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, ~~2012~~2013



o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the Transition Period from _______ to_______
	Commission File Number 0-22496

SCHNITZER STEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



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

~~3200 NW Yeon Ave.~~299 SW Clay St., Suite 350 Portland, OR		~~97210~~97201
(Address of principal executive offices)		(Zip Code)

(503) 224-9900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

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



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

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

Yes o No x

The Registrant had ~~25,681,272~~26,305,256 shares of Class A common stock, par value of $1.00 per share, and ~~719,823~~305,900 shares of Class B common stock, par value of $1.00 per share, outstanding as of January 3, ~~2013~~2014.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

INDEX



	PAGE
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of November 30, ~~2012~~2013 and August 31, ~~2012~~ 2013	3

Condensed Consolidated Statements of Operations for the Three Months Ended November 30, ~~2012~~2013 and ~~2011~~2012	4

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended November 30, ~~2012~~2013 and ~~2011~~2012	5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended November 30, ~~2012~~2013 and ~~2011~~2012	6

Notes to the Unaudited Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819

Item 3. Quantitative and Qualitative Disclosures ~~About~~about Market Risk	30

Item 4. Controls and Procedures	30

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	31

Item 1A. Risk Factors	31

Item 6. Exhibits	32

SIGNATURES	33

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, 2012			November 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 $4,459	152,860			137,313
Accounts receivable, net of allowance for doubtful accounts of $3,094 and $2,990							125,975			188,270
Inventories, net	302,626			246,992			280,100			236,049
Deferred income taxes	5,458			6,362			3,749			3,750
Refundable income taxes	6,269			7,671			5,073			3,521
Prepaid expenses and other current assets	23,764			28,618			21,076			22,159
Total current assets	515,381			516,819			465,907			467,230
Property, plant and equipment, net of accumulated depreciation of $553,099 and $535,728	564,110			564,185
Property, plant and equipment, net of accumulated depreciation of $615,464 and $597,989							554,010			564,426
Investments in joint venture partnerships	16,339			17,126			14,530			14,808
Goodwill	634,451			635,491			327,215			327,264
Intangibles, net of accumulated amortization of $20,262 and $19,023	14,544			15,778
Intangibles, net of accumulated amortization of $15,215 and $14,139							12,233			13,264
Other assets	14,379			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 payable	97,331			115,007			85,851			96,348
Accrued payroll and related liabilities	19,741			22,130			19,784			24,002
Environmental liabilities	2,261			2,185			943			754
Accrued income taxes	47			38			—			388
Other accrued liabilities	37,911			38,799			33,108			35,468
Total current liabilities	166,460			178,842			140,299			166,134
Deferred income taxes	86,068			85,447			22,953			22,929
Long-term debt, net of current maturities	345,797			334,629			393,426			372,663
Environmental liabilities, net of current portion	44,939			44,874			48,804			49,040
Other long-term liabilities	11,585			11,837			14,366			13,547
Total liabilities	654,849			655,629			619,848			624,313
Commitments and contingencies (Note 6)
Redeemable noncontrolling interest	23,602			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 outstanding	25,684			25,219
Class B common stock – 25,000 shares $1.00 par value authorized, 720 and 1,113 shares issued and outstanding	720			1,113
Class A common stock – 75,000 shares $1.00 par value authorized, 26,293 and 26,171 shares issued and outstanding							26,293			26,171
Class B common stock – 25,000 shares $1.00 par value authorized, 306 and 393 shares issued and outstanding							306			393
Additional paid-in capital	3,171			816			10,103			7,476
Retained earnings	1,049,399			1,056,024			740,649			751,879
Accumulated other comprehensive loss	(3,629		)	(2,589		)	(10,087		)	(9,361		)
Total SSI shareholders’ equity	1,075,345			1,080,583			767,264			776,558
Noncontrolling interests	5,408			5,113			5,007			4,641
Total equity	1,080,753			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.

