UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the Quarterly Period Ended February ~~29, 2012~~28, 2013



o	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 0-22496

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.)

3200 NW Yeon Ave. Portland, OR		97210
(Address of principal executive offices)		(Zip Code)

(503) 224-9900

(Registrant’s telephone number, including area code)

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes x No o

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



Large accelerated filer	x	Accelerated filer	o	Non-accelerated filer	o	Smaller Reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The Registrant had ~~25,233,810~~25,957,268 shares of Class A common stock, par value of $1.00 per share, and ~~2,058,972~~503,959 shares of Class B common stock, par value of $1.00 per share, outstanding as of March ~~30, 2012~~28, 2013.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

INDEX



	PAGE
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of February ~~29, 2012~~28, 2013 and August 31, ~~2011~~2012	3

Condensed Consolidated Statements of Income for the Three and Six Months Ended February ~~29, 2012~~28, 2013 and February ~~28, 2011~~29, 2012	4

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended February 28, 2013 and February 29, 2012	5

Condensed Consolidated Statements of Cash Flows for the Six Months Ended February ~~29, 2012~~28, 2013 and February ~~28, 2011~~29, 2012	56

Notes to the Unaudited Condensed Consolidated Financial Statements	67

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1720

Item 3. Quantitative and Qualitative Disclosures About Market Risk	2834

Item 4. Controls and Procedures	2834

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	2935

Item 1A. Risk Factors	2935

Item 6. Exhibits	3036

SIGNATURES	3137

Table of Contents

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)


	February 29, 2012			August 31, 2011		February 28, 2013			August 31, 2012
Assets
Current assets:
Cash and cash equivalents	$	51,720		$	49,462	$	34,540		$	89,863
Accounts receivable, net of allowance for doubtful accounts of $6,603 and $6,148	210,083			229,975
Accounts receivable, net of allowance for doubtful accounts of $1,989 and $4,459						159,055			137,313
Inventories, net	324,818			335,120		305,454			246,992
Deferred income taxes	11,274			11,784		4,872			6,362
Refundable income taxes	13,581			3,541		6,072			7,671
Prepaid expenses and other current assets	31,004			24,117		35,004			28,618
Total current assets	642,480			653,999		544,997			516,819
Property, plant and equipment, net of accumulated depreciation of $503,416 and $471,305	552,851			555,284
Property, plant and equipment, net of accumulated depreciation of $570,021 and $535,728						566,890			564,185
Investments in joint venture partnerships	17,654			17,208		16,486			17,126
Goodwill	628,079			627,805		647,471			635,491
Intangibles, net of accumulated amortization of $16,409 and $20,846	18,029			20,906
Intangibles, net of accumulated amortization of $21,365 and $19,023						15,659			15,778
Other assets	14,694			14,967		15,927			14,174
Total assets	$	1,873,787		$	1,890,169	$	1,807,430		$	1,763,573
Liabilities and Equity
Current liabilities:
Short-term borrowings	$	668		$	643	$	669		$	683
Accounts payable	115,415			141,011		96,334			115,007
Accrued payroll and related liabilities	22,040			36,475		22,116			22,130
Environmental liabilities	3,060			2,983		2,253			2,185
Accrued income taxes	3,836			13,833		—			38
Other accrued liabilities	41,521			38,368		36,803			38,799
Total current liabilities	186,540			233,313		158,175			178,842
Deferred income taxes	88,926			85,378		85,986			85,447
Long-term debt, net of current maturities	412,891			403,287		400,720			334,629
Environmental liabilities, net of current portion	37,569			37,872		47,530			44,874
Other long-term liabilities	9,562			10,030		11,627			11,837
Total liabilities	735,488			769,880		704,038			655,629
Commitments and contingencies (Note 7)
Redeemable noncontrolling interest	21,176			19,053		24,760			22,248
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, 24,873 and 24,241 shares issued and outstanding	24,873			24,241
Class B common stock – 25,000 shares $1.00 par value authorized, 2,417 and 3,060 shares issued and outstanding	2,417			3,060
Class A common stock – 75,000 shares $1.00 par value authorized, 25,870 and 25,219 shares issued and outstanding						25,870			25,219
Class B common stock – 25,000 shares $1.00 par value authorized, 584 and 1,113 shares issued and outstanding						584			1,113
Additional paid-in capital	5,099			762		6,137			816
Retained earnings	1,079,528			1,065,109		1,050,575			1,056,024
Accumulated other comprehensive income (loss)	(610		)	1,540
Accumulated other comprehensive loss						(9,877		)	(2,589		)
Total SSI shareholders’ equity	1,111,307			1,094,712		1,073,289			1,080,583
Noncontrolling interests	5,816			6,524		5,343			5,113
Total equity	1,117,123			1,101,236		1,078,632			1,085,696
Total liabilities and equity	$	1,873,787		$	1,890,169	$	1,807,430		$	1,763,573

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)


	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	2/29/2012			2/28/2011			2/29/2012			2/28/2011			2/28/2013			2/29/2012			2/28/2013			2/29/2012
Revenues	$	886,612		$	721,842		$	1,698,787		$	1,396,946		$	662,210		$	886,612		$	1,255,030		$	1,698,787
Operating expense:
Cost of goods sold	817,087			632,856			1,559,303			1,235,402			600,786			817,087			1,142,670			1,559,303
Selling, general and administrative	52,370			44,033			108,362			88,908			48,760			52,370			96,754			108,362
Income from joint ventures	(832		)	(984		)	(1,833		)	(1,741		)	(266		)	(832		)	(131		)	(1,833		)
Restructuring charges													1,540			—			3,133			—
Operating income	17,987			45,937			32,955			74,377			11,390			17,987			12,604			32,955
Other income (expense):
Interest income	72			234			234			289
Interest expense	(3,472		)	(1,157		)	(6,743		)	(1,755		)	(2,354		)	(3,472		)	(4,371		)	(6,743		)
Other income (expense), net	545			2,854			(11		)	3,015			(49		)	617			271			223
Total other income (expense)	(2,855		)	1,931			(6,520		)	1,549
Income from continuing operations before income taxes	15,132			47,868			26,435			75,926
Income before income taxes													8,987			15,132			8,504			26,435
Income tax expense	(4,767		)	(15,745		)	(8,328		)	(24,909		)	(244		)	(4,767		)	(1,205		)	(8,328		)
Income from continuing operations	10,365			32,123			18,107			51,017
Income from discontinued operations, net of tax	—			11			—			34
Net income	10,365			32,134			18,107			51,051			8,743			10,365			7,299			18,107
Net income attributable to noncontrolling interests	(735		)	(1,309		)	(1,462		)	(2,432		)	(100		)	(735		)	(329		)	(1,462		)
Net income attributable to SSI	$	9,630		$	30,825		$	16,645		$	48,619		$	8,643		$	9,630		$	6,970		$	16,645
Basic:
Income per share from continuing operations attributable to SSI	$	0.35		$	1.12		$	0.61		$	1.76
Income per share from discontinued operations	—			—			—			—
Net income per share attributable to SSI	$	0.35		$	1.12		$	0.61		$	1.76
Diluted:
Income per share from continuing operations attributable to SSI	$	0.35		$	1.10		$	0.60		$	1.74
Income per share from discontinued operations	—			—			—			—
Net income per share attributable to SSI	$	0.35		$	1.10		$	0.60		$	1.74

Net income per share attributable to SSI - basic													$	0.32		$	0.35		$	0.26		$	0.61
Net income per share attributable to SSI - diluted													$	0.32		$	0.35		$	0.26		$	0.60
Weighted average number of common shares:
Basic	27,509			27,627			27,480			27,595			26,640			27,509			26,597			27,480
Diluted	27,781			27,944			27,734			27,918			26,781			27,781			26,751			27,734
Dividends declared per common share	$	0.017		$	0.017		$	0.034		$	0.034		$	0.188		$	0.017		$	0.376		$	0.034

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)



	Three Months Ended						Six Months Ended
	2/28/2013			2/29/2012			2/28/2013			2/29/2012
Net income	$	8,743		$	10,365		$	7,299		$	18,107
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments⁽¹⁾	(5,518		)	5,172			(6,777		)	(2,529		)
Cash flow hedges, net⁽²⁾	5			28			22			28
Pension obligations, net⁽³⁾	151			66			526			133
Total other comprehensive income (loss), net of tax	(5,362		)	5,266			(6,229		)	(2,368		)
Comprehensive income	3,381			15,631			1,070			15,739
Less amounts attributable to noncontrolling interests:
Net income attributable to noncontrolling interests	(100		)	(735		)	(329		)	(1,462		)
Foreign currency translation adjustment attributable to redeemable noncontrolling interest	(886		)	(669		)	(1,059		)	217
Total amounts attributable to noncontrolling interests	(986		)	(1,404		)	(1,388		)	(1,245		)
Comprehensive income (loss) attributable to SSI	$	2,395		$	14,227		$	(318	)	$	14,494

_____________________________


(1)	Net of tax expense (benefit) of $(353) thousand, $343 thousand, $(444) thousand and $(125) thousand for each respective period.


(2)	Net of tax expense of $1 thousand, $16 thousand, $24 thousand and $16 thousand for each respective period.


(3)	Net of tax expense of $87 thousand, $39 thousand, $303 thousand and $78 thousand for each respective period.

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Six Months Ended						Six Months Ended
	2/29/2012			2/28/2011			2/28/2013			2/29/2012
Cash flows from operating activities:
Net income	$	18,107		$	51,051		$	7,299		$	18,107
Adjustments to reconcile net income to cash provided by operating activities:
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization	40,991			34,476			41,573			40,991
Deferred income taxes	4,109			2,136			2,919			4,109
Undistributed equity in earnings of joint ventures	(1,833		)	(1,931		)	(349		)	(1,833		)
Share-based compensation expense	5,895			6,692			7,156			5,895
Excess tax benefit from share-based payment arrangements	(497		)	299			—			(497		)
Loss (gain) on disposal of assets	112			(20		)
Net gain on derivatives	—			(759		)
Unrealized foreign exchange loss (gain), net	89			(2,403		)
Bad debt expense, net of recoveries	—			578
Loss on disposal of assets							188			112
Unrealized foreign exchange loss, net							469			89
Bad debt recoveries, net of expense							(572		)	—
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	8,237			(29,021		)	(32,168		)	8,237
Inventories	13,579			(79,544		)	(45,736		)	13,579
Refundable income taxes	(10,031		)	(122		)
Income taxes							825			(19,772		)
Prepaid expenses and other current assets	(943		)	1,008			(11,312		)	(943		)
Intangibles and other long-term assets	456			(944		)	378			456
Accounts payable	(14,882		)	31,353			(10,595		)	(14,882		)
Accrued payroll and related liabilities	(14,056		)	(9,360		)	511			(14,056		)
Other accrued liabilities	836			(1,368		)	(5,366		)	836
Accrued income taxes	(9,741		)	15,165
Environmental liabilities	(323		)	(278		)	21			(323		)
Other long-term liabilities	(136		)	(134		)	(315		)	(136		)
Distributed equity in earnings of joint ventures	1,400			3,405			1,279			1,400
Net cash provided by operating activities	41,369			20,279
Net cash (used in) provided by operating activities							(43,795		)	41,369
Cash flows from investing activities:
Capital expenditures	(43,178		)	(46,284		)	(47,823		)	(43,178		)
Joint venture receipts, net							(510		)	(335		)
Proceeds from sale of assets							711			519
Acquisitions, net of cash acquired	—			(165,919		)	(22,667		)	—
Joint venture receipts (payments), net	(335		)	(1,118		)
Proceeds from sale of assets	519			290
Net cash used in investing activities	(42,994		)	(213,031		)	(70,289		)	(42,994		)
Cash flows from financing activities:
Proceeds from line of credit	211,000			311,000			315,000			211,000
Repayment of line of credit	(211,000		)	(311,000		)	(315,000		)	(211,000		)
Borrowings from long-term debt	315,661			413,000			158,324			315,661
Repayment of long-term debt	(305,986		)	(193,298		)	(94,987		)	(305,986		)
Debt financing fees	—			(5,114		)
Repurchase of Class A common stock	(3,117		)	—			—			(3,117		)
Taxes paid related to net share settlement of share-based payment arrangements	(840		)	(1,880		)	(1,161		)	(840		)
Excess tax benefit from share-based payment arrangements	497			(299		)	—			497
Stock options exercised	498			279			300			498
Contributions from noncontrolling interests	2,104			—
Distributions to noncontrolling interests	(2,368		)	(1,219		)
Contributions from noncontrolling interest							1,970			2,104
Distributions to noncontrolling interest							(1,002		)	(2,368		)
Contingent consideration paid relating to business acquisitions	(1,469		)	—			—			(1,469		)
Dividends paid	(932		)	(1,400		)	(4,952		)	(932		)
Net cash provided by financing activities	4,048			210,069			58,492			4,048
Effect of exchange rate changes on cash	(165		)	586			269			(165		)
Net increase in cash and cash equivalents	2,258			17,903
Net (decrease) increase in cash and cash equivalents							(55,323		)	2,258
Cash and cash equivalents as of beginning of period	49,462			30,342			89,863			49,462
Cash and cash equivalents as of end of period	$	51,720		$	48,245		$	34,540		$	51,720

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

Table of Contents

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. (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 presentation 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 year ended August 31, ~~2011~~2012. The results for the three and six months ended February ~~29, 2012~~28, 2013 and February 29, ~~February 28, 2011~~2012 are not necessarily indicative of the results of operations for the entire year.

Accounting Changes

In June 2011, the Financial Accounting Standards Board (“FASB”) issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. No changes were made to the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, or to the calculation and presentation of earnings per share. The Company adopted the new requirement in the first quarter of fiscal 2013 with no impact on the Company’s Unaudited Condensed Consolidated Financial Statements except for the change in presentation. The Company has chosen to present a separate statement of comprehensive income.

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 checks in excess of funds on deposit of $3529 million as of February ~~29, 2012~~28, 2013 and $4038 million as of August 31, ~~2011~~2012.

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 are maintained with two major financial institutions (Bank of America and Wells Fargo Bank, N.A.). Balances in these institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250,000 as of February ~~29, 2012~~28, 2013. 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, letters of credit, 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. The Company had $8759 million and $9037 million of open letters of credit relating to accounts receivable as of February ~~29, 2012~~28, 2013 and August 31, ~~2011~~2012, respectively.

Goodwill

Goodwill represents the excess of the purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. The Company evaluates goodwill for impairment annually during the second fiscal quarter and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. 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’). The Company has determined that its reporting units for which goodwill has been allocated are equivalent to the Company’s operating segments, as all of the components of each operating segment meet the criteria for aggregation.

Under the new accounting guidance issued by the FASB in September 2011 and effective for the Company in fiscal 2013, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to



Table of Contents	SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, the Company is then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.

In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.

The Company estimates the fair value of its reporting units using an income approach based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital (“WACC”) determined separately for each reporting unit. The determination of fair value involves the use of significant estimates and assumptions, including revenue growth rates driven by future commodity prices and volume expectations, operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rates and synergistic benefits available to market participants. In addition, to corroborate the reporting units’ valuation, the Company uses a market approach based on earnings multiple data and a reconciliation of the aggregated fair value of the reporting units to the Company’s market capitalization, including consideration of a control premium.

Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, debt and derivative contracts. The Company uses the market approach to value its financial assets and liabilities, determined using available market information. The net carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short term nature of these instruments. For long-term debt, which is primarily at variable interest rates, fair value is estimated using observable inputs (Level 2) and approximates its carrying value.

Fair Value Measurements

Fair value is measured using inputs from the three levels of the fair value hierarchy. Classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are described as follows:

Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the determination of the fair value of the asset or liability, either directly or indirectly.

Level 3 – Unobservable inputs that are significant to the determination of the fair value of the asset or liability.

When developing the fair value measurements, the Company uses quoted market prices whenever available or seeks to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available. See Note 89 - Redeemable Noncontrolling Interest and Note 1012 - Derivative Financial Instruments for further detail.

~~Financial Instruments~~

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, debt and derivative contracts. The carrying amounts of the non-derivative financial instruments approximate fair value, including debt primarily at variable interest rates. The Company uses the market approach to value its financial assets and liabilities, determined using available market information.

Derivatives

The Company records derivative instruments in other assets or other liabilities in the Unaudited Condensed Consolidated Balance Sheets at fair value and changes in the fair value are either recognized in accumulated other comprehensive ~~income (loss)~~loss in the

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Unaudited Condensed Consolidated Balance Sheets or net income in the Unaudited Condensed Consolidated Statements of Income, as applicable, depending on the nature of the underlying exposure, whether the derivative has been designated as a hedge, and if designated as a hedge, the extent to which the hedge is effective. Amounts included in accumulated other comprehensive ~~income (loss)~~loss are reclassified to earnings in the period in which earnings are impacted by the hedged items or in the period that the hedged transaction is deemed no longer likely to occur. For cash flow hedges, a formal assessment is made, both at the hedge’s inception and on an ongoing basis, to determine whether the derivatives that are designated as hedging instruments have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. To the extent the hedge is determined to be ineffective, the ineffective portion is immediately recognized in earnings. When available, quoted market prices or prices obtained through external sources are used to measure a ~~contract’s~~derivative instrument’s fair value. The fair value of these instruments is a function of underlying forward commodity prices, related volatility, counterparty creditworthiness and duration of the contracts. Cash flows from derivatives are recognized in the Unaudited Condensed Consolidated Statements of Cash Flows in a manner consistent with the underlying transactions. See Note 1012 - Derivative Financial Instruments.



