted under the oversight of the applicable state regulatory agency and are on-going, and the Company’s subsidiary has also been working with state and local officials with respect to the protection of public and private water supplies. As part of its activities relating to the protection of public water supplies, the Company’s subsidiary agreed to reimburse the municipality for certain studies and plans and to provide funding for the construction and operation by the municipality of wellhead treatment facilities. It is reasonably possible that the Company may recognize additional liabilities in connection with this matter at the time such additional losses are probable and can be reasonably estimated. However, the Company cannot reasonably estimate at this time the possible additional loss or range of possible additional losses associated with this matter pending the on-going implementation of the approved remediation plans for soil and groundwater conditions and completion and operation of the wellhead treatment facilities.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In addition, the Company’s loss contingencies as of both May 31, 2023 and August 31, 2022 included $7 million for the estimated costs related to remediation of a site a portion of which was previously leased to and operated by an indirect, wholly-owned subsidiary. In connection with settlement of a lawsuit relating to allocation of the remediation costs, the Company’s subsidiary agreed to perform the remedial action related to metals contamination on the site estimated to cost approximately $7.9 million, and another potentially liable party agreed to perform the remedial action related to creosote contamination at the site. As part of the settlement, other potentially liable parties agreed to make payments totaling approximately $7.6 million to fund the remediation of the metals contamination at the site in exchange for a release and indemnity. This amount was fully funded into a client trust account for the Company’s subsidiary in December 2020. See “Other Assets” in Note 1 - Summary of Significant Accounting Policies for further discussion of this client trust account. It is reasonably possible that the Company may recognize additional liabilities in connection with this matter at the time such additional losses are probable and can be reasonably estimated. However, the Company cannot reasonably estimate at this time the possible additional loss or range of possible additional losses associated with this matter pending completion, approval, and implementation of the remediation action plan.

Summary - Environmental Contingencies

With respect to environmental contingencies other than the Portland Harbor Superfund site and the Other Legacy Environmental Loss Contingencies, which are discussed separately above, management currently believes that adequate provision has been made for the potential impact of its environmental contingencies. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material in any given period, but there can be no assurance that such amounts paid will not be material in the future.

Contingencies – Other

In addition to legal proceedings relating to the contingencies described above, the Company is a party to various legal proceedings arising in the normal course of business. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. The Company does not anticipate that the liabilities arising from such legal proceedings in the normal course of business, after taking into consideration expected insurance recoveries, will have a material adverse effect on its results of operations, financial condition, or cash flows.

Note 6 - Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss, net of tax, comprise the following (in thousands):


	Three Months Ended May 31, 2023									Three Months Ended May 31, 2022
	Foreign Currency Translation Adjustments			Pension Obligations, Net			Total			Foreign Currency Translation Adjustments			Pension Obligations, Net			Total
Balances - March 1 (Beginning of period)	$	(38,286	)	$	(2,319	)	$	(40,605	)	$	(32,002	)	$	(2,436	)	$	(34,438	)
Other comprehensive income before reclassifications		362			—			362			153			—			153
Income tax expense		—			—			—			—			—			—
Other comprehensive income before reclassifications, net of tax		362			—			362			153			—			153
Amounts reclassified from accumulated other comprehensive loss		—			75			75			—			52			52
Income tax (benefit)		—			(17	)		(17	)		—			(12	)		(12	)
Amounts reclassified from accumulated other comprehensive loss, net of tax		—			58			58			—			40			40
Net periodic other comprehensive income		362			58			420			153			40			193
Balances - May 31 (End of period)	$	(37,924	)	$	(2,261	)	$	(40,185	)	$	(31,849	)	$	(2,396	)	$	(34,245	)

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	Nine Months Ended May 31, 2023									Nine Months Ended May 31, 2022
	Foreign Currency Translation Adjustments			Pension Obligations, Net			Total			Foreign Currency Translation Adjustments			Pension Obligations, Net			Total
Balances - September 1 (Beginning of period)	$	(34,679	)	$	(2,410	)	$	(37,089	)	$	(31,609	)	$	(2,945	)	$	(34,554	)
Other comprehensive (loss) income before reclassifications		(3,245	)		(34	)		(3,279	)		(240	)		451			211
Income tax benefit (expense)		—			8			8			—			(101	)		(101	)
Other comprehensive (loss) income before reclassifications, net of tax		(3,245	)		(26	)		(3,271	)		(240	)		350			110
Amounts reclassified from accumulated other comprehensive loss		—			226			226			—			257			257
Income tax (benefit)		—			(51	)		(51	)		—			(58	)		(58	)
Amounts reclassified from accumulated other comprehensive loss, net of tax		—			175			175			—			199			199
Net periodic other comprehensive (loss) income		(3,245	)		149			(3,096	)		(240	)		549			309
Balances - May 31 (End of period)	$	(37,924	)	$	(2,261	)	$	(40,185	)	$	(31,849	)	$	(2,396	)	$	(34,245	)

Reclassifications from accumulated other comprehensive loss to earnings, both individually and in the aggregate, were not material to the impacted captions in the Unaudited Condensed Consolidated Statements of Operations in all periods presented.

Note 7 - Revenue

Disaggregation of Revenues

The table below illustrates the Company’s revenues disaggregated by major product and sales destination (in thousands):


	Three Months Ended May 31,				Nine Months Ended May 31,
	2023		2022		2023		2022
Major product information:
Ferrous revenues	$	405,350	$	530,303	$	1,101,201	$	1,434,473
Nonferrous revenues		222,904		272,208		580,234		662,779
Steel revenues(1)		137,426		165,210		369,766		384,644
Retail and other revenues		43,930		42,366		113,092		109,507
Total revenues	$	809,610	$	1,010,087	$	2,164,293	$	2,591,403
Revenues based on sales destination:
Foreign	$	413,815	$	533,087	$	1,122,718	$	1,439,731
Domestic		395,795		477,000		1,041,575		1,151,672
Total revenues	$	809,610	$	1,010,087	$	2,164,293	$	2,591,403

(1)

Steel revenues include predominantly sales of finished steel products, in addition to sales of semi-finished goods (billets) and steel manufacturing scrap.

Receivables from Contracts with Customers

The revenue accounting standard defines a receivable as an entity’s right to consideration that is unconditional, meaning that only the passage of time is required before payment is due. As of May 31, 2023 and August 31, 2022, receivables from contracts with customers, net of an allowance for credit losses, totaled $296 million and $230 million, respectively, representing 99% and 97%, respectively, of total accounts receivable reported in the Unaudited Condensed Consolidated Balance Sheets at each reporting date.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contract Liabilities

Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company’s contract liabilities, which consist almost entirely of customer deposits for recycled metal and finished steel sales contracts, are reported within accounts payable in the Unaudited Condensed Consolidated Balance Sheets and totaled $11 million and $8 million as of May 31, 2023 and August 31, 2022, respectively. Unsatisfied performance obligations reflected in these contract liabilities relate to contracts with original expected durations of one year or less and, therefore, are not disclosed. The substantial majority of outstanding contract liabilities are reclassified to revenues within three months of the reporting date as a result of satisfying performance obligations.

