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 ~~May 31,~~November 30, 2011



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~~File Number 0-22496

SCHNITZER STEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



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

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

(503) 224-9900

(Registrant’s telephone number, including area code)

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

Yes x No o

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

Yes x No o

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



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

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

Yes o No x

The Registrant had ~~24,463,409~~24,395,353 shares of Class A common stock, par value of ~~$1.00~~$1.00 per share, and ~~3,091,401~~2,866,295 shares of Class B common stock, par value of ~~$1.00~~$1.00 per share, outstanding as of ~~June 24, 2011.~~December 30, 2011.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

INDEX



	PAGE
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of ~~May 31,~~November 30, 2011 and August 31, ~~2010~~2011	3

Condensed Consolidated Statements of Income for the Three Months ~~and Nine Months~~ Ended ~~May 31,~~November 30, 2011 and 2010	4

Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~May 31,~~November 30, 2011 and 2010	5

Notes to the Unaudited Condensed Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1916

Item 3. Quantitative and Qualitative Disclosures About Market Risk	3127

Item 4. Controls and Procedures	3127

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	3228

Item 1A. Risk Factors	3228

Item ~~5. Other Information~~2. Unregistered Sales of Equity Securities and Use of Proceeds	3328

Item 6. Exhibits	3329

SIGNATURES	3430

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)


	May 31, 2011		August 31, 2010			November 30, 2011			August 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	32,801	$	30,342		$	26,989		$	49,462
Accounts receivable, net of allowance for doubtful accounts of $6,336 and $6,209	245,785		126,156
Accounts receivable, net of allowance for doubtful accounts of $6,048 and $6,148						209,475			229,975
Inventories, net	364,159		268,103			410,119			335,120
Deferred income taxes	5,907		9,037			10,942			11,784
Refundable income taxes	7,306		14,610			13,035			3,541
Prepaid expenses and other current assets	12,706		12,546			30,583			24,117
Total current assets	668,664		460,794			701,143			653,999
Property, plant and equipment	993,255		871,901
Less accumulated depreciation	454,362		411,091
Property, plant and equipment, net	538,893		460,810
Other assets:
Property, plant and equipment, net of accumulated depreciation of $486,737 and $471,305						552,833			555,284
Investments in joint venture partnerships	16,499		13,706			17,665			17,208
Goodwill	628,976		380,332			622,382			627,805
Intangibles, net	22,806		20,444
Intangibles, net of accumulated amortization of $15,015 and $20,846						19,510			20,906
Other assets	12,950		7,332			14,768			14,967
Total assets	$	1,888,788	$	1,343,418		$	1,928,301		$	1,890,169
Liabilities and Equity
Current liabilities:
Short-term borrowings and capital lease obligations, current	$	3,280	$	1,189
Short-term borrowings						$	14,665		$	643
Accounts payable	123,374		91,879			111,079			141,011
Accrued payroll and related liabilities	32,734		34,162			21,766			36,475
Environmental liabilities	3,425		2,588			2,971			2,983
Accrued income taxes	2,593		1,816			2,788			13,833
Other accrued liabilities	29,724		28,479			40,265			38,368
Total current liabilities	195,130		160,113			193,534			233,313
Deferred income taxes	84,146		58,630			84,845			85,378
Long-term debt and capital lease obligations, net of current maturities	468,611		99,240
Long-term debt, net of current maturities						480,943			403,287
Environmental liabilities, net of current portion	37,745		37,286			37,562			37,872
Other long-term liabilities	9,612		8,517			10,315			10,030
Total liabilities	795,244		363,786			807,199			769,880
Commitments and contingencies (Note 7)
Commitments and contingencies (Note 6)
Redeemable noncontrolling interest	19,647		—			18,936			19,053
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:
Preferred stock–20,000 shares $1.00 par value authorized, none issued	—		—
Class A common stock–75,000 shares $1.00 par value authorized, 24,255 and 22,700 shares issued and outstanding	24,255		22,700
Class B common stock–25,000 shares $1.00 par value authorized, 3,237 and 4,721 shares issued and outstanding	3,237		4,721
Preferred stock – 20,000 shares $1.00 par value authorized, none issued						—			—
Class A common stock – 75,000 shares $1.00 par value authorized, 24,395 and 24,241 shares issued and outstanding						24,395			24,241
Class B common stock – 25,000 shares $1.00 par value authorized, 2,866 and 3,060 shares issued and outstanding						2,866			3,060
Additional paid-in capital	9,663		1,815			3,769			762
Retained earnings	1,028,887		948,642			1,070,363			1,065,109
Accumulated other comprehensive income (loss)	1,911		(2,552		)	(5,208		)	1,540
Total SSI shareholders’ equity	1,067,953		975,326			1,096,185			1,094,712
Noncontrolling interests	5,944		4,306			5,981			6,524
Total equity	1,073,897		979,632			1,102,166			1,101,236
Total liabilities and equity	$	1,888,788	$	1,343,418		$	1,928,301		$	1,890,169

The accompanying ~~notes~~Notes to the ~~unaudited condensed consolidated financial statements~~Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)


	Three Months Ended May 31,						Nine Months Ended May 31,						Three Months Ended November 30,
	2011			2010			2011			2010			2011			2010
Revenues	$	981,062		$	703,539		$	2,378,008		$	1,662,150		$	812,176		$	675,104
Operating expense:
Cost of goods sold	870,530			598,721			2,105,932			1,446,241			742,215			602,546
Selling, general and administrative	56,316			42,779			145,425			116,886			56,292			45,075
Environmental matters	532			141			332			(241		)
Environmental reserves charges (releases), net													(300		)	(200		)
Income from joint ventures	(1,648		)	(1,877		)	(3,389		)	(2,330		)	(1,001		)	(757		)
Operating income	55,332			63,775			129,708			101,594			14,970			28,440
Other income (expense):
Interest income	35			86			324			389			163			55
Interest expense	(3,127		)	(503		)	(4,883		)	(1,816		)	(3,271		)	(598		)
Other income (expense), net	(66		)	115			2,950			702			(556		)	161
Total other expense	(3,158		)	(302		)	(1,609		)	(725		)	(3,664		)	(382		)
Income from continuing operations before income taxes	52,174			63,473			128,099			100,869			11,306			28,058
Income tax expense	(18,056		)	(21,715		)	(42,965		)	(33,315		)	(3,561		)	(9,164		)
Income from continuing operations	34,118			41,758			85,134			67,554			7,745			18,894
Income (loss) from discontinued operations, net of tax	282			23			317			(15,023		)
Income from discontinued operations, net of tax													—			23
Net income	34,400			41,781			85,451			52,531			7,745			18,917
Net income attributable to noncontrolling interests	(1,372		)	(1,328		)	(3,804		)	(3,188		)	(727		)	(1,123		)
Net income attributable to SSI	$	33,028		$	40,453		$	81,647		$	49,343		$	7,018		$	17,794
Basic net income (loss) per share attributable to SSI:
Net income per share from continuing operations	$	1.18		$	1.45		$	2.95		$	2.31
Net income (loss) per share from discontinued operations	0.01			—			0.01			(0.54		)
Net income per share	$	1.19		$	1.45		$	2.96		$	1.77
Diluted net income (loss) per share attributable to SSI:
Net income per share from continuing operations	$	1.17		$	1.43		$	2.91		$	2.28
Net income (loss) per share from discontinued operations	0.01			—			0.01			(0.53		)
Net income per share	$	1.18		$	1.43		$	2.92		$	1.75
Basic:
Income per share from continuing operations attributable to SSI													$	0.26		$	0.65
Income per share from discontinued operations													—			—
Net income per share attributable to SSI													$	0.26		$	0.65
Diluted:
Income per share from continuing operations attributable to SSI													$	0.25		$	0.64
Income per share from discontinued operations													—			—
Net income per share attributable to SSI													$	0.25		$	0.64
Weighted average number of common shares:
Basic	27,677			27,898			27,622			27,856			27,451			27,563
Diluted	27,998			28,211			27,952			28,177			27,715			27,871
Dividends declared per common share	$	0.017		$	0.017		$	0.051		$	0.051		$	0.017		$	0.017

The accompanying ~~notes~~Notes to the ~~unaudited condensed consolidated financial statements~~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)


	Nine Months Ended May 31,						Three Months Ended November 30,
	2011			2010			2011			2010
Cash flows from operating activities:
Net income	$	85,451		$	52,531		$	7,745		$	18,917
Adjustments to reconcile net income to cash provided by operating activities:
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization	53,983			47,023			20,346			16,321
Inventory write-down	—			368
Deferred income taxes	25,764			4,517			906			2,464
Undistributed equity in earnings of joint ventures	(3,389		)	(2,390		)	(963		)	(962		)
Share-based compensation expense	9,454			7,886			4,613			3,568
Excess tax benefit from share-based payment arrangements	(201		)	(110		)	(413		)	383
Loss on disposal of a business and other assets	934			16,613
Environmental matters	332			460
Gain on disposal of assets							(116		)	(61		)
Environmental reserves charges (releases), net							(300		)	(200		)
Net gain on derivatives	(759		)	(3,337		)	—			(759		)
Unrealized foreign exchange gains, net	(73		)	—
Bad debt expense, net of recoveries	421			123
Unrealized foreign exchange loss, net							272			—
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	(112,906		)	(24,083		)	8,278			(34,740		)
Inventories	(73,304		)	(133,017		)	(74,117		)	(6,456		)
Refundable income taxes	(506		)	39,171			(5,292		)	53
Prepaid expenses and other current assets	(46		)	(1,194		)	(1,148		)	740
Intangibles and other long-term assets	665			1,346			(1,079		)	(556		)
Accounts payable	16,169			15,420			(19,193		)	(7,387		)
Accrued payroll and related liabilities	(1,487		)	5,900			(14,745		)	(13,942		)
Other accrued liabilities	849			856			3,452			(1,291		)
Accrued income taxes	7,870			12,900			(14,834		)	5,173
Environmental liabilities	(114		)	(924		)	(12		)	(65		)
Other long-term liabilities	(836		)	(215		)	(81		)	3
Distributed equity in earnings of joint ventures	4,405			430			525			1,175
Net cash provided by operating activities	12,676			40,274
Net cash used in operating activities							(86,156		)	(17,622		)
Cash flows from investing activities:
Capital expenditures	(74,968		)	(35,373		)	(25,551		)	(25,168		)
Acquisitions, net of cash acquired	(294,030		)	(40,933		)	—			(6,956		)
Joint venture (payments) receipts, net	(1,316		)	433
Proceeds from sale of business and other assets	437			41,260
Joint venture receipts (payments), net							353			(619		)
Proceeds from sale of assets							251			251
Net cash used in investing activities	(369,877		)	(34,613		)	(24,947		)	(32,492		)
Cash flows from financing activities:
Proceeds from line of credit	436,000			307,500			173,000			147,500
Repayment of line of credit	(433,500		)	(307,500		)	(159,000		)	(147,500		)
Borrowings from long-term debt	788,974			542,000			294,212			168,000
Repayment of long-term debt	(420,851		)	(553,143		)	(214,396		)	(88,144		)
Debt financing fees	(5,309		)	—
Restricted stock withheld for taxes	(1,893		)	(2,421		)
Repurchase of Class A common stock							(3,117		)	—
Taxes paid related to net share settlement of share-based payment arrangements							(840		)	(1,873		)
Excess tax benefit from share-based payment arrangements	201			110			413			(383		)
Stock options exercised	555			892			—			16
Contributions from redeemable noncontrolling interests							454			—
Distributions to noncontrolling interests	(2,101		)	(1,888		)	(1,477		)	(631		)
Dividends paid	(1,400		)	(944		)	(468		)	(466		)
Net cash provided by (used in) financing activities	360,676			(15,394		)
Net cash provided by financing activities							88,781			76,519
Effect of exchange rate changes on cash	(1,016		)	231			(151		)	288
Net increase (decrease) in cash and cash equivalents	2,459			(9,502		)	(22,473		)	26,693
Cash and cash equivalents as of beginning of period	30,342			41,026			49,462			30,342
Cash and cash equivalents as of end of period	$	32,801		$	31,524		$	26,989		$	57,035

The accompanying ~~notes~~Notes to the ~~unaudited condensed consolidated financial statements~~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~~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 (“USU.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 was derived from audited financial statements, but does not include all disclosures required by USU.S. GAAP. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to ~~those~~the rules and ~~regulations.~~regulations of the SEC. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. ~~Although management believes the disclosures made are adequate to ensure the information presented is not misleading, management~~Management suggests that these ~~unaudited condensed consolidated financial statements~~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, ~~2010~~2011. The results for the three ~~and nine~~ months ended ~~May 31,~~November 30, 2011 and 2010 are not necessarily indicative of the results of operations for the entire year.

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 of ~~$41~~$33 million as of ~~May 31,~~November 30, 2011 and ~~$25~~$40 million as of August 31, ~~2010~~2011.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The majority of cash and cash equivalents are maintained with two major financial institutions (Bank of America and Wells Fargo Bank, N.A.). Balances in these institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250,000 as of November 30, 2011. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up the Company’s customer base. The Company controls credit risk through credit approvals, credit limits, letters of credit, cash deposits and monitoring procedures. The Company is exposed to a residual credit risk with respect to open letters of credit by virtue of the possibility of the failure of a bank providing a letter of credit. The Company had $100 million and $90 million of open letters of credit relating to accounts receivable as of November 30, 2011 and August 31, 2011, respectively.

Fair Value Measurements

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

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

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

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

When developing the fair value measurements, the Company uses quoted market prices whenever available or seeks to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available. See Note 7 - Redeemable Noncontrolling Interest and Note 9 - Derivative Financial Instruments for further detail.

~~From time to time the Company enters into forward exchange contracts as a hedge against foreign currency asset and liability commitments and anticipated transaction exposures.~~ Derivatives

The Company records derivative instruments in other assets or other liabilities in the ~~consolidated balance sheets~~Unaudited Condensed Consolidated Balance Sheets at 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 in the ~~consolidated balance sheets or the consolidated statements~~Unaudited Condensed Consolidated Statements of ~~income,~~Income, as applicable, depending on the nature of the underlying exposure, whether the derivative has been designated as a hedge, and if designated as a hedge, the extent to which the hedge is effective.~~Derivative contracts for commodities used~~ Amounts included in ~~normal business operations~~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 ~~settled by physical delivery, among other criteria, are eligible for~~designated as hedging instruments have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be ~~designated as normal purchases and normal sales pursuant~~expected to remain highly effective in future periods. To the ~~exemption from~~extent the accounting requirements of ASC 815 “Derivatives and Hedging” (“ASC 815”). Contracts that qualify as normal purchases or normal sales are not marked-to-market. The Company does not use financial instruments for trading or speculative purposes.hedge is determined to be ineffective, the ineffective portion is immediately recognized in

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

earnings. When available, quoted market prices or prices obtained through external sources are used to measure a contract’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. ~~Refer to~~ 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 109 - 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.

Redeemable Noncontrolling Interest

The Company has issued ~~redeemable~~ common stock of one of its subsidiaries to ~~the~~a noncontrolling interest holder of ~~one of our subsidiaries~~that subsidiary that is redeemable both at the option of the holder and upon the occurrence of an event that is not solely within the Company’s control. 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 Company estimates~~As such, the redeemable noncontrolling interest is measured at fair value ~~using Level 3 inputs under the fair value hierarchy based on standard valuation techniques using a discounted cash flow analysis.~~at each reporting period. Any adjustments to the carrying amount of the redeemable noncontrolling interest prior to exercise of the redemption option will be recorded to equity. Since redemption of the noncontrolling interest is outside of the Company’s control, these interests are presented on the ~~condensed consolidated balance sheet~~Unaudited Condensed Consolidated Balance Sheets in the mezzanine section under the caption “Redeemable noncontrolling ~~interests.~~interest.”

The determination of fair value requires management to apply significant judgment in formulating estimates and assumptions. These estimates and assumptions primarily include forecasts of future cash flows based on management’s best estimate of future sales and operating costs; pricing expectations; capital expenditures; working capital requirements; discount rates; growth rates; tax rates; and general market conditions.

~~Foreign Currency Translation and Transactions~~

~~Assets and liabilities of foreign operations are translated into US dollars at the period-end exchange rate and revenues and expenses~~

~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ See Note 7 - Redeemable Noncontrolling Interest for further detail.

of foreign operations are translated into US dollars at the average exchange rate for the period. Translation adjustments are not included in determining net income for the period, but are recorded in accumulated other comprehensive income (loss), a separate component of SSI shareholders’ equity. Foreign currency transaction gains and losses are generated from the effects of exchange rate changes on transactions denominated in a currency other than the functional currency of the Company, which is the US dollar. The functional currency for the Company’s Canadian operations is the Canadian dollar. Gains and losses on foreign currency transactions are generally required to be recognized in the determination of net income for the period. The Company records these gains and losses in other income (expense), net.