Table of Contents

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			2011			2013			2012
Revenues	$	592,820		$	812,176		$	587,745		$	592,820
Operating expense:
Cost of goods sold	541,884			742,215			542,417			541,884
Selling, general and administrative	47,995			55,992			47,550			47,995
Loss (income) from joint ventures	135			(1,001		)
(Income) loss from joint ventures							(409		)	135
Restructuring charges	1,593			—			1,812			1,593
Operating income	1,213			14,970
Operating income (loss)							(3,625		)	1,213
Interest expense	(2,017		)	(3,271		)	(2,702		)	(2,017		)
Other income (expense), net	321			(393		)
Income (loss) before income taxes	(483		)	11,306
Income tax expense	(960		)	(3,561		)
Net income (loss)	(1,443		)	7,745
Other income, net							176			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:
Basic	26,567			27,451			26,755			26,567
Diluted	26,567			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			2011			2013			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 $~~216~~25 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.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Three Months Ended November 30,						Three Months Ended November 30,
	2012			2011			2013			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 amortization	20,899			20,346			21,019			20,899
Deferred income taxes	2,261			906			(317		)	2,261
Undistributed equity in earnings of joint ventures	(40		)	(963		)	(409		)	(40		)
Share-based compensation expense	4,210			4,613			3,868			4,210
Excess tax benefit from share-based payment arrangements	—			(413		)	(20		)	—
(Gain) loss on disposal of assets	226			(116		)	(304		)	226
Unrealized foreign exchange loss, net	46			272			342			46
Bad debt recoveries	(1,573		)	—
Bad debt expense (recoveries), net							856			(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 taxes	903			(20,126		)	(1,949		)	903
Prepaid expenses and other current assets	1,173			(1,148		)	(181		)	1,173
Intangibles and other long-term assets	298			(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 ventures	735			525			645			735
Net cash used in operating activities	(59,534		)	(86,156		)
Net cash provided by (used in) operating activities							25,843			(59,534		)
Cash flows from investing activities:
Capital expenditures	(26,675		)	(25,551		)	(14,380		)	(26,675		)
Joint venture receipts, net	222			353
Joint venture receipts (payments), net							(63		)	222
Proceeds from sale of assets	532			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 credit	135,500			173,000			147,500			135,500
Repayment of line of credit	(127,000		)	(159,000		)	(156,000		)	(127,000		)
Borrowings from long-term debt	72,742			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 exercised							11			—
Contributions from noncontrolling interest	1,970			454			—			1,970
Distributions to noncontrolling interest	(375		)	(1,477		)	(495		)	(375		)
Dividends paid	—			(468		)	(4,990		)	—
Net cash provided by financing activities	20,284			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 equivalents							16,453			(65,459		)
Cash and cash equivalents as of beginning of period	89,863			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.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements of Schnitzer Steel Industries, Inc. (the “Company”) have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for Form 10-Q, including Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all normal, recurring adjustments considered necessary for a fair ~~presentation~~statement have been included. Management suggests that these Unaudited Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended August 31, ~~2012~~2013. The results for the three months ended November 30, ~~2012~~2013 and ~~2011~~2012 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 activities	60,023			(24,734		)	35,289			20,587			(24,734		)	(4,147		)



Table of Contents	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 presentation~~reporting of amounts reclassified out of accumulated other comprehensive income. ~~These changes give an entity~~This standard does not change the ~~option to present the total of comprehensive income, the components of~~current requirements for reporting net income ~~and the components of~~or other comprehensive income ~~either~~ in ~~a single continuous statement~~the 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 of~~accumulated other comprehensive income ~~as part~~by component, either on the face of the financial statement ~~of changes~~where net income is presented or in ~~stockholders’ equity was eliminated. No changes were made~~the 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 ~~2013~~2014 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 statement~~amounts 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, ~~2012~~2013 and $3831 million as of August 31, ~~2012~~2013.

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, ~~2012~~2013. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up the Company’s customer base. The Company controls credit risk through credit approvals, credit limits, letters of credit 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, ~~2012~~2013 and August 31, ~~2012~~2013, 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.