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Derivative contracts for commodities used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases and normal sales. Contracts that qualify as normal purchases or normal sales are not marked-to-market. The Company does not use derivative instruments for trading or speculative purposes.

Restructuring Charges

Restructuring charges consist of severance, contract termination and other exit costs. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred under operating leases for their remaining terms without economic benefit to the Company. A liability for contract termination costs is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals. A liability for other exit costs is measured at its fair value in the period in which the liability is incurred. See Note 8 - Restructuring Charges for further detail.

Redeemable Noncontrolling Interest

The Company ~~has~~ issued common stock of one of its subsidiaries to a noncontrolling interest holder of that subsidiary that is redeemable both at the option of the holder and upon the occurrence of an event that is not solely within the Company’s control. Since redemption of the noncontrolling interest is outside of the Company’s control, this interest is presented on the Unaudited Condensed Consolidated Balance Sheets in the mezzanine section under the caption ~~“Redeemable~~redeemable noncontrolling interest.” If the interest were to be redeemed, the Company would be required to purchase all of such interest at fair value on the date of redemption. ~~As such, the~~The redeemable noncontrolling interest is ~~measured~~presented at the greater of its carrying amount (adjusted for the noncontrolling interest’s share of the allocation of income or loss of the subsidiary, dividends to and contributions from the noncontrolling interest) or its fair value atas of each ~~reporting period.~~measurement date. Any adjustments to the carrying amount of the redeemable noncontrolling interest for changes in fair value prior to exercise of the redemption option are ~~determined after the attribution of net income or loss of the subsidiary and are~~ recorded to retained earnings. See Note 89 - Redeemable Noncontrolling Interest for further detail.

Reclassifications

Certain prior year amounts have been reclassified within ~~operating expenses~~other income (expense), net in the Unaudited Condensed Statements of Income and cash flows from operating activities in the Unaudited Condensed Statements of Cash Flows to conform to the current ~~year~~period presentation. These changes had no impact on previously reported ~~operating income,~~ net income or net cash ~~provided by~~used in operating activities.

Note 2 - Recent Accounting Pronouncements

In May 2011, an accounting standard update was issued to clarify existing fair value measurement guidance and expand the disclosure requirements for fair value measurements estimated using unobservable inputs (Level 3 inputs). New disclosures are required to report quantitative information about the unobservable inputs used in the measurement of Level 3 valuations and to include the valuation process used to determine the fair value of the item and the sensitivity of the measurement to changes in unobservable inputs. This standard will be effective for the Company for the third quarter of fiscal year 2012. The standard is unlikely to impact the fair value measurement of any of the Company’s existing assets, liabilities, or equity valuations, but the additional disclosures will be required for the Company’s redeemable noncontrolling interest, which is measured using Level 3 inputs.

In June 2011, an accounting standard update was issued regarding the presentation of other comprehensive income in the financial statements. The standard eliminates the option of presenting other comprehensive income as part of the statement of changes in stockholders’ equity and instead requires the entity to present other comprehensive income as either a single statement of comprehensive income combined with net income or as two separate but consecutive statements. This amendment will be effective for the Company for fiscal year 2013 and interim periods therein. The Company currently reports other comprehensive income in the summary of changes in equity and comprehensive income and will be required to update the presentation of comprehensive income to be in compliance with the new standard.

In September 2011, an accounting standard update was issued that simplifies how an entity tests goodwill for impairment by allowing an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

is required. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt this standard for the goodwill impairment test to be performed in fiscal 2013. Upon adoption, this standard will impact how the Company assesses goodwill for impairment but will not change the measurement or recognition of a potential goodwill impairment charge.

In December 2011, an accounting ~~standard~~standards update was issued increasing disclosures regarding offsetting assets and liabilities. For financial instruments and derivative instruments, the standard requires disclosure of the gross amounts of recognized assets and liabilities, the amounts offset on the balance sheet, and the amounts subject to the offsetting requirements but not offset on the balance sheet. In January 2013, the FASB issued updated guidance which clarified that the 2011 amendment to the balance sheet offsetting standard does not cover transactions that are not considered part of the guidance for derivatives and hedge accounting. The standard is effective for the Company for fiscal ~~year~~ 2014 ~~and interim periods therein~~ and is to be applied retrospectively. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

In July 2012, an accounting standards update was issued that simplifies how an entity tests indefinite-lived intangible assets for impairment by allowing an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. The Company early-adopted this standard for the annual impairment test performed in the second quarter of fiscal 2013. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

In February 2013, an accounting standards update was issued that amends the reporting of amounts reclassified out of accumulated other comprehensive income. This standard does not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component, either on the face of the financial statement where net income is presented or in the notes to the financial statements. The standard is effective for the Company for fiscal 2014



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and is to be applied prospectively. The adoption of this standard is not expected to have a significant impact on the Company's consolidated financial position, results of operations or cash flows.

Note 3 - Inventories, net

Inventories, net consisted of the following (in thousands):


	February 29, 2012		August 31, 2011		February 28, 2013		August 31, 2012
Processed and unprocessed scrap metal	$	220,365	$	241,093	$	188,878	$	152,930
Semi-finished steel products (billets)	15,557		9,237		6,306		7,328
Finished goods	53,783		54,395		71,572		49,988
Supplies	35,113		30,395		38,698		36,746
Inventories, net	$	324,818	$	335,120	$	305,454	$	246,992

Note 4 - Business Combinations

~~During fiscal~~ ~~2011~~,In December 2012, the Company made the following acquisitions:

The Company acquired substantially all of the assets of Ralph’s Auto Supply (B.C.) Ltd., a used auto parts business with 10four ~~acquisitions accounted~~stores in Richmond and Surrey, British Columbia, which expanded the Auto Parts Business (“APB”)’s presence in Western Canada and is near the Metals Recycling Business’ operations in Surrey, British Columbia.

The Company acquired substantially all of the assets of U-Pick-It, Inc., a used auto parts business with two stores in the Kansas City metropolitan area in Missouri and Kansas, which expanded APB’s presence in the Midwestern U.S.

The Company acquired all of the equity interests of Freetown Self Serve Used Auto Parts, LLC, Freetown Transfer Facility, LLC, Millis Used Auto Parts, Inc. and Millis Industries, Inc., which together operated a used auto parts and scrap metal recycling business with two stores in Massachusetts. This acquisition established a new APB presence in the Northeastern U.S. and expanded the nearby Metals Recycling Business’ operations.

The aggregate consideration paid for ~~as business combinations. The total purchase price of~~ these acquisitions ofwas $~~316~~23 million, ~~comprising~~ ~~$294 million~~ ~~in cash and~~ ~~$22 million~~ ~~in non-cash consideration ($20 million~~ ~~in shares of a subsidiary and~~ ~~$2 million~~ ~~in contingent consideration),~~which was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the date of acquisition. The excess of the aggregate purchase price over the fair value of the identifiable net assets acquired of $~~248~~18 million was recorded as ~~goodwill.~~goodwill, of which $17 million is expected to be deductible for tax purposes.

The ~~following unaudited pro forma~~Company paid a premium (i.e. goodwill) over the fair value of the net tangible and identified intangible assets acquired in the transactions described above for a number of reasons, including but not limited to the following:

The Company will benefit from the assets and capabilities of these acquisitions, including additional resources, skills and industry expertise;

The acquired businesses increase the Company's market presence in new and existing regions; and

The Company anticipates cost savings, efficiencies and synergies.

The acquisitions completed in the second quarter of fiscal 2013 were not material, individually or in the aggregate, to the Company's financial ~~information represents the combined~~position or results of ~~our operations~~operations. Pro forma operating results for the ~~three and six~~ ~~months ended~~ ~~February 28, 2011, as if all of the fiscal 2011~~ acquisitions ~~had occurred as of September 1, 2009 (in thousands):~~

Three Months Ended Six Months Ended
February 28, 2011 February 28, 2011
Revenues $ 747,829
$ 1,466,512
Operating income⁽¹⁾
$ 53,330
$ 89,585
Net income⁽¹⁾
$ 36,661
$ 60,149
Net income attributable to SSI⁽¹⁾
$ 34,685
$ 56,328

~~_____________________________~~


~~(1)~~	~~Excludes nonrecurring executive compensation paid to the management of acquired companies that will not be incurred in the future.~~

~~These pro forma results~~ are not ~~necessarily indicative of what actual~~presented, since the aggregate results would ~~have been had these acquisitions occurred for the periods presented. In addition, the 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.~~significantly different than reported results.

Note 5 - Goodwill

In the second quarter of fiscal ~~2012,~~2013, the Company performed its annual goodwill impairment testing, proceeding directly to the two-step quantitative impairment test by comparing the fair value of each reporting unit with its carrying value, including goodwill. As a result of this testing, the Company determined that the fair value of each ~~of its~~ reporting ~~units~~unit for which goodwill was ~~substantially~~allocated was in excess of its respective carrying value and ~~the~~therefore no goodwill ~~balance~~impairment was ~~not impaired.~~identified. The Company will continue to ~~monitor~~assess its goodwill for possible future impairment.

The determination of fair value of the reporting units used to perform the first step of 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

810

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~



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assumptions. Due to the inherent uncertainty associated with forming these estimates, actual results could differ from those estimates. Future events and changing market conditions may impact the Company's assumptions as to future revenue growth rates, pace and extent of operating margin and volume recovery, market-based WACC and other factors that may result in changes in the estimates of the Company's reporting units' fair value. Although management believes the assumptions used in testing the Company's reporting units’ goodwill for impairment are reasonable, it is possible that market and economic conditions could deteriorate further or not improve as expected. Additional declines in or a lack of recovery in market conditions from current levels, a trend of weaker than anticipated Company financial performance including the pace and extent of operating margin and volume recovery, a lack of further recovery in the Company's share price from current levels, or an increase in the market-based WACC, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on the Company's financial condition and results of operations.

The gross changes in the carrying amount of goodwill by reporting segment for the six months ended February ~~29, 2012~~28, 2013 were as follows (in thousands):

Metals Recycling Business Auto Parts Business Total
Balance as of August 31, 2011 $ 464,646
$ 163,159
$ 627,805
Purchase price adjustment 1,540
—
1,540
Purchase accounting adjustments 370
—
370
Foreign currency translation adjustment (1,417 ) (219 ) (1,636 )
Balance as of February 29, 2012 $ 465,139
$ 162,940
$ 628,079



	Metals Recycling Business			Auto Parts Business			Total
Balance as of August 31, 2012	$	471,954		$	163,537		$	635,491
Acquisitions	1,744			16,606			18,350
Foreign currency translation adjustment	(5,215		)	(1,155		)	(6,370		)
Balance as of February 28, 2013	$	468,483		$	178,988		$	647,471

There were no accumulated goodwill impairment charges as of February ~~29, 2012~~28, 2013. and August 31, 2012.

Note 6 - Short-Term Borrowings

The Company has an unsecured, uncommitted $25 million credit line with Wells Fargo Bank, N.A. The term of this credit facility was recently extended to March 1, ~~2013~~2014. Interest rates are set by the bank at the time of borrowing. The Company had no borrowings outstanding under this facility as of February ~~29, 2012~~28, 2013 and August 31, ~~2011~~2012. The credit agreement contains various representations and warranties, events of default and financial and other covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio.

Note 7 - Commitments and Contingencies

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 six months ended February ~~29, 2012~~28, 2013 were as follows (in thousands):


	Balance as of August 31, 2011		Liabilities Established (Released), Net			Payments and other		Balance as of February 29, 2012		Short-Term		Long-Term
Reporting Segment														Balance as of August 31, 2012		Liabilities Established (Released), Net⁽¹⁾			Payments and Other			Balance as of February 28, 2013		Short-Term		Long-Term
Metals Recycling Business	$	25,655	$	(300	)	$	74	$	25,429	$	2,506	$	22,923	$	30,859	$	(101	)	$	(132	)	$	30,626	$	1,700	$	28,926
Auto Parts Business	15,200		—			—		15,200		554		14,646		16,200		2,957			—			19,157		553		18,604
Total	$	40,855	$	(300	)	$	74	$	40,629	$	3,060	$	37,569	$	47,059	$	2,856		$	(132	)	$	49,783	$	2,253	$	47,530

_____________________________


(1)	The Company recorded $3 million in purchase accounting for environmental liabilities related to properties leased in connection with business combinations completed in fiscal 2013.

Metals Recycling Business (“MRB”)

As of February ~~29, 2012~~28, 2013, MRB had environmental liabilities of $2531 million for the potential remediation of locations where it has conducted business and has environmental liabilities from historical or recent activities.

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



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parties (“PRPs”) that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”). The precise nature and extent of any cleanup of the Site, the parties to be involved, the process to be followed for any cleanup and the allocation of the costs for any cleanup among responsible parties have not yet been determined, but the process of identifying additional PRPs and beginning allocation of costs is underway. It is unclear to what extent the Company will be liable for environmental costs or natural resource damage claims or third party contribution or damage claims with respect to the Site. While the Company participated in certain preliminary Site study efforts, it is not party to the consent order entered into by the EPA with certain other PRPs, referred to as the “Lower Willamette Group” (“LWG”), for a remedial investigation/feasibility study (“RI/FS”).

During fiscal 2007, the Company and certain other parties agreed to an interim settlement with the LWG under which the Company made a cash contribution to the LWG RI/FS. The Company has also joined with more than 80 other PRPs, including the LWG, in a voluntary process to establish an allocation of costs at the Site. These parties have selected an allocation team and have entered into an allocation process design agreement. The LWG has also commenced federal court litigation, which has been stayed, seeking to bring additional parties into the allocation process.

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

In January 2008, the Natural Resource Damages Trustee Council (“Trustees”) for Portland Harbor invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. Following meetings among the Trustees and the PRPs, a funding and participation agreement was negotiated under which the participating PRPs agreed to fund the first phase of the natural resource damage assessment. The Company joined in that Phase I agreement and paid a portion of those costs. The Company did not participate in funding the second phase of the natural resource damage assessment.

On March 30, 2012, the LWG submitted to the EPA and made available on its website a draft feasibility study (“draft FS”) for the Site based on approximately ten years of work and $100 million in costs classified by the LWG as investigation related. ~~The Company obtained a copy of the draft FS on the same day.~~ The draft FS identifies ten possible remedial alternatives which range in estimated cost from approximately $170 million to $250 million (net present value) for the least costly alternative to approximately $1.08 billion to $1.76 billion (net present value) for the most costly and estimates a range of two to 28 years to implement the remedial work, depending on the selected alternative. The draft FS does not determine who is responsible for remediation costs, define the precise cleanup boundaries or select remedies. The draft FS ~~will be~~is being reviewed, and may be subject to revisions prior to its approval, by the EPA. While the draft FS is an important step in the EPA’s development of a proposed plan for addressing the Site, a final decision on the nature and extent of the required remediation will occur only after the EPA has prepared a proposed plan for public review and issued a record of decision (“ROD”). Currently available information indicates that the EPA does not expect to issue its final ROD selecting a remedy for the Site until at least ~~2013.~~2014. Responsibility for implementing and funding EPA’s selected remedy will be determined in a separate allocation process.

Because there has not been a determination of the total cost of the investigations, the remediation that will be required, the amount of natural resource damages or how the costs of the ongoing investigations and any remedy and natural resource damages will be allocated among the PRPs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it is likely or reasonably possible that the Company may incur in connection with the Site, although such costs could be material to the Company’s financial position, results of operations, cash flows orand liquidity. Among the facts currently not known or available 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 the Site, 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 and remediation in connection with the Site, although there is no assurance that those policies will cover all of the costs which the Company may incur. The Company previously recorded a liability for its estimated share of the costs of the investigation of $1 million.

The Oregon Department of Environmental Quality is separately providing oversight of voluntary investigations by the Company involving the Company’s sites adjacent to the Portland Harbor which are focused on controlling any current “uplands” releases of contaminants into the Willamette River. No liabilities have been established in connection with these investigations because the extent of contamination (if any) and the Company’s responsibility for the contamination (if any) has not yet been determined.

Other MRB Sites

As of February ~~29, 2012~~28, 2013, the Company had environmental liabilities related to various MRB sites other than Portland Harbor of $2430 million. The liabilities relate to the potential future remediation of soil contamination, groundwater contamination and storm water runoff issues and were not individually material at any site. No material environmental compliance enforcement proceedings are currently pending related to these sites.