~~Net realized and unrealized foreign currency transaction gains (losses) were less than ($1) million and $2 million for the~~ ~~three and nine~~Note 2 ~~months ended~~ ~~May 31, 2011, respectively. The Company did not have any realized or unrealized foreign currency transaction gains or losses for the~~ ~~three and nine~~ ~~months ended~~ ~~May 31, 2010~~.

- Recent Accounting Pronouncements

In December 2010, an accounting standard update was issued regarding the interpretation of the disclosure of supplementary pro forma information for business combinations. The standard clarifies that an entity is required to disclose pro forma revenue and earnings as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. In addition, this standard expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This standard will be effective for the Company for fiscal year 2012. The Company currently complies with these disclosures and thus this standard will not have any impact on previously issued financial statements.

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

In June 2011, an accounting standard update was issued regarding the presentation of other comprehensive income in the financial statements. The standard eliminates the option of presenting other comprehensive income as part of the statement of changes in stockholders’ equity and instead requires the entity to present other comprehensive income as either a single statement of comprehensive income combined with net income or as two separate but ~~continuous~~consecutive statements. This amendment will be effective for the Company for fiscal year ~~2012.~~2013 and interim periods therein. The Company currently reports other comprehensive income in the summary of changes in equity and comprehensive income and will be required to update the presentation of comprehensive income to be in compliance with the new standard.

In September 2011, an accounting standard update was issued that simplifies how an entity tests goodwill for impairment by allowing an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard includes examples of types of factors to consider in conducting the qualitative assessment. These include macro-economic conditions, such as a deterioration in the entity’s operating environment, entity-specific events, such as declining financial performance, and other events, such as an expectation that a reporting unit will be sold. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company is likely to early adopt this standard for the goodwill impairment test to be performed in fiscal 2012. Upon adoption, this standard will impact how the Company assesses goodwill for impairment but will not change the measurement or recognition of a potential goodwill impairment charge.

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note ~~2 –~~3 - Inventories, net

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


	May 31, 2011		August 31, 2010		November 30, 2011		August 31, 2011
Processed and unprocessed scrap metal	$	263,839	$	189,618	$	308,124	$	241,093
Semi-finished steel products (billets)	6,817		5,593		10,168		9,237
Finished goods	63,305		43,352		58,314		54,395
Supplies, net	30,198		29,540
Supplies					33,513		30,395
Inventories, net	$	364,159	$	268,103	$	410,119	$	335,120

Note ~~3 –~~4 - Business Combinations

During ~~the first~~ ~~nine~~ ~~months of~~ fiscal 2011, the Company made ~~the following acquisitions:~~

~~In September 2010, the Company acquired substantially all of the assets of SOS Metals Island Recycling, LLC, a metals recycler in Maui, Hawaii, to provide an additional source of scrap metal~~10 acquisitions accounted for ~~the Metals Recycling Business (“MRB”) Hawaiian facility.~~

~~In November 2010, the Company acquired substantially all of the assets utilized by Specialized Parts Planet,~~

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

~~Inc. at its Stockton, California used auto parts facility, which expanded the Auto Parts Business (“APB”) presence in the Western US.~~

~~In December 2010, the Company acquired substantially all of the assets of Waco U-Pull It, Inc., a used auto parts store in Waco, Texas, which expanded APB’s presence in the Southwestern US.~~

In December 2010, the Company acquired substantially all of the assets of Macon Iron & Paper Stock Co., a metals recycler with two yards in Macon, Georgia, which expanded MRB’s presence in the Southeastern US.

In December 2010, the Company acquired substantially all of the assets of Steel Pacific Recycling Inc., a metals recycler with six yards on Vancouver Island, British Columbia, Canada, that previously supplied ferrous scrap to MRB’s Tacoma, Washington facility. This acquisition marked MRB’s initial expansion into Canada.

In January 2011, the Company acquired substantially all of the assets of State Line Scrap Co., Inc., a metals recycler with one yard in Attleboro, Massachusetts, which expanded MRB’s presence in the Northeastern US.

In January 2011, the Company acquired substantially all of the mobile car crushing assets of Northwest Recycling, Inc., based in Portland, Oregon, which provides scrap metal for MRB’s Portland, Oregon facility.

~~In February 2011, the Company acquired substantially all of the assets of Ferrill’s Auto Parts, Inc., a used auto parts~~as business ~~with three stores in Seattle, Washington, which expanded APB’s presence in the Northwestern US.~~

In March 2011, the Company, through a wholly-owned subsidiary, acquired substantially all of the metals recycling business assets of Amix Salvage & Sales Ltd., which operated four metals recycling yards in British Columbia, Canada and two metals recycling yards in Alberta, Canada that previously supplied ferrous scrap to MRB’s Tacoma, Washington facility. This acquisition expanded MRB’s presence in Western Canada. As part of the consideration paid, the Company issued the seller common shares equal to 20% of the issued and outstanding capital stock of the Company’s acquisition subsidiary.

In April 2011, the Company acquired substantially all of the assets of American Metal Group, Inc. and certain of its affiliates, a metals recycler with yards in San Jose and Santa Clara, California that previously supplied ferrous scrap to MRB’s Oakland, California facility. This acquisition expanded MRB’s presence in the Western US.

combinations. The total purchase price of ~~$332~~these acquisitions of $314 million (, comprising $293 million in cash and $21 million in non-cash consideration ($19 million in shares of a subsidiary ~~$18 million in assumed debt~~ and $2 million in contingent consideration) ~~for the acquisitions~~, was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the date of acquisition. The excess of the aggregate purchase price over the fair value of the identifiable net assets acquired of $~~245~~246 million for the ~~nine~~ ~~months~~year ended ~~May~~August 31, 2011 was recorded as ~~goodwill, of which $231 million is expected to be deductible for tax purposes.~~goodwill.

~~The following is a summary of the aggregate fair values of assets acquired and liabilities assumed for acquisitions completed during the~~ ~~nine~~ ~~months ended~~ ~~May 31, 2011~~ ~~(in thousands):~~

Assets:
Cash $ 285
Accounts receivable ⁽¹⁾
6,174
Inventories 22,894
Prepaids and other current assets 1,324
Deferred tax assets 283
Property, plant and equipment 57,898
Intangible assets 7,182
Goodwill 244,827
Liabilities:
Short-term liabilities (3,866 )
Environmental liabilities (1,069 )
Long-term liabilities ⁽²⁾
(18,859 )
Deferred tax liability - long-term (2,449 )
Net assets acquired $ 314,624

⁽¹⁾ ~~The Company expects to collect 100% of the fair value of the acquired accounts receivable.~~

⁽²⁾~~Long-term liabilities include bank debt and assumed capital lease obligations.~~

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

~~The following table presents the fair value of intangible assets acquired with the acquisitions completed during the~~ ~~nine~~ ~~months ended~~ ~~May 31, 2011~~ ~~(dollars in thousands):~~

Weighted
Average Life
In Years

Gross
Carrying
Amount
Tradename Indefinite $ 51
Real property option Indefinite 206
Covenants not to compete 4.8 6,062
Supply contracts 1.0 699
Permits and licenses 0.2 46
Leasehold interests 5.0 118
Total 4.4 $ 7,182

The following unaudited pro forma ~~summary presents~~financial information represents the ~~effect on the consolidated financial~~combined results of our operations for the ~~Company~~three months ended November 30, 2010, as if all of the ~~businesses acquired during the~~ ~~nine~~ ~~months ended~~ ~~May 31,~~fiscal 2011 ~~as though the businesses~~ acquisitions had ~~been acquired~~occurred as of September 1, 2009 (in thousands):

Three Months Ended May 31, Nine Months Ended May 31,
2011 2010 2011 2010
Revenues $ 991,979
$ 747,188
$ 2,458,491
$ 1,785,005
Operating income⁽¹⁾
$ 58,201
$ 73,457
$ 149,539
$ 119,645
Net income ⁽¹⁾
$ 36,309
$ 47,595
$ 98,315
$ 63,114
Net income attributable to SSI ⁽¹⁾
$ 34,617
$ 46,044
$ 92,715
$ 59,800
Basic net income per share attributable to SSI $ 1.25
$ 1.65
$ 3.36
$ 2.15
Diluted net income per share attributable to SSI $ 1.24
$ 1.63
$ 3.32
$ 2.12



	Three Months Ended
	November 30, 2010
Revenues	$	718,683
Operating income⁽¹⁾	$	36,256
Net income⁽¹⁾	$	23,487
Net income attributable to SSI⁽¹⁾	$	21,643

⁽¹⁾_____________________________


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

These pro forma results are not necessarily indicative of ~~acquired companies that will not be incurred in the future.~~

~~Since the dates of the acquisitions, the acquired operations generated aggregate revenues from sales to third parties of $35 million and operating income of $8 million through May 31, 2011.~~

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

~~The Company will benefit from the assets and capabilities of~~what actual results would have been had these acquisitions ~~including additional resources, skills~~occurred for the periods presented. In addition, the pro forma results are not intended to be a projection of future results and ~~industry expertise;~~

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

~~The Company anticipates cost savings, efficiencies and synergies.~~do not reflect any synergies that may be achieved from combining operations.

~~Note 4 – Discontinued Operations~~

In October 2009, the Company sold its full-service used auto parts operation, which had been operated as part of the APB reporting segment, for proceeds of $41 million. The Company concluded that the divestiture met the definition of a discontinued operation. Accordingly, the results of this discontinued operation have been reclassified for all periods presented. The sale resulted in a loss of $15 million, net of tax, and included the write-off of $12 million of goodwill that was allocated to the full-service operation from the APB reporting segment.

Note 5 ~~– Goodwill and Other Intangible Assets, net~~

In the second quarter of fiscal 2011, the Company performed its annual goodwill impairment testing by comparing the fair value of each reporting unit with its carrying value, including goodwill. As a result of this testing, the Company determined that the fair values of each of the reporting units were significantly in excess of their respective carrying values and the goodwill balances and indefinite lived intangible assets were not impaired as of February 28, 2011. There were no triggering events during the ~~third~~ ~~quarter of fiscal~~ ~~2011~~ ~~that required a goodwill impairment test. The Company will continue to monitor its goodwill and indefinite-lived intangible and long-lived assets for possible future impairment.~~- Goodwill

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

The gross changes in the carrying amount of goodwill by reporting segment for the ~~nine~~three months ended ~~May 31,~~November 30, 2011 were as follows (in thousands):

Metals
Recycling
Business

Auto Parts
Business
Total
Balance as of August 31, 2010 $ 230,198
$ 150,134
$ 380,332
Acquisitions 232,341
11,583
243,924
Purchase accounting adjustments 999
(51 ) 948
Foreign currency translation adjustment 2,102
1,670
3,772
Balance as of May 31, 2011 $ 465,640
$ 163,336
$ 628,976

~~The following table presents the Company’s intangible assets and their related lives (dollars in thousands):~~

May 31, 2011 August 31, 2010

Life
In Years

Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
Amortization
Identifiable intangibles:
Tradename Indefinite $ 801
$ —
$ 750
$ —
Tradename 5 – 6 507
(418 ) 583
(423 )
Marketing agreement 5 563
(229 ) 563
(159 )
Employment agreements 2 1,117
(1,117 ) 1,117
(884 )
Covenants not to compete 2 – 20 30,845
(14,166 ) 27,797
(13,329 )
Leasehold interests 2 – 25 1,382
(189 ) 862
(266 )
Permits and licenses 3 – 9 826
(174 ) 780
(54 )
Supply contracts Indefinite 361
—
361
—
Supply contracts 2 – 6 5,270
(2,923 ) 4,571
(2,035 )
Real property options Indefinite 299
—
210
—
Real property options 30 100
(49 ) —
—
Total $ 42,071
$ (19,265 ) $ 37,594
$ (17,150 )



	Metals Recycling Business			Auto Parts Business			Total
Balance as of August 31, 2011	$	464,646		$	163,159		$	627,805
Purchase accounting adjustments	142			—			142
Foreign currency translation adjustment	(4,808		)	(757		)	(5,565		)
Balance as of November 30, 2011	$	459,980		$	162,402		$	622,382

Intangible assets with finite useful lives are amortized over their useful lives using methods that reflect the pattern over which the economic benefits are expected to be consumed or on a straight-line basis based on estimated lives. Amortization expense for identifiable intangible assets for theThere were ~~three and nine~~no ~~months ended~~ ~~May 31, 2011~~ ~~was $2 million and $5 million, respectively, compared to $1 million and $4 million, respectively, for the same periods in the prior year.~~accumulated goodwill impairment charges as of November 30, 2011.

Note 6 ~~– Short-Term Borrowings, Long-Term Debt~~ - Commitments and ~~Capital Lease Obligations~~

The Company has an unsecured, uncommitted $25 million credit line with Wells Fargo Bank, N.A. that expires March 1, 2012. Interest rates are set by the bank at the time of borrowing. The Company had borrowings outstanding under this facility of Contingencies~~$3 million~~ ~~as of~~ ~~May 31, 2011~~ ~~and had no borrowings outstanding as of~~ ~~August 31, 2010~~.

In February 2011, the Company amended and restated its unsecured committed bank credit agreement with Bank of America, N.A., as administrative agent, and the other lenders party thereto to increase the amount available to $650 million from $450 million, including $30 million in Canadian Dollar availability. The maturity was also extended to February 2016. Interest rates on outstanding indebtedness under the amended agreement are based, at the Company’s option, on either the London Interbank Offered Rate (or the Canadian equivalent) plus a spread of between 1.75% and 2.75%, with the amount of the spread based on a pricing grid tied to the Company’s leverage ratio, or the base rate plus a spread of between 0% and 1%. In addition, annual commitment fees are payable on the unused portion of the credit facility at rates between 0.25% and 0.45%, which is based on a pricing grid tied to the Company’s leverage ratio. The Company paid commitment fees of less than $1 million for the ~~three and nine~~ ~~months ended~~ ~~May 31, 2011~~ ~~and~~ ~~2010. The Company had borrowings outstanding under the credit facility of~~ ~~$459 million~~ ~~as of~~ ~~May 31, 2011~~ ~~and~~ ~~$90 million~~ ~~as of~~ ~~August 31, 2010. The weighted average interest rate on amounts outstanding under this facility was 2.25% as of~~ ~~May 31, 2011~~ ~~and 0.79% as of~~ ~~August 31, 2010. The carrying value of this debt approximates fair value as it primarily consists of variable interest rate notes.~~

~~These bank credit agreements contain various representations and warranties, events of default and financial and other covenants,~~

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

~~including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of~~ ~~May 31, 2011~~ ~~and~~ ~~August 31, 2010, the Company was in compliance with all such covenants.~~

~~The Company had capital lease obligations for the use of equipment of $3 million as of~~ ~~May 31, 2011~~ ~~and $2 million as of~~ ~~August 31, 2010~~ ~~that expire at various dates through February 2021. In addition, as of~~ ~~May 31, 2011~~ ~~and~~ ~~August 31, 2010~~ ~~the Company had $8 million of long-term bonded indebtedness that matures in January 2021.~~

~~Note 7 – Environmental Liabilities and Other 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 reserves were established.

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Changes in the Company’s environmental liabilities for the ~~nine~~three months ended ~~May 31,~~November 30, 2011 were as follows (in thousands):

Reporting Segment Balance as of August 31, 2010
Reserves
Established, Net ⁽¹⁾
Payments Balance as of May 31, 2011 Short-Term Long-Term
Metals Recycling Business $ 25,374
$ 840
$ (114 ) $ 26,100
$ 2,872
$ 23,228
Auto Parts Business 14,500
570
—
15,070
553
14,517
Total $ 39,874
$ 1,410
$ (114 ) $ 41,170
$ 3,425
$ 37,745

⁽¹⁾~~Includes $1 million in environmental liabilities recorded in purchase accounting related to acquisitions completed in the first nine months of fiscal 2011.~~



	Balance as of August 31, 2011		Reserves Established (Released), Net			Payments			Balance as of November 30, 2011		Short-Term		Long-Term
Metals Recycling Business	$	25,655	$	(300	)	$	(22	)	$	25,333	$	2,417	$	22,916
Auto Parts Business	15,200		—			—			15,200		554		14,646
Total	$	40,855	$	(300	)	$	(22	)	$	40,533	$	2,971	$	37,562

Metals Recycling Business (“MRB”)

As of ~~May 31,~~November 30, 2011, MRB had environmental reserves of $2625 million for the potential remediation of locations where it has conducted business and has environmental liabilities from historical or recent activities.

Portland Harbor

~~The~~In December 2000, the Company ~~has been~~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. The EPA has indicated that it expects to issue a record of decision that will discuss remedial alternatives for the Site sometime in 2013. 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 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.

