Table of Contents

     
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 November 30, 20122013
Or
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.299 SW Clay St., Suite 350
Portland, OR
 9721097201
(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 filerxAccelerated fileroNon-accelerated fileroSmaller Reporting companyo
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 25,681,27226,305,256 shares of Class A common stock, par value of $1.00 per share, and 719,823305,900 shares of Class B common stock, par value of $1.00 per share, outstanding as of January 3, 20132014.

     


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SCHNITZER STEEL INDUSTRIES, INC.
INDEX
 
 PAGE
 
  
 
  
  
  
  
  
  
  
  
  
 
  
  
  
  


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)
November 30, 2012 August 31, 2012November 30, 2013 August 31, 2013
Assets      
Current assets:      
Cash and cash equivalents$24,404
 $89,863
$29,934
 $13,481
Accounts receivable, net of allowance for doubtful accounts of $1,038 and $4,459152,860
 137,313
Accounts receivable, net of allowance for doubtful accounts of $3,094 and $2,990125,975
 188,270
Inventories, net302,626
 246,992
280,100
 236,049
Deferred income taxes5,458
 6,362
3,749
 3,750
Refundable income taxes6,269
 7,671
5,073
 3,521
Prepaid expenses and other current assets23,764
 28,618
21,076
 22,159
Total current assets515,381
 516,819
465,907
 467,230
Property, plant and equipment, net of accumulated depreciation of $553,099 and $535,728564,110
 564,185
Property, plant and equipment, net of accumulated depreciation of $615,464 and $597,989554,010
 564,426
Investments in joint venture partnerships16,339
 17,126
14,530
 14,808
Goodwill634,451
 635,491
327,215
 327,264
Intangibles, net of accumulated amortization of $20,262 and $19,02314,544
 15,778
Intangibles, net of accumulated amortization of $15,215 and $14,13912,233
 13,264
Other assets14,379
 14,174
18,224
 18,520
Total assets$1,759,204
 $1,763,573
$1,392,119
 $1,405,512
Liabilities and Equity      
Current liabilities:      
Short-term borrowings$9,169
 $683
$613
 $9,174
Accounts payable97,331
 115,007
85,851
 96,348
Accrued payroll and related liabilities19,741
 22,130
19,784
 24,002
Environmental liabilities2,261
 2,185
943
 754
Accrued income taxes47
 38

 388
Other accrued liabilities37,911
 38,799
33,108
 35,468
Total current liabilities166,460
 178,842
140,299
 166,134
Deferred income taxes86,068
 85,447
22,953
 22,929
Long-term debt, net of current maturities345,797
 334,629
393,426
 372,663
Environmental liabilities, net of current portion44,939
 44,874
48,804
 49,040
Other long-term liabilities11,585
 11,837
14,366
 13,547
Total liabilities654,849
 655,629
619,848
 624,313
Commitments and contingencies (Note 6)
 
Redeemable noncontrolling interest23,602
 22,248
Commitments and contingencies (Note 5)
 
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:      
Preferred stock – 20,000 shares $1.00 par value authorized, none issued
 

 
Class A common stock – 75,000 shares $1.00 par value authorized, 25,684 and 25,219 shares issued and outstanding25,684
 25,219
Class B common stock – 25,000 shares $1.00 par value authorized, 720 and 1,113 shares issued and outstanding720
 1,113
Class A common stock – 75,000 shares $1.00 par value authorized, 26,293 and 26,171 shares issued and outstanding26,293
 26,171
Class B common stock – 25,000 shares $1.00 par value authorized, 306 and 393 shares issued and outstanding306
 393
Additional paid-in capital3,171
 816
10,103
 7,476
Retained earnings1,049,399
 1,056,024
740,649
 751,879
Accumulated other comprehensive loss(3,629) (2,589)(10,087) (9,361)
Total SSI shareholders’ equity1,075,345
 1,080,583
767,264
 776,558
Noncontrolling interests5,408
 5,113
5,007
 4,641
Total equity1,080,753
 1,085,696
772,271
 781,199
Total liabilities and equity$1,759,204
 $1,763,573
$1,392,119
 $1,405,512
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
 
Three Months Ended November 30,Three Months Ended November 30,
2012 20112013 2012
Revenues$592,820
 $812,176
$587,745
 $592,820
Operating expense:      
Cost of goods sold541,884
 742,215
542,417
 541,884
Selling, general and administrative47,995
 55,992
47,550
 47,995
Loss (income) from joint ventures135
 (1,001)
(Income) loss from joint ventures(409) 135
Restructuring charges1,593
 
1,812
 1,593
Operating income1,213
 14,970
Operating income (loss)(3,625) 1,213
Interest expense(2,017) (3,271)(2,702) (2,017)
Other income (expense), net321
 (393)
Income (loss) before income taxes(483) 11,306
Income tax expense(960) (3,561)
Net income (loss)(1,443) 7,745
Other income, net176
 321
Loss before income taxes(6,151) (483)
Income tax benefit (expense)784
 (960)
Net loss(5,367) (1,443)
Net income attributable to noncontrolling interests(228) (727)(861) (228)
Net income (loss) attributable to SSI$(1,671) $7,018
Net loss attributable to SSI$(6,228) $(1,671)
      
Net income (loss) per share attributable to SSI - basic$(0.06) $0.26
Net income (loss) per share attributable to SSI - diluted$(0.06) $0.25
Net loss per share attributable to SSI - basic$(0.23) $(0.06)
Net loss per share attributable to SSI - diluted$(0.23) $(0.06)
Weighted average number of common shares:      
Basic26,567
 27,451
26,755
 26,567
Diluted26,567
 27,715
26,755
 26,567
Dividends declared per common share$0.188
 $0.017
$0.188
 $0.188
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)

Three Months Ended November 30,Three Months Ended November 30,
2012 20112013 2012
Net income (loss)$(1,443) $7,745
Net loss$(5,367) $(1,443)
Other comprehensive income (loss), net of tax:      
Foreign currency translation adjustments(1)
(1,258) (6,438)(891) (1,258)
Cash flow hedges, net(2)
17
 
121
 17
Pension obligations, net(3)
375
 67
44
 375
Total other comprehensive loss, net of tax(866) (6,371)(726) (866)
Comprehensive income (loss)(2,309) 1,374
Comprehensive loss(6,093) (2,309)
Less amounts attributable to noncontrolling interests:      
Net income attributable to noncontrolling interests(228) (727)(861) (228)
Foreign currency translation adjustment attributable to redeemable noncontrolling interest(174) (377)
 (174)
Total amounts attributable to noncontrolling interests(402) (1,104)(861) (402)
Comprehensive income (loss) attributable to SSI$(2,711) $270
Comprehensive loss attributable to SSI$(6,954) $(2,711)
_____________________________
(1)
Net of tax benefit of $(91)zero and $(468)91 thousand for each respective period.
(2)
Net of tax (benefit) expense of $24(23) thousand and $024 thousand for each respective period.
(3)
Net of tax expense of $21625 thousand and $39216 thousand for each respective period.

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


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SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended November 30,Three Months Ended November 30,
2012 20112013 2012
Cash flows from operating activities:      
Net income (loss)$(1,443) $7,745
Adjustments to reconcile net income (loss) to cash used in operating activities:   
Net loss$(5,367) $(1,443)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:   
Depreciation and amortization20,899
 20,346
21,019
 20,899
Deferred income taxes2,261
 906
(317) 2,261
Undistributed equity in earnings of joint ventures(40) (963)(409) (40)
Share-based compensation expense4,210
 4,613
3,868
 4,210
Excess tax benefit from share-based payment arrangements
 (413)(20) 
(Gain) loss on disposal of assets226
 (116)(304) 226
Unrealized foreign exchange loss, net46
 272
342
 46
Bad debt recoveries(1,573) 
Bad debt expense (recoveries), net856
 (1,573)
Changes in assets and liabilities, net of acquisitions:      
Accounts receivable(20,010) 8,278
57,375
 (20,010)
Inventories(50,776) (74,117)(39,083) (50,776)
Income taxes903
 (20,126)(1,949) 903
Prepaid expenses and other current assets1,173
 (1,148)(181) 1,173
Intangibles and other long-term assets298
 (1,079)90
 298
Accounts payable(10,429) (19,193)(4,404) (10,429)
Accrued payroll and related liabilities(1,950) (14,745)(4,284) (1,950)
Other accrued liabilities(3,687) 3,452
(1,730) (3,687)
Environmental liabilities(74) (312)(306) (74)
Other long-term liabilities(303) (81)2
 (303)
Distributed equity in earnings of joint ventures735
 525
645
 735
Net cash used in operating activities(59,534) (86,156)
Net cash provided by (used in) operating activities25,843
 (59,534)
Cash flows from investing activities:      
Capital expenditures(26,675) (25,551)(14,380) (26,675)
Joint venture receipts, net222
 353
Joint venture receipts (payments), net(63) 222
Proceeds from sale of assets532
 251
673
 532
Acquisitions, net of cash acquired(2,147) 
Net cash used in investing activities(25,921) (24,947)(15,917) (25,921)
Cash flows from financing activities:      
Proceeds from line of credit135,500
 173,000
147,500
 135,500
Repayment of line of credit(127,000) (159,000)(156,000) (127,000)
Borrowings from long-term debt72,742
 294,212
119,269
 72,742
Repayment of long-term debt(61,449) (214,396)(98,472) (61,449)
Repurchase of Class A common stock
 (3,117)
Taxes paid related to net share settlement of share-based payment arrangements(1,104) (840)(628) (1,104)
Excess tax benefit from share-based payment arrangements
 413
20
 
Stock options exercised11
 
Contributions from noncontrolling interest1,970
 454

 1,970
Distributions to noncontrolling interest(375) (1,477)(495) (375)
Dividends paid
 (468)(4,990) 
Net cash provided by financing activities20,284
 88,781
6,215
 20,284
Effect of exchange rate changes on cash(288) (151)312
 (288)
Net decrease in cash and cash equivalents(65,459) (22,473)
Net increase (decrease) in cash and cash equivalents16,453
 (65,459)
Cash and cash equivalents as of beginning of period89,863
 49,462
13,481
 89,863
Cash and cash equivalents as of end of period$24,404
 $26,989
$29,934
 $24,404