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Auto Parts Business ~~(“APB”)~~

As of February ~~29, 2012~~28, 2013, the Company had environmental liabilities related to various APB sites of $1519 million. The liabilities relate to the potential future remediation of soil contamination, groundwater contamination and storm water runoff issues and were not individually material at any site. No material environmental compliance enforcement proceedings are currently pending related to these sites.

Steel Manufacturing Business (“SMB”)

SMB’s electric arc furnace generates dust (“EAF dust”) that is classified as hazardous waste by the EPA because of its zinc and lead content. As a result, the Company captures the EAF dust and ships it in specialized rail cars to a domestic firm that applies a treatment that allows the EAF dust to be delisted as hazardous waste so it can be disposed of as a non-hazardous solid waste.

SMB has an operating permit issued under Title V of the Clean Air Act Amendments of 1990, which governs certain air quality standards. The permit is based on an annual production capacity of 950 thousand tons. The permit was first issued in 1998 and was renewed through March 1, 2012. The Company timely filed a renewal application, which allows for existing permit conditions to remain in force until the permit is renewed or a new permit is issued.

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

SMB had no environmental liabilities as of February ~~29, 2012~~28, 2013.

Other than the Portland Harbor Superfund site, which is discussed above, management currently believes that adequate provision has been made for the potential impact of these issues and that the ultimate outcomes will not have a material adverse effect on the Unaudited Condensed Consolidated Financial Statements of the Company as a whole. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material in any given period.

In addition, ~~we are~~the Company is party to various legal proceedings arising in the normal course of ~~our~~ business. ~~We do~~Management believes that adequate provisions have been made for these contingencies. The Company does not anticipate that the resolution of legal proceedings arising in the normal course of business will have a material adverse effect on ~~our business,~~its results of operations, financial condition, or cash flows.

Note 8 - Restructuring Charges

In the fourth quarter of fiscal 2012, the Company undertook a number of restructuring initiatives designed to extract greater synergies from the significant acquisitions and technology investments made in fiscal 2011, realign the Company’s organization to support its future growth and decrease operating expenses by streamlining functions and reducing organizational layers, including achieving greater synergies between MRB and APB. These initiatives are expected to be substantially implemented by the end of fiscal 2013.

The Company expects that total pre-tax charges pursuant to these restructuring initiatives will be approximately $13 million. Of this amount, $8 million were incurred through the second quarter of fiscal 2013, with the balance expected to be incurred by the end of fiscal 2013. The Company expects that the vast majority of the restructuring charges will require cash payments.

The following illustrates the reconciliation of the restructuring liability by major type of costs for the six months ended February 28, 2013 (in thousands):



	Balance as of August 31, 2012		Charges		Payments and Other			Balance as of February 28, 2013		Total Charges to Date		Total Expected Charges
Severance costs	$	2,477	$	1,055	$	(3,034	)	$	498	$	3,796	$	4,900
Contract termination costs	414		24		(193		)	245		464		3,500
Other exit costs	64		2,054		(1,750		)	368		3,885		4,200
Total	$	2,955	$	3,133	$	(4,977	)	$	1,111	$	8,145	$	12,600



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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restructuring charges by operating segment were as follows (in thousands):



	As of February 28, 2013
	Current Period Charges		Total Charges to Date		Total Expected Charges
Metals Recycling Business	$	610	$	2,270	$	3,000
Auto Parts Business	211		444		500
Unallocated (Corporate)	2,312		5,431		9,100
Total	$	3,133	$	8,145	$	12,600

Note 89 - Redeemable Noncontrolling Interest

In March 2011, the Company, through a wholly-owned acquisition subsidiary, acquired substantially all of the metals recycling business assets of Amix Salvage & Sales Ltd. As part of the purchase consideration, the Company issued the seller common shares equal to 20% of the issued and outstanding capital stock of the Company’s acquisition subsidiary. Under the terms of an agreement related to the acquisition, the noncontrolling interest holder has the right to require the Company to purchase its ~~20%~~interest in the Company’s acquisition subsidiary for fair value. The noncontrolling interest becomes redeemable within 60 days after the later of (i) the third anniversary of the date of the acquisition and (ii) the date on which certain principals of the minority shareholder are no longer employed by the Company. ~~The conditions for redemption of the noncontrolling interest had not been met as of~~ ~~February 29, 2012~~.

As of February ~~29, 2012~~28, 2013, the noncontrolling interest was 19% of the outstanding capital stock of the subsidiary and the conditions for redemption had not been met.

On March 8, 2013, the Company entered into an agreement with the noncontrolling interest holder for the purchase of all of the outstanding noncontrolling interest in the Company's subsidiary for $25 million. As of February 28, 2013, the noncontrolling interest was presented at its fair value of $25 million in the Condensed Consolidated Balance Sheets. The difference between the adjusted carrying value and the fair value of the ~~redeemable~~ noncontrolling interest was ~~$21 million. The Company estimates fair value using Level 3 inputs under the fair value hierarchy based on standard valuation techniques using~~recorded as a ~~discounted cash flow analysis. The determination of fair value requires management~~reduction to apply significant judgment in formulating estimates and assumptions. These estimates and assumptions primarily include forecasts of future cash flows based on management’s best estimate of future sales and operating costs; pricing expectations; capital expenditures; working capital requirements; discount rates; growth rates; tax rates; and general market conditions.retained earnings.

Following is a reconciliation of the changes in the redeemable noncontrolling interest for the six months ended February 28, 2013 and February 29, 2012 (in thousands):


	Fiscal 2012			2013			2012
Balance as of August 31, 2011	$	19,053
Balances - September 1 (Beginning of period)				$	22,248		$	19,053
Net loss attributable to noncontrolling interest	(198		)	(903		)	(198		)
Currency translation adjustment	217			(1,059		)	217
Capital contributions from noncontrolling interest holder	2,104			1,970			2,104
Balance as of February 29, 2012	$	21,176
Adjustment to fair value				2,504			—
Balances - February 28, 2013 and February 29, 2012 (End of period)				$	24,760		$	21,176

1114

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~



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Note 910 - Changes in Equity ~~and Comprehensive Income~~

The following is a summary of the changes in equity for the six months ended February 28, 2013and ~~comprehensive income~~February 29, 2012 (in thousands):


	Fiscal 2012									Fiscal 2011									Fiscal 2013									Fiscal 2012
	SSI shareholders’ equity			Noncontrolling interests			Total equity			SSI shareholders’ equity			Noncontrolling interests			Total equity			SSI Shareholders’ Equity			Noncontrolling Interests			Total Equity			SSI Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balances - September 1 (Beginning of period)	$	1,094,712		$	6,524		$	1,101,236		$	975,326		$	4,306		$	979,632		$	1,080,583		$	5,113		$	1,085,696		$	1,094,712		$	6,524		$	1,101,236
Net income⁽¹⁾	16,645			1,660			18,305			48,619			2,432			51,051			6,970			1,232			8,202			16,645			1,660			18,305
Other comprehensive income (loss), net of tax⁽²⁾	(2,151		)	—			(2,151		)	3,828			—			3,828
Other comprehensive loss, net of tax⁽²⁾																			(7,288		)	—			(7,288		)	(2,151		)	—			(2,151		)
Distributions to noncontrolling interests	—			(2,368		)	(2,368		)	—			(1,219		)	(1,219		)	—			(1,002		)	(1,002		)	—			(2,368		)	(2,368		)
Share repurchases	(3,117		)	—			(3,117		)	—			—			—			—			—			—			(3,117		)	—			(3,117		)
Restricted stock withheld for taxes	(840		)	—			(840		)	(1,880		)	—			(1,880		)	(1,161		)	—			(1,161		)	(840		)	—			(840		)
Stock options exercised	498			—			498			279			—			279
Stock option exercised																			300			—			300			498			—			498
Share-based compensation	6,271			—			6,271			6,692			—			6,692			7,156			—			7,156			6,271			—			6,271
Excess tax benefit (deficiency) from stock options exercised and restricted stock units vested	216			—			216			(299		)	—			(299		)
Cash dividends ($0.034 per share)	(927		)	—			(927		)	(936		)	—			(936		)
Balances - February 29, 2012 and February 28, 2011 (End of period)	$	1,111,307		$	5,816		$	1,117,123		$	1,031,629		$	5,519		$	1,037,148
Excess tax (deficiency) benefit from stock options exercised and restricted stock units vested																			(852		)	—			(852		)	216			—			216
Adjustments to fair value of redeemable noncontrolling interest																			(2,504		)	—			(2,504		)	—			—			—
Cash dividends ($0.376 and $0.034 per share)																			(9,915		)	—			(9,915		)	(927		)	—			(927		)
Balances - February 28, 2013 and February 29, 2012 (End of period)																			$	1,073,289		$	5,343		$	1,078,632		$	1,111,307		$	5,816		$	1,117,123

_____________________________

(1)

Net income attributable to noncontrolling interests for the six months ended February 28, 2013 and February 29, 2012 excludes a net ~~loss~~losses of $~~198~~(903) thousand and $(198) thousand, respectively, allocable to the redeemable noncontrolling interest, which is reported in the mezzanine section of the Unaudited Condensed Consolidated Balance Sheets. See Note 89 - Redeemable Noncontrolling Interest.

(2)

Other comprehensive ~~income (loss),~~loss, net of tax for the six months ended February 28, 2013 and February 29, 2012 excludes $~~(217)~~(1) million and $217 thousand, respectively, relating to foreign currency translation adjustments for the redeemable noncontrolling interest, which is reported in the mezzanine section of the Unaudited Condensed Consolidated Balance Sheets. See Note 89 - Redeemable Noncontrolling Interest.

~~SCHNITZER STEEL INDUSTRIES, INC.~~Note 11 - Accumulated Other Comprehensive Loss

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

The components of accumulated other comprehensive ~~income for the~~ ~~three and six~~ ~~months ended~~ ~~February 29, 2012~~ ~~and~~ ~~February 28, 2011~~ ~~were~~loss, net of tax, are as follows (in thousands):

Three Months Ended Six Months Ended
2/29/2012 2/28/2011 2/29/2012 2/28/2011
Net income $ 10,365
$ 32,134
$ 18,107
$ 51,051
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment⁽¹⁾
5,172
2,877
(2,529 ) 3,537
Change in net unrealized gain on cash flow hedges⁽²⁾
28
—
28
117
Pension obligations, net⁽³⁾
66
88
133
174
Other comprehensive income (loss), net of tax 5,266
2,965
(2,368 ) 3,828
Total comprehensive income 15,631
35,099
15,739
54,879
Less amounts attributable to noncontrolling interests:
Net income attributable to noncontrolling interests (735 ) (1,309 ) (1,462 ) (2,432 )
Foreign currency translation adjustment attributable to redeemable noncontrolling interest (669 ) —
217
—
Amounts attributable to noncontrolling interests: (1,404 ) (1,309 ) (1,245 ) (2,432 )
Comprehensive income attributable to SSI $ 14,227
$ 33,790
$ 14,494
$ 52,447

~~_____________________________~~


~~(1)~~	~~Net of tax expense (benefit) of~~ ~~$343 thousand~~, ~~$581 thousand~~, ~~$(125) thousand~~ ~~and~~ ~~$952 thousand~~ ~~for each respective period.~~


~~(2)~~	~~Net of tax expense of~~ ~~$16 thousand~~, ~~$0 thousand~~, ~~$16 thousand~~ ~~and~~ ~~$66 thousand~~ ~~for each respective period.~~


~~(3)~~	~~Net of tax expense of~~ ~~$39 thousand~~, ~~$52 thousand~~, ~~$78 thousand~~ ~~and~~ ~~$106 thousand~~ ~~for each respective period.~~



	February 28, 2013			August 31, 2012
Foreign currency translation adjustments	$	(4,178	)	$	3,658
Pension obligations, net	(5,580		)	(6,106		)
Cash flow hedges, net	(119		)	(141		)
Total accumulated other comprehensive loss	$	(9,877	)	$	(2,589	)

Note 1012 - Derivative Financial Instruments

Foreign Currency Exchange Rate Risk Management

To manage exposure to foreign exchange rate risk, the Company may enter into foreign currency forward contracts to stabilize the U.S. dollar amount of the transaction at settlement. When such contracts are not designated as hedging instruments for accounting purposes, the realized and unrealized gains and losses on settled and unsettled forward contracts measured at fair value are recognized as other income or expense in the Unaudited Condensed Consolidated Statements of Income.



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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company entered into forward contracts ~~during fiscal 2011~~ to mitigate exposure to exchange rate fluctuations on Euro-denominated fixed asset purchases, which were designated as qualifying cash flow hedges for accounting purposes. These foreign currency forward contracts are measured using forward exchange rates based on observable exchange rates quoted in an active market and are classified as a Level 12 fair value ~~measurement~~measurements under the fair value hierarchy. In the first quarter of fiscal 2012, the Company determined that ~~the~~certain forecasted ~~transaction was~~transactions were no longer probable, de-designated these contracts as hedges and subsequently terminated the contracts. The nominal amount and fair value of ~~these~~ forward contracts, the amounts reclassified from accumulated other comprehensive ~~income (loss)~~loss and the realized losses recorded in other income (expense), net ~~during the period~~ were not material to the Unaudited Condensed Consolidated Financial ~~Statements.~~Statements for all periods presented.

Note 1113 - ~~Share-based~~Share-Based Compensation

In the first quarter of fiscal ~~2012,~~2013, as part of the annual awards under the Company’s Long-Term Incentive Plan, the Compensation Committee granted ~~143,718~~209,639 restricted stock units (“RSU”) to its key employees and officers under the Company’s 1993 Stock Incentive Plan. The ~~majority of the~~ RSUs have a five~~-year~~ year term and vest 20% per year commencing June 1, ~~2012.~~2013. The ~~estimated~~ fair value of the RSUs granted is based on the market closing price of the underlying Class A common stock on the date of grant and totaled $6 million. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures.

In the second quarter of fiscal ~~2012,~~2013, the Company granted a deferred stock unit (“DSU”) award to each of its non-employee directors under the ~~Company’s Deferred Compensation Plan for Non-Employee Directors.~~Company's 1993 Stock Incentive Plan. John Carter, the ~~Company’s~~Company's Chairman, and Tamara Lundgren, President and Chief Executive Officer, receive compensation pursuant to their employment agreements and do not receive DSUs. One DSU gives the director the right to receive one share of Class A common stock at a future date. The grant included a total of ~~18,202~~29,167 shares that will vest on the day before the ~~Company’s 2013~~Company's 2014 annual meeting, subject to continued Board service. The total ~~fair~~ value of these awards was not material.

Note 1214 - Income Taxes

The effective tax rate for the Company’s ~~continuing~~ operations for the three and six months ended February ~~29, 2012~~28, 2013 was ~~31.5%~~2.7% and 14.2% compared to ~~32.9%~~ ~~and~~ ~~32.8%~~31.5% for the three and six months ended February 29, ~~February 28, 2011~~2012, respectively.

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

A reconciliation of the difference between the federal statutory rate and the Company’s effective rate is as follows:


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	2/29/2012		2/28/2011		2/29/2012		2/28/2011		2/28/2013		2/29/2012		2/28/2013		2/29/2012
Federal statutory rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
State taxes, net of credits	(3.7	)	1.0		(1.5	)	1.0		(0.5	)	(3.7	)	(1.0	)	(1.5	)
Foreign income taxed at different rates	0.2		(2.1	)	(0.6	)	(1.7	)	0.6		0.2		0.7		(0.6	)
Section 199 deduction	(1.2	)	(0.6	)	(1.4	)	(0.9	)	(11.9	)	(1.2	)	(12.9	)	(1.4	)
Non-deductible officers’ compensation	0.9		0.3		0.8		0.3		0.5		0.9		0.6		0.8
Noncontrolling interests	(2.3	)	(0.9	)	(2.2	)	(1.1	)	(2.2	)	(2.3	)	(5.1	)	(2.2	)
Research and development credits									(2.2	)	—		(3.6	)	—
Valuation allowance on deferred tax assets									(16.8	)	—		—		—
Foreign interest income	2.0		—		1.2		—		—		2.0		—		1.2
Other	0.6		0.2		0.2		0.2		0.2		0.6		0.5		0.2
Effective tax rate	31.5	%	32.9	%	31.5	%	32.8	%	2.7	%	31.5	%	14.2	%	31.5	%

In the second quarter of fiscal 2013, the Company released a valuation allowance on deferred tax assets of a foreign subsidiary and recorded a benefit of $2 million. The release was attributable to a change in the Company's facts and circumstances with respect to the feasibility of implementing a change in the Company's foreign subsidiaries' operating structure which will allow the Company to rely on future forecasted taxable income and conclude that the deferred tax assets will more-likely-than-not be realized. The new structure is expected to enable the Company to realize further synergies between its Metals Recycling and Auto Parts operations and will also result in a combined tax reporting entity which will allow recently generated taxable losses at the foreign subsidiary to offset income at a currently profitable foreign entity, thus allowing for expected realization of deferred tax assets. The new operating structure is currently being implemented and is expected to be in place in the fourth quarter of fiscal 2013. The valuation allowance had been recognized in the first quarter of fiscal 2013 as a result of negative evidence, including recent losses at the subsidiary, outweighing the more subjective positive evidence, thus indicating that at that time it was more likely than not



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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

that the associated tax benefit would not be realized. During the second quarter of fiscal 2013, the Company's ability to control the implementation of the new foreign entity operating structure increased, including by virtue of an agreement to purchase the noncontrolling interests in a foreign subsidiary which was completed on March 8, 2013. In the second quarter of fiscal 2013 the Company also recognized a tax benefit of $1 million related to increased domestic production activities deductions and research and development credits.

