40 / Schnitzer Steel Industries, Inc. Form 10-K 2021 We assess the realizability of our 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. We consider all negative and positive evidence, including the weight of the evidence, to determine if valuation allowances against deferred tax assets are required. We continue to maintain valuation allowances against certain deferred tax assets related to certain jurisdictions as a result of negative objective evidence, including the effects of historical losses in these tax jurisdictions, outweighing positive objective and subjective evidence, indicating that it is morelikely-than-not that the associated tax benefit will not be realized. Realization of the deferred tax assets is dependent upon generating sufficient taxable income in the associated tax jurisdictions in future years to benefit from the reversal of net deductible temporary differences and from the utilization of net operating losses. We will continue to regularly assess the realizability of deferred tax assets. Changes in historical earnings performance and future earnings projections, among other factors, may cause us to adjust our valuation allowance on deferred tax assets, which would impact our results of operations in the period we determine that these factors have changed. CARES Act On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted into law. The CARESAct contains several income tax provisions, as well as other measures, aimed at assisting businesses impacted by the economic effects of the COVID19 pandemic. Among other provisions, the CARES Act removes certain limitations on utilization of net operating losses (“NOLs”) and allows for carrybacks of certain past and future NOLs. We applied the NOL carryback provisions of the CARES Act to our NOL for fiscal 2020, which resulted in the reclassification of a $11 million NOL deferred income tax asset to refundable income taxes and recognition of a $1 million income tax benefit in the third quarter of fiscal 2020. We do not anticipate the other income tax provisions of the CARES Act to have a material impact on our financial statements. See Note 14 - Income Taxes in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion. 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 $28 million and $18 million as of each August 31, 2021 and 2020, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of August 31, 2021, debt was $75 million, compared to $104 million as of August 31, 2020, and debt, net of cash, was $47 million as of August 31, 2021 compared to $87 million as of August 31, 2020 (see the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 7). Operating Activities Net cash provided by operating activities in fiscal 2021 was $190 million, compared to $125 million in fiscal 2020. Sources of cash other than from earnings in fiscal 2021 included a $65 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of payments, a $28 million increase in accrued payroll and related liabilities primarily due to increased incentive compensation liabilities, and a $23 million increase in income tax accruals. Uses of cash in fiscal 2021 included a $89 million increase in inventories due to higher raw material purchase prices, higher volumes on hand, and the timing of purchases and sales, and a $84 million increase in accounts receivable primarily due to increases in selling prices and higher sales volumes for recycled metals, as well as the timing of sales and collections. Sources of cash in fiscal 2020 included a $39 million decrease in inventories due to lower raw material purchase prices and the timing of purchases and sales and a $13 million increase in accrued payroll and related liabilities due to increased incentive compensation liabilities and deferred payroll taxes as permitted under the CARES Act. Uses of cash in fiscal 2020 included an $8 million decrease in accounts payable primarily due to lower raw material purchase prices and the timing of payments. Investing Activities Net cash used in investing activities in fiscal 2021 was $118 million, compared to $79 million in fiscal 2020. Cash used in investing activities in fiscal 2021 included capital expenditures of $119 million to upgrade our equipment and infrastructure and for investments in advanced metals recovery technology and environmental and safety-related assets, as well as $8 million related to the repair and replacement of damaged steel mill equipment, compared to $82 million in the prior year.
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