~~Table of Contents~~	~~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 at~~There 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 11~~November 30, 2013 ~~- Derivative Financial Instruments.~~.

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.



Table of Contents	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 subsidiaries~~Employee 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 option~~multiemployer plan benefiting union employees of the ~~holder~~Steel Manufacturing Business, had an accumulated funding deficiency (i.e., a failure to satisfy the minimum funding requirements) and ~~upon~~was certified in a Red Zone Status, as defined by the ~~occurrence~~Pension Protection Act of ~~an event that is not solely within~~2006. As of October 1, 2013, the ~~Company’s control. Since redemption of~~WISPP 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 Sheets~~plan’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.



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~~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, 2012		November 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 goods	51,797		49,988		53,825		56,830
Supplies	36,812		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 ~~assets~~equity interests of ~~Ralph’s Auto Supply (B.C.) Ltd.~~Pick A Part, Inc., a used auto parts business with ~~four~~ ~~stores~~one store in ~~Richmond and Surrey, British Columbia,~~the Olympia metropolitan area in Washington, which expanded the Auto Parts ~~Business (“APB”)’s~~Business’ presence in ~~Western Canada~~the 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 is~~allows 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



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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~Note 5~~ ~~- Goodwill~~

~~The gross changes in the carrying amount of~~Accumulated 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

~~There~~impairment charges were no$321 million ~~accumulated goodwill impairment charges~~ as of November 30, ~~2012~~2013. 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, ~~2012~~2013 were as follows (in thousands):


Reporting Segment	Balance 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 Business	16,200		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, ~~2012~~2013, 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.



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~~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 ~~may~~is 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



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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, ~~2012~~2013, 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, ~~2012~~2013, 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 ~~was~~has since been renewed through ~~March~~February 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, ~~2012~~2013.

Other than the Portland Harbor Superfund site, which is discussed above, management currently believes that adequate provision has been made for the potential impact of these issues and that the ultimate outcomes will not have a material adverse effect on



~~Table of Contents~~	~~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



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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 be~~were substantially ~~complete~~completed 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 through~~In 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 ~~balance~~charges 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 costs	5		—		5
Other exit costs	649		—		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 costs	462		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, ~~2012~~2013 (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 Charges		Balance 8/31/2013		Charges		Payments and Other			Balance 11/30/2013		Balance 8/31/2013		Charges		Payments and Other			Balance 11/30/2013					Total Expected Charges
Severance costs	$	2,477	$	939	$	(2,548	)	$	868	$	3,680	$	4,000	$	278	$	26	$	(227	)	$	77	$	—	$	1,076	$	(115	)	$	961	Total Charges to Date	$	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 operating~~relating to each segment were as follows (in thousands):


	As of November 30, 2012							Three Months Ended November 30,				Total Charges to Date			Total Expected Charges
		Current Period Charges		Total Charges to Date		Total Expected Charges		2013		2012					Total Expected Charges
Metals Recycling Business		$	550	$	2,209	$	2,400	$	1,291	$	550	Total Charges to Date	$	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.



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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 ~~has~~had 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 after~~value upon the ~~later~~occurrence 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 ~~approximates~~approximated its fair value. The Company ~~determines~~determined 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~~



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~~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			2011			2012
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, ~~2012~~2013 and ~~2011~~2012 (in thousands):


	Fiscal 2013									Fiscal 2012									2013									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 exercised																			11			—			11			—			—			—
Share-based compensation	4,210			—			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.

~~Table of Contents~~

~~SCHNITZER STEEL INDUSTRIES, INC.~~



Table of Contents	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-based~~Share-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 ~~209,639~~219,504 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~~ ~~2011~~2013 was a benefit of 12.7% compared to an expense of (198.8)% for the ~~(198.8)%~~three ~~and~~months 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 rate 35.0 % 35.0 %
State taxes, net of credits 7.1
1.3
Foreign income taxed at different rates (1.0 ) (1.6 )
Section 199 deduction 4.6
(1.7 )
Non-deductible officers’ compensation (1.1 ) 0.7
Noncontrolling interests 48.5
(2.0 )
Research and development credits 21.7
—
Valuation allowance on deferred tax assets (312.1 ) —
Other (1.5 ) (0.2 )
Effective tax rate (198.8 )% 31.5 %