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

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

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements of Schnitzer Steel Industries, Inc. (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 presentationstatement 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, 20122013. The results for the three months ended November 30, 20122013 and 20112012 are not necessarily indicative of the results of operations for the entire year.
Revision of Previously Issued Financial Statements
In the first quarter of fiscal 2014, an error was identified in the classification of the cash outflow of $24.7 million for the purchase of a noncontrolling interest in a subsidiary as a use of cash in investing activities that, under generally accepted accounting principles, should have been reflected as a use of cash in financing activities in the Company’s consolidated statements of cash flows included in the previously reported financial statements for the nine months ended May 31, 2013 included in the Quarterly Report on Form 10-Q and for the year ended August 31, 2013 included in the 2013 Annual Report on Form 10-K.
The Company assessed the materiality of this classification error under the guidance in ASC 250-10 relating to SEC’s Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and concluded that the previously issued financial statements for the nine months ended May 31, 2013 and the year ended August 31, 2013 were not materially misstated. The Company also evaluated the impact of correcting the error through an adjustment to its financial statements and concluded, based on the guidance within ASC 250-10 relating to SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, to revise its previously issued financial statements to reflect the impact of the correction of the classification error. The consolidated statement of cash flows for the year ended August 31, 2013 and for the nine months ended May 31, 2013 will be revised in the Company’s 2014 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the third quarter of fiscal 2014, respectively, to correct the classification error.
The revision had no impact on the Company’s consolidated balance sheets, consolidated results of operations, earnings (loss) per share and net cash provided by operating activities in the consolidated statements of cash flows.
The effect of the revision on the line items within the Company’s consolidated statement of cash flows for the nine months ended May 31, 2013 and the year ended August 31, 2013 is as follows (in thousands):
 Nine Months Ended May 31, 2013 Year Ended August 31, 2013
 As Reported Adjustments As Revised As Reported Adjustments As Revised
Investing Activities           
Purchase of noncontrolling interest$(24,734) $24,734
 $
 $(24,734) $24,734
 $
Net cash used in investing activities(115,089) 24,734
 (90,355) (137,184) 24,734
 (112,450)
            
Financing Activities           
Purchase of noncontrolling interest
 (24,734) (24,734) 
 (24,734) (24,734)
Net cash provided by (used in) financing activities60,023
 (24,734) 35,289
 20,587
 (24,734) (4,147)



7

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

Accounting Changes
In June 2011,February 2013, an accounting standards update was issued that amends the Financial Accounting Standards Board (“FASB”) issued changes to the presentationreporting of amounts reclassified out of accumulated other comprehensive income. These changes give an entityThis standard does not change the option to present the total of comprehensive income, the components ofcurrent requirements for reporting net income and the components ofor other comprehensive income either in a single continuous statementthe financial statements. However, the guidance requires an entity to provide information about the amounts reclassified out of comprehensive income or in two separate but consecutive statements; the option to present components ofaccumulated other comprehensive income as partby component, either on the face of the financial statement of changeswhere net income is presented or in stockholders’ equity was eliminated. No changes were madethe notes 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 (loss) per share.financial statements. The Company adopted the new requirement in the first quarter of fiscal 20132014 with no impact onto the Company’s Unaudited Condensed Consolidated Financial Statements, except for the change in presentation. The Company has chosen to present a separate statementamounts reclassified out of accumulated other comprehensive income.income in the notes to the financial statements. See Note 9 - Accumulated Other Comprehensive Income for further detail.

During the first quarter of fiscal 2014, the Company changed its annual goodwill impairment testing date from February 28 to July 1 of each year. See Note 4 - Goodwill for further detail.
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 $3022 million as of November 30, 20122013 and $3831 million as of August 31, 20122013.

Other Assets
The Company’s other assets, exclusive of prepaid expenses, consist primarily of receivables from insurers, notes and other contractual receivables, and assets held for sale. Other assets are reported within either prepaid expenses and other current assets or other assets in the Condensed Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle of one year from the reporting date. Other assets are reported net of an allowance for credit losses on notes and other contractual receivables of $8 million as of November 30, 2013 and August 31, 2013.

Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable and accounts receivable.notes and other contractual receivables. 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 November 30, 20122013. 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 or other collateral, cash deposits and monitoring procedures. The Company is exposed to a residual credit risk with respect to open letters of credit by virtue of the possibility of the failure of a bank providing a letter of credit. The Company had $5429 million and $3794 million of open letters of credit relating to accounts receivable as of November 30, 20122013 and August 31, 20122013, respectively.

Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable debt and derivative contracts.debt. 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). The and approximates its carrying amounts of the non-derivative financial instruments approximate fair 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.

7

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

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 8 - Redeemable Noncontrolling Interest and Note 11 - Derivative Financial Instruments for further detail.
Derivatives
The Company records derivative instruments in other assets or other liabilities in the Unaudited Condensed Consolidated Balance Sheets atThere were no material fair value and changes in the fair value are either recognized in accumulated other comprehensive income (loss) in the Unaudited Condensed Consolidated Balance Sheets or net income (loss) in the Unaudited Condensed Consolidated Statementsmeasurements as of Operations, 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) 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 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 11November 30, 2013 - Derivative Financial Instruments..


8

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

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 76 - Restructuring Charges for further detail.
Redeemable Noncontrolling Interest
The Company has issued common stock of one of its subsidiariesEmployee Benefits
Prior to October 1, 2013, the Steelworkers Western Independent Shops Pension Plan (“WISPP”), a noncontrolling interest holder of that subsidiary that is redeemable both at the optionmultiemployer plan benefiting union employees of the holderSteel Manufacturing Business, had an accumulated funding deficiency (i.e., a failure to satisfy the minimum funding requirements) and uponwas certified in a Red Zone Status, as defined by the occurrencePension Protection Act of an event that is not solely within2006.  As of October 1, 2013, the Company’s control. Since redemption ofWISPP was no longer in Red Zone Status, having been certified by the noncontrolling interest is outside of the Company’s control, this interest is presented on the Unaudited Condensed Consolidated Balance Sheetsplan’s actuaries as being in the mezzanine section under the caption 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. The redeemable noncontrolling interest is 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 as of each 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 will be recorded to retained earnings. See Note 8 - Redeemable Noncontrolling Interest for further detail.

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


8

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

Note 2 - Recent Accounting Pronouncements

In December 2011, an accounting 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. 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 intends to early adopt this standard for the annual impairment test to be performed in the second quarter of fiscal 2013. 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.Green Zone.

Note 32 - Inventories, net

Inventories, net consisted of the following (in thousands):
November 30, 2012 August 31, 2012November 30, 2013 August 31, 2013
Processed and unprocessed scrap metal$209,067
 $152,930
$174,966
 $132,485
Semi-finished steel products (billets)4,950
 7,328
Semi-finished goods (billets)14,000
 10,745
Finished goods51,797
 49,988
53,825
 56,830
Supplies36,812
 36,746
37,309
 35,989
Inventories, net$302,626
 $246,992
$280,100
 $236,049

Note 43 - Business Combinations

In December 2012,November 2013, the Company made the following acquisitions:
The Company acquired substantially all of the assetsequity interests of Ralph’s Auto Supply (B.C.) Ltd.Pick A Part, Inc., a used auto parts business with four storesone store in Richmond and Surrey, British Columbia,the Olympia metropolitan area in Washington, which expanded the Auto Parts Business (“APB”)’sBusiness’ presence in Western Canadathe Pacific Northwest and is near the Metals Recycling Business’ operations in Surrey, British Columbia.
Tacoma, Washington. The Company acquired substantially all of the assets of U-Pick-It, 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 business with two stores in Massachusetts. This acquisition established a new APB presence in the Northeast near our Metals Recycling Business’ operations.

The aggregate consideration paid for these acquisitions was$23 million. As of January 8, 2013, the initial accounting for determining the acquisition-date fair value for each major class of assets acquired, including goodwill, and liabilities assumed was not yet complete. These acquisitions, individually or in the aggregate, are not material to the Company’s financial position or results of operations,operations. Pro forma operating results for the acquisition are not presented, since the aggregate results would not be significantly different than reported results.

Note 4 - Goodwill
During the first quarter of fiscal 2014, the Company elected to change its annual goodwill impairment testing date from February 28 to July 1 of each year. The Company believes this new testing date is preferable because it allows the Company to better align the annual goodwill impairment testing procedures with the Company’s year-end financial reporting as well as its annual budgeting cycle and thus pro forma information isallows the Company visibility into fourth quarter operating results which are typically significant to its annual performance. The Company most recently performed an assessment of the goodwill in each of its reporting units during the fourth quarter of fiscal 2013. This change in accounting principle will not presented.delay, accelerate or cause the Company to avoid an impairment charge. As a result of this change, the Company will complete its next annual goodwill impairment test during the fourth quarter of fiscal 2014.

The gross changes in the carrying amount of goodwill by reporting segment for the three months ended November 30, 2013 were as follows (in thousands):

 Metals Recycling Business Auto Parts Business Total
Balance as of August 31, 2013$147,213
 $180,051
 $327,264
Acquisitions
 586
 586
Purchase accounting adjustments
 (160) (160)
Foreign currency translation adjustment(277) (198) (475)
Balance as of November 30, 2013$146,936
 $180,279
 $327,215

9

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

Note 5 - Goodwill
The gross changes in the carrying amount ofAccumulated goodwill by reporting segment for the three months ended November 30, 2012 were as follows (in thousands):
 Metals Recycling Business Auto Parts Business Total
Balance as of August 31, 2012$471,954
 $163,537
 $635,491
Purchase accounting adjustments(2) 
 (2)
Foreign currency translation adjustment(904) (134) (1,038)
Balance as of November 30, 2012$471,048
 $163,403
 $634,451

Thereimpairment charges were no$321 million accumulated goodwill impairment charges as of November 30, 20122013. and August 31, 2013.

Note 65 - 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 three months ended November 30, 20122013 were as follows (in thousands):
Reporting SegmentBalance as of August 31, 2012 Liabilities Established (Released), Net Payments and Other Balance as of November 30, 2012 Short-Term Long-Term Balance as of August 31, 2013 Liabilities Established (Released), Net Payments and Other Balance as of November 30, 2013 Short-Term Long-Term
Metals Recycling Business$30,859
 $165
 $(124) $30,900
 $1,707
 $29,193
 $30,520
 $(329) $(10) $30,181
 $189
 $29,992
Auto Parts Business16,200
 100
 
 16,300
 554
 15,746
 18,774
 292
 
 19,066
 554
 18,512
Corporate 500
 
 
 500
 200
 300
Total$47,059
 $265
 $(124) $47,200
 $2,261
 $44,939
 $49,794
 $(37) $(10) $49,747
 $943
 $48,804

Metals Recycling Business (“MRB”)
As of November 30, 20122013, MRB had environmental liabilities of $3130 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 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.

