SCHN 2017 Annual Report

SCHNITZER STEEL INDUSTRIES, INC. 30 / Schnitzer Steel Industries, Inc. Form 10-K 2017 Our operating results in fiscal 2017 benefited from improved market conditions, increased sales diversification, improved supply volumes, expanded nonferrous metal recovery, and additional benefits from our multi-year cost reduction and productivity improvement measures compared to the prior two years. The higher price environment for scrap metal during fiscal 2017 together with benefits from commercial initiatives to improve supply channels and an improved trend in U.S. economic conditions led to an increase in the supply of scrap metal in our domestic market, including end-of-life vehicles, resulting in higher processed volumes compared to fiscal 2016. The higher price environment also positively impacted the spread between direct purchase costs and selling prices of ferrous recycled metal compared to the prior year. Executive Overview of Financial Results We generated consolidated revenues of $1.7 billion in fiscal 2017, an increase of 25% from the $1.4 billion of consolidated revenues generated in fiscal 2016, primarily due to improved market conditions for recycled metals in the domestic and export markets resulting in higher average net selling prices and increased sales volumes compared to the prior year, including benefits from increased sales diversification. Consolidated operating income was $56 million in fiscal 2017, compared to consolidated operating loss of $8 million in fiscal 2016. Adjusted consolidated operating income in fiscal 2017 was $54 million, compared to $28 million in the prior year. Adjusted results in fiscal 2017 exclude net recoveries on previously impaired assets of $1 million, a net gain from restructuring and exit- related activities of less than $1 million, and recoveries related to the resale or modification of previously contracted shipments of $1 million. Adjusted results in fiscal 2016 exclude the impact of a goodwill impairment charge of $9 million, other asset impairment charges of $21 million, restructuring charges and other exit-related activities of $7 million, and recoveries related to the resale ormodification of previously contracted shipments of $1million. See the reconciliation of adjusted consolidated operating income (loss) in Non-GAAP Financial Measures at the end of this Item 7. Operating results in fiscal 2017 benefited from better market conditions, increased sales diversification, improved supply volumes, expanded nonferrous metal recovery, and additional benefits from cost savings and productivity improvement initiatives compared to fiscal 2016. The higher price environment for scrap metal in fiscal 2017 together with benefits from commercial initiatives to improve supply channels and an improved trend in U.S. economic conditions also led to an increase in the supply of scrap metal, including end-of-life vehicles, resulting in higher processed volumes and improved operating results, primarily at AMR, compared to the prior year. The stronger price environment also positively impacted the spread between direct purchase costs and selling prices of ferrous recycled metal at AMR, with the metal spread for fiscal 2017 expanding by approximately 10% compared to the prior year. Operating results in fiscal 2016 were adversely impacted by a lower price environment which included sharp declines in commodity selling prices during the first half of fiscal 2016 resulting in an unfavorable impact fromaverage inventory accounting during the year. This compares to a favorable impact fromaverage inventory accounting in fiscal 2017which, relative to performance benefits from other drivers, was not a major contributor to the improvement in operating results year over year. CSS's operating results improved, with operating income of just over $5 million for fiscal 2017, compared to just under $5 million for the prior year. CSS's operating results included a net recovery on previously impaired assets of $1 million in fiscal 2017, compared to asset impairments of $4 million in fiscal 2016. The benefits to CSS from higher finished steel selling prices and sales volumes in fiscal 2017 were more than offset by continued pressure from low-priced imports and the adverse impact of the downtime and costs associated with major equipment upgrades at our steel mill during the first quarter of fiscal 2017. Operating results in fiscal 2016 were also adversely impacted by a non-cash goodwill impairment charge of $9million in a reporting unit within AMR and non-cash other asset impairment charges of $21 million primarily at AMR. See Results of Operations, Asset Impairment Charges (Recoveries), net in this Item 7 for further details on asset impairment charges. Consolidated selling, general and administrative ("SG&A") expense in fiscal 2017 increased by $23 million, or 15%, compared to the prior year primarily due to higher employee-related expenses, including an increase in incentive compensation accruals resulting from improved financial performance, other expenses related to higher volumes, and increased environmental liabilities. This increase was partially offset by incremental benefits from cost savings and productivity improvement measures. SG&A expense in fiscal 2016 included a $6 million benefit from an insurance reimbursement. In recent years, we implemented a number of cost reduction and productivity improvement measures to more closely align our business to market conditions. The combined benefit of the measures initiated since the beginning of fiscal 2015 represents a targeted annual improvement to operating performance of approximately $95 million. In fiscal 2017, we achieved the full $95 million in combined benefits related to these measures, compared to $78 million and $28 million of benefits in fiscal 2016 and 2015, respectively. In total, we have achieved approximately $160 million in combined annual benefits to operating performance since announcing the initial phase of these cost savings and productivity initiatives at the end of fiscal 2012. Charges incurred in connection with the foregoing initiatives are discussed in Results of Operations, Restructuring Charges and Other Exit-Related Activities in this Item 7.