The Company files federal and state income tax returns in the U.S. and foreign tax returns in Puerto Rico and Canada. The federal statute of limitations has expired for fiscal ~~2007~~2009 and prior years. The ~~Internal Revenue Service is currently examining the Company’s federal income tax returns for fiscal years 2009 and 2010, and~~ Canadian and several state tax authorities are currently examining returns for fiscal years 2005 to 2009.

Note 1315 - Net Income Per Share

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


	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	2/29/2012			2/28/2011			2/29/2012			2/28/2011			2/28/2013			2/29/2012			2/28/2013			2/29/2012
Income from continuing operations	$	10,365		$	32,123		$	18,107		$	51,017
Net income													$	8,743		$	10,365		$	7,299		$	18,107
Net income attributable to noncontrolling interests	(735		)	(1,309		)	(1,462		)	(2,432		)	(100		)	(735		)	(329		)	(1,462		)
Income from continuing operations attributable to SSI	9,630			30,814			16,645			48,585
Income from discontinued operations, net of tax	—			11			—			34
Net income attributable to SSI	$	9,630		$	30,825		$	16,645		$	48,619		$	8,643		$	9,630		$	6,970		$	16,645
Computation of shares:
Weighted average common shares outstanding, basic	27,509			27,627			27,480			27,595			26,640			27,509			26,597			27,480
Incremental common shares attributable to dilutive stock options, performance share awards, DSUs and RSUs	272			317			254			323			141			272			154			254
Weighted average common shares outstanding, diluted	27,781			27,944			27,734			27,918			26,781			27,781			26,751			27,734

Common stock equivalent shares of ~~57,364~~599,184 and ~~92,107~~622,664 were considered antidilutive and were excluded from the calculation of diluted net income per share for the three and six months ended February ~~29, 2012~~28, 2013, respectively, compared to ~~27,194~~57,364 and ~~48,678~~92,107 common stock equivalent shares, ~~respectively,~~ for the three and six ~~months~~ ended February 29, ~~February 28, 2011~~2012., respectively.

Note 1416 - Related Party Transactions

The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $6 million and $13 million for the three months ended February ~~29, 2012~~28, 2013 and February 29, ~~February 28, 2011~~2012, respectively, and $12 million and $23 million for the six months ended February ~~29, 2012~~28, 2013 and February 29, ~~February 28, 2011~~2012., respectively. Advances to these joint ventures were$1 million for the three months ended February 28, 2013 and February 29, 2012, and $1 million and less than $1 million for the ~~three~~ ~~months ended~~ ~~February 29, 2012~~ ~~and~~ ~~February 28, 2011, respectively, and less than~~ ~~$1 million~~ ~~and~~ ~~$1 million~~ ~~for the~~ six months ended February ~~29, 2012~~28, 2013 and February 29, ~~February 28, 2011~~2012, respectively. The Company owed$1 million and $2 million to joint ventures as of February ~~29, 2012~~28, 2013 and August 31, ~~2011~~2012., respectively.

In November 2010, the Company and a joint venture partner entered into a series of agreements to facilitate the expansion of their joint venture operations in order to increase the flow of scrap into MRB yards. In order to fund this growth, the Company and its joint venture partner each contributed an additional ~~$2 million~~ ~~in equity to the joint venture.~~

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

In connection with the acquisition of the metals recycling business assets of Amix Salvage & Sales Ltd., in March 2011, the Company entered into a series of agreements to obtain barging and other services and lease property with entities owned by the minority shareholder of the Company’s subsidiary that operates its MRB facilities in Vancouver, British Columbia and Alberta, Canada. The Company paid $2 million ~~and~~ ~~$5 million~~, primarily for barging services, under these agreements for the three months ended February 28, 2013, and February 29, 2012, and $4 million and $5 million for the six months ended February 28, 2013 and February 29, 2012, respectively. Amounts payable to entities affiliated with this minority shareholder were less than $21 million as of February ~~29,~~28, 2013 and August 31, 2012. As of March 8, 2013, Amix Salvage & Sales Ltd. and affiliated entities are no longer a related party due to the purchase of all of the outstanding noncontrolling interest as discussed in Note 18 - Subsequent Event.

In connection with the acquisition of a ~~purchase price adjustment.~~metals recycling business in fiscal 2011, the Company entered into an agreement with the selling parties, one of which is an employee of the Company, whereby the selling parties agreed to indemnify the Company for property improvements in excess of a contractually defined threshold on property owned by the selling parties and leased to the Company. The Company recognized an amount receivable from the selling parties of $1 million as of August 31, 2012 under the agreement, for which payment was received in the first quarter of fiscal 2013.

Thomas D. Klauer, Jr., President of the Company’s Auto Parts Business, is the sole shareholder of a corporation that is the 25% minority partner in a partnership in which the Company is the 75% partner and which operates ~~four~~five self-service stores in Northern



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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

California. Mr. Klauer’s 25% share of the profits of this partnership totaled less than $1 million ~~and~~ ~~$1 million~~for the three months ended February ~~29, 2012~~28, 2013 and February 29, ~~February 28, 2011~~2012, ~~respectively,~~ and $1 million for the six months ended February ~~29, 2012~~28, 2013 and February 29, ~~February 28, 2011~~2012. The ~~Company and a company owned by~~partnership leases properties from entities in which Mr. Klauer ~~jointly own the real property at one of these stores, which is leased to the partnership. Mr. Klauer’s share of the annual rent paid by the partnership is less than~~ ~~$1 million. The term of this lease expires~~has ownership interests under agreements that expire in December 2015~~, and the partnership has the option~~ with options to renew the ~~lease,~~leases, upon ~~its~~ expiration, for multiple ~~five-year~~five-year periods. Rent under the lease is adjusted annually based on the Consumer Price Index. The partnership also leases property owned by Mr. Klauer, through a company of which he is the sole shareholder. The term of this lease expires in ~~December 2015, and the partnership has the option to renew the lease, upon its expiration, for multiple~~ ~~five-year periods. Rent under the lease is adjusted annually based on the Consumer Price Index.~~ The rent paid by the partnership to the entities in which Mr. ~~Klauer’s company for this parcel~~Klauer has ownership interests was less than $1 million for ~~each of~~ the three months ended February 28, 2013 and February 29, 2012, and less than $1 million for the six months ended February ~~29, 2012~~28, 2013 and ~~February 28, 2011. In addition, in~~ ~~July 2011, the Company leased a parcel of land in San Jose from a company of which Mr. Klauer is the sole shareholder. The initial term of this lease expired on~~ ~~January 31, 2012, and the Company exercised its option to renew the lease through~~ ~~July 31, 2012. The rent paid to Mr. Klauer’s company for the~~ ~~three and six~~ ~~months ended~~ February 29, ~~2012~~ ~~was less than~~ ~~$1 million~~2012.

Certain members of the Schnitzer family own significant interests in, or are related to owners of, MMGL Corp (“MMGL”, formerly known as Schnitzer Investment Corp. ~~(“SIC”~~), which is engaged in the real estate business and was a subsidiary of the Company prior to 1989. ~~SIC~~MMGL is considered a related party for financial reporting purposes. The Company and ~~SIC~~MMGL are both potentially responsible parties with respect to Portland Harbor, which has been designated as a Superfund site since December 2000. The Company and ~~SIC~~MMGL have worked together in response to Portland Harbor matters, and the Company has paid all of the legal and consulting fees for the joint defense, in part due to its environmental indemnity obligation to ~~SIC~~MMGL with respect to the Portland scrap metal operations property. ~~As these costs have increased substantially in the last two years, the~~The Company and ~~SIC~~MMGL have agreed to an equitable cost sharing arrangement with respect to defense costs under which ~~SIC~~MMGL will pay 50% of the legal and consulting costs, net of insurance recoveries. The amounts receivable from (payable to) ~~SIC~~MMGL vary from period to period because of the timing of incurring legal and consulting fees, payments for cost reimbursements and insurance recoveries. ~~As of~~ ~~February 29, 2012, amounts payable to SIC~~Amounts receivable from MMGL under this agreement were less than $1 million~~, compared to amounts receivable from SIC of less than~~ ~~$1 million~~ as of February 28, 2013 and August 31, ~~2011~~2012.

Note 1517 - Segment Information

The accounting standards for reporting information about operating segments define operating segments as components of an enterprise ~~about~~that engages in business activities from which ~~separate~~it may earn revenues and incur expenses and 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 chief operating decision maker is the Chief Executive Officer. The Company is organized by line of business. While the Chief Executive Officer evaluates results in a number of different ways, the line of business management structure is the primary basis for which the allocation of resources and financial results are assessed. Under the aforementioned criteria, the Company operates in three operating and reporting segments: metal purchasing, processing, recycling and selling (MRB), used auto parts (APB) and mini-mill steel manufacturing (SMB). Additionally, the Company is a noncontrolling partner in joint ventures, which are either in the metals recycling business or are suppliers of unprocessed metal.

MRB buys and processes ferrous and nonferrous metal for sale to foreign and other domestic steel producers or their representatives and to SMB. MRB also purchases ferrous metal from other processors for shipment directly to SMB.

APB purchases used and salvaged vehicles, sells parts from those vehicles through its retail facilities and wholesale operations, and sells the remaining portion of the vehicles to metal recyclers, including MRB.

SMB operates a steel mini-mill that produces a wide range of finished steel products using recycled metal and other raw materials.

Intersegment sales from MRB to SMB are made at rates that approximate export market prices for shipments from the West Coast of the U.S. In addition, the Company has intersegment sales of autobodies from APB to MRB at rates that approximate market prices. These intercompany sales tend to produce intercompany profits which are not recognized until the finished products are ultimately sold to third parties.

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

The information provided below is obtained from internal information that is provided to the Company’s chief operating decision maker for the purpose of corporate management. The Company uses operating income ~~(loss)~~ to measure segment performance. The Company does not allocate corporate interest income and expense, income taxes, other income and expenses related to corporate activity or corporate expense for management and administrative services that benefit all three segments. In addition, the Company does not allocate restructuring charges to the segment operating income because management does not include this information in its measurement of the performance of the operating segments. Because of this unallocated income and expense, the operating income ~~(loss)~~ of each reporting segment does not reflect the operating income ~~(loss)~~ the reporting segment would ~~have~~report as a stand-alone business. ~~All amounts presented exclude the results of operations of the Company’s discontinued full-service used auto parts operation.~~



Table of Contents	SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The table below illustrates the Company’s operating results ~~from continuing operations~~ by reporting segment (in thousands):


	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	2/29/2012			2/28/2011			2/29/2012			2/28/2011			2/28/2013			2/29/2012			2/28/2013			2/29/2012
Revenues:
Metals Recycling Business:
Revenues	$	781,933		$	637,028		$	1,510,371		$	1,228,736		$	576,191		$	781,933		$	1,070,652		$	1,510,371
Less: Intersegment revenues	(39,986		)	(39,049		)	(98,700		)	(70,758		)	(42,461		)	(39,986		)	(89,717		)	(98,700		)
MRB external customer revenues	741,947			597,979			1,411,671			1,157,978			533,730			741,947			980,935			1,411,671
Auto Parts Business:
Revenues	78,232			72,533			162,285			139,214			78,082			78,232			147,637			162,285
Less: Intersegment revenues	(18,090		)	(18,738		)	(39,593		)	(33,949		)	(20,849		)	(18,090		)	(36,818		)	(39,593		)
APB external customer revenues	60,142			53,795			122,692			105,265			57,233			60,142			110,819			122,692
Steel Manufacturing Business:
Revenues	84,523			70,068			164,424			133,703			71,247			84,523			163,276			164,424
Total revenues	$	886,612		$	721,842		$	1,698,787		$	1,396,946		$	662,210		$	886,612		$	1,255,030		$	1,698,787

The table below illustrates the reconciliation of the Company’s segment operating income ~~(loss)~~ to income ~~from continuing operations~~ before income taxes (in thousands):


	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	2/29/2012			2/28/2011			2/29/2012			2/28/2011			2/28/2013			2/29/2012			2/28/2013			2/29/2012
Metals Recycling Business	$	19,952		$	41,691		$	33,051		$	67,225		$	14,158		$	19,952		$	19,812		$	33,051
Auto Parts Business	8,708			15,957			19,150			29,996			6,711			8,708			13,075			19,150
Steel Manufacturing Business	(868		)	(711		)	349			(2,746		)	1,041			(868		)	4,445			349
Segment operating income	27,792			56,937			52,550			94,475			21,910			27,792			37,332			52,550
Restructuring charges													(1,540		)	—			(3,133		)	—
Corporate and eliminations	(9,805		)	(11,000		)	(19,595		)	(20,098		)	(8,980		)	(9,805		)	(21,595		)	(19,595		)
Operating income	17,987			45,937			32,955			74,377			11,390			17,987			12,604			32,955
Other income (expense)	(2,855		)	1,931			(6,520		)	1,549
Income from continuing operations before income taxes	$	15,132		$	47,868		$	26,435		$	75,926
Interest expense													(2,354		)	(3,472		)	(4,371		)	(6,743		)
Other income (expense), net													(49		)	617			271			223
Income before income taxes													$	8,987		$	15,132		$	8,504		$	26,435

The following is a summary of the Company’s total assets by reporting segment (in thousands):


	February 29, 2012			August 31, 2011			February 28, 2013			August 31, 2012
Metals Recycling Business⁽¹⁾	$	1,658,143		$	1,668,778		$	1,699,320		$	1,696,296
Auto Parts Business	319,665			304,060			350,299			329,327
Steel Manufacturing Business	324,247			324,596			327,972			322,398
Total segment assets	2,302,055			2,297,434			2,377,591			2,348,021
Corporate and eliminations	(428,268		)	(407,265		)	(570,161		)	(584,448		)
Total assets	$	1,873,787		$	1,890,169		$	1,807,430		$	1,763,573

_____________________________


(1)	MRB total assets include $1816 million and $17 million as of February ~~29, 2012~~28, 2013 and August 31, ~~2011,~~2012, respectively, for investments in joint venture partnerships.

Note 18 - Subsequent Event

On March 8, 2013, the Company entered into an agreement with the noncontrolling interest holder and purchased all of the outstanding redeemable noncontrolling interest for $25 million. See Note 9 - Redeemable Noncontrolling Interest for further detail.

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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 six months ended February ~~29, 2012~~28, 2013 and February 29, ~~February 28, 2011~~2012. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, ~~2011~~2012 and the Unaudited Condensed Consolidated Financial Statements and the related Notes thereto included in Part I, Item 1 of this report.

Forward-Looking Statements

Statements and information included in this Quarterly Report on Form 10-Q by Schnitzer Steel Industries, Inc. (the “Company”) 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” and “SSI” refer to the Company and its consolidated subsidiaries.

Forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding our expectations, intentions, beliefs and strategies regarding the future, including statements regarding trends, cyclicality and changes in the markets we sell into; strategic direction; changes to manufacturing and production processes; the cost of compliance with environmental and other laws; expected tax rates, deductions and credits; the realization of deferred tax assets; planned capital expenditures; liquidity positions; ability to generate cash from ~~continuing~~ operations; the potential impact of adopting new accounting pronouncements; expected results, including pricing, sales volumes and profitability; obligations under our retirement plans; savings or additional costs from business realignment and cost containment programs; and the adequacy of accruals.

When used in this report, the words “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “could,” “opinions,” “forecasts,” “future,” “forward,” “potential,” “probable,” “plan,” and similar expressions are intended to identify forward-looking statements.

We may make other forward-looking statements from time to time, including in press releases and 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 in our Annual Report on Form 10-K for the year ended August 31, ~~2011.~~2012. Examples of these risks include: potential environmental cleanup costs related to the Portland Harbor Superfund site; the impact of general economic conditions; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials we purchase; difficulties associated with acquisitions and integration of acquired businesses; the impact of goodwill impairment charges; the realization of expected cost reductions related to restructuring initiatives; the inability of customers to fulfill their contractual obligations; the impact of foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under our bank credit agreement; the impact of the consolidation in the steel industry; the impact of imports of foreign steel into the U.S.; inability to realize expected benefits from investments in technology; freight rates and availability of transportation; product liability claims; costs associated with compliance with environmental regulations; the adverse impact of climate change; inability to obtain or renew business licenses and permits; compliance with greenhouse gas emission regulations; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.