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.

10

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

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 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 is being reviewed and mayis likely to be subject to revisions, which could be significant, 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

10

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

selecting a remedy for the Site until at least 2014.2015. Responsibility for implementing and funding the EPA’s selected remedy will be determined in a separate allocation process.process, which is currently underway.

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 and 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 November 30, 20122013, the Company had environmental liabilities related to various MRB sites other than Portland Harbor of $3029 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.

Auto Parts Business (“APB”)
As of November 30, 20122013, the Company had environmental liabilities related to various APB sites of $1619 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 washas since been renewed through MarchFebruary 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.2018.
 
SMB had no environmental liabilities as of November 30, 20122013.

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

11

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

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, the Company is party to various legal proceedings arising in the normal course of business. 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 its results of operations, financial condition, or cash flows.
 
Note 76 - Restructuring Charges

In the fourth quarter of fiscal 2012, the Company announced and undertook a number of restructuring initiatives designed to extract greater synergies from the significant acquisitions and technology investments made in fiscal 2011,recent years, achieve further integration

11

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

between MRB and APB, 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.layers. These initiatives are expected to bewere substantially completecompleted by the end of fiscal 2013.

The Company expects that total pre-tax charges pursuant to these restructuring initiatives will be approximately $11 million. Of this amount, $7 million were incurred throughIn the first quarter of fiscal 2013,2014, the Company announced and began implementing additional restructuring initiatives to further reduce its annual operating expenses through headcount reductions, productivity improvements, procurement savings and other operational efficiencies. The Company expects to incur restructuring charges of $3 million in connection with these initiatives, with substantially all of the balancecharges expected to be incurred by the end of fiscal 2013.2014. The Company expects that the vast majority of the restructuring charges will require the Company to make cash payments.

Restructuring charges were comprised of the following (in thousands):
 Three Months Ended November 30, 2012
 Q4’12 Plan Q1’14 Plan Total Charges
Severance costs$939
 $
 $939
Contract termination costs5
 
 5
Other exit costs649
 
 649
Total charges$1,593
 $
 $1,593
 Three Months Ended November 30, 2013
 Q4’12 Plan Q1’14 Plan Total Charges
Severance costs$26
 $1,076
 $1,102
Contract termination costs462
 38
 500
Other exit costs
 210
 210
Total charges$488
 $1,324
 $1,812
      
 Total Charges
 Q4’12 Plan Q1’14 Plan Total
Total charges to date$13,406
 $1,324
 $14,730
Total expected charges$13,500
 $3,000
 $16,500

The following illustrates the reconciliation of the restructuring liability by major type of costs for the three months ended November 30, 20122013 (in thousands):
Q4’12 Plan Q1’14 Plan Total Charges to Date Total Expected Charges
 Balance as of August 31, 2012 Charges Payments and Other Balance as of November 30, 2012 Total Charges to Date Total Expected ChargesBalance 8/31/2013 Charges Payments and Other Balance 11/30/2013 Balance 8/31/2013 Charges Payments and Other Balance 11/30/2013 
Severance costs $2,477
 $939
 $(2,548) $868
 $3,680
 $4,000
$278
 $26
 $(227) $77
 $
 $1,076
 $(115) $961
 $6,286
 $6,900
Contract termination costs 414
 5
 (59) 360
 445
 4,100
3,027
 462
 (1,425) 2,064
 
 38
 
 38
 4,169
 4,700
Other exit costs 64
 649
 (693) 20
 2,480
 2,600

 
 
 
 
 210
 (210) 
 4,275
 4,900
Total $2,955
 $1,593
 $(3,300) $1,248
 $6,605
 $10,700
$3,305
 $488
 $(1,652) $2,141
 $
 $1,324
 $(325) $999
 $14,730
 $16,500

Restructuring
The amounts of restructuring charges by operatingrelating to each segment were as follows (in thousands):
As of November 30, 2012Three Months Ended November 30, 
Total Charges
to Date
 Total Expected Charges
 Current Period Charges Total Charges to Date Total Expected Charges2013 2012 
Metals Recycling Business $550
 $2,209
 $2,400
$1,291
 $550
 $5,699
 $7,300
Auto Parts Business 187
 420
 600
61
 187
 533
 600
Unallocated (Corporate) 856
 3,976
 7,700
460
 856
 8,498
 8,600
Total $1,593
 $6,605
 $10,700
$1,812
 $1,593
 $14,730
 $16,500
The Company does not allocate restructuring charges to the segments’ operating results because management does not include this information in its measurement of the performance of the operating segments.

12

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

Note 87 - 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.a business. 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 hashad the right to require the Company to purchase its interest in the Company’s acquisition subsidiary for fair value. The noncontrolling interest becomes redeemable within 60 days aftervalue upon the lateroccurrence 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. As of November 30, 2012, the noncontrolling interest was 19% of the outstanding capital stock of the subsidiary and the conditions for redemption had not been met.triggering events.

AsOn 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. In the second quarter of fiscal 2013, the Company adjusted the redeemable noncontrolling interest to its fair value corresponding to the purchase price of November 30, 2012$25 million,. Prior to its purchase, the noncontrolling interest was presented at its adjusted carrying value, of $24 million, which approximatesapproximated its fair value. The Company determinesdetermined fair value using Level 3 inputs under the fair value hierarchy using an income approach based on a discounted cash flow analysis. The determination of fair value requires management to apply significant judgment in formulating estimates and assumptions used in the discounted cash flow model, including primarily revenue growth

12

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

rates driven by future commodity prices and volume expectations, operating margins, capital expenditures, working capital requirements, terminal year growth rates and an appropriate discount rate. The present value of future cash flows is determined using a market-based weighted average cost of capital of 12.8%, including a subject-company risk premium. The subsidiary is presently undertaking significant investments to install a shredder and related processing and sorting equipment. As a result, projections of future cash flows assume volumes and earnings will grow above historical levels once construction activity is complete and the new equipment is put in service. The terminal year growth rate used in the discounted cash flow model is 2%. The Company also used a market approach based on earnings multiple data to corroborate the fair value estimate of the noncontrolling interest determined using the discounted cash flow model.

Significant increases (decreases) in the revenue growth rate driven by commodity prices and volume expectations and the terminal growth rate would result in a significantly higher (lower) fair value measurement. A significant decrease (increase) in the market-based weighted average cost of capital would result in a significantly higher (lower) fair value measurement.

Following is a reconciliation of the changes in the redeemable noncontrolling interest for the three months ended November 30, 2012 and 2011 (in thousands):
 2012 20112012
Balances - September 1 (Beginning of period) $22,248
 $19,053
$22,248
Net loss attributable to noncontrolling interest (442) (207)(442)
Currency translation adjustment (174) (377)(174)
Capital contributions from noncontrolling interest holder 1,970
 467
1,970
Balances - November 30 (End of period) $23,602
 $18,936
$23,602

Note 98 - Changes in Equity
 
The following is a summary of the changes in equity for the three months ended November 30, 20122013 and 20112012 (in thousands):
Fiscal 2013 Fiscal 20122013 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)$1,080,583
 $5,113
 $1,085,696
 $1,094,712
 $6,524
 $1,101,236
$776,558
 $4,641
 $781,199
 $1,080,583
 $5,113
 $1,085,696
Net income (loss)(1)
(1,671) 670
 (1,001) 7,018
 934
 7,952
(6,228) 861
 (5,367) (1,671) 670
 (1,001)
Other comprehensive loss, net of tax(2)
(1,040) 
 (1,040) (6,748) 
 (6,748)(726) 
 (726) (1,040) 
 (1,040)
Distributions to noncontrolling interests
 (375) (375) 
 (1,477) (1,477)
 (495) (495) 
 (375) (375)
Share repurchases
 
 
 (3,117) 
 (3,117)
Restricted stock withheld for taxes(1,104) 
 (1,104) (840) 
 (840)(628) 
 (628) (1,104) 
 (1,104)
Stock options exercised11
 
 11
 
 
 
Share-based compensation4,210
 
 4,210
 5,210
 
 5,210
3,868
 
 3,868
 4,210
 
 4,210
Excess tax (deficiency) benefit from stock options exercised and restricted stock units vested(681) 
 (681) 413
 
 413
Cash dividends ($0.188 and $0.017 per share)(4,952) 
 (4,952) (463) 
 (463)
Excess tax deficiency from stock options exercised and restricted stock units vested(589) 
 (589) (681) 
 (681)
Cash dividends(5,002) 
 (5,002) (4,952) 
 (4,952)
Balances - November 30 (End of period)$1,075,345
 $5,408
 $1,080,753
 $1,096,185
 $5,981
 $1,102,166
$767,264
 $5,007
 $772,271
 $1,075,345
 $5,408
 $1,080,753
_____________________________
(1)
Net income attributable to noncontrolling interests for the three months ended November 30, 2012 and 2011 excludes net losses of $(442) thousand and $(207) thousand, respectively, allocable to the redeemable noncontrolling interest, which is reported in the mezzanine section of the Unaudited Condensed Consolidated Balance Sheets.interest. See Note 87 - Redeemable Noncontrolling Interest.
(2)
Other comprehensive loss, net of tax for the three months ended November 30, 2012 and 2011 excludes $(174) thousand and $(377) 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.interest. See Note 87 - Redeemable Noncontrolling Interest.


13

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

Note 109 - Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of tax, are as follows (in thousands):
 November 30, 2012 August 31, 2012
Foreign currency translation adjustments$2,226
 $3,658
Pension obligations, net(5,731) (6,106)
Cash flow hedges, net(124) (141)
Total accumulated other comprehensive loss$(3,629) $(2,589)
Note 11 - Derivative Financial Instruments
 November 30, 2013 August 31, 2013
Foreign currency translation adjustments$(7,314) $(6,423)
Pension obligations, net(2,773) (2,817)
Cash flow hedges, net
 (121)
Total accumulated other comprehensive loss$(10,087) $(9,361)

Changes in accumulated other comprehensive loss, net of tax, for the three months ended November 30, 2013 were as follows:
Foreign Currency Exchange Rate Risk Management
To manage exposure
 Foreign Currency Translation Adjustments Pension Obligations, net Net Unrealized Loss on Cash Flow Hedges
Balance as of August 31, 2013$(6,423) $(2,817) $(121)
Other comprehensive loss before reclassifications(891) 
 
Income tax (expense) benefit
 
 
Other comprehensive loss before reclassifications, net of tax(891) 
 
Amounts reclassified from accumulated other comprehensive loss
 69
 98
Income tax (expense) benefit
 (25) 23
Amounts reclassified from accumulated other comprehensive loss, net of tax
 44
 121
Net current period other comprehensive income (loss)(891) 44
 121
Balance as of November 30, 2013$(7,314) $(2,773) $
Reclassifications from accumulated other comprehensive loss, both individually and in the aggregate, were immaterial 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 Operations.
The Company entered into forward contracts 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 Level 2 fair value measurements under the fair value hierarchy. In the first quarter of fiscal 2012, the Company determined that certain forecasted transactions were no longer probable, de-designated these contracts as hedges and subsequently terminated the contracts. The nominal amount and fair value of forward contracts, the amounts reclassified from accumulated other comprehensive income (loss) and the realized losses recorded in other income (expense), net were not material to the Unaudited Condensed Consolidated Financial Statements for all periods presented.