Table of Contents	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 rate	35.0	%	35.0	%
State taxes, net of credits	2.5		7.1
Foreign income taxed at different rates	(6.5	)	(1.0	)
Section 199 deduction	(1.0	)	4.6
Non-deductible officers’ compensation	0.3		(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	)
Other	0.4		(1.5	)
Effective tax rate	12.7	%	(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 ~~will~~would 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			2011			2013			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, basic	26,567			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, diluted	26,567			27,715			26,755			26,567

Common stock equivalent shares of ~~864,874~~1,106,990 and ~~351,074~~864,874 were considered antidilutive and were excluded from the calculation of diluted net ~~income (loss)~~loss per share for the three months ended November 30, ~~2012~~2013 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, ~~2012~~2013 and ~~2011~~2012~~. 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, ~~2012~~2013 and ~~2011~~2012., respectively. The Company owed $3$3 million ~~and~~ ~~$2 million~~ to joint ventures as of November 30, ~~2012~~2013 and August 31, ~~2012~~2013. Amounts receivable from joint venture partners were $1 million as of November 30, 2013 and August 31, 2013.



Table of Contents	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 million~~for the three months ended November 30, ~~2012~~2013 and ~~2011~~2012~~, respectively.~~. The partnership leases properties from entities in which Mr. Klauer has ownership interests under agreements that expire in ~~December 2015~~March 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, ~~2012~~2013 and ~~2011~~2012.



~~Table of Contents~~	~~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, the~~The 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 from~~payable to MMGL under this agreement were less than $1 million as of November 30, ~~2012~~2013, and amounts receivable from MMGL were less than $1 million as of August 31, ~~2012~~2013.

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.



Table of Contents	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 revenues	440,558			447,206
Auto Parts Business:
Revenues	79,635			69,555
Less: Intersegment revenues	(20,571		)	(15,970		)
APB external customer revenues	59,064			53,585
Steel Manufacturing Business:
Revenues	88,123			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 Business	5,609			6,364
Steel Manufacturing Business	1,744			3,404
Segment operating income	7,943			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, net	176			321
Loss before income taxes	$	(6,151	)	$	(483	)

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Table of Contents	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 revenues 447,206
669,742
Auto Parts Business:
Revenues 69,555
84,054
Less: Intersegment revenues (15,970 ) (21,522 )
APB external customer revenues 53,585
62,532
Steel Manufacturing Business:
Revenues 92,029
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 Business 6,364
10,442
Steel Manufacturing Business 3,404
1,218
Segment operating income 15,422
24,759
Restructuring charges (1,593 ) —
Corporate and eliminations (12,616 ) (9,789 )
Operating income 1,213
14,970
Interest expense (2,017 ) (3,271 )
Other income (expense), net 321
(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, 2012			November 30, 2013			August 31, 2013
Metals Recycling Business⁽¹⁾	$	1,680,808		$	1,696,296		$	1,327,490		$	1,316,202
Auto Parts Business	337,734			329,327			348,392			359,977
Steel Manufacturing Business	325,741			322,398			331,203			330,282
Total segment assets	2,344,283			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~~ ~~$17~~15 million as of November 30, ~~2012~~2013 and August 31, ~~2012~~2013~~, respectively,~~ for investments in joint venture partnerships.

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

Forward-Looking Statements

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

Forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding our expectations, intentions, beliefs and strategies regarding the future, ~~including~~which 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 ~~Factors~~Factors” of Part I inof our ~~Annual Report~~most 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.



Table of Contents	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,



~~Table of Contents~~	~~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 ~~nonferrous~~recycled and processed ~~recycled~~nonferrous metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers and wire and cable producers globally. We also transport both ferrous and nonferrous metals by truck and rail in order to transfer scrap metal between our facilities for further processing, to load shipments at our export facilities and to meet regional domestic demand.