The cost of the investigations and any remediation associated with the Site will not be reasonably estimable until completion of the data review and further investigations now being conducted by the LWG and the Trustees and the selection and approval of a remedy by the EPA. However, given the size of the Site and the nature of the conditions identified to date, the total cost of the investigations and remediation is likely to be substantial. In addition, 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, it is not possible to estimate the costs which the Company might incur in connection with the Site, although such costs could be material to the Company’s financial position, or results of ~~operations.~~operations, cash flows or liquidity. 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

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

costs which the Company may incur. In fiscal 2006, the Company recorded a liability for its then estimated share of the costs of the investigation incurred by the LWG to date. As of ~~May 31,~~November 30, 2011 and August 31, ~~2010~~2011, the Company’s reserve for third party investigation costs of the Site was ~~$1 million.~~$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 reserves 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 Metals Recycling Business Sites

As of ~~May 31,~~November 30, 2011, the Company had environmental reserves related to various ~~other~~ MRB sites other than Portland Harbor of ~~$25 million.~~

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

$24 million. The reserves ~~which range in amounts from less than $1 million to $2 million per site,~~ relate to the potential future remediation of soil contamination, groundwater contamination and storm water runoff ~~issues.~~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 ~~May 31,~~November 30, 2011, the Company had environmental reserves related to various APB sites of $15 million. The reserves ~~which range in amounts from less than $1 million to $2 million per site,~~ relate to the potential future remediation of soil contamination, groundwater contamination and storm water runoff ~~issues.~~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 ~~has since been~~and was renewed through March 1, ~~2012 and is expected~~2012. The Company timely filed a renewal application, which allows for existing permit conditions to ~~be renewed prior to its expiration. The~~remain in force until the permit is ~~based upon an annual production capacity of 950 thousand tons.~~renewed or a new permit is issued.

SMB had no environmental reserves as of ~~May 31,~~November 30, 2011.

Other than the Portland Harbor Superfund site, which is discussed above, management currently believes that adequate provision has been made ~~in the financial statements~~ for the potential impact of these issues and that the ultimate outcomes will not have a material adverse effect on the ~~condensed consolidated financial statements~~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.~~material in any given period.

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. 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 ~~owners have~~holder has the right to require the Company to purchase ~~their~~ its 20% interest in the Company’s acquisition subsidiary for fair ~~value (the “Redemption Option”).~~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 ~~May 31, 2011.~~

Since the redemption of the noncontrolling interest is outside the control of the Company, the noncontrolling interest is accounted for as redeemable noncontrolling interest in the mezzanine section of the condensed consolidated balance sheet at ~~May 31,~~November 30, 2011.

As of ~~May 31,~~November 30, 2011 ~~the Company has redeemable noncontrolling interests of~~ ~~$20 million~~. The redeemable noncontrolling interests are measured at fair value, both at the date of acquisition and subsequently at each reporting period, using Level 3 inputs. The Company uses an income approach to determine, the fair value of the redeemable noncontrolling interest ~~which is based on~~was $19 million. No material changes in fair value were recorded since the ~~present value of expected future cash flows.~~

~~The~~ initial ~~issuance price~~measurement of the noncontrolling ~~interest represented~~interest. The Company estimates fair value asusing Level 3 inputs under the fair value hierarchy based on standard valuation techniques using a discounted cash flow analysis. The determination of ~~May 31, 2011. Therefore, no adjustment~~fair value requires management to ~~the value~~apply significant judgment in formulating estimates and assumptions. These estimates and assumptions primarily include forecasts of ~~the redeemable noncontrolling interest was recognized in the condensed consolidated balance sheet. Any adjustments to~~future cash flows based on management’s best estimate of future sales and operating costs; pricing expectations; capital expenditures; working capital requirements; discount rates; growth rates; tax rates; and general market conditions.

1210

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~the carrying amount of the redeemable noncontrolling interest prior to exercise of the Redemption Option will be recorded to equity.~~

Note ~~9 –~~8 - Changes in Equity and Comprehensive Income

The following is a summary of the changes in equity and comprehensive income (in thousands):

Fiscal 2011 Fiscal 2010

SSI shareholders’
equity

Noncontrolling
interests

Total
equity

SSI shareholders’
equity

Noncontrolling
interests

Total
equity
Balances - September 1 (Beginning of period) $ 975,326
$ 4,306
$ 979,632
$ 919,367
$ 3,383
$ 922,750
Net income ⁽¹⁾
81,647
3,739
85,386
49,343
3,188
52,531
Components of other comprehensive income, net of tax:
Foreign currency translation adjustment 4,070
—
4,070
730
—
730
Pension obligations, net 294
—
294
607
—
607
Change in unrealized loss on cash flow hedges 99
—
99
285
—
285
Comprehensive income 86,110
3,739
89,849
50,965
3,188
54,153
Distributions to noncontrolling interests —
(2,101 ) (2,101 ) —
(1,888 ) (1,888 )
Restricted stock withheld for taxes (1,893 ) —
(1,893 ) (2,421 ) —
(2,421 )
Stock options exercised 555
—
555
892
—
892
Share-based compensation expense 9,454
—
9,454
7,886
—
7,886
Cash dividends declared (1,402 ) —
(1,402 ) (1,416 ) —
(1,416 )
Excess tax (expense) benefits from share- based payment arrangements, net (197 ) —
(197 ) 110
—
110
Balances - May 31 (End of period) $ 1,067,953
$ 5,944
$ 1,073,897
$ 975,383
$ 4,683
$ 980,066



	Fiscal 2012									Fiscal 2011
	SSI shareholders’ equity			Noncontrolling interests			Total equity			SSI shareholders’ equity			Noncontrolling interests			Total equity
Balances - September 1 (Beginning of period)	$	1,094,712		$	6,524		$	1,101,236		$	975,326		$	4,306		$	979,632
Net income⁽¹⁾	7,018			934			7,952			17,794			1,123			18,917
Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (net of tax of $(468) and $371)⁽²⁾	(6,815		)	—			(6,815		)	660			—			660
Pension obligations, net (net of tax of $39 and $54)	67			—			67			86			—			86
Change in net unrealized gain on cash flow hedges (net of tax of $66)	—			—			—			117			—			117
Comprehensive income	270			934			1,204			18,657			1,123			19,780
Distributions to noncontrolling interests	—			(1,477		)	(1,477		)	—			(631		)	(631		)
Share repurchases	(3,117		)	—			(3,117		)	—			—			—
Restricted stock withheld for taxes	(840		)	—			(840		)	(1,873		)	—			(1,873		)
Stock options exercised	—			—			—			16			—			16
Share-based compensation expense	5,210			—			5,210			3,568			—			3,568
Excess tax benefit (deficiency) from stock options exercised and restricted stock units vested	413			—			413			(383		)	—			(383		)
Cash dividends ($0.017 per share)	(463		)	—			(463		)	(467		)	—			(467		)
Balances - November 30 (End of period)	$	1,096,185		$	5,981		$	1,102,166		$	994,844		$	4,798		$	999,642

_____________________________


(1)	Net income attributable to noncontrolling interests at November 30, 2011 excludes a loss of $207 thousand allocable to the redeemable noncontrolling interest, which is reported in the mezzanine section of the Unaudited Condensed Consolidated Balance Sheets at November 30, 2011. See Note 7 - Redeemable Noncontrolling Interest.


(2)	Foreign currency translation adjustments exclude $(886) thousand relating to redeemable noncontrolling interests for the three months ended November 30, 2011, which is reported in the mezzanine section of the Unaudited Condensed Consolidated Balance Sheets at November 30, 2011. See Note 7 - Redeemable Noncontrolling Interest.

⁽¹⁾Net income attributable to noncontrolling interests at May 31, 2011 excludes $65 thousand allocable to the redeemable noncontrolling interest, which is reported in the mezzanine section of the condensed consolidated balance sheets at May 31, 2011. See Note 8 - Redeemable Noncontrolling Interest.

Note ~~10 –~~9 - Derivative Financial Instruments

Foreign Currency Exchange Rate Risk Management

The Company entered into forward contracts during ~~the third quarter of~~ fiscal 2011 to mitigate exposure to exchange rate fluctuations on Euro-denominated fixed asset purchases, which ~~have been~~were designated as cash flow hedges for accounting purposes. ~~There were four open forward contracts as of~~ ~~May 31, 2011~~, which had rates ranging from 1.4436 US dollars per Euro to 1.4461 US dollars per Euro. Each of these contracts had an underlying nominal value of between $1 million and $2 million, for a total of $5 million. As of ~~May 31, 2011, the fair value of these contracts and the unrealized losses were not material to the Company’s financial statements. For the~~ ~~three and nine~~ ~~months of~~ ~~fiscal 2011, no gains or losses relating to these forward contracts were recognized in our consolidated balance sheets or in our consolidated statements of income.~~ These forward contracts expire on February 29, 2012. The Company did not hold any foreign currency forward contracts during the prior year. Losses related to the fixed asset purchases that are currently reported in accumulated other comprehensive income (loss) are expected to be reclassified into earnings over the life of the fixed assets to be purchased.

~~The Company’s~~ foreign currency forward contracts are measured using forward exchange rates based on observable exchange rates quoted in an active market and are classified as a Level 1 fair value measurement under the fair value hierarchy.

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

~~Note 11 – Employee Benefits~~

~~Multiemployer Pension Plans~~

~~Approximately 60%~~ In the first quarter of fiscal 2012, the ~~Company’s multiemployer pension plan contributions are made~~Company determined that the forecasted transaction was no longer probable and de-designated these contracts as hedges. These forward contracts were terminated in the first quarter of fiscal 2012. The nominal amount and fair value of these forward contracts, the amounts reclassified from accumulated other comprehensive income (loss) and the realized losses recorded in other income (expense), net during the period were not material to the Western Independent Shops Pension Trust (the “WISP Trust”) for the benefit of union employees of SMB. In 2004, the Internal Revenue Service (“IRS”) approved a seven-year extension of the period over which the WISP Trust may amortize unfunded liabilities, conditioned upon maintenance of certain minimum funding levels. Based on the actuarial valuation for the WISP Trust as of October 1, 2009 (the latest available actuarial information), the funded percentage of the WISP Trust (based on the ratio of the market value of assets to the accumulated benefits liability (present value of accrued benefits)) was 65%, which is below the targeted funding ratio specified in the agreement with the IRS. As a result, in September 2010, the WISP Trust submitted a request to the IRS for relief from the specified funding requirements. In February 2011, the IRS tentatively approved the WISP Trust’s request for relief subject to maintenance of certain minimum funding levels. If the WISP Trust had not been able to obtain relief, the IRS could have retroactively revoked the amortization extension back to the 2002 plan year, which could have resulted in a material liability for the Company’s share of the resulting funding deficiency.Unaudited Condensed Consolidated Financial Statements.

Note ~~12 –~~10 - Share-based Compensation

~~The Company recognized $3 million and $9 million for share-based compensation expense for~~In the ~~three and nine~~ ~~months ended~~ ~~May 31, 2011, compared to $3 million and $8 million for~~first quarter of fiscal 2012, the ~~same periods in the prior year, respectively.~~

~~Fiscal 2011-2013 Performance Share Awards~~

~~On October 26, 2010, the Company’s~~ Compensation Committee approved performance-based awards under the Company’s 1993 Stock Incentive Plan (“the Plan”) and entry by the Company into long-term incentive award agreements evidencing the award of these performance shares. The Compensation Committee established performance targets based on the Company’s earnings per share (weighted at 50%) and the average return on capital employed on a divisional basis (weighted at 50%) for the three years of the performance period, with award payouts ranging from a threshold of 50%granted 143,718 restricted stock units (RSU) to a maximum of 200% for each portion of the awards. A participant generally must be employed by the Company on the October 31 following the end of the performance period to receive an award payout, although adjusted awards will be paid if employment terminates earlier on account of death, disability, retirement, termination without cause after the first year of the performance period or on a sale of the Company. Awards will be paid in Class A common stock as soon as practicable after October 31 following the end of the performance period. The grant date for the fiscal 2011–2013 performance-based awards was December 3, 2010. Compensation expense for the fiscal 2011–2013 performance-based awards during the ~~three and nine~~ ~~months ended~~ ~~May 31, 2011~~ ~~was $1 million.~~

~~Deferred Stock Units~~

On January 19, 2011, each of the Company’s non-employee directors received a deferred stock unit (“DSU”) award equal to $120,000 divided by the closing market price of the Class A common stock on January 19, 2011. John Carter, the Company’s Chairman, and Tamara Lundgren, President and Chief Executive Officer, receive compensation pursuant to their employment agreements and do not receive DSUs. The DSUs granted on January 19, 2011 were for a total of 17,459 shares and will become fully vested on the day before the Company’s 2012 annual meeting, subject to continued Board service. The compensation expense related to these DSU awards for the ~~three and nine~~ ~~months ended~~ ~~May 31, 2011~~ ~~was less than $1 million.~~

~~Note 13 – Income Taxes~~

~~The effective tax rates for the Company’s continuing operations for the~~ ~~three and nine~~ ~~months ended~~ ~~May 31, 2011~~ ~~were~~ ~~34.6%~~ ~~and~~ ~~33.5%, respectively, compared to~~ ~~34.2%~~ ~~and~~ ~~33.0%, for the same periods in the prior year.~~its key employees

1411

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

and officers under the Company’s 1993 Stock Incentive Plan. The majority of the RSUs have a five-year term and vest 20% per year commencing June 1, 2012. The estimated fair value of the RSUs granted is based on the market closing price of the underlying Class A common stock on the date of grant and totaled $6 million. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures.

Note 11 - Income Taxes

The effective tax rates for the Company’s continuing operations for the three months ended November 30, 2011 and 2010 were 31.5% and 32.7%, respectively.

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


	Three Months Ended May 31,				Nine Months Ended May 31,				Three Months Ended November 30,
	2011		2010		2011		2010		2011		2010
Federal statutory rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
State taxes, net of credits	1.7		0.9		1.3		1.2		1.3		1.0
Foreign income taxed at different rates	(0.4	)	(1.0	)	(1.2	)	(0.8	)	(1.6	)	(1.1	)
Section 199 deduction	(0.3	)	(1.3	)	(0.7	)	(1.3	)	(1.7	)	(1.4	)
Prior year Section 199 deduction, reinstated	—		—		—		(1.2	)
Non-deductible officers’ compensation	0.3		0.9		0.3		1.0		0.7		0.3
Noncontrolling interests	(0.9	)	(0.7	)	(1.1	)	(1.1	)	(2.0	)	(1.4	)
Other	(0.8	)	0.4		(0.1	)	0.2		(0.2	)	0.3
Effective tax rate	34.6	%	34.2	%	33.5	%	33.0	%	31.5	%	32.7	%

The Company files federal and state income tax returns in the ~~United States~~U.S. and foreign tax returns in Puerto Rico and Canada. The federal statute of limitations has expired for fiscal ~~2003~~2007 and prior years. The Internal Revenue Service is currently examining the Company’s federal income tax returns for fiscal years 2009 and ~~the Company is no longer subject to state~~2010, and ~~foreign tax examinations for those years.~~ Canadian and several state tax authorities are currently examining ~~the Company’s income tax~~ returns for fiscal years ~~2004~~2005 to ~~2008.~~

The Company currently pays a 7% tax rate on earnings in Puerto Rico. The Company is aware that regulatory agencies there are reevaluating the Company’s entitlement to a manufacturing tax exemption. While the Company currently believes it will continue to be entitled to the 7% tax rate under existing exemptions, a change in the Company’s tax exemption status could cause an increase in the tax rate on Puerto Rico earnings and in the overall effective tax rate on consolidated earnings. Based on current known facts, Management does not expect that the resolution of the issue will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

~~Deferred taxes included the benefits from state net operating loss carry forwards of $1 million and state tax credits of $2 million that will expire if not used between 2011 and 2023. As of~~ ~~May 31, 2011~~, the Company had a valuation allowance of $1 million for a federal capital loss carry forward and for state tax credits that are expected to expire unused in the future. Management believes it is more likely than not that the Company will generate sufficient taxable income prior to the expiration of the remaining deferred tax assets to ensure their realization.2009.