Note 1210 - Share-basedShare-Based Compensation

In the first quarter of fiscal 2013,2014, as part of the annual awards under the Company’s Long-Term Incentive Plan, the Compensation Committee granted 209,639219,504 restricted stock units (“RSU”) and 219,504 performance share awards to its key employees and officers under the Company’s 1993 Stock Incentive Plan. Plan, as amended.

The RSUs have a five-year term and vest 20% per year commencing June 1, 2013.October 31, 2014. The 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 $67 million. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures.

The performance-based awards have a two-year performance period consisting of the Company’s fiscal 2014 and fiscal 2015. The performance targets are based on divisional volume metrics (weighted at 50%) and divisional operating income metrics (weighted at 50%) for the two years of the performance period, with award payouts ranging from a threshold of 50% to a maximum of 200% for each portion of the awards. Awards will be paid in Class A common stock as soon as practicable after October 31 following the end of the performance period. The estimated fair value of the performance-based awards at the date of grant was $7 million.

Note 1311 - Income Taxes

The effective tax rate for the Company’s operations for the three months ended November 30, 2012 and 20112013 was a benefit of 12.7% compared to an expense of (198.8)% for the (198.8)%three andmonths ended 31.5%November 30, 2012, respectively..

A reconciliation of the difference between the federal statutory rate and the Company’s effective rate is as follows:
 Three Months Ended November 30,
 2012 2011
Federal statutory rate35.0 % 35.0 %
State taxes, net of credits7.1
 1.3
Foreign income taxed at different rates(1.0) (1.6)
Section 199 deduction4.6
 (1.7)
Non-deductible officers’ compensation(1.1) 0.7
Noncontrolling interests48.5
 (2.0)
Research and development credits21.7
 
Valuation allowance on deferred tax assets(312.1) 
Other(1.5) (0.2)
Effective tax rate(198.8)% 31.5 %


14

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 November 30,
 2013 2012
Federal statutory rate35.0 % 35.0 %
State taxes, net of credits2.5
 7.1
Foreign income taxed at different rates(6.5) (1.0)
Section 199 deduction(1.0) 4.6
Non-deductible officers’ compensation0.3
 (1.1)
Noncontrolling interests(0.9) 48.5
Research and development credits(0.1) 21.7
Valuation allowance on deferred tax assets(17.0) (312.1)
Other0.4
 (1.5)
Effective tax rate12.7 % (198.8)%

The effective tax rate for the first quarter of fiscal 2014 was lower than the statutory rate primarily due to the impact of recording a full valuation allowance on the current period benefit associated with foreign operations losses and the impact of the lower financial performance of foreign operations, which are taxed at more favorable rates.
In the first quarter of fiscal 2013, the Company recorded an expense of $2 million to recognize a valuation allowance on deferred tax assets of a foreign subsidiary as a result of negative evidence, including recent losses at the subsidiary, outweighing the more subjective positive evidence, thus indicating that it iswas more likely than not that the associated tax benefit willwould not be realized in the future.

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 2009 and prior years. The Canadian and several state tax authorities are currently examining returns for fiscal years 2005 to 2009.2012.

Note 1412 - Net Income (Loss)Loss Per Share

The following table sets forth the information used to compute basic and diluted net income (loss)loss per share attributable to SSI (in thousands):
Three Months Ended November 30,Three Months Ended November 30,
2012 20112013 2012
Net income (loss)$(1,443) $7,745
Net loss$(5,367) $(1,443)
Net income attributable to noncontrolling interests(228) (727)(861) (228)
Net income (loss) attributable to SSI(1,671) 7,018
Net loss attributable to SSI$(6,228) $(1,671)
Computation of shares:      
Weighted average common shares outstanding, basic26,567
 27,451
26,755
 26,567
Incremental common shares attributable to dilutive stock options, performance share awards, DSUs and RSUs
 264

 
Weighted average common shares outstanding, diluted26,567
 27,715
26,755
 26,567

Common stock equivalent shares of 864,8741,106,990 and 351,074864,874 were considered antidilutive and were excluded from the calculation of diluted net income (loss)loss per share for the three months ended November 30, 20122013 and 2011,2012, respectively.

Note 1513 - Related Party Transactions

The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $67 million and $106 million for the three months ended November 30, 20122013 and 20112012. Payments from, respectively. Net advances to (payments from) these joint ventures were less than $1 million and less than $(1) million for the three months ended November 30, 20122013 and 20112012., respectively. The Company owed $3$3 million and $2 million to joint ventures as of November 30, 20122013 and August 31, 20122013. Amounts receivable from joint venture partners were $1 million as of November 30, 2013 and August 31, 2013.


15

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

In connection with the acquisition of the assets of a metals recycling business assets of Amix Salvage & Sales Ltd. in March 2011, the Company had 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. On March 8, 2013, the Company purchased the noncontrolling interest in that subsidiary and, as a result, those entities under common ownership of the former minority shareholder ceased to be related parties of the Company. The Company paid less than $1$1 million, and $3 million, primarily for barging services, under these agreements for the three months ended November 30, 2012 and 2011, respectively. Amounts payable to entities affiliated with this minority shareholder were less than $1 million as of November 30, 2012 and August 31, 2012.2012.

In connection with the acquisition of a 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 five self-service stores in Northern California. Mr. Klauer’s 25% share of the profits of this partnership totaled less than $1 million and $1 millionfor the three months ended November 30, 20122013 and 20112012, respectively.. The partnership leases properties from entities in which Mr. Klauer has ownership interests under agreements that expire in December 2015March 2016 with options to renew the leases, upon expiration, for multiple five-year periods. The rent paid by the partnership to the entities in which Mr. Klauer has ownership interests was less than $1$1 million for the three months ended November 30, 20122013 and 20112012.


15

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

Certain members of the Schnitzer family own significant interests in, or are related to owners of, MMGL Corp (“MMGL”,MMGL,” formerly known as Schnitzer Investment Corp.), which is engaged in the real estate business and was a subsidiary of the Company prior to 1989. MMGL is considered a related party for financial reporting purposes. The Company and 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 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 MMGL with respect to the Portland scrap metal operations property. As these costs have increased substantially in the last two years, theThe Company and MMGL have agreed to an equitable cost sharing arrangement with respect to defense costs under which MMGL will pay 50% of the legal and consulting costs, net of insurance recoveries. The amounts receivable from (payable to) MMGL vary from period to period because of the timing of incurring legal and consulting fees, payments for cost reimbursements and insurance recoveries. Amounts receivable frompayable to MMGL under this agreement were less than $1 million as of November 30, 20122013, and amounts receivable from MMGL were less than $1 million as of August 31, 20122013.

Note 1614 - Segment Information

The accounting standards for reporting information about operating segments define operating segments as components of an enterprise that engages in business activities from which 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.


16

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 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 of each reporting segment does not reflect the operating income the reporting segment would report as a stand-alone business.

The table below illustrates the Company’s operating results by reporting segment (in thousands):
 Three Months Ended November 30,
 2013 2012
Revenues:   
Metals Recycling Business:   
Revenues$490,309
 $494,461
Less: Intersegment revenues(49,751) (47,255)
MRB external customer revenues440,558
 447,206
Auto Parts Business:   
Revenues79,635
 69,555
Less: Intersegment revenues(20,571) (15,970)
APB external customer revenues59,064
 53,585
Steel Manufacturing Business:   
Revenues88,123
 92,029
Total revenues$587,745
 $592,820

The table below illustrates the reconciliation of the Company’s segment operating income (loss) to income before income taxes (in thousands):
 Three Months Ended November 30,
 2013 2012
Metals Recycling Business$590
 $5,654
Auto Parts Business5,609
 6,364
Steel Manufacturing Business1,744
 3,404
Segment operating income7,943
 15,422
Restructuring charges(1,812) (1,593)
Corporate and eliminations(9,756) (12,616)
Operating income (loss)(3,625) 1,213
Interest expense(2,702) (2,017)
Other income, net176
 321
Loss before income taxes$(6,151) $(483)


1617

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

The table below illustrates the Company’s operating results by reporting segment (in thousands):
 Three Months Ended November 30,
 2012 2011
Revenues:   
Metals Recycling Business:   
Revenues$494,461
 $728,438
Less: Intersegment revenues(47,255) (58,696)
MRB external customer revenues447,206
 669,742
Auto Parts Business:   
Revenues69,555
 84,054
Less: Intersegment revenues(15,970) (21,522)
APB external customer revenues53,585
 62,532
Steel Manufacturing Business:   
Revenues92,029
 79,902
Total revenues$592,820
 $812,176

The table below illustrates the reconciliation of the Company’s segment operating income to income (loss) before income taxes (in thousands):
 Three Months Ended November 30,
 2012 2011
Metals Recycling Business$5,654
 $13,099
Auto Parts Business6,364
 10,442
Steel Manufacturing Business3,404
 1,218
Segment operating income15,422
 24,759
Restructuring charges(1,593) 
Corporate and eliminations(12,616) (9,789)
Operating income1,213
 14,970
Interest expense(2,017) (3,271)
Other income (expense), net321
 (393)
Income (loss) before income taxes$(483) $11,306

The following is a summary of the Company’s total assets by reporting segment (in thousands):
November 30, 2012 August 31, 2012November 30, 2013 August 31, 2013
Metals Recycling Business(1)
$1,680,808
 $1,696,296
$1,327,490
 $1,316,202
Auto Parts Business337,734
 329,327
348,392
 359,977
Steel Manufacturing Business325,741
 322,398
331,203
 330,282
Total segment assets2,344,283
 2,348,021
2,007,085
 2,006,461
Corporate and eliminations(585,079) (584,448)(614,966) (600,949)
Total assets$1,759,204
 $1,763,573
$1,392,119
 $1,405,512
_____________________________
(1)
MRB total assets include $16 million and $1715 million as of November 30, 20122013 and August 31, 20122013, respectively, for investments in joint venture partnerships.