Note 8 - Share-Based Compensation

In the first quarter of fiscal 2023, as part of the annual awards under the Company’s Long-Term Incentive Plan, the Compensation Committee of the Company’s Board of Directors granted 213,080 restricted stock units (“RSUs”) and 211,046 performance share awards to the Company’s key employees and officers under the Company’s 1993 Amended and Restated Stock Incentive Plan.

The RSUs have a five-year term and vest 20% per year commencing October 31, 2023. The aggregate fair value of all the RSUs granted was based on the market closing price of the underlying Class A common stock on the grant date and totaled $7 million. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures, which for participants who were retirement eligible as of the grant date or who will become retirement eligible during the five-year term of the awards is the longer of two years or the period ending on the date retirement eligibility is achieved.

The performance share awards comprise two separate and distinct awards with different vesting conditions. Awards vest if the threshold level under the specified metric is met at the end of the approximately three-year performance period. For awards granted in the first quarter of fiscal 2023, the performance metrics are the Company’s recycled metal volume growth and its return on capital employed (“ROCE”). Award share payouts depend on the extent to which the performance goals have been achieved, which performance-based payout factors are adjusted by a total shareholder return (“TSR”) modifier based on the Company’s average TSR percentile rank relative to a designated peer group. The number of shares that a participant receives is equal to the number of performance shares granted multiplied by an initial payout factor based on recycled metal volume growth and ROCE, which ranges from a threshold of 50% to a maximum of 200%. The final payout factor is then determined by applying the TSR modifier to the initial payout factor within a certain range, with a maximum increase or decrease of 20%.

Half of the performance share awards granted by the Company during the first quarter of fiscal 2023 were based on the Company's recycled metal volume growth metric and half were based on its ROCE metric, in each case subject to a TSR modifier with performance measured over a three-year period consisting of the Company’s 2023, 2024, and 2025 fiscal years. The Company estimated the fair value of performance share awards granted in the first quarter of fiscal 2023 using a Monte-Carlo simulation model utilizing several key assumptions, including the following:


	Percentage
Expected share price volatility (SSI)		56.1	%
Expected share price volatility (Peer group)		60.5	%
Expected correlation to peer group companies		48.1	%
Risk-free rate of return		4.16	%

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The estimated aggregate fair value of these performance share awards at the date of grant was $7 million. The Company accrues compensation cost for these performance share awards based on the probable outcome of achieving specified performance conditions, net of estimated forfeitures, over the requisite service period (or to the date a qualifying employment termination event entitles the recipient to a prorated award, if before the end of the service period). The Company reassesses whether achievement of the performance conditions is probable at each reporting date. If it is probable that the actual performance results will exceed the stated target performance conditions, the Company accrues additional compensation cost for the additional performance shares to be awarded irrespective of the TSR modifier, the effects of which are incorporated in the grant-date fair value of the awards. If, upon reassessment, it is no longer probable that the actual performance results will exceed the stated target performance conditions, or that it is no longer probable that the target performance conditions will be achieved, the Company reverses any recognized compensation cost for shares no longer probable of being issued. If the performance conditions are not achieved at the end of the performance period, all related compensation cost previously recognized is reversed. Performance share awards will be paid in Class A common stock as soon as practicable after the end of the requisite service period and vesting date of October 31, 2025.

In the second quarter of fiscal 2023, the Company granted deferred stock units (“DSUs”) to each of its non-employee directors under the Company’s 1993 Stock Incentive Plan, as amended. Each DSU gives the director the right to receive one share of Class A common stock at a future date. The grant reflected an aggregate of 21,438 DSUs that will vest in full on the day before the Company’s 2024 annual meeting of shareholders, subject to continued Board service. The total fair value of these awards at the grant date was $1 million.

Note 9 - Income Taxes

Effective Tax Rate

The Company’s effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2023 was an expense on pre-tax income of 34.3% and 62.7%, respectively, compared to 21.0% and 21.2%, respectively, for the comparable prior year periods. The Company’s effective tax rate from continuing operations for the third quarter of fiscal 2023 was higher than the U.S. federal statutory rate of 21% primarily due to the aggregate effect of permanent differences from non-deductible expenses and also unrecognized tax benefits on intra-period allocation. For the first nine months of fiscal 2023, the higher-than-statutory effective tax rate primarily reflected the Company's near-breakeven financial performance for the period. For the third quarter and first nine months of fiscal 2022, the Company's effective tax rate from continuing operations approximated the U.S. federal statutory rate of 21%, reflecting primarily 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, offset by discrete tax benefits resulting from vesting of share-based awards in the applicable periods and the favorable effects of other discrete items.

Valuation Allowances

The Company assesses the realizability of its deferred tax assets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies, and forecasts of taxable income. The Company considers all negative and positive evidence, including the weight of the evidence, to determine if valuation allowances against deferred tax assets are required. The Company continues to maintain valuation allowances against certain state and Canadian deferred tax assets. Canadian deferred tax assets against which the Company continues to maintain a valuation allowance relate to indefinite-lived assets.

The Company files federal and state income tax returns in the U.S. and foreign tax returns in Puerto Rico and Canada. For U.S. federal income tax returns, fiscal years 2014 to 2022 remain subject to examination under the statute of limitations.

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SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 - Net Income Per Share

The following table sets forth the information used to compute basic and diluted net income per share attributable to SSI shareholders (in thousands):


	Three Months Ended May 31,						Nine Months Ended May 31,
	2023			2022			2023			2022
Income from continuing operations	$	13,841		$	75,550		$	402		$	160,991
Net (income) attributable to noncontrolling interests		(148	)		(870	)		(299	)		(2,497	)
Income from continuing operations attributable to SSI shareholders	$	13,693		$	74,680		$	103		$	158,494
Loss from discontinued operations, net of tax		(233	)		(46	)		(78	)		(46	)
Net income attributable to SSI shareholders	$	13,460		$	74,634		$	25		$	158,448
Computation of shares:
Weighted average common shares outstanding, basic		28,114			28,143			27,980			28,161
Incremental common shares attributable to dilutive performance share awards, restricted stock units and deferred stock units		545			1,482			666			1,580
Weighted average common shares outstanding, diluted		28,659			29,625			28,646			29,741

Common stock equivalent shares of 54,512 and 52,258 were considered antidilutive and were excluded from the calculation of diluted net income per share for the three and nine months ended May 31, 2023, respectively, compared to 47,095 and 172,288 three and nine months ended May 31, 2022, respectively.