Note ~~14 –~~12 - Net Income Per Share

Basic net income per share attributable to SSI is based on the weighted average number of outstanding common shares during the periods presented including vested DSUs and restricted stock units (“RSUs”). Diluted net income per share attributable to SSI is based on the weighted average number of common shares outstanding, assuming dilution. Potentially dilutive common shares include the assumed exercise of stock options and assumed vesting of performance shares, DSU and RSU awards using the treasury stock method. The Company had 27,194 and 40,557 common stock equivalents for the ~~three~~ ~~months ended~~ ~~May 31, 2011~~ ~~and~~ ~~2010, respectively, and 48,678 and 35,080 common stock equivalents for the~~ ~~nine~~ ~~months ended~~ ~~May 31, 2011~~ ~~and~~ ~~2010, respectively, that were considered anti-dilutive and were excluded from the calculation of diluted earnings per share.~~

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

The following table sets forth the information used to compute basic and diluted net income per share attributable to SSI for the three months ended November 30(in thousands):


	Three Months Ended May 31,						Nine Months Ended May 31,
	2011			2010			2011			2010			2011			2010
Income from continuing operations	$	34,118		$	41,758		$	85,134		$	67,554		$	7,745		$	18,894
Net income attributable to noncontrolling interests	(1,372		)	(1,328		)	(3,804		)	(3,188		)	(727		)	(1,123		)
Income from continuing operations attributable to SSI	32,746			40,430			81,330			64,366			7,018			17,771
Income (loss) from discontinued operations, net of tax	282			23			317			(15,023		)
Income from discontinued operations, net of tax													—			23
Net income attributable to SSI	$	33,028		$	40,453		$	81,647		$	49,343		$	7,018		$	17,794
Computation of shares:
Weighted average common shares outstanding, basic	27,677			27,898			27,622			27,856			27,451			27,563
Incremental common shares attributable to dilutive stock options, performance share awards, DSUs and RSUs	321			313			330			321			264			308
Weighted average common shares outstanding, diluted	27,998			28,211			27,952			28,177			27,715			27,871

Common stock equivalent shares of 351,074 and 50,599 were considered antidilutive and were excluded from the calculation of diluted net income per share for the three months ended November 30, 2011 and 2010.

Note ~~15 –~~13 - Related Party Transactions

The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled ~~$14~~$10 million for each of the three months ended November 30, 2011 and ~~$12~~2010. Payments from these joint ventures were less than $1 million and $1 million for the three months ended ~~May 31, 2011~~ ~~and~~ ~~2010, respectively, and $37 million and $21 million for the~~ ~~nine~~ ~~months ended~~ ~~May 31, 2011~~ ~~and~~ ~~2010, respectively. Advances to (payments from) these joint ventures were less than $1 million and less than ($1) million for the~~ ~~three~~ ~~months ended~~ ~~May 31, 2011~~ ~~and~~ ~~2010, respectively, and ($1) million and less than ($1) million for the~~ ~~nine~~ ~~months ended~~ ~~May 31,~~November 30, 2011 and 2010, respectively. The Company owed $2$3 million and $2 million to joint ventures as of ~~May 31,~~November 30, 2011 ~~compared to $1 million as of~~and August 31, ~~2010~~2011.

In November 2010, the Company and a joint venture partner entered into a series of agreements to facilitate the expansion of their

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

joint venture operations in order to increase the flow of scrap into MRB yards. In order to fund this growth, the Company and its joint venture partner each contributed an additional $2$2 million in equity to the joint venture.

In connection with the acquisition of the metals recycling assets of Amix Salvage & Sales Ltd., the Company entered into a series of agreements to obtain barging and other services and lease property ~~or obtain services~~ with entities owned by the minority shareholder of the Company’s subsidiary that operates its MRB facilities in Vancouver, British Columbia and Alberta, Canada. The ~~amounts~~Company paid ~~by the Company~~$3 million, primarily for barging services, under these agreements ~~were not material~~ for the three months ended ~~May 31, 2011.~~November 30, 2011.

Thomas D. Klauer, Jr., President of the Company’s Auto Parts Business, is the sole shareholder of a corporation that is the 25% minority partner in a partnership in which the Company is the 75% partner and which operates four self-service stores in Northern California. Mr. Klauer’s 25% share of the profits of this partnership totaled $1$1 million ~~and $2 million~~ for each of the three ~~and nine~~ months ended ~~May 31,~~November 30, 2011 and 2010. The Company and a company owned by Mr. Klauer jointly own the real property at one of these stores, which is leased to the partnership. Mr. Klauer’s share of the annual rent paid by the partnership is less than ~~$1 million.~~$1 million. The term of this lease expires in December 2015, and the partnership has the option to renew the lease, upon its expiration, for multiple ~~five-year~~five-year periods. Rent under the lease is adjusted annually based on the Consumer Price Index. The partnership also leases property owned by Mr. Klauer, through a company of which he is the sole shareholder. The term of this lease expires in December 2015, and the partnership has the option to renew the lease, upon its expiration, for multiple ~~five-year~~five-year periods. Rent under the lease is adjusted annually based on the Consumer Price Index. The rent paid by the partnership to Mr. Klauer’s company for this parcel was less than $1$1 million for each of the three ~~and nine~~ months ended ~~May 31,~~November 30, 2011 and 2010. In addition, in July 2011, the Company leased a parcel of land in San Jose from a company of which Mr. Klauer is the sole shareholder. The initial term of this lease expires on January 31, 2012, and the Company has exercised its option to renew the lease for an additional six months. The rent paid to Mr. Klauer’s company for the three months ended November 30, 2011 was less than $1 million.

Certain members of the Schnitzer family own significant interests in, or are related to owners of, Schnitzer Investment Corp (“SIC”), which is engaged in the ~~Company.~~real estate business and was a subsidiary of the Company prior to 1989. SIC is considered a related party for financial reporting purposes. All transactions with the Schnitzer family (including Schnitzer family companies) require the approval of the Company’s Audit Committee, and the Company is in compliance with this policy. Members of the Schnitzer family own all of the outstanding stock of Schnitzer Investment Corp. (“SIC”), which is engaged in the real estate business and was a subsidiary of the Company prior to 1989. The Company and SIC are both potentially responsible parties with respect to Portland Harbor, which has been designated as a Superfund site since December 2000. The Company and SIC have worked together in response to Portland Harbor matters, and the Company has paid all of the legal and consulting fees for the joint defense, in part due to its environmental indemnity obligation to SIC with respect to the Portland scrap metal operations property. As these costs have increased substantially in the last two years, the Company and SIC have agreed to

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

an equitable cost sharing arrangement with respect to defense costs under which SIC will pay 50% of the legal and consulting costs, net of insurance recoveries. The ~~Company has recognized less than $1 million~~amounts receivable from (payable to) SIC vary from period to period because of the timing of incurring legal and ~~$1 million in reimbursement~~consulting fees, payments for cost reimbursements and insurance recoveries. As of ~~environmental expenses for the~~ ~~three and nine~~ ~~months ended~~ ~~May 31,~~November 30, 2011, ~~respectively, compared~~amounts payable to ~~less than $1 million and $3 million for the same periods in the prior year, for SIC’s share of costs. Amounts receivable from~~ SIC under this agreement were less than $1$(1) million as, compared to amounts receivable from SIC of less than ~~May 31, 2011~~$1 million ~~and $1 million~~ as of August 31, ~~2010~~2011.

Note ~~16 –~~14 - Segment Information

The accounting standards for reporting information about operating segments define operating segments as components of an enterprise about which separate 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. ~~The Company’s reporting segments are based on~~

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 ~~nature~~remaining portion of the ~~business activities (nature~~vehicles to metal recyclers, including MRB.

SMB operates a steel mini-mill that produces a wide range of ~~different~~finished steel products using recycled metal and ~~production processes)~~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 ~~it earns revenues and incurs expenses, financial information reviewed by~~are not recognized until the ~~chief operating decision-maker, capital allocation and performance assessment process and organizational structure.~~finished products are

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ultimately sold to third parties.

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

The table below illustrates the Company’s operating results from continuing operations by reporting segment for the three months ended November 30 (in thousands):



	2011			2010
Revenues:
Metals Recycling Business:
Revenues	$	728,438		$	591,708
Less: Intersegment revenues	(58,696		)	(31,709		)
MRB external customer revenues	669,742			559,999
Auto Parts Business:
Revenues	84,054			66,681
Less: Intersegment revenues	(21,522		)	(15,210		)
APB external customer revenues	62,532			51,471
Steel Manufacturing Business:
Revenues	79,902			63,634
Total revenues	$	812,176		$	675,104

The table below illustrates the reconciliation of the Company’s segment operating income (loss) to income from continuing operations before income taxes for the three months ended November 30 (in thousands):



	2011			2010
Metals Recycling Business	$	13,099		$	25,533
Auto Parts Business	10,442			14,039
Steel Manufacturing Business	1,218			(2,035		)
Segment operating income	24,759			37,537
Corporate and eliminations	(9,789		)	(9,097		)
Operating income	14,970			28,440
Interest income	163			55
Interest expense	(3,271		)	(598		)
Other income (expense), net	(556		)	161
Income from continuing operations before income taxes	$	11,306		$	28,058

1714

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three Months Ended May 31, Nine Months Ended May 31,
2011 2010 2011 2010
Revenues:
Metals Recycling Business:
External customer revenues $ 823,370
$ 564,283
$ 1,981,346
$ 1,310,288
Intersegment revenues 55,934
53,853
126,694
113,670
Total Metals Recycling Business revenues 879,304
618,136
2,108,040
1,423,958
Auto Parts Business:
External customer revenues 66,798
52,849
172,066
141,231
Intersegment revenues 20,052
14,731
53,997
36,412
Total Auto Parts Business revenues 86,850
67,580
226,063
177,643
Steel Manufacturing Business:
External customer revenues 90,894
86,407
224,596
210,631
Total revenues:
External customer revenues 981,062
703,539
2,378,008
1,662,150
Intersegment revenues 75,986
68,584
180,691
150,082
Total revenues $ 1,057,048
$ 772,123
$ 2,558,699
$ 1,812,232

Reconciliation of the Company’s segment operating income (loss) to income from continuing operations before income taxes:

Metals Recycling Business $ 45,693
$ 53,061
$ 112,918
$ 97,641
Auto Parts Business 17,328
18,173
47,324
41,460
Steel Manufacturing Business 3,485
3,904
739
(5,785 )
Segment operating income 66,506
75,138
160,981
133,316
Corporate and eliminations (11,174 ) (11,363 ) (31,273 ) (31,722 )
Operating income 55,332
63,775
129,708
101,594
Interest income 35
86
324
389
Interest expense (3,127 ) (503 ) (4,883 ) (1,816 )
Other income (expense), net (66 ) 115
2,950
702
Income from continuing operations before income taxes $ 52,174
$ 63,473
$ 128,099
$ 100,869

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


	May 31, 2011			August 31, 2010			November 30, 2011			August 31, 2011
Metals Recycling Business(1)	$	1,589,928		$	1,405,765		$	1,645,870		$	1,668,778
Auto Parts Business	285,625			243,976			309,551			304,060
Steel Manufacturing Business	322,523			322,601			325,486			324,596
Total segment assets	2,198,076			1,972,342			2,280,907			2,297,434
Corporate and eliminations	(309,288		)	(628,924		)	(352,606		)	(407,265		)
Total assets	$	1,888,788		$	1,343,418		$	1,928,301		$	1,890,169

_____________________________


(1)	MRB total assets include $18 million and $17 million as of November 30, 2011 and August 31, 2011, respectively, for investments in joint venture partnerships.

1815

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 ~~and nine~~ months ended ~~May 31,~~November 30, 2011 and 2010. 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, ~~2010~~2011 and the ~~unaudited condensed consolidated financial statements~~Unaudited Condensed Consolidated Financial Statements and the related ~~notes~~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”~~(the “Company”) that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Except as noted herein or as the context may otherwise require, all references to “we,” “our,” “us” and “SSI” refer to the Company and its consolidated subsidiaries.

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

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

We may make other forward-looking statements from time to time, including in press releases and public conference calls. All forward-looking statements we make are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements, except as may be required by law. Our business is subject to the effects of changes in domestic and global economic conditions and a number of other risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in Item 1A. Risk Factors of Part I in our Annual Report on Form 10-K for the year ended August 31, ~~2010. Other examples include~~2011. Examples of these risks include: potential environmental cleanup costs related to the Portland Harbor Superfund site; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials we purchase; ~~world economic conditions; world political conditions;~~difficulties associated with acquisitions and integration of acquired businesses; the impact of goodwill impairment charges; the inability of customers to fulfill their contractual obligations; the impact of foreign currency fluctuations; potential limitations on our ability to ~~match raw material intake and finished product output with demand; changes in income tax laws; government regulations and environmental matters;~~access credit facilities; the impact of ~~pending or new laws and regulations regarding~~the consolidation in the steel industry; the impact of imports of foreign steel into ~~and exports~~the U.S.; inability to realize expected benefits from ~~the United States (“US”) and other countries; foreign currency fluctuations; competition; seasonality, including weather; energy supplies;~~investments in technology; freight rates and availability of transportation; loss of key personnel; the inability to obtain sufficient quantities of scrap metal to support current orders; purchase price estimates made during acquisitions; business integration issues relating to acquisitions of businesses; creditworthiness of and availability of credit to suppliers and customers; new accounting pronouncements; availability of capital resources; business disruptions resulting from installation or replacement of major capital assets; natural disasters and disturbances; andproduct liability claims; costs associated with compliance with environmental regulations; the adverse impact of climate ~~change, including as a result~~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 ~~treaties, legislation or regulations.~~the underfunded status of multiemployer plans in which we participate.

General

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

We operate in three reporting segments: the Metals Recycling Business (“MRB”), the Auto Parts Business (“APB”) and the Steel Manufacturing Business (“SMB”), ~~which~~that collectively provide an end-of-life cycle solution for a variety of ~~metal~~ products through our integrated businesses. We use operating income (loss) to measure our segment performance. Corporate expense consists primarily of unallocated expense for management and administrative services that benefit all three reporting segments. As a result of this unallocated expense, the operating income (loss) of each reporting segment does not reflect the operating income (loss) the reporting segment would have as a stand-alone business. For further information regarding our reporting segments, see Note ~~16 –~~14 - Segment Information in the ~~notes~~Notes to the ~~unaudited condensed consolidated financial statements~~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 steel~~

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~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~products in the Western US.~~markets. Our deep water port facilities on both the East and West coasts of the USU.S. (in Everett, Massachusetts; Oakland, California; Portland,

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Oregon; Tacoma, Washington; and Providence, Rhode ~~Island, all of which are owned except for the Providence, Rhode Island facility, which is operated under a long-term lease)~~Island) and access to public deep water port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) allow us to efficiently meet the global demand for ~~recycled~~ferrous scrap metal by shipping bulk cargoes to steel manufacturers located in Europe, Asia, Central America and Africa. ~~Recycled~~Our exports of nonferrous processed scrap 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 ~~metal produced from~~and nonferrous metals by truck and rail to meet regional domestic demand. In particular, our ~~Canadian facilities is barged to, processed at, and shipped out of our Tacoma, Washington facility. Our~~ processing facilities in the Southeastern USU.S. also provide efficient access to the automobile and steel manufacturing industries in that region.

Executive Overview of Financial Results for the ~~Third~~First Quarter of Fiscal ~~2011~~2012

In the ~~third~~first quarter of fiscal 2012, we generated consolidated revenues of $812 million, an increase of 20% from the $675 million of revenues achieved in the first quarter of fiscal 2011~~, we saw our revenues grow by~~ ~~39%~~ to ~~$981 million~~. The increase was primarily due ~~to continuing strong worldwide demand from export markets as well as recovering domestic demand for scrap and recycled metal and incremental revenues from acquisitions. The increased demand led~~ to higher average net selling prices compared with the prior year quarter and ~~increased availability of raw materials. Despite the increase in~~incremental revenues ~~our~~from fiscal 2011 acquisitions. Our operating income infor the quarter decreased by $~~(8)~~13 million, or ~~(13)~~(47)%, to $15 million when compared with our prior year quarter.

Our results in the first quarter of fiscal 2012 were adversely impacted by heightened global macroeconomic concerns, stemming primarily from an escalation in the European debt crisis which led to market volatility and resulted in a significant slowdown in customer buying patterns, followed by a rapid decline in selling prices, which impacted shipments and sales in the second half of the quarter. As selling prices declined, we adjusted our metal purchase prices downward. However, average inventory costs did not keep pace with the sharp drop in selling prices during the quarter. As cost of goods sold reflects the weighted average inventory costing method, this resulted in a compression of our operating margins.

In contrast with the current quarter, the prior year quarter ~~primarily due~~reflected a less volatile market environment and was characterized by rising recycled metal prices. As net selling prices for our shipments increased faster than cost of goods sold determined using the weighted average inventory costing method, the prevalent market conditions in the first quarter of fiscal 2011 did not lead to a ~~significant~~similar compression in operating margins as in the current quarter.