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SCHNITZER STEEL INDUSTRIES, INC. 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section includes a discussion of our operations for the three months ended November 30, 20122013 and 20112012. 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, 20122013 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, includingwhich may include 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; benefits, 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,” and similar expressions are intended to identify forward-looking statements.
We may make other forward-looking statements from time to time, including in reports filed with the Securities and Exchange Commission, 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“Item 1A. Risk FactorsFactors” of Part I inof our Annual Reportmost recent annual report on Form 10-K for the year ended August 31, 2012.10-K. 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 impact of long-lived asset 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; impact of equipment upgrades and failures on production; product liability claims; the impact of impairment of our deferred tax assets; 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.


19

SCHNITZER STEEL INDUSTRIES, INC.

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”), which collectively provide an end-of-life cycle solution for a variety of products through our integrated businesses. We use operating income to measure our segment’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 of each reporting segment does not reflect the operating income the reporting segment would report as a stand-alone business. For further information regarding our reporting segments,

18

SCHNITZER STEEL INDUSTRIES, INC.

see Note 1614 - 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 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, Oregon; and Tacoma, Washington) and, access to public deep water port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) and water access for transportation purposes (in Surrey, British Columbia) allow us to efficiently meet the global demand for recycled and processed ferrous recycled metal by shipping bulk cargoes to steel manufacturers located in Europe, Asia, Central America and Africa. Our exports of nonferrousrecycled and processed recyclednonferrous 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.

Executive Overview of Financial Results for the First Quarter of Fiscal 20132014

We generated consolidated revenues of $588 million in the first quarter of fiscal 2014, a decrease of 1% from the $593 million of revenues in the first quarter of fiscal 2013. This decrease was primarily due to lower average net selling prices for ferrous and nonferrous metal in the first quarter of fiscal 2014 as a result of continued weak economic conditions that negatively impacted export demand for recycled metal. Despite a slight increase in sales volumes compared to the prior year period, scrap flows remained significantly constrained primarily as a result of weak economic conditions.

Consolidated operating loss was $4 million in the first quarter of fiscal 2014, compared to consolidated operating income of $1 million in the first quarter of fiscal 2013, a decrease of 27% from. Adjusted consolidated operating loss in the $812 millionfirst quarter of revenuesfiscal 2014, excluding restructuring charges of $2 million, was $2 million compared to adjusted consolidated operating income of $3 million in the first quarter of fiscal 2012. This decrease was primarily due to lower ferrous and nonferrous sales volumes and average net selling prices as a result2013 (see reconciliation of weak economicadjusted consolidated operating income (loss) in Non-GAAP Financial Measures at the end of Item 2). Market conditions that negatively impacted global demand for the export of recycled metal. In addition, the sluggish U.S. economic growth and the lower price environment adversely impacted the supply of scrap metal.

The weak global economic conditions and the slowdown of economic activity adversely impacted our resultsmetals improved in the first quarter of fiscal 2013, leading to operating income of $1 million, which included restructuring charges of $2 million, compared to operating income of $15 million in the prior year quarter. Selling prices for ferrous recycled metal experienced a sharp decline in the firstsecond half of the first quarter of fiscal 2013. In these weak market conditions, purchase costs for recycled metal decreased at a slower pace than average net selling prices for shipments resulting in a compression of operating margins2014. However, compared to the prior year period. This compression was further compounded at MRB byperiod, average net selling prices were lower which, together with the adverse impact of average inventory costingconstrained supply conditions on costs of goods sold caused by the sharp decline in ferrous recycled metal prices during the quarter. In addition, operating results at MRB and APB were negatively impacted by the reduction in volumes due to the constrained supplycost of raw materials, contributed to a compression in operating margins, which was only partly offset by slightly higher volumes. Consolidated operating results in fiscal 2014 also included $1 million of operating losses, including end-of-life vehicles, primarilyintegration and startup costs, related to the continued weak domestic economic conditions. This was partially offsetstore locations acquired or opened by an increase in operating income at SMB primarily as a result of higher finished steel volumes compared toAPB after the first quarter of fiscal 2012. Selling, general2013 and administrative (“SG&A”) expenses decreasedthe recognition of bad debt expense of $1 million by SMB.

$8 million, or 14%, compared toIn the first quarter of fiscal 2012 primarily as a result2014, we initiated additional restructuring initiatives to further reduce our annual operating expenses by approximately $30 million, with approximately 70% of the restructuring initiativesreduction expected to benefit fiscal 2014 results and the full annual benefit expected to be achieved in fiscal 2015. The reduction in operating expenses will primarily occur at MRB and is expected to result from a combination of headcount reductions, productivity improvements, procurement savings and other operating efficiencies initiated in fiscal 2012 and reduced incentive compensation expense due to lower financial performance.operational efficiencies.


20

SCHNITZER STEEL INDUSTRIES, INC.

The following items summarize our consolidated financial results for the first quarter of fiscal 20132014:
Revenues of $593588 million, compared to $812593 million in the first quarter of fiscal 20122013;
OperatingConsolidated operating loss of $4 million, compared to consolidated operating income of $1 million, compared to operating income of $15 million in the first quarter of fiscal 20122013;
Adjusted consolidated operating loss of $2 million compared to adjusted consolidated operating income of $3 million in the first quarter of fiscal 2013 (see reconciliation of adjusted consolidated operating income (loss) in Non-GAAP Financial Measures at the end of Item 2);
Net loss attributable to SSI of $6 million, or $(0.23) per diluted share, compared to $2 million, or $(0.06) per diluted share, compared to net income of $7 million, or $0.25 per diluted share, in the first quarter of fiscal 20122013;
Adjusted net loss attributable to SSI, excluding restructuring charges, was $5 million, or $(0.18) per diluted share, compared to adjusted net loss of $1 million, or $(0.02) per diluted share, in the first quarter of fiscal 2013 (see the reconciliation of adjusted net loss and adjusted diluted earnings per share in Non-GAAP Financial Measures at the end of Item 2);
Net cash provided by operating activities of $26 million, compared to net cash used in operating activities of $60 million in the first three months of fiscal 2013, compared to $86 million in the first quarter of fiscal 2012;prior year period; and
Debt, net of cash, of $331364 million as of November 30, 20122013, compared to $245368 million as of August 31, 20122013 (see the reconciliation of Debt,debt, net of cash in Non-GAAP Financial Measures at the end of this Item 2).

The following items highlight the financial results for our operatingreporting segments for the first quarter of fiscal 20132014:
MRB revenues and operating income of $490 million and $1 million, respectively, compared to $494 million and $6 million in the first quarter of fiscal 2013, respectively;
APB revenues and operating income of $80 million and $6 million, respectively, compared to $72870 million and $136 million in the first quarter of fiscal 2012, respectively;
APB revenues and operating income of $70 million and $6 million, respectively, compared to $84 million and $10 million in the first quarter of fiscal 20122013, respectively; and
SMB revenues and operating income of $9288 million and $32 million, respectively, compared to $8092 million and $1$3 million in the first quarter of fiscal 20122013, respectively.



1921

SCHNITZER STEEL INDUSTRIES, INC. 

Results of Operations
Three Months Ended November 30,Three Months Ended November 30,
($ in thousands)2012 2011 % Change2013 2012 % Change
Revenues:          
Metals Recycling Business$494,461
 $728,438
 (32)%$490,309
 $494,461
 (1)%
Auto Parts Business69,555
 84,054
 (17)%79,635
 69,555
 14 %
Steel Manufacturing Business92,029
 79,902
 15 %88,123
 92,029
 (4)%
Intercompany revenue eliminations(1)
(63,225) (80,218) (21)%(70,322) (63,225) 11 %
Total revenues592,820
 812,176
 (27)%587,745
 592,820
 (1)%
Cost of goods sold:          
Metals Recycling Business466,587
 686,456
 (32)%468,601
 466,587
  %
Auto Parts Business50,044
 59,460
 (16)%59,383
 50,044
 19 %
Steel Manufacturing Business86,944
 77,005
 13 %83,680
 86,944
 (4)%
Intercompany cost of goods sold eliminations(1)
(61,691) (80,706) (24)%(69,247) (61,691) 12 %
Total cost of goods sold541,884
 742,215
 (27)%542,417
 541,884
  %
Selling, general and administrative expense:          
Metals Recycling Business22,173
 29,865
 (26)%21,483
 22,173
 (3)%
Auto Parts Business13,147
 14,152
 (7)%14,643
 13,147
 11 %
Steel Manufacturing Business1,681
 1,679
  %2,699
 1,681
 61 %
Corporate(2)
10,994
 10,296
 7 %8,725
 10,994
 (21)%
Total SG&A expense47,995
 55,992
 (14)%
Loss (income) from joint ventures:     
Total selling, general and administrative expense47,550
 47,995
 (1)%
(Income) loss from joint ventures:     
Metals Recycling Business47
 (982) NM
(365) 47
 NM
Change in intercompany profit elimination(3)
88
 (19) NM
(44) 88
 NM
Total joint venture loss (income)135
 (1,001) NM
Operating income:     
Total (income) loss from joint ventures(409) 135
 NM
Operating income (loss):     
Metals Recycling Business5,654
 13,099
 (57)%590
 5,654
 (90)%
Auto Parts Business6,364
 10,442
 (39)%5,609
 6,364
 (12)%
Steel Manufacturing Business3,404
 1,218
 179 %1,744
 3,404
 (49)%
Segment operating income15,422
 24,759
 (38)%7,943
 15,422
 (48)%
Restructuring charges(4)
(1,593) 
 NM
(1,812) (1,593) 14 %
Corporate expense(2)
(11,144) (10,296) 8 %(8,725) (11,144) (22)%
Change in intercompany profit elimination(5)
(1,472) 507
 NM
(1,031) (1,472) (30)%
Total operating income$1,213
 $14,970
 (92)%
Total operating income (loss)$(3,625) $1,213
 NM
_____________________________
NM = Not Meaningful
(1)MRB sells ferrous recycled metal to SMB at rates per ton that approximate West Coast U.S. export market prices. In addition, APB sells ferrous and nonferrous material to MRB.MRB at prices that approximate local market rates. 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 recycled metal to MRB and then subsequently to SMB at rates per tonprices that approximate West Coast U.S. exportlocal market prices. Consequently, theserates, which produces intercompany revenues produceprofit. This intercompany operating income (loss), whichprofit is eliminated while the products remain in inventory and is not recognized until the finished products are sold to third parties; therefore, intercompany profit is eliminated while the products remain in inventory.parties.
(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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SCHNITZER STEEL INDUSTRIES, INC. 