Note 11 - Related Party Transactions

The Company purchases recycled metal from its joint venture operation at prices that approximate fair market value. These purchases totaled $5 million and $10 million for the three months ended May 31, 2023 and 2022, respectively, and $13 million and $21 million for the nine months ended May 31, 2023 and 2022, respectively.

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SCHNITZER STEEL INDUSTRIES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section includes a discussion of our operations for the three and nine months ended May 31, 2023 and 2022. The following discussion and analysis provide information which management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, 2022, and the Unaudited Condensed Consolidated Financial Statements and the related Notes thereto included in Part I, Item 1 of this report.

General

Founded in 1906, 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, 54 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 ship bulk cargoes of processed recycled ferrous metal 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.

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SCHNITZER STEEL INDUSTRIES, INC.

Our quarterly operating results fluctuate based on a variety of factors including, but not limited to, changes in market conditions for recycled ferrous and nonferrous metal and finished steel products, the supply of scrap metal in our domestic markets, varying demand for used auto parts from our self-service retail stores, the efficiency of our supply chain, and variations in production and other operating costs. Certain of these factors are influenced, to a degree, by the impact of seasonal changes including severe weather conditions, which can impact the timing of shipments and inhibit construction activity utilizing our products, scrap metal collection and production levels at our facilities, and retail admissions and parts sales at our auto parts stores. Further, sanctions, trade actions, and licensing, product quality, and inspection requirements can impact the level of profitability on sales of our products and, in certain cases, impede or restrict our ability to sell to certain export markets or require us to direct our sales to alternative market destinations, which can cause our quarterly operating results to fluctuate.

Steel Mill Fire

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. The rolling mill production ceased in early June 2021. In August 2021, our steel mill began ramping up operations following the substantial completion of replacement and repairs of property and equipment in the melt shop that had been lost or damaged by the fire. We experienced the loss of business income during the shutdown of the steel mill and the subsequent ramp-up phase which was substantially completed during the second quarter of fiscal 2022. We have insurance that we believe is fully applicable to the losses and have filed insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property that experienced physical loss or damage and business income losses resulting from the matter. The property damage deductible under the policies insuring our assets in this matter is $1 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. As of August 31, 2021, prepaid expenses and other current assets included an initial $10 million insurance receivable recognized in fiscal 2021, primarily offsetting applicable losses including capital purchases of $10 million that we had incurred as of August 31, 2021. In the first nine months of fiscal 2022, we increased the amount of this insurance receivable to $25 million and recognized a related $15 million insurance recovery gain, $3 million and $12 million of which were recognized in the first and second quarters of fiscal 2022, respectively, within cost of goods sold in the Unaudited Condensed Consolidated Statements of Operations, reflecting recovery of applicable losses incurred as a result of the fire to date. In addition, during the first nine months of fiscal 2022, we received advance payments from insurers totaling approximately $30 million towards our claims, and not reflecting any final or full settlement of claims with the insurers, which amount reduced the $25 million insurance receivable to zero with the remaining amount of advance payments reported within other accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets. In the third quarter of fiscal 2023, we received additional advance payments from insurers of approximately $13 million towards our claims, increasing the total of such advance payments from insurers to approximately $43 million, and not reflecting any final or full settlement of claims with the insurers. The amount of advance payments reported within other accrued liabilities was $18 million as of May 31, 2023 and $5 million as of August 31, 2022. These amounts do not reflect potential additional recoveries of business income losses resulting from this matter that may be recognized in the future when settlements of the business interruption claims are resolved.

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SCHNITZER STEEL INDUSTRIES, INC.

Everett Facility Shredder Fire

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. In addition, shredding operations temporarily ceased at the facility on June 18, 2022 and, following discussions with the Massachusetts Department of Environmental Protection and the Massachusetts Attorney General’s office, we installed a temporary emission capture system and controls that allowed for us to resume shredding operations on November 11, 2022 and for continued operation during the repair and replacement of the shredder enclosure building. Non-shredding operations at the facility continued during this period. We have insurance that we believe is fully applicable to the losses, including but not limited to the costs of installing the temporary capture and controls system and any associated loss of business income, and have filed insurance claims, which are subject to deductibles and various conditions, exclusions, and limits, for the property damage or loss and business income losses resulting from the matter. The property damage deductible under the policies insuring our assets in this matter is $0.5 million, while the deductible for lost business income is 10 times the Average Daily Gross Earnings which would have been earned had no interruption occurred, calculated subject to judgments and uncertainties. The insurance claims resolution process may extend significantly beyond completion of repair and replacement of the physical plant property that experienced physical loss or damage and the restart of production activities. In fiscal 2022, after the fire, we recognized an aggregate $17 million insurance receivable and related insurance recovery gain, $10 million and $1 million of which were recorded in the second and third quarters of fiscal 2022, respectively. In the third quarter and first nine months of fiscal 2023, we recognized an additional $2 million insurance receivable and related insurance recovery gain. As of May 31, 2023, we had recognized a total of $20 million in insurance recovery gains, all reported within cost of goods sold, reflecting recovery of applicable losses to date including impairment charges of $7 million related to the carrying value of plant and equipment assets lost in or damaged by the fire and initial capital purchases, non-capitalizable repair and replacement costs, and other applicable losses totaling $13 million. Also, in the third quarters of fiscal 2023 and 2022, we received advance payments from insurers totaling approximately $8 million and $7 million, respectively, towards our claims, and not reflecting any final or full settlement of claims with the insurers, which amounts reduced the insurance receivable to $5 million and $10 million as of May 31, 2023 and August 31, 2022, respectively. The insurance receivable is reported within prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheets. These amounts do not reflect potential additional recoveries of costs for the repair and replacement of property that experienced physical loss or damage or of business income losses resulting from this matter that may be recognized in the future when settlements of the claims are resolved.

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, charges for legacy environmental matters (net of recoveries), asset impairment charges, restructuring charges and other exit-related activities, business development costs not related to ongoing operations including pre-acquisition expenses, charges related to non-ordinary course legal settlements, and other items which are not related to underlying business operational performance. See the reconciliations of supplemental financial measures, including adjusted EBITDA, in Non-GAAP Financial Measures at the end of this Item 2.

Our non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable GAAP measures. Although we find these non-GAAP financial measures useful in evaluating the performance of our business, our reliance on these measures is limited because they often materially differ from our consolidated financial statements presented in accordance with GAAP. Therefore, we typically use these adjusted amounts in conjunction with our GAAP results to address these limitations. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

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Financial Highlights of Results of Operations for the Third Quarter of Fiscal 2023

•

Diluted earnings per share from continuing operations attributable to SSI shareholders in the third quarter of fiscal 2023 was $0.48, compared to $2.52 per share in the prior year quarter.