General

Founded in 1906, Schnitzer Steel Industries, Inc., an Oregon corporation, is one of the nation’s largest recyclers of ferrous and nonferrous scrap metal, a leading recycler of used and salvaged vehicles and a manufacturer of finished steel products.

We operate in three reporting segments: the Metals Recycling Business (“MRB”), the Auto Parts Business (“APB”) and the Steel Manufacturing Business (“SMB”), ~~that~~which collectively provide an end-of-life cycle solution for a variety of products through our integrated businesses. We use operating income ~~(loss)~~ to measure our segments’ performance. Restructuring charges are not allocated to segment operating income because we do not include this information in our measurement of the segments’ performance. Corporate expense consists primarily of unallocated expense for management and administrative services that benefit all three reporting segments. As a result of this unallocated expense, the operating income ~~(loss)~~ of each reporting segment does not reflect the operating income ~~(loss)~~ the reporting segment would ~~have~~report as a stand-alone business. For further information regarding our reporting



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segments, see Note 1517 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic ~~markets.~~markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. Our deep water port facilities on both the East and West coasts of the U.S. (in Everett, Massachusetts; Providence, Rhode Island; Oakland, California; Portland,

~~SCHNITZER STEEL INDUSTRIES, INC.~~

Oregon; and Tacoma, ~~Washington; and Providence, Rhode Island)~~Washington) and access to public deep water port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) allow us to efficiently meet the global demand for recycled and processed ferrous ~~scrap~~ metal by shipping bulk cargoes to steel manufacturers located in Europe, Asia, Central America and Africa. Our exports of ~~nonferrous~~recycled and processed ~~scrap~~nonferrous 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 and wire and cable producers globally. We also transport both ferrous and nonferrous metals by truck and rail 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. ~~In particular, our processing facilities in the Southeastern U.S. also provide efficient access to the automobile and steel manufacturing industries in that region.~~

Executive Overview of Financial Results for the Second Quarter of Fiscal ~~2012~~2013

~~In the~~ ~~second~~ ~~quarter of fiscal~~ ~~2012, we~~We generated consolidated revenues of $~~887~~662 million~~, an increase of~~ ~~23%~~ ~~from the~~ ~~$722 million~~ ~~of revenues achieved~~ in the second quarter of fiscal ~~2011~~2013~~. The increase~~, a decrease of 25% from the $887 million of revenues in the second quarter of fiscal 2012. This decrease was primarily due to ~~higher~~lower ferrous and nonferrous sales volumes ~~achieved by each~~and average ferrous net selling prices as a result of ~~our segments~~weak economic conditions that negatively impacted global demand for recycled metal. In addition, sluggish U.S. economic growth and ~~incremental revenues from fiscal 2011 acquisitions~~the lower price environment adversely impacted the supply of ~~$33 million~~.scrap metal.

~~Operating~~Although financial performance improved significantly from the preceding quarter, operating income ~~for~~in the second quarter ~~decreased by~~of fiscal 2013 of $2811 million, orincluding restructuring charges of ~~61%~~$2 million, towas lower than operating income of $18 million ~~when compared with~~in the prior year quarter. ~~Our results were adversely impacted by~~Selling prices of recycled ferrous metal declined sharply at the ~~significant market volatility~~beginning of fiscal 2013 as a result of softening demand and, ~~rapid decline~~despite a slight increase in ~~selling prices that occurred~~the second quarter, remained substantially lower than in the prior year quarter. Although sales volumes increased sequentially from the first quarter of fiscal ~~2012~~2013, the weaker economic conditions and constrained supply of raw materials in our domestic market caused ~~mainly by an escalation in the European financial crisis. The carry over effect of these weaker conditions resulted~~purchase costs for scrap metal to decrease at a slower pace than average net selling prices resulting in a compression of operating margins ~~on shipments made in the early part of~~compared to the second quarter of fiscal 2012. ~~While selling prices rebounded~~In addition, compared to the prior year quarter operating results in the second quarter ~~compared~~of fiscal 2013 were negatively impacted at MRB by the reduction in volumes due to softer global demand and the constrained supply of raw materials, and at APB by $2 million of operating losses, including transaction, integration and startup costs, related to the ~~first quarter’s trough, they fluctuated due to cautious customer demand. The impact of~~store locations acquired or under development during the quarter.

Operating income benefited from a ~~weak market environment together with the effect of mild winter weather conditions~~reduction in the U.S., which eased customer concerns regarding availability of materials for sale, contributed to continuing softness in selling prices. As a result, operating margins of both MRB and APB declined from the prior year. In addition, selling, general and administrative (“SG&A”) expenses ~~increased by $8~~of $4 million, or ~~19%~~7%, ~~primarily due~~compared to the ~~absence~~second quarter of fiscal 2012 primarily as a result of the restructuring initiatives and other operating efficiencies initiated in fiscal 2012. This was partially offset by increased SG&A expenses at APB related to the ~~current year of $6 million of favorable customer contract settlements that were recorded~~acquisitions completed in the second quarter of fiscal ~~2011.~~2013 and higher incentive compensation expense compared to the prior year quarter. Net income attributable to SSI of $9 million, or $0.32 per diluted share, in the second quarter of fiscal 2013 included a tax benefit of $3 million, or $0.10 per diluted share, associated with the release of a valuation allowance on deferred tax assets of a foreign subsidiary which had been recorded in the first quarter of fiscal 2013 and certain tax deductions and credits.

In the second quarter, we made further progress on our growth strategy through the acquisition of eight stores and the commencement of the development of two greenfield store locations in our Auto Parts Business. In the Metals Recycling Business, testing of our new shredder in Surrey, British Columbia, was successfully completed and the shredder became operational in the third quarter of fiscal 2013. In addition, on March 8, 2013 we acquired the redeemable noncontrolling interest in one of MRB's Canadian subsidiaries for consideration of $25 million.

The following items summarize our consolidated financial results for the second quarter of fiscal ~~2012~~2013:

Revenues of $~~887~~662 million, compared to $~~722~~887 million in the second quarter of fiscal ~~2011~~2012;

Operating income of $1811 million, compared to operating income of $4618 million in the second quarter of fiscal ~~2011~~2012;

Net income attributable to SSI of $9 million, or $0.32 per diluted share, compared to $10 million, or $0.35 per diluted share, ~~(diluted), compared to~~ ~~$31 million, or~~ ~~$1.10~~ ~~per share (diluted),~~ in the second quarter of fiscal ~~2011~~2012;

Net cash used in operating activities of $44 million in the first six months of fiscal 2013, compared to net cash provided by operating activities of $41 million in the ~~first six months~~second quarter of fiscal ~~2012, compared to~~ ~~$20 million~~ ~~in the prior year;~~2012; and

Debt, net of cash, of $~~362~~367 million as of February ~~29, 2012~~28, 2013, compared to $~~354~~245 million as of August 31, ~~2011~~2012 (see the reconciliation of Debt, net of cash in Non-GAAP Financial Measures at the end of this Item 2).



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The following items highlight the financial results for our operating segments for the second quarter of fiscal ~~2012:~~2013:

MRB revenues and operating income of $576 million and $14 million, respectively, compared to $782 million and $20 million~~, respectively, compared to~~ ~~$637 million~~ ~~and~~ ~~$42 million~~ in the second quarter of fiscal ~~2011,~~2012, respectively;

APB revenues and operating income of $78 million and $97 million, respectively, compared to $7378 million and $169 million in the second quarter of fiscal ~~2011,~~2012, respectively; and

SMB revenues and operating ~~loss~~income of$71 million and $1 million, respectively, compared to $85 million and $(1) million~~, respectively, compared to~~ ~~$70 million~~ ~~and~~ ~~$(1) million~~ in the second quarter of fiscal ~~2011,~~2012, respectively.

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~~SCHNITZER STEEL INDUSTRIES, INC.~~



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Results of Operations


	Three Months Ended								Six Months Ended								Three Months Ended								Six Months Ended
($ in thousands)	2/29/2012			2/28/2011			% Change		2/29/2012			2/28/2011			% Change		2/28/2013			2/29/2012			% Change		2/28/2013			2/29/2012			% Change
Revenues:
Metals Recycling Business	$	781,933		$	637,028		23	%	$	1,510,371		$	1,228,736		23	%	$	576,191		$	781,933		(26	)%	$	1,070,652		$	1,510,371		(29	)%
Auto Parts Business	78,232			72,533			8	%	162,285			139,214			17	%	78,082			78,232			—	%	147,637			162,285			(9	)%
Steel Manufacturing Business	84,523			70,068			21	%	164,424			133,703			23	%	71,247			84,523			(16	)%	163,276			164,424			(1	)%
Intercompany revenue eliminations⁽¹⁾	(58,076		)	(57,787		)	1	%	(138,293		)	(104,707		)	32	%	(63,310		)	(58,076		)	9	%	(126,535		)	(138,293		)	(9	)%
Total revenues	886,612			721,842			23	%	1,698,787			1,396,946			22	%	662,210			886,612			(25	)%	1,255,030			1,698,787			(26	)%
Cost of goods sold:
Metals Recycling Business	735,844			577,363			27	%	1,422,300			1,123,051			27	%	538,230			735,844			(27	)%	1,004,817			1,422,300			(29	)%
Auto Parts Business	55,562			44,410			25	%	115,021			85,639			34	%	57,529			55,562			4	%	107,573			115,021			(6	)%
Steel Manufacturing Business	83,576			68,955			21	%	160,581			133,173			21	%	68,320			83,576			(18	)%	155,264			160,581			(3	)%
Intercompany cost of goods sold eliminations⁽¹⁾	(57,895		)	(57,872		)	—	%	(138,599		)	(106,461		)	30	%	(63,293		)	(57,895		)	9	%	(124,984		)	(138,599		)	(10	)%
Total cost of goods sold	817,087			632,856			29	%	1,559,303			1,235,402			26	%	600,786			817,087			(26	)%	1,142,670			1,559,303			(27	)%
SG&A expense:
Selling, general and administrative expense:
Metals Recycling Business	27,004			18,943			43	%	56,869			40,390			41	%	24,090			27,004			(11	)%	46,263			56,869			(19	)%
Auto Parts Business	13,962			12,166			15	%	28,114			23,579			19	%	13,842			13,962			(1	)%	26,989			28,114			(4	)%
Steel Manufacturing Business	1,815			1,824			—	%	3,494			3,276			7	%	1,886			1,815			4	%	3,567			3,494			2	%
Corporate⁽²⁾	9,589			11,100			(14	)%	19,885			21,663			(8	)%	8,942			9,589			(7	)%	19,935			19,885			—	%
Total SG&A expense	52,370			44,033			19	%	108,362			88,908			22	%
Total selling, general and administrative expense																	48,760			52,370			(7	)%	96,754			108,362			(11	)%
Income from joint ventures:
Metals Recycling Business	(867		)	(969		)	(11	)%	(1,849		)	(1,930		)	(4	)%	(287		)	(867		)	(67	)%	(240		)	(1,849		)	(87	)%
Change in intercompany profit elimination⁽³⁾	35			(15		)	NM		16			189			(92	)%	21			35			(40	)%	109			16			581	%
Total joint venture income	(832		)	(984		)	(15	)%	(1,833		)	(1,741		)	5	%
Total income from joint ventures																	(266		)	(832		)	(68	)%	(131		)	(1,833		)	(93	)%
Operating income (loss):
Metals Recycling Business	19,952			41,691			(52	)%	33,051			67,225			(51	)%	14,158			19,952			(29	)%	19,812			33,051			(40	)%
Auto Parts Business	8,708			15,957			(45	)%	19,150			29,996			(36	)%	6,711			8,708			(23	)%	13,075			19,150			(32	)%
Steel Manufacturing Business	(868		)	(711		)	22	%	349			(2,746		)	NM		1,041			(868		)	NM		4,445			349			1,174	%
Corporate expense	(9,589		)	(11,100		)	(14	)%	(19,885		)	(21,663		)	(8	)%
Change in intercompany profit elimination⁽⁴⁾	(216		)	100			NM		290			1,565			(81	)%
Segment operating income																	21,910			27,792			(21	)%	37,332			52,550			(29	)%
Restructuring charges⁽⁴⁾																	(1,540		)	—			NM		(3,133		)	—			NM
Corporate expense⁽²⁾																	(8,942		)	(9,589		)	(7	)%	(19,935		)	(19,885		)	—	%
Change in intercompany profit elimination⁽⁵⁾																	(38		)	(216		)	NM		(1,660		)	290			NM
Total operating income	$	17,987		$	45,937		(61	)%	$	32,955		$	74,377		(56	)%	$	11,390		$	17,987		(37	)%	$	12,604		$	32,955		(62	)%

_____________________________

NM = Not Meaningful


(1)	MRB sells ferrous recycled ~~ferrous~~ metal to SMB at rates per ton that approximate West Coast U.S. export market prices. In addition, APB sells ~~auto bodies~~ferrous and nonferrous material to MRB. These intercompany revenues and cost of goods sold are eliminated in consolidation.


(2)	Corporate expense consists primarily of unallocated expenses for services that benefit all three reporting segments. As a consequence of this unallocated expense, the operating income of each segment does not reflect the operating income the segment would have as a stand-alone business.

(3)

The joint ventures sell recycled ~~ferrous~~ metal to MRB and then subsequently to SMB at rates per ton that approximate West Coast U.S. export market prices. Consequently, these intercompany revenues produce intercompany operating income (loss), which is not recognized until the finished products are sold to third parties; therefore, intercompany profit is eliminated while the products remain in inventory.


(4)	Restructuring charges consist of expense for severance, contract termination and other exit costs that management does not include in its measurement of the performance of the operating segments.


(5)	Intercompany profits are not recognized until the finished products are sold to third parties; therefore, intercompany profit is eliminated while the products remain in inventory.



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Revenues

Consolidated revenues in ~~the second quarter and first six months of fiscal 2012 were~~ ~~$887 million~~ ~~and~~ ~~$1.7 billion, respectively, an increase of~~ ~~23%~~ ~~and~~ ~~22%~~, respectively, compared to the same periods in the prior year. The increase in consolidated revenues was primarily due to higher sales volumes in each of our segments mainly as a result of fiscal 2011 acquisitions, increased recycled metal collection activity and improved recovery of nonferrous materials through enhanced processing technologies at MRB. In

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~addition, after experiencing a period of steady growth throughout most of fiscal 2011, average net selling prices for ferrous recycled metal were~~ ~~11%~~ higher for the six months ended February 29, 2012 compared to the prior year period despite the significant pricing decline that occurred in the first quarter of fiscal 2012. Incremental revenues from third party sales generated by fiscal 2011 acquisitions were ~~$33 million~~ ~~and~~ ~~$63 million~~ ~~for~~ the second quarter and first six months of fiscal ~~2012, respectively.~~2013 were $662 million and $1.3 billion, respectively, a decrease of 25% and 26% compared to the same periods in the prior year. The decrease was primarily due to lower ferrous and nonferrous sales volumes and lower ferrous average net selling prices due to softer global demand for recycled metal resulting from weaker global economic conditions. In addition, the sluggish U.S. economic growth and the lower price environment adversely impacted the supply of scrap metal compared to the prior year periods and contributed to the lower sales volumes.

Operating Income

Consolidated operating income in the second quarter and first six months of fiscal ~~2012~~2013 was$11 million and $13 million, respectively, a decrease of 37% and 62%, compared to operating income of $18 million and $33 million~~, respectively,~~ in the same periods in the prior year. Selling prices of recycled ferrous metal declined sharply at the beginning of fiscal 2013 as a result of softening demand, and despite a slight increase in the second quarter, remained substantially lower than in the prior year period. The weak economic conditions and constrained supply of raw materials in our domestic market caused purchase costs for scrap metal, including end-of-life vehicles, to decrease at a slower pace than average net selling prices resulting in a further compression of operating margins compared to the prior year periods. Operating results at MRB were also negatively impacted by the reduction in volumes due to the constrained supply of raw materials compared to the prior year periods. In addition, operating results included ~~61%~~$2 million of operating losses at APB, including transaction, integration and ~~56%, respectively,~~startup costs, related to the store locations acquired or under development during the second quarter of fiscal 2013. These decreases were partially offset by an increase in operating income at SMB primarily as a result of increased operating margins from reduced raw material costs compared to the same periods in the prior year.

~~Despite the increase in sales volumes achieved by each of our segments compared to the same periods in~~ While the prior year ~~consolidated~~periods also experienced declining selling prices for recycled metals, operating ~~income~~results for MRB and APB for the second quarter and first six months of fiscal 2012 ~~decreased~~benefited from higher sales volumes and higher average net selling prices resulting in less margin compression compared to fiscal 2013.