Revenues
Consolidated revenues in the first quarter of fiscal 20132014 were $593588 million, a decrease of 27%1% compared to the same period in the prior year. ThisThe decrease was primarily due to lower ferrous and nonferrous sales volumes and lower average net selling prices due to softer globalfor scrap metal as a result of continued weak economic conditions that negatively impacted export demand for recycled metal resulting frommetal. Despite a continued slowdownslight increase in global economic growth. In addition, the sluggish U.S. economic growth and the lower price environment adversely impacted the supply of scrap metalsales volumes compared to the prior year and contributed to the lower sales volumes.period, scrap flows remained significantly constrained primarily as a result of weak economic conditions.
Operating Income
Consolidated operating incomeloss in the first three months of fiscal 2013 was $1 million, compared to operating income of $15 million in the prior year period. In the first quarter of fiscal 2013, selling prices for ferrous recycled metal experienced a sharp decline. As a result of the weak market conditions, purchase costs for recycled metal decreased at a slower pace than average net selling prices for shipments resulting in a compression of operating margins compared to the prior year period. This compression was further compounded at MRB by the adverse impact of average inventory costing on costs of goods sold caused by the sharp decline in recycled recycled metal prices during the quarter. In addition, operating results at MRB and APB were negatively impacted by the reduction in volumes due to the constrained supply of raw materials, including end-of-life vehicles, primarily related to the continued weak domestic economic conditions. This was partially offset by an increase in operating income at SMB primarily as a result of higher finished steel volumes compared to the first quarter of fiscal 2012. While the prior year period also experienced a decline in selling prices for recycled metals, operating results for MRB and APB in the first quarter of fiscal 2012 benefited from higher sales volumes and average net selling prices resulting in less margin compression.
Included in operating results for the first quarter of fiscal 20132014 was a reduction in SG&A expenses$4 million, compared to consolidated operating income of $81 million in the same period in the prior year. Adjusted consolidated operating loss in the first quarter of 2014, or 14%. The decreaseexcluding restructuring charges of $2 million, was primarily as a result of the restructuring initiatives and other operating efficiencies initiated in fiscal 2012 and reduced incentive compensation expense due$2 million compared to lower financial performance.
Consolidatedadjusted consolidated operating income of $3 million in the first quarter of 2013 (see reconciliation of adjusted consolidated operating income (loss) in Non-GAAP Financial Measures at the end of Item 2). Market conditions for the export of recycled metals improved in the second half of the first quarter of fiscal 2014. However, compared to the prior year period, average net selling prices were lower which, together with the impact of constrained supply conditions on the cost of raw materials, contributed to a compression in operating margins, which was only partly offset by slightly higher volumes. Consolidated operating results in fiscal 2014 also included $1 million of operating losses, including integration and startup costs, related to store locations acquired or opened by APB after the first quarter of fiscal 2013 and the recognition of bad debt expense of $1 million by SMB.
Consolidated operating loss in the first quarter of fiscal 2014 included restructuring charges of $2 million, consisting of severance, contract termination and other exit costs.costs, compared to restructuring charges of $2 million in the prior year period. These charges are related to the restructuring initiatives under two separate plans announced in the fourth quarter of fiscal 2012 (the “Q4’12 Plan”) and the first quarter of fiscal 2014 (the “Q1’14 Plan”), respectively.

In the first quarter of fiscal 2014, we initiated the Q1’14 Plan and began implementing restructuring initiatives to further reduce our annual operating expenses by approximately $30 million, of which the substantial majority will be reflected in cost of goods sold. We expect approximately 70% of the cost reductions to benefit fiscal 2014 results with the full annual benefit to be achieved in fiscal 2015. The reduction in operating expenses will primarily occur at MRB and is expected to result from a combination of headcount reductions, productivity improvements, procurement savings and other operational efficiencies. We expect to incur restructuring charges of approximately $3 million, substantially all in fiscal 2014, in connection with these initiatives, the vast majority of which will require us to make cash payments.

The Q4’12 Plan included restructuring initiatives designed to extract greater synergies from the significant acquisitions and technology investments made in recent years, to achieve further integration between MRB and APB, to realign our organization to support future growth and to decrease operating expenses by streamlining functions and reducing organizational layers. These initiatives, are expected to lower annualwhich were completed by the end of fiscal 2013, achieved a reduction in operating costs byof approximately $25 million on an annualized basis, comprising approximately $18 million of selling, general and administrative expense and $7 million of cost of goods sold,sold.

Restructuring charges for the three months ended November 30, 2013 and be substantially complete by the end of fiscal 2013. Total pre-tax charges pursuant to these restructuring initiatives are expected to amount to $11 million, of which $7 million have been recognized to date with the balance expected to be incurred by the end of fiscal 2013. We expect that the vast majority2012 were comprised of the restructuring charges will require us to make cash payments.
Following is a summary of the restructuring charges incurred in the first quarter of fiscal 2013 by major type of cost and the total charges expected to be incurred pursuant to these restructuring initiativesfollowing (in thousands):
Three Months Ended November 30, 2013 Three Months Ended November 30, 2012
 MRB APB Corporate Total charges in the Period Total Expected ChargesQ4’12 Plan Q1’14 Plan Total Charges Q4’12 Plan Q1’14 Plan Total Charges
Severance costs $521
 $111
 $307
 $939
 $4,000
$26
 $1,076
 $1,102
 $939
 $
 $939
Contract termination costs 5
 
 
 5
 4,100
462
 38
 500
 5
 
 5
Other exit costs 24
 76
 549
 649
 2,600

 210
 210
 649
 
 649
Total $550
 $187
 $856
 $1,593
 $10,700
Total charges$488
 $1,324
 $1,812
 $1,593
 $
 $1,593
Total charges to date$13,406
 $1,324
 $14,730
 $6,605
 $
 $6,605
We do not include restructuring charges
See Note 6 - Restructuring Charges in the measurementNotes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of the performance of our operating segments.this report for additional details on restructuring charges.

Interest Expense
Interest expense was $2 million and $3 million for the threefirst months endedquarter of fiscal November 30, 2012 and 20112014, respectively.compared to $2 million for the same period in the prior year. The decreaseincrease in interest expense was primarily due to decreasedincreased average borrowings under our bank credit facilities compared to the prior year period.

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Income Tax Expense
Our effective tax rate for the first quarter of fiscal 20132014 was a benefit of 12.7%, compared to an expense of 198.8%, compared to 31.5% for the same period in the prior year.

The effective tax rate for the first quarter of fiscal 2014 was lower than the federal statutory rate of 35% primarily due to the impact of recording a full valuation allowance on the current period benefit associated with foreign operations losses and the impact of the lower financial performance of foreign operations, which are taxed at more favorable rates.

The effective tax rate in the first quarter of fiscal 2013 was impacted by the near break-even pre-tax results and the recognition of a valuation allowance on deferred tax assets of $2 million. The valuation allowance was recorded on deferred tax assets of a foreign subsidiary of $2 million as a result of negative evidence, including recent losses at the subsidiary, outweighing the more

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subjective positive evidence, thus indicating that it iswas more likely than not that the associated tax benefit willwould not be realized in the future. 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 20132014 is expected to be approximately 36%37%, subject to financial performance for the remainder of the year.

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 1614 - 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 November 30,Three Months Ended November 30,
($ in thousands, except for prices)2012 2011 % Change2013 2012 % Change
Ferrous revenues$370,476
 $578,024
 (36)%$369,555
 $370,476
  %
Nonferrous revenues116,601
 142,290
 (18)%113,154
 116,601
 (3)%
Other7,384
 8,124
 (9)%7,600
 7,384
 3 %
Total segment revenues494,461
 728,438
 (32)%490,309
 494,461
 (1)%
Cost of goods sold466,587
 686,456
 (32)%468,601
 466,587
  %
Selling, general and administrative expense22,173
 29,865
 (26)%21,483
 22,173
 (3)%
Loss (income) from joint ventures47
 (982) NM
(Income) loss from joint ventures(365) 47
 NM
Segment operating income$5,654
 $13,099
 (57)%$590
 $5,654
 (90)%
Average ferrous recycled metal sales prices ($/LT):(1)
          
Domestic$354
 $420
 (16)%$356
 $354
 1 %
Foreign$360
 $436
 (17)%$344
 $360
 (4)%
Average$358
 $432
 (17)%$348
 $358
 (3)%
Ferrous sales volume (LT, in thousands):          
Domestic279
 319
 (13)%323
 279
 16 %
Foreign675
 913
 (26)%655
 675
 (3)%
Total ferrous sales volume (LT, in thousands)954
 1,232
 (23)%978
 954
 3 %
Average nonferrous sales price ($/pound)(1)
$0.95
 $1.00
 (5)%$0.89
 $0.95
 (6)%
Nonferrous sales volumes (pounds, in thousands)118,931
 137,243
 (13)%123,941
 118,931
 4 %
Outbound freight included in cost of goods sold$32,322
 $50,086
 (35)%$32,583
 $32,322
 1 %
_____________________________
NM = Not Meaningful
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 was due to the combination of lower sales volumes and lower average net selling prices. Softer global demand for recycled metal resulting from a continued slowdown in global economic growth compared to the prior year quarter contributed to these declines. 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 and contributed to the lower sales volumes.
The decrease in nonferrous revenues was driven primarily by the combination of lower sales volumes and lower average net selling prices as a result of the weak market conditions. Nonferrous volumes decreased compared to the first quarter of fiscal 2012 despite the impact of improved recovery of nonferrous materials processed through our enhanced processing technologies.
Segment Operating Income
Operating income for the first quarter of fiscal 2013 decreased by $7 million, or 57%, to $6 million compared to the prior year period. The first half of the first quarter of fiscal 2013 included a decline in selling prices for ferrous recycled metal which led to