•

Adjusted diluted earnings per share from continuing operations attributable to SSI shareholders in the third quarter of fiscal 2023 was $0.67, compared to $2.59 per share in the prior year quarter.

•

Net income in the third quarter of fiscal 2023 was $14 million, compared to $76 million in the prior year quarter.

•

Adjusted EBITDA in the third quarter of fiscal 2023 was $56 million, compared to $119 million in the prior year quarter.

Market conditions for recycled metals were weaker in the third quarter of fiscal 2023 compared to the prior year quarter, leading to lower average net selling prices for our ferrous and nonferrous products, and a compression in metal spreads. The average net selling prices for our ferrous and nonferrous products decreased by 24% and 10%, respectively, compared to the third quarter of fiscal 2022. Ferrous and nonferrous sales volumes increased by 2% and 3%, respectively, compared to the prior year quarter, primarily reflecting additional volumes arising from our two business acquisitions completed in April and November 2022, as well as the impact on prior year quarterly ferrous sales volumes of delays in contracting and shipping bulk cargoes. Market conditions for our finished steel products were softer in the third quarter of fiscal 2023, leading to finished steel average selling prices decreasing 18% and lower metal spreads compared to the prior year quarter. Our results in the third quarter of fiscal 2023 also reflected tighter supply flows and reduced processed volumes in the lower price environment, lower year-over-year platinum group metals (PGM) prices, and a less favorable impact from average inventory accounting compared to the prior year quarter. In the third quarter of fiscal 2023, we achieved the full quarterly run rate of $10 million of productivity initiatives announced in October 2022 and the full quarterly run rate of $5 million of selling, general, and administrative (“SG&A”) savings initiatives announced in January 2023, which helped to offset the effects of higher operating costs including from inflationary pressure.

SG&A expense in the third quarter of fiscal 2023 decreased by 12% compared to the prior year quarter reflecting lower incentive compensation accruals due to Company performance, partially offset by higher legacy environmental charges and legal costs. Productivity and cost reduction initiatives substantially offset the impact of inflation and growth-related initiatives on our SG&A expense.

The following items highlight selected liquidity and capital structure metrics:

•

For the first nine months of fiscal 2023, net cash provided by operating activities was $5 million, compared to $58 million in the prior year comparable period.

•

Debt was $351 million as of May 31, 2023, compared to $249 million as of August 31, 2022, as a result of increased borrowings from our credit facilities primarily to fund capital expenditures, higher net working capital needs, and the acquisition of the ScrapSource business.

•

Debt, net of cash, was $346 million as of May 31, 2023, compared to $205 million as of August 31, 2022.

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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Results of Operations

Selected Financial Measures and Operating Statistics


	Three Months Ended May 31,									Nine Months Ended May 31,
($ in thousands, except for prices and per share amounts)	2023			2022			%			2023			2022			%
Ferrous revenues	$	405,350		$	530,303			(24	)%	$	1,101,201		$	1,434,473			(23	)%
Nonferrous revenues		222,904			272,208			(18	)%		580,234			662,779			(12	)%
Steel revenues(1)		137,426			165,210			(17	)%		369,766			384,644			(4	)%
Retail and other revenues		43,930			42,366			4	%		113,092			109,507			3	%
Total revenues		809,610			1,010,087			(20	)%		2,164,293			2,591,403			(16	)%
Cost of goods sold		713,685			834,375			(14	)%		1,946,633			2,188,158			(11	)%
Gross margin (total revenues less cost of goods sold)	$	95,925		$	175,712			(45	)%	$	217,660		$	403,245			(46	)%
Gross margin (%)		11.8	%		17.4	%		(32	)%		10.1	%		15.6	%		(35	)%
Selling, general and administrative expense	$	68,527		$	77,672			(12	)%	$	196,712		$	194,020			1	%
Diluted earnings per share from continuing operations attributable to SSI shareholders:
Reported	$	0.48		$	2.52			(81	)%	$	—		$	5.33		NM
Adjusted(2)	$	0.67		$	2.59			(74	)%	$	0.38		$	5.54			(93	)%
Net income	$	13,608		$	75,504			(82	)%	$	324		$	160,945			(100	)%
Adjusted EBITDA(2)	$	55,610		$	119,090			(53	)%	$	95,822		$	272,435			(65	)%
Average ferrous recycled metal sales prices ($/LT)(3):
Domestic	$	414		$	516			(20	)%	$	365		$	458			(20	)%
Foreign	$	414		$	552			(25	)%	$	380		$	484			(21	)%
Average	$	413		$	541			(24	)%	$	376		$	477			(21	)%
Ferrous volumes (LT, in thousands):
Domestic(4)		548			490			12	%		1,424			1,329			7	%
Foreign		609			639			(5	)%		1,846			2,020			(9	)%
Total ferrous volumes (LT, in thousands)(4)(8)		1,157			1,129			2	%		3,270			3,349			(2	)%
Average nonferrous sales price ($/pound)(3)(5)	$	1.01		$	1.12			(10	)%	$	0.97		$	1.10			(12	)%
Nonferrous volumes (pounds, in thousands)(4)(5)		207,714			201,413			3	%		535,230			501,785			7	%
Finished steel average sales price ($/ST)(3)	$	924		$	1,129			(18	)%	$	959		$	1,059			(9	)%
Finished steel sales volumes (ST, in thousands)		142			135			5	%		369			340			9	%
Cars purchased (in thousands)(6)		78			84			(7	)%		219			237			(8	)%
Number of auto parts stores at period end		50			50			(—	)%		50			50			(—	)%
Rolling mill utilization(7)		97	%		96	%		1	%		84	%		87	%		(3	)%

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 scrap.

(2)

See the reconciliations of Non-GAAP Financial Measures at the end of this Item 2.

(3)

Price information is shown after netting the cost of freight incurred to deliver the product to the customer.

(4)

Ferrous and nonferrous volumes sold externally and delivered to our steel mill for finished steel production.

(5)

Average sales price and volume information excludes PGMs in catalytic converters.

(6)

Cars purchased by auto parts stores only.

(7)

Rolling mill utilization is based on effective annual production capacity under current conditions of 580 thousand tons of finished steel products.

(8)

May not foot due to rounding.

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SCHNITZER STEEL INDUSTRIES, INC.