Included in operating results for the second quarter and the first six months of fiscal 2013 was a reduction in SG&A expenses of $4 million and $12 million, respectively, or a decrease of 7% and 11%, primarily as a result of ~~the significant market volatility that occurred~~restructuring initiatives and other operating efficiencies initiated in ~~the first quarter of~~ fiscal 2012 caused mainly by an escalation in the European financial crisis. This led to a slowdown in customer buying patterns, followed by a rapid decline in selling prices and metal purchase prices. These market conditions caused a temporary but significant compression in operating margins on shipments made in the latter part of the first quarter and the early part of2012. In the second quarter of fiscal ~~2012 as a result of cost of goods sold, which reflects~~2013, the ~~weighted average inventory cost method, decreasing~~reduction in SG&A expenses was partially offset by increased costs at ~~a slower rate than metal purchase prices and net selling prices in a period of sharply declining recycled metal prices. While selling prices rebounded in the second quarter compared~~APB related to the first quarter’s trough, they fluctuated due to cautious customer demand. The impact of a weak market environment together with the effect of mild winter weather in the U.S., which eased customer concerns regarding availability of materials for sale, contributed to continuing softness in selling prices. Operating margins at APB were also affected by higher vehicle purchase costs due to tight supply markets for end-of-life vehicles. As a result, operating margins of both MRB and APB declined from the prior year. Unlike fiscal 2012, the prior year comparable periods reflected a less volatile market environment characterized by rising recycled metal prices, which did not lead to a similar compression in operating margins.

~~In addition, SG&A expenses for the second quarter and first six months of fiscal 2012 increased by~~ ~~$8 million, or~~ ~~19%, and~~ ~~$19 million, or~~ ~~22%, respectively, primarily due to the absence in the current year of~~ ~~$6 million~~ ~~of favorable customer contract settlements that were recorded~~acquisitions completed in the second quarter of fiscal ~~2011, increased~~2013 and higher incentive compensation expense compared to the prior year quarter.

Consolidated operating ~~expenses related to~~income in the second quarter and first six months of fiscal ~~2011 acquisitions~~2013 included restructuring charges of$2 million and $3 million, respectively, consisting of severance, contract termination and other exit costs. These charges related to the restructuring initiatives announced in the fourth quarter of fiscal 2012 designed to extract greater synergies from the significant acquisitions and technology investments made in recent years, achieve further integration between MRB and APB, realign our organization to support future growth and decrease operating expenses by streamlining functions and reducing organizational layers. These initiatives are expected to lower annual operating costs by $25 million, comprising approximately $18 million of selling, general and administrative expense and $7 million of cost of goods sold, and be substantially implemented by the end of fiscal 2013. Total pre-tax charges pursuant to these restructuring initiatives are expected to amount to $13 million, of which $8 million~~, respectively,~~ have been recognized through the end of the second quarter with the remaining charges expected to be incurred by the end of fiscal 2013. We expect that the vast majority of the restructuring charges will require us to make cash payments.

The following is a summary of the restructuring charges incurred in the second quarter of fiscal 2013 by major type of cost (in thousands):



	Three Months Ended February 28, 2013
	MRB			APB			Corporate		Total Charges Quarter to Date
Severance costs	$	90		$	(37	)	$	63	$	116
Contract termination costs	(63		)	—			82		19
Other exit costs	33			61			1,311		1,405
Total	$	60		$	24		$	1,456	$	1,540



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The following is a summary of the restructuring charges incurred in the first six months of fiscal 2013 by major type of cost and ~~costs associated with additional headcount from business growth.~~the total charges expected to be incurred pursuant to these restructuring initiatives (in thousands):

~~Other Income (Expense)~~



	Six Months Ended February 28, 2013
	MRB			APB		Corporate		Total Charges Year to Date		Total Expected Charges
Severance costs	$	611		$	74	$	370	$	1,055	$	4,900
Contract termination costs	(58		)	—		82		24		3,500
Other exit costs	57			137		1,860		2,054		4,200
Total	$	610		$	211	$	2,312	$	3,133	$	12,600

We do not include restructuring charges in the measurement of the performance of our operating segments.

Interest Expense

Interest expense was$2 million and $4 million for the second quarter and first six months of fiscal 2013, respectively, compared to $3 million and $7 million ~~for the second quarter and first six months of fiscal 2012,~~, respectively, ~~compared to~~ ~~$1 million~~ ~~and~~ ~~$2 million~~ for the same periods in the prior year. The ~~increase~~decrease in interest expense was primarily due to ~~increased~~decreased average borrowings ~~primarily related to our acquisitions in fiscal 2011~~ and ~~higher~~lower average interest rates under our bank credit ~~facilities.~~

~~Other income, net decreased~~ ~~$2 million~~ ~~and~~ ~~$3 million~~ ~~for the second quarter and first six months of fiscal 2012~~facilities compared to the ~~same periods in the~~ prior year ~~primarily due to~~ ~~$3 million~~ ~~of unrealized transaction gains recognized in the second quarter of the prior year relating to foreign currency forward contracts in connection with the acquisition of a business in Canada.~~periods.

Income Tax Expense

Our effective tax rate for the second quarter and first six months of fiscal ~~2012~~2013 was ~~31.5%~~2.7% and 14%, compared to ~~32.9%~~31.5% ~~and~~ ~~32.8%, respectively,~~ for the same periods in the prior year. The effective tax rate for the second quarter of fiscal 2013 benefited from the release of a valuation allowance on deferred tax assets of a foreign subsidiary of $2 million and from increased domestic production activities deductions and research and development credits of $1 million. The release of the valuation allowance was attributable to a change in the Company's facts and circumstances with respect to the feasibility of implementing a change in our foreign subsidiaries' operating structure which will allow the Company to rely on future forecasted taxable income and conclude that the deferred tax assets will more likely than not be realized. The valuation allowance had been recognized in the first quarter of fiscal 2013 as a result of negative evidence, including recent losses at the subsidiary, outweighing the more subjective positive evidence, thus indicating that at that time it was more likely than not that the associated tax benefit would not be realized. During the second quarter of fiscal 2013, the Company's ability to control the implementation of the new foreign entity operating structure increased, including by virtue of an agreement to purchase the noncontrolling interests in a foreign subsidiary which was completed on March 8, 2013. 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 income tax expense in the period we determine that these factors have changed.

The effective tax rate for fiscal ~~2012~~2013 is expected to be approximately ~~34%~~30%., subject to financial performance for the remainder of the year.

2025

~~SCHNITZER STEEL INDUSTRIES, INC.~~



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Financial Results by Segment

We operate our business across three reporting segments: MRB, APB and SMB. Additional financial information relating to these reporting segments is contained in Note 1517 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Metals Recycling Business



	Three Months Ended								Six Months Ended
($ in thousands, except for prices)	2/28/2013			2/29/2012			% Change		2/28/2013			2/29/2012			% Change
Ferrous revenues	$	443,418		$	612,603		(28	)%	$	813,894		$	1,190,627		(32	)%
Nonferrous revenues	125,255			158,997			(21	)%	241,856			301,287			(20	)%
Other	7,518			10,333			(27	)%	14,902			18,457			(19	)%
Total segment revenues	576,191			781,933			(26	)%	1,070,652			1,510,371			(29	)%
Cost of goods sold	538,230			735,844			(27	)%	1,004,817			1,422,300			(29	)%
Selling, general and administrative expense	24,090			27,004			(11	)%	46,263			56,869			(19	)%
Income from joint ventures	(287		)	(867		)	(67	)%	(240		)	(1,849		)	(87	)%
Segment operating income	$	14,158		$	19,952		(29	)%	$	19,812		$	33,051		(40	)%
Average ferrous recycled metal sales prices ($/LT):⁽¹⁾
Domestic	$	363		$	424		(14	)%	$	358		$	422		(15	)%
Foreign	$	374		$	420		(11	)%	$	368		$	428		(14	)%
Average	$	372		$	421		(12	)%	$	365		$	426		(14	)%
Ferrous sales volume (LT, in thousands):
Domestic	261			298			(12	)%	540			617			(12	)%
Foreign	843			1,055			(20	)%	1,518			1,968			(23	)%
Total ferrous sales volume (LT, in thousands)	1,104			1,353			(18	)%	2,058			2,585			(20	)%
Average nonferrous sales price ($/pound)⁽¹⁾	$	0.97		$	0.91		7	%	$	0.96		$	0.95		1	%
Nonferrous sales volumes (pounds, in thousands)	125,500			168,545			(26	)%	244,432			305,788			(20	)%
Outbound freight included in cost of goods sold	$	37,349		$	48,472		(23	)%	$	69,907		$	98,560		(29	)%

Three Months Ended Six Months Ended
($ in thousands, except for prices) 2/29/2012 2/28/2011 % Change 2/29/2012 2/28/2011 % Change
Ferrous revenues $ 612,603
$ 502,289
22 % $ 1,190,627
$ 983,157
21 %
Nonferrous revenues 158,997
130,441
22 % 301,287
238,713
26 %
Other 10,333
4,298
140 % 18,457
6,866
169 %
Total segment revenues 781,933
637,028
23 % 1,510,371
1,228,736
23 %
Cost of goods sold 735,844
577,363
27 % 1,422,300
1,123,051
27 %
SG&A expense 27,004
18,943
43 % 56,869
40,390
41 %
Income from joint ventures (867 ) (969 ) (11 )% (1,849 ) (1,930 ) (4 )%
Segment operating income $ 19,952
$ 41,691
(52 )% $ 33,051
$ 67,225
(51 )%
Average ferrous recycled metal sales prices ($/LT):⁽¹⁾

Steel Manufacturing Business $ 432
$ 408
6 % $ 430
$ 380
13 %
Other domestic $ 421
$ 399
6 % $ 417
$ 354
18 %
Foreign $ 420
$ 424
(1 )% $ 428
$ 389
10 %
Average $ 421
$ 419
— % $ 426
$ 384
11 %
Ferrous sales volume (LT, in thousands):
Steel Manufacturing Business 91
96
(5 )% 226
186
22 %
Other domestic 207
144
44 % 391
306
28 %
Total domestic 298
240
24 % 617
492
25 %
Foreign 1,055
860
23 % 1,968
1,839
7 %
Total ferrous sales volume (LT, in thousands) 1,353
1,100
23 % 2,585
2,331
11 %
Average nonferrous sales price ($/pound)⁽¹⁾
$ 0.91
$ 1.04
(13 )% $ 0.95
$ 0.99
(4 )%
Nonferrous sales volumes (pounds, in thousands) 168,545
121,498
39 % 305,788
232,993
31 %
Outbound freight included in cost of goods sold $ 48,472
$ 45,212
7 % $ 98,560
$ 96,009
3 %

_____________________________

LT = Long Ton, which is 2,240 pounds

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

Revenues

The decrease in ferrous revenues in the second quarter and first six months of fiscal 2013 compared to the prior year periods was due to the combination of lower sales volumes and lower average net selling prices. Softer global demand for recycled metal resulting from weaker global economic conditions compared to the prior year periods contributed to these declines. In addition, sluggish U.S. economic growth and the lower price environment adversely impacted the supply of scrap metal compared to the prior year and contributed to the lower sales volumes.

The decrease in nonferrous revenues was primarily due to lower sales volumes partially offset by higher average net selling prices. Nonferrous volumes decreased primarily as a result of lower volumes of processed scrap, despite the impact of improved recovery of nonferrous materials processed through our enhanced processing technologies.

Segment Operating Income

Although MRB's second quarter financial performance improved significantly compared to the preceding quarter, operating income for the second quarter and first six months of fiscal 2013 was $14 million and $20 million, respectively, a decrease of 29% and 40% compared to the same periods in the prior year. Selling prices of recycled ferrous metal declined sharply at the beginning of fiscal 2013 as a result of softening demand and, despite a slight increase in the second quarter, remained substantially lower than in the prior year period. The weak economic conditions and constrained supply of raw materials in our domestic market caused



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purchase costs for scrap metal to decrease at a slower pace than average net selling prices resulting in a further compression of operating margins compared to the prior year periods. In addition, operating results compared to the prior year periods were negatively impacted by the reduction in both ferrous and nonferrous sales volumes primarily due to the constrained supply of raw materials compared to the prior year periods. While the prior year periods also experienced declining selling prices for recycled metals, operating results for the second quarter and first six months of fiscal 2012 benefited from higher sales volumes and higher average net selling prices resulting in less margin compression compared to fiscal 2013.

Included in operating income was a reduction in SG&A expenses for the second quarter and first six months of fiscal 2013 of $3 million and $11 million, respectively, or a decrease of 11% and 19%, respectively. The decrease was primarily as a result of the restructuring initiatives and other operating efficiencies initiated in fiscal 2012.

Auto Parts Business



	Three Months Ended						Six Months Ended
($ in thousands)	2/28/2013		2/29/2012		% Change		2/28/2013		2/29/2012		% Change
Revenues	$	78,082	$	78,232	—	%	$	147,637	$	162,285	(9	)%
Cost of goods sold	57,529		55,562		4	%	107,573		115,021		(6	)%
Selling, general and administrative expense	13,842		13,962		(1	)%	26,989		28,114		(4	)%
Segment operating income	$	6,711	$	8,708	(23	)%	$	13,075	$	19,150	(32	)%
Number of stores at period end	59		51		16	%	59		51		16	%
Cars purchased (in thousands)	88		84		5	%	167		169		(1	)%

Revenues

Second quarter of fiscal 2013 compared with the second quarter of fiscal 2012

Revenues remained consistent with the prior year quarter as the lower commodity prices were offset by higher sales volumes primarily due to contributions from the addition of eight stores as a result of acquisitions made in the second quarter of fiscal 2013.

First six month of fiscal 2013 compared with the first six months of fiscal 2012

Revenues decreased by 9% in the first six months of fiscal 2013 primarily due to lower commodity prices, which adversely impacted sales of ferrous and nonferrous material compared to the prior year period, partially offset by the acquisitions referred to above.

Segment Operating Income

Operating income for the second quarter and first six months of fiscal 2013 decreased by 23% and 32%, respectively, compared to the same periods in the prior year. The compression in operating margins was primarily related to car purchase costs decreasing at a slower rate than ferrous and nonferrous selling prices due to supply constraints of end-of-life vehicles. In addition, operating income in the second quarter of fiscal 2013 was negatively impacted by $2 million of operating losses, including transaction, integration and startup costs, related to the store locations acquired or under development during the quarter. SG&A expense decreased compared to the prior year period primarily as a result of lower legal expenses and benefits in the current fiscal year from restructuring initiatives and other operational efficiencies implemented at existing stores, which were partially offset by acquisition-related costs incurred in the second quarter of fiscal 2013.

Steel Manufacturing Business



	Three Months Ended								Six Months Ended
($ in thousands, except for price)	2/28/2013			2/29/2012			% Change		2/28/2013			2/29/2012			% Change
Revenues	$	71,247		$	84,523		(16	)%	$	163,276		$	164,424		(1	)%
Cost of goods sold	68,320			83,576			(18	)%	155,264			160,581			(3	)%
Selling, general and administrative expense	1,886			1,815			4	%	3,567			3,494			2	%
Segment operating income (loss)	$	1,041		$	(868	)	NM		$	4,445		$	349		1,174	%
Finished steel products average sales price ($/ton)⁽¹⁾	$	690		$	725		(5	)%	$	684		$	724		(6	)%
Finished steel products sold (tons, in thousands)	96			112			(14	)%	225			219			3	%
Rolling mill utilization	63		%	54		%			66		%	57		%



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_____________________________

NM = not meaningful


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

Revenues

Second quarter of fiscal ~~2012~~2013 compared with the second quarter of fiscal ~~2011~~
2012

The ~~increase in ferrous revenues was due to higher sales volumes mainly driven by fiscal 2011 acquisitions and higher ferrous scrap collection activity.~~

The increase in nonferrous revenues was driven by increased sales volumes, primarily due to incremental volume from fiscal 2011 acquisitions, timing of shipments, more nonferrous collection activity and increased recovery of nonferrous materials processed through our enhanced shredding and sorting technologies. The increase in volume was partially offset by a decrease in revenues by 16% was primarily as a result of lower volumes of finished steel products and lower average ~~nonferrous net selling prices.~~

sales prices as a result of the decreased global steel prices compared to the prior year quarter.

Firstsix month of fiscal 2013 compared with the first six months of fiscal 2012 ~~compared with first~~ ~~six~~ ~~months of fiscal~~ ~~2011~~

~~The increase in ferrous revenues was due to higher average ferrous net selling prices and increased sales volumes. Average ferrous net selling prices were higher~~Revenues in the first six months of fiscal ~~2012 compared to the prior year despite recent pricing declines due~~

~~SCHNITZER STEEL INDUSTRIES, INC.~~

to weaker global economic conditions. Ferrous sales volumes increased primarily due to incremental volume from fiscal 2011 acquisitions and higher ferrous scrap collection activity due to business growth.

The increase in nonferrous revenues was primarily due to increased sales volumes, mainly reflecting incremental volume from fiscal 2011 acquisitions, more nonferrous collection activity and increased recovery of nonferrous materials processed through our enhanced shredding and sorting technologies.