Executive Overview of Financial Results for the First Quarter of Fiscal ~~2013~~2014

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 million~~first quarter of ~~revenues~~fiscal 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 result~~2013 (see reconciliation of ~~weak economic~~adjusted 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 results~~metals 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 first~~second 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 margins~~2014. However, compared to the prior year ~~period. This compression was further compounded at MRB by~~period, average net selling prices were lower which, together with the ~~adverse~~ impact of ~~average inventory costing~~constrained 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 supply~~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 ~~end-of-life vehicles, primarily~~integration and startup costs, related to ~~the continued weak domestic economic conditions. This was partially offset~~store locations acquired or opened by ~~an increase in operating income at SMB primarily as a result of higher finished steel volumes compared to~~APB after the first quarter of fiscal ~~2012. Selling, general~~2013 and ~~administrative (“SG&A”) expenses decreased~~the recognition of bad debt expense of $1 million by SMB.

~~$8 million, or~~ ~~14%, compared to~~In the first quarter of fiscal ~~2012 primarily as a result~~2014, we initiated additional restructuring initiatives to further reduce our annual operating expenses by approximately $30 million, with approximately 70% of the ~~restructuring initiatives~~reduction 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.



Table of Contents	SCHNITZER STEEL INDUSTRIES, INC.

The following items summarize our consolidated financial results for the first quarter of fiscal ~~2013~~2014:

Revenues of $~~593~~588 million, compared to $~~812~~593 million in the first quarter of fiscal ~~2012~~2013;

~~Operating~~Consolidated 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 ~~2012~~2013;

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 ~~2012~~2013;

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 $~~331~~364 million as of November 30, ~~2012~~2013, compared to $~~245~~368 million as of August 31, ~~2012~~2013 (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 ~~operating~~reporting segments for the first quarter of fiscal ~~2013~~2014:

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 $~~728~~70 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~~ ~~2012~~2013, 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 ~~2012~~2013, respectively.

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Results of Operations


	Three Months Ended November 30,								Three Months Ended November 30,
($ in thousands)	2012			2011			% Change		2013			2012			% Change
Revenues:
Metals Recycling Business	$	494,461		$	728,438		(32	)%	$	490,309		$	494,461		(1	)%
Auto Parts Business	69,555			84,054			(17	)%	79,635			69,555			14	%
Steel Manufacturing Business	92,029			79,902			15	%	88,123			92,029			(4	)%
Intercompany revenue eliminations⁽¹⁾	(63,225		)	(80,218		)	(21	)%	(70,322		)	(63,225		)	11	%
Total revenues	592,820			812,176			(27	)%	587,745			592,820			(1	)%
Cost of goods sold:
Metals Recycling Business	466,587			686,456			(32	)%	468,601			466,587			—	%
Auto Parts Business	50,044			59,460			(16	)%	59,383			50,044			19	%
Steel Manufacturing Business	86,944			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 sold	541,884			742,215			(27	)%	542,417			541,884			—	%
Selling, general and administrative expense:
Metals Recycling Business	22,173			29,865			(26	)%	21,483			22,173			(3	)%
Auto Parts Business	13,147			14,152			(7	)%	14,643			13,147			11	%
Steel Manufacturing Business	1,681			1,679			—	%	2,699			1,681			61	%
Corporate⁽²⁾	10,994			10,296			7	%	8,725			10,994			(21	)%
Total SG&A expense	47,995			55,992			(14	)%
Loss (income) from joint ventures:
Total selling, general and administrative expense									47,550			47,995			(1	)%
(Income) loss from joint ventures:
Metals Recycling Business	47			(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 Business	5,654			13,099			(57	)%	590			5,654			(90	)%
Auto Parts Business	6,364			10,442			(39	)%	5,609			6,364			(12	)%
Steel Manufacturing Business	3,404			1,218			179	%	1,744			3,404			(49	)%
Segment operating income	15,422			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 ton~~prices that approximate ~~West Coast U.S. export~~local market ~~prices. Consequently, these~~rates, which produces intercompany ~~revenues produce~~profit. This intercompany ~~operating income (loss), which~~profit 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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Revenues