Revenues

Revenues in the third quarter and first nine months of fiscal 2023 decreased by 20% and 16%, respectively, compared to the prior year periods primarily due to lower average net selling prices for our ferrous and nonferrous products driven by weaker market conditions for recycled metals globally. In the third quarter and first nine months of fiscal 2023, the average net selling prices for our ferrous products decreased by 24% and 21%, respectively, and for our nonferrous products decreased by 10% and 12%, respectively, compared to the prior year periods. Ferrous sales volumes in the third quarter and first nine months of fiscal 2023 increased by 2% and decreased by 2%, respectively, and nonferrous sales volumes increased by 3% and 7%, respectively, compared to the prior year periods. Our ferrous and nonferrous sales volumes in the fiscal 2023 periods in part reflected additional volumes arising from the Columbus Recycling business acquired on October 1, 2021, the Encore Recycling business acquired on April 29, 2022, and the ScrapSource business acquired on November 18, 2022, as well as the adverse impact on sales volumes in the prior year periods of the initial Everett shredder downtime. Our ferrous sales volumes in the first nine months of fiscal 2023 were adversely impacted by disruptions related to an extended shredder outage at the Everett facility and a regulatory issue limiting operations at our shredder facility in California, both of which were resolved by mid-November 2022, as well as tight supply flows in the lower price environment. Market conditions for our finished steel products were softer in the third quarter and first nine months of fiscal 2023, leading to finished steel average selling prices decreasing 18% and 9%, respectively, compared to the prior year periods. Finished steel sales volumes increased 9% in the first nine months of fiscal 2023, compared to the prior year period, primarily reflecting the impact on the prior period volumes of the ramp up of steel mill operations that began in August 2021 and which was substantially completed during the second quarter of fiscal 2022. The ramp-up of steel mill operations during the first half of fiscal 2022 followed completion of repair and replacement of damaged property arising from the May 2021 steel mill fire.

Operating Performance

Net income in the third quarter and first nine months of fiscal 2023 was $14 million and near breakeven, respectively, compared to net income of $76 million and $161 million, respectively, in the prior year periods. Adjusted EBITDA in the third quarter and first nine months of fiscal 2023 was $56 million and $96 million, respectively, compared to $119 million and $272 million, respectively, in the prior year periods. The lower price environment for recycled metals, as well as the impact of tight supply flows, reduced processed volumes, and the extended operational disruptions in the first quarter of fiscal 2023, had a significant adverse impact on our operating margins and overall operating results in the first nine months of fiscal 2023. Ferrous metal spreads in the third quarter and first nine months of fiscal 2023 decreased by approximately 32% and 25%, respectively, compared to the prior year periods. Finished steel metal spreads were also lower in the third quarter and first nine months of fiscal 2023 compared to the prior year periods. Our results in the third quarter and first nine months of fiscal 2023 also reflected lower year-over-year PGM prices, recognized fair value losses related to an equity investment, and the impact of inflation on operating costs. The impact from average inventory accounting was less favorable in the third quarter, but more favorable in the first nine months, of fiscal 2023, compared to the prior year periods.

SG&A expense in the third quarter and first nine months of fiscal 2023 decreased by 12% and increased by 1%, respectively, compared to the prior year periods. The fiscal 2023 periods reflected lower incentive compensation accruals due to Company performance, partially offset by higher legacy environmental charges and legal costs compared to the fiscal 2022 periods. SG&A expense in the first nine months of fiscal 2023 also reflected higher salaries and wages, outside and professional services, and travel expenses, partially resulting from our acquisitions and other growth-related initiatives, and the impact of inflation. The higher expenses in the first nine months of fiscal 2023 were partially offset by benefits from productivity and cost reduction initiatives when compared to the prior year period.

In October 2022, we announced and began implementing productivity and cost reduction initiatives with a targeted annual benefit of approximately $40 million, the vast majority of which is expected to be achieved in fiscal 2023. In addition, in January 2023, we announced incremental initiatives aiming to reduce SG&A costs by approximately $20 million annually, of which approximately two-thirds is expected to be achieved in fiscal 2023. These initiatives aim to improve profitability through a combination of increased yields, efficiencies in processing, procurement, and pricing, and reduced costs including from headcount reductions, decreased lease costs, professional and outside services, and implementation of operational efficiencies. In the third quarter of fiscal 2023, we achieved the full quarterly run rate of benefits from these initiatives, and others implemented during fiscal 2022, which helped to partially offset the effects of inflationary pressure on operating costs.

See the reconciliation of adjusted EBITDA in Non-GAAP Financial Measures at the end of this Item 2.

Interest Expense

Interest expense was $5 million and $13 million, respectively, for the third quarter and first nine months of fiscal 2023, compared to $2 million and $5 million for the same periods in the prior year. The increase in interest expense was primarily due to higher interest rates on amounts outstanding under our bank credit facilities, as well as increased average borrowings, compared to the prior year periods.

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Income Tax

The effective tax rate from continuing operations for the third quarter and first nine months of fiscal 2023 was an expense on pre-tax income of 34.3% and 62.7%, respectively, compared to 21.0% and 21.2%, respectively, for the comparable prior year periods. Our effective tax rate from continuing operations for the third quarter of fiscal 2023 was higher than the U.S. federal statutory rate of 21% primarily due to the aggregate effect of permanent differences from non-deductible expenses and also unrecognized tax benefits on intra-period allocation. For the first nine months of fiscal 2023, the higher-than-statutory effective tax rate primarily reflected our near-breakeven financial performance for the period. For the third quarter and first nine months of fiscal 2022, our effective tax rate approximated the U.S. federal statutory rate reflecting primarily 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, offset by discrete tax benefits resulting from vesting of share-based awards in the applicable periods and the favorable effects of other discrete items.

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 $5 million and $44 million as of May 31, 2023 and August 31, 2022, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of May 31, 2023, debt was $351 million compared to $249 million as of August 31, 2022, and debt, net of cash, was $346 million as of May 31, 2023, compared to $205 million as of August 31, 2022, which increases were primarily due to increased borrowings from our credit facilities to fund capital expenditures, higher net working capital needs, and the acquisition of the ScrapSource business on November 18, 2022. See the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2.

Operating Activities

Net cash provided by operating activities in the first nine months of fiscal 2023 was $5 million, compared to $58 million in the first nine months of fiscal 2022.

Sources of cash other than from earnings in the first nine months of fiscal 2023 included a $23 million decrease in inventories primarily due to lower raw material purchase costs and the timing of purchases and sales, a $10 million increase in accounts payable primarily due to the timing of purchases and payments, and a $10 million increase in other accrued liabilities due in part to receipt of additional advance payments from insurers towards our claims arising from the May 2021 steel mill fire. Uses of cash in the first nine months of fiscal 2023 included a $71 million increase in accounts receivable primarily due to the timing of sales and collections and a $30 million decrease in accrued payroll and related liabilities primarily due to the payment of incentive compensation in the first quarter of fiscal 2023 previously accrued under our fiscal 2022 plans.