In addition, operating income in the current quarter was impacted by an increase in selling, ~~prices~~general and administrative expenses of $11 million, or 25%, including operating expenses related to fiscal 2011 acquisitions of $5 million and costs associated with additional headcount from business growth. Diluted net income attributable to SSI was $0.25 per share in the first quarter of fiscal 2012, compared to $0.64 per share in the prior year ~~quarter that rose at a faster rate than raw material costs. This was partially offset by operating income generated by acquisitions in the third quarter fiscal 2011.~~comparable period.

MRB, with its geographic concentration on the East and West Coasts of the US and seven deep water ports, benefited from strong global demand and a steady intake of scrap. APB benefited from increases in commodity prices and higher purchased car volumes. Although SMB benefited from higher average sales prices due to increased seasonal demand and generated positive third quarter operating income, overall SMB continued to be impacted by weak demand in its West Coast markets.

The following items summarize our consolidated financial results for the ~~third~~first quarter of fiscal ~~2011~~2012:

Revenues of $~~981~~812 million, compared to $~~704~~675 million in the ~~third~~first quarter of fiscal ~~2010~~2011;

Operating income of $5515 million, compared to $6428 million in the ~~third~~first quarter of fiscal ~~2010~~2011;

Net income attributable to SSI of $337 million, or $~~1.18~~0.25 per share (diluted), compared to $4018 million, or $~~1.43~~0.64 per share (diluted), in the ~~third~~first quarter of fiscal ~~2010~~2011;

Net cash ~~provided by~~used in operating activities of $1386 million, compared to $4018 million in the first ~~nine~~three months of fiscal ~~2010~~2011;

Cash and cash equivalents of $3327 million as of ~~May 31,~~November 30, 2011, compared to $3049 million as of August 31, ~~2010~~2011; and

Debt, net of cash, of $~~439~~469 million as of ~~May 31,~~November 30, 2011, compared to $70354 million as of August 31, ~~2010~~2011 (see the reconciliation of Debt, net of cash in Non-GAAP Financial Measures at the end of this Item 2)~~; and~~

~~$332 million (including $293 million of cash) spent on ten acquisitions during the first~~ ~~nine~~ ~~months of fiscal~~ ~~2011~~.

Our MRB segment generated revenues of $~~879~~728 million, a $~~261~~137 million increase from the ~~third~~first quarter of fiscal ~~2010~~2011~~, which included~~. The increase in revenues was driven by a $~~207~~97 million, or ~~42%~~20%, increase in ferrous revenues and a $4734 million, or ~~39%~~31%, increase in nonferrous ~~revenues,~~revenues. These increases were primarily due to ~~increased demand from both export and domestic markets, which, together with increased availability of supply, contributed to~~ higher ~~scrap~~average net selling prices and higher nonferrous sales volumes. ~~Incremental volumes from acquisitions contributed to the increased availability of supply.~~ MRB had operating income of $4613 million compared to $5326 million for the ~~third~~first quarter of fiscal ~~2010~~2011. Operating income during the quarter was negatively impacted by a compression in operating margins as a result of cost of goods sold, which reflects the weighted average inventory costing method, decreasing at a slower rate than net selling prices in a period of sharply declining recycled metal prices. In addition, operating income in the current quarter was impacted by an increase in selling, general and administrative expenses of $9 million, including operating expenses related to fiscal 2011 acquisitions of $4 million and costs associated with additional headcount from business growth.

Our APB segment generated revenues of $8784 million, a $1917 million increase from the ~~third~~first quarter of fiscal ~~2010~~2011. The increase in revenues was driven by an $8$8 million increase in scrap vehicle revenue, a $7$5 million increase in core revenue and a $3$3 million increase in parts ~~revenue.~~revenue primarily due to higher commodity prices, increased car volumes from acquisitions and further enhancements of production operating efficiencies. APB had ~~third~~first quarter operating income of $1710 million compared to $1814 million for the ~~third~~first quarter of fiscal ~~2010~~2011. Operating income in the first quarter of fiscal 2012 was negatively impacted by a compression in operating margins as a result of declining net selling prices that outpaced the decrease in car purchasing costs and the adverse effect of using the weighted average inventory costing method to determine cost of goods sold. In addition, operating income was

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impacted by an increase in selling, general and administrative expenses of $3 million primarily due to operating expenses related to fiscal 2011 acquisitions and increases in advertising costs.

Our SMB segment generated revenues of $9180 million, a $416 million increase from the ~~third~~first quarter of fiscal ~~2010~~2011. ~~This~~The increase in revenues was primarily due to ~~an increase~~increases in average ~~selling~~sales prices ofand finished steel sales volumes due to improved, but still weak, demand for finished steel products ~~reflecting our increased ability to pass through higher purchase prices for scrap and other raw materials to end customers. The increase~~ in ~~average selling prices was partially offset by a decrease in the volume of finished steel products sold due to continuing weak demand in West Coast markets.~~western North America. SMB had operating income of $31 million compared to an operating loss of $4(2) million for the ~~third~~first quarter of fiscal ~~2010~~2011.

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SCHNITZER STEEL INDUSTRIES, INC.

Results of Operations


	Three Months Ended May 31,								Nine Months Ended May 31,								Three Months Ended November 30,
($ in thousands)	2011			2010			% Change		2011			2010			% Change		2011			2010			% Change
Revenues:
Metals Recycling Business	$	879,304		$	618,136		42	%	$	2,108,040		$	1,423,958		48	%	$	728,438		$	591,708		23	%
Auto Parts Business	86,850			67,580			29	%	226,063			177,643			27	%	84,054			66,681			26	%
Steel Manufacturing Business	90,894			86,407			5	%	224,596			210,631			7	%	79,902			63,634			26	%
Intercompany revenue eliminations⁽¹⁾	(75,986		)	(68,584		)	11	%	(180,691		)	(150,082		)	20	%	(80,218		)	(46,919		)	71	%
Total revenues	981,062			703,539			39	%	2,378,008			1,662,150			43	%	812,176			675,104			20	%
Cost of goods sold:
Metals Recycling Business	804,621			547,253			47	%	1,927,672			1,277,855			51	%	686,456			545,688			26	%
Auto Parts Business	55,393			38,103			45	%	141,032			104,665			35	%	59,460			41,229			44	%
Steel Manufacturing Business	85,845			80,420			7	%	219,019			210,945			4	%	77,005			64,218			20	%
Intercompany cost of goods sold eliminations⁽¹⁾	(75,329		)	(67,055		)	12	%	(181,791		)	(147,224		)	23	%	(80,706		)	(48,589		)	66	%
Total cost of goods sold	870,530			598,721			45	%	2,105,932			1,446,241			46	%	742,215			602,546			23	%
Selling, general and administrative (“SG&A”) expense:
Metals Recycling Business	30,041			19,360			55	%	70,631			51,093			38	%	30,165			21,648			39	%
Auto Parts Business	14,129			11,304			25	%	37,707			31,518			20	%	14,152			11,413			24	%
Steel Manufacturing Business	1,564			2,083			(25	)%	4,838			5,471			(12	)%	1,679			1,451			16	%
Corporate⁽²⁾	10,582			10,032			5	%	32,249			28,804			12	%	10,296			10,563			(3	)%
Total SG&A expense	56,316			42,779			32	%	145,425			116,886			24	%	56,292			45,075			25	%
Environmental matters:
Environmental reserves charges (releases), net:
Metals Recycling Business	532			141			277	%	332			(241		)	NM		(300		)	(200		)	50	%
Total environmental matters	532			141			277	%	332			(241		)	NM
Total environmental reserves charges (releases), net																	(300		)	(200		)	50	%
Income from joint ventures:
Metals Recycling Business	(1,583		)	(1,679		)	(6	)%	(3,513		)	(2,390		)	47	%	(982		)	(961		)	2	%
Change in intercompany income elimination⁽³⁾	(65		)	(198		)	(67	)%	124			60			107	%
Change in intercompany profit elimination⁽³⁾																	(19		)	204			NM
Total joint venture income	(1,648		)	(1,877		)	(12	)%	(3,389		)	(2,330		)	45	%	(1,001		)	(757		)	32	%
Operating income (loss):
Metals Recycling Business	45,693			53,061			(14	)%	112,918			97,641			16	%	13,099			25,533			(49	)%
Auto Parts Business	17,328			18,173			(5	)%	47,324			41,460			14	%	10,442			14,039			(26	)%
Steel Manufacturing Business	3,485			3,904			(11	)%	739			(5,785		)	NM		1,218			(2,035		)	NM
Corporate expense	(10,582		)	(10,547		)	—	%	(32,249		)	(29,325		)	10	%	(10,296		)	(10,563		)	(3	)%
Change in intercompany income (loss) elimination⁽⁴⁾	(592		)	(816		)	(27	)%	976			(2,397		)	NM
Change in intercompany profit elimination⁽⁴⁾																	507			1,466			(65	)%
Total operating income	$	55,332		$	63,775		(13	)%	$	129,708		$	101,594		28	%	$	14,970		$	28,440		(47	)%

_____________________________

NM = Not Meaningful

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

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

⁽³⁾ Certain joint ventures sell recycled ferrous metal to MRB, a portion of which is sold to SMB. Consequently, these intercompany revenues produce an intercompany operating (income) loss, which is not recognized until the finished products are sold to third parties; therefore, intercompany profit is eliminated while the products remain in inventory.

⁽⁴⁾ ~~Intercompany income (loss) is not recognized until the inventory is sold to third parties, therefore intercompany profit is eliminated while the products remain in inventory.~~


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


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

(3)

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


(4)	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

~~Third~~ ~~quarter of fiscal~~ ~~2011~~ ~~compared with~~ ~~third~~ ~~quarter of fiscal~~ ~~2010~~

Consolidated revenues increased $~~278~~137 million to $~~981~~812 million compared to the same period in the prior year, primarily due to continuing strong worldwide demand from export markets as well as recovering domestic demand for scrap and recycled metal and increased availability of raw materials, which led to higher average net selling prices and higher ferrous and nonferrous sales volumes. Incremental volumes from acquisitions contributed to higher revenues.

~~First~~ ~~nine~~ ~~months of fiscal~~ ~~2011~~ ~~compared with first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~

~~Consolidated revenues increased~~ ~~$716 million~~ to ~~$2.4 billion~~ compared to the same periods in the prior year, primarily due to continuing strong worldwide demand from export markets as well as recovering domestic demand for scrap and recycled metal and increased availability of raw materials, which led to higher average net selling prices and higher ferrous and nonferrous sales volumes. Incremental volumes from acquisitions contributed to higher revenues.

~~Operating Income~~

~~Third~~ ~~quarter of fiscal~~ ~~2011~~ ~~compared with~~ ~~third~~ ~~quarter of fiscal~~ ~~2010~~

~~Consolidated operating income decreased~~ ~~$8 million~~ to ~~$55 million, or~~ ~~5.6%~~ ~~of revenues compared to~~ ~~$64 million, or~~ ~~9.1%~~ of revenues, for the same period in the prior year. The decline in consolidated operating income and operating income as a percentage of revenue was primarily due to a significant increase in selling prices in the prior year quarter that rose at a faster rate than raw material costs. In addition, in the third quarter of fiscal 2011 incremental operating income of $5 million from acquisitions and benefits from higher sales volumes were offset by additional SG&A costs, including those incurred from acquisitions.

~~Consolidated operating income included~~ ~~$56 million~~ ~~in consolidated SG&A expenses, an increase of~~ ~~$14 million~~ over the same period in the prior year. The increase was primarily due to $3 million in increased compensation expense due to increased headcount from recent acquisitions and an increase of $3 million for professional and other third party services, primarily due to transaction costs associated with acquisitions. Additionally, SG&A expenses were lower in the prior year as they included $3 million in benefits from legal settlements and environmental cost reimbursements.

~~First~~ ~~nine~~ ~~months of fiscal~~ ~~2011~~ ~~compared with first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~

~~Consolidated operating income increased~~ ~~$28 million~~ to ~~$130 million, or~~ ~~5.5%~~ ~~of revenues compared to $102 million, or 6.1% of revenues, for~~ the same period in the prior year. The increase in consolidated ~~operating income~~revenues was primarily due to higher average net selling prices ~~and~~as a result of higher ~~ferrous and nonferrous~~commodity price levels. In addition, sales volumes increased for nonferrous materials mainly due to fiscal 2011 acquisitions and increased ~~availability of supply, continuing strong export market conditions, higher production from back end sorting~~recovery through enhanced processing technologies and ~~incremental operating income of $8 million from acquisitions. This increase was partially offset by an increase in SG&A expenses. The decline in operating income~~for APB primarily as a ~~percentage~~result of ~~revenue was primarily~~fiscal 2011 acquisitions. Incremental revenues from third party sales generated by fiscal 2011 acquisitions were $30 million in the first quarter of fiscal 2012.

Operating Income

Operating income decreased compared to the prior year period due to a ~~significant increase~~compression in operating margins in the first quarter of fiscal 2012 as a result of cost of goods sold, which reflects the weighted average inventory costing method, decreasing at a slower rate than metal purchase prices and net selling prices in ~~the third quarter~~a period of ~~the~~sharply declining recycled metal prices. The prior year ~~that outpaced increases~~quarter, reflecting less volatile market conditions, was characterized by rising metal recycling selling prices and did not result in ~~raw material costs.~~

~~Consolidated~~a similar compression in operating margins as in the current quarter. In addition, operating income ~~included~~ ~~$145 million~~in ~~consolidated SG&A expenses,~~the current quarter was impacted by an increase of $2911 million in SG&A expenses over the same period in the prior year, including operating expenses related to fiscal 2011 acquisitions of $5 million and costs associated with additional headcount from business growth.

Interest Expense

Interest expense was $3 million and $1 million for the three months ended November 30, 2011 and 2010, respectively. The increase in interest expense was due to increased borrowings primarily related to our acquisitions in fiscal 2011 and higher average interest rates under our bank credit facilities.

Income Tax Expense

Our effective tax rate for the first quarter of fiscal 2012 was 31.5%, compared to 32.7% for the same period in the prior year. The increase was primarily due to a $12 million increase in compensation expense due to improved financial performance and increased headcount from recent acquisitions and an $8 million increase for professional and other third party services, including transaction costs associated with acquisitions. In the current year we also had $6 million of favorable customer contract settlements, a $3 million increase over the prior year. Additionally, SG&A expenses were lower in the prior year as they included $9 million in benefits from other legal settlements and environmental cost reimbursements.

~~Other Income (Expense)~~

~~Interest expense increased~~ ~~$3 million~~ ~~for the~~ ~~three and nine~~ ~~months ended~~ ~~May 31, 2011, compared to the same periods in the prior year, due primarily to increased borrowings and higher average interest rates.~~

Other income, net increased $2 million for the nine months ended May 31, 2011 due to $3 million of realized transaction gains related to the foreign currency forward contracts we entered into in the second quarter of fiscal 2011.

~~Income Tax Expense~~

~~Our effective tax rates for the~~ ~~third~~ ~~quarter and first~~ ~~nine~~ ~~months of fiscal~~ ~~2011~~ ~~were~~ ~~34.6%, and~~ ~~33.5%, respectively, compared to~~ ~~34.2%~~ ~~and~~ ~~33.0%~~ for the same periods in the prior year. The fiscal 2010 rate was lower primarily because the Worker, Homeownership, and Business Act of 2009, enacted in the first quarter of that year, extended the carry back period for corporate net operating losses from two years to five years, thereby restoring the full tax benefit of the manufacturing deduction originally claimed in fiscal 2007 and reducing the effective tax rate for the first nine months of fiscal 2010 by 1.2%.

~~The~~ effective tax rate is expected to be ~~33.6%~~approximately 32.5% for the remainder of fiscal ~~2011~~2012.