~~Segment Operating Income~~

~~Despite the significant increase in sales volumes~~2013 decreased slightly compared to the same ~~periods~~period in the prior year ~~operating income for the second quarter and first six months of fiscal 2012 decreased by~~ ~~52%~~ ~~and~~ ~~51%~~, respectively. The decrease in operating income was primarily a result of the market volatility and sharp decline in selling prices that occurred in the first quarter of fiscal 2012. These market conditions caused a temporary but significant compression in operating margins on shipments made in the latter part of the first quarter and the early part of the second quarter of fiscal 2012 due to ~~the adverse impact of average inventory costing on cost of goods sold.~~

~~In addition, operating income in the second quarter and first six months of fiscal 2012 reflected higher SG&A expenses of~~ ~~$8 million~~ ~~and~~ ~~$16 million, respectively, primarily due to the absence in the current year of~~ ~~$6 million~~ ~~of favorable customer contract settlements that were recorded in the second quarter of fiscal 2011, operating expenses related to fiscal 2011 acquisitions of~~ ~~$2 million~~ ~~and~~ ~~$6 million, respectively, and costs associated with additional headcount from business growth.~~

~~Auto Parts Business~~

Three Months Ended Six Months Ended
($ in thousands) 2/29/2012 2/28/2011 % Change 2/29/2012 2/28/2011 % Change
Revenues $ 78,232
$ 72,533
8 % $ 162,285
$ 139,214
17 %
Cost of goods sold 55,562
44,410
25 % 115,021
85,639
34 %
SG&A expense 13,962
12,166
15 % 28,114
23,579
19 %
Segment operating income $ 8,708
$ 15,957
(45 )% $ 19,150
$ 29,996
(36 )%
Number of stores at period end 51
50
2 % 51
50
2 %
Cars purchased (in thousands) 84
81
4 % 169
163
4 %

~~Revenues~~

The increase in revenues in the second quarter and first six months of fiscal 2012 was primarily due to increased car volumes from fiscal 2011 acquisitions, further enhancements of production operating efficiencies and higher customer admissions and parts sales, which benefited from marketing initiatives and mild winter weather conditions in fiscal 2012. Revenues for the first six months of fiscal 2012 also benefited from higherlower average selling prices for ~~recycled scrap metal.~~

~~Segment Operating Income~~

~~Operating income for the second quarter and first six months of fiscal 2012 decreased by~~ ~~45%~~ ~~and~~ ~~36%~~, respectively. The market volatility and sharp decline in selling prices that occurred in the first quarter of fiscal 2012 caused a temporary but significant compression in operating margins on scrap and core sales made in the latter part of the first quarter and the early part of the second quarter of fiscal 2012 due to the adverse impact of average inventory costing on cost of goods sold. Operating margins were also affected by higher vehicle purchase costs due to tight supply markets for end of life vehicles.

~~In addition, operating income in the second quarter and first six months of fiscal 2012 was impacted by an increase in SG&A expenses of~~ ~~$2 million~~ ~~and~~ ~~$5 million, respectively, which included increased legal expenses and operating expenses related to fiscal 2011 acquisitions.~~

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~Steel Manufacturing Business~~

Three Months Ended Six Months Ended
($ in thousands, except for price) 2/29/2012 2/28/2011 % Change 2/29/2012 2/28/2011 % Change
Revenues $ 84,523
$ 70,068
21 % $ 164,424
$ 133,703
23 %
Cost of goods sold 83,576
68,955
21 % 160,581
133,173
21 %
SG&A expense 1,815
1,824
— % 3,494
3,276
7 %
Segment operating income (loss) $ (868 ) $ (711 ) 22 % $ 349
$ (2,746 ) NM
Finished steel products average sales price ($/ton)⁽¹⁾
$ 725
$ 687
6 % $ 724
$ 660
10 %
Finished steel products sold (tons, in thousands) 112
99
13 % 219
197
11 %
Rolling mill utilization 54 % 52 % 57 % 50 %

~~_____________________________~~

~~NM = Not Meaningful~~


~~(1)~~	~~Price information is shown after netting the cost of freight incurred to deliver the product to the customer.~~

~~Revenues~~

~~The increase in revenues was primarily~~our finished steel products as a result of ~~an improvement~~a decline in ~~the average selling price for finished~~global steel products and growth in the volume of finished steel products sold in the second quarter and first six months of fiscal 2012 compared to the same periods in the prior year. The rise in the average selling price for finished steel products was primarily drivenprices, partially offset by ~~increased scrap metal purchase prices, reflecting our ability to pass through higher purchase prices for scrap and other raw materials to end customers. The~~an increase in the volume of finished steel products sold, ~~was~~ primarily in the first quarter of fiscal 2013, as a result of slightly improved ~~although still weak,~~ demand in our West Coast ~~markets.~~markets during that period.

Segment Operating Income (Loss)

Second quarter of fiscal 2013 compared with the second quarter of fiscal 2012

The increase in operating income for the second quarter of fiscal 2013 was primarily due to raw material costs decreasing at a faster rate than the average sales price for finished steel products, partially offset by the adverse impact of lower production volumes on cost of goods sold and product mix changes.

First six month of fiscal 2013 compared with the first six months of fiscal 2012

The increase in operating income for the first six months of fiscal 2013 was primarily due to the ~~increase in~~positive impact of higher production volumes on cost of goods sold. In addition, operating results benefited from raw material costs decreasing at a faster rate than the average ~~selling prices~~sales price for finished steel products ~~compared to the prior year, which outpaced the increase~~resulting in ~~scrap and other raw material purchase costs and the increase in the volume of finished steel products sold as a result of improved, but still weak, demand in western North America.~~increased operating margins.

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 $5235 million and $4990 million as of February ~~29, 2012~~28, 2013 and August 31, ~~2011~~2012, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, acquisitions, dividends and share repurchases. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of February ~~29, 2012~~28, 2013, debt, net of cash, was $~~362~~367 million compared to $~~354~~245 million as of August 31, ~~2011~~2012 (refer to Non-GAAP Financial Measures below), an increase of $8122 million primarily ~~due to~~as a result of higher working capital ~~requirements.~~and the acquisitions made in the second quarter of fiscal 2013. Our cash balances as of February ~~29,~~28, 2013 and August 31, 2012 ~~and August 31, 2011~~ include $214 million and $1113 million, respectively, which are indefinitely reinvested in Puerto Rico and Canada.

Operating Activities

Net cash ~~provided by~~used in operating activities in the first six months of fiscal ~~2012~~2013 was $4144 million, compared to net cash provided by operating activities of $2041 million in the first six months of fiscal ~~2011~~2012.

~~Cash provided by operating activities in the first~~ ~~six~~ ~~months of fiscal~~ ~~2012~~ ~~included a~~ ~~$14 million~~ ~~decrease in inventory due to lower volumes on hand and an~~ ~~$8 million~~ ~~decrease in accounts receivable due to the timing of collections. Uses of cash included a~~ ~~$15 million~~ ~~decrease in accounts payable and a~~ ~~$14 million~~ ~~decrease in accrued payroll and related liabilities due to the timing of payments.~~

Cash used in operating activities in the first six months of fiscal ~~2011~~2013 included ana $46 million increase in inventory of ~~$80 million~~due to higher ~~purchase costs for raw materials and an increase~~volumes on hand including the impact of timing of sales, a $2932 million increase in accounts receivable due to the timing of ~~collections.~~

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~Sources of cash included an increase of~~collections and a $3111 million decrease in accounts payable due to ~~increases in purchase costs for raw materials and~~ the timing of ~~payments~~payments.

Cash provided by operating activities in the first six months of fiscal 2012 included a $14 million decrease in inventory due to lower volumes on hand and an ~~increase~~$8 million decrease in accounts receivable due to the timing of ~~$15~~collections. Uses of cash included a $15 million decrease in accounts payable and a $14 million decrease in accrued ~~taxes~~payroll and related liabilities due to ~~improved financial results.~~the timing of payments.

Investing Activities

Net cash used in investing activities in the first six months of fiscal ~~2012~~2013 was $4370 million, compared to $~~213~~43 million in the first six months of fiscal ~~2011~~2012. Cash used in investing activities in fiscal 2013 included capital expenditures of $48 million, representing investments in the construction of a new shredder, advanced processing equipment and related infrastructure for our facility in



Table of Contents	SCHNITZER STEEL INDUSTRIES, INC.

Surrey, British Columbia, which commenced shredding operations in the third quarter of fiscal 2013. Cash used for investing activities also included $23 million related to the acquisition of eight used auto parts facilities in the second quarter of fiscal 2013.

Cash used in investing activities in the first six months of fiscal 2012 included $43 million in capital expenditures to upgrade our equipment and infrastructure.

~~Cash used in investing activities in the first~~ ~~six~~ ~~months of fiscal~~ ~~2011~~ ~~included~~ ~~$166 million~~ ~~paid for acquisitions and~~ ~~$46 million~~ ~~in capital expenditures to upgrade our equipment and infrastructure.~~

Financing Activities

Net cash provided by financing activities in the first six months of fiscal ~~2012~~2013 was $458 million, compared to $~~210~~4 million in the first six months of fiscal ~~2011~~2012.

Cash provided by financing activities in the first six months of fiscal 2013 included $63 million in net borrowings of debt (refer to Non-GAAP Financial Measures below) mainly used to support higher working capital requirements.

Cash provided by financing activities in the first six months of fiscal 2012 included $10 million in net borrowings of debt (refer to Non-GAAP Financial Measures below) principally used to support higher working capital requirements, partially offset by $3$3 million used to repurchase outstanding shares of our Class A common stock.

~~Cash provided by financing activities in the first~~ ~~six~~ ~~months of fiscal~~ ~~2011~~ ~~included~~ ~~$220 million~~ ~~in net borrowings of debt (refer to Non-GAAP Financial Measures below) principally used to support acquisitions, higher working capital requirements and capital expenditures.~~

Credit Facilities

~~We maintain a~~Our credit facility, which provides for revolving loans of $~~650~~670 million ~~revolving credit facility, including~~and $C$30 million ~~in Canadian Dollar availability, that~~, matures in ~~February 2016~~April 2017 pursuant to an unsecured committed bank credit agreement with Bank of America, N.A., as administrative agent, and ~~the~~ other lenders party thereto. Interest rates on outstanding indebtedness under the ~~amended~~ agreement are based, at our option, on either the London Interbank Offered Rate (or the Canadian equivalent) plus a spread of between ~~1.75%~~1.25% and ~~2.75%~~2.25%, with the amount of the spread based on a pricing grid tied to our leverage ratio, or the ~~base~~greater of the prime rate, the federal funds rate plus ~~a spread of between~~ 0%0.5% ~~and~~or the British Bankers Association LIBOR Rate plus 1%1.75%. In addition, annual commitment fees are payable on the unused portion of the credit facility at rates between ~~0.25%~~0.15% and ~~0.45%~~0.35%~~, which is~~ based on a pricing grid tied to our leverage ratio.

We had borrowings outstanding under the credit facility of $~~403~~388 million as of February ~~29, 2012~~28, 2013 and $~~393~~325 million as of August 31, ~~2011~~2012~~, an increase of~~ ~~$10 million~~ ~~primarily due to increased working capital requirements.~~. The weighted average interest rate on amounts outstanding under this facility was ~~2.55%~~2.06% as of February ~~29, 2012~~28, 2013 and ~~2.48%~~ ~~as of~~ August 31, ~~2011~~2012.

We also have an unsecured, uncommitted $25 million credit line with Wells Fargo Bank, N.A. ~~The term of this credit facility was recently extended to~~that expires on March 1, ~~2013~~2014. Interest rates are set by the bank at the time of borrowing. We had no borrowings outstanding under this facility as of February ~~29, 2012~~28, 2013 and August 31, ~~2011~~2012.

The two bank credit agreements contain various representations and warranties, events of default and financial and other covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of February ~~29, 2012~~28, 2013, we were in compliance with ~~all such~~these covenants. We use these credit facilities to fund working capital requirements, acquisitions, capital expenditures, dividends and share repurchases.

In addition, as of February ~~29, 2012~~28, 2013 and August 31, ~~2011~~2012, we had $8 million of long-term tax-exempt bonds outstanding that mature in January 2021.

~~Acquisitions~~

~~During the first~~ ~~six~~ ~~months of~~ ~~fiscal 2011, we closed eight acquisitions with an aggregate purchase price of $166 million as we continued to execute our growth strategy. There were no acquisitions in the first~~ ~~six~~ ~~months of~~ ~~fiscal 2012~~.

Capital Expenditures

Capital expenditures totaled $4348 million for the first six months of fiscal ~~2012~~2013, compared to $4643 million for the same period in the prior year. During the second quarter of fiscal ~~2012~~2013, we continued our investments in the ~~replacement~~construction of ~~existing~~a new shredder, advanced processing equipment

~~SCHNITZER STEEL INDUSTRIES, INC.~~

and related infrastructure in Surrey, British Columbia, which commenced shredding operations in the third quarter of fiscal 2013. In addition, we made further investments in technology to improve the recovery and separation of nonferrous materials from the shredding process and investments in infrastructure to ~~further~~ improve efficiency, ~~and~~ increase capacity, improve worker safety, ~~and~~ enhance environmental ~~systems.~~systems and replace equipment. We plan to invest ~~approximately $100~~up to $100 million in capital expenditures in fiscal ~~2012.~~2013, including capital expenditures associated with acquisitions and the commencement of the development of greenfield locations.

Dividends

On February 1, 2013, our Board of Directors declared a dividend for the second quarter of fiscal 2013 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share.



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Acquisitions

In the second quarter of fiscal 2013, we expanded our presence in the regions in which we operate and in new locations through the acquisition of four used auto parts facilities in Richmond and Surrey, British Columbia, near our MRB operations in Surrey, British Columbia; two used auto parts facilities located in Kansas and Missouri; and two used auto parts facilities located in Massachusetts near our MRB operations. The acquired facilities operate under APB’s Pick-N-Pull brand. The aggregate consideration paid for these acquisitions was $23 million. See Note 4 - Business Combinations in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Environmental Compliance

Our commitment to sustainable recycling and to operating our business in an environmentally responsible manner requires us to continue to invest in facilities that improve our environmental presence in the communities in which we operate. As part of our capital expenditures, we invested $93 million in capital expenditures for environmental projects during the first six months of fiscal ~~2012~~2013., and plan to invest up to $11 million for such projects in fiscal 2013.

We have been identified by the United States Environmental Protection Agency (“EPA”) as 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 (“the Site”). A group of PRPs is conducting an investigation and study to identify and characterize the contamination at the Site and develop alternative approaches to remediation of the contamination. On March 30, 2012 the group submitted to the EPA a draft feasibility study (“draft FS”) based on approximately ten years of work and $100 million in costs classified as investigation-related. The draft FS identifies ten possible remedial alternatives which range in estimated cost from approximately $170 million to $250 million (net present value) for the least costly alternative to approximately $1.08 billion to $1.76 billion (net present value) for the most costly and estimates a range of two to 28 years to implement the remedial work, depending on the selected alternative. The draft FS does not determine who is responsible for remediation costs, define the precise cleanup boundaries or select remedies. The draft FS ~~will be~~is being reviewed, and may be subject to revisions prior to its approval, by the EPA. A final decision on the nature and extent of the required remediation will occur only after the EPA has prepared a proposed plan for public review and issued a record of decision (“ROD”). Currently available information indicates that the EPA does not expect to issue its final ROD selecting a remedy for the Site until at least ~~2013.~~2014. Because there has not been a determination of the total cost of the investigations, the remediation that will be required, the amount of natural resource damages or how the costs of the ongoing investigations and any remedy and natural resource damages will be allocated among the PRPs, we believe it is not reasonably possible to estimate the amount or range of costs which we are likely or which are reasonably possible to incur in connection with the Site, although such costs could be material to our financial position, results of operations, future cash flows and liquidity. Any material liabilities recorded in the future related to the Site could result in our failure to maintain compliance with certain covenants in our debt agreements. Significant cash outflows in the future related to the Site could reduce the amounts available for borrowing that could otherwise be used for investment in capital expenditures, acquisitions, dividends and share repurchases. See Note 7 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Redeemable Noncontrolling Interest

In March 2011,, we issued common stock of one of our subsidiaries to a noncontrolling interest holder of that subsidiary that is redeemable both at the option of the holder and upon the occurrence of an event that is not solely within ~~the Company’s~~our control. Under the terms of an agreement related to the acquisition, the noncontrolling interest ~~owner~~holder has the right to require ~~the Company~~us to purchase its ~~20%~~interest in ~~the Company’s~~our subsidiary for fair value. The noncontrolling interest becomes redeemable within 60 days after the later of (i) the third anniversary of the date of the acquisition and (ii) the date on which certain principals of the minority shareholder are no longer employed by the Company. The conditions for redemption of the noncontrolling interest had not been met as of February ~~29, 2012~~28, 2013.