Sources of cash other than from earnings in the first nine months of fiscal 2022 included a $45 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of purchases and payments and a $9 million increase in income tax accruals. Uses of cash in the first nine months of fiscal 2022 included a $164 million increase in inventories due to higher raw material purchase costs and the timing of purchases and sales, a $43 million increase in accounts receivable primarily due to higher selling prices for most of our products, as well as the timing of sales and collections, a $17 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 $15 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.

Investing Activities

Net cash used in investing activities was $117 million in the first nine months of fiscal 2023, compared to $262 million in the first nine months of fiscal 2022.

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Cash used in investing activities in the first nine months of fiscal 2023 included $25 million paid to acquire the assets of the ScrapSource business on November 18, 2022. We funded the acquisition using cash on hand and borrowings under our existing credit facilities. See Note 3 - Business Acquisitions in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further detail. Cash used in investing activities also included capital expenditures of $101 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, compared to $98 million in the prior year period. Cash flows from investing activities in the first nine months of fiscal 2023 included proceeds of $8 million representing the portion of advance payments from insurers deemed a recovery of capital purchases incurred for repair and replacement of damaged property arising from the December 2021 Everett facility shredder fire, compared to such proceeds totaling $17 million in the prior year period in connection with our insurance claims relating to the May 2021 steel mill fire and the December 2021 Everett facility shredder fire.

Cash used in investing activities in the first nine 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, and also included $63 million paid to acquire the assets of the Encore Recycling business on April 29, 2022, which amount included $8 million paid at closing for estimated net working capital in excess of an agreed-upon benchmark. We funded these acquisitions using cash on hand and borrowings under our existing credit facilities. Cash used in investing activities in the first nine months of fiscal 2022 also included the purchase of an investment in the equity of a privately-held Canadian recycling entity for $5 million.

Financing Activities

Net cash provided by financing activities in the first nine months of fiscal 2023 was $74 million, compared to $192 million in the first nine months of fiscal 2022.

Cash flows from financing activities in the first nine months of fiscal 2023 included $99 million in net borrowings of debt, compared to $240 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 nine months of fiscal 2023 and 2022 included $8 million and $11 million, respectively, for payment of employee tax withholdings resulting from settlement of share-based awards and $16 million in each period for the payment of dividends.

Debt

Our senior secured revolving credit facilities, which provide for revolving loans of $800 million and C$15 million, mature in August 2027 pursuant to a credit agreement with Bank of America, N.A., as administrative agent, and other lenders party thereto. Interest rates on outstanding indebtedness under the credit agreement are based, at our option, on either the Secured Overnight Financing Rate (“SOFR”) (or the Canadian Dollar Offered Rate, "CDOR" for C$ loans), plus a spread of between 1.25% and 2.00%, with the amount of the spread based on a pricing grid tied to our ratio of consolidated net funded debt to EBITDA (as defined by the credit agreement), or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50% or (c) the daily rate equal to Term SOFR plus 1.00%, in each case, plus a spread of between 0.25% and 1.00% based on a pricing grid tied to our consolidated net funded debt to EBITDA ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.175% and 0.30% based on a pricing grid tied to our ratio of consolidated net funded debt to EBITDA.

Under the credit agreement, we may establish one or more key performance indicators (“KPIs”) to measure our performance with respect to certain of our environmental, social and governance targets. Subject to the terms and conditions of the credit agreement, we may propose to amend the credit agreement to modify (i) the pricing spread and (ii) the commitment fee rate. Such modifications would be tied to our performance against the KPIs and would allow for (i) the pricing spread to be increased or decreased by no more than (a) 0.025% per KPI and (b) 0.05% for all KPIs, and (ii) the commitment fee rate to be increased or decreased by no more than 0.005% for all KPIs. Such adjustments would be determined on an annual basis and would not be cumulative.

We had borrowings outstanding under our credit facilities of $330 million as of May 31, 2023 and $230 million as of August 31, 2022. The weighted average interest rate on amounts outstanding under our credit facilities was 6.72% and 3.65% as of May 31, 2023 and August 31, 2022, respectively.

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SCHNITZER STEEL INDUSTRIES, INC.

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 May 31, 2023, we were in compliance with the financial covenants under our credit agreement. The consolidated fixed charge coverage ratio was required to be no less than 1.50 to 1.00 and was 2.64 to 1.00 as of May 31, 2023. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was 0.28 to 1.00 as of May 31, 2023.

Our obligations under our credit agreement are guaranteed by substantially all of our subsidiaries. The credit facilities and the related guarantees are secured by senior first priority liens on certain of our and our subsidiaries’ assets, including equipment, inventory, and accounts receivable.

While we currently expect to remain in compliance with the financial covenants under the credit agreement, we may not be able to do so in the event market conditions or other factors have a significant adverse impact on our results of operations and financial position. If we do not maintain compliance with our financial covenants and are unable to obtain an amendment or waiver from our lenders, a breach of a financial covenant would constitute an event of default and allow the lenders to exercise remedies under the agreements, the most severe of which is the termination of the credit facility under our committed bank credit agreement and acceleration of the amounts owed under the agreement. In such case, we would be required to evaluate available alternatives and take appropriate steps to obtain alternative funds. We cannot assure that any such alternative funds, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.

Other debt obligations, which totaled $13 million as of both May 31, 2023 and August 31, 2022, respectively, primarily relate to equipment purchases, the contract consideration for which includes an obligation to make future monthly payments to the vendor in the form of licensing fees. For accounting purposes, such obligations are treated as a partial financing of the purchase price by the equipment vendor. Monthly payments commence when the equipment is placed in service and achieves specified minimum operating metrics, with payments continuing for a period of four years thereafter.

Capital Expenditures

Capital expenditures totaled $101 million for the first nine months of fiscal 2023, compared to $98 million for the prior year period. Capital expenditures in the first nine months of fiscal 2023 included approximately $27 million for investments in growth. We currently plan to invest in the range of $110 million to $120 million in capital expenditures in fiscal 2023, which range excludes capital expenditures associated with the ongoing repair and replacement of the shredder enclosure building damaged by the fire at our Everett facility, as these expenditures are expected to be substantially recovered through insurance. These capital expenditures include investments in growth, including new nonferrous processing technologies, and to support volume initiatives as well as post-acquisition and other growth projects, and investments to upgrade our equipment and infrastructure and for environmental and safety-related assets, using cash generated from operations and available credit facilities. Supply chain disruptions have contributed to some delays in construction activities and equipment deliveries related to our capital projects, and to the time required to obtain permits from government agencies, resulting in the deferral of certain capital expenditures. Given the continually evolving nature of such disruptions and other factors impacting the timing of project completion, the extent to which forecasted capital expenditures could be deferred is uncertain.

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SCHNITZER STEEL INDUSTRIES, INC.