Consolidated revenues in the first quarter of fiscal ~~2013~~2014 were $~~593~~588 million, a decrease of ~~27%~~1% compared to the same period in the prior year. ~~This~~The decrease was primarily due to lower ~~ferrous and nonferrous sales volumes and lower~~ average net selling prices ~~due to softer global~~for scrap metal as a result of continued weak economic conditions that negatively impacted export demand for recycled ~~metal resulting from~~metal. Despite a ~~continued slowdown~~slight increase in ~~global economic growth. In addition, the sluggish U.S. economic growth and the lower price environment adversely impacted the supply of scrap metal~~sales 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 ~~income~~loss 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 ~~2013~~2014 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 decrease~~excluding 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.~~

~~Consolidated~~adjusted 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 annual~~which 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 majority~~2012 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 Charges		Q4’12 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 ~~measurement~~Notes 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 ~~three~~first ~~months ended~~quarter of fiscal ~~November 30, 2012~~ ~~and~~ ~~2011~~2014, ~~respectively.~~compared to $2 million for the same period in the prior year. The ~~decrease~~increase in interest expense was primarily due to ~~decreased~~increased average borrowings under our bank credit facilities compared to the prior year period.



Table of Contents	SCHNITZER STEEL INDUSTRIES, INC.

Income Tax Expense

Our effective tax rate for the first quarter of fiscal ~~2013~~2014 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



~~Table of Contents~~	~~SCHNITZER STEEL INDUSTRIES, INC.~~

subjective positive evidence, thus indicating that it iswas more likely than not that the associated tax benefit ~~will~~would 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 ~~2013~~2014 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			% Change		2013			2012		% Change
Ferrous revenues	$	370,476	$	578,024		(36	)%	$	369,555		$	370,476	—	%
Nonferrous revenues	116,601		142,290			(18	)%	113,154			116,601		(3	)%
Other	7,384		8,124			(9	)%	7,600			7,384		3	%
Total segment revenues	494,461		728,438			(32	)%	490,309			494,461		(1	)%
Cost of goods sold	466,587		686,456			(32	)%	468,601			466,587		—	%
Selling, general and administrative expense	22,173		29,865			(26	)%	21,483			22,173		(3	)%
Loss (income) from joint ventures	47		(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):
Domestic	279		319			(13	)%	323			279		16	%
Foreign	675		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 results~~Revenues

Ferrous revenues in the first ~~quarter~~quarters of fiscal 2014 and 2013 were ~~negatively impacted by the reduction in volumes~~consistent as a result of the ~~constrained supply~~offsetting 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 ~~higher~~lower 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 sold 50,044
59,460
(16 )%
Selling, general and administrative expense 13,147
14,152
(7 )%
Segment operating income $ 6,364
$ 10,442
(39 )%
Number of stores at period end 51
50
2 %
Cars purchased (in thousands) 79
85
(7 )%

~~Revenues~~

ferrous sales prices. The decrease in nonferrous revenues in the first quarter of fiscal ~~2013~~2014 was primarily due to lower ~~commodity prices and decreased car volumes, both of which adversely impacted ferrous and~~average 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 due~~average net selling prices were lower which, together with the impact of constrained supply conditions on the cost of raw materials, contributed to ~~the~~a compression in operating margins, ~~caused~~which 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 sold	59,383		50,044		19	%
Selling, general and administrative expense	14,643		13,147		11	%
Segment operating income	$	5,609	$	6,364	(12	)%
Number of stores at period end	62		51		22	%
Cars purchased (in thousands)	91		79		15	%

Revenues

Revenues in the ~~adverse impact~~first quarter of ~~lower car~~fiscal 2014 increased by 14% compared to the prior year quarter primarily due to higher sales volumes ~~on costs~~as a result of ~~goods sold and~~additional 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 ~~ferrous~~commodity selling ~~prices.~~prices and