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an adverse effect of average inventory costing on cost of goods sold. In addition, operating resultsRevenues
Ferrous revenues in the first quarterquarters of fiscal 2014 and 2013 were negatively impacted by the reduction in volumesconsistent as a result of the constrained supplyoffsetting effects of raw materials primarily related to the continued weak domestic economic conditions. The combination of these factors led to a compression in operating margins in the first quarter of fiscal 2013. While the prior year period also experienced declining selling prices for recycled metals, MRB’s operating results in the first quarter of fiscal 2012 benefited from higher ferrous sales volumes and higherlower average net selling prices resulting in less margin compression.
Included in operating income was an $8 million reduction in SG&A expenses for the first quarter of fiscal 2013 primarily as a result of the restructuring initiatives and other operating efficiencies initiated in fiscal 2012 and reduced incentive compensation expense due to lower financial performance.
Auto Parts Business
 Three Months Ended November 30,
($ in thousands)2012 2011 % Change
Revenues$69,555
 $84,054
 (17)%
Cost of goods sold50,044
 59,460
 (16)%
Selling, general and administrative expense13,147
 14,152
 (7)%
Segment operating income$6,364
 $10,442
 (39)%
Number of stores at period end51
 50
 2 %
Cars purchased (in thousands)79
 85
 (7)%

Revenues
ferrous sales prices. The decrease in nonferrous revenues in the first quarter of fiscal 20132014 was primarily due to lower commodity prices and decreased car volumes, both of which adversely impacted ferrous andaverage nonferrous sales compared to the prior year period.prices.
Segment Operating Income
Operating income for the first quarter of fiscal 2013 decreased by 39%2014 was $1 million compared to $6 million in the prior year period. Market conditions for the export of recycled metals improved in the second half of the first quarter of fiscal 2014. However, compared to the prior year period, primarily dueaverage net selling prices were lower which, together with the impact of constrained supply conditions on the cost of raw materials, contributed to thea compression in operating margins, causedwhich was only partly offset by slightly higher volumes.
Auto Parts Business
 Three Months Ended November 30,
($ in thousands)2013 2012 % Change
Revenues$79,635
 $69,555
 14 %
Cost of goods sold59,383
 50,044
 19 %
Selling, general and administrative expense14,643
 13,147
 11 %
Segment operating income$5,609
 $6,364
 (12)%
Number of stores at period end62
 51
 22 %
Cars purchased (in thousands)91
 79
 15 %

Revenues
Revenues in the adverse impactfirst quarter of lower carfiscal 2014 increased by 14% compared to the prior year quarter primarily due to higher sales volumes on costsas a result of goods sold andadditional volume from stores acquired or opened during the prior twelve-month period.
Segment Operating Income
Operating income for the first quarter of fiscal 2014 decreased by12% compared to the same period in the prior year. The benefits from increased sales volumes due to the additional store locations were more than offset by a compression in operating margins as a result of car purchase costs decreasing at a slower rate than ferrouscommodity selling prices.prices and
Operating income inoperating losses of $1 million, including integration and startup costs, related to store locations acquired or opened by APB during the twelve months prior to the end of the first quarter of fiscal 2013 reflected lower SG&A expenses of $1 million primarily as a result of the benefits arising from restructuring initiatives and other operational efficiencies.2014.
Steel Manufacturing Business
Three Months Ended November 30,Three Months Ended November 30,
($ in thousands, except for price)2012 2011 % Change2013 2012 % Change
Revenues$92,029
 $79,902
 15 %$88,123
 $92,029
 (4)%
Cost of goods sold86,944
 77,005
 13 %83,680
 86,944
 (4)%
Selling, general and administrative1,681
 1,679
  %
Selling, general and administrative expense2,699
 1,681
 61 %
Segment operating income$3,404
 $1,218
 179 %$1,744
 $3,404
 (49)%
Finished steel products average sales price ($/ton)(1)
$680
 $722
 (6)%$657
 $680
 (3)%
Finished steel products sold (tons, in thousands)130
 107
 21 %128
 130
 (2)%
Rolling mill utilization70% 60%  65% 70%  
_____________________________
(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 due to an increase in the volume of finished steel products sold inRevenues for the first quarter of fiscal 2013 as a result of slightly improved demand2014 decreased by 4% compared to the same period in our West Coast markets. The impact on revenue from improved volumes was partially offset bythe prior year primarily due to lower average sellingsales prices for our finished steel products as a result of the declining trend in global steel prices.impact of reduced costs of raw materials.

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Segment Operating Income
The increase in operatingOperating income for the first quarter of fiscal 20132014 decreased compared to the prior year period was primarily due to the 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 thelower average sales price for our finished steel productsprices and a more favorable product mix.volumes, and the recognition of bad debt expense of $1 million.
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 $2430 million and $9013 million as of November 30, 20122013 and August 31, 20122013, 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 November 30, 20122013, debt, net of cash, was $331364 million compared to $245368 million as of August 31, 20122013 (refer to Non-GAAP Financial Measures below), an increasea decrease of $864 million primarily as a result of the increase in our working capital.timing of borrowings and repayments. Our cash balances as of November 30, 20122013 and August 31, 20122013 include $59 million and $137 million, respectively, which are indefinitely reinvested in Puerto Rico and Canada.
Operating Activities
Net cash used inprovided by operating activities in the first three months of fiscal 20132014 was $6026 million, compared to net cash used in operating activities of $8660 million in the first three months of fiscal 20122013.

Cash used in operating activitiesSources of cash in the first three months of fiscal 20132014 included a $5157 million decrease in accounts receivable due to the timing of sales and collections. Uses of cash included a $39 million increase in inventory due to higher volumes on hand a $20 million increase in accounts receivable due toincluding the impact of timing of collectionspurchases and a $10 million decrease in accounts payable due to the timing of payments.sales.

Cash used in operating activities in the first three months of fiscal 20122013 included ana $51 million increase in inventory of $74 million due to higher volumes on hand, a $20 million increase in accounts receivable due to the timing of collections and a $10 million decrease of $19 million in accounts payable due to the timing of payments. Sources of cash included a decrease of $8 million in accounts receivable due to the timing of collections.

Investing Activities
Net cash used in investing activities in the first three months of fiscal 20132014 was $2616 million, compared to $2526 million in the first three months of fiscal 20122013.

Cash used in investing activities in the first three months of fiscal 2013 and 20122014 included capital expenditures of $2714 million and $26 million, respectively, in capital expenditures to upgrade our equipment and infrastructure.infrastructure, compared to $27 million in the first three months of fiscal 2013.

Financing Activities
Net cash provided by financing activities in the first three months of fiscal 20132014 was $206 million, compared to $8920 million in the first three months of fiscal 20122013.

Cash provided by financing activities in the first three months of fiscal 20132014 was primarily due to $12 million in net borrowings of debt (refer to Non-GAAP Financial Measures below) mainly used to support capital expenditures. Uses of cash included $205 million for dividends.

Cash provided by financing activities in the first three months of fiscal 2013 included $20 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 three months of fiscal 2012 included $94 million in net borrowings of debt (refer to Non-GAAP Financial Measures below) principally used to support higher working capital requirements and $3 million in repurchases of outstanding shares of our Class A common stock.

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


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SCHNITZER STEEL INDUSTRIES, INC. 


We had borrowings outstanding under the credit facility of $337381 million as of November 30, 20122013 and $325360 million as of August 31, 20122013. The weighted average interest rate on amounts outstanding under this facility was 1.80%1.96% and 1.98% as of November 30, 20122013 and 2.06% as of August 31, 20122013., respectively.

We also have an unsecured, uncommitted $25 million credit line with Wells Fargo Bank, N.A. that expires on March 1, 20132014. Interest rates are set by the bank at the time of borrowing. We had zero and $9 million of borrowings outstanding of $9 million under this facility as of November 30, 20122013 and no borrowings outstanding as of August 31, 20122013.

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 November 30, 20122013, we were in compliance with these covenants. While we expect to remain in compliance with these covenants, there can be no assurances that we will be able to do so in the event of a sustained deterioration in market conditions or other negative factors which adversely impact our results of operations and lead to a trend of consolidated net losses. We use these credit facilities to fund working capital requirements, acquisitions, capital expenditures, dividends and share repurchases.
 
In addition, as of November 30, 20122013 and August 31, 20122013, we had $8 million of long-term tax-exempt bonds outstanding that mature in January 2021.

Capital Expenditures
Capital expenditures totaled $2714 million for the first three months of fiscal 20132014, compared to $2627 million for the same period in the prior year. During the first quarter of fiscal 20132014, we continuedcompleted our investmentsinvestment in the construction of a new shredder, advancednonferrous processing equipment and related infrastructurefacility in Surrey, British Columbia,Puerto Rico, which is expected to begincommenced operations in fiscalSeptember 2013. In addition, we made further investments in technologyWe plan to improve the recovery and separation of nonferrous materials from the shredding process and investments in infrastructureinvest up to improve efficiency, increase capacity, improve worker safety, enhance environmental systems and replace equipment. We expect our investments$50 million in capital expenditures to be up to $90 millionin fiscal 20132014., which includes capital expenditures associated with APB acquisitions and greenfield store developments made or commenced in fiscal 2013 or fiscal 2014.

Dividends
On November 12, 2012,7, 2013, our Board of Directors declared a dividend for the first quarter of fiscal 20132014 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend was paid on November 29, 2013.

Acquisitions
We continue to expandIn the first quarter of fiscal 2014, we expanded our presence in the regions in which we operate and in new locations throughPacific Northwest with the acquisition of businesses. In December 2012, we completed the acquisition of fourone used auto parts facilitiesstore in Richmond and Surrey, British Columbia,the Olympia metropolitan area in Washington, which is near our MRBMetals Recycling Business’ 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 will operate under APB’s Pick-N-Pull brand. The aggregate consideration paid for these acquisitions was $23 million.Tacoma, Washington. See Note 43 - 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 $21 million in capital expenditures for environmental projects during the first three months of fiscal 20132014, and plan to invest up to $1211 million for such projects in fiscal 2013.2014.

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 is being reviewed and mayis likely to be subject to revisions, which could be significant, 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 2014.2015. Responsibility for implementing and funding the EPA’s selected remedy will be determined in a separate allocation process, which is currently underway. Because there has not been a determination of the total cost of

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SCHNITZER STEEL INDUSTRIES, INC.

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

27

SCHNITZER STEEL INDUSTRIES, INC.

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 65 - 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 our control. Under the terms of an agreement related to the acquisition, the noncontrolling interest holder has the right to require us to purchase its interest in 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 November 30, 2012. If the interest were to be redeemed, we would be required to purchase all of such interest at fair value on the date of redemption. As of November 30, 2012, the fair value of the redeemable noncontrolling interest was $24 million. See Note 8 - 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, working capital and other financing needs.

We generally believe our current cash resources, internally generated funds, existing credit facilities and access to the capital markets will provide adequate short-term and long-term liquidity needs for acquisitions, capital expenditures, working capital, dividends, share repurchases, 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.