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 $19 million in capital expenditures for environmental projects in the first nine months of fiscal 2023, and we currently plan to invest in the range of $30 million to $40 million for such projects in fiscal 2023. These projects include investments in equipment to ensure ongoing compliance with air quality and other environmental regulations and storm water systems.

We have been identified by 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 (“Portland Harbor”). See Note 5 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of this matter, as well as other legacy environmental loss contingencies. We believe it is not possible to reasonably estimate the amount or range of costs which we are likely to or which it is reasonably possible that we will incur in connection with Portland Harbor, although such costs could be material to our financial position, results of operations, cash flows, and liquidity. We have insurance policies and Qualified Settlement Funds ("QSFs") that we believe will provide reimbursement for costs we incur for defense, remediation, and mitigation for natural resource damages claims in connection with Portland Harbor, although there are no assurances that those policies and the QSFs will cover all of the costs which we may incur. Significant cash outflows in the future related Portland Harbor, as well as related to other legacy environmental loss contingencies, could reduce the amounts available for borrowing that could otherwise be used for working capital, capital expenditures, dividends, share repurchases, investments, and acquisitions and could result in our failure to maintain compliance with certain covenants in our debt agreements, and could adversely impact our liquidity.

Dividends

On April 5, 2023, our Board of Directors declared a dividend for the third quarter of fiscal 2023 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend was paid on May 8, 2023.

Share Repurchase Program

As of May 31, 2023, pursuant to our board-authorized share repurchase programs, we had remaining authorization to repurchase up to 2.8 million shares of our Class A common stock when we deem such repurchases to be appropriate. We may repurchase our common stock for a variety of reasons, such as to optimize our capital structure and to offset dilution related to share-based compensation arrangements. We consider several factors in determining whether to make share repurchases including, among other things, our cash needs, the availability of funding, our future business plans, and the market price of our stock. We did not repurchase any of our common stock during the first nine months of fiscal 2023.

Assessment of Liquidity and Capital Resources

Historically, our available cash resources, internally generated funds, credit facilities, and equity offerings have financed our acquisitions, capital expenditures, working capital, and other financing needs.

We generally believe our current cash resources, internally generated funds, existing credit facilities, and access to the capital markets will provide adequate short-term and long-term liquidity needs for working capital, capital expenditures, dividends, investments and acquisitions, joint ventures, debt service requirements, environmental obligations, share repurchases, and other contingencies. However, in the event of a sustained market deterioration, we may need additional liquidity which would require us to evaluate available alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurances that any such supplemental funding, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.

Contractual Obligations

There were no material changes related to contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2022.

We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. As of May 31, 2023, we had $7 million outstanding under these arrangements.

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SCHNITZER STEEL INDUSTRIES, INC.

Critical Accounting Estimates

There were no material changes to our critical accounting estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended August 31, 2022.

Recently Issued Accounting Standards

We have not identified any recent accounting pronouncements that are expected to have a material impact on our financial condition, results of operations, or cash flows upon adoption.

Non-GAAP Financial Measures

Debt, net of cash

Debt, net of cash is the difference between (i) the sum of long-term debt and short-term borrowings (i.e., total debt) and (ii) cash and cash equivalents. We believe that presenting debt, net of cash is useful to investors as a measure of our leverage, as cash and cash equivalents can be used, among other things, to repay indebtedness.

The following is a reconciliation of debt, net of cash (in thousands):


	May 31, 2023		August 31, 2022
Short-term borrowings	$	6,724	$	6,041
Long-term debt, net of current maturities		344,084		242,521
Total debt		350,808		248,562
Less cash and cash equivalents		4,511		43,803
Total debt, net of cash	$	346,297	$	204,759

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):


	Nine Months Ended May 31,
	2023			2022
Borrowings from long-term debt	$	501,761		$	895,175
Repayments of long-term debt		(403,129	)		(655,440	)
Net borrowings (repayments) of debt	$	98,632		$	239,735

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SCHNITZER STEEL INDUSTRIES, INC.

Adjusted EBITDA, adjusted selling, general, and administrative expense, 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 charges for legacy environmental matters (net of recoveries), asset impairment charges, adjustments for restructuring charges and other exit-related activities, business development costs not related to ongoing operations including pre-acquisition expenses, charges related to non-ordinary course legal settlements, 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 and adjusted selling, general, and administrative expense (in thousands):


	Three Months Ended May 31,						Nine Months Ended May 31,
	2023			2022			2023			2022
Reconciliation of adjusted EBITDA:
Net income	$	13,608		$	75,504		$	324		$	160,945
Loss from discontinued operations, net of tax		233			46			78			46
Interest expense		5,146			2,223			13,378			5,496
Income tax expense		7,221			20,037			676			43,207
Depreciation and amortization		22,540			18,750			66,390			54,566
Charges for legacy environmental matters, net(1)		5,167			62			6,523			4,522
Asset impairment charges(2)		1,455			932			5,455			932
Restructuring charges and other exit-related activities		169			26			2,589			52
Business development costs		71			920			409			2,079
Charges related to legal settlements(3)		—			590			—			590
Adjusted EBITDA	$	55,610		$	119,090		$	95,822		$	272,435

Selling, general and administrative expense:
As reported	$	68,527		$	77,672		$	196,712		$	194,020
Charges for legacy environmental matters, net(1)		(5,167	)		(62	)		(6,523	)		(4,522	)
Business development costs		(71	)		(920	)		(409	)		(2,079	)
Adjusted	$	63,289		$	76,690		$	189,780		$	187,419

(1)

Legal and environmental charges, net of recoveries, for legacy environmental matters including those related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies. See Note 5 - Commitments and Contingencies, “Portland Harbor” and “Other Legacy Environmental Loss Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

(2)

For the three and nine months ended May 31, 2023, asset impairment charges included $1 million and $5 million, respectively, of impairment and other adjustments of an equity investment to fair value reported within "Other loss, net" on the Unaudited Condensed Consolidated Statement of Operations.

(3)

Charges related to legal settlements in the three and nine months ended May 31, 2022 relate to a claim with a utility provider for past charges.