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Financial Results by Segment

We operate our business across three reporting segments: MRB, APB and SMB. Additional financial information relating to these reporting segments is contained in Note 1614 - Segment Information in the ~~notes~~Notes to the ~~unaudited condensed consolidated financial statements~~Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Metals Recycling Business


	Three Months Ended May 31,								Nine Months Ended May 31,								Three Months Ended November 30,
($ in thousands, except for prices)	2011			2010			% Change		2011			2010			% Change		2011			2010			% Change
Ferrous revenues	$	702,829		$	495,658		42	%	$	1,685,986		$	1,127,662		50	%	$	578,024		$	480,868		20	%
Nonferrous revenues	167,812			120,527			39	%	406,526			291,130			40	%	142,290			108,273			31	%
Other	8,663			1,951			344	%	15,528			5,166			201	%	8,124			2,567			216	%
Total segment revenues	879,304			618,136			42	%	2,108,040			1,423,958			48	%	728,438			591,708			23	%
Cost of goods sold	804,621			547,253			47	%	1,927,672			1,277,855			51	%	686,456			545,688			26	%
Selling, general and administrative expense	30,041			19,360			55	%	70,631			51,093			38	%	30,165			21,648			39	%
Environmental matters	532			141			277	%	332			(241		)	NM
Environmental reserves charges (releases), net																	(300		)	(200		)	50	%
Income from joint ventures	(1,583		)	(1,679		)	(6	)%	(3,513		)	(2,390		)	47	%	(982		)	(961		)	2	%
Segment operating income	$	45,693		$	53,061		(14	)%	$	112,918		$	97,641		16	%	$	13,099		$	25,533		(49	)%
Average ferrous recycled metal sales prices ($/LT): ⁽¹⁾
Steel Manufacturing Business	$	442		$	386		15	%	$	404		$	332		22	%	$	429		$	350		23	%
Other domestic	$	422		$	356		19	%	$	381		$	306		25	%	$	413		$	315		31	%
Foreign	$	443		$	382		16	%	$	410		$	325		26	%	$	436		$	359		21	%
Average	$	440		$	378		16	%	$	406		$	323		26	%	$	432		$	353		22	%
Ferrous sales volume (LT, in thousands):
Steel Manufacturing Business	122			139			(12	)%	309			342			(10	)%	135			91			48	%
Other domestic	200			197			2	%	505			492			3	%	184			161			14	%
Total domestic	322			336			(4	)%	814			834			(2	)%	319			252			27	%
Foreign	1,142			839			36	%	2,981			2,272			31	%	913			979			(7	)%
Total ferrous sales volume (LT, in thousands)	1,464			1,175			25	%	3,795			3,106			22	%	1,232			1,231			—	%
Average nonferrous sales price ($/pound) ⁽¹⁾	$	1.12		$	0.94		19	%	$	1.04		$	0.83		25	%	$	1.00		$	0.94		6	%
Nonferrous sales volumes (pounds, in thousands)	144,505			124,283			16	%	377,498			339,422			11	%	137,243			111,495			23	%
Outbound freight included in cost of goods sold (in thousands)	$	63,580		$	55,806		14	%	$	159,476		$	135,539		18	%
Outbound freight included in cost of goods sold																	$	50,086		$	50,797		(1	)%

_____________________________

LT = Long Ton, which is 2,240 pounds

~~NM = Not Meaningful~~

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


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

Revenues

~~Third~~ ~~quarter of fiscal~~ ~~2011~~The increase in revenues was primarily attributable to higher average recycled metal sales prices in the commodity markets compared ~~with~~ ~~third~~ ~~quarter of fiscal~~ ~~2010~~

~~MRB revenues increased~~ ~~$261 million~~to ~~$879 million~~.

the prior year quarter.

Ferrous revenues increased ~~$207 million~~ to ~~$703 million, due to higher sales volumes and~~mainly as a result of higher average ferrous net selling prices. ~~Ferrous~~While average selling prices in the current year quarter were 22% higher than in the prior year quarter, a period of weak demand led to a significant declining trend in ferrous net selling prices for shipments in the second half of the first quarter of fiscal 2012.

The increase in nonferrous revenues was driven by higher average nonferrous net selling prices and increased sales volumes. Average nonferrous net selling prices were 6% higher than in the prior year quarter despite a declining trend in nonferrous net selling prices during the first quarter of fiscal 2012. The 23% increase in nonferrous sales volumes ~~increased by~~ ~~289 thousand~~ ~~long tons to~~ ~~1.5 million~~ ~~long tons due to increased availability of raw materials and~~reflected incremental volume from ~~acquisitions. The~~fiscal 2011 acquisitions, increased recovery of nonferrous materials processed through our enhanced shredding and sorting technologies and more nonferrous collection activity.

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SCHNITZER STEEL INDUSTRIES, INC.

Segment Operating Income

Operating income decreased compared to the prior year quarter as operating margins were compressed in the first quarter of fiscal 2012 as a result of a significant slowdown in customer buying patterns, followed by a rapid decline in selling prices, which impacted our shipments in the second half of the quarter. As selling prices declined, we adjusted metal purchase prices downward. However, average inventory costs could not keep pace with the sharp drop in selling prices, causing cost of goods sold, which reflects the weighted average inventory costing method, to decrease at a slower rate than net selling ~~price~~prices for our shipments. The prior year quarter, reflecting less volatile market conditions, was characterized by rising metal recycling selling prices and did not result in a similar compression in operating margins as in the current quarter. In addition, operating income in the current quarter was impacted by an increase in SG&A expenses of $9 million, including operating expenses related to fiscal 2011 acquisitions of $4 million and costs associated with additional headcount from business growth.

Auto Parts Business



	Three Months Ended November 30,
($ in thousands)	2011		2010		% Change
Revenues	$	84,054	$	66,681	26	%
Cost of goods sold	59,460		41,229		44	%
Selling, general and administrative expense	14,152		11,413		24	%
Segment operating income	$	10,442	$	14,039	(26	)%
Number of stores at period end	50		45		11	%
Cars purchased (in thousands)	85		82		4	%

Revenues

The increase in revenues included an $8 million increase in scrap vehicle revenue, a $5 million increase in core revenue and a $3 million increase in parts revenue. These increases were driven by higher commodity prices, increased car volumes from acquisitions and further enhancements of production operating efficiencies.

Segment Operating Income

Operating income in the first quarter of fiscal 2012 decreased compared to the prior year quarter as a result of a compression in operating margins due to selling prices declining at a faster rate than car purchasing costs and the adverse impact on cost of goods sold, which reflects the weighted average inventory costing method. In addition, operating income was impacted by ~~$62~~ ~~per long ton to~~ ~~$440~~ ~~per long ton~~an increase in SG&A expenses primarily due to operating expenses related to fiscal 2011 acquisitions and increases in advertising costs.

Steel Manufacturing Business



	Three Months Ended November 30,
($ in thousands, except for price)	2011			2010			% Change
Revenues	$	79,902		$	63,634		26	%
Cost of goods sold	77,005			64,218			20	%
Selling, general and administrative expense	1,679			1,451			16	%
Segment operating income (loss)	$	1,218		$	(2,035	)	NM
Finished steel products average sales price ($/ton)⁽¹⁾	$	722		$	634		14	%
Finished steel products sold (tons, in thousands)	107			98			9	%
Rolling mill utilization	60		%	48		%

_____________________________

NM = Not Meaningful


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

Revenues

SMB revenues increased ~~demand from export~~primarily as a result of an $88 per ton increase in the average selling price for finished steel products. The increase in average selling prices for finished steel products was primarily driven by increased scrap metal purchase prices in global markets ~~as well as recovering domestic demand~~compared to the prior year quarter, reflecting our ability to pass through higher purchase prices for scrap and ~~increased availability of raw materials.~~

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~~Nonferrous revenues increased~~other raw materials to end customers. Additionally, there was a ~~$47 million~~ to ~~$168 million, driven by increases in the average nonferrous net selling price and higher sales volumes. The average nonferrous net selling price increased by~~ ~~$0.18~~ ~~per pound to~~ ~~$1.12~~ ~~per pound and nonferrous sales volumes increased by~~ ~~20 million~~ ~~pounds to~~ ~~145 million~~ ~~pounds reflecting increased commodity prices, improved recovery of nonferrous materials through enhanced processing technologies, and additional volumes from acquisitions and existing operations.~~

~~First~~ ~~nine~~ ~~months of fiscal~~ ~~2011~~ ~~compared with first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~

~~MRB revenues increased~~ ~~$684 million~~ to ~~$2.1 billion~~.

~~Ferrous revenues increased~~ ~~$558 million~~ to ~~$1.7 billion, due to both higher average ferrous net selling prices and higher sales volumes. The average net selling price increased by~~ ~~$83~~ ~~per long ton to~~ ~~$406~~ ~~per long ton primarily due to strong demand in foreign and domestic markets which drove further increases in foreign selling prices. Ferrous sales volumes increased by~~ ~~689~~9 thousand ~~long tons to~~ ~~3.8 million~~ ~~long tons driven by strong worldwide demand for scrap and recycled metal, increased availability of raw materials and incremental volume from acquisitions.~~

~~Nonferrous revenues increased~~ ~~$115 million~~ to ~~$407 million, driven by increases~~ton increase in ~~the average nonferrous net selling price and higher sales volumes. The average nonferrous net selling price increased by~~ ~~$0.21~~ ~~per pound to~~ ~~$1.04~~ ~~per pound and nonferrous sales volumes increased by~~ ~~38 million~~ ~~pounds to~~ ~~377 million~~ pounds, reflecting improved demand, higher commodity prices, improved recovery of nonferrous materials through enhanced processing technologies and additional volumes from acquisitions and existing operations.

~~Segment Operating Income~~

~~Third~~ ~~quarter of fiscal~~ ~~2011~~ ~~compared with~~ ~~third~~ ~~quarter of fiscal~~ ~~2010~~

~~Operating income for MRB decreased to~~ ~~$46 million, or~~ ~~5.2%~~ ~~of revenues,~~finished steel products sold compared to~~$53 million, or~~ ~~8.6%~~ ~~of revenues, for~~ the same period in the prior ~~year. The decline in operating income and operating income as a percentage of revenues was primarily due to a significant increase in selling prices in the prior~~ year quarter that rose at a faster rate than raw material costs. In addition, in the third quarter of fiscal 2011 incremental operating income of $5 million from acquisitions and benefits from higher sales volumes were offset by additional SG&A costs, including costs incurred from acquisitions.

~~Included in operating income for MRB was an increase in SG&A expenses of~~ ~~$11 million~~ primarily due to a $3 million increase in compensation expense due to increased headcount from new acquisitions and a $2 million increase in professional and other third party services including transaction costs associated with acquisitions. Additionally, SG&A expenses were lower in the prior year as they were offset by $1 million in benefits recognized from legal settlements and environmental cost reimbursements.

~~First~~ ~~nine~~ ~~months of fiscal~~ ~~2011~~ ~~compared with first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~

~~Operating income for MRB increased to~~ ~~$113 million, or~~ ~~5.4%~~ ~~of revenues, compared to~~ ~~$98 million, or~~ ~~6.9%~~ of revenues, for the same period in the prior year. The increase in operating income was primarily due to higher average net selling prices and higher ferrous and nonferrous sales volumes due to increased availability of supply, continuing strong export market conditions, higher production from back end sorting technologies and incremental operating income of $8 million from acquisitions. This increase was partially offset by an increase in SG&A expenses. The decline in operating income as a percentage of revenues was primarily due to a significant increase in selling prices in the third quarter of the prior year that outpaced increases in raw material costs.

~~Included in operating income for MRB was an increase in SG&A expenses of~~ ~~$20 million~~, primarily due to a $7 million increase in compensation expense due to improved financial performance and increased headcount from new acquisitions, a $6 million increase in professional and other third party services due to transaction costs associated with acquisitions and a $1 million reduction in net favorable contract settlements and environmental cost reimbursements.

~~Outlook~~

~~As an update to the outlook for fiscal~~ ~~2011~~ ~~that was provided in our Annual Report on Form 10-K for the year ended~~ ~~August 31, 2010~~, we expect the acquisitions made through May 31, 2011, to provide on an annual basis approximately 625 thousand ferrous long tons of volume. However, as we have historically purchased approximately 60% of this volume from the acquired businesses, we expect that only approximately 40% of the acquired volumes will be incremental to existing volumes. In addition, these acquisitions are expected to provide on an annual basis approximately 98 million pounds of nonferrous material that is entirely incremental to existing volumes. Subject to the impact of short term volatility in economic conditions and the effects of purchase accounting, we expect these acquisitions to be accretive to net income in fiscal ~~2011~~.

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~~SCHNITZER STEEL INDUSTRIES, INC.~~

On March 11, 2011, Japan experienced a magnitude 9.0 earthquake, followed by a related tsunami and severe damage to certain of its nuclear facilities. We have analyzed the impact on our sales to Japan and the potential impacts on our sales to China and Southeast Asia and on our steel mill and determined that we do not currently expect any material impact on our financial position or results of operations due to these events. We will continue to evaluate the impact of this tragedy on our global operations.

~~Auto Parts Business~~

Three Months Ended May 31, Nine Months Ended May 31,
($ in thousands) 2011 2010
%
Change
2011 2010
%
Change
Revenues $ 86,850
$ 67,580
29 % $ 226,063
$ 177,643
27 %
Cost of goods sold 55,393
38,103
45 % 141,032
104,665
35 %
Selling, general and administrative expense 14,129
11,304
25 % 37,707
31,518
20 %
Segment operating income $ 17,328
$ 18,173
(5 )% $ 47,324
$ 41,460
14 %
Number of stores at period end 50
45
11 % 50
45
11 %
Cars purchased (in thousands) 93
86
8 % 256
244
5 %

~~Revenues~~

~~Third~~ ~~quarter of fiscal~~ ~~2011~~ ~~compared with~~ ~~third~~ ~~quarter of fiscal~~ ~~2010~~

~~APB revenues increased~~ ~~$19 million~~ to ~~$87 million~~ ~~due to an $8 million increase in scrap vehicle revenue, a $7 million increase in core revenue and a $3 million increase in parts revenue. These increases were driven by increased sales prices~~ as a result of ~~higher commodity prices, increased car volumes and an increase from 45 to 50 self-service store locations.~~

~~First~~ ~~nine~~ ~~months of fiscal~~ ~~2011~~ ~~compared with first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~

~~APB revenues increased~~ ~~$48 million~~ to ~~$226 million~~ due to a $25 million increase in scrap vehicle revenue, an $18 million increase in core revenue and a $2 million increase in parts revenue. These increases were driven by increased sales prices as a result of higher commodity prices, increased car volumes, and an increase from 45 to 50 self-service store locations and even without the benefits of the Cash-For-Clunkers government stimulus program that increased sales volumes in the first ~~nine~~ ~~months of the prior year.~~

~~Segment Operating Income~~

~~Third~~ ~~quarter of fiscal~~ ~~2011~~ ~~compared with~~ ~~third~~ ~~quarter of fiscal~~ ~~2010~~

~~APB’s operating income decreased to~~ ~~$17 million, or~~ ~~20.0%~~ ~~of revenues, compared to~~ ~~$18 million, or~~ ~~26.9%~~ of revenues, for the same period in the prior year. The decrease in operating income and operating income as a percentage of revenues reflected an increase in car purchasing costs which outpaced the increase in sales prices, partly offset by incremental operating income from acquisitions.

~~Included in operating income for APB was an increase in SG&A expenses of~~ ~~$3 million~~ ~~primarily due to a $1 million increase in compensation expense due to additional headcount from new acquisitions and~~slightly improved, ~~financial performance, a $1 million increase in depreciation and amortization and a $1 million increase in advertising expenses due to acquisitions.~~

~~First~~ ~~nine~~ ~~months of fiscal~~ ~~2011~~ ~~compared with first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~

~~APB’s operating income increased to~~ ~~$47 million, or~~ ~~20.9%~~ ~~of revenues, compared to~~ ~~$41 million, or~~ ~~23.3%~~ of revenues, for the same period in the prior year. The increase in operating income reflected the impact of higher commodity prices which drove increased volumes of scrap and core sales. The decrease in operating income as a percentage of revenues reflected an increase in car purchasing costs which outpaced the increase in sales prices.

~~Included in operating income for APB was an increase in SG&A expenses of~~ ~~$6 million~~ primarily due to a $2 million increase in compensation expense due to additional headcount from new acquisitions and improved financial performance, a $1 million increase in depreciation and amortization and a $1 million increase in advertising expenses due to acquisitions.

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~~SCHNITZER STEEL INDUSTRIES, INC.~~

~~Steel Manufacturing Business~~

Three Months Ended May 31, Nine Months Ended May 31,
($ in thousands, except for price) 2011 2010
%
Change
2011 2010
%
Change
Revenues⁽¹⁾
$ 90,894
$ 86,407
5 % $ 224,596
$ 210,631
7 %
Cost of goods sold 85,845
80,420
7 % 219,019
210,945
4 %
Selling, general and administrative expense 1,564
2,083
(25 )% 4,838
5,471
(12 )%
Segment operating income (loss) $ 3,485
$ 3,904
(11 )% $ 739
$ (5,785 ) NM
Finished steel products average sales price ($/ton)⁽²⁾
$ 734
$ 635
16 % $ 688
$ 576
19 %
Finished steel products sold (tons, in thousands) 118
131
(10 )% 315
328
(4 )%
Rolling mill utilization 68 % 64 % 56 % 57 %

~~NM = Not Meaningful~~

⁽¹⁾ ~~Revenues include sales of semi-finished goods (billets) and finished steel products.~~

⁽²⁾ ~~Price information is shown after netting the cost of freight incurred to deliver the product to the customer.~~

~~Revenues~~

~~Third~~ ~~quarter of fiscal~~ ~~2011~~ ~~compared with~~ ~~third~~ ~~quarter of fiscal~~ ~~2010~~

~~SMB revenues increased~~ ~~$4 million~~ to ~~$91 million~~ ~~primarily as a result of increased average selling prices for finished steel products of~~ ~~$99~~ ~~per ton, reflecting our ability to pass through higher purchase prices for scrap and other raw materials to end customers. The increase in average selling prices was partially offset by a~~ ~~13 thousand~~ ~~ton decrease in finished steel products sold due to continuing~~although still weak, demand infor our ~~West Coast markets.~~

~~First~~ ~~nine~~ ~~months of fiscal~~ ~~2011~~ ~~compared with first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~

~~SMB revenues increased~~ ~~$14 million~~ to ~~$225 million~~ ~~primarily as a result of increased average selling prices for finished steel~~ products of ~~$112~~ ~~per ton, reflecting our ability to pass through higher purchase prices for scrap and other raw materials to end customers. The increase in average selling prices was partially offset by a~~ ~~13 thousand~~ ~~ton decrease in finished steel products sold due to continuing weak demand~~ in our West Coast markets.