On March 8, 2013, the Company entered into an agreement with the noncontrolling interest holder for the purchase of all of the outstanding noncontrolling interest in the Company's subsidiary for $25 million. IfThe purchase was paid in cash using our borrowing capacity on our existing credit facilities. As of February 28, 2013, the noncontrolling interest ~~were to be redeemed, the Company would be required to purchase all of such interest~~was presented at its fair value ~~on the date of redemption. As~~ of ~~February 29, 2012~~$25 million, in the Condensed Consolidated Balance Sheets. The difference between the adjusted carrying value and the fair value of the ~~redeemable~~ noncontrolling interest was ~~$21 million~~.recorded as a reduction to retained earnings. See Note 89 - Redeemable Noncontrolling Interest in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

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, ~~share repurchases, dividends,~~ working capital and other financing needs.



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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 acquisitions, capital expenditures, working capital, ~~joint ventures,~~dividends, share repurchases, ~~dividends,~~joint ventures, debt service requirements and environmental obligations. 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 assurance that any such supplemental funding, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.

~~SCHNITZER STEEL INDUSTRIES, INC.~~

Off-Balance Sheet Arrangements

With the exception of operating leases and letters of credit, we are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations or cash flows. We enter into operating leases for both new equipment and property. There have been no material changes to any off-balance sheet arrangements as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended ~~August 31, 2011~~.None.

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, ~~2011 as updated in our Quarterly Report on Form 10-Q~~2012.

On March 8, 2013, the Company entered into an agreement with the noncontrolling interest holder for the ~~interim period ended November 30, 2011.~~

~~Our redeemable~~purchase of all of the outstanding noncontrolling interest ~~is a potential future obligation~~in the Company's subsidiary for ~~which the exercise date and future fair value are not known and not solely within~~$25 million. The purchase was paid in cash using our ~~control.~~borrowing capacity on our existing credit facilities. See Note 89 - Redeemable Noncontrolling Interest in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. At February ~~29, 2012~~28, 2013, we had $18 million outstanding under these arrangements.

Critical Accounting Policies and Estimates

We reaffirm our critical accounting policies and 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, ~~2011~~2012, with the following ~~changes:~~change:

Goodwill

We evaluate goodwill for impairment annually during the second fiscal quarter and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the ~~carrying~~fair value of goodwill may be impaired. ~~Based on our~~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’). The Company has determined that its reporting units for which goodwill has been allocated are equivalent to the Company’s operating segments, as all of the components of each segment meet the criteria for aggregation.

When testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. In the first step of the quantitative impairment test, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed ~~during~~for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.

We estimate the fair value of the reporting units using an income approach based on the present value of expected future cash flows utilizing a market-based weighted average cost of capital (“WACC”) determined separately for each reporting unit. To estimate the present value of the cash flows that extend beyond the final year of the discounted cash flow model, we employ a terminal value technique, whereby we use estimated operating cash flows minus capital expenditures and adjust for changes in working capital requirements in the final year of the model, then discount it by the WACC to establish the terminal value.

The determination of fair value using the income approach requires judgment and involves the use of significant estimates and assumptions about expected future cash flows derived from internal forecasts and the impact of market conditions on those assumptions. Critical assumptions primarily include revenue growth rates driven by future commodity prices and volume expectations, operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rates and synergistic benefits available to market participants.



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We performed our annual impairment test in the second quarter of fiscal ~~2012,~~2013, proceeding directly to the two-step quantitative impairment test. For the APB reporting unit, the calculated fair value using the income approach substantially exceeded its carrying value. For the MRB reporting unit with goodwill of $468 million as of February 28, 2013, the calculated fair value exceeded the carrying value by approximately 15%. The projections used in the income approach for MRB took into consideration the current weak market conditions, including the challenging macroeconomic indicators in the markets in which we operate and those where our customers are based, and the cyclical nature of our industry. The projections assumed a recovery of operating margins and volumes over a multi-year period, eventually returning to levels of profitability in the range of average historical levels. The market-based WACC used in the income approach for MRB was 11.4%. The terminal year growth rate used in the discounted cash flow model was 2%. Assuming all other components of the fair value estimate were held constant, an increase in the WACC in excess of 1%, or weaker than anticipated improvements in either operating margins or volumes, could result in a failure of the Step 1 quantitative impairment test for the MRB reporting unit.

We also use a market approach based on earnings multiple data and our Company’s market capitalization to corroborate our reporting units’ valuations. We reconcile the Company’s market capitalization to the aggregated estimated fair value of our reporting units, ~~substantially exceeded their carrying values.~~

~~Redeemable Noncontrolling Interest~~

~~We have issued~~including consideration of a control premium representing the estimated amount a market participant would pay to obtain a controlling interest. Although the market price of the Company's Class A common stock at the end of ~~one~~the second quarter of fiscal 2013 has increased from its low point in the third quarter of fiscal 2012, the implied control premium resulting from the difference between our market capitalization (based on the average trading price of the Company’s Class A common stock for the two-week period ended February 28, 2013) and the higher aggregated estimated fair value of our ~~subsidiaries to a noncontrolling interest holder~~reporting units was still above the historical range of ~~that subsidiary that is redeemable both~~average and mean premiums observed on historical transactions within the steel making and scrap processing industries and at the ~~option~~high end of the ~~holder~~range of average and ~~upon~~mean premiums observed in more broadly defined sectors. While we identified specific reconciling items, including market participant synergies, we believe the ~~occurrence of an event that is not solely within~~implied control premium reflected the impact on our ~~control. Since redemption~~common stock price of the ~~noncontrolling interest is outside~~cyclical nature of our ~~control, this interest~~business, which is ~~presented on~~currently affected by weak market conditions including the ~~Consolidated Balance Sheets~~constrained supply of scrap metal in our domestic market due to the sluggish U.S. economic growth and weak global macroeconomic indicators including a slowdown of scrap demand in China, in addition to the significant market uncertainty caused by the fiscal uncertainty in the ~~mezzanine section under~~U.S. and the ~~caption “Redeemable noncontrolling interest.” If~~sovereign debt crisis in Europe. We believe the ~~interest were to be redeemed,~~current weak market conditions do not reflect the scrap metal industry's long-term fundamentals and the earnings potential of our business. As a result, we ~~would be required to purchase all of such interest at fair value on~~believe the ~~date of redemption. As such, the redeemable noncontrolling interest is measured at fair value at each reporting period. Any adjustments to the carrying amount~~quoted market price of the ~~redeemable noncontrolling interest for changes in fair~~Company's Class A common stock does not fully reflect the underlying value ~~prior to exercise~~ of the ~~redemption option are determined after~~Company’s reporting units. Accordingly, we do not believe that the ~~attribution~~fact that the Company's market capitalization is less than total shareholders’ equity as of ~~net income or loss of the subsidiary and are recorded~~February 28, 2013 is an indication that goodwill allocated to ~~retained earnings.~~our reporting units is impaired.

We estimate fair value using Level 3 inputs under the fair value hierarchy based on standard valuation techniques using a discounted cash flow analysis. The determination of fair value requires management to apply significant judgment in formulating estimates and assumptions. These estimates and assumptions primarily include forecasts of future cash flows based on management’s best estimate of future sales and operating costs; pricing expectations; capital expenditures; working capital requirements; discount rates; growth rates; tax rates; and general market conditions. As a result of the inherent uncertainty associated with forming these estimates, actual results could differ from those estimates. Future events and changing market conditions may impact our assumptions as to future revenue growth rates, pace and extent of operating margin and volume recovery, market-based WACC and other factors that may result in changes in our estimates of the reporting units' fair value. Although we believe the assumptions used in testing our reporting units’ goodwill for impairment are reasonable, it is possible that market and economic conditions could deteriorate further or not improve as expected. Additional declines in or a lack of recovery in market conditions from current levels, a trend of weaker than anticipated Company financial performance including the pace and extent of operating margin and volume recovery, a lack of further recovery in our share price from current levels, or an increase in the market-based WACC, among other factors, could significantly impact our impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.

Recently Issued Accounting Standards

For a description of recent accounting pronouncements that may have an impact on our financial condition, results of operations or cash flows, see Note 2 - Recent Accounting Pronouncements in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

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 debt (i.e., total debt) and (ii) cash and cash equivalents. Management believes that debt, net of cash is a useful measure for investors because, as cash and cash equivalents

~~SCHNITZER STEEL INDUSTRIES, INC.~~

can be used, among other things, to repay indebtedness, netting this against total debt is a useful measure of our leverage.



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


	February 29, 2012		August 31, 2011		February 28, 2013		August 31, 2012
Short-term borrowings	$	668	$	643	$	669	$	683
Long-term debt, net of current maturities	412,891		403,287		400,720		334,629
Total debt	413,559		403,930		401,389		335,312
Less: cash and cash equivalents	51,720		49,462		34,540		89,863
Total debt, net of cash	$	361,839	$	354,468	$	366,849	$	245,449

Net borrowings (repayments) of debt

Net borrowings (repayments) of debt is the sum of borrowings from long-term debt, repayments of long-term debt, proceeds from line of credit, and repayment of line of credit. Management presents this amount as the net change in the Company’s borrowings (repayments) for the period because it believes it is useful for investors as a meaningful presentation of the change in debt.

The following is a reconciliation of net borrowings (repayments) of debt (in thousands):


	Six Months Ended						Six Months Ended
	2/29/2012			2/28/2011			2/28/2013			2/29/2012
Borrowings from long-term debt	$	315,661		$	413,000		$	158,324		$	315,661
Proceeds from line of credit	211,000			311,000			315,000			211,000
Repayment of long-term debt	(305,986		)	(193,298		)	(94,987		)	(305,986		)
Repayment of line of credit	(211,000		)	(311,000		)	(315,000		)	(211,000		)
Net borrowings of debt	$	9,675		$	219,702		$	63,337		$	9,675

Management believes that these non-GAAP financial measures allow for a better understanding of our operating and financial performance. These non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable U.S. GAAP measures.

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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 finished steel products, ferrous and nonferrous metals, including scrap metal, autobodies and other commodities. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions. We respond to increases and decreases in forward selling prices by adjusting purchase prices on a timely basis. 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 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 at February ~~29, 2012~~28, 2013, a 10% decrease in the selling price ~~per ton~~ of ~~finished steel products~~inventory would not have caused an NRV inventory write down at any of ~~approximately~~ ~~$3 million~~ ~~at SMB. A 10% decrease in the selling price~~our operating segments as of ~~inventory would not have had a material NRV impact on MRB or APB at~~ February ~~29, 2012~~28, 2013.

Interest Rate Risk

There have been no material changes to the Company’s 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, ~~2011~~2012.

Credit Risk

As of February ~~29, 2012~~28, 2013 and August 31, ~~2011~~2012, ~~44%~~39% and 28%, respectively, of our trade accounts receivable balance was covered by letters of credit. Of the remaining balance as of February ~~29, 2012~~28, 2013, ~~92%~~91% was less than 60 days past due, compared to ~~93%~~89% as of August 31, ~~2011~~2012.


ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains 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 required to be disclosed by the Company in the reports that it files or submits 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. The Company’s 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 the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of February ~~29, 2012~~28, 2013, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during its most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

See Note 7 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item I, incorporated by reference herein.


ITEM 1A.	RISK FACTORS

There have been no material changes to our risk factors reported or new factors identified since the filing of our Annual Report on Form 10-K for the year ended August 31, ~~2011~~2012, which was filed with the Securities and Exchange Commission on October ~~20, 2011,~~25, 2012, except for the following:

~~Potential costs related~~Goodwill impairment charges may adversely affect our financial condition and results of operations

We have a substantial amount of goodwill on our balance sheet generated in connection with our acquisition business growth strategy. Goodwill represents the excess purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. We test the goodwill balances allocated to our reporting units for impairment on an annual basis and if events occur or circumstances change that indicate that the ~~environmental cleanup~~fair value of ~~Portland Harbor~~one or more of our reporting units may be ~~material~~below its carrying amount. A decline in the quoted market price of our stock could denote a triggering event indicating that goodwill may be impaired. When testing goodwill for impairment, we determine fair value using an income approach based on the present value of expected future cash flows utilizing a market-based weighted average cost of capital. Given that market prices of our reporting units are not readily available, we make various estimates and assumptions in determining the fair value of the reporting units, including estimating revenue growth rates, operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rate and synergistic benefits available to market participants. We corroborate the reporting units’ valuation using a market approach based on earnings multiple data and a reconciliation of the aggregated fair value of the reporting units to our market capitalization, including consideration of a control premium. Fair value determinations require considerable judgment and are sensitive to inherent uncertainties and changes in the estimates and assumptions described above. Additional declines in or a lack of recovery in market conditions from current levels, a trend of weaker than anticipated Company financial ~~position and liquidity~~

~~In December 2000, we were notified by~~performance including the United States Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that we are a potentially responsible party (“PRP”) that owns or operates or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”). The precise naturepace and extent of ~~any cleanup~~operating margin and volume recovery, a lack of further recovery in our share price from current levels, or an increase in the ~~Site, the parties to be involved, the process to be followed for any cleanup and the allocation of the costs for any cleanup~~market-based WACC, among responsible parties have not yet been determined, but the process of identifying additional PRPs and beginning allocation of costs is underway. A group of PRPs is conducting an investigation and study to identify and characterize the contamination at the Site and develop alternative approaches to remediation of the contamination. On March 30, 2012 the group submitted to the EPA a draft feasibility study (“draft FS”) based on approximately ~~ten~~ ~~years of work and~~ ~~$100 million~~ ~~in costs classified as investigation-related. The draft FS identifies~~ ~~ten~~ ~~possible remedial alternatives which range in estimated cost from approximately~~ ~~$170 million~~ to ~~$250 million~~ ~~(net present value) for the least costly alternative to approximately~~ ~~$1.08 billion~~ to ~~$1.76 billion~~ ~~(net present value) for the most costly and estimates a range of~~ ~~two~~ to 28 years to implement the remedial work, depending on the selected alternative. The draft FS does not determine who is responsible for remediation costs, define the precise cleanup boundaries or select remedies. The draft FS will be reviewed,other factors, could significantly impact our goodwill impairment analysis and may be subject to revisions prior to its approval, by the EPA. A final decision on the nature and extent of the required remediation will occur only after the EPA has prepared a proposed plan for public review and issued a record of decision (“ROD”). Currently available information indicates that the EPA does not expect to issue its final ROD selecting a remedy for the Site until at least 2013. Separately, the natural resource damages trustees for the Site are conducting a process to determine the amount of natural resource damages at the Site and identify the persons potentially liable for such damages. It is currently unclear to what extent we will be liable for environmental costs or damages associated with the Site or for natural resource damage claims or third party contribution or damage claims with respect to the Site; however, given the size of the Site, the costs to date of the RI/FS and the nature of the conditions identified to date, the total cost of the investigations, remediation and natural resource damages claims are likely to be substantial. Significant cash outflows in the future related to the Site could reduce the amount of our borrowing capacity that could otherwise be used for investment in capital expenditures, acquisitions, dividends and share repurchases. Any material liabilities incurred in the future related to the Site could result in ~~our failure to maintain compliance with certain covenants in our debt agreements. Because there has not been~~an impairment charge, which could have a determination of the total cost of the investigations, the remediation that will be required, the amount of natural resource damages or how the costs of the ongoing investigations and any remedy and natural resource damages will be allocated among the PRPs, we believe it is not possible to reasonably estimate the amount or range of costs which we are likely or reasonably possible to incur in connection with the Site, although such costs could be material toadverse effect on our financial ~~position,~~condition and results of ~~operations, cash flows or liquidity.~~operations. See ~~Note 7~~ ~~- Commitments~~Critical Accounting Policies and ~~Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements~~Estimates in Part I, Item 12 of this report.

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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	The following financial information from Schnitzer Steel Industries, Inc.’s Quarterly Report on Form 10-Q for the quarter ended February ~~29, 2012,~~28, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income for the three and six months ended February ~~29, 2012~~28, 2013 and February ~~28, 2011,~~29, 2012, (ii) Condensed Consolidated Balance Sheets as of February ~~29, 2012,~~28, 2013, and August 31, ~~2011,~~2012, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended February 28, 2013 and February 29, 2012; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended February ~~29, 2012~~28, 2013 and February ~~28, 2011,~~29, 2012; and ~~(iv)~~(v) the Notes to Condensed Consolidated Financial Statements.⁽¹⁾

(1) In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by the specific reference in such filing.

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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:	April ~~5, 2012~~3, 2013	By:	/s/ Tamara L. Lundgren
			Tamara L. Lundgren
			President and Chief Executive Officer

Date:	April ~~5, 2012~~3, 2013	By:	/s/ Richard D. Peach
			Richard D. Peach
			Senior Vice President and Chief Financial Officer

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	Three Months Ended		Six Months Ended
	February 28, 2011		February 28, 2011
Revenues	$	747,829	$	1,466,512
Operating income⁽¹⁾	$	53,330	$	89,585
Net income⁽¹⁾	$	36,661	$	60,149
Net income attributable to SSI⁽¹⁾	$	34,685	$	56,328