~~Operating income in~~operating 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			% Change		2013			2012			% Change
Revenues	$	92,029		$	79,902		15	%	$	88,123		$	92,029		(4	)%
Cost of goods sold	86,944			77,005			13	%	83,680			86,944			(4	)%
Selling, general and administrative	1,681			1,679			—	%
Selling, general and administrative expense									2,699			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 utilization	70		%	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 in~~Revenues for the first quarter of fiscal ~~2013 as a result of slightly improved demand~~2014 decreased by 4% compared to the same period in ~~our West Coast markets. The impact on revenue from improved volumes was partially offset by~~the prior year primarily due to lower average ~~selling~~sales 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 operating~~Operating income for the first quarter of fiscal ~~2013~~2014 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 the~~lower average sales ~~price for our finished steel products~~prices 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, ~~2012~~2013 and August 31, ~~2012~~2013, 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, ~~2012~~2013, debt, net of cash, was $~~331~~364 million compared to $~~245~~368 million as of August 31, ~~2012~~2013 (refer to Non-GAAP Financial Measures below), ~~an increase~~a 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, ~~2012~~2013 and August 31, ~~2012~~2013 include $59 million and $137 million, respectively, which are indefinitely reinvested in Puerto Rico and Canada.

Operating Activities

Net cash ~~used in~~provided by operating activities in the first three months of fiscal ~~2013~~2014 was $6026 million, compared to net cash used in operating activities of $8660 million in the first three months of fiscal ~~2012~~2013.

~~Cash used in operating activities~~Sources of cash in the first three months of fiscal ~~2013~~2014 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 to~~including the impact of timing of ~~collections~~purchases 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 ~~2012~~2013 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 ~~2013~~2014 was $2616 million, compared to $2526 million in the first three months of fiscal ~~2012~~2013.

Cash used in investing activities in ~~the first~~ ~~three~~ ~~months of~~ fiscal ~~2013~~ ~~and~~ ~~2012~~2014 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 ~~2013~~2014 was $206 million, compared to $8920 million in the first three months of fiscal ~~2012~~2013.

Cash provided by financing activities in the first three months of fiscal ~~2013~~2014 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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We had borrowings outstanding under the credit facility of $~~337~~381 million as of November 30, ~~2012~~2013 and $~~325~~360 million as of August 31, ~~2012~~2013. The weighted average interest rate on amounts outstanding under this facility was ~~1.80%~~1.96% and 1.98% as of November 30, ~~2012~~2013 and ~~2.06%~~ ~~as of~~ August 31, ~~2012~~2013., respectively.

We also have an unsecured, uncommitted $25 million credit line with Wells Fargo Bank, N.A. that expires on March 1, ~~2013~~2014. 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, ~~2012~~2013 and no ~~borrowings outstanding as of~~ August 31, ~~2012~~2013.

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, ~~2012~~2013, 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, ~~2012~~2013 and August 31, ~~2012~~2013, 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 ~~2013~~2014, compared to $2627 million for the same period in the prior year. During the first quarter of fiscal ~~2013~~2014, we ~~continued~~completed our ~~investments~~investment in the construction of a new ~~shredder, advanced~~nonferrous processing ~~equipment and related infrastructure~~facility in ~~Surrey, British Columbia,~~Puerto Rico, which ~~is expected to begin~~commenced operations in ~~fiscal~~September 2013. ~~In addition, we made further investments in technology~~We plan to ~~improve the recovery and separation of nonferrous materials from the shredding process and investments in infrastructure~~invest 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 million~~in fiscal ~~2013~~2014., 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 ~~2013~~2014 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 expand~~In the first quarter of fiscal 2014, we expanded our presence in the ~~regions in which we operate and in new locations through~~Pacific Northwest with the acquisition of ~~businesses. In December 2012, we completed the acquisition of four~~one used auto parts ~~facilities~~store in ~~Richmond and Surrey, British Columbia,~~the Olympia metropolitan area in Washington, which is near our ~~MRB~~Metals 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 ~~2013~~2014, 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 ~~may~~is 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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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



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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, ~~2012~~2013.