Segment Operating Income (Loss)

~~Third~~ ~~quarter of fiscal~~ ~~2011~~ ~~compared with~~ ~~third~~ ~~quarter of fiscal~~ ~~2010~~

~~SMB’s operating income decreased to~~ ~~$3 million, or~~ ~~3.8%~~ ~~of revenues, compared to operating income of~~ ~~$4 million, or~~ ~~4.5%~~ ~~of revenues, for the same period in the prior year.~~ The ~~decline~~increase in operating income ~~as a percentage of revenues~~ was primarily due to the ~~decrease~~increase in the ~~volume of~~average selling prices for finished steel products ~~sold.~~

~~First~~ ~~nine~~ ~~months of fiscal~~ ~~2011~~ ~~compared with first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~

~~SMB’s operating income increased $7 million to~~ ~~$1 million, or~~ ~~0.3%~~ ~~of revenues, compared to an operating loss of~~ ~~$(6) million, for the same period in the prior year. The increase in operating income reflected the impact of increased average selling prices,~~ which outpaced the increase in scrap and other raw material purchase ~~costs.~~costs, as well as the increase in the volume of finished steel products sold due to improved, but still weak, demand for finished steel products in western North America.

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 $3327 million and $49 million as of ~~May 31,~~November 30, 2011 and ~~$30 million~~ ~~as of~~ August 31, ~~2010~~2011., respectively. Cash balances are intended to be used primarily for working capital and capital expenditures. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of ~~May 31,~~November 30, 2011, debt, net of cash, was $~~439~~469 million compared to $70354 million as of August 31, ~~2010~~2011 ~~(see the reconciliation of Debt, net of cash in~~(refer to Non-GAAP Financial Measures ~~at the end~~below), an increase of ~~Item 2).~~$115 million primarily due to higher working capital requirements. Our cash balances as of November 30, 2011 and August 31, 2011 include $15 million and $11 million, respectively, which are indefinitely reinvested in Puerto Rico and Canada.

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~~SCHNITZER STEEL INDUSTRIES, INC.~~

Operating Activities

Net cash ~~provided by~~used in operating activities in the first ~~nine~~three months of fiscal 2012 was $86 million, compared to $18 million in the first three months of fiscal 2011 ~~was~~ ~~$13 million, compared to~~ ~~$40 million~~ ~~in the first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~.

Cash used in operating activities in the first ~~nine~~three months of fiscal 2012 included an increase in inventory of $74 million due to higher volumes on hand and a decrease of $19 million in accounts payable due to the timing of payments. Sources of cash include a decrease of $8 million in accounts receivable due to the timing of collections.

Cash used in operating activities for the first three months of fiscal 2011 included an increase in ~~inventory~~accounts receivable of $7335 million due to ~~higher purchase costs for raw materials and higher volumes on hand and an increase~~timing of collections, a $~~113~~14 million decrease in ~~accounts receivable~~accrued payroll and related liabilities due to ~~higher sales prices and~~ the ~~timing~~payment of ~~collections. Sources~~fiscal 2010 incentive compensation awards in the first quarter of ~~cash included an increase of~~fiscal 2011, a $167 million decrease in accounts payable due to ~~increases in purchase costs for raw materials and the~~ timing of payments and ~~an increase of~~ ~~$8 million~~ ~~in accrued taxes due to our improved financial results.~~

~~Cash provided by operating activities for the first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~ ~~included an income tax refund of $41 million that was received in the second quarter of fiscal 2010,~~ a $~~133~~6 million increase in ~~inventory (excluding $35 million of inventory sold as a part of the divestiture of the full service auto parts operations)~~inventories due to higher purchase costs and higher volumes of material on hand at period ~~end and an increase in accounts receivable of~~ ~~$24 million~~ ~~due to timing of collections.~~end.

Investing Activities

Net cash used in investing activities in the first ~~nine~~three months of fiscal 2012 was $25 million, compared to $32 million in the first three months of fiscal 2011 ~~was~~ ~~$370 million, compared to~~ ~~$35 million~~ ~~in the first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~.

Cash used in investing activities in the first ~~nine~~three months of fiscal ~~2011~~2012 included $~~294 million~~ ~~paid for acquisitions and~~ ~~$75~~26 million in capital expenditures to upgrade our equipment and infrastructure.

Cash used in investing activities in the first ~~nine~~three months of fiscal ~~2010~~2011 included $~~41 million~~ ~~paid for completed acquisitions and~~ ~~$35~~25 million in capital expenditures to upgrade our equipment and infrastructure ~~partially offset by~~and $417 million paid for acquisitions completed in ~~proceeds from~~ the ~~sale~~first quarter of ~~the full-service auto parts business and other assets.~~fiscal 2011 as well as amounts that were accrued for prior acquisitions.

Financing Activities

Net cash provided by financing activities in the first ~~nine~~three months of fiscal 2012 was $89 million, compared to $77 million in the first three months of fiscal 2011 ~~was~~ ~~$361 million, compared to net cash used of~~ ~~$15 million~~ ~~in the first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~.

Cash provided by financing activities in the first ~~nine~~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.

Cash provided by financing activities in the first three months of fiscal 2011 included $~~371~~80 million in net ~~additional~~ borrowings of debt (refer

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SCHNITZER STEEL INDUSTRIES, INC.

to Non-GAAP Financial Measures below) ~~which were~~ principally used to support ~~recent acquisitions,~~ higher working capital ~~requirements and capital expenditures.~~

~~Cash used in financing activities in the first~~ ~~nine~~ ~~months of fiscal~~ ~~2010~~ ~~included~~ ~~$11 million~~ ~~in net debt repayments (refer to Non-GAAP Financial Measures below).~~requirements.

Credit Facilities

In We maintain a $650 million revolving credit facility, including $30 million in Canadian dollar availability, that matures in February ~~2011, we amended and restated our~~2016 pursuant to an unsecured committed bank credit agreement with Bank of America, N.A., as administrative agent, and the other lenders party ~~thereto to increase the amount available to US $650 million from $450 million, including $30 million in Canadian Dollar borrowings. The final maturity was also extended to February 2016.~~thereto. Interest rates on outstanding indebtedness under the ~~amended~~ agreement are based, at our option, on either the London Interbank Offered Rate (or the Canadian equivalent) plus a spread of between 1.75% and 2.75%, with the amount of the spread based on a pricing grid tied to our leverage ratio, or the base rate plus a spread of between 0% and 1%. In addition, annual commitment fees are payable on the unused portion of the credit facility at rates between 0.25% and 0.45%, which is ~~also~~ based on a pricing grid tied to our leverage ratio. We ~~paid commitment fees of less than $1 million for the~~ ~~three and nine~~ ~~months ended~~ ~~May 31, 2011~~ ~~and~~ ~~2010. We~~ had borrowings outstanding under the credit facility of $~~459~~471 million as of ~~May 31,~~November 30, 2011 and $90393 million as of August 31, ~~2010~~2011~~. The~~, an increase of $78 million primarily due to increased ~~borrowings were primarily used to finance the recent acquisitions.~~working capital requirements. The weighted average interest rate on amounts outstanding under this facility was ~~2.25%~~2.57% as of ~~May 31,~~November 30, 2011 and ~~0.79%~~2.48% as of August 31, ~~2010~~2011.

We also have an unsecured, uncommitted ~~$25~~$25 million credit line with Wells Fargo Bank, N.A. ~~that~~The credit line expires on March 1, ~~2012.~~2012; however, we believe we will be able to renew the facility on terms substantially similar to the existing facility. Interest rates are set by the bank at the time of borrowing. ~~The Company~~We had$14 million of borrowings outstanding under this facility of ~~$3 million~~as of ~~May 31,~~November 30, 2011 and ~~had~~ no borrowings outstanding as of August 31, ~~2010~~2011.

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 ~~May 31,~~November 30, 2011 ~~and~~ ~~August 31, 2010~~, we were in compliance with all such covenants. We use these credit facilities to fund

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~~SCHNITZER STEEL INDUSTRIES, INC.~~

working capital requirements, acquisitions, capital expenditures and share ~~repurchases and working capital requirements.~~repurchases.

In addition, as of ~~May 31,~~November 30, 2011 and August 31, ~~2010~~2011, we had $8$8 million of long-term ~~bonded indebtedness~~tax-exempt bonds that ~~matures~~mature in January 2021.

Acquisitions

During the ~~first~~ ~~nine~~first ~~months~~quarter of fiscal 2011, we ~~closed ten~~completed two acquisitions with an aggregate purchase price of ~~$332 million, including cash~~$6 million. There were no acquisitions in the first quarter of ~~$293 million~~fiscal 2012, as we continued to execute our growth strategy. See Note 3 - Business Combinations in the notes to the unaudited condensed consolidated financial statements in Part I, Item 1 of this report for additional information on business acquisitions..

Capital Expenditures

Capital expenditures totaled $7526 million for the first ~~nine~~three months of fiscal ~~2011~~2012, compared to $3525 million for the same period in the prior year. During the ~~third~~first quarter of fiscal ~~2011~~2012, we continued our ~~investment~~investments in ~~general improvements at a number~~the replacement of ~~our metals recycling facilities, including~~existing equipment and infrastructure, investments in technology to improve the recovery and separation of nonferrous materials from the shredding process and investments to further improve efficiency and increase capacity, ~~increase~~improve worker safety and enhance environmental systems. ~~We plan to invest in the range of $25 million to $40 million in capital expenditures during the remainder of fiscal~~ ~~2011~~, which is expected to be spent on continued investments in technology to improve the recovery of nonferrous materials from the shredding process, material handling and processing equipment, enhancements to our information technology infrastructure, improvements for the facilities, environmental and safety infrastructure and normal equipment replacement. We believe these investments will create value for our shareholders. We expect to use cash provided by operating activities and available lines of credit to fund capital expenditures during the remainder of fiscal ~~2011~~.

Environmental Compliance

Our commitment to sustainable recycling and 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. WeAs part of our capital expenditures, we invested $6$5 million in capital expenditures for environmental projects during the first ~~nine~~three months of fiscal ~~2011~~ ~~and plan to invest a further $10 million in capital expenditures for environmental projects during the remainder of fiscal~~ ~~2011~~2012. ~~These projects include investments in storm water systems and equipment to ensure ongoing compliance with air quality and other environmental regulations.~~

We have been identified by the ~~EPA~~United States Environmental Protection Agency (“EPA”) as ~~a PRP~~one of the potentially responsible parties (“PRPs”) that ~~owns~~own or ~~operates~~operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund ~~site.~~site (“the Site”). Because there has not been a determination of the total investigation costs, 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, it is not presently possible to estimate the costs which we are likely to incur in connection with the Site, although such costs could be significant and material to our future cash flows. 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 and acquisitions. The EPA has indicated that it expects to issue a record of decision sometime in 2013 that will discuss remedial alternatives for the ~~Site sometime in 2012.~~Site. See Note 76 - ~~Environmental Liabilities~~Commitments and ~~Other~~ Contingencies in the ~~notes~~Notes to the ~~unaudited condensed consolidated financial statements~~Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

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SCHNITZER STEEL INDUSTRIES, INC.

Redeemable Noncontrolling Interest

In March 2011, we issued common stock of one of our subsidiaries to a noncontrolling interest holder of that subsidiary that is redeemable both at the option of the holder and upon the occurrence of an event that is not solely within the Company’s control. Under the terms of an agreement related to the acquisition, the noncontrolling interest owner has the right to require the Company to purchase its 20% interest in the Company’s 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, 2011. If the interest were to be redeemed, the Company would be required to purchase all of such interest at fair value on the date of redemption. As of November 30, 2011, the fair value of the redeemable noncontrolling interest was $19 million. See Note 7 - Redeemable Noncontrolling Interest in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Assessment of Liquidity and Capital Resources

Historically, our available cash resources, internally generated funds, credit facilities and equity offerings have financed our acquisitions, capital expenditures, share repurchases, 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 ~~financing~~short-term and long-term liquidity needs for acquisitions, capital expenditures, working capital, joint ventures, share repurchases, debt service requirements ~~post-retirement obligations~~ and ~~future~~ environmental ~~obligations for~~obligations. However, in the ~~next 12 months. However, should~~event of a sustained market ~~conditions deteriorate,~~deterioration, we may need additional ~~short-term~~ 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.

~~As of~~ ~~May 31, 2011, we had~~ ~~$33 million~~ ~~in cash, of which $19 million is indefinitely reinvested in Puerto Rico and Canada and not available to satisfy our general cash needs.~~

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~~SCHNITZER STEEL INDUSTRIES, INC.~~

Off-Balance Sheet Arrangements

With the exception of operating leases and letters of credit, we are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations or cash flows. We enter into operating leases for both new equipment and property. There have been no material changes to any off-balance sheet arrangements as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended August 31, ~~2010~~2011.

Contractual Obligations

As of ~~May 31,~~November 30, 2011, contractual obligations that have materially changed from the contractual obligations table in our Annual Report on Form 10-K for the year ended August 31, ~~2010~~2011 are presented in the table below:

Payment Due by Period (in thousands)

Remainder
of 2011
2012 2013 2014 2015 2016 Thereafter Total
Contractual Obligations
Long-term debt ⁽¹⁾
$ —
$ —
$ —
$ —
$ —
$ 458,607
$ 7,700
$ 466,307
Interest payments on long-term debt 2,631
10,526
10,526
10,526
10,526
5,277
127
50,139
Capital leases 240
875
824
566
247
155
619
3,526
Operating leases 5,812
20,905
18,414
15,592
11,373
5,571
17,323
94,990
Total $ 8,683
$ 32,306
$ 29,764
$ 26,684
$ 22,146
$ 469,610
$ 25,769
$ 614,962



	Payment Due by Period (in thousands)
	Remainder of 2012		2013		2014		2015		2016		2017		Thereafter		Total
Contractual Obligations
Short-term borrowings	$	14,000	$	—	$	—	$	—	$	—	$	—	$	—	$	14,000
Long-term debt⁽¹⁾	—		—		—		—		471,095		—		7,700		478,795
Interest payments on debt⁽²⁾	9,095		12,128		12,128		12,128		6,075		22		75		51,651
Purchase obligations⁽³⁾	43,648		1,589		735		720		720		720		7,980		56,112

_____________________________


(1)	Long-term debt represents the principal amounts of all outstanding long-term debt, maturities of which extend to 2021.


(2)	Interest payments on debt are based on interest rates in effect as of November 30, 2011. As the contractual interest rates are variable, actual cash payments may differ from the estimates provided.


(3)	Purchase obligations include all enforceable, legally binding agreements to purchase goods or services that specify all significant terms, regardless of the duration of the agreement, including purchases of inventory items to be sold in the ordinary course of business.

⁽¹⁾Our unsecured committed bank credit agreement expires in February 2016 and our long-term bonded indebtedness matures in January 2021, resulting in $459 million and $8 million of obligations in 2016 and thereafter, respectively.

Our redeemable noncontrolling interest is a potential future obligation; however, as the exercise date and future fair value are not known and not solely within our control, no amount has been included in the contractual obligations table. See Note 87 - Redeemable Noncontrolling Interest in the ~~notes~~Notes to the ~~unaudited condensed consolidated financial statements~~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, 2011 we had $18 million outstanding under these arrangements.

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SCHNITZER STEEL INDUSTRIES, INC.

Critical Accounting Policies and Estimates

We ~~believe that the assumptions, estimates and judgments involved in the~~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, ~~2010~~2011 have the most significant potential impact on our financial statements. These estimates require difficult and subjective judgments, including whether estimates are required to be made about matters that are inherently uncertain, if different estimates reasonably could have been used or if changes in the estimates that are reasonably likely to occur could materially impact the financial statements. Actual results could differ from the estimates we used in applying the critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported..