Off-Balance Sheet Arrangements
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, 20122013.
Our redeemable noncontrolling interest is a potential future obligation for which the exercise date and future fair value are not known and not solely within our control. See Note 8 - 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 November 30, 20122013, we had $1817 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, 20122013, with the following changes:

Goodwill
We evaluate goodwill for impairment annuallyexcept that 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

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SCHNITZER STEEL INDUSTRIES, INC.

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 have similar economic characteristics.
When testing goodwill for impairment, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment test. If we believe, as a result of the 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 is required. 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 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 and appropriate discount rates.
In the third quarter of fiscal 2012, we identified the combination of the then recent but significant decline of the Company’s market capitalization below the carrying value of its net assets, the persistent uncertainty around global macroeconomic conditions and the impact on our fiscal 2012 operating results of current challenging market conditions in our industry as a triggering event requiring an interim impairment test of goodwill. 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 $465 million as of May 31, 2012, the calculated fair value exceeded the carrying value by approximately 11%. 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 gradual recovery of operating margins 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 11.7%. 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% could result in a failure of the Step 1 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, including consideration of a control premium representing the estimated amount an investor would pay to obtain a controlling interest. 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 ending May 31, 2012) and the higher aggregated estimated fair value of our reporting units was above the historical range of premiums observed in normal market conditions on transactions within the steel making and scrap processing industries and in other comparable sectors. We believe the implied control premium reflected the recent impact on our stock price of current depressed market conditions in our industry, weak macroeconomic indicators and the cyclical nature of our business.
We did not identify triggering events during either the fourth quarter of fiscal 2012 or first quarter of fiscal 2013 requiring an interim2014, we changed the annual impairment testtesting date of goodwill.
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 asgoodwill allocated to future revenue growth rates, pace and extent of operating margins’ recovery, market-based WACC and other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions used in testing our reporting units’ goodwill for impairment are reasonable, it is reasonably possible that market and economic conditions deteriorate further, including additional declines in or a lack of long-term recovery of market conditionsunits from current levels, a lack of recovery in our share price from current levels, or an increase in the market-based WACC, among other factors, which could significantly impact our impairment analysis and increase the likelihood of future goodwill impairment charges that, if incurred, could be materialFebruary 28 to our results of operations and financial position.

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SCHNITZER STEEL INDUSTRIES, INC.

Redeemable Noncontrolling Interest
We have 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 our control. Since redemption of the noncontrolling interest is outside of our control, this interest is presented on the Consolidated Balance Sheets in the mezzanine section under the caption “Redeemable noncontrolling interest.” If the interest were to be redeemed, we would be required to purchase all of such interest at fair value on the date of redemption. The redeemable noncontrolling interest is 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 asJuly 1 of each 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 recorded to retained earnings.
As of November 30, 2012, the noncontrolling interest was presented at its adjusted carrying value of $24 million, which approximates its fair value. 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 used in the discounted cash flow model, including primarily revenue growth rates driven by future commodity prices and volume expectations, operating margins, capital expenditures, working capital requirements, terminal growth rates and an appropriate discount rate. The subsidiary is presently undertaking significant investments to install a large-scale shredder and related processing and sorting equipment and increase shipping capabilities. As a result, projections of future cash flows assume volumes to grow above historical levels once construction activity is complete and the new equipment is put in service. The present value of future cash flows are determined using a market-based weighted average cost of capital of 12.8%, including a subject-company risk premium. The terminal year growth rate used in the discounted cash flow model is 2%. A 1% increase (decrease) in the discount rate would decrease (increase) the estimated fair value of the redeemable noncontrolling interest by approximately 7%. We also used a market approach based on earnings multiple data to corroborate the fair value estimate of the noncontrolling interest determined using the discounted cash flow model. As a result of the inherent uncertainty associated with forming these estimates, including changes in general market conditions, actual results could differ from those estimates which may result in a material change in the fair value of the redeemable noncontrolling interest.
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 year. See Note 24 - Recent Accounting PronouncementsGoodwill in the Notes to the Unaudited Condensed Consolidated Financial Statements, in Part I,1, Item 1 of this report.report for further detail.

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 can be used, among other things, to repay indebtedness, netting this against total debt is a useful measure of our leverage.
The following is a reconciliation of debt, net of cash (in thousands):
November 30, 2012 August 31, 2012November 30, 2013 August 31, 2013
Short-term borrowings$9,169
 $683
$613
 $9,174
Long-term debt, net of current maturities345,797
 334,629
393,426
 372,663
Total debt354,966
 335,312
394,039
 381,837
Less: cash and cash equivalents24,404
 89,863
29,934
 13,481
Total debt, net of cash$330,562
 $245,449
$364,105
 $368,356
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.

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SCHNITZER STEEL INDUSTRIES, INC. 

The following is a reconciliation of net borrowings (repayments) of debt (in thousands):
Three Months Ended November 30,Three Months Ended November 30,
2012 20112013 2012
Borrowings from long-term debt$72,742
 $294,212
$119,269
 $72,742
Proceeds from line of credit135,500
 173,000
147,500
 135,500
Repayment of long-term debt(61,449) (214,396)(98,472) (61,449)
Repayment of line of credit(127,000) (159,000)(156,000) (127,000)
Net borrowings of debt$19,793
 $93,816
Net borrowings (repayments) of debt$12,297
 $19,793
Adjusted consolidated operating income (loss), adjusted net loss and adjusted diluted lossearnings per share
Management presents adjusted consolidated operating income (loss), adjusted net loss attributable to SSI and adjusted diluted lossearnings per share attributable to SSI because it believes these measures provide a meaningful presentation of the Company’sour results from its core business operations excluding adjustments for restructuring charges that are not related to the Company’s ongoing core underlying business operations and improvesimprove the period-to-period comparability of the Company’sour results from its core business operations.
The following is a reconciliation of the adjusted consolidated operating income (loss), adjusted net loss attributable to SSI and adjusted diluted lossearnings per share attributable to SSI for the three months ended November 30, 2012 (in thousands, except per share data):
Three Months Ended November 30,
2013 2012
Consolidated operating income (loss):   
As reported$(3,625) $1,213
Restructuring charges1,812
 1,593
Adjusted$(1,813) $2,806
November 30, 2012   
Net loss attributable to SSI:    
As reported$(1,671)$(6,228) $(1,671)
Restructuring charges, net of tax1,055
1,279
 1,055
Adjusted$(616)$(4,949) $(616)
    
Diluted loss per share attributable to SSI: 
Diluted earnings per share attributable to SSI:   
As reported$(0.06)$(0.23) $(0.06)
Restructuring charges, net of tax, per share0.04
0.05
 0.04
Adjusted$(0.02)$(0.18) $(0.02)
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. Although we find these non-GAAP financial measures useful in evaluating the performance of our business, our reliance on these measures is limited because the adjustments often have a material impact on our condensed consolidated financial statements presented in accordance with GAAP. Therefore, we typically use these adjusted amounts in conjunction with our GAAP results to address these limitations.

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SCHNITZER STEEL INDUSTRIES, INC. 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We are exposed to commodity price risk, mainly associated with variations in the market price for 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 the shipment date. However, financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter based upon contracted sales orders and estimated future selling prices. Based on contracted sales and estimates of future selling prices at November 30, 20122013, a 10% decrease in the selling price per ton of finished steel products would not have caused an NRV inventory write down of $1 million at anySMB. A 10% decrease in the selling price of our operating segments as ofinventory would not have had a material NRV impact on MRB or APB at November 30, 20122013.
Interest Rate Risk
There have been no material changes to the Company’sour 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, 20122013.
Credit Risk
As of November 30, 20122013 and August 31, 20122013, 37%23% and 28%49%, respectively, of our trade accounts receivable balance was covered by letters of credit. Of the remaining balance as of November 30, 20122013, 91%96% was less than 60 days past due, compared to 89%95% as of August 31, 20122013.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintainsWe maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information we are required to be disclosed by the Companydisclose in the reports that it fileswe file or submitssubmit 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’sOur 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’sour disclosure controls and procedures. Based on this evaluation, the Company’sour Chief Executive Officer and Chief Financial Officer have concluded that, as of November 30, 20122013, the Company’sour 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’sour internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during itsour most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.

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SCHNITZER STEEL INDUSTRIES, INC. 

PART II. OTHER INFORMATION
 
ITEM 1.LEGAL PROCEEDINGS
See Note 65 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item I, incorporated by reference herein.
In fiscal 2013, the Commonwealth of Massachusetts advised us of alleged violations of environmental requirements, including but not limited to those related to air emissions and hazardous waste management, at our operations in the Commonwealth. We have been discussing resolution of the alleged violations with the Commonwealth representatives. No enforcement proceeding has been filed to date and we do not believe that the outcome of this matter will be material to our financial position, results of operations, cash flows or liquidity.

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, 20122013, which was filed with the Securities and Exchange Commission on October 25, 2012.29, 2013.


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SCHNITZER STEEL INDUSTRIES, INC. 

ITEM 6.EXHIBITS
Exhibit NumberExhibit Description
*10.1Form of Restricted Stock Unit Award Agreement under the 1993 Stock Incentive Plan used for awards granted in fiscal 2013.
*10.2Form of Long-Term Incentive Award Agreement under the 1993 Stock Incentive Plan used for awards granted in fiscal 2012.2014.
  
*10.310.2Amendment No. 1Fiscal 2014 Annual Performance Bonus Program for Tamara L. Lundgren.
18.1Preferability letter provided by PricewaterhouseCoopers LLP, the Company’s registered public accounting firm, to Employment Agreement by and betweenchange the Registrant and John D. Carter dated November 6, 2012.measurement date in connection with the Company’s annual goodwill impairment test.
  
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
32.1Certification 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.
  
32.2Certification 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 November 30, 2012,2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three months ended November 30, 20122013 and 2011,2012, (ii) Condensed Consolidated Balance Sheets as of November 30, 2012,2013, and August 31, 2012,2013, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended November 30, 20122013 and 2011;2012; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 20122013 and 2011;2012; and (v) the Notes to Condensed Consolidated Financial Statements.(1)
 
*Management contract or compensatory plan or arrangement.
(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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SCHNITZER STEEL INDUSTRIES, INC. 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  SCHNITZER STEEL INDUSTRIES, INC.
  (Registrant)
    
Date:January 8, 20132014By:/s/ Tamara L. Lundgren
   Tamara L. Lundgren
   President and Chief Executive Officer
    
Date:January 8, 20132014By:/s/ Richard D. Peach
   Richard D. Peach
   Senior Vice President and Chief Financial Officer

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