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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 May 31,						Nine Months Ended May 31,
	2023			2022			2023			2022
Income from continuing operations attributable to SSI shareholders:
As reported	$	13,693		$	74,680		$	103		$	158,494
Charges for legacy environmental matters, net(1)		5,167			62			6,523			4,522
Asset impairment charges(2)		1,455			932			5,455			932
Restructuring charges and other exit-related activities		169			26			2,589			52
Business development costs		71			920			409			2,079
Charges related to legal settlements(3)		—			590			—			590
Income tax benefit allocated to adjustments(4)		(1,324	)		(557	)		(4,189	)		(1,879	)
Adjusted	$	19,231		$	76,653		$	10,890		$	164,790

Diluted earnings per share from continuing operations attributable to SSI shareholders:
As reported	$	0.48		$	2.52		$	—		$	5.33
Charges for legacy environmental matters, net, per share(1)		0.18			—			0.23			0.15
Asset impairment charges, per share(2)		0.05			0.03			0.19			0.03
Restructuring charges and other exit-related activities, per share		0.01			—			0.09			—
Business development costs, per share		—			0.03			0.01			0.07
Charges related to legal settlements, per share(3)		—			0.02			—			0.02
Income tax benefit allocated to adjustments, per share(4)		(0.05	)		(0.02	)		(0.15	)		(0.06	)
Adjusted(5)	$	0.67		$	2.59		$	0.38		$	5.54

(1)

(2)

For the three and nine months ended May 31, 2023, asset impairment charges included $1 million ($0.05 per share before income tax) and $5 million ($0.19 per share before income tax), respectively, of impairment and other adjustments of an equity investment to fair value reported within "Other loss, net" on the Unaudited Condensed Consolidated Statement of Operations.

(3)

Charges related to legal settlements in the three and nine months ended May 31, 2022 relate to a claim with a utility provider for past charges.

(4)

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 without the adjustments.

(5)

May not foot due to rounding.

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SCHNITZER STEEL INDUSTRIES, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

We are exposed to commodity price risk, mainly associated with variations in the market price for ferrous and nonferrous metals, including scrap metal, finished steel products, auto bodies and other commodities. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions as well as other factors including political and military events. We respond to increases and decreases in forward selling prices by adjusting purchase prices. We actively manage our exposure to commodity price risk and monitor the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. Sales contracts are based on prices negotiated with our customers, and generally orders are placed 30 to 60 days ahead of the shipment date. However, financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter based upon contracted sales orders and estimated future selling prices. Based on contracted sales and estimates of future selling prices, a 10% decrease in the estimated selling price of inventory would not have had a material NRV impact as of May 31, 2023.

Interest Rate Risk

There have been no material changes to our disclosure regarding interest rate risk set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended August 31, 2022.

Credit Risk

Credit risk relates to the risk of loss that might occur as a result of non-performance by counterparties of their contractual obligations to take delivery of scrap metal and finished steel products and to make financial settlements of these obligations, or to provide sufficient quantities of scrap metal or payment to settle advances, loans and other contractual receivables in connection with demolition and scrap extraction projects. We manage our exposure to credit risk through a variety of methods, including shipping ferrous scrap metal exports under letters of credit, collection of deposits prior to shipment for certain nonferrous export customers, establishment of credit limits for certain sales on open terms, credit insurance and designation of collateral and financial guarantees securing advances, loans, and other contractual receivables. We have experienced reductions in the availability of credit insurance that we have historically used to cover a portion of our recycled metal and finished steel sales to domestic customers, which reduced availability may increase our exposure to customer credit risk. In addition, in higher or rising commodity price environments, we have experienced proportionately lower credit insurance coverage of applicable customer credit limits, which may increase our exposure to customer credit risk.

Historically, we have shipped almost all of our large shipments of ferrous scrap metal to foreign customers under contracts supported by letters of credit issued or confirmed by banks deemed creditworthy. The letters of credit ensure payment by the customer. As we generally sell export recycled ferrous metal under contracts or orders that generally provide for shipment within 30 to 60 days after the price is agreed, our customers typically do not have difficulty obtaining letters of credit from their banks in periods of rising ferrous prices, as the value of the letters of credit are collateralized by the value of the inventory on the ship. However, in periods of significantly declining prices, our customers may not be able to obtain letters of credit for the full sales value of the inventory to be shipped.

As of May 31, 2023 and August 31, 2022, 35% and 24%, respectively, of our accounts receivable balance was covered by letters of credit, and the amount of past due receivables was not material.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk, mainly associated with sales transactions and related accounts receivable denominated in the U.S. Dollar by our Canadian subsidiary with a functional currency of the Canadian Dollar.

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SCHNITZER STEEL INDUSTRIES, INC.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Consistent with guidance issued by the Securities and Exchange Commission that an assessment of internal controls over financial reporting of a recently acquired business may be omitted from management's evaluation of disclosure controls and procedures, management is excluding an assessment of the internal controls of the ScrapSource business, which we acquired on November 18, 2022, from its evaluation of the effectiveness of our disclosure controls and procedures. The ScrapSource business represented less than 2% of our consolidated total assets and less than 1% of our consolidated total revenues as of and for the nine months ended May 31, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of May 31, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended May 31, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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SCHNITZER STEEL INDUSTRIES, INC.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information regarding reportable legal proceedings is contained in Part I, “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2022; and in Part II, “Item 1. Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2023. Also see Note 5 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, incorporated by reference herein.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors reported or new risk factors identified since the filing of our Annual Report on Form 10-K for the year ended August 31, 2022.

ITEM 5. OTHER INFORMATION

On June 27, 2023, Schnitzer Steel Industries, Inc. (the “Company”) announced that Michael R. Henderson plans to retire from his position as the Company’s Senior Vice President and President, Operations, effective July 21, 2023 or such earlier date as agreed by the Company and Mr. Henderson.

On June 27, 2023, the Company and Mr. Henderson entered into a separation agreement (the “Separation Agreement”) under which Mr. Henderson will provide consulting services to the Company for up to a one-year period following his retirement (the “Consulting Term”). In consideration of the consulting services, the Company will pay Mr. Henderson a fee in the form of salary continuation payments at Mr. Henderson’s current annualized salary rate through the end of the Consulting Term. Additionally, in consideration of Mr. Henderson’s agreement to a customary release of claims and certain restrictive covenants pursuant to the Separation Agreement, the Company will provide Mr. Henderson with approximately $20,000 in Company-paid COBRA continuation coverage. In accordance with Mr. Henderson’s retirement eligible status under the Company’s incentive plans, the Separation Agreement reflects that Mr. Henderson’s equity awards will vest and be settled to the extent provided in accordance with their existing terms and Mr. Henderson will be entitled to receive a pro-rated annual bonus for the 2023 fiscal year.

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SCHNITZER STEEL INDUSTRIES, INC.

ITEM 6. EXHIBITS


Exhibit Number		Exhibit Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Management contract or compensatory plan or arrangement.

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SCHNITZER STEEL INDUSTRIES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SCHNITZER STEEL INDUSTRIES, INC.
		(Registrant)

Date:	June 27, 2023	By:	/s/ Tamara L. Lundgren
			Tamara L. Lundgren
			Chairman, President and Chief Executive Officer

Date:	June 27, 2023	By:	/s/ Stefano R. Gaggini
			Stefano R. Gaggini
			Senior Vice President and Chief Financial Officer