~~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, ~~2012~~2013, 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, ~~2012~~2013, ~~with the following changes:~~

~~Goodwill~~

~~We evaluate goodwill for impairment annually~~except 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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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 interim~~2014, we changed the annual impairment ~~test~~testing 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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~~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 Pronouncements~~Goodwill 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, 2012		November 30, 2013		August 31, 2013
Short-term borrowings	$	9,169	$	683	$	613	$	9,174
Long-term debt, net of current maturities	345,797		334,629		393,426		372,663
Total debt	354,966		335,312		394,039		381,837
Less: cash and cash equivalents	24,404		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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The following is a reconciliation of net borrowings (repayments) of debt (in thousands):


	Three Months Ended November 30,						Three Months Ended November 30,
	2012			2011			2013			2012
Borrowings from long-term debt	$	72,742		$	294,212		$	119,269		$	72,742
Proceeds from line of credit	135,500			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 ~~loss~~earnings per share

Management presents adjusted consolidated operating income (loss), adjusted net loss attributable to SSI and adjusted diluted ~~loss~~earnings per share attributable to SSI because it believes these measures provide a meaningful presentation of ~~the Company’s~~our 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 ~~improves~~improve the period-to-period comparability of ~~the Company’s~~our 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 ~~loss~~earnings 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 charges				1,812			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 tax	1,055			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 share	0.04			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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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, ~~2012~~2013, 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 ~~any~~SMB. A 10% decrease in the selling price of ~~our operating segments as of~~inventory would not have had a material NRV impact on MRB or APB at November 30, ~~2012~~2013.

Interest Rate Risk

There have been no material changes to ~~the Company’s~~our disclosure regarding interest rate risk set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended August 31, ~~2012~~2013.

Credit Risk

As of November 30, ~~2012~~2013 and August 31, ~~2012~~2013, ~~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, ~~2012~~2013, ~~91%~~96% was less than 60 days past due, compared to ~~89%~~95% as of August 31, ~~2012~~2013.


ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

~~The Company maintains~~We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information we are required to ~~be disclosed by the Company~~disclose in the reports ~~that it files~~we file or ~~submits~~submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. ~~The Company’s~~Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of ~~the Company’s~~our disclosure controls and procedures. Based on this evaluation, ~~the Company’s~~our Chief Executive Officer and Chief Financial Officer have concluded that, as of November 30, ~~2012~~2013, ~~the Company’s~~our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

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



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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, ~~2012~~2013, which was filed with the Securities and Exchange Commission on October ~~25, 2012.~~29, 2013.



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ITEM 6.	EXHIBITS



Exhibit Number	Exhibit Description
*10.1	Form of ~~Restricted Stock Unit Award Agreement under the 1993 Stock Incentive Plan used for awards granted in fiscal 2013.~~

*10.2	~~Form of~~ Long-Term Incentive Award Agreement under the 1993 Stock Incentive Plan used for awards granted in fiscal ~~2012.~~2014.

*~~10.3~~10.2	~~Amendment No. 1~~Fiscal 2014 Annual Performance Bonus Program for Tamara L. Lundgren.

18.1	Preferability letter provided by PricewaterhouseCoopers LLP, the Company’s registered public accounting firm, to ~~Employment Agreement by and between~~change the ~~Registrant and John D. Carter dated November 6, 2012.~~measurement date in connection with the Company’s annual goodwill impairment test.

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

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

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

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

101	The following financial information from Schnitzer Steel Industries, Inc.’s Quarterly Report on Form 10-Q for the quarter ended November 30, ~~2012,~~2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three months ended November 30, ~~2012~~2013 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, ~~2012~~2013 and ~~2011;~~2012; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended November 30, ~~2012~~2013 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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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, ~~2013~~2014	By:	/s/ Tamara L. Lundgren
			Tamara L. Lundgren
			President and Chief Executive Officer

Date:	January 8, ~~2013~~2014	By:	/s/ Richard D. Peach
			Richard D. Peach
			Senior Vice President and Chief Financial Officer