~~Derivatives and Hedging~~

We record derivative instruments in the consolidated balance sheets at fair value and changes in the fair value are either recognized in accumulated other comprehensive income or net income in the consolidated balance sheets or the consolidated statements of income, as applicable, depending on the nature of the underlying exposure, whether the derivative has been designated as a hedge, and if designated as a hedge, the extent to which the hedge is effective.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 pursuant to the exemption from the accounting requirements of ASC 815. Contracts that qualify as normal purchases or normal sales are not marked-to-market.

When available, quoted market prices or prices obtained through external sources are used to measure a contract'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.

~~Redeemable Noncontrolling Interest~~

We have issued redeemable common stock to the noncontrolling interest holder of one of our subsidiaries that is redeemable both at the option of the holder and upon the occurrence of an event that is not solely within our control. 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. We estimate fair value

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~~SCHNITZER STEEL INDUSTRIES, INC.~~

using Level 3 inputs under the fair value hierarchy based on standard valuation techniques using a discounted cash flow analysis. Any adjustments to the carrying amount of the redeemable noncontrolling interest prior to exercise of the redemption option will be recorded to equity. Since redemption of the noncontrolling interest is outside of our control, these interests are presented on the condensed consolidated balance sheet in the mezzanine section under the caption “Redeemable noncontrolling interests.”

Recently Issued Accounting Standards

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

Non-GAAP Financial Measures

Debt, net of cash

Debt, net of cash is the difference between (i) the sum of long-term debt and short-term debt (i.e., total debt) and (ii) cash and cash equivalents. Management believes that debt, net of cash is a useful measure for investors because, as cash and cash equivalents 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):


	May 31, 2011		August 31, 2010		November 30, 2011		August 31, 2011
Short-term borrowings and capital lease obligations, current	$	3,280	$	1,189
Long-term debt and capital lease obligations, net of current maturities	468,611		99,240
Short-term borrowings					$	14,665	$	643
Long-term debt, net of current maturities					480,943		403,287
Total debt	471,891		100,429		495,608		403,930
Less: cash and cash equivalents	32,801		30,342		26,989		49,462
Total debt, net of cash	$	439,090	$	70,087	$	468,619	$	354,468

Net borrowings ~~(repayment)~~ of debt

Net borrowings ~~(repayment)~~ 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 .~~credit. Management presents this amount as the net change in the Company’s borrowings for the period because it believes it is useful for investors as a meaningful presentation of the change in debt.

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


($ in thousands)	2011			2010
For the nine months ended May 31,
							Three Months Ended November 30,
							2011			2010
Borrowings from long-term debt	$	788,974		$	542,000		$	294,212		$	168,000
Proceeds from line of credit	436,000			307,500			173,000			147,500
Repayment of long-term debt	(420,851		)	(553,143		)	(214,396		)	(88,144		)
Repayment of line of credit	(433,500		)	(307,500		)	(159,000		)	(147,500		)
Net borrowings (repayment) of debt	$	370,623		$	(11,143	)
Net borrowings of debt							$	93,816		$	79,856

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 USU.S. GAAP measures.

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SCHNITZER STEEL INDUSTRIES, INC.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

We are exposed to commodity price risk, mainly associated with variations in the market price for finished steel products, ferrous and nonferrous metals, including scrap metal, autobodies and other commodities. The ~~information required hereunder is~~timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions. We respond to increases and decreases in forward selling prices by adjusting purchase prices on a timely basis. We actively manage our exposure to commodity price risk and monitor the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. Sales contracts are based on prices negotiated with our customers, and generally orders are placed 30 to 60 days ahead of shipment date. However, financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter based upon contracted sales orders and estimated future selling prices. Based on contracted sales and estimates of future selling prices at November 30, 2011, a 10% decrease in the selling price per ton of finished steel products would have caused an NRV inventory write down of approximately $5 million at SMB. A 10% decrease in the selling price of inventory would not ~~materially different from~~have had a material NRV impact on MRB or APB at November 30, 2011.

Interest Rate Risk

There have been no material changes to the ~~information~~Company’s disclosure regarding interest rate risk set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended August 31, ~~2010~~2011 ~~and is therefore not presented herein.~~

~~Interest Rate Risk~~

The information required hereunder is not materially different from the information 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, 2010~~ ~~and is therefore not presented herein.~~.

Credit Risk

As of ~~May~~November 30, 2011 and August 31, 2011, 54% and ~~August 31, 2010, 47% and 43%~~44%, respectively, of our trade accounts receivable balance was covered by letters of credit. Of the remaining balance as of ~~May 31,~~November 30, 2011, ~~98%~~93% was less than 60 days past due, compared to ~~89%~~93% as of August 31, ~~2010.~~2011.


ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

During the quarterly period covered by this report our management, with the participation of the Chief Executive Officer and Chief Financial Officer, completed an evaluation of the effectiveness of the design and operation of ourThe Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange ~~Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded~~Act of 1934, as amended (the “Exchange Act”)) that ~~as of the end of the quarterly period covered by this report, disclosure controls and procedures were effective~~are designed to ensure that information required to be disclosed by usthe Company in the reports that ~~we file~~it files or ~~submit~~submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of November 30, 2011, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

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

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SCHNITZER STEEL INDUSTRIES, INC.

PART II. OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

See Note ~~7 – Environmental Liabilities~~6 - Commitments and ~~Other~~ Contingencies in the ~~notes~~Notes to the ~~unaudited condensed consolidated financial statements~~Unaudited Condensed Consolidated Financial Statements in Part I, Item I, incorporated by reference herein.


ITEM 1A.	RISK FACTORS

~~Described below are risks that could~~There have abeen no material ~~adverse effect on~~changes to our ~~results of operations and financial condition~~risk factors reported or ~~could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report that have been~~new factors identified since the filing of our Annual Report on Form 10-K for the year ended August 31, ~~2010~~2011, which was filed with the Securities and Exchange Commission on October ~~21, 2010. The risks described in our 2010 Annual Report on Form 10-K, as supplemented below, are not the only risks we face.~~20, 2011.

~~We are exposed~~


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Pursuant to ~~translation~~a share repurchase program as amended in 2001 and ~~transaction risks associated with fluctuations~~2006, we were authorized to repurchase up to 6 million shares of our Class A common stock when management deems such repurchases to be appropriate. In November 2008, our Board of Directors approved an increase in ~~foreign currency exchange rates. Hedging instruments may~~the shares authorized for repurchase by 3 million, to 9 million. Prior to fiscal 2012, we had repurchased approximately 5.8 million shares of our Class A common stock under the program. In the first quarter of fiscal 2012, we repurchased 68,983 shares of our Class A common stock in open-market transactions at a cost of $3 million, leaving approximately 3.1 million shares available for repurchase under existing authorizations.

The table below presents a summary of our share repurchases during the quarter ended November 30, 2011:



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
September 1, 2011 – September 30, 2011	68,983	$	45.18	68,983	3,127,981
October 1, 2011 – October 31, 2011	—	—		—	3,127,981
November 1, 2011 – November 30, 2011	—	—		—	3,127,981
Total First Quarter	68,983			68,983

The share repurchase program does not ~~be effective in mitigating such risks and may expose~~require us to ~~losses~~acquire any specific number of shares, and we may suspend, extend or ~~limit our potential gains.~~

~~Our operations expose us to translation and transaction risks associated with fluctuations in foreign currency exchange rates as compared to~~terminate the US Dollar, our reporting currency. A portion of our results of operations, assets and liabilities are denominated in foreign currencies. As a result, we are subject to foreign currency exchange risks due to exchange rate movements in connection with the translation of the operating incomeprogram at any time without prior notice and the ~~assets~~program may be executed through open-market purchases, privately negotiated transactions or utilizing Rule 10(b)5-1 programs. We evaluate long- and ~~liabilities~~short-range forecasts as well as anticipated sources and uses of ~~our foreign operations into our functional currency for inclusion in our consolidated financial statements. We are also exposed to foreign currency exchange transaction risk. As part~~cash before determining the course of our risk management program, we may use financial instruments, including foreign currency exchange forward contracts. While intended to reduce the effects of fluctuations in foreign currency exchange rates, these instruments may not be effective in reducing all risks related to such fluctuations and may limit our potential gains or expose us to loss. Although we do not enter into these instruments for trading purposes or speculation, and although our management believes all such instruments are entered into as hedges of underlying physical transactions, these foreign exchange commitments are dependent on timely performance by our counterparties. Should our counterparties to such instruments or the sponsors of the exchanges through which these transactions are offered fail to honor their obligations due to financial distress or otherwise, weaction that would ~~be exposed to potential losses or the inability to recover anticipated gains from the transactions covered by these instruments.~~

best enhance shareholder value.

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SCHNITZER STEEL INDUSTRIES, INC.

~~ITEM 5.OTHER INFORMATION~~

On June 29, 2011, the Company entered into an amendment (the “Amendment”) to the employment agreement (the “Employment Agreement”) between the Company and Tamara L. Lundgren, President and Chief Executive Officer of the Company. Pursuant to the Amendment, the parties agreed to:

~~An increase in Ms. Lundgren's annual base salary from $900,000 to $1,000,000 effective May 1, 2011,~~

An increase in Ms. Lundgren's target bonus under the annual bonus program from 100% of year-end base salary to 150% of year-end base salary effective beginning with the Company's next fiscal year commencing September 1, 2011,

A decrease in the maximum bonus payment under the financial performance portion of Ms. Lundgren's annual bonus program from 7 times the target bonus to 3 times the target bonus, resulting in a decrease in her overall maximum annual bonus from 5 times target to 3 times target, also effective beginning with the Company's next fiscal year commencing September 1, 2011, and

~~Certain other technical changes.~~

The Employment Agreement continues to provide for a cash severance benefit upon a termination of Ms. Lundgren's employment by the Company without “cause” or by her for “good reason” in circumstances not involving a change in control. The cash severance benefit is three times the sum of base salary plus target bonus in effect at the time of termination, so the indirect effect of the increases to base salary and target bonus described above is to increase the cash severance benefit payable to Ms. Lundgren upon an involuntary termination from $5.4 million prior to May 1, 2011 to $7.5 million as of September 1, 2011. A copy of the Amendment is attached hereto as Exhibit 10.1.

In connection with the execution and delivery of the Amendment by Ms. Lundgren, on June 29, 2011, the Company granted her restricted stock units (“RSUs”) for 17,717 shares of Class A Common Stock. These RSUs will vest and the underlying shares will be issued to Ms. Lundgren based on continued employment through June 30, 2013.


ITEM 6.	EXHIBITS



~~4.1~~Exhibit Number	~~Second Amended and Restated Credit Agreement, dated February 9, 2011, between the Registrant, Bank of America, NA, and the Other Lenders Party Thereto.~~ ⁽¹⁾ Exhibit Description
3.1
~~10.1~~	~~Amendment No. 1 dated June 29, 2011 to Amended and~~2006 Restated ~~Employment Agreement by and between~~Articles of Incorporation (as corrected December 2, 2011) of the ~~Registrant and Tamara L. Lundgren dated October 29, 2008.~~

~~10.2~~	~~Amended and Restated Employment Agreement by and between the Registrant and John D. Carter dated June 29, 2011.~~Registrant.

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 ~~May 31,~~November 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income for the three ~~and nine~~ months ended ~~May 31,~~November 30, 2011 and 2010, (ii) Condensed Consolidated Balance Sheets as of ~~May 31,~~November 30, 2011, and August 31, ~~2010,~~2011, (iii) Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~May 31,~~November 30, 2011 and 2010, and (iv) the Notes to Condensed Consolidated Financial Statements. ⁽²⁾⁽¹⁾

(1) The exhibit filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 14, 2011 inadvertently contained an incorrect definition for “Disposed Business” and omitted Schedule 7.02 to such agreement, which have been corrected in the exhibit filed herewith.

~~(2)~~ In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by the specific reference in such filing.

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SCHNITZER STEEL INDUSTRIES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		SCHNITZER STEEL INDUSTRIES, INC.
		(Registrant)

Date:	~~June 30, 2011~~January 9, 2012	By:	/s/ Tamara L. Lundgren
			Tamara L. Lundgren
			President and Chief Executive Officer

Date:	~~June 30, 2011~~January 9, 2012	By:	/s/ Richard D. Peach
			Richard D. Peach
			~~Sr.~~Senior Vice President and Chief Financial Officer

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Assets:
Cash	$	285
Accounts receivable ⁽¹⁾	6,174
Inventories	22,894
Prepaids and other current assets	1,324
Deferred tax assets	283
Property, plant and equipment	57,898
Intangible assets	7,182
Goodwill	244,827
Liabilities:
Short-term liabilities	(3,866		)
Environmental liabilities	(1,069		)
Long-term liabilities ⁽²⁾	(18,859		)
Deferred tax liability - long-term	(2,449		)
Net assets acquired	$	314,624



	Weighted Average Life In Years	Gross Carrying Amount
Tradename	Indefinite	$	51
Real property option	Indefinite	206
Covenants not to compete	4.8	6,062
Supply contracts	1.0	699
Permits and licenses	0.2	46
Leasehold interests	5.0	118
Total	4.4	$	7,182



	Metals Recycling Business		Auto Parts Business			Total
Balance as of August 31, 2010	$	230,198	$	150,134		$	380,332
Acquisitions	232,341		11,583			243,924
Purchase accounting adjustments	999		(51		)	948
Foreign currency translation adjustment	2,102		1,670			3,772
Balance as of May 31, 2011	$	465,640	$	163,336		$	628,976



		May 31, 2011					August 31, 2010
	Life In Years	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Identifiable intangibles:
Tradename	Indefinite	$	801	$	—		$	750	$	—
Tradename	5 – 6	507		(418		)	583		(423		)
Marketing agreement	5	563		(229		)	563		(159		)
Employment agreements	2	1,117		(1,117		)	1,117		(884		)
Covenants not to compete	2 – 20	30,845		(14,166		)	27,797		(13,329		)
Leasehold interests	2 – 25	1,382		(189		)	862		(266		)
Permits and licenses	3 – 9	826		(174		)	780		(54		)
Supply contracts	Indefinite	361		—			361		—
Supply contracts	2 – 6	5,270		(2,923		)	4,571		(2,035		)
Real property options	Indefinite	299		—			210		—
Real property options	30	100		(49		)	—		—
Total		$	42,071	$	(19,265	)	$	37,594	$	(17,150	)



Reporting Segment	Balance as of August 31, 2010		Reserves Established, Net ⁽¹⁾		Payments			Balance as of May 31, 2011		Short-Term		Long-Term
Metals Recycling Business	$	25,374	$	840	$	(114	)	$	26,100	$	2,872	$	23,228
Auto Parts Business	14,500		570		—			15,070		553		14,517
Total	$	39,874	$	1,410	$	(114	)	$	41,170	$	3,425	$	37,745



	Fiscal 2011									Fiscal 2010
	SSI shareholders’ equity			Noncontrolling interests			Total equity			SSI shareholders’ equity			Noncontrolling interests			Total equity
Balances - September 1 (Beginning of period)	$	975,326		$	4,306		$	979,632		$	919,367		$	3,383		$	922,750
Net income ⁽¹⁾	81,647			3,739			85,386			49,343			3,188			52,531
Components of other comprehensive income, net of tax:
Foreign currency translation adjustment	4,070			—			4,070			730			—			730
Pension obligations, net	294			—			294			607			—			607
Change in unrealized loss on cash flow hedges	99			—			99			285			—			285
Comprehensive income	86,110			3,739			89,849			50,965			3,188			54,153
Distributions to noncontrolling interests	—			(2,101		)	(2,101		)	—			(1,888		)	(1,888		)
Restricted stock withheld for taxes	(1,893		)	—			(1,893		)	(2,421		)	—			(2,421		)
Stock options exercised	555			—			555			892			—			892
Share-based compensation expense	9,454			—			9,454			7,886			—			7,886
Cash dividends declared	(1,402		)	—			(1,402		)	(1,416		)	—			(1,416		)
Excess tax (expense) benefits from share- based payment arrangements, net	(197		)	—			(197		)	110			—			110
Balances - May 31 (End of period)	$	1,067,953		$	5,944		$	1,073,897		$	975,383		$	4,683		$	980,066



	Payment Due by Period (in thousands)
	Remainder of 2011		2012		2013		2014		2015		2016		Thereafter		Total
Contractual Obligations
Long-term debt ⁽¹⁾	$	—	$	—	$	—	$	—	$	—	$	458,607	$	7,700	$	466,307
Interest payments on long-term debt	2,631		10,526		10,526		10,526		10,526		5,277		127		50,139
Capital leases	240		875		824		566		247		155		619		3,526
Operating leases	5,812		20,905		18,414		15,592		11,373		5,571		17,323		94,990
Total	$	8,683	$	32,306	$	29,764	$	26,684	$	22,146	$	469,610	$	25,769